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 March 31, 1996
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)
750 Lexington Avenue, New York, New York 10022
----------------------------------------------
(Address of principal executive office) (Zip Code)
(212) 753-5340
--------------
(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 April 30, 1996)
Page 1 of 20 Pages
<PAGE>
PDV AMERICA, INC.
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
Index
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
March 31, 1996 and December 31, 1995..............................4
Condensed Consolidated Statements of Operations --
Three Month Periods Ended March 31, 1996 and 1995.................5
Condensed Consolidated Statements of Cash Flows --
Three Month Periods Ended March 31, 1996 and 1995.................6
Notes to the Condensed Consolidated Financial Statements.......7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..............12-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................19
SIGNATURES
2
<PAGE>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 31E 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" relating to
capital expenditures and investments related to environmental compliance and
strategic planning, purchasing patterns of refined product and capital resources
available to the Companies (as defined herein) are forward looking statements.
Such statements are subject to certain risks and uncertainties, such as
increased inflation, continued access to capital markets and commercial bank
financing on favorable terms, increases in regulatory burdens, 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. Such statements are also subject to the risks of
increased costs in related technologies and such 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. Although PDV America, Inc. believes that the
expectations reflected by such forward looking statements are reasonable based
on information currently available to the Companies, no assurances can be given
that such expectations will prove to have been correct.
3
<PAGE>
PART I. FINANCIAL INFORMATION
PDV AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,400 $ 25,794
Short term investments 38,000 --
Accounts receivable, net 902,497 817,990
Due from affiliates 40,702 61,376
Inventories 784,282 785,275
Prepaid expenses and other 41,292 37,625
---------- ----------
TOTAL CURRENT ASSETS 1,829,173 1,728,060
NOTES RECEIVABLE FROM PDVSA 1,000,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT - Net 2,557,572 2,492,146
RESTRICTED CASH 15,641 1,258
INVESTMENTS IN AFFILIATES 926,228 881,960
OTHER ASSETS 118,370 116,860
---------- ----------
TOTAL ASSETS $6,446,984 $6,220,284
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank loans $ 147,000 $ 25,000
Accounts payable 410,199 438,664
Due to affiliates 245,681 176,800
Taxes other than income 160,510 173,915
Other current liabilities 242,830 241,796
Income taxes payable 8,392 6,068
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 10,559 10,562
---------- ----------
TOTAL CURRENT LIABILITIES 1,320,411 1,168,045
LONG-TERM DEBT 2,201,310 2,155,316
CAPITAL LEASE OBLIGATION 141,504 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 171,794 167,905
OTHER NONCURRENT LIABILITIES 187,205 188,707
DEFERRED INCOME TAXES 410,585 400,137
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 26,368 25,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1 par, 1000 shares authorized,
issued and outstanding 1 1
Additional capital 1,232,435 1,232,435
Retained earnings 755,371 740,616
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 1,987,807 1,973,052
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,446,984 $6,220,284
========== ==========
(See Notes to the Condensed Consolidated Financial Statements)
4
<PAGE>
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands)
THREE MONTH PERIOD ENDED
MARCH 31, MARCH 31,
1996 1995
----------- ----------
REVENUES:
Sales $ 2,566,742 $2,308,994
Sales to affiliates 40,453 48,488
----------- ----------
2,607,195 2,357,482
Equity in earnings (losses) of affiliates 9,407 12,596
Interest income from PDVSA 19,431 19,431
Other (loss) income - net (500) 3,407
----------- ----------
2,635,533) 2,392,916
----------- ----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 2,521,101 2,237,491
Selling, general and administrative expenses 44,387 34,872
Interest expense:
Capital leases 4,277 4,543
Other 41,583 39,588
Minority interest in earnings of
consolidated subsidiary 750 406
----------- ----------
2,612,098 2,316,900
----------- ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 23,435 76,016
INCOME TAXES 8,680 28,001
----------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 14,755 48,015
EXTRAORDINARY ITEM:
Gain on early extinguishment of debt,
net of related income taxes of $2,160 -- 3,380
----------- ----------
