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, 1997
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, 1997)
Page 1 of 25 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 September 30, 1997
Table of Contents
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
September 30, 1997 and December 31, 1996........................4
Condensed Consolidated Statements of Income --
Three-Month Periods Ended September 30, 1997 and 1996 and
Nine-Month Periods Ended September 30, 1997 and 1996............5
Condensed Consolidated Statements of Cash Flows --
Nine-Month Periods Ended September 30, 1997 and 1996............6
Notes to the Condensed Consolidated Financial Statements........7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...............14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................23
Item 6. Exhibits and Reports on Form 8-K...............................24
SIGNATURES....................................................................25
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 21E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the caption "Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" 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,
1997 1996
------------ -----------
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 37,900 $ 32,845
Accounts receivable, net 943,431 1,004,098
Due from affiliates 41,466 60,123
Inventories 1,145,566 833,191
Current portion of notes receivable from PDVSA 250,000 --
Prepaid expenses and other 39,641 25,093
---------- ----------
TOTAL CURRENT ASSETS 2,458,004 1,955,350
NOTES RECEIVABLE FROM PDVSA 750,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,404,858 2,786,941
RESTRICTED CASH 6,822 9,369
INVESTMENTS IN AFFILIATES 856,671 1,040,525
OTHER ASSETS 224,426 146,142
---------- ----------
TOTAL ASSETS $7,700,781 $6,938,327
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Short-term bank loans $98,000 $53,000
Accounts payable 553,897 530,758
Due to affiliates 247,419 275,551
Taxes other than income 238,960 200,863
Other current liabilities 313,919 237,115
Income taxes payable 28,023 21,137
Current portion of long-term debt 345,034 95,240
Current portion of capital lease obligation 12,440 11,778
---------- ----------
TOTAL CURRENT LIABILITIES 1,837,692 1,425,442
LONG-TERM DEBT 2,203,422 2,465,336
CAPITAL LEASE OBLIGATION 123,336 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 201,491 183,370
OTHER NONCURRENT LIABILITIES 262,416 196,979
DEFERRED INCOME TAXES 486,116 399,768
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 27,861 26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1.00 par, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,482,435 1,232,435
Retained earnings 1,076,011 878,639
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,558,447 2,111,075
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,700,781 $6,938,327
========== ==========
(See Notes to the Condensed Consolidated Financial Statements.)
4
<PAGE>
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD NINE-MONTH PERIOD
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $3,513,032 $3,258,006 $10,098,632 $9,071,078
Sales to affiliates 51,073 52,450 168,591 180,569
---------- ---------- ---------- -----------
3,564,105 3,310,456 10,267,223 9,251,647
Equity in earnings (losses) of
affiliates, net 25,688 9,163 45,822 34,699
Interest income from PDVSA 19,432 19,432 58,294 58,294
Other income (expense), net (11,032) (342) (9,254) (889)
---------- ---------- ---------- -----------
3,598,193 3,338,709 10,362,085 9,343,751
---------- ---------- ---------- -----------
COST OF SALES AND EXPENSES:
Cost of sales and operating
expenses 3,313,878 3,186,413 9,747,413 8,936,804
Selling, general and administrative
expenses 59,434 45,290 156,152 123,164
Interest expense:
Capital leases 3,818 4,133 11,778 12,686
Other 50,693 45,319 148,164 131,049
Minority interest in earnings of
consolidated subsidiary 498 (77) 1,230 1,453
---------- ---------- ---------- -----------
3,428,321 3,281,078 10,064,737 9,205,156
---------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES 169,872 $57,631 297,348 $138,595
INCOME TAXES 65,541 21,419 99,976 51,626
---------- ---------- ---------- -----------
NET INCOME $ 104,331 $ 36,212 $ 197,372 $ 86,969
=========== ========== =========== ==========
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements.)
5
<PAGE>
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
NINE-MONTH PERIOD
ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 108,423 $ 73,657
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (190,322) (318,354)
Decrease (increase) in restricted cash 2,547 (10,770)
Investments in LYONDELL-CITGO Refining Company, Ltd. (45,635) (106,361)
Investments and advances to affiliates (717) --
Proceeds from sales of property, plant and equipment 21,697 3,700
--------- ---------
Net cash used in investing activities (212,430) (431,785)
--------- ---------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Net payments on revolving bank loans (5,000) (10,000)
Net proceeds from short-term bank loans 32,000 61,000
Payments on term bank loans (22,059) (22,059)
Proceeds from issuance of CITGO senior notes -- 199,694
Proceeds from issuance of tax-exempt bonds -- 25,000
Proceeds from issuance of taxable bonds -- 120,000
Payments on senior notes of UNO-VEN (135,000) --
Repayments of other debt (5,357) (5,357)
Capital contribution from parent 250,000 --
Payments of capital lease obligations (5,521) (5,916)
--------- ---------
Net cash provided by financing activities 109,063 362,362
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 5,056 4,234
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 32,844 25,794
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 37,900 $ 30,028
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 159,267 $ 150,859
========= =========
Income taxes, net of refunds received $ 25,227 $ 31,213
========= =========
(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, 1997
1. Basis of Presentation
The financial information for PDV America, Inc. ("PDV America" or the
"Company") subsequent to December 31, 1996 and with respect to the interim
three- and nine-month periods ended September 30, 1997 and 1996 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, 1997 and 1996 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, 1996 on Form 10-K, dated March 28, 1997, for additional
information.
