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, 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.
----------------------------------------------------
(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, 1996)
Page 1 of 21
<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 September 30, 1996
Index
-----
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets --
September 30, 1996 and December 31, 1995..............................4
Condensed Consolidated Statements of Operations --
Three Month Periods Ended September 30, 1996 and 1995 and
Nine Month Periods Ended September 30, 1996 and 1995..................5
Condensed Consolidated Statements of Cash Flows --
Nine Month Periods Ended September 30, 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.........12-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
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
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PDV AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 30,028 $ 25,794
Accounts receivable, net 926,320 817,990
Due from affiliates 40,522 61,376
Inventories 897,615 785,275
Prepaid expenses and other 72,258 37,625
---------- ----------
TOTAL CURRENT ASSETS 1,966,743 1,728,060
========== ==========
NOTES RECEIVABLE FROM PDVSA 1,000,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT, Net 2,705,133 2,492,146
RESTRICTED CASH 12,028 1,258
INVESTMENTS IN AFFILIATES 999,589 881,960
OTHER ASSETS 144,199 116,860
---------- ----------
TOTAL ASSETS $6,827,692 $6,220,284
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank loans $ 86,000 $ 25,000
Accounts payable 473,825 438,664
Due to affiliates 223,904 176,800
Taxes other than income 159,497 173,915
Other current liabilities 252,448 241,796
Income taxes payable 6,903 6,068
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 11,150 10,562
---------- ----------
TOTAL CURRENT LIABILITIES 1,308,967 1,168,045
LONG-TERM DEBT 2,463,003 2,155,316
CAPITAL LEASE OBLIGATION 135,776 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 179,523 167,905
OTHER NONCURRENT LIABILITIES 193,532 188,707
DEFERRED INCOME TAXES 459,799 400,137
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 27,071 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 827,585 740,616
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,060,021 1,973,052
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,827,692 $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)
<TABLE>
<CAPTION>
Three Month Period Ended Nine Month Period Ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 3,258,006 $ 2,659,890 $ 9,071,078 $ 7,860,553
Sales to affiliates 52,450 47,593 180,569 156,556
----------- ----------- ----------- -----------
3,310,456 2,707,483 9,251,647 8,017,109
Equity in earnings (losses) of affiliates 9,163 12,696 34,699 41,426
Interest income from PDVSA 19,432 19,432 58,294 58,294
Other (loss) income, net (342) 271 (889) 3,421
----------- ----------- ----------- -----------
3,338,709 2,739,882 9,343,751 8,120,250
----------- ----------- ----------- -----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 3,186,413 2,596,525 8,936,804 7,683,709
Selling, general and administrative expenses 45,290 43,062 123,164 117,571
Interest expense:
Capital leases 4,133 4,413 12,686 13,499
Other 45,319 43,214 131,049 126,686
(77) 443 1,453 1,259
----------- ----------- ----------- -----------
Minority interest 3,281,078 2,687,657 9,205,156 7,942,724
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 57,631 52,225 138,595 177,526
INCOME TAXES 21,419 19,443 51,626 65,973
----------- ----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY
ITEM 36,212 32,782 86,969 111,553
EXTRAORDINARY ITEM:
Gain on early extinguishment of debt,
net of related income taxes of
$2,160 -- -- -- 3,380
----------- ----------- ----------- -----------
NET INCOME $ 36,212 $ 32,782 $ 86,969 $ 114,933
=========== =========== =========== ===========
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements)
5
<PAGE>
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Month Period Ended
September 30, September 30,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 73,657 $ 190,560
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (318,354) (207,844)
(Increase) decrease in restricted cash (10,770) 18,038
Investments in LYONDELL-CITGO Refining Company, Ltd. (106,361) (147,768)
Investments in and advances to affiliates -- (47,805)
Other 3,700 810
--------- ---------
Net cash used in investing activities (431,785) (384,569)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of revolving bank loans (10,000) (35,000)
Net proceeds from short-term bank loans 61,000 65,000
Proceeds from issuance of CITGO senior notes 199,694 --
Payments of term bank loans (22,059) --
Proceeds from issuance of tax-exempt bonds 25,000 90,700
Proceeds from issuance of taxable bonds 120,000 --
Payments on tax-exempt bonds -- (40,237)
Proceeds from master shelf agreement -- 100,000
(Repayments) borrowings of other debt (5,357) 4,183
Capital contribution from parent -- 15,000
Payments of capital lease obligations (5,916) (4,784)
--------- ---------
Net cash provided by financing activities 362,362 194,862
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 4,234 853
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,794 22,642
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,028 $ 23,495
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 150,859 $ 145,155
========= =========
Income taxes $ 31,213 $ 43,786
========= =========
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements)
6
<PAGE>
PDV AMERICA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 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
and nine month periods ended September 30, 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 and nine month periods ended September 30, 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 did not have a material effect on the
consolidated financial position or results of operations of the Company.