NET INCOME $ 14,755 $ 51,395
=========== ==========
(See Notes to the Condensed Consolidated Financial Statements)
5
<PAGE>
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
THREE MONTH PERIOD ENDED
MARCH 31, MARCH 31,
1996 1995
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES ($ 18,220) $ 147,451
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,400) (66,777)
(Increase) decrease in restricted cash (14,384) 5,622
Investments in LYONDELL-CITGO Refining Company, Ltd. (40,547) (73,037)
Other 2,211 424
--------- ---------
Net cash used in investing activities (153,120) (133,768)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of revolving bank loans 30,000 (30,000)
Net proceeds from short-term bank loans 122,000 29,000
Payments of term bank loans (7,353) --
Proceeds from issuance of tax-exempt bonds 25,000 --
Payments on tax-exempt bonds -- (40,237)
Proceeds from master shelf agreement -- 25,000
(Repayments) borrowings of other debt (1,786) 7,754
Proceeds from capitalized leases -- --
Payments of capital lease obligations 85 (75)
--------- ---------
Net cash provided by (used in) financing activities 167,946 (8,558)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,394) 5,125
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,794 22,642
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,400 $ 27,767
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 61,633 $ 49,310
========= =========
Income taxes $ 4,901 $ 4,377
========= =========
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements)
6
<PAGE>
PDV AMERICA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
THREE MONTH PERIOD ENDED MARCH 31, 1996
1. Basis of Presentation
The financial information for PDV America, Inc. ("PDV America" or the
"Company") subsequent to December 31, 1995 and with respect to the interim three
month periods ended March 31, 1996 and 1995 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 three month periods ended March
31, 1996 and 1995 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, 1995 on Form 10-K, dated March 29, 1996, for
additional information.
The condensed consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries (including CITGO Petroleum
Corporation ("CITGO") and its wholly owned subsidiaries) and Cit-Con Oil
Corporation, which is 65 percent owned by CITGO (collectively, the "Companies").
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for Impairment of Long-lived Assets
and for Long-lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121 establishes
the accounting for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and the
accounting for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS 121 will not have a material effect on the
consolidated financial position or results of operations of the Company.
Certain reclassifications have been made to the December 31, 1995
financial statements to conform with the classifications used at March 31, 1996.
2. Inventories
Inventories, primarily at LIFO, consist of the following:
7
<PAGE>
<TABLE>
March 31, December 31,
1996 1995
----------- -----------
(Unaudited)
(dollars in thousands)
<S> <C> <C>
Refined product........................................... $ 579,045 $ 588,696
Crude oil................................................. 158,553 149,414
Materials and supplies.................................... 46,684 47,165
--------- ---------
$ 784,282 $ 785,275
========= =========
</TABLE>
3. Long-term Debt
<TABLE>
March 31, December 31,
1996 1995
----------- -----------
(000's Omitted)
<S> <C> <C>
7.25% Senior Notes $250 million face amount due 1998 $ 249,471 $ 249,420
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 496,715 496,633
Revolving bank loan 320,000 290,000
Term bank loan 110,294 117,647
8.75% Series A Senior Notes due 1998 56,250 56,250
9.03% Series B Senior Notes due 2001 171,429 171,429
9.30% Series C Senior Notes due 2006 125,000 125,000
Master Shelf Agreement:
8.55% Senior Notes due 2002 25,000 25,000
8.68% Senior Notes due 2003 50,000 50,000
7.29% Senior Notes due 2004 20,000 20,000
8.59% Senior Notes due 2006 40,000 40,000
8.94% Senior Notes due 2007 50,000 50,000
7.17% Senior Notes due 2008 25,000 25,000
7.22% Senior Notes due 2009 50,000 50,000
Tax Exempt Bonds:
Pollution control revenue bonds due 2004 15,800 15,800
Port facilities revenue bonds due 2007 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023 3,020 3,020
Louisiana wastewater facility revenue bonds due 2024 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026 25,000 --
Cit-Con bank credit agreement 41,071 42,857
----------- -----------
2,296,550 2,250,556
Less current portion of long-term debt (95,240) (95,240)
----------- -----------
$ 2,201,310 $ 2,155,316
=========== ===========
</TABLE>
In March 1996, CITGO issued $25 million of Port of Corpus Christi
Sewage & Solid Waste Disposal Revenue Bonds due 2026.
