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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 001-12138
PDV AMERICA, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297556
-------- ----------
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
--------------
(Registrant's telephone number, including area code)
N. A.
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
- ----------------------------- -----
(Class) (outstanding at July 31, 2002)
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PDV AMERICA, INC.
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
TABLE OF CONTENTS
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<Table>
<Caption>
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001.........................2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Six-Month Periods Ended June 30, 2002 and 2001............................................3
Condensed Consolidated Statement of Shareholder's Equity - Six-Month Period
Ended June 30, 2002.................................................................................4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods Ended
June 30, 2002 and 2001..............................................................................5
Notes to the Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................26
Item 6. Exhibits and Reports on Form 8-K...................................................................26
SIGNATURES.......................................................................................................27
</Table>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Specifically, all statements under
the caption "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" pertaining to capital expenditures and
investments related to environmental compliance, strategic planning, purchasing
patterns of refined products and capital resources available to the Companies
(as defined herein) are forward looking statements. In addition, when used in
this document, the words "anticipate," "estimate," "prospect" and similar
expressions are used to identify forward looking statements. Those statements
are subject to risks and uncertainties, such as increased inflation, continued
access to capital markets and commercial bank financing on favorable terms,
increases in environmental and other regulatory burdens, outcomes of currently
contested matters, changes in prices or demand for the Companies' products as a
result of competitive actions or economic factors and changes in the cost of
crude oil, feedstocks, blending components or refined products. Those statements
are also subject to the risks of increased costs in related technologies and
those technologies producing anticipated results. Should one or more of these
risks or uncertainties, among others, materialize, actual results may vary
materially from those estimated, anticipated or projected. Readers are cautioned
not to place undue reliance on these forward looking statements, which speak
only as of the date of this Report. PDV America undertakes no obligation to
publicly release any revision to these forward looking statements to reflect
events or circumstances after the date of this Report.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PDV AMERICA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,226 $ 116,069
Accounts receivable, net 1,110,304 913,068
Due from affiliates 52,279 67,788
Inventories 1,127,993 1,109,346
Prepaid expenses and other 77,054 122,921
------------ ------------
Total current assets 2,410,856 2,329,192
NOTES RECEIVABLE FROM PDVSA AND AFFILIATE 798,000 798,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,505,395 3,292,555
RESTRICTED CASH 36,012 --
INVESTMENTS IN AFFILIATES 724,265 700,701
OTHER ASSETS 276,437 231,222
------------ ------------
$ 7,750,965 $ 7,351,670
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans 130,000 --
Accounts payable 712,670 616,854
Payables to affiliates 332,487 265,518
Taxes other than income 206,511 219,699
Other 225,592 313,946
Current portion of long-term debt 531,364 107,864
Current portion of capital lease obligation 31,404 20,358
------------ ------------
Total current liabilities 2,170,028 1,544,239
LONG-TERM DEBT 1,470,741 1,802,809
CAPITAL LEASE OBLIGATION 35,918 46,964
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 233,166 218,706
OTHER NONCURRENT LIABILITIES 217,843 218,766
DEFERRED INCOME TAXES 831,181 793,233
MINORITY INTEREST -- 23,176
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized, issued and outstanding 1 1
Additional capital 1,532,435 1,532,435
Retained earnings 1,262,962 1,174,806
Accumulated other comprehensive loss (3,310) (3,465)
------------ ------------
Total shareholder's equity 2,792,088 2,703,777
------------ ------------
$ 7,750,965 $ 7,351,670
============ ============
</Table>
See notes to condensed consolidated financial statements.
2
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Net sales $ 4,733,631 $ 5,689,901 $ 8,355,986 $ 10,585,533
Sales to affiliates 59,810 66,070 108,877 131,989
------------ ------------ ------------ ------------
4,793,441 5,755,971 8,464,863 10,717,522
Equity in earnings of affiliates 30,339 37,190 49,273 60,821
Interest income from affiliates 16,544 16,544 33,088 33,088
Insurance recoveries 115,835 -- 210,541 --
Other income (expense) - net (7,825) 1,100 (14,278) 2,091
------------ ------------ ------------ ------------
4,948,334 5,810,805 8,743,487 10,813,522
------------ ------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $1,642,405, $1,891,288,
$2,881,253 and $3,477,258 from affiliates) 4,686,882 5,300,767 8,395,785 10,048,235
Selling, general and administrative expenses 75,499 79,022 152,303 139,792
Interest expense, excluding capital lease 27,798 28,230 53,867 56,843
Capital lease interest charge 1,894 2,406 3,787 4,813
Minority interest -- 37 -- 71
------------ ------------ ------------ ------------
4,792,073 5,410,462 8,605,742 10,249,754
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 156,261 400,343 137,745 563,768
INCOME TAXES 56,254 144,878 49,589 203,833
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 100,007 255,465 88,156 359,935
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- -- -- 13,600
------------ ------------ ------------ ------------
NET INCOME 100,007 255,465 88,156 373,535
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives, net
of related income taxes of $(850) -- -- -- (1,450)
Less: reclassification adjustment for derivative
losses included in net income, net of related
income taxes of $44, $45, $88, and $184 77 77 155 314
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) 77 77 155 (1,136)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 100,084 $ 255,542 $ 88,311 $ 372,399
============ ============ ============ ============
</Table>
See notes to condensed consolidated financial statements.
