United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 2000
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.
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(Exact name of registrant as specified in its charter)
Delaware 51-0297556
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
750 Lexington Avenue, New York, New York 10022
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(Address of principal executive office) (Zip Code)
(212) 753-5340
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(Registrant's telephone number, including area code)
N.A.
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common Stock, $1.00 par value 1,000
----------------------------- -----
(Class) (outstanding at July 31, 2000)
<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 June 30, 2000
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TABLE OF CONTENTS
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.........................2
Condensed Consolidated Statements of Income - Three and Six-Month Periods Ended
June 30, 2000 and 1999..............................................................................3
Condensed Consolidated Statement of Shareholder's Equity - Six-Month Period
Ended June 30, 2000.................................................................................4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods Ended
June 30, 2000 and 1999..............................................................................5
Notes to the Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................21
Item 6. Exhibits and Reports on Form 8-K...................................................................21
SIGNATURES.......................................................................................................22
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<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 products and capital
resources available to the Company (as defined herein) are forward looking
statements. In addition, when used in this document, the words "anticipate,"
"estimate," "prospect" and similar expressions are used to identify forward
looking statements. 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 Company's 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 the Company believes
that the expectations reflected by such forward looking statements are
reasonable based on information currently available to the Company, no
assurances can be given that such expectations will prove to have been correct.
1
<PAGE>
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (Unaudited)
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
(Unaudited)
------------------- --------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 54,464 $ 113,414
Accounts receivable, net 1,084,129 1,027,352
Due from affiliates 60,197 42,340
Inventories 1,139,154 1,097,923
Current portion of notes receivable from PDVSA 250,000 250,000
Prepaid expenses and other 21,209 16,949
------------------- --------------------
Total current assets 2,609,153 2,547,978
NOTES RECEIVABLES FROM PDVSA AND AFFILIATE 798,000 798,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,365,021 3,417,815
RESTRICTED CASH - 3,015
INVESTMENTS IN AFFILIATES 732,149 758,812
OTHER ASSETS 248,473 219,946
------------------- --------------------
TOTAL ASSETS $ 7,752,796 $ 7,745,566
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans $ 34,000 $ 16,000
Accounts payable 883,129 780,660
Due to affiliates 429,396 281,428
Taxes other than income 221,885 218,503
Other current liabilities 218,684 208,394
Income taxes payable 52,829 6,367
Current portion of deferred income taxes 19,456 9,716
Current portion of long-term debt 297,078 314,078
Current portion of capital lease obligation 17,276 16,356
------------------- --------------------
Total current liabilities 2,173,733 1,851,502
LONG-TERM DEBT 1,561,894 2,010,223
CAPITAL LEASE OBLIGATION 76,695 85,570
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 210,654 212,871
OTHER NONCURRENT LIABILITIES 221,445 230,189
DEFERRED INCOME TAXES 635,596 607,213
MINORITY INTEREST 31,102 29,710
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,532,435 1,532,435
Retained earnings 1,312,455 1,189,066
Accumulated other comprehensive income (3,214) (3,214)
------------------- --------------------
Total shareholders' equity 2,841,677 2,718,288
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,752,796 $ 7,745,566
=================== ====================
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements.)
2
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PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands)
----------------------------------------------------------------------------------------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ----------------- ---------------- -----------------
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 5,637,271 $ 3,115,067 $ 10,416,545 $ 5,346,456
Sales to affiliates 48,013 44,981 100,284 72,702
----------------- ----------------- ---------------- -----------------
5,685,284 3,160,048 10,516,829 5,419,158
Equity in earnings (losses) of affiliates (7,262) (12,905) 3,565 (2,480)
Interest income from affiliates 21,387 20,524 42,703 40,869
Other income (expense) - net (2,453) (3,599) (5,333) (13,146)
----------------- ----------------- ---------------- -----------------
5,696,956 3,164,068 10,557,764 5,444,401
----------------- ----------------- ---------------- -----------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 5,473,083 3,032,147 10,177,668 5,087,950
Selling, general and administrative 56,362 60,212 102,708 118,222
expenses
Interest expense:
Capital leases 2,866 3,279 5,733 6,558
Other 37,427 36,993 75,130 74,540
Minority interest 701 (19) 1,392 394
----------------- ----------------- ---------------- -----------------
5,570,439 3,132,612 10,362,631 5,287,664
----------------- ----------------- ---------------- -----------------
INCOME BEFORE INCOME TAXES 126,517 31,456 195,133 156,737
INCOME TAXES 46,857 1,505 71,744 48,473
----------------- ----------------- ---------------- -----------------
NET INCOME $ 79,660 $ 29,951 $ 123,389 $ 108,264
================= ================= ================ =================
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements.)