4. Commitments and Contingencies
Litigation and Injury Claims. Various lawsuits and claims arising in
the ordinary course of business are pending against the Companies. Included
among these are (i) litigation with a contractor who is claiming additional
compensation for sludge removal
8
<PAGE>
and treatment at CITGO's Lake Charles, Louisiana refinery; CITGO is seeking
contractual penalties for nonperformance and breach of contract and also a
determination that a portion of any damages awarded would be recoverable from a
former owner; (ii) litigation against the State of Louisiana concerning a
potential assessment to CITGO and other refiners of a use tax on petroleum coke
which accumulates on catalyst during refining operations and a change to the
calculation of the sales/use tax on fuel gas generated by refinery operations;
and (iii) litigation against CITGO by a number of current and former employees
and applicants on behalf of themselves and a class of similarly situated persons
asserting claims under Federal and State laws of racial discrimination in
connection with the employment practices at CITGO's Lakes Charles, Louisiana
refining complex; the plaintiffs have appealed the Court's denial of class
certification. The Companies are vigorously contesting such lawsuits and claims
and believe that their positions are sustainable. The Company has recorded
accruals for losses it considers to be probable and reasonably estimable.
However, due to uncertainties involved in litigation, there are cases in which
the outcome is not reasonably predictable, and the losses, if any, are not
reasonably estimable. If such lawsuits and claims were to be determined in a
manner adverse to the Companies, and in amounts in excess of the Companies'
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Companies' results of operations in a given year.
The term "reasonably possible" is used herein to mean that the chance of a
future transaction or event occurring is more than remote but less than likely.
However, based upon management's current assessments of these lawsuits and
claims and that provided by counsel in such matters, and the capital resources
available to the Companies, management of the Companies believes that the
ultimate resolution of these lawsuits and claims would not exceed the aggregate
of the amounts accrued in respect of such lawsuits and claims and the insurance
coverages available to the Companies by a material amount and, therefore, should
not have a material adverse effect on the Companies' financial condition,
results of operations or liquidity.
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 action to correct or improve the effects on the
environment of prior disposal or release of petroleum substances by the
Companies or other parties. Management believes the Companies are in compliance
with these laws and regulations in all material aspects. Maintaining compliance
with environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
At March 31, 1996, the Companies had $60 million of environmental
accruals included in other noncurrent liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, management believes these accruals are adequate. Conditions
which require additional expenditures may exist for various sites of the
Companies including, but not limited to, CITGO's 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.
9
<PAGE>
Derivative Commodity and Financial Instruments. CITGO enters into
petroleum futures contracts primarily to reduce its inventory exposure to market
risk. CITGO also buys and sells commodity options for delivery and receipt of
crude oil and refined products. Such contracts are entered into through major
brokerage houses and traded on national exchanges and can be settled in cash or
through delivery of the commodity. Such contracts generally qualify for hedge
accounting and correlate to market price movements of crude oil and refined
products. Resulting gains and losses, therefore, will generally be offset by
gains and losses on CITGO's hedged inventory or future purchases and sales.
CITGO has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to manage
well defined interest rate and commodity price risks arising out of CITGO's core
activities. PDV America itself has no involvement with derivative financial
instruments. CITGO has entered into various interest rate swap and cap
agreements to manage its risk related to interest rate changes on its debt. The
fair value of the interest rate swap agreements in place at March 31, 1996,
based on the estimated amount that CITGO would receive or pay to terminate the
agreement as of that date and taking into account current interest rates was an
unrealized loss of $1 million. In connection with the determination of said fair
market value, the Companies consider the credit worthiness of the
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and operating
expenses and pretax earnings was immaterial for all periods presented. The
market risk to the Company related to these instruments was not significant
during any of the periods presented.
