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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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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
incorporation or organization) Identification No.)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
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(Address of principal executive office) (Zip Code)
(918) 495-4000
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(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 October 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 SEPTEMBER 30, 2002
TABLE OF CONTENTS
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PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS............................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001.........................................................................2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Nine-Month Periods Ended September 30, 2002 and 2001............................3
Condensed Consolidated Statement of Shareholder's Equity - Nine-Month Period
Ended September 30, 2002..................................................................4
Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 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
Item 4. Controls and Procedures..................................................................27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................28
Item 6. Exhibits and Reports on Form 8-K.........................................................28
SIGNATURES.............................................................................................29
CERTIFICATIONS.........................................................................................30
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 forward looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from the forward looking
statements. Those risks and uncertainties include changes in the availability
and cost of crude oil, feedstocks, blending components and refined products;
changes in prices or demand for the Companies' products as a result of
competitive actions or economic factors; changes in environmental and other
regulatory requirements, which may affect operations, operating costs and
capital expenditure requirements; costs and uncertainties associated with
technological change and implementation; inflation; and continued access to
capital markets and commercial bank financing on favorable terms. In addition,
the Companies purchase a significant portion of their crude oil requirements
from Petroleos de Venezuela, S.A. ("PDVSA" which may also be used to refer to
one or more of its subsidiaries), their ultimate parent corporation, under
long-term supply agreements, and could be adversely affected by social, economic
and political conditions in Venezuela.
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)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
----------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,234 $ 116,069
Accounts receivable, net 1,054,058 913,068
Due from affiliates 58,336 67,788
Inventories 1,080,993 1,109,346
Current portion of Notes Receivables from PDVSA 500,000 --
Prepaid expenses and other 45,577 122,921
----------- -----------
Total current assets 2,766,198 2,329,192
NOTES RECEIVABLE FROM PDVSA AND AFFILIATE 298,000 798,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,576,170 3,292,555
RESTRICTED CASH 33,507 --
INVESTMENTS IN AFFILIATES 714,007 700,701
OTHER ASSETS 268,271 231,222
----------- -----------
$ 7,656,153 $ 7,351,670
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans 119,000 --
Accounts payable 686,405 616,854
Payables to affiliates 472,640 265,518
Taxes other than income 204,124 219,699
Other 217,836 313,946
Current portion of long-term debt 798,385 107,864
Current portion of capital lease obligation 21,503 20,358
----------- -----------
Total current liabilities 2,519,893 1,544,239
LONG-TERM DEBT 971,216 1,802,809
CAPITAL LEASE OBLIGATION 35,918 46,964
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 240,376 218,706
OTHER NONCURRENT LIABILITIES 210,779 218,766
DEFERRED INCOME TAXES 825,144 793,233
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 1,323,778 1,174,806
Accumulated other comprehensive loss (3,387) (3,465)
----------- -----------
Total shareholder's equity 2,852,827 2,703,777
----------- -----------
$ 7,656,153 $ 7,351,670
=========== ===========
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)
- --------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES:
Net sales $ 5,342,794 $ 5,090,755 $ 13,698,780 $ 15,676,288
Sales to affiliates 67,777 77,357 176,654 209,346
------------ ------------ ------------ ------------
5,410,571 5,168,112 13,875,434 15,885,634
Equity in earnings of affiliates 28,132 36,722 77,405 97,543
Interest income from affiliates 16,544 16,544 49,632 49,632
Insurance recoveries 46,326 -- 256,867 --
Other expense - net (11,312) (17,358) (25,590) (15,267)
------------ ------------ ------------ ------------
5,490,261 5,204,020 14,233,748 16,017,542
------------ ------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $2,103,726, $1,803,022,
$4,989,436 and $5,280,280 from affiliates) 5,298,606 4,979,758 13,694,391 15,027,993