On April 21, 1997, Propernyn B.V. ("Propernyn"), a Dutch limited
liability company whose ultimate parent is Petroleos de Venezuela, S.A.
("PDVSA"), and which held all of the Company's common stock, contributed its
shares of the Company to PDV Holding, Inc. ("PDV Holding"), a corporation
organized under the laws of Delaware, a subsidiary of Propernyn.
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), Cit-Con Oil
Corporation, which is 65 percent owned by CITGO, and VPHI Midwest, Inc.
("Midwest") and its wholly owned subsidiary, PDV Midwest Refining, L.L.C.
("PDVMR") (collectively, the "Companies").
Prior to May 1, 1997, Midwest had a 50 percent interest in The
Uno-Ven Company ("UNO-VEN"), an Illinois general partnership. Beginning May 1,
1997, pursuant to a distribution of assets from UNO-VEN as discussed in Note 7,
PDVMR now owns such former UNO-VEN assets (primarily the refining, distribution
and marketing assets), and such assets are now operated by CITGO under an
operating agreement between PDVMR and CITGO.
Certain reclassifications have been made to the September 30, 1996
financial statements to conform with the classifications used at September 30,
1997.
2. Accounts Receivable
During the second quarter of 1997, CITGO established a new limited
purpose subsidiary, CITGO Funding Corporation, which entered into an agreement
to sell, on an ongoing basis and without recourse, up to a maximum of $125
million of trade accounts
7
<PAGE>
receivable at any one point in time. This agreement has a minimum term of one
year expiring in June 1998 and is renewable for successive one-year terms by
mutual agreement. Fees and expenses related to the agreement were recorded as
Other Income (Expense) and totaled approximately $1.9 million in the third
quarter of 1997 and $2.2. million for the nine months ended September 30, 1997.
Proceeds from the initial sale were used primarily to make payments on the
revolving bank loan.
3. Inventories
Inventories, primarily at LIFO, consist of the following:
September 30, December 31,
1997 1996
---------------- ------------
(Unaudited)
(000's Omitted)
Refined product.......................... $863,959 $616,527
Crude oil................................ 215,397 165,564
Materials and supplies................... 66,210 51,100
----------- ---------
$1,145,566 $833,191
========== ========
8
<PAGE>
4. Long-term Debt
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
(000's Omitted)
<S> <C> <C>
Senior Notes:
7.25% Senior Notes $250 million face amount due 1998 $ 249,794 $ 249,631
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 497,227 496,967
Shelf registration:
7.875% Senior Notes $200 million face amount, due 2006 199,738 199,715
Revolving bank loans:
Bank of America 270,000 350,000
Chase 75,000 ---
Term bank loan 66,176 88,235
Private Placement:
8.75% Series A Senior Notes due 1998 37,500 37,500
9.03% Series B Senior Notes due 2001 142,857 142,857
9.30% Series C Senior Notes due 2006 113,637 113,637
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
Illinois pollution control revenue bonds due 2008 19,850 ---
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 25,000
Taxable Louisiana wastewater facility revenue bonds due 2026 120,000 120,000
Cit-Con bank credit agreement 30,357 35,714
---------- ----------
2,548,456 2,560,576
Less current portion of long-term debt (345,034) (95,240)
---------- ----------
$2,203,422 $2,465,336
========== ==========
</TABLE>
9
<PAGE>
5. Income Taxes
Income taxes were based on an effective tax rate of 39% for the
three-month period ended September 30, 1997, as compared to 37% for the
comparable period in 1996. The effective tax rate was 34% for the nine-month
period ended September 30, 1997, as compared to 37% for the comparable period in
1996. The decrease is due primarily to the favorable resolution of a significant
tax issue with the Internal Revenue Service ("IRS") in the second quarter of
1997. The resolution resulted in the reduction of a contingency reserve
previously established related to this matter. The decrease was partially offset
by the recording of a valuation allowance related to a capital loss carryforward
that will, more likely than not, expire in 1998.
6. 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 is 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 Lake
Charles, Louisiana refining complex; the plaintiffs seek injunctive relief and
monetary damages and have appealed the Court's denial of class certification;
the initial trials relating to this litigation are not currently included in the
trial docket.
In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical & Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against UNO-VEN to assert claims against
CITGO, PDVSA, the Company, PDVMR and Union Oil Company of California pursuant to
Section 301 of the Labor Management Relations Act ("LMRA"). This complaint
alleges that CITGO and the other defendants constitute a single employer, joint
employers or alter-egos for the purposes of the LMRA, and are therefore bound by
the terms of a collective bargaining agreement between UNO-VEN and Local 7-517
covering certain production and maintenance employees at a Lemont, Illinois
petroleum refinery. On May 1, 1997, in a transaction involving the former
partners of UNO-VEN, the Lemont refinery was acquired by PDVMR. Pursuant to an
operating agreement with PDVMR, CITGO became the operator of the Lemont
refinery, and employed the substantial majority of employees previously employed
by UNO-VEN pursuant to its initial employment terms, but did not assume the
existing labor agreement.