3
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS (LOSS) INCOME TOTAL
---------- ---------- ------------ ------------ ------------- ----------
BALANCE, DECEMBER 31, 2001 1 $ 1 $ 1,532,435 $ 1,174,806 $ (3,465) $2,703,777
Net income -- -- -- 88,156 -- 88,156
Other comprehensive income -- -- -- -- 155 155
---------- ---------- ------------ ------------ ------------ ----------
BALANCE, JUNE 30, 2002 1 $ 1 $ 1,532,435 $ 1,262,962 $ (3,310) $2,792,088
========== ========== ============ ============ ============ ==========
</Table>
See notes to condensed consolidated financial statements.
4
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SIX MONTHS
ENDED JUNE 30,
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 134,367 $ 419,869
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (349,957) (81,113)
Proceeds from sales of property, plant and equipment 547 1,036
Increase in restricted cash (36,012) --
Investments in LYONDELL-CITGO Refining LP (18,700) (5,700)
Investments in and advances to other affiliates (15,918) (304)
------------ ------------
Net cash used in investing activities (420,040) (86,081)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans 130,000 (37,500)
Net proceeds from revolving bank loans 78,500 16,000
Proceeds from issuance of tax-exempt bonds 62,650 25,000
Payments on taxable bonds (25,000) (25,000)
Payments of capital lease obligations -- (17,276)
Payments of master shelf agreement notes (25,000) --
Repayments of other debt (8,320) (11,577)
------------ ------------
Net cash provided by (used in) financing activities 212,830 (50,353)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (72,843) 283,435
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 116,069 20,751
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 43,226 $ 304,186
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 53,466 $ 65,627
============ ============
Income taxes, net of refunds of $50,700 in 2002 $ 45,222 $ 184,300
============ ============
</Table>
See notes to condensed consolidated financial statements.
5
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for PDV America, Inc. ("PDV America")
subsequent to December 31, 2001 and with respect to the interim
three-month and six-month periods ended June 30, 2002 and 2001 is
unaudited. In the opinion of management, such interim information
contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such
periods. The results of operations for the six-month periods ended June
30, 2002 and 2001 are not necessarily indicative of the results to be
expected for the full year. Reference is made to PDV America's Annual
Report for the fiscal year ended December 31, 2001 on Form 10-K, dated
March 29, 2002, for additional information.
The condensed consolidated financial statements include the accounts of
PDV America and its wholly owned subsidiaries, CITGO Petroleum
Corporation ("CITGO"), and PDV USA, Inc. ("PDV USA"), as well as
CITGO's wholly-owned subsidiaries, VPHI Midwest, Inc. ("VPHI") and its
wholly owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR") and
Cit-Con Oil Corporation, which was 65% owned by CITGO through December
31, 2001 (collectively, "the Companies"). On January 1, 2002, CITGO
acquired the outstanding 35 percent interest in Cit-Con from Conoco,
Inc. The principal asset of Cit-Con is a lubricants refinery in Lake
Charles, Louisiana. This transaction did not have a material effect on
the consolidated financial position or results of operations of PDV
America. The legal entity, Cit-Con Oil Corporation, was dissolved
effective April 1, 2002.
On January 1, 2002, PDV America contributed all of the common stock of
VPHI to CITGO. This transaction had no effect on the consolidated
financial statements of PDV America.
Certain reclassifications have been made to the June 30, 2001 financial
statements to conform to the classifications used for the periods ended
June 30, 2002.
2. CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001 the Companies adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The statement, as amended,
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives, at fair value, as either assets or
liabilities in the statement of financial position with an offset
either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. Under the
transition provisions of SFAS No. 133, on January 1, 2001 the Companies
recorded an after-tax, cumulative-effect-type transition benefit of
$13.6 million to net income related to derivatives that existed on that
date and an after-tax, cumulative-effect-type transition charge of $1.5
million to accumulated other comprehensive income.
6
3. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ ------------
(000'S OMITTED)
Refined products $ 778,023 $ 836,683
Crude oil 268,650 193,319
Materials and supplies 81,320 79,344
------------ ------------
$ 1,127,993 $ 1,109,346
============ ============
</Table>
4. SHORT-TERM BANK LOANS
As of July 30, 2002, the Companies had established $150 million of
uncommitted, unsecured, short-term borrowing facilities with various
banks. Interest rates on these facilities are determined daily based
upon the federal funds' interest rates. Maturity options vary up to 30
days. The Companies had $130 million and $0 of borrowings outstanding
under these facilities at June 30, 2002 and December 31, 2001,
respectively.
7
5. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------ ------------
(000'S OMITTED)
Revolving bank loans $ 470,000 $ 391,500
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7.875% 199,882 199,867
Senior Notes due August 1, 2003 with interest rate of 7.875% 499,384 499,117
Private Placement Senior Notes, due 2002 to 2006 with
interest rate of 9.30% 56,819 56,819
Master Shelf Agreement Senior Notes, due 2003 to
2009 with interest rates from 7.17% to 8.94% 235,000 260,000
Tax Exempt Bonds, due 2004 to 2032 with variable
and fixed interest rates 420,020 357,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 121,000 146,000
------------ ------------
2,002,105 1,910,673
Current portion of long-term debt (531,364) (107,864)
------------ ------------
$ 1,470,741 $ 1,802,809
============ ============
</Table>
The Companies' revolving bank loan agreements with various banks mature
in May 2003 and consist of (i) a $400 million, five-year, revolving
bank loan; (ii) a $150 million, 364-day, revolving bank loan; and (iii)
a $25 million, 364-day, revolving bank loan. The Companies intend to
replace the revolving bank loans when they mature.
On March 20, 2002, the Companies issued $25 million of tax exempt
revenue bonds due 2032. The proceeds were used to redeem $25 million of
taxable Gulf Coast environmental facilities revenue bonds due 2032.