Certain reclassifications have been made to the September 30, 1995 and
the December 31, 1995 financial statements to conform with the classifications
used at September 30, 1996.
2. Inventories
Inventories, primarily at LIFO, consist of the following:
7
<PAGE>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
(Dollars in Thousands)
Refined product $700,083 $588,696
Crude oil 149,906 149,414
Materials and supplies 47,626 47,165
-------- --------
$897,615 $785,275
======== ========
3. Long-term Debt
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(Unaudited)
(Dollars in Thousands)
<S> <C> <C>
7.25% Senior Notes $250 million face amount due 1998 $ 249,573 $ 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 496,876 496,633
Revolving bank loan 280,000 290,000
Term bank loan 95,588 117,647
Private Placement:
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
7.875% Senior Notes $200 million face amount due 2006 199,707 --
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 --
Taxable Bonds:
Louisiana wastewater facility revenue bonds due 2026 120,000 --
Cit-Con bank credit agreement 37,500 42,857
----------- -----------
2,558,243 2,250,556
-----------
Less current portion of long-term debt (95,240) (95,240)
----------- -----------
$ 2,463,003 $ 2,155,316
=========== ===========
</TABLE>
8
<PAGE>
In March 1996, CITGO issued $25 million of Port of Corpus Christi
Sewage and Solid Waste Disposal Revenue Bonds due 2026. On April 4, 1996, CITGO
filed a registration statement with the Securities and Exchange Commission
related to the shelf registration of $600 million of debt securities that may be
offered and sold from time to time. Pursuant to such registration statement, on
May 23, 1996, CITGO issued $200 million face amount of 7.875% Senior Notes due
2006.
On July 25, 1996, CITGO issued $120 million of taxable environmental
revenue bonds due 2026. The bonds were issued at a variable rate of interest,
which was 5.429% on the date of issuance.
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 and treatment at CITGO's Lake Charles, Louisiana
refinery; CITGO is seeking contractual penalties for non-performance and breach
of contract and also a determination that a portion of any damages awarded would
be recoverable from a former owner; a trial is currently scheduled for March
1997 concerning the non-performance and breach of contracts issues; (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, a Louisiana Supreme
Court decision on a similar industry case is expected by December 31, 1996; 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 initial trials on this litigation are currently scheduled for
March 1997. The Companies are vigorously contesting or pursuing, as applicable,
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,
including the matters noted above, 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
9
<PAGE>
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 September 30, 1996, the Companies had $58 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.
Recent Developments Relating to Environmental Compliance. Recent
developments relating to environmental compliance and remediation matters
include the following: (i) during late 1993 and 1994, CITGO Asphalt Refining
Company ("CARCO") received two Notices of Violation and two Compliance Orders
from the U.S. Environmental Protection Agency ("EPA") related to the operations
of certain units at CARCO's Paulsboro, New Jersey asphalt refinery. CARCO
disagreed with those allegations, but entered into a consent decree with the EPA
that settles this matter for $1,230,000 in October 1996. In November 1996, the
EPA filed the Consent Decree with the U.S. District Court, District of New
Jersey for public comments and judicial approval; and (ii) on September 30,
1996, CITGO received a Notice of Violation from the EPA, Washington D.C.,
alleging ten violations of the Clean Air Act in the Chicago-Gary-Lake County,
Illinois-Indiana-Wisconsin area, arising from the sale of gasoline that failed
to meet the applicable minimum or maximum applicable oxygen content. The EPA has
not yet proposed penalties, but CITGO anticipates the proposed penalty could
possibly exceed $100,000 but the Company does not expect that such penalties
will have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
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 on such contracts, therefore, will
generally be offset by gains and losses on CITGO's hedged inventory or future
purchases and sales.