Selling, general and administrative expenses 67,545 73,625 219,848 213,417
Interest expense, excluding capital lease 27,471 27,123 81,338 83,966
Capital lease interest charge 1,615 2,157 5,402 6,970
Minority interest -- 957 -- 1,028
------------ ------------ ------------ ------------
5,395,237 5,083,620 14,000,979 15,333,374
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 95,024 120,400 232,769 684,168
INCOME TAXES 34,208 44,242 83,797 248,075
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 60,816 76,158 148,972 436,093
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- -- -- 13,600
------------ ------------ ------------ ------------
NET INCOME 60,816 76,158 148,972 449,693
------------ ------------ ------------ ------------
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 $43, $46, $130, and $230 77 78 232 392
------------ ------------ ------------ ------------
77 78 232 (1,058)
Foreign currency translation loss, net of related
income taxes of $(86) (154) -- (154) --
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) (77) 78 78 (1,058)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 60,739 $ 76,236 $ 149,050 $ 448,635
============ ============ ============ ============
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)
- --------------------------------------------------------------------------------
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 -- -- -- 148,972 -- 148,972
Other comprehensive income -- -- -- -- 78 78
--- --- ---------- ----------- ------- ----------
BALANCE, SEPTEMBER 30, 2002 1 $ 1 $1,532,435 $ 1,323,778 $(3,387) $2,852,827
=== === ========== =========== ======= ==========
See notes to condensed consolidated financial statements.
4
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
2002 2001
---- ----
CASH FLOW FROM OPERATING ACTIVITIES (See Note 9) $ 501,656 $ 485,741
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (478,053) (144,175)
Proceeds from sales of property, plant and equipment 718 1,656
Increase in restricted cash (33,507) --
Investments in LYONDELL-CITGO Refining LP (28,700) (19,900)
Investments in and advances to other affiliates (19,237) (304)
---------- ----------
Net cash used in investing activities (558,779) (162,723)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 119,000 26,500
Net (repayments of) proceeds from revolving bank loans (154,000) 103,350
Proceeds from loans from affiliates 9,000 --
Proceeds from issuance of tax-exempt bonds 62,501 25,000
Payments on taxable bonds (25,000) (25,000)
Payments of capital lease obligations (9,901) (17,276)
Payments of master shelf agreement notes (25,000) --
Repayments of other debt (8,312) (13,196)
Dividends paid -- (412,700)
---------- ----------
Net cash used in financing activities (31,712) (313,322)
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (88,835) 9,696
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 116,069 20,751
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,234 $ 30,447
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of $1,686 and $1,052 capitalized in 2002 and 2001 $ 87,452 $ 95,983
========== ==========
Income taxes, net of refunds of $51,381 in 2002 $ (45,293) $ 186,141
========== ==========
See notes to condensed consolidated financial statements.
5
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001
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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
nine-month periods ended September 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 nine-month periods ended September 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 September 30, 2001
financial statements to conform to the classifications used for the
periods ended September 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:
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------- ------------
(000'S OMITTED)
Refined products $ 836,085 $ 836,683
Crude oil 160,909 193,319
Materials and supplies 83,999 79,344
----------- -----------
$ 1,080,993 $ 1,109,346
=========== ===========
4. SHORT-TERM BANK LOANS
As of September 30, 2002, the Company had established $140 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 Company had $119 million and $0 of borrowings outstanding under these
facilities at September 30, 2002 and December 31, 2001, respectively.
7
5. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED)
------------- ------------
(000'S omitted)
Revolving bank loans $ 237,500 $ 391,500
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7.875% 199,890 199,867
Senior Notes due August 1, 2003 with interest rate 7.875% 499,521 499,117
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 419,871 357,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 121,000 146,000
----------- -----------
1,769,601 1,910,673
Current portion of long-term debt (798,385) (107,864)
----------- -----------
$ 971,216 $ 1,802,809
=========== ===========
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 tax exempt
environmental facilities revenue bonds due 2032. On June 28, 2002, the
Companies issued $30 million of tax exempt 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 $34
million at September 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.