On May 3, 2002, the Companies issued $7.7 million of environmental
facilities revenue bonds due 2032. On June 28, 2002, the Companies
issued $30 million of environmental facilities revenue bonds due 2032.
The proceeds from both of these issuances will be used for capital
projects at the Lemont refinery. Restricted cash of $36 million at
June 30, 2002 represents highly liquid investments held in trust
accounts in accordance with these bond agreements. Funds are released
solely for financing the qualified capital expenditures as defined in
the bond agreements.
8
6. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265
MBPD refinery in Houston, Texas and is owned by subsidiaries of CITGO
(41.25%) and Lyondell Chemical Company (58.75%) ("the Owners"). This
refinery processes heavy crude oil supplied by Petroleos de Venezuela,
S.A. ("PDVSA" which may also be used to refer to one or more of its
subsidiaries) under a long-term supply contract that expires in 2017.
CITGO purchases substantially all of the gasoline, diesel and jet fuel
produced at the refinery under a long-term contract.
On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective
February 1, 2001, it had declared force majeure under the contract
described above. As of December 31, 2001, PDVSA deliveries of crude oil
to LYONDELL-CITGO had not been reduced due to PDVSA's declaration of
force majeure. On January 22, 2002, PDVSA notified LYONDELL-CITGO that
pursuant to the February 9, 2001 declaration of force majeure,
effective March 1, 2002, PDVSA expected to deliver approximately 20
percent less than the contract volume and PDVSA indicated that force
majeure will be in effect until at least June 2002. To date, there have
been no updates to the January 22, 2002 notification, and as a result,
force majeure remains in effect. PDVSA delivered approximately 83
percent of the contractual crude oil volume during the second quarter
of 2002. In the six months ended June 30, 2002, PDVSA delivered
approximately 86 percent of the contractual crude oil volume. When
PDVSA reduces its delivery of crude oil under the crude oil supply
contract, LYONDELL-CITGO may obtain alternative sources of crude oil
which may result in reduced operating margins. As a result,
LYONDELL-CITGO estimates that crude oil costs in the quarter and the
six-month period ended June 30, 2002 were increased by $17 million. The
future effect of this declaration on LYONDELL-CITGO's crude oil supply
and the duration of this situation are not known at this time.
CITGO has notes receivable from LYONDELL-CITGO which total $35 million
at June 30, 2002 and December 31, 2001. The notes bear interest at
market rates and are due July 1, 2003. These notes are included in
other assets in the accompanying consolidated balance sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Cash distributions are allocated to the Owners based on participation
interest. Information on CITGO's investment in LYONDELL-CITGO follows:
9
<Table>
<Caption>
(000s omitted)
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
Carrying value of investment $ 528,927 $ 507,940
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of financial position:
Current assets $ 281,000 $ 227,000
Non current assets 1,419,000 1,434,000
Current liabilities (including debt of 802,000 377,000
$460,000 and $50,000 at June 30,
2002 and December 31, 2001,
respectively)
Non current liabilities (including debt 345,000 776,000
of $0 and $450,000 at June 30,
2002 and December 31, 2001,
respectively)
Member's equity 553,000 508,000
</Table>
<Table>
<Caption>
Six Months Ended June 30,
-------------------------------
2002 2001
------------ ------------
(Unaudited)
Equity in net income $ 38,089 $ 39,220
Cash distribution received 35,802 37,002
Summary of operating results:
Revenue $ 1,545,725 $ 1,841,785
Gross profit 145,384 166,324
Net income 104,325 107,507
</Table>
LYONDELL-CITGO's 18-month term loan and working capital revolver will
mature in January 2003. The Owners are currently reviewing financing
alternatives to address this situation.
10
7. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in
the ordinary course of business are pending against the Companies. The
Companies record accruals for potential losses when, in management's
opinion, such losses are probable and reasonably estimable. If known
lawsuits and claims were to be determined in a manner adverse to the
Companies, and in amounts greater than the Companies' accruals, then
such determinations could have a material adverse effect on the
Companies' results of operations in a given reporting period. The most
significant lawsuits and claims are discussed below.
A class action lawsuit brought by four former marketers of the UNO-VEN
Company ("UNO-VEN") in U.S. District Court in Wisconsin against UNO-VEN
alleging improper termination of the UNO-VEN Marketer Sales Agreement
under the Petroleum Marketing Practices Act in connection with PDVMR's
1997 acquisition of Unocal's interest in UNO-VEN has resulted in the
judge granting PDVMR's motion for summary judgment. The plaintiffs are
appealing the summary judgment. PDVMR and its parent, VPHI, jointly and
severally, have agreed to indemnify UNO-VEN and certain other related
entities against certain liabilities and claims, including this matter.
A lawsuit is pending against PDVMR and CITGO in Illinois state court
which claims damages as a result of PDVMR invoicing a partnership in
which it is a partner, and an affiliate of the other partner of the
partnership, alleging excessive charges for electricity utilized by
these entities' facilities located adjacent to the Lemont, Illinois
refinery. The electricity supplier to the refinery is seeking recovery
from the Companies of alleged underpayments for electricity. The
Companies have denied all allegations and are pursuing their defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery. No
serious personal injuries were reported. There are seventeen related
lawsuits pending in Corpus Christi, Texas state court against CITGO on
behalf of approximately 9,000 individuals alleging property damages,
personal injury and punitive damages. A trial of the claims of
approximately 20 plaintiffs which began in April 2002 is currently
stayed. Approximately 1,300 claims have been resolved for immaterial
amounts.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO which claims damages for reduced value of residential
properties as a result of alleged air, soil and groundwater
contamination. CITGO has purchased 275 adjacent properties included in
the lawsuit and settled those related property damage claims. Over
CITGO's objections, the trial court has recently ruled that an
agreement by CITGO that purported to provide for settlement of the
remaining property damage claims for $5 million payable by it is
enforceable. CITGO will appeal this decision.