10
<PAGE>
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 September 30, 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 gain of $0.2 million. In connection with the determination of said
fair market value, the Companies consider the creditworthiness 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.
Management believes that the market risk to the Company related to these
instruments was insignificant during the periods presented.
5. Related Party Transactions
CITGO has various long-term crude oil and feedstock supply agreements
with subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"). Commencing in the
third quarter of 1995, certain deductible costs under certain of CITGO's supply
agreements 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 nine
months and third quarter of 1996 were approximately $33 million and $11 million
higher, respectively, and crude costs for the full 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.
6. Other Matters
On March 24, 1996, managerial, supervisory and other salaried employees
of The UNO-VEN Company ("UNO-VEN"), in which the Company has an indirect 50%
partnership interest, 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 has negotiated and is willing to
continue to negotiate in good faith with the Oil, Chemical and Atomic Workers
International Union Local 7-517, 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.
Petroleum industry operations and profitability are influenced by a
large number of factors, which individual petroleum refining and marketing
companies cannot entirely control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum, refining and marketing activities, regulating
the manner in which companies conduct their operations and formulate their
products, and, in some cases, directly limiting their profits. Demand for crude
oil and refined products is largely driven by the condition of local and
worldwide economies, although weather patterns (including both seasonal and
year-to-year variations) and taxation relative to other energy sources can also
be significant. The Company's consolidated operating results are affected by
these industry-specific and by company-specific factors, such as the success of
marketing programs and refinery operations.
The refining and marketing business is characterized by high fixed
costs resulting from significant capital investments associated with refineries,
terminals and related facilities. It is also characterized by substantial
fluctuations in variable costs related to costs of crude oil, feedstocks and
blending components, and substantial fluctuation in the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
Although an increase or decrease in the price of crude oil, feedstocks or
blending components generally results in a corresponding increase or decrease in
the price of refined products, there is usually a lag in the realization of any
such corresponding change. 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 changes in crude oil, feedstock or blending component
prices. During the nine months ended September 30, 1996, CITGO purchased
approximately two-thirds of its crude oil requirements under long-term contracts
with subsidiaries of PDVSA. These supply agreements are designed to reduce the
volatility of earnings and cash flows from CITGO's refining operations by
providing a relatively stable level of gross margin on the crude oil supplied.
However, CITGO purchased approximately one-third of its crude oil requirement
from other sources, which purchases were subject to market pricing to varying
degrees. In addition, CITGO purchases significant volumes of refined products to
supplement the production from its refineries to meet market demands and resolve
logistical problems. The sale of petrochemicals by CITGO can, if market
conditions are favorable, contribute significantly to PDV America's consolidated
income. However, petrochemical profit margins have decreased during the first
nine months of 1996 from 1995 levels. Inflation was not a significant factor in
the operations of the Companies during 1995 or the first nine months of 1996.
Due to the seasonality of refined products and refinery maintenance
schedules, results of operations for the first nine months or the third quarter
of a calendar year are not necessarily indicative of results to be expected for
the full year.