3
<PAGE>
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PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (Unaudited)
(Dollars in Thousands)
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Accumulated
Common Stock Other
Additional Retained Comprehensive
Shares Amount Capital Earnings Income Total
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<S> <C> <C> <C> <C> <C> <C>
RETAINED EARNINGS,
DECEMBER 31, 1999 1 $ 1 $1,532,435 $1,189,066 $ (3,214) $2,718,288
Net income - - - 123,389 - 123,389
--------- ---------- -------------- --------------- ----------------- --------------
RETAINED EARNINGS, JUNE 30, 2000 1 $ 1 $1,532,435 $1,312,455 $ (3,214) $2,841,677
========= ========== ============== =============== ================= ==============
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements.)
4
<PAGE>
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PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
--------------------------------------------------------------------------- ----------------------------------------
Six Months Ended June 30,
----------------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES $ 489,194 $ 108,465
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (61,847) (118,682)
Proceeds from sale of property, plant and equipment 4,028 3,894
Decrease (Increase) in restricted cash 3,015 (254)
Loans to LYONDELL-CITGO Refining LP (25,130) (17,000)
Investments in LYONDELL-CITGO Refining LP (4,700) -
Investments in and advances to other affiliates (8,000) (2,712)
------------------- --------------------
Net cash used in investing activities (92,634) (134,754)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (repayments on) proceeds from revolving bank loans (462,000) 3,000
Net proceeds from short-term bank loans 18,000 97,000
Proceeds from issuance of tax-exempt bonds - 25,000
Payments on taxable bonds - (25,000)
Dividend to parent - (22,015)
Repayments of other debt (3,556) (3,556)
Payments of capital lease obligations (7,954) (7,130)
------------------- --------------------
Net cash (used in) provided by financing activities (455,510) 67,299
------------------- --------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (58,950) 41,010
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 113,414 34,822
------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 54,464 $ 75,832
=================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $ 81,015 $ 86,004
=================== ====================
Income taxes, net of refunds of $15,008 and $30,000 $ (12,776) $ (28,080)
=================== ====================
</TABLE>
(See Notes to the Condensed Consolidated Financial Statements.)
5
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for PDV America, Inc. ("PDV America" or the
"Company") subsequent to December 31, 1999 and with respect to the interim
three-month and six-month periods ended June 30, 2000 and 1999 is
unaudited. In the opinion of management, such interim information contains
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of such periods. The
results of operations for the three-month and six-month periods ended June
30, 2000 and 1999 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, 1999 on Form 10-K, dated
March 30, 2000, for additional information.
The condensed consolidated financial statements include the accounts of
PDV America, its wholly owned subsidiaries, CITGO Petroleum Corporation
("CITGO") and its wholly owned subsidiaries and Cit-Con Oil Corporation,
which is 65% owned by CITGO, VPHI Midwest, Inc. ("Midwest") and its wholly
owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR"), and PDV USA,
Inc. ("PDV USA") (collectively, the "Companies").
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
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June 30, December 31,
2000 1999
(Unaudited)
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(000's omitted)
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Refined products $ 849,102 $ 814,785
Crude oil 218,864 215,248
Materials and supplies 71,188 67,890
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$ 1,139,154 $ 1,097,923
============ ===========
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6
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3. LONG-TERM DEBT
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June 30, December 31,
2000 1999
(Unaudited)
------------------------------------
(000's omitted)
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Revolving bank loans - CITGO $ - $ 345,000
Revolving bank loan - PDVMR - 117,000
Senior Notes $200 million face amount, due 2006 with
interest rate of 7.875% 199,822 199,806
Senior Notes $750 million face amount, due 2000 and 2003 with interest
rates from 7.75% to 7.875% 748,378 748,151
Private Placement Senior Notes, due 2000 to 2006 with interest rates from
9.03% to 9.30% 136,688 136,688
Master Shelf Agreement Senior Notes, due 2002 to 2009 with interest rates
from 7.17% to 8.94% 260,000 260,000
Tax Exempt Bonds, due 2004 to 2029 with variable
and fixed interest rates 325,370 325,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 178,000 178,000
Cit-Con bank credit agreement
10,714 14,286
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1,858,972 2,324,301
Current portion of long-term debt 297,078 314,078
----------- ----------
$1,561,894 $2,010,223
=========== ==========
</TABLE>
At June 30, 2000, the net year to date repayments on the revolving bank
loans were $462 million.