On May 12, 1997 an explosion and fire occurred at CITGO's Corpus
Christi refinery. There were no reports of serious personal injuries. Affected
units were shut down for repair and were returned to full service in early
August, 1997. The Company has property damage and business interruption
insurance which related to this event. As a result, this event did not have a
material adverse effect on the Companies' financial condition or results of
operations. There are six lawsuits against CITGO pending in federal and state
courts in Corpus Christi, Texas alleging property damage and personal injury
arising from the incident as well as punitive damages.
10
<PAGE>
Additionally, there is a class action lawsuit pending against CITGO and
other operators and owners of nearby heavy industrial facilities which was filed
in state court in Corpus Christi, Texas in 1993 on behalf of property owners in
the vicinity of these facilities. This lawsuit asserts property damage claims
and diminution in property values allegedly resulting from environmental
contamination in the air, soil, and groundwater, occasioned by ongoing
operations of CITGO's Corpus Christi refinery and the respective industrial
facilities of the other defendants. The certification of the class action has
been appealed to the Texas Supreme Court by CITGO and other defendants. Two
related personal injury and wrongful death lawsuits were filed in 1996 and are
in preliminary stages of discovery at this time. The Company has signed an
agreement to settle the property damage class action lawsuit for approximately
$17.3 million, which includes the purchase of approximately 290 properties in an
adjacent neighborhood. Of this amount, an expense of $15.7 million was included
in Other Income (Expense), Net, during the third quarter of 1997. The agreement
provides that the Company may terminate the settlement if more than ten percent
of the class members elect to opt out of the settlement. The court is currently
considering the approval of the settlement agreement.
The lawsuits and claims against UNO-VEN include (i) arbitration
proceedings initiated by Always Open Franchising Corporation against UNO-VEN,
alleging that it is entitled to recover $2.5 million as liquidated damages for
breach of contract and (ii) the case of Francois Oil Company, Inc. v. Stop-N-Go
of Madison, Inc. et al, pending in the Circuit Court of Dane County, Wisconsin,
in which UNO-VEN has been made a third party defendant, and where the third
party plaintiff has made a claim for $1.0 million based on alleged
misrepresentations and on a variety of indemnity theories that UNO-VEN is liable
to reimburse the third party plaintiff for any and all damages which may be
recovered by the plaintiff from the third party plaintiff. The Company, Midwest
and PDVMR, jointly and severally, have agreed to indemnify UNO-VEN and certain
other related entities against certain liabilities and claims, including the
above matters.
The Companies are vigorously contesting or pursuing, as applicable,
such lawsuits and claims and believe that their positions are sustainable. The
Companies have recorded accruals for losses they consider to be probable and
reasonably estimable. However, due to uncertainties involved in litigation,
there are cases, including the significant matters noted above, 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
reporting period. 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 believes that the
ultimate resolution of these lawsuits and claims would not exceed, by a material
amount, the aggregate of the amounts accrued in respect of such lawsuits and
claims and the insurance coverages available to the Companies and, therefore,
should not have a material adverse effect on the Companies' financial condition,
results of operations or liquidity.
11
<PAGE>
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, 1997, 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 and other environmental related matters, management believes
these accruals are adequate. Conditions which would require additional
expenditures may exist for various sites of the Companies including, but not
limited to, the Companies' operating refinery complexes, former refinery sites,
service stations and crude oil and petroleum product storage terminals. The
amount of such future expenditures, if any, is indeterminable.
Derivative Commodity and Financial Instruments. 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 and PDVMR have only limited involvement with other derivative
financial instruments, and do not use them for trading purposes. They are used
to manage well defined interest rate and commodity price risks arising out of
their core activities. The Company itself has no involvement with derivative
financial instruments. CITGO and PDVMR have entered into various interest rate
swap and cap agreements to manage their risk related to interest rate changes on
their debt. The fair value of the interest rate swap agreements in place at
September 30, 1997, based on the estimated amount that CITGO and PDVMR would
receive or pay to terminate the agreement as of that date and taking into
account current interest rates, was an unrealized loss of $2.6 million. In
connection with the determination of said fair market value, the Company
considers 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 considers the market risk to the Company related to these instruments
to be insignificant during the periods presented.
12
<PAGE>
7. Distribution of UNO-VEN Assets
On May 1, 1997, certain assets and liabilities of UNO-VEN were
transferred to PDV Midwest Refining L.L.C. ("PDVMR"), a subsidiary of the
Company, as a result of the liquidation of the Company's 50% ownership interest
in UNO-VEN. The assets transferred to PDVMR include UNO-VEN's 153-thousand
barrel per day refinery in Lemont, Illinois, as well as eleven product
distribution terminals and 89 retail sites located in the Midwest. CITGO now
operates these facilities and purchases the products produced at the refinery.
In addition, a PDV America affiliate acquired Union Oil Company of California's
("Unocal") hydrocarbon solvents marketing business, which sells solvents
produced at the Lemont refinery.
In connection with the transaction, the Company received a capital
contribution of $250,000,000 from PDV Holding, the Company's parent. This
contribution was used, in part, to pay off UNO-VEN's senior notes and to provide
working capital.
The transaction, for accounting purposes, has been treated as a
purchase and, accordingly, the allocation of fair values to the underlying
assets and liabilities acquired is based upon the best information currently
available and is subject to adjustment pending receipt of other information.