12
<PAGE>
Results of Operations
The following table summarizes the sources of PDV America's sales
revenues:
PDV America Sales
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended Quarter Ended Nine Months Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
1996 1995 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ---- ---- ----
(Dollars in Millions) (Gallons in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline $1,959 $1,663 $5,430 $4,977 3,023 2,947 8,434 8,498
Jet fuel 396 285 1,041 838 634 556 1,727 1,656
Diesel/#2 fuel 496 324 1,544 983 817 664 2,632 2,020
Petrochemicals,
industrial products
and other products 212 206 601 626 366 459 1,043 1,115
Asphalt 94 90 182 186 209 178 416 382
Lubricants and waxes 111 112 326 300 56 58 166 158
------ ------ ------ ------ ------ ------ ------ ------
Total refined
product sales $3,268 $2,680 $9,124 $7,910 5,105 4,862 14,418 13,829
Other sales 42 27 128 107 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total sales $3,310 $2,707 $9,252 $8,017 5,105 4,862 14,418 13,829
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The following table summarizes PDV America's cost of sales and
operating expenses:
PDV America Cost of Sales and Operating Expenses
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
(Dollars in Millions)
Crude oil $ 747 $ 588 $2,129 $1,840
Refined products 1,829 1,393 5,224 4,284
Intermediate feedstocks 250 253 676 687
Refining and manufacturing costs 201 195 602 559
Other operating costs and expenses and
inventory changes 159 168 306 314
------ ------ ------ ------
Total cost of sales and operating expenses $3,186 $2,597 $8,937 $7,684
====== ====== ====== ======
Sales, revenues and volumes. Sales increased $603 million, or
approximately 22%, in the three-month period ended September 30, 1996, and by
$1,235 million, or 15%, in the nine-month period ended September 30, 1996, as
compared to the same periods in 1995. Total sales volumes increased by 5% from
4,862 million gallons in the third quarter of 1995 to 5,105 million gallons in
the third quarter of 1996, and increased by 4% from 13,829 million gallons in
the first nine months of 1995 to 14,418 million gallons in the first nine months
of
13
<PAGE>
1996. The increase in volumes, coupled with increases in most product sales
prices, resulted in the increase in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 10% in the third
quarter of 1996 as compared to the third quarter of 1995, and increased by 11%
in the first nine months of 1996 as compared to the same period in 1995.
Gasoline, jet fuel and diesel/#2 fuel, excluding bulk sales, had sales volume
increases of 8%, 13% and 23%, respectively, in the third quarter of 1996,
compared to the third quarter of 1995. For the nine-month period ended September
30, 1996 versus the same period in 1995, gasoline, jet fuel and diesel/#2 fuel,
excluding bulk sales, had sales volume increases of 10%, 6% and 23%,
respectively. Gasoline sales volumes increased due to successful marketing
efforts, including the net addition of 808 independently owned CITGO branded
retail outlets since September 30, 1995, bringing the total number of CITGO
branded retail outlets to 14,572 at September 30, 1996, (17 of which are owned
by CITGO).
Sales prices of gasoline, excluding bulk sales, have been higher for
the nine-month period ended September 30, 1996 as compared to the same period in
1995. The average increase for the third quarter of 1996 over the third quarter
of 1995 is 9 cents per gallon, representing a 15% increase. Sales prices of jet
fuel and diesel/#2 fuel, excluding bulk sales, increased 11 cents and 12 cents
per gallon, respectively, or 22% and 24%, respectively, in the third quarter of
1996 as compared to the same period in 1995. For the nine-month period ended
September 30, 1996, gasoline prices were approximately 10% higher, jet fuel
prices were approximately 18% higher and diesel/#2 fuel prices were
approximately 22% higher 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 increased by $93 million, or 15%, from $619 million in the
three-month period ended September 30, 1995 to $712 million in the same period
in 1996, and decreased by $24 million, or 1%, from $1,913 million in the
nine-month period ended September 30, 1995 to $1,889 million in the same period
in 1996. The increase in the three-month period ended September 30, 1996 in
revenue is a result of a 16% increase in bulk sales prices partially offset by a
less than 1% decrease in volumes and the decrease in the nine-month period ended
September 30, 1996 is a result of a 10% decrease in volumes partially offset by
a 10% increase in bulk sales prices. Despite the nine-moth period decrease in
overall bulk sales revenue, bulk sales revenue of diesel/#2 fuel increased by
$76 million, or 52% for the third quarter ended September 30, 1996 and increased
$277 million, or 67% for the nine-month period ended September 30, 1996 as
compared to the same periods in 1995. The increase in diesel/#2 fuel bulk sales
revenue is the result of a 23% increase in volumes combined with a 24% increase
in sales prices between the quarters and a 40% increase in volumes combined with
a 19% increase in bulk sales prices between the nine-month periods.