On May 10, 2000, CITGO renewed its $150 million 364-day revolving bank
loan facility for another term.
4. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by
subsidiaries of CITGO and Lyondell Chemical Company (the "Owners"). The
heavy crude oil processed by the Houston refinery is supplied by Petroleos
de Venezuela, S.A. (together with its subsidiaries, "PDVSA") under a
long-term crude oil supply contract that expires in 2017. CITGO purchases
substantially all of the gasoline, diesel and jet fuel produced at the
Houston refinery under a long-term contract.
7
<PAGE>
In April 1998, the crude oil supplier exercised its contractual rights and
reduced deliveries of crude oil to LYONDELL-CITGO. LYONDELL-CITGO has been
required to obtain alternative sources of crude oil supply in replacement,
which has resulted in lower operating margins.
CITGO has a 41.25% participation interest in LYONDELL-CITGO. CITGO has a
one-time option to increase, for an additional investment, its
participation interest to 50%. This option must be exercised no later than
September 30, 2000.
CITGO has notes receivable from LYONDELL-CITGO which total $53 million and
$28 million at June 30, 2000 and December 31, 1999, respectively. The
notes bear interest at market rates and are due July 1, 2003. These notes
are included in other assets in the accompanying consolidated balance
sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
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June 30, December 31,
2000 1999
---------------- ----------------
(Unaudited)
(000s omitted)
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Carrying value of investment $ 536,079 $ 560,227
Notes receivable 53,385 28,255
Participation interest 41% 41%
Summary of financial position:
Current assets $ 336,004 $ 219,365
Non current assets 1,402,042 1,405,879
Current liabilities 847,093 696,661
Non current liabilities 350,219 316,492
Member's equity 540,734 612,091
Six Months Ended June 30,
2000 1999
---------------- ----------------
(Unaudited)
(000's omitted)
Equity in net loss $ (5,711) $ (14,109)
Cash distribution received 23,137 22,412
Summary of operating results:
Revenue $1,760,190 $ 913,957
Gross profit 55,692 30,315
Net loss (480) (23,107)
</TABLE>
LYONDELL-CITGO has arranged interim financing and repaid a $450 million
term loan that matured on May 5, 2000.
8
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5. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims - Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. The Company
records accruals for potential losses when, in management's opinion, such
losses are probable and reasonably estimable. If known lawsuits and claims
were to be determined in a manner adverse to the Company, and in amounts
greater than the Company's accruals, then such determinations could have a
material adverse effect on the Company's results of operations in a given
reporting period. However, in management's opinion the ultimate resolution
of these lawsuits and claims will not exceed, by a material amount, the
amount of the accruals and the insurance coverage available to the
Company. This opinion is based upon management's and counsel's current
assessment of these lawsuits and claims. The most significant lawsuits and
claims are discussed below.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property
damage related to the incident. Approximately 1,300 of these claims have
been resolved for amounts that individually and collectively were not
material. There are presently seventeen lawsuits filed on behalf of
approximately 9,000 individuals arising out of this incident in federal
and state courts in Corpus Christi alleging property damages, personal
injury and punitive damages. A trial of one of the federal court lawsuits
in October 1998 involving ten bellwether plaintiffs, out of approximately
400 plaintiffs, resulted in a verdict for CITGO. The remaining plaintiffs
in this case have agreed to settle for an immaterial amount. Another
lawsuit, involving five plaintiffs was settled during trial for amounts
that were not material. There are no other trials on these claims
scheduled to take place until mid-2001.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO which claims damages for reduced value of residential
properties located in the vicinity of the industrial facilities as a
result of air, soil and groundwater contamination. CITGO has contracted to
purchase all of the 275 properties included in the lawsuit that are in an
area adjacent to CITGO's Corpus Christi refinery and settle the property
damage claims relating to these properties. Related to this purchase,
$15.7 million was expensed in 1997. The trial judge recently ruled, over
CITGO's objections, that a settlement agreement CITGO entered into in
September 1997 and subsequently withdrew from, which provided for
settlement of the remaining property damage claims for $5 million is
enforceable. CITGO has asked the court to reconsider its ruling. The trial
against CITGO of these remaining claims has been postponed indefinitely.