Management, however, believes, that the final allocation will not be materially
different than that included in the accompanying condensed, consolidated
financial statements.
8. Related Party Transactions
PDV Chalmette, Inc., another subsidiary of PDV Holding, the Company's
direct parent, acquired a 50 percent equity interest in Mobil Corporation's
refinery in Chalmette, Louisiana on October 31, 1997 and has assigned to CITGO
it's option to purchase up to 50 percent of the refined products produced at the
refinery through December 31, 1998. CITGO exercised this option on November 1,
1997 and is acquiring approximately 80 thousand barrels per day of refined
products, approximately one half of which is gasoline. The term is one year
which is renewable for an additional one year.
13
<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 the Company should be read in conjunction with the unaudited
condensed consolidated financial statements of the Company included elsewhere
herein. Reference is made to the Company's Annual Report for the fiscal year
ended December 31, 1996 on Form 10-K, dated March 28, 1997, for additional
information and a description of factors which may cause substantial
fluctuations in the earnings and cash flows of the Company.
In the third quarter ended September 30, 1997, the Company generated
net income of $104.3 million on revenue of $3.6 billion compared to net income
of $36.2 million on revenues of $3.3 billion for the same period last year. Net
income for the nine months ended September 30, 1997 was $197.4 million on
revenues of $10.4 billion in 1997 compared to net income of $87 million on
revenues of $9.3 billion for the same period in 1996. This improvement is due
primarily to improved margins, and the inclusion of 100% of the results of
operations of the Lemont refinery, which was formerly owned by UNO-VEN and now
owned by PDVMR as of May 1, 1997, and a better than expected earnings
contribution from CITGO's petrochemicals and asphalt operations. These positive
factors were offset to some extent by the lost production and the additional
expenses associated with a fire and explosion which occurred at the Corpus
Christi Refinery on May 12, 1997.
On May 1, 1997, UNO-VEN transferred certain assets and liabilities to
PDVMR in liquidation of the Company's 50 percent ownership interest in UNO-VEN.
The assets include a 153 thousand barrel per day refinery in Lemont, Illinois,
as well as eleven product distribution terminals and 89 retail sites located in
the Midwest. Under an operating agreement between PDVMR and CITGO, CITGO now
operates these facilities and purchases the products produced at the refinery.
Results of Operations
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month and nine-month periods ended
September 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Nine Months Three Months Nine Months
Ended September 30, Ended September 30, Ended September 30, Ended September 30,
------------------- ------------------- ------------------- -------------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline $ 2,128 $ 1,959 $ 5,901 $ 5,430 3,180 3,023 8,815 8,434
Jet fuel 241 396 888 1,041 424 634 1,479 1,727
Diesel/#2 fuel 541 496 1,815 1,544 1,007 817 3,163 2,632
Petrochemicals, industrial
products and other 318 212 851 601 532 366 1,388 1,043
products
Asphalt 151 94 308 182 280 209 559 416
Lubricants and waxes 127 111 351 326 63 56 179 166
------- ------- ------- ------- ------- ------- ------- -------
Total refined product sales 3,506 3,268 10,114 9,124 5,486 5,105 15,583 14,418
Other sales 58 42 153 128
------- ------- ------- ------- ------- ------- ------- -------
Total sales $ 3,564 $ 3,310 $10,267 $ 9,252 5,486 5,105 15,583 14,418
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
14
<PAGE>
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and nine-month periods ended September
30, 1997 and 1996:
PDV America Cost of Sales and Operating Expenses
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
Crude oil $ 798 $ 747 $2,265 $2,129
Refined products 1,916 1,829 5,871 5,224
Intermediate feedstocks 276 250 805 676
Refining and manufacturing costs 201 201 612 602
Other operating costs and expenses and
inventory changes 123 159 194 306
------ ------ ------ ------
Total cost of sales and operating expenses $3,314 $3,186 $9,747 $8,937
====== ====== ====== ======
</TABLE>
Sales Revenues and Volumes. Sales increased $254 million, or
approximately 8%, in the three-month period ended September 30, 1997, and by
$1,015 million, or 11%, in the nine-month period ended September 30, 1997 as
compared to the same periods in 1996. Total sales volumes increased by 7% from
5,105 million gallons in the third quarter of 1996 to 5,486 million gallons in
the third quarter of 1997, and increased by 8% from 14,418 million gallons in
the first nine months of 1996 to 15,583 million gallons in the first nine months
of 1997. The increase in volumes, coupled with increases in most product sales
prices, resulted in the increase in revenues between the nine-month periods.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 9% in the third
quarter of 1997 as compared to the third quarter of 1996, and increased by 9% in
the first nine months of 1997 as compared to the same period in 1996. Gasoline,
diesel/#2 fuel and jet fuel, excluding bulk sales, had sales volume increases of
14% and 35% and a decrease of 30%, respectively, in the third quarter of 1997,
compared to the third quarter of 1996. For the nine-month period ended September
30, 1997 versus the same period in 1996, gasoline, diesel/#2 fuel and jet fuel,
excluding bulk sales, had sales volume increases of 9% and 25%, and a decrease
of 9%, respectively. Gasoline sales volumes increased due to successful
marketing efforts, including the net addition of 315 independently owned CITGO
branded retail outlets since September 30, 1996, bringing the total number of
CITGO branded retail outlets to 14,887 at September 30, 1997, substantially all
of which are independently owned. Diesel/#2 fuel sales volumes increased in part
due to sales to former UNO-VEN customers that have become CITGO customers. In
addition, CITGO increased its marketing effort relative to diesel/#2 fuel in
order to sell the increased production of LYONDELL-CITGO Refining Company, Ltd.