Petrochemicals and industrial products sales revenues increased 8% and
decreased 2%, respectively, for the three months ended September 30, 1996 as
compared to the three months ended September 30, 1995, and decreased 14% and
increased 6%, respectively, for the nine months ended September 30, 1996 as
compared to the nine months ended September 30, 1995. The petrochemicals revenue
increase was the result of a 10% increase in volume partially offset by a 3%
decrease in unit sales price and the decrease for the nine-month period ended
September 30, 1996 was the result of a 17% decrease in unit sales prices and a
2% increase in
14
<PAGE>
volume as compared to the same periods in 1995. The industrial products revenue
decrease was the result of an 11% increase in unit sales prices and a 12%
decrease in volumes for the third quarter of 1996 and the increase was the
result of an 8% increase in unit sales prices and a 2% volume decrease for the
nine-month period ended September 30, 1996, as compared to the same periods in
1995.
Asphalt sales revenues in the third quarter of 1996 were $4 million
higher, and sales volumes were 17% higher as compared to the same period in
1995, and sales revenues were $2 million lower, and sales volumes were 9%
higher, in the first nine months of 1996 as compared to the same period in 1995.
Asphalt sales prices decreased 11% in the third quarter of 1996, and 9% in the
first nine months of 1996, from the same periods in 1995.
Equity in earnings (losses) of affiliates. Equity in earnings of
affiliates, in the aggregate, decreased by $3.5 million overall for the
three-month period and decreased $6.7 million overall for the nine-month period
ended September 30, 1996 as compared to the same periods in 1995. For the third
quarter periods, equity in earnings of Nelson Industrial Steam Company ("NISCO")
increased by $1.1 million, from a loss of $1.2 million in the third quarter of
1995 to a loss of $0.1 million in the third quarter of 1996 and equity in the
earnings of UNO-VEN increased $1.3 million, from $4.0 million in the third
quarter of 1995 to $5.3 million in the third quarter of 1996 while equity in the
earnings of LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") decreased
$4.8 million, from $4.0 million in the third quarter of 1995 to $0.8 million in
the third quarter of 1996. For the first nine months, the decrease in 1996 from
1995 was primarily due to a decrease in the equity in the earnings of
LYONDELL-CITGO which decreased $7.6 million, from $11.2 million in the first
nine months of 1995 to $3.6 million in the first nine months of 1996. This
decrease was partially offset by an increase in the equity in earnings of NISCO
of $2.0 million, from a loss of $4.4 million to a loss of $2.4 million in the
nine months ended September 30, 1995 as compared to 1996.
As of September 30, 1996, LYONDELL-CITGO was not in compliance with a
financial ratio covenant contained in LYONDELL-CITGO's $450 million five-year
credit facility and its $70 million 360-day revolving working capital facility
(together the "LCR Credit Facilities"). Effective as of November 13, 1996, the
LCR Credit Facilities were amended for the third quarter of 1996 through June
30, 1997. As a result of these amendments, LYONDELL-CITGO is currently in
compliance with the financial covenants in the LCR Credit Facilities.
Other (loss) income, net. Other (loss) income, net was $(0.9) million
for the nine-month period ended September 30, 1996 as compared to $3.4 million
for the same period in 1995. The difference is primarily due to a $2.4 million
gain on the termination of an interest rate swap agreement recognized in the
first nine months of 1995.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $589 million or 23%, in the quarter ended September 30,
1996, and increased $1,253 million, or 16%, in the nine-month period ended
September 30, 1996, as compared to the same periods in 1995. Higher crude oil
costs (an increase from $588 million in the third quarter of 1995 to $747
million in the third quarter of 1996) resulted from a 22% increase in crude
prices, and a 4% increase in crude oil volumes purchased. Crude oil costs
increased from $1,840 million in the nine-month period ended September 30, 1995
to $2,129 million in the first nine months of 1996, the result of a 14% increase
in crude prices, and a 1% increase in crude
15
<PAGE>
oil volumes purchased. Refined product purchases increased in 1996 as compared
to the comparable period in 1995 (a 31% increase from $1,393 million to $1,829
million for the third quarter, and a 22% increase from $4,284 million to $5,224
million, for the first nine months). These increases resulted from increases in
refined product purchase volumes (a 15% increase for the third quarter and a 10%
increase for the first nine months of 1996 as compared to the same periods in
1995), and changes in prices (a 15% increase for the third quarter and a 10%
increase for the first nine months of 1996 as compared to the same periods in
1995). Intermediate feedstock purchases decreased to $250 million from $253
million in the third quarter of 1995, or a decrease of 1%, and decreased to $676
million for the first nine months of 1996 from $687 million for the first nine
months of 1995, or a decrease of 25%. Intermediate feedstock volumes purchased
decreased 22%, and prices increased 27% between the quarters ended September 30,
1995 and September 30, 1996. Intermediate feedstock volumes purchased decreased
13% and prices increased 13% between the nine-month periods ended September 30,
1995 and September 30, 1996. Refining and manufacturing expenses increased for
both periods in 1996 as compared to 1995, 3% for the third quarter (from $195
million to $201 million), and 8% for the nine-month period ended September 30
(from $559 million to $602 million). The increases in refining and manufacturing
expenses are due primarily to increased costs of purchased fuel and electricity
at CITGO's Lake Charles and Corpus Christi refineries as well as the additional
manufacturing costs related to the lubricants plant acquired in May 1995.