A lawsuit alleging wrongful death and personal injury filed in 1996
against CITGO and other industrial facilities in Corpus Christi, Texas
state court brought by persons who claim that exposure to refinery
hydrocarbon emissions have caused various forms of illness has been
settled by CITGO for an immaterial amount.
Litigation is pending in federal court in Lake Charles, Louisiana
against CITGO by a number of current and former refinery employees and
applicants asserting claims of racial discrimination in connection with
CITGO's employment practices. A trial involving two plaintiffs resulted
in verdicts for CITGO. The Court granted CITGO summary judgment with
respect to another group of claims; these rulings have been affirmed by
the Fifth Circuit Court of Appeals. Trials of the remaining cases will
be set in the future.
11
CITGO is among defendants to putative class action and individual
lawsuits in New York and Illinois alleging contamination of water
supplies by methyl tertiary butyl ether ("MTBE"), a component of
gasoline. These actions allege that MTBE poses public health risks and
seek testing, damages and remediation of the alleged contamination.
These matters are in early stages of discovery. One of the Illinois
cases was consolidated in U.S. District Court in New York with the case
pending in New York and the judge in the case denied the plaintiffs'
motion for class certification.
In August 1999, the U.S. Department of Commerce rejected a petition
filed by a group of independent oil producers to apply antidumping
measures and countervailing duties against imports of crude oil from
Venezuela, Iraq, Mexico and Saudi Arabia. The petitioners appealed this
decision before the U.S. Court of International Trade based in New
York, where the matter is still pending. On September 19, 2000, the
Court of International Trade remanded the case to the Department of
Commerce with instructions to reconsider its August 1999 decision. The
Department of Commerce was required to make a revised decision as to
whether or not to initiate an investigation within 60 days. The
Department of Commerce appealed to the U.S. Court of Appeals for the
Federal Circuit, which dismissed the appeal as premature on July 31,
2001. The Department of Commerce issued its revised decision, which
again rejected the petition, in August 2001. The revised decision is
awaiting review by the Court of International Trade.
Approximately 280 lawsuits are currently pending against the Companies
in state and federal courts, primarily in Louisiana, Texas, and
Illinois. The cases were brought by former employees and contractors
seeking damages for asbestos related illnesses allegedly resulting from
exposure at refineries owned or operated by the Companies in Lake
Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many
of these cases, there are multiple defendants. In some cases, the
Companies are indemnified by or have the right to seek indemnification
for losses and expense that they may incur from prior owners of the
refineries or employers of the claimants. The Companies do not believe
that the resolution of the cases will have an adverse material effect
on their financial condition or results of operations.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The Companies are subject to
various federal, state and local environmental laws and regulations
which may require the Companies to take additional compliance actions
and also actions to remediate the effects on the environment of prior
disposal or release of petroleum, hazardous substances and other waste
and/or pay for natural resource damages. Maintaining compliance with
environmental laws and regulations could require significant capital
expenditures and additional operating costs.
The Companies' accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably
capable of estimation. The Companies believe the amounts provided in
their consolidated financial statements, as prescribed by generally
accepted accounting principles, are adequate in light of probable and
estimable liabilities and obligations. However, there can be no
assurance that the actual amounts required to discharge alleged
liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a
material adverse affect on their consolidated results of operations,
financial condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at the Lake Charles refinery by 1994. A mutually
acceptable closure plan was filed with the LDEQ in 1993. CITGO and its
former owner are participating in the closure and sharing the related
costs based on estimated contributions of waste and ownership periods.
The remediation commenced in December 1993. In 1997, CITGO
12
presented a proposal to the LDEQ revising the 1993 closure plan. In
1998 and 2000, CITGO submitted further revisions as requested by the
LDEQ. The LDEQ issued an administrative order in June 2002 that
addressed the requirements and schedule for proceeding to develop and
implement the corrective action or closure plan for these surface
impoundments and related waste units. Compliance with the terms of the
administrative order will begin in 2002.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998
and 1999. CITGO and TNRCC have agreed to settle all matters related to
the compliance reviews. CITGO has agreed to revise certain
environmental practices and reports and has agreed to pay $750
thousand.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. EPA that the U.S. EPA believes these companies
have contributed to contamination in the Calcasieu Estuary, in the
proximity of Lake Charles, Calcasieu Parish, Louisiana and are
Potentially Responsible Parties ("PRPs") under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"). The
U.S. EPA made a demand for payment of its past investigation costs from
CITGO and other PRPs and is conducting a Remedial
Investigation/Feasibility Study ("RI/FS") under its CERCLA authority.
CITGO and other PRPs may be potentially responsible for the costs of
the RI/FS, subsequent remedial actions and natural resource damages.
CITGO disagrees with the U.S. EPA's allegations and intends to contest
this matter.
In January and July 2001, CITGO received Notices of Violation ("NOVs")
from the U.S. EPA alleging violations of the Federal Clean Air Act. The
NOVs are an outgrowth of an industry-wide and multi-industry U.S. EPA
enforcement initiative alleging that many refineries and electric
utilities modified air emission sources without obtaining permits under
the New Source Review provisions of the Clean Air Act. The NOV's to
CITGO followed inspections and formal Information Requests regarding
the Lake Charles, Louisiana and Corpus Christi, Texas refineries and
the Lemont, Illinois refinery which at the time was operated by CITGO
but not owned by CITGO. At the U.S. EPA's request, CITGO is engaged in
settlement discussions, but is prepared to contest the NOVs if
settlement discussions fail. If CITGO settles or is found to have
violated the provisions cited in the NOVs, it would be subject to
possible penalties and significant capital expenditures for
installation or upgrading of pollution control equipment or
technologies.