("LYONDELL-CITGO") (see also "--Equity in earnings (losses) of affiliates,
net"). Jet fuel sales volume decreased as CITGO reduced its contract sales
volume in order to bring it closer to the refinery production volume.
15
<PAGE>
Sales prices of gasoline, excluding bulk sales, were higher in the
third quarter of 1997 than in the third quarter of 1996. The average increase
for the third quarter of 1997 over the third quarter of 1996 was 1 cent per
gallon, or a 2% increase. Sales prices of jet fuel and diesel/#2 fuel, excluding
bulk sales, decreased 6 cents and 8 cents per gallon, respectively, or 9% and
13%, respectively, in the third quarter of 1997 as compared to the same period
in 1996. For the nine-month period ended September 30, 1997, gasoline prices,
excluding bulk sales, were approximately 3% higher, diesel/#2 fuel prices were
approximately 5% lower and jet fuel prices were less than 1% lower than for the
same period in 1996.
To meet demand for its products and to manage logistics, timing
differences and product grade imbalances, the Company purchases and sells
gasoline, diesel/#2 fuel and jet fuel from and to other refiners and in the spot
market. Such bulk sales revenue decreased by $106 million, or 15%, from $712
million in the three-month period ended September 30, 1996 to $606 million in
the same period in 1997. The decrease is attributable to a 2% decrease in prices
and a 13% decline in volumes. Such bulk sales revenue decreased by $19 million
or 1% from $1,889 million in the nine-month period ended September 30, 1996 to
$1,870 million in the same period in 1997. The decrease is attributable to a 4%
decrease in volumes offset by a 3% increase in prices.
Petrochemicals and industrial products sales revenues increased 41%
and 67%, respectively, for the three months ended September 30, 1997 as compared
to the three months ended September 30, 1996, and increased 40% and 45%,
respectively, for the nine months ended September 30, 1997 versus the nine
months ended September 30, 1996. The petrochemicals revenue increases were the
result of a 50% increase in volume, offset by a 6% decrease in unit sales price
for the third quarter of 1997 and a 30% increase in volume and a 7% increase in
unit sales price for the nine-month period ended September 30, 1997, as compared
to the same periods in 1996. The increase in sales volume of petrochemicals is
due primarily to significant increases in the production of xylene and polymer
grade propylene in 1997 compared to 1996. The industrial products revenue
increases were the result of a 16% increase in unit sales price and a 44%
increase in volumes for the third quarter of 1997 and a 10% increase in unit
sales price and a 31% volume increase for the nine-month period ended September
30, 1997, as compared to the same periods in 1996.
Asphalt sales revenues in the third quarter of 1997 were $57 million
higher and sales volumes were 34% higher than in the same period in 1996. Sales
revenues were $126 million higher, and sales volumes were 34% higher, in the
first nine months of 1997 as compared to the same period in 1996. Asphalt sales
prices increased 20% in the third quarter of 1997, and 26% in the first nine
months of 1997, from the same periods in 1996. The increase in sales volume of
asphalt is due primarily to the Company's efforts in production and marketing to
take advantage of Sun Oil Company's withdrawal from the East Coast asphalt
market.
Equity in earnings (losses) of affiliates, net. Equity in earnings of
affiliates increased by $17 million overall for the three-month period and
increased $11 million overall for the nine-month period ended September 30, 1997
as compared to the same periods in 1996. For
16
<PAGE>
the third quarter period, the increase was primarily due to the change in the
equity in earnings of four affiliates. Effective May 1, 1997, the Company is no
longer a partner in the UNO-VEN partnership, having received a distribution of
assets from UNO-VEN (primarily the refining, distribution and marketing assets).
Since that date, the results of operations from these assets have been included
on a consolidated basis. Equity in the earnings of UNO-VEN was $5.3 million in
the third quarter of 1996 compared to no corresponding amount in the same period
in 1997, and equity in the earnings of Nelson Industrial Steam Company ("NISCO")
decreased by $0.6 million, from a loss of $0.1 million in the third quarter of
1996 to a loss of $0.7 million in the third quarter of 1997. Equity in the
earnings of LYONDELL-CITGO increased $19.4 million, from a loss of $0.8 million
in the third quarter of 1996 to $18.6 million in the third quarter of 1997. For
the first nine months, the increase in 1997 from 1996 was due primarily to the
change in the equity and earnings of two affiliates. Equity in the earnings of
LYONDELL-CITGO increased $24.9 million, from $3.6 million in the first nine
months of 1996 to $28.5 million in the first nine months of 1997. This increase
was due primarily to the change in CITGO's interest in LYONDELL-CITGO, which
increased from 13% at December 31, 1996 to approximately 42% on April 1, 1997.