Depreciation and amortization expense increased by $9 million, from $42 million
to $51 million for the quarters ended September 30, 1995 and 1996, respectively,
and by $17 million, from $122 million to $139 million for the nine-month periods
ended September 30, 1995 and 1996, respectively, due in both cases to increases
in depreciation and turnaround amortization. Increased capital expenditures are
expected to continue to result in 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 57% and 54% of total costs of sales and operating
expenses for the third quarters of 1996 and 1995, respectively, and 58% and 56%
for the first nine months of 1996 and 1995, respectively. CITGO estimates that
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 products. However,
purchased products are not segregated from CITGO's 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 market 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 and profit
margins 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. The estimated impact
of this adjustment is an increase in crude oil cost of $11 million per quarter
beginning in the third quarter of 1995 and $45 million for 1996 over what would
otherwise have been payable. As a result of this deferral, crude costs for the
first nine months of 1996 increased approximately $33 million over such costs in
the first nine months of 1995. (See Note 5 to the Condensed Consolidated
Financial
16
<PAGE>
Statements.) 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 the supply agreements, effective January 1, 1992, between CITGO and PDVSA.
Gross margin. The gross margin for the three-month period ended
September 30, 1996 was $124 million, or 3.7%, compared to $111 million, or
4.1%, for the same period in 1995. The gross margin for the nine-month period
ended September 30, 1996 was $315 million, or 3.4%, compared to $333 million, or
4.2% for the nine-month period ended September 30, 1995. Gross margins in 1996
have been adversely affected by the scheduled modifications to the pricing
provisions in the crude and feedstock supply agreements, the decline in
petrochemical profitability, increased volumes of refined products purchased as
a percentage of sales volume and increased costs of purchased fuel and
electricity at the refineries (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the third quarter of 1996 by 5%, from $43
million in the third quarter of 1995 to $45 million in the third quarter of
1996, and increased 3% from $118 million in the first nine months of 1995 to
$123 million in the same period in 1996. The increase during the third quarter
and the nine months ended September 30, 1996 is primarily due to increased
marketing expenses in 1996, including the effect of the change in focus of the
Company's marketing programs, designed to defend market share and increase
volumes sold to existing distributors by providing an incentive which is earned
over time.
Interest expense. Interest expense increased by approximately $1
million, or 4% (from $48 million to $49 million), for the third quarter ended
September 30, 1996, and increased year-to-date by approximately $4 million, or
4% (from $140 million to $144 million), as compared to the same period in 1995.
Income taxes. Income taxes for each period reported were based on an
effective tax rate of approximately 37%.
Net income. The net income of $115 million for the nine-month period
ended September 30, 1995 includes an after-tax extraordinary gain of $3.4
million on the early extinguishment of certain tax-exempt debt.