Two related personal injury and wrongful death lawsuits were filed against
CITGO in 1996 and are scheduled for trial in 2001.
Litigation is pending in federal court in Lake Charles, Louisiana against
CITGO by a number of current and former Lake Charles refinery employees
and applicants asserting claims of racial discrimination in connection
with CITGO's employment practices. The first trial in this case, which
involved two plaintiffs, began in October 1999 and resulted in verdicts
for the Company. The Court granted the Company's motion for summary
judgment with respect to another group of claims; this action has been
appealed to the Fifth Circuit Court of Appeals. Trials of all the
remaining cases have been taken off the trial court's docket pending this
appeal.
Four former UNO-VEN Company ("UNO-VEN") marketers have filed a class
action complaint against UNO-VEN alleging improper termination of the
UNO-VEN Marketer Sales Agreement under the Petroleum Marketing Practices
Act in connection with PDVMR's 1997 acquisition of Union Oil Company of
California's interest in UNO-VEN. This class action has been certified for
liability purposes. The lawsuit is pending in U.S. District Court in
Wisconsin and is presently in the discovery phase.
9
<PAGE>
PDVMR and the Company, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities and
claims, including this matter.
CITGO is among defendants to lawsuits in North Carolina, New York and
Illinois alleging contamination of water supplies by methyl tertiary butyl
ether ("MTBE"), a component of gasoline. A similar case in California has
been settled for an immaterial amount. The North Carolina case, filed in
January 1999, and the New York case, filed in January 2000 are putative
class actions on behalf of owners of water wells and other drinking water
supplies in such states. The Illinois class action, filed in April 2000,
purports to be on behalf of well owners in sixteen states. All of these
actions allege that MTBE poses public health risks. The suits seek damages
as well as remediation of the alleged contamination. These matters are in
early stages of discovery. CITGO has denied all of the allegations and is
pursuing its defenses.
Environmental Compliance and Remediation - The Company is subject to
various federal, state and local environmental laws and regulations which
may require the Company to take action to correct or improve the effects
on the environment of prior disposal or release of petroleum substances by
the Company or other parties. Management believes the Company is 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.
The Company's accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably
capable of estimation. Based on currently available information, including
the continuing participation of former owners in remediation actions and
indemnification agreements with third parties, the Company believes that
its accruals are sufficient to address its environmental clean-up
obligations.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998
and 1999. TNRCC has issued Notices of Violation ("NOV") related to each of
the reviews and has proposed fines of approximately $970,000 based on the
1998 review and $700,000 based on the 1999 review. Most of the alleged
violations refer to recordkeeping and reporting issues, failure to meet
required emission levels, and failure to properly monitor emissions. The
Company is currently reviewing the alleged violations and intends to
vigorously protest the alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency ("EPA") that the EPA
believes these companies have contributed to contamination in the
Calcasieu Estuary, in the proximity of Lake Charles, Calcasieu Parish,
Louisiana and are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). The EPA made a demand for payment of its past investigation
costs from CITGO and other PRPs and advised it is conducting a Remedial
Investigation/Feasibility Study ("RI/FS") under its CERCLA authority.
CITGO and other PRPs may be potentially responsible for the costs of the
RI/FS. CITGO disagrees with the EPA's allegations and intends to contest
this matter.
In October 1999, the EPA issued a NOV to CITGO for violations of federal
regulations regarding reformulated gasoline found during a May 1998
inspection of CITGO's Braintree, Massachusetts terminal and recommended a
penalty of $218,500. The Company intends to vigorously contest the
proposed fines and allegations.