5. Related Party Transactions
Commencing in the third quarter of 1995, certain deductible costs
under certain of CITGO's supply agreements with subsidiaries of Petroleos de
Venezuela, S.A. ("PDVSA") were and will be deferred from 1995 and 1996 to the
years 1997 through 1999. As a result of this deferral, crude costs for the first
quarter of 1996 were approximately $11 million higher, and crude costs for the
year 1996 are estimated to be $45 million higher, than that which would
otherwise have been payable. However, from 1997 through 1999, crude oil costs
are estimated to decrease by approximately $25 million per year as a result of
the deferral and without giving effect to other factors that may affect the
price payable for crude oil under these agreements.
In February 1996, the Company received from PDVSA an advance of $38
million. Such advance, plus interest to accrue thereon through July 31, 1996, is
intended for, and restricted to, application toward the payment of interest due
on such date from PDVSA under the Mirror Notes issued to the Company by PDVSA in
connection with the Company's $1 billion issuance of Senior Notes in August
1993. The proceeds of such advance are included in Short term investments.
10
<PAGE>
6. Subsequent Events and Other
On April 4, 1996, CITGO filed a registration statement with the
Securities and Exchange Commission relating to the shelf registration of $600
million of debt securities that may be offered and sold from time to time. CITGO
anticipates that it will offer for sale to the public a tranche of debt
securities with an initial aggregate offering price of $200 million as soon as
practicable after the effective date of the registration statement. The proceeds
of such offering will be used by CITGO for general corporate purposes, including
capital expenditures and the repayment of debt.
On March 24, 1996, managerial, supervisory and other salaried
employees of The UNO-VEN Company, in which the Company has an indirect 50%
partnership interest ("UNO-VEN"), assumed operating and maintenance duties at
UNO-VEN's Lemont, Illinois refinery. UNO-VEN took this action after the Oil,
Chemical and Atomic Workers International Union Local 7-517 terminated the labor
contract extensions which had been in force since February 1, 1996 and rejected
UNO-VEN's proposals for a new contract. While UNO-VEN continues to be willing to
negotiate in good faith, the ultimate resolution of the issues involved in such
negotiations, and the timing thereof, cannot be predicted at this time. However,
UNO-VEN does not anticipate that its actions will result in any material adverse
effect on UNO-VEN's operations, and, to date, such actions have resulted in
safe, continuous and reliable operation of the refinery.
11
<PAGE>
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.
PDV America's consolidated operating results are affected both by
industry factors, such as movements in crude oil and refined product prices, and
by company-specific factors, such as the success of wholesale marketing programs
and refinery operations. Crude oil and refined products are commodities whose
price levels are determined by market forces beyond the control of PDV America,
its wholly-owned operating subsidiary CITGO or its joint venture interest
operators. The effect of changes in crude oil prices on PDV America's
consolidated operating results depends in part on how quickly refined product
prices adjust to reflect these changes. PDV America is insulated to a
substantial degree from the price volatility that the industry experiences due
to the pricing mechanisms in the crude oil supply agreements that it has with
PDVSA or subsidiaries thereof, which are designed to provide a relatively stable
level of gross margin on crude oil supplied by PDVSA or its subsidiaries. This
supply represented approximately two-thirds of the crude oil processed in
refineries operated by CITGO in the first quarter of 1996.
Due to the seasonality of refined products markets and refinery
maintenance schedules, results of operations for the first three months of a
calendar year are not necessarily indicative of results to be expected for a
full year.