CITGO is preparing for a debt offering of up to $250 million from its
remaining $400 million shelf registration with the Securities and Exchange
Commission. Net proceeds to be received from the sale of the debt
securities will be used for general corporate purposes, including capital
expenditures and repayment of indebtedness.
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 PDVSA 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.
Under a force majeure declaration, PDVSA may reduce the amount of crude
oil that it would otherwise be required to supply under the agreement.
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 increased crude costs. 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. Deliveries remained
approximately 20 percent less than contract volume through June 30, 2002.
Beginning in July 2002, contract volumes delivered increased and
deliveries are returning to contractual levels. PDVSA delivered
approximately 95 percent of the contractual crude oil volume during the
third quarter of 2002. In the nine months ended September 30, 2002, PDVSA
delivered approximately 89 percent of the contractual crude oil volume.
Crude oil was purchased in the market to replace the volume not delivered
under the contract.
CITGO has notes receivable from LYONDELL-CITGO which total $35 million at
September 30, 2002 and December 31, 2001. The notes bear interest at
market rates. Principal and interest are due July 1, 2003. CITGO presently
expects that the term of these notes will be extended as a part of the
total debt restructuring described below; accordingly, these notes are
included in other assets in the accompanying consolidated balance sheets.
9
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
which differ from participation interests. Cash distributions are
allocated to the Owners based on participation interest. Information on
CITGO's investment in LYONDELL-CITGO follows:
(000S OMITTED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- --------------
(UNAUDITED)
Carrying value of investment $ 512,630 $ 507,940
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 258,000 $ 227,000
Non current assets 1,400,000 1,434,000
Current liabilities
Debt 463,000 50,000
Loans from owners 265,000 -
Other 380,000 327,000
Non current liabilities (including debt 69,000 776,000
of $0 and $450,000 at September 30,
2002 and December 31, 2001,
respectively)
Members' equity 482,000 508,000
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------
2002 2001
------------- --------------
(UNAUDITED)
Equity in net income $ 56,127 $ 69,597
Cash distribution received 80,137 92,683
Summary of LYONDELL-CITGO's operating results:
Revenue $ 2,435,792 $ 2,691,753
Gross profit 216,499 273,484
Net income 153,969 185,822
LYONDELL-CITGO's 18-month term loan and working capital revolver will
mature in January 2003. The Owners have engaged an underwriter and expect
to replace these two credit facilities prior to the existing maturity date.
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,
allegedly excessive charges for electricity utilized by these entities'
facilities located adjacent to the Lemont, Illinois refinery. The
Companies believe they will be able to resolve these claims for a
non-material amount. 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.
Approximately seventeen related lawsuits were filed in federal and state
courts in Corpus Christi, Texas against CITGO on behalf of approximately
9,000 individuals alleging property damages, personal injury and punitive
damages. In September 2002, CITGO reached an agreement to settle
substantially all of the claims related to this incident for an amount
that will not have a material financial impact on CITGO.
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 are set to begin
in December 2003. CITGO does not expect that the ultimate resolution of
these cases will have an adverse material effect on its financial
condition or results of operations.
CITGO is among refinery defendants to state and federal lawsuits in New
York and a state action in Illinois alleging contamination of water
supplies by methyl tertiary butyl ether ("MTBE"), a component of gasoline.
Plaintiffs claim that MTBE is a defective product and that refiners failed
to adequately warn customers and the public about risks associated with
the use of MTBE in gasoline. These actions allege that MTBE poses public
health risks and seek testing, damages and remediation of the alleged
contamination. Plaintiffs filed putative class action lawsuits in federal
courts in Illinois, California, Florida and New York. CITGO was named as a
defendant in all but the California case. The federal cases were all
consolidated in a Multidistrict Litigation case in the United States
District Court for the Southern District of New York ("MDL 1358"). In July
2002, the court in the MDL case denied plaintiffs' motion for class
certification. In August 2002, a New York state court judge handling two
separate but related individual MTBE lawsuits dismissed plaintiffs'
11
product liability claims, leaving only traditional nuisance and trespass
claims for leakage from underground storage tanks at gasoline stations
near plaintiffs' water wells. The judge in the Illinois state court action
is expected to hear plaintiffs' motion for class certification in that
case sometime within the next year.