10
<PAGE>
On June 28, 1999, PDVMR received a Finding of Violation ("FOV") from the
EPA (Region V) for alleged violations of the federal benzene New Source
Hazardous Air Pollutants regulations under the Federal Clean Air Act at
the Lemont refinery operated by CITGO. PDVMR is currently in negotiations
with the EPA concerning the FOV. While PDVMR does not expect this matter
to have a material financial impact on the Company, it can reasonably
anticipate proposed penalties to exceed $100,000.
In November 1999, the Attorney General's Officer of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois
against PDV Midwest Refining and CITGO Petroleum Corporation alleging
damages from several releases to the air of contaminants from the Lemont,
Illinois refinery. The initial complaint addressed alleged violations and
potential compliance actions. The Attorney General's office later made a
demand for penalties of approximately $150,000. While CITGO and PDVMR
disagree with the Attorney General's alleged violations and proposed
penalty demand, they are cooperating with the agency and anticipate
reaching an agreement with the agency to resolve this lawsuit by late
2000.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, the Company's
operating refinery complexes, closed refineries, service stations and
crude oil and petroleum product storage terminals. The amount of such
future expenditures, if any, is indeterminable.
Derivative Commodity and Financial Instruments - The Company enters into
petroleum futures contracts, options and other over-the-counter commodity
derivatives, primarily to reduce its inventory exposure to market risk.
Such contracts are generally 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 the Company's hedged
inventory or future purchases and sales. In the six-month period ended
June 30, 2000, there was no non-hedging activity.
The Company has only limited involvement with other derivative financial
instruments and does not currently use them for trading purposes. The
Company has entered into various interest rate swaps to manage its risk
related to interest rate changes on its debt. The fair value of the
interest rate swap agreements in place at June 30, 2000, based on the
estimated amount that the Company would receive or pay to terminate the
agreements as of that date and taking into account current interest rates,
was an unrealized loss of $1 million. In connection with the determination
of fair market value, the Company considers the creditworthiness of the
counterparties, but no adjustment was determined to be necessary as a
result.
The commodity instruments increased cost of sales and operating expenses
and decreased pretax earnings by $5 million for the quarter and $6 million
for the six months ended June 30, 2000. The commodity instruments did not
have a material impact on cost of sales and operating expenses or pretax
earnings in the quarter or the six months ended June 30, 1999. The impact
of the interest rate swaps on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented.
11
<PAGE>
6. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries. These crude oil supply
agreements contain force majeure provisions that entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements under specified circumstances. As of June 30, 2000,
PDVSA's deliveries of crude oil to CITGO were less than contractual base
volumes due to PDVSA's declaration of force majeure pursuant to all of the
long-term crude oil supply contracts related to CITGO's refineries.
Therefore, CITGO has been required to use alternative sources of crude
oil, which resulted in lower operating margins. It is not possible to
forecast future financial impacts of these reductions in crude oil
deliveries on CITGO's costs because the correlation between crude oil
and refined product prices is not constant over time. Additionally, due
to changes in crude oil economics, among other things, the duration of
the force majeure cannot be forecasted.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements and oblige the supplier to pay CITGO the deemed margin
under that contract for each barrel of reduced crude oil and feedstocks.
During the six months ended June 30, 2000, PDVSA did not deliver naphtha
pursuant to two of the contracts. As a result, the Company has been
required to use alternative sources of naphtha, which resulted in lower
operating margins. There was no shortfall in the naphtha deliveries in the
six months ended June 30, 1999.
12
<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. Reference is made to PDV America's Annual Report for the fiscal year
ended December 31, 1999 on Form 10-K, dated March 30, 2000, for additional
information and a description of factors that may cause substantial fluctuations
in the earnings and cash flows of PDV America.
In the quarter ended June 30, 2000, PDV America generated net income of
$79.7 million on revenue of $5.7 billion compared to net income of $30.0 million
on revenues of $3.2 billion for the same period last year. In the six months
ended June 30, 2000, the Company generated net income of $123.4 million on
revenue of $10.6 billion compared to net income of $108.3 million on revenues of
$5.4 billion for the same period last year. Gross margin for the first six
months of 1999 benefited from the sale of inventories that were written down by
$172 million at December 31, 1998, to reflect market prices at that time. (See
"Gross margin").