This increase was partially offset by a decrease in the equity and earnings of
UNO- VEN from $15 million for the first nine months of 1996 as compared to $0.5
million for the first nine months of 1997. In addition, during the third quarter
of 1997, LYONDELL-CITGO's operating and financial performance showed
significant improvement from the second quarter. The key improvement factors
were the processing of 100% of available crude under a Venezuelan supply
agreement in the third quarter compared to 92% in the second quarter;
significantly better gross refining margins due to the fact that the second
quarter margins were adversely affected by product downgrades associated with
the fluid unit outage during the second quarter; and improved aromatics and
lubes performance as compared to the second quarter due to increased sales
volumes.
Other income (expense), net. Other income (expense) was ($9.3) million
for the nine-month period ended September 30, 1997 as compared to ($0.9) million
for the same period in 1996. The difference is primarily due to a $15.7 million
charge related to a proposed Corpus Christi neighborhood settlement during the
third quarter (see Note 6 to the Condensed Consolidated Financial Statements for
the Three- and Nine-Month Periods ended September 30, 1997, included in Part I
hereof), a $6 million write-off of a capital project during the third quarter,
and $2.2 million, during the second and third quarters, in fees related to the
sale of accounts receivable in June 1997. These items were offset by a net $8.3
million property insurance recovery relating to the Corpus Christi alkylation
unit fire during the third quarter, a $3.5 million gain from the sale of
refinery steam and other services by PDVMR and a $1.3 million gain on the sale
of pipeline assets in the first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $128 million, or 4%, in the quarter ended September 30,
1997, and increased $810 million or 9%, in the nine-month period ended September
30, 1997, as compared to the same periods in 1996. Higher crude oil costs (an
increase from $747 million in the third quarter of 1996 to $798 million in the
third quarter of 1997) resulted from a 15% increase in crude oil volumes
purchased offset by a 7% decrease in crude prices. Crude oil costs increased
17
<PAGE>
from $2,129 million in the nine-month period ended September 30, 1996 to $2,265
million in the first nine months of 1997, the result of a 7% increase in crude
oil volumes purchased and a less than 1% decrease in crude prices. Refined
product purchases increased in the third quarter of 1997 as compared to the same
quarter in 1996 (up 5%, from $1,829 million to $1,916 million for the third
quarter), and increased in the first nine months of 1997 as compared to the same
period in 1996 (up 12%, from $5,224 million to $5,871 million, for the first
nine months). These changes resulted from increases in refined product purchase
volumes (up 6% for the third quarter and 10% for the first nine months of 1997
as compared to the same periods in 1996), and changes in prices (down 1% for the
third quarter and up 3% for the first nine months of 1997 as compared to the
same periods in 1996). Intermediate feedstock purchases increased to $276
million from $250 million in the third quarter of 1996, or an increase of 10%,
and increased to $805 million for the first nine months of 1997 from $676
million for the first nine months of 1996, or an increase of 19%. Intermediate
feedstock volumes purchased increased 12%, and prices decreased 1% between the
quarters ended September 30, 1996 and September 30, 1997. Intermediate feedstock
volumes purchased increased 14% and prices increased 4% between the nine-month
periods ended September 30, 1996 and September 30, 1997, respectively. Refining
and manufacturing costs were $201 million for the third quarters, and increased
2% for the nine-month period ended September 30 (from $602 million to $612
million). CITGO incurred additional expenses associated with a fire and
explosion which occurred at the Corpus Christi refinery on May 12, 1997.
Depreciation and amortization expense increased from $51 million to $57 million
between the quarters ended September 30, 1996 and 1997, respectively, due to a
decrease in amortization offset by an increase in depreciation. Depreciation and
amortization increased from $139 million to $165 million between the nine-month
periods ended September 30, 1996 and 1997, respectively, due to an increase in
depreciation offset by a minor decrease in amortization. The increases in
depreciation are due to significant capital projects, formerly classified as
work-in-progress, put into service during the 1996 reporting periods. The
decrease in amortization is due to an increase in the time periods between
turnarounds for many of the refining units.
The Company purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues.
Refined product purchases, including purchases from LYONDELL-CITGO, represented
58% and 57% of total cost of sales and operating expenses for the third quarter
of 1997 and 1996, respectively, and 60% and 58% for the first nine months of
1997 and 1996 respectively. The Company estimates that margins on purchased
products, on average, are lower than margins on produced products due to the
fact that the Company can only receive the marketing portion of the total margin
received on the produced refined products. However, purchased products are not
segregated from the Company's produced products and margins may vary due to
market conditions and other factors beyond the Company's control. As the Company
increases the focus on strategic growth, the Company anticipates that its
purchased refined product requirements will stabilize in the near term. However,
there could be events beyond the control of the Company which would impact the
volume of refined products purchased during any given period.
18
<PAGE>
Gross margin. The gross margin for the three-month period ended
September 30, 1997 was $250 million, or 7%, compared to $124 million, or 3.8%,
for the same period in 1996. The gross margin for the nine-month period ended
September 30, 1997 was $520 million, or 5.1%, compared to $315 million, or 3.4%
for the nine-month period ended September 30, 1996. Gross margins in 1997 have
been positively affected by asphalt and petrochemical activities as well as
generally improved operating margins (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the third quarter of 1997 by 31%, from $45
million in the third quarter of 1996 to $59 million in the third quarter of
1997, and increased 27% from $123 million in the first nine months of 1996 to
$156 million in the same period in 1997. The increase during the third quarter
and the nine months ended September 30, 1997 is primarily due to increased
selling expenses in 1997, including the effect of the change in focus of the
Company's marketing programs initiated in April 1996 and increased employee
burden and benefit accruals. In addition, the increase is due to the inclusion
of 100% of PDVMR's expenses of $5 million for the period from May 1, 1997 to
September 30, 1997. Furthermore, selling, general and administrative expenses
increased in several other areas, including purchasing, administrative services,
information systems, corporate executive, credit card and other charges, none of
which increased more than $4 million individually, but in the aggregate
increased approximately $13 million for the third quarter. For the nine-month
period, none of these areas increased more than $5 million individually, but in
the aggregate increased $22 million.