In June 1999, a NOV was issued by the U.S. EPA alleging violations of
the National Emission Standards for Hazardous Air Pollutants
regulations covering benzene emissions from wastewater treatment
operations at the Lemont, Illinois refinery operated by CITGO. CITGO is
in settlement discussions with the U.S. EPA. CITGO believes this matter
will be consolidated with the matters described in the previous
paragraph.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues which provides, in part,
that the former owner will continue to share the costs of certain
specific environmental remediation and certain tort liability actions
based on ownership periods and specific terms of the agreement.
Conditions which require additional expenditures may exist with respect
to various sites of the Companies including, but not limited to, the
Companies' operating refinery complexes, closed refineries, service
stations and crude oil and petroleum product storage terminals. The
amount of such future expenditures, if any, is indeterminable.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of June 30, 2002
the Companies' petroleum commodity derivatives included exchange traded
futures contracts, forward purchase and
13
sale contracts and over-the-counter swaps. At June 30, 2002, the
balance sheet captions prepaid expenses and other current assets and
other current liabilities include $19 million and $13 million,
respectively, related to the fair values of open commodity derivatives.
The Companies have also entered into various interest rate swaps to
manage their risk related to interest rate changes on their debt. The
fair value of the interest rate swap agreements in place at June 30,
2002, based on the estimated amount that the Companies would receive or
pay to terminate the agreements as of that date and taking into account
current interest rates, was a loss of $3 million, the offset of which
is recorded in the balance sheet caption other current liabilities. In
connection with the determination of fair market value, the Companies
consider the creditworthiness of the counterparties, but no adjustment
was determined to be necessary as a result.
14
8. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the
crude oil requirements for each of CITGO's refineries. These crude oil
supply agreements contain force majeure provisions which entitle PDVSA
to reduce the quantity of crude oil and feedstocks delivered under the
crude oil supply agreements under specified circumstances. On February
9, 2001, PDVSA notified CITGO that it had declared force majeure,
effective February 1, 2001, under each of the long-term crude oil
supply agreements it has with CITGO. Under a force majeure declaration,
PDVSA may reduce the amount of crude oil that it would otherwise be
required to supply under these agreements. During 2001, PDVSA
deliveries of crude oil to CITGO were slightly less than contractual
base volumes due to this declaration of force majeure. Therefore, CITGO
was required to obtain alternative sources of crude oil, which resulted
in lower operating margins. On January 22, 2002, PDVSA notified CITGO
that pursuant to the February 9, 2001 declaration of force majeure,
effective March 1, 2002, PDVSA expected to deliver approximately 20
percent less than the contract volume and PDVSA indicated that force
majeure will be in effect until at least June 2002. To date, there have
been no updates to the January 22, 2002 notification, and as a result,
force majeure remains in effect. PDVSA delivered approximately 81
percent of the contractual crude oil volume during the second quarter
of 2002. In the six months ended June 30, 2002, PDVSA delivered
approximately 87 percent of the contractual crude oil volume. When
PDVSA reduces its delivery of crude oil under these crude oil supply
agreements, CITGO may obtain alternative sources of crude oil or
increase its purchases of refined products which may result in reduced
operating margins. As a result, CITGO estimates that crude oil costs
during the quarter ended June 30, 2002 were increased by $12 million
and during the six months ended June 30, 2002 were increased by $16
million. The future effect of this declaration on CITGO's crude oil
supply and the duration of this situation are not known at this time.
During the first half of 2002, PDVSA did not deliver naphtha pursuant
to certain contracts and has made or will make contractually specified
payments in lieu thereof.
9. INSURANCE RECOVERIES
The insurance recoveries of $116 million included in the quarter ended
June 30, 2002 and $211 million included in the six-months ended June
30, 2002 relate primarily to a fire which occurred on August 14, 2001
at the Lemont refinery. The crude unit was destroyed and the refinery's
other processing units were temporarily taken out of production. A new
crude unit was operational at the end of May 2002. The Companies have
insurance coverage for this type of event including business
interruption insurance. The Companies received cash proceeds of $142
million during the quarter ended June 30, 2002 and $243 million during
the six months ended June 30, 2002, a portion of which were applied to
receivables recorded during 2001. The Companies expect to recover
additional amounts related to this event subject to final settlement
negotiations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of PDV America should be read in conjunction with the unaudited
condensed consolidated financial statements of PDV America included elsewhere
herein. Reference is made to PDV America's Annual Report for the fiscal year
ended December 31, 2001 on Form 10-K, dated March 29, 2002, for additional
information and a description of critical accounting policies and factors which
may cause substantial fluctuations in the earnings and cash flows of PDV
America.
On January 1, 2002, PDV America contributed all of the common stock of
VPHI to CITGO. This transaction had no effect on the consolidated financial
statements of PDV America.
In the quarter ended June 30, 2002, PDV America generated a net income
of $100.0 million on total revenue of $4.9 billion compared to net income of
$255.5 million on total revenue of $5.8 billion for the same period last year.
In the six months ended June 30, 2002, PDV America generated net income of $88.2
million on revenue of $8.7 billion compared to net income of $373.5 million on
revenue of $10.8 billion for the same period last year. (See "Gross margin").