Results of Operations
The following table summarizes the sources of PDV America's sales
revenues:
12
<PAGE>
PDV America Sales
Quarter Quarter
Ended March 31, Ended March 31,
---------------------------------
1996 1995 1996 1995
---------------------------------
($ in millions) (MM gallons)
Gasoline $1,482 $1,412 2,509 2,590
Jet fuel 323 269 530 551
Diesel/#2 fuel 453 332 794 700
Petrochemicals, industrial products and other
products 189 204 334 312
Asphalt 13 19 32 45
Lubricants and waxes 101 88 52 49
---------------------------------
Total refined product sales $2,561 $2,324 4,251 4,247
Other sales 46 33
---------------------------------
Total sales $2,607 $2,357 4,251 4,247
=================================
The following table summarizes PDV America' cost of sales and
operating expense:
PDV America Cost of Sales and Operating Expenses
Quarter
Ended March 31,
-------------------
1996 1995
-------------------
($ in millions)
Crude oil $ 617 $ 540
Refined products 1,378 1,185
Intermediate feedstocks 197 221
Refining and manufacturing 195 174
Other operating costs and expenses and inventory changes 134 117
-------------------
Total cost of sales and operating expenses $2,521 $2,237
===================
Sales increased $250 million, or approximately 11%, in the three month
period ended March 31, 1996, as compared to the same period in 1995. Total sales
volumes were relatively constant in the first quarter of 1996 as compared to the
first quarter of 1995. Total sales volumes of light fuels (gasoline, diesel/#2
and jet fuel) declined slightly in the first quarter of 1996 as compared to the
first quarter of 1995 as a result of increases (discussed below) in light fuels
sales volumes, excluding bulk sales, being essentially offset by decreases in
such bulk sales volumes during the period (as discussed below). Although total
sales volumes remained relatively flat, increases in light oil product sales
prices resulted in an increase in revenues for the first three months of 1996 as
compared to the first three months of 1995.
13
<PAGE>
Sales volumes of light fuels, excluding bulk sales made for logistical
reasons, increased by 10% in the first quarter of 1996 as compared to the first
quarter of 1995. Gasoline and distillates had increases of 12% and 13%,
respectively, but jet fuel volumes decreased 1%. Gasoline sales volumes
increased due to successful marketing efforts, including the net addition of 962
independently-owned CITGO branded retail outlets since March 31, 1995, bringing
the total number of CITGO branded retail outlets to 14,159 at March 31, 1996 (17
of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, were higher in the
first quarter of 1996 than in 1995. The average increase for the first quarter
of 1996 from the first quarter of 1995 was 4 cents per gallon, a 7% increase.
Sales prices of jet fuel and distillates, excluding bulk sales, increased 9 and
11 cents per gallon, respectively, or 19% and 22%, respectively, in the first
quarter of 1996 as compared to the same period in 1995.
To meet demand for its products and to manage logistics, timing
differences and product grade imbalances, CITGO purchases and sells gasoline,
diesel/#2 fuel and jet fuel from and to other refiners and in the spot market.
Such bulk sales decreased by $113 million, or 21%, from $537 million in the
three month period ended March 31, 1995 to $424 million in the same period in
1996. The decrease in revenue is a result of a 28% decrease in volumes offset by
a 9% increase in bulk sales prices between the quarters.
Petrochemicals and industrial products sales revenues decreased 26%
and increased 10%, respectively, for the three months ended March 31, 1996 as
compared to the three months ended March 31, 1995. Petrochemicals revenue
decreased as the result of a 1% increase in volume, from 97 million gallons at
March 31, 1995 to 98 million gallons at March 31, 1996, offset by a 27% decrease
in unit sales price. Industrial products had an 8% growth in volume and a 2%
increase in unit sales price.
Asphalt sales in the first quarter of 1996 were $6 million lower, and
sales volumes were 31% lower, than in the same quarter in 1995. The decrease in
sales volumes was largely associated with the fact that the first quarter sales
of 1995 were unusually high due to a mild winter in the Northeast during that
period. Asphalt sales prices increased by 5% in the first quarter of 1996 over
the first quarter of 1995.
Equity in earnings (losses) of affiliates decreased by $3 million for
the three month period ended March 31, 1996 as compared to the same period in
1995. The decrease was primarily due to the decrease in the equity in earnings
of LYONDELL-CITGO Refining Company, Ltd. (LYONDELL-CITGO) by $1 million, a
decrease in the equity in the earnings of Nelson Industrial Steam Company
(NISCO) by $1 million and a decrease in the equity in the earnings of UNO-VEN of
$1 million.
Other (loss) income was ($0.5) million for the three month period
ended March 31, 1996 as compared to $3.4 million for the same period in 1995.