Interest expense. Interest expense increased $6 million, or 12% (from
$49 million to $55 million), for the third quarter ended September 30, 1997, and
increased year-to-date by approximately $16 million, or 11% (from $144 million
to $160 million), as compared to the same periods in 1996. This increase is
primarily due to the public debt and certain industrial revenue bonds that were
outstanding for only a partial year during 1996, CITGO's revolving bank loan,
which had a higher outstanding balance during most of 1997 as compared to 1996,
as well as the effect of additional debt of PDVMR following the distribution to
the Company of the assets of UNO-VEN.
Income taxes. Income taxes were based on an effective tax rate of 39%
for the three-month period ended September 30, 1997, compared to 37% for the
comparable period in 1996. The effective rate was 34% for the nine-month period
ended September 30, 1997, as compared to 37% for the comparable period in 1996.
The decrease is due primarily to the favorable resolution of a significant tax
issue with the IRS in the second quarter of 1997. The resolution resulted in the
reduction of a contingency reserve previously established related to this
matter. The decrease was partially offset by the recording of a valuation
allowance related to a capital loss carryforward that will, more likely than
not, expire in 1998.
19
<PAGE>
Liquidity and Capital Resources
For the nine-month period ended September 30, 1997, the Company's
consolidated net cash provided by operating activities totaled approximately
$108 million. Net income of $197 million and depreciation and amortization of
$168 million were offset by net changes in other items of $257 million. The more
significant changes in other items included a decrease in accounts receivable
(including amounts due from affiliates) of $92 million, increases in deferred
taxes of $69 million, and increases in other liabilities of $77 million. These
were more than offset by increases in inventory of $246 million and decreases in
accounts payable (including amounts due to affiliates) of $201 million. The
decrease in accounts receivable is due primarily to the sale of $125 million of
accounts receivable in September 1997, proceeds of which were used primarily to
make payments on the revolving bank loan. Refined products inventories have
increased since the end of 1996 due to increases in both volumes purchased and
costs.
Net cash used in investing activities of $212 million for the
nine-month period ended September 30, 1997 included capital expenditures of $190
million (compared to $318 million for the same period in 1996), and an
additional investment in LYONDELL-CITGO of $46 million (compared to $106 million
for the same period in 1996). Net cash provided by financing activities of $109
million for the nine-month period ended September 30, 1997 included net proceeds
of $32 million from short-term borrowing facilities, net payments during the
period of $5 million on the revolving bank facilities and a capital contribution
of $250 million from PDV Holding, Inc. Funds received from these financing
activities were partially offset by the repayment of the $135 million UNO-VEN
senior notes and net repayments of $33 million on CITGO's term note and other
debt.
As of September 30, 1997, capital resources available to the Companies
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $405 million and $117 million of
uncommitted short-term borrowing facilities with various banks. In addition,
PDVMR has available borrowing capacity of $50 million under a revolving bank
loan. Additionally, CITGO may offer and sell up to $400 million of debt
securities under a shelf registration filed with the Securities and Exchange
Commission which became effective in May 1996. CITGO has recently initiated a
Medium Term Note Exchange program under such shelf registration that would
permit CITGO to sell up to $235 million in principal amount of notes from time
to time in tranches. Any tranche of notes could have a maturity ranging from
nine months to 30 years from the date of issuance and could bear interest at a
fixed rate or at a fluctuating rate based on one of several possible indices. In
addition, CITGO anticipates selling an additional $150-200 million of accounts
receivable in November 1997. 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. The Companies periodically evaluate other
sources of capital in the marketplace and anticipate that long-term capital
requirements will be satisfied with current capital resources and future
financing arrangements, including the issuance of debt securities. Of course,
the Companies' ability to obtain such financings will depend on numerous
factors, including market conditions and the perceived creditworthiness of the
Companies at that time. See
20
<PAGE>
"Factors Affecting Forward Looking Statements". The Companies believe that they
are in material compliance with their obligations under their debt financing
arrangements at September 30, 1997.
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 the Company's hedged inventory or
future purchases and sales.
CITGO and PDVMR have only limited involvement with other derivative
financial instruments, and do not use them for trading purposes. They are used
to manage well defined interest rate and commodity price risks arising out of
their core activities. CITGO and PDVMR have entered into various interest rate
swap and cap agreements to manage their risk related to interest rate changes on
their debt. The fair value of the interest rate swap agreements in place at
September 30, 1997, based on the estimated amount that CITGO and PDVMR would
receive or pay to terminate the agreements as of that date and taking into
account current interest rates was an unrealized loss of $2.6 million. In
connection with the determination of said fair market value, CITGO and PDVMR
considered 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 considers the market risk to the Company related to these instruments
to be insignificant during the periods presented.