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 310 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 contractor employees 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 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
12
the corrective action or closure plan for these surface impoundments and
related waste units. Compliance with the terms of the administrative order
has begun.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted a
multi-media investigation of the Corpus Christi Refinery during the second
quarter of 2002 and has issued a Notice of Enforcement to the Companies
which identifies approximately 35 items of alleged violations of Texas
environmental regulations. The Companies anticipate that penalties will be
proposed with respect to these matters, but no amounts have yet been
specified.
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 June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air
quality regulations at the Lake Charles, Louisiana refinery. CITGO is in
settlement discussions with the LDEQ.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of the Companies' and
their subsidiaries' facilities and operations. Those audits have the
potential to reveal matters that those authorities believe represent
non-compliance in one or more respects with regulatory requirements and
for which those authorities may seek corrective actions and/or penalties
in an administrative or judicial proceeding. Based upon current
information, the Companies are not aware that any such audits or their
findings have resulted in the filing of such a proceeding or are the
subject of a threatened filing with respect to such a proceeding, nor do
the Companies believe that any such audit or their findings will have a
material adverse effect on their future business and operating results,
except for events otherwise described in
13
their Annual Report on Form 10-K for the year ended December 31, 2001 or
in this Quarterly Report on Form 10-Q for the period ended September 30,
2002.
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, former refinery sites, 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 September 30, 2002
the Companies' petroleum commodity derivatives included exchange traded
futures contracts, forward purchase and sale contracts, exchange traded
and over-the-counter options and over-the-counter swaps. At September 30,
2002, the balance sheet captions prepaid expenses and other current assets
and other current liabilities include $26 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 September 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 $4 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.
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. When PDVSA reduces its delivery of crude oil under these
crude oil supply agreements, CITGO may obtain alternative sources of crude
oil which may result in increased crude costs or increase its purchases of
refined products. 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.
Deliveries remained approximately 20 percent less than contract volume
through June 30, 2002. Beginning in July 2002, contract volumes delivered
increased and deliveries are returning to contractual levels. PDVSA
delivered approximately 98 percent of the contractual crude oil volume
during the third quarter of 2002. In the nine months ended September 30,
2002, PDVSA delivered approximately 91 percent of the contractual crude
oil volume. As a result, CITGO estimates that crude oil costs during the
quarter ended September 30, 2002 were increased by $1 million and during
the nine months ended September 30, 2002 were increased by $22 million.
14
In August 2002, two affiliates entered into agreements to advance excess
cash to the Companies from time to time under demand notes for amounts of
up to a maximum of $10 million with PDV Texas, Inc. ("PDV Texas") and $10
million with PDV Holding, Inc. ("PDV Holding"). The notes bear interest at
rates equivalent to 30-day LIBOR plus .875% payable quarterly. Amounts
outstanding on these notes at September 30, 2002 were $5 million and $4
million from PDV Texas and PDV Holding, respectively and are included in
payables to affiliates in the accompanying consolidated balance sheet.
9. INSURANCE RECOVERIES
The insurance recoveries of $46 million included in the quarter ended
September 30, 2002 and $257 million included in the nine-months ended
September 30, 2002, relate primarily to a fire which occurred on August
14, 2001 at the Lemont refinery. These recoveries are, in part,
reimbursements for expenses incurred in 2002 to mitigate the effect of the
fire on the Companies' earnings. The Companies received cash proceeds of
$49 million during the quarter ended September 30, 2002 and $292 million
during the nine months ended September 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 September 30, 2002, PDV America generated net
income of $60.8 million on total revenue of $5.5 billion compared to net income
of $76.2 million on total revenue of $5.2 billion for the same period last year.
In the nine months ended September 30, 2002, PDV America generated net income of
$149.0 million on total revenue of $14.2 billion compared to net income of
$449.7 million on total revenue of $16.0 billion for the same period last year.