16
RESULTS OF OPERATIONS
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month and six-month periods ended June
30, 2002 and 2001:
PDV AMERICA SALES REVENUES AND VOLUMES
<Table>
<Caption>
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- -------- -------- --------
($ in millions) (gallons in millions)
Gasoline $ 2,960 $ 3,553 $ 5,069 $ 6,213 3,619 3,508 6,958 6,522
Jet fuel 322 456 632 938 472 564 1,004 1,137
Diesel/#2 fuel 783 1,005 1,540 2,193 1,173 1,264 2,492 2,721
Asphalt 183 136 223 186 277 255 354 345
Petrochemicals and industrial products 376 439 674 865 538 604 1,038 1,140
Lubricants and waxes 149 153 279 295 69 72 128 142
-------- -------- -------- -------- -------- -------- -------- --------
Total refined product sales 4,773 5,742 8,417 10,690 6,148 6,267 11,974 12,007
Other sales 20 14 48 28
-------- -------- -------- -------- -------- -------- -------- --------
Total sales $ 4,793 $ 5,756 $ 8,465 $ 10,718 6,148 6,267 11,974 12,007
======== ======== ======== ======== ======== ======== ======== ========
</Table>
17
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and six-month periods ended June 30, 2002
and 2001:
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
($ in millions) ($ in millions)
Crude oil $ 1,294 $ 1,455 $ 2,186 $ 2,781
Refined products 2,481 3,063 4,463 5,525
Intermediate feedstocks 486 448 752 757
Refining and manufacturing costs 303 281 586 582
Other operating costs, expenses and inventory changes 123 54 409 403
------------ ------------ ------------ ------------
Total cost of sales and operating expenses $ 4,687 $ 5,301 $ 8,396 $ 10,048
============ ============ ============ ============
</Table>
Sales revenues and volumes. Sales decreased $963 million, or
approximately 17%, in the three-month period ended June 30, 2002 as compared to
the same period in 2001. This was due to a decrease in average sales price of
15% and a decrease in sales volume of 2%. Sales decreased $2.3 billion, or
approximately 21%, in the six-month period ended June 30, 2002 as compared to
the same period in 2001. This was due to a decrease in average sales price of
21% and a decrease in sales volume of less than 1%. (See PDV America Sales
Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $7 million for the three-month period ended June 30, 2002 and
decreased $12 million for the six-month period ended June 30, 2002 as compared
to the same periods in 2001. The decrease was primarily due to the decrease in
the earnings of Nelson Industrial Steam Company. The Companies' share of these
earnings decreased $4 million, from $3 million in the second quarter of 2001 to
$(1) million in the second quarter of 2002, and $12 million, from $9 million in
the first six months of 2001 to $(3) million in the first six months of 2002.
Insurance recoveries. The insurance recoveries of $116 million included
in the three months ended June 30, 2002 and $211 million included in the six
months ended June 30, 2002 relate primarily to a fire which occurred on August
14, 2001 at the Lemont refinery. The crude unit was destroyed and the refinery's
other processing units were temporarily taken out of production. A new crude
unit was operational at the end of May 2002. The Companies have insurance
coverage for this type of event including business interruption insurance. The
Companies expect to recover additional amounts related to this event subject to
final settlement negotiations.
Cost of sales and operating expenses. Cost of sales and operating
expenses decreased by $614 million or 12%, in the quarter ended June 30, 2002 as
compared to the same period in 2001. Cost of sales and operating expenses
decreased by $1.7 billion or 16%, in the six months ended June 30, 2002 as
compared to the same period in 2001. (See PDV America Cost of Sales and
Operating Expenses table above.)
18
The Companies purchase refined products to supplement the production
from their refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 53% and 58% of total cost of sales and
operating expenses for the second quarters of 2002 and 2001, respectively and
53% and 55% for the first six months of 2002 and 2001, respectively. PDV America
estimates that margins on purchased products, on average, are lower than margins
on produced products due to the fact that PDV America can only receive the
marketing portion of the total margin received on the produced refined products.
However, purchased products are not segregated from PDV America produced
products and margins may vary due to market conditions and other factors beyond
the Companies' control. As such, it is difficult to measure the effects on
profitability of changes in volumes of purchased products. In the near term,
other than normal refinery turnaround maintenance, PDV America does not
anticipate operational actions or market conditions which might cause a material
change in anticipated purchased product requirements; however, there could be
events beyond the control of PDV America which impact the volume of refined
products purchased. (See also "Factors Affecting Forward Looking Statements".)
Gross margin. The gross margin for the three-month period ended June
30, 2002 was approximately 1.7 cents per gallon, compared to approximately 7.3
cents per gallon for the same period in 2001. The gross margin for the six-month
period ended June 30, 2002 was approximately 0.6 cents per gallon, compared to
approximately 5.6 cents per gallon for the same period in 2001. In the
three-month period ended June 30, 2002, the revenue per gallon component
decreased approximately 15% while the cost per gallon component decreased
approximately 10%. As a result, the gross margin decreased approximately 5.5
cents on a per gallon basis in the quarter ended June 30, 2002 compared to the
same period in 2001. In the six-month period ended June 30, 2002, the revenue
per gallon component decreased approximately 21% while the cost per gallon
component decreased approximately 16%. As a result, the gross margin decreased
approximately 5.0 cents on a per gallon basis in the six months ended June 30,
2002 compared to the same period in 2001. The gross margin is directly affected
by changes in selling prices relative to changes in costs. An increase or
decrease in the price for crude oil, feedstocks and blending products generally
results in a corresponding increase or decrease in prices for refined products.