The difference is
14
<PAGE>
primarily due to a $2.4 million gain on the termination of an interest rate swap
agreement recognized in the first three months of 1995.
Cost of sales and operating expenses increased by $284 million, or
13%, in the three month period ended March 31, 1996, as compared to the same
period in 1995. Higher crude oil costs (an increase from $540 million in the
first quarter of 1995 to $617 million in the first quarter of 1996) resulted
from a 15% increase in crude prices, an increase of approximately $11 million
due to an adjustment in the crude and feedstock supply agreements (discussed
below), and a less than 1% decline in crude oil volumes. Refined product
purchases increased approximately 16%, from $1,184 million in the first quarter
of 1995 to $1,378 million in the first quarter of 1996, as the result of a 4%
increase in volumes of refined product purchases to support the increase in
sales volumes discussed above, and an 11% increase in sales price between the
two periods. Intermediate feedstocks purchases decreased 11% from 1995 to 1996,
from $221 million to $197 million. Intermediate feedstock volumes are down 16%
between the two periods and sales prices increased 6% from March 31, 1995 to
March 31, 1996. Refinery and manufacturing expenses increased 12%, from $174
million to $195 million for the three month periods ended March 31, 1995 and
March 31, 1996, respectively. Purchased fuel costs increased by $7 million, from
$9 million in 1995 to $16 million in 1996, as a result of price increases.
Depreciation and amortization expense increased by $3 million, from $41 million
in 1995 to $44 million in 1996. Increased capital expenditures at the Companies'
refineries related to environmental compliance and strategic planning will
continue to result in increases in capital assets with corresponding increases
in depreciation expense.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 55% and 53% of total cost of sales and operating
expenses for the first quarter of 1996 and 1995, respectively. CITGO estimates
margins on purchased products, on average, are somewhat lower than margins on
produced products due to the fact that CITGO can only receive the marketing
portion of the total margin received on the produced refined product. However,
purchased products are not segregated from CITGO produced products and margins
may vary due to market conditions and other factors beyond the Company's
control. As such, it is difficult to measure the effects on profitability of
changes in volumes of purchased products. CITGO anticipates that its purchased
refined product requirements will continue to increase to meet marketing
demands. In the near term, other than normal refinery turnaround maintenance,
CITGO does not anticipate operational actions or market conditions which might
cause a material change in purchased product requirements. However, there could
be events beyond the control of CITGO which would impact the volume of refined
products purchased.
Commencing in the third quarter of 1995, certain deductible costs
under certain of CITGO's supply agreements with subsidiaries of PDVSA were and
will be deferred from 1995 and 1996 to the years 1997 through 1999. As a result
of this deferral, crude costs for the first quarter of 1996 increased
approximately $11 million over such costs
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in the first quarter of 1995, which is included in cost of sales and operating
expenses, and it is estimated that crude costs will be approximately $11 million
higher for the second quarter 1996 and approximately $45 million higher for the
year 1996 than what would otherwise have been payable. However, from 1997
through 1999, crude oil costs are estimated to decrease by approximately $25
million per year as a result of the deferral and without giving effect to other
factors that may affect the price paid for crude oil under these agreements.
The gross margin for the three month period ended March 31, 1996 was
$86 million, or 3.3%, compared to $120 million, or 5.1%, for the same period in
1995. The 1996 first quarter gross margin was adversely affected by the crude
and feedstock supply agreement changes, the decline in petrochemical
profitability, refinery operations and increased volumes of refined products
purchased as a percentage of sales volume (in each case, as discussed above).
Selling, general and administrative expenses increased by 27%, from
$35 million in the first quarter of 1995 to $44 million in the first quarter of
1996. The increase is primarily due to an increase of approximately $5 million
in advertising and marketing programs. Also, CITGO has begun a multi-year effort
to replace its current business information system. Expenditures related to this
project were approximately $2 million during the first quarter of 1996.
Interest expense increased $2 million, or 4% (from $44 million to $46
million) for the first quarter ended March 31, 1996. This increase is partially
due to an increase in the level of outstanding debt arising from capital
expenditures, capital contributions to LYONDELL-CITGO and reduced cash flow from
operations.