(See "Gross margin").
16
RESULTS OF OPERATIONS
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month and nine-month periods ended
September 30, 2002 and 2001:
PDV AMERICA SALES REVENUES AND VOLUMES
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------------------------- -------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
($ in millions) (gallons in millions)
Gasoline $ 3,363 $ 3,069 $ 8,432 $ 9,282 4,056 3,717 11,014 10,239
Jet fuel 359 426 991 1,364 479 556 1,483 1,693
Diesel/#2 fuel 899 999 2,439 3,192 1,232 1,353 3,724 4,074
Asphalt 245 192 468 378 353 365 707 710
Petrochemicals and industrial products 379 308 1,053 1,173 555 501 1,593 1,641
Lubricants and waxes 143 156 422 451 67 74 195 216
-------------------------------------------- ------------------------------------------
Total refined product sales 5,388 5,150 13,805 15,840 6,742 6,566 18,716 18,573
Other sales 23 18 70 46
-------------------------------------------- ------------------------------------------
Total sales $ 5,411 $ 5,168 $ 13,875 $ 15,886 6,742 6,566 18,716 18,573
============================================ ==========================================
17
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and nine-month periods ended September
30, 2002 and 2001:
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ----------------------
2002 2001 2002 2001
---- ---- ---- ----
($ in millions) ($ in millions)
Crude oil $ 1,641 $ 1,257 $ 3,827 $ 4,038
Refined products 2,840 2,767 7,303 8,292
Intermediate feedstocks 352 400 1,104 1,157
Refining and manufacturing costs 314 269 900 851
Other operating costs, expenses and inventory changes 152 287 560 690
------------------------ ----------------------
Total cost of sales and operating expenses $ 5,299 $ 4,980 $13,694 $ 15,028
======================== ======================
Sales revenues and volumes. Sales increased $243 million, or
approximately 5%, in the three-month period ended September 30, 2002 as compared
to the same period in 2001. This was due to an increase in average sales price
of 2% and an increase in sales volume of 3%. Sales decreased $2 billion, or
approximately 13%, in the nine-month period ended September 30, 2002 as compared
to the same period in 2001. This was due to a decrease in average sales price of
13%. (See PDV America Sales Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $9 million for the three-month period ended September 30, 2002 and
decreased by $20 million for the nine-month period ended September 30, 2002 as
compared to the same periods in 2001. The decrease for the three month period
was primarily due to the change in the earnings of LYONDELL-CITGO, CITGO's share
of which decreased $12 million, from $30 million in the third quarter of 2001 to
$18 million in the third quarter of 2002. The decrease for the nine-month period
was primarily due to the decrease in the earnings of LYONDELL-CITGO and Nelson
Industrial Steam Company ("NISCO"). CITGO's share of LYONDELL-CITGO's earnings
decreased $14 million, from $70 million in the first nine months of 2001 to $56
million in the first nine months of 2002. CITGO's share of NISCO's earnings
decreased $11 million, from $8 million in the first nine months of 2001 to $(3)
million in the first nine months of 2002. The decrease in LYONDELL-CITGO's
earnings was primarily due to a reduction of contract crude supply and lower
margins on crude purchased in the spot market. The decrease in NISCO's earnings
was primarily related to a decrease in electricity rates from the prior year.
Insurance recoveries. The insurance recoveries of $46 million included
in the three months ended September 30, 2002 and $257 million included in the
nine months ended September 30, 2002, relate primarily to a fire which occurred
on August 14, 2001 at the Lemont refinery. These recoveries are, in part,
reimbursements for expenses incurred in 2002 to mitigate the effect of the fire
on the Companies' earnings. The Companies expect to recover additional amounts
related to this event subject to final settlement negotiations.
18
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $319 million or 6%, in the quarter ended September 30,
2002 as compared to the same period in 2001. Cost of sales and operating
expenses decreased by $1.3 billion or 9%, in the nine months ended September 30,
2002 as compared to the same period in 2001. (See PDV America Cost of Sales and
Operating Expenses table above.)