Generally, the effect of changes in crude oil and feedstock prices on PDV
America's consolidated operating results therefore depends in part on how
quickly refined product prices adjust to reflect these changes. In the first
half of 2002, there was a substantial decrease in refined product sales prices
without an equivalent decrease in costs resulting in a significant negative
impact on PDV America's gross margin and earnings.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $79 million in the second quarter of 2001
to $75 million in the second quarter of 2002, or 4%. Selling, general and
administrative expenses increased from $140 million in the first six months of
2001 to $152 million in the same period in 2002, or 9%. The increase for the
six-month period is primarily related to sponsorship fees and the start-up
expenses related to international operations.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 2002, the Companies'
consolidated net cash provided by operating activities totaled approximately
$134 million including $243 million from insurance proceeds. Operating cash
flows were derived from net income of $88 million, depreciation and amortization
of $146 million and changes in operating assets and liabilities of $(100)
million. The more significant changes in operating assets and liabilities
included the increase in accounts receivable, including receivables from
affiliates, of approximately $187 million, the decrease in prepaid expenses of
$89 million, and the decrease in accounts payable and other current liabilities,
including payables to affiliates, of approximately $49 million. Additionally,
other long-term assets which mainly consist of cost of major refinery turnaround
maintenance increased $78 million.
19
Net cash used in investing activities totaled $420 million for the
six-month period ended June 30, 2002 consisting primarily of capital
expenditures of $350 million (compared to $81 million for the same period in
2001), the increase of restricted cash of $36 million, and the increase in
investments in affiliates of $35 million. The capital expenditures during the
six-month period of 2002 relate primarily to crude unit reconstruction at the
Lemont refinery. On August 14, 2001, a fire occurred at the crude distillation
unit of the Lemont refinery. The crude unit was destroyed and the refinery's
other processing units were temporarily taken out of production. The new crude
unit was operational at the end of May 2002.
Net cash provided by financing activities totaled $213 million for the
six-month period ended June 30, 2002 consisting primarily of $130 million in
proceeds from short term borrowings, $79 million in proceeds from revolving bank
loans, and $63 million in proceeds from the tax-exempt bonds. These proceeds are
offset in part by the payment of $25 million on master shelf agreement notes and
the payment of $25 million on taxable bonds.
As of June 30, 2002, capital resources available to the Companies
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $25 million and $40 million of uncommitted
short-term borrowing facilities with various banks. Additionally, the remaining
$400 million from CITGO's shelf registration with the Securities and Exchange
Commission for $600 million of debt securities may be offered and sold from time
to time. PDV America management believes that the Companies have sufficient
capital resources to carry out planned capital spending programs, including
regulatory and environmental projects in the near term, and to meet currently
anticipated future obligations as they arise. In addition, PDV America intends
that payment received from its notes receivable from PDVSA will provide funds to
service PDV America's $500 million of 7.875% Senior Notes. PDV America
periodically evaluates other sources of capital in the marketplace and
anticipates that long-term capital requirements will be satisfied with current
capital resources and future financing arrangements, including the issuance of
debt securities. PDV America's ability to obtain such financing will depend on
numerous factors, including market conditions and the perceived creditworthiness
of the Companies at that time. (See also "Factors Affecting Forward Looking
Statements".)
In April 2000, CITGO amended an agreement to sell trade accounts
receivable on an ongoing basis and without recourse. The amendment increased the
amount of such receivables that can be sold to $225 million. The amended
agreement expires in June 2003 and is renewable for successive annual terms by
mutual agreement.
The Companies are in compliance with their obligations under their debt
financing arrangements at June 30, 2002.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which is fully
effective in fiscal years beginning after December 15, 2001, although certain
provisions of SFAS No. 142 were applicable to goodwill and other intangible
assets acquired in transactions completed after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and requires that goodwill and intangibles with an indefinite
life no longer be amortized but instead be periodically reviewed for impairment.
The adoption of SFAS No. 142 did not materially impact the Companies' financial
position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
20
retirement costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Companies have not
determined the impact on their financial statements that may result from the
adoption of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets by requiring that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discontinued operations to include more disposal transactions. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The provisions
of this statement generally are to be applied prospectively; therefore, the
adoption of SFAS No. 144 did not impact the Companies financial position or
results of operations.