New Accounting Standards
In October 1996, the Accounting Standards Executive Committee issued
Statement of Position 96-1 -- Environmental Remediation Liabilities (SOP 96-1),
which is effective for the Company's fiscal year ending December 31, 1997. The
statement provides guidance on environmental liabilities and disclosure.
Adoption of SOP 96-1 did not have a material effect on the Company's financial
statements.
In February 1997, the FASB issued SFAS No. 129 -- Disclosure of
Information About Capital Structure, which is effective for the Company's fiscal
year ending December 31, 1997. The statement establishes standards for
disclosing information about a reporting company's capital structure. Adoption
of SFAS No. 129 relates to disclosure within the financial statements and will
not have a material effect on the Company's financial statements.
21
<PAGE>
In June 1997, the FASB issued SFAS No. 130 -- Reporting Comprehensive
Income, which is effective for the Company's fiscal year ending December 31,
1998. The statement addresses the reporting and displaying of comprehensive
income and its components. The Company does not currently believe adoption of
SFAS 130 will result in material differences between comprehensive income and
net income.
Also in June 1997, the FASB issued SFAS No. 131 -- Disclosure About
Segments of an Enterprise and Related Information, which is effective for the
fiscal year ending December 31, 1998. SFAS No. 131 modifies current segment
reporting requirements and establishes, for public companies, criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers in annual and interim financial statements. The Company will
adopt SFAS No. 131 for the fiscal year ending December 31, 1998. The Company is
unable to determine the full extent of disclosure changes that may result from
adoption of SFAS No. 131.
Current Developments
CITGO has numerous computer systems that were developed employing six
digit date structures. Where date logic requires the year 2000 or beyond, such
date structures may produce inaccurate results. Management has implemented a
program to comply with year 2000 requirements on a system-by-system basis,
including the implementation of SAP. The program includes extensive systems
testing and is expected to be completed by the end of 1998. Each of the systems
has a solution that is potentially unique and often dependent on third-party
software and developers. A failure on the part of CITGO to ensure that its
computer systems are year 2000 compliant could have a material effect on CITGO's
operations.
PDV Chalmette, Inc., another subsidiary of PDV Holding, the Company's
direct parent, acquired a 50 percent equity interest in Mobil Corporation's
refinery in Chalmette, Louisiana on October 31, 1997 and has assigned to CITGO
it's option to purchase up to 50 percent of the refined products produced at the
refinery through December 31, 1998. CITGO exercised this option on November 1,
1997 and is acquiring approximately 80 thousand barrels per day of refined
products, approximately one half of which is gasoline. The term is one year
which is renewable for an additional one year.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Recent Developments Relating to Litigation and Injury Claims. On May
12, 1997 an explosion and fire occurred at CITGO's Corpus Christi refinery.
There were no reports of serious personal injuries. Affected units were shut
down for repair and were returned to full service in early August, 1997. The
Company has property damage and business interruption insurance which related to
this event. As a result, this event did not have a material adverse effect on
the Companies' financial condition or results of operations. There are six
lawsuits against CITGO pending in federal and state courts in Corpus Christi,
Texas alleging property damage and personal injury arising from the incident as
well as punitive damages.
Additionally, there is a class action lawsuit pending against CITGO
and other operators and owners of nearby heavy industrial facilities which was
filed in state court in Corpus Christi, Texas in 1993 on behalf of property
owners in the vicinity of these facilities. This lawsuit asserts property damage
claims and diminution in property values allegedly resulting from environmental
contamination in the air, soil, and groundwater, occasioned by ongoing
operations of CITGO's Corpus Christi refinery and the respective industrial
facilities of the other defendants. The certification of the class action has
been appealed to the Texas Supreme Court by CITGO and other defendants. Two
related personal injury and wrongful death lawsuits were filed in 1996 and are
in preliminary stages of discovery at this time. The Company has signed an
agreement to settle the property damage class action lawsuit for approximately
$17.3 million, which includes the purchase of approximately 290 properties in an
adjacent neighborhood. Of this amount, $15.7 million was expensed during the
third quarter of 1997. The agreement provides that the Company may terminate the
settlement if more than ten percent of the class members elect to opt out of the
settlement. The court is currently considering the approval of the settlement
agreement.
Recent developments relating to environmental compliance. On July 2,
1997, the Executive Director of the Texas Natural Resources Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's
rules relating to operating a hazardous waste management unit without a permit.
The Report recommended a penalty of $699 thousand. CITGO Refining disagrees with
these allegations and the proposed penalties and plans to contest the matter.
For a description of other legal proceedings, see Note 6 to the
Condensed Consolidated Financial Statements (unaudited) for the Three- and
Nine-Month Periods Ended September 30, 1997, included in Part I hereof.
23
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on August 12, 1997. The report noted that on July 14, 1997, PDVSA
announced the beginning of its internal reorganization. A copy of the pertinent
release filed by PDVSA on Form 6-K was attached thereto as Exhibit 99.1.
24
<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 13, 1997 /s/ ALONSO VELASCO
------------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Date: November 13, 1997 /s/ JOSE M. PORTAS
------------------------------
Jose M. Portas
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from PDV
America, Inc.'s September 30, 1997 condensed consolidated financial
statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000906422
<NAME> PDV AMERICA, INC.
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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