Income taxes were based on an effective tax rate of 37% for both three
month periods ended March 31, 1996 and 1995.
Net income of $51 million for the three month period ended March 31,
1995 includes an extraordinary gain of $3 million, net of related income taxes
of $2 million, due to the early extinguishment of tax-exempt Louisiana
wastewater facility revenue bonds.
Liquidity and Capital Resources
For the three month period ended March 31, 1996, the Company's
consolidated net cash used in operating activities totaled approximately $18
million, primarily reflecting net income of approximately $15 million and
depreciation and amortization of $44 million offset by the net effect of other
items of ($77) million. The more significant changes in other items included the
increase in accounts receivable, including due from affiliates, of approximately
$67 million, increases in prepaid expenses and short term investments of $50
million, partially offset by the net increase in accounts payable, including due
to affiliates, of $21 million and the positive effects of other items of $11
million.
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Net cash used in investing activities of $153 million for the three
month period ended March 31, 1996 included capital expenditures of $100 million
(compared to $67 million for the same period in 1995) and additional investments
of $41 million in LYONDELL-CITGO.
Net cash provided by financing activities of $168 million for the
three month period ended March 31, 1996 included proceeds of $122 million from
CITGO's short term borrowing facilities, $30 million from CITGO's revolving bank
facility, the issuance of $25 million of tax-exempt revenue bonds and net
repayments during the period of $9 million on CITGO's term note and other debt.
As of March 31, 1996, capital resources available to the Companies
include cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $355 million and $38.5 million of uncommitted
short-term borrowing facilities with various banks. The Companies believe that
they 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. CITGO
periodically evaluates other sources of capital in the marketplace and
anticipates long-term capital requirement will be satisfied with current capital
resources and future financing arrangements. The Companies are in compliance
with their respective obligations under their respective debt financing
arrangements at March 31, 1996.
On April 4, 1996, CITGO filed a registration statement with the
Securities and Exchange Commission relating to the shelf registration of $600
million of debt securities that may be offered and sold from time to time. CITGO
anticipates that it will offer for sale to the public a tranche of debt
securities with an initial aggregate offering price of $200 million as soon as
practicable after the effective date of the registration statement. The proceeds
of such offering will be used by CITGO for general corporate purposes, including
capital expenditures and the repayment of debt.
Derivative Commodity and Financial Instruments
CITGO enters into petroleum futures contracts primarily to reduce its
inventory exposure to market risk. CITGO also buys and sells commodity options
for delivery and receipt of crude oil and refined products. Such contracts are
entered into through major brokerage houses and traded on national exchanges and
can be settled in cash or through delivery of the commodity. Such contracts
generally qualify for hedge accounting and correlate to market price movements
of crude oil and refined products. Resulting gains and losses, therefore, will
generally be offset by gains and losses on CITGO's hedged inventory or future
purchases and sales.
CITGO has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to manage
well
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defined interest rate and commodity price risks arising out of CITGO's core
activities. PDV America itself has no involvement with derivative financial
instruments. CITGO has entered into various interest rate swap and cap
agreements to manage its risk related to interest rate changes on its debt. The
fair value of the interest rate swap agreements in place at March 31, 1996,
based on the estimated amount that CITGO would receive or pay to terminate the
agreement as of that date and taking into account current interest rates was an
unrealized loss of $1 million. In connection with the determination of said fair
market value, the Companies consider the credit worthiness of the
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and operating
expenses and pretax earnings was immaterial for all periods presented. The
market risk to the Company related to these instruments was not significant
during any of the periods presented.
New Accounting Standard
Effective January 1, 1996, the Company adopted SFAS 121. SFAS 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS 121 will not have a material
effect on the consolidated financial position or results of operations of the
Company.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 10-K
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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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: May 13, 1996 /s/ ALONSO VELASCO
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Alonso Velasco
President, Chief Executive and
Financial Officer
Date: May 13, 1996 /s/ JOSE M. PORTAS
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Jose M. Portas
Secretary