The Companies purchase refined products to supplement the production
from their refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 54% and 56% of total cost of sales and
operating expenses for the third quarters of 2002 and 2001, respectively and 53%
and 55% for the first nine 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
September 30, 2002 was approximately 1.7 cents per gallon, compared to
approximately 2.9 cents per gallon for the same period in 2001. The gross margin
for the nine-month period ended September 30, 2002 was less than one cent per
gallon, compared to approximately 4.6 cents per gallon for the same period in
2001. In the three-month period ended September 30, 2002, the revenue per gallon
component increased approximately 2% while the cost per gallon component
increased approximately 4%. As a result, the gross margin decreased
approximately 1.2 cents on a per gallon basis in the quarter ended September 30,
2002 compared to the same period in 2001. In the nine-month period ended
September 30, 2002, the revenue per gallon component decreased approximately 13%
while the cost per gallon component decreased approximately 10%. As a result,
the gross margin decreased approximately 3.6 cents on a per gallon basis in the
nine months ended September 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 nine months 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 $74 million in the third quarter of 2001
to $68 million in the third quarter of 2002, or 8%. Selling, general and
administrative expenses increased from $213 million in the first nine months of
2001 to $220 million in the same period in 2002, or 3%. The decrease for the
quarter is primarily related to a decrease in incentive compensation. The
increase for the nine-month period is primarily related to sponsorship fees,
media fees and the start-up expenses related to international operations.
19
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended September 30, 2002, the Companies'
consolidated net cash provided by operating activities totaled approximately
$502 million. Operating cash flows were derived from net income of $149 million,
depreciation and amortization of $222 million and changes in operating assets
and liabilities of $131 million. The more significant changes in operating
assets and liabilities included the increase in accounts receivable, including
receivables from affiliates, of approximately $153 million, the decrease in
prepaid expenses of $86 million, the increase in income taxes payable of $65
million, and the increase in accounts payable and other current liabilities,
including payables to affiliates, of approximately $120 million. Additionally,
other long-term assets, which mainly consist of costs of major refinery
turnaround maintenance, increased $88 million.
Net cash used in investing activities totaled $559 million for the
nine-month period ended September 30, 2002 consisting primarily of capital
expenditures of $478 million (compared to $144 million for the same period in
2001), the increase of restricted cash of $34 million, and investments in
affiliates of $48 million. The capital expenditures during the nine-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 used in financing activities totaled $32 million for the
nine-month period ended September 30, 2002 consisting primarily of the payment
of $154 million on revolving bank loans, the payment of $25 million on master
shelf agreement notes, the payment of $25 million on taxable bonds, the payment
of capital lease obligations of $10 million and the net repayments of other debt
of $8 million. These payments are offset in part by $119 million in proceeds
from short term borrowings, $63 million in proceeds from tax exempt bonds, and
$9 million in proceeds from loans from affiliates.
As of September 30, 2002, capital resources available to the Companies
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $287 million and $21 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. CITGO is preparing for a debt offering of up to $250 million from this
shelf registration. 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 and other planned expenditures 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. The Companies' 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.
20
PDV America's and CITGO's senior unsecured debt ratings, as assessed by
the three major credit rating agencies, are as follows:
================================================
PDV
America CITGO
-----------------------------------------------
Fitch BB+ BBB-
-----------------------------------------------
Moody's Ba1 Baa2
-----------------------------------------------
Standard & Poor's B BB-
================================================
The Companies' debt instruments do not contain any provisions which
trigger acceleration of payment or decreases in available borrowing capacity as
a result of changes in credit ratings.
The Companies are in compliance with their obligations under their debt
financing arrangements at September 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 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 CHANGES
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
21
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 September 30, 2002, the Companies had included turnaround costs of
$136 million in other assets. The Companies' management has not determined the
amount, if any, of these costs that could be capitalized under the provisions of
the exposure draft.