PROPOSED ACCOUNTING CHANGE
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is expected
to require companies to expense the non-capital portion of major maintenance
costs as incurred. The statement is expected to require that any existing
deferred non-capital major maintenance costs be expensed immediately. This
statement also has provisions which will change the method of determining
depreciable lives. The impact on future depreciation expense is not determinable
at this time. The exposure draft indicates that this change will be required to
be adopted for fiscal years beginning after June 15, 2003, and that the effect
of expensing existing deferred major maintenance costs will be reported as a
cumulative effect of an accounting change in the consolidated statement of
income. At June 30, 2002, the Companies had included turnaround costs of $148
million in other assets. PDV America management has not determined the amount,
if any, of these costs that could be capitalized under the provisions of the
exposure draft.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. CITGO has exposure to price fluctuations of crude oil and
refined products as well as fluctuations in interest rates. To manage these
exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which CITGO operates and finances
its assets. CITGO does not attempt to manage the price risk related to all of
its inventories of crude oil and refined products. As a result, at June 30,
2002, CITGO was exposed to the risk of broad market price declines with respect
to a substantial portion of its crude oil and refined product inventories. The
following disclosures do not attempt to quantify the price risk associated with
such commodity inventories.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply/demand and manages a portion of its price risk by entering into
petroleum commodity derivatives.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2002
<Table>
<Caption>
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- -------- ---------- -------- ------
($ in millions)
-------------------
No Lead Gasoline (1) Futures Purchased 2002 599 $ 19.4 $ 19.8
Futures Sold 2002 915 $ 30.0 $ 30.1
OTC Swaps (Pay Floating/Receive Floating)(4) 2002 25 $ -- $ --
Forward Purchase Contracts 2002 3,004 $ 96.0 $ 95.2
Forward Sale Contracts 2002 4,023 $ 129.1 $ 127.6
Distillates (1) Futures Purchased 2002 1,256 $ 34.5 $ 36.5
Futures Purchased 2003 375 $ 10.2 $ 10.9
Futures Sold 2002 317 $ 8.9 $ 9.1
Forward Purchase Contracts 2002 1,135 $ 30.7 $ 31.6
Forward Sale Contracts 2002 1,295 $ 34.7 $ 36.3
Crude Oil (1) Futures Purchased 2002 250 $ 6.6 $ 6.7
Futures Sold 2002 1,110 $ 28.7 $ 29.4
Futures Sold 2003 400 $ 9.8 $ 10.1
OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 1,270 $ -- $ 0.6
Forward Purchase Contracts 2002 8,106 $ 202.0 $ 212.1
Forward Sale Contracts 2002 4,883 $ 123.5 $ 130.0
Natural Gas (2) Futures Purchased 2002 30 $ 1.0 $ 1.0
Propane (1) OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 400 $ -- $ 0.8
OTC Swaps (Pay Floating/Receive Fixed)(3) 2003 300 $ -- $ 0.6
</Table>
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed
price agreed upon at date of contract.
(4) Pay floating price based on a market index designated in contract;
receive floating price based on a different market index designated in
contract
22
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2001
<Table>
<Caption>
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- -------- ---------- -------- ---------
($ in millions)
-----------------------
No Lead Gasoline (1) Futures Purchased 2001 299 $ 9.3 $ 9.2
Futures Sold 2001 815 $ 27.0 $ 24.2
OTC Swaps (Pay Floating/Receive Fixed)(3) 2001 200 $ -- $ (0.4)
Forward Purchase Contracts 2001 6,014 $ 194.5 $ 163.6
Forward Sale Contracts 2001 6,086 $ 195.7 $ 167.8
Distillates (1) Futures Purchased 2001 1,697 $ 54.6 $ 52.3
Futures Purchased 2002 720 $ 22.2 $ 21.9
OTC Swap Options Purchased 2001 10 $ -- $ --
OTC Swap Options Sold 2001 10 $ -- $ --
OTC Swap Options Purchased 2002 30 $ -- $ --
OTC Swap Options Sold 2002 30 $ -- $ --
Forward Purchase Contracts 2001 1,092 $ 34.3 $ 32.1
Forward Sale Contracts 2001 1,482 $ 46.2 $ 44.9
Crude Oil (1) Futures Purchased 2001 947 $ 26.2 $ 24.7
Forward Purchase Contracts 2001 6,785 $ 190.1 $ 180.2
Forward Sale Contracts 2001 7,549 $ 210.4 $ 200.4
Natural Gas (2) Futures Purchased 2001 85 $ 3.4 $ 2.9
OTC Swap Options Purchased 2001 240 $ -- $ 0.1
OTC Swap Options Sold 2001 140 $ -- $ (1.3)
</Table>
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed
price agreed upon at date of contract.
23
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At June 30, 2002
and 2001, CITGO's primary exposures were to LIBOR and floating rates on tax
exempt bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2002 AND 2001
<Table>
<Caption>
NOTIONAL
EXPIRATION FIXED RATE PRINCIPAL
VARIABLE RATE INDEX DATE PAID AMOUNT
- ------------------- ---------- ---------- ---------
($ in millions)
J.J. Kenny February 2005 5.30% $ 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
--------
$ 42
========
</Table>
The fair value of the interest rate swap agreements in place at June
30, 2002, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was a loss of $3 million.
24
For debt obligations, the table below presents principal cash flows
and related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT JUNE 30, 2002
<Table>
<Caption>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- ------------ ------------- --------- ----------------
($ in millions) ($ in millions)
2002 $ 11 9.30% $ 130 3.20%
2003 561 7.98% 470 4.20%
2004 31 8.02% 16 5.15%
2005 11 9.30% -- --
2006 251 8.06% -- --
Thereafter 159 7.88% 492 7.99%
------------ ------------ ------------ ------------
Total $ 1,024 8.01% $ 1,108 5.78%
============ ============ ============ ============
Fair Value $ 1,048 $ 1,108
============ ============
</Table>
DEBT OBLIGATIONS
AT JUNE 30, 2001
<Table>
<Caption>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- ------------ ------------- ------------ ----------------
($ in millions) ($ in millions)
2001 $ 40 9.11% $ 4 4.67%
2002 36 8.78% 16 5.01%
2003 560 7.98% -- --
2004 31 8.02% 16 6.41%
2005 11 9.30% -- --
Thereafter 380 7.99% 484 8.37%
------------ ------------ ------------ ------------
Total $ 1,058 8.07% $ 520 8.18%
============ ============ ============ ============
Fair Value $ 1,079 $ 520
============ ============
</Table>
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 7 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certificate Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United
States Code.
(b) Reports on Form 8-K:
None.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PDV AMERICA, INC.
Date: August 14, 2002 /s/ Carlos Jorda
--------------------------------------
Carlos Jorda
President and Chief Executive Officer
Date: August 14, 2002 /s/ Paul Largess
--------------------------------------
Paul Largess
Chief Accounting Officer and Treasurer
27
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
99.1 Certificate Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code
</Table>