Liquidity and Capital Resources
For the nine-month period ended September 30, 1996, the Company's
consolidated net cash provided by operating activities totaled approximately $74
million. Net income of $87 million and depreciation and amortization of $142
million were offset by net changes in other items of $155 million. The more
significant changes in other items included an increase in accounts receivable
(including amounts due from affiliates) of $96 million, increases in inventory
of $112 million and increases in prepaid expenses and other assets of $63
million, which were partially offset by increases in accounts payable (including
amounts due to affiliates) of $63 million, increases in deferred taxes of $19
million, and an increase in other liabilities of $29 million. The increase in
accounts receivable is due primarily to an increase in credit card receivables
and crude oil receivables. The increase in credit card receivables is
17
<PAGE>
primarily the result of an increase in the number of active accounts, higher
gasoline prices and increased use of revolving credit. The increase in crude oil
receivables is a result of an increase in crude oil sales volumes and prices.
Refined products inventories have increased from year-end 1995 due to normal
seasonal fluctuations for various products. The Company anticipates that
inventory levels will be 5% to 10% higher as compared to December 31, 1995
levels by the end of 1996.
Net cash used in investing activities of $432 million for the
nine-month period ended September 30, 1996 include capital expenditures of $318
million (compared to $208 million for the same period in 1995), additional
investment in LYONDELL-CITGO of $106 million (compared to $148 million for the
same period in 1995) and an increase in restricted cash of $11 million. Net cash
provided by financing activities of $362 million for the nine-month period ended
September 30, 1996 included proceeds to CITGO of $61 million from short-term
borrowing facilities, proceeds of $25 million from a tax-exempt revenue bond
issue and proceeds of $120 million from a taxable revenue bond issue. CITGO also
received approximately $200 million from the public offering of a tranche of
debt securities from the $600 million shelf registration statement filed with
the Securities and Exchange Commission in April 1996. Funds received from these
financing activities were partially offset by net repayments of $43 million on
the Company's term loan, revolving bank loans and other debt.
As of September 30, 1996, capital resources available to the Company
include cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $395 million and $94 million of uncommitted
short-term borrowing facilities with various banks. The Company believes that it
has 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 that
long-term capital requirements will be satisfied with current capital resources
and future financing arrangements. The Companies believe that they are in
compliance with their obligations under their debt financing arrangements at
September 30, 1996 in all material respects.
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
investments. 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 September 30, 1996,
based on the
18
<PAGE>
estimated amount that CITGO would receive or pay to terminate the agreements as
of that date and taking into account current interest rates, was an unrealized
gain of $0.2 million. In connection with the determination of said fair market
value, the Company considered the creditworthiness of the counterparties, but no
adjustment was determined to be necessary as a result of such consideration.
The impact of these instruments on costs of sales and operating
expenses and pretax earning was immaterial for all periods presented. Management
considers the market risk to the Company related to these instruments to be
insignificant during 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 did not have a material
effect on the consolidated financial position or results of operations of the
Company.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of certain recent developments relating to
environmental compliance, see Note 4 to the Condensed Consolidated Financial
Statements (unaudited) for the Three and Nine Month Periods Ended September 30,
1996, included in Part I hereof.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter
for which this report is filed.
20
<PAGE>
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 14, 1996 /s/ ALONSO VELASCO
------------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Date: November 14, 1996 /s/ JOSE M. PORTAS
-------------------------------
Jose M. Portas
Secretary
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PDV
AMERICA, INC.'S SEPTEMBER 30, 1996 CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 30,028
<SECURITIES> 0
<RECEIVABLES> 973,910
<ALLOWANCES> 20,022
<INVENTORY> 897,615
<CURRENT-ASSETS> 1,966,743
<PP&E> 3,275,436
<DEPRECIATION> 570,303
<TOTAL-ASSETS> 6,827,692
<CURRENT-LIABILITIES> 1,308,967
<BONDS> 2,463,003
0
0
<COMMON> 1
<OTHER-SE> 2,060,020
<TOTAL-LIABILITY-AND-EQUITY> 6,827,692
<SALES> 9,251,647
<TOTAL-REVENUES> 9,343,751
<CGS> 8,936,804
<TOTAL-COSTS> 9,059,968
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,788
<INTEREST-EXPENSE> 143,735
<INCOME-PRETAX> 138,595
<INCOME-TAX> 51,626
<INCOME-CONTINUING> 86,969
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<NET-INCOME> 86,969
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</TABLE>