In May 2002, the FASB issued an exposure draft of a proposed
interpretation, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". This
proposed interpretation would elaborate on the disclosures made by a guarantor
in its financial statements about its obligations under certain guarantees that
it issued. It would also require a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken
in issuing the guarantee. The initial recognition and initial measurement
provisions of the proposed interpretation are expected to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are expected to be effective for financial statements of
interim or annual periods ending after December 15, 2002.
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 September 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.
22
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2002
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- ---- ------ ----- -----
($ in millions)
----------------
No Lead Gasoline (1) Futures Purchased 2002 50 $ 1.7 $ 1.7
Futures Sold 2002 2,902 $ 99.4 $ 98.1
Forward Purchase Contracts 2002 5,901 $194.7 $204.6
Forward Sale Contracts 2002 4,765 $159.8 $164.3
Distillates (1) Futures Purchased 2002 2,253 $ 72.8 $ 76.6
Futures Purchased 2003 646 $ 18.3 $ 20.6
Futures Sold 2002 350 $ 11.8 $ 11.9
Futures Sold 2003 595 $ 18.7 $ 18.5
OTC Options Purchased 2002 66 $ -- $ 0.1
OTC Options Sold 2002 66 $ -- $ (0.1)
Forward Purchase Contracts 2002 812 $ 26.7 $ 27.3
Forward Sale Contracts 2002 1,255 $ 42.6 $ 42.8
Crude Oil (1) Futures Purchased 2002 2,732 $ 83.0 $ 83.2
Futures Purchased 2003 595 $ 16.5 $ 16.5
Futures Sold 2002 377 $ 10.0 $ 11.3
Futures Sold 2003 475 $ 11.6 $ 13.5
Listed Options Purchased 2002 300 $ -- $ --
Listed Options Sold 2002 300 $ -- $ --
OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 1,280 $ -- $ (0.4)
Forward Purchase Contracts 2002 6,794 $178.1 $187.0
Forward Sale Contracts 2002 4,149 $111.5 $116.1
Natural Gas (2) Futures Sold 2002 40 $ 1.6 $ 1.7
Propane (1) OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 300 $ -- $ (0.8)
OTC Swaps (Pay Floating/Receive Fixed)(3) 2003 300 $ -- $ (0.8)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2002 75 $ -- $ 0.3
OTC Swaps (Pay Fixed/Receive Floating)(3) 2003 75 $ -- $ 0.3
- ------------------------
(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
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2001
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- ---- ------ ----- -----
($ in millions)
----------------
No Lead Gasoline (1) Futures Purchased 2001 740 $ 22.8 $ 20.0
Futures Sold 2001 880 $ 24.5 $ 23.8
Forward Purchase Contracts 2001 5,126 $149.4 $135.5
Forward Sale Contracts 2001 3,856 $111.6 $100.9
Distillates (1) Futures Purchased 2001 1,483 $ 45.6 $ 42.1
Futures Purchased 2002 1,184 $ 35.7 $ 33.0
Futures Purchased 2003 12 $ 0.3 $ 0.3
Futures Sold 2001 959 $ 30.5 $ 27.0
Futures Sold 2002 600 $ 18.7 $ 16.8
OTC Options Purchased 2001 10 $ -- $ -
OTC Options Sold 2001 10 $ -- $ -
OTC Options Purchased 2002 30 $ -- $ -
OTC Options Sold 2002 30 $ -- $ (0.1)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2001 1 $ -- $ -
Forward Purchase Contracts 2001 1,298 $ 38.5 $ 38.0
Forward Sale Contracts 2001 1,321 $ 36.7 $ 36.3
Forward Sale Contracts 2002 25 $ 0.8 $ 0.7
Crude Oil (1) Futures Purchased 2001 1,512 $ 41.9 $ 35.5
Futures Purchased 2002 600 $ 15.8 $ 14.3
Futures Sold 2001 579 $ 15.7 $ 13.5
Listed Options Purchased 2001 694 $ -- $ 0.6
Listed Options Sold 2001 1,194 $ -- $ 0.4
Forward Purchase Contracts 2001 4,215 $114.1 $ 98.6
Forward Sale Contracts 2001 3,711 $100.5 $ 86.7
Natural Gas (2) Futures Sold 2001 30 $ 0.8 $ 0.8
Futures Sold 2002 20 $ 0.6 $ 0.6
OTC Options Purchased 2001 60 $ -- $ (0.1)
OTC Options Sold 2001 30 $ -- $ (0.5)
OTC Options Sold 2001 11 $ -- $ (0.1)
- -------------------------
(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.
24
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 preferred mix of 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 September 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 SEPTEMBER 30, 2002 AND 2001
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
====
The fair value of the interest rate swap agreements in place at
September 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 $4 million.
25
For debt obligations, the table below presents principal cash flows
and related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2002
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2002 $ 11 9.30% $ 119 3.07%
2003 561 7.98% 238 3.94%
2004 31 8.02% 16 4.81%
2005 11 9.30% -- --
2006 252 8.06% -- --
Thereafter 183 7.90% 467 8.24%
------ ---- ----- ----
Total $1,049 8.01% $ 840 6.23%
====== ==== ===== ====
Fair Value $1,080 $ 840
====== =====
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2001
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% $ 66 3.44%
2002 36 8.78% 18 3.81%
2003 560 7.98% 85 4.45%
2004 31 8.02% 16 5.14%
2005 11 9.30% -- --
Thereafter 380 7.99% 484 8.14%
------ ---- ----- ----
Total $1,058 8.07% $ 669 7.02%
====== ==== ===== ====
Fair Value $1,095 $ 669
====== =====
</Table>
26
ITEM 4. CONTROLS AND PROCEDURES
The certifying officers of PDV America are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for PDV America and have (i) designed such disclosure
controls and procedures to ensure that material information relating to PDV
America, including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in which this
quarterly report is being prepared; and (ii) evaluated the effectiveness of the
Companies' disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
this evaluation, the chief executive officer and the chief financial officer of
PDV America have concluded that the Companies' disclosure controls and
procedures were effective during the quarter being reported on in this quarterly
report.
PDV America's certifying officers have indicated that there were no
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their most
recent evaluation, including any significant deficiencies or material weaknesses
that would require corrective actions.
27
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 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
28
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: November 8, 2002 /s/ Carlos Jorda
------------------------------------------
Carlos Jorda
President and Chief Executive Officer
Date: November 8, 2002 /s/ Paul Largess
------------------------------------------
Paul Largess
Chief Accounting Officer and Treasurer
29
CERTIFICATIONS
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Carlos Jorda, President and Chief Executive Officer of PDV America, Inc.
("PDV America"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2002 of PDV America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of PDV America as of, and for, the periods presented in this
quarterly report;
4. PDV America's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for PDV America and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to PDV America, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of PDV America's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. PDV America's other certifying officer and I have disclosed, based on our
most recent evaluation, to PDV America's auditors and the audit committee
of PDV America's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect PDV America's ability to record,
process, summarize and report financial data and have identified for PDV
America's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in PDV America's internal controls;
and
30
6. PDV America's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ Carlos Jorda
------------------------ ------------------------------
Name: Carlos Jorda
Title: Chief Executive Officer
31
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Luis Davila, Chief Financial Officer of PDV America, Inc. ( "PDV America"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2002 of PDV America;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of PDV America as of, and for, the periods presented in this
quarterly report;
4. PDV America's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for PDV America and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to PDV America, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of PDV America's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. PDV America's other certifying officer and I have disclosed, based on our
most recent evaluation, to PDV America's auditors and the audit committee
of PDV America's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect PDV America's ability to record,
process, summarize and report financial data and have identified for PDV
America's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in PDV America's internal controls;
and
32
6. PDV America's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002 /s/ Luis Davila
------------------------ ----------------------------------
Name: Luis Davila
Title: Chief Financial Officer
33
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
Exhibit 99.1 Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.