CITGO's revenue accounted for over 99% of PDV America's consolidated
revenues for all periods presented. PDVMR's sales in all periods presented were
primarily to CITGO and, accordingly, have been eliminated in consolidation.
Results of Operations
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month and six-month periods ended June
30, 2000 and 1999:
<TABLE>
<CAPTION>
PDV America's Sales Revenues and Volumes
Three months Six months Three months Six months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
---------------- --------------- ------------------ ----------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------- ------- ------ ------- ------- ------- -------
($ in millions) ($ in millions) MM gallons MM gallons
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline $3,441 $1,878 $ 6,096 $3,134 3,650 3,386 6,791 6,487
Jet Fuel 440 238 934 429 571 535 1,182 1,071
Diesel/#2 fuel 1,030 560 2,124 1,012 1,338 1,293 2,718 2,602
Asphalt 166 93 213 119 244 227 321 297
Petrochemicals and industrial products 461 236 852 432 430 469 816 1,046
Lubricants and waxes 139 122 254 241 72 75 128 143
------ ------ ------- ------ ----- ----- ------ ------
Total refined product sales 5,677 3,127 10,473 5,367 6,305 5,985 11,956 11,646
Other sales 8 33 47 52
------ ------ ------- ------ ----- ----- ------ ------
Total Sales $5,685 $3,160 $10,517 $5,419 6,305 5,985 11,956 11,646
====== ====== ======= ====== ===== ===== ====== ======
</TABLE>
13
<PAGE>
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and six-month periods ended June 30, 2000
and 1999:
<TABLE>
<CAPTION>
PDV America's Cost of Sales and Operating Expenses
Three months Six months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
Crude oil $ 1,706 $ 875 $ 3,167 $ 1,479
Refined products 3,005 1,577 5,440 2,709
Intermediate feedstocks 432 205 749 342
Refining and manufacturing costs 267 245 518 493
Other operating costs, expense and inventory
changes(1) 63 130 304 65
--------- --------- --------- ---------
Total cost of sales and operating expenses $ 5,473 $ 3,032 $ 10,178 $ 5,088
========= ========= ========= =========
(1) The six months ended June 30, 1999, includes the impact of the inventory valuation reserve of $172 million
recorded at December 31, 1998. See "Gross Margin."
</TABLE>
Sales revenues and volumes. Sales increased $2.5 billion, or
approximately 80%, in the three-month period ended June 30, 2000 as compared to
the same period in 1999. This was due to an increase in average sales price of
71% and an increase in sales volume of 5%. Sales increased $5.1 billion, or
approximately 94%, in the six-month period ended June 30, 2000 as compared to
the same period in 1999. This was due to an increase in average sales price of
89% and an increase in sales volume of 3%. (See PDV America's Sales Revenues and
Volumes table above.)
Equity in earnings (losses) of affiliates. Equity in earnings (losses)
of affiliates increased by $5.6 million for the three-month period ended June
30, 2000 and increased $6.0 million for the six-month period ended June 30, 2000
as compared to the same periods in 1999. The increase was primarily due to the
change in the earnings of LYONDELL-CITGO. CITGO's share of these earnings
increased $9 million, from $(14) million in the first six months of 1999 to $(5)
million in the first six months of 2000. The six-month periods in both 2000 and
1999 experienced lower crude processing rates. In 2000, this was due to a major
planned turnaround. In 1999, it was due to unplanned production unit outages.
However, the improvement in 2000 compared to 1999 was primarily due to higher
margins reflecting a stronger gasoline market in the first six months of 2000.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2.4 billion or 81%, in the quarter ended June 30, 2000 as
compared to the same period in 1999. Cost of sales and operating expenses
increased by $5.1 billion or 100%, in the six months ended June 30, 2000 as
compared to the same period in 1999. (See PDV America's Cost of Sales and
Operating Expenses table above.)
The invocation of the force majeure clause in the Company's crude oil
supply contracts resulted in an increase of an estimated $5 million in crude oil
costs for the six months ended June 30, 2000. However, the Company believes that
such force majeure provisions did not have a material effect on crude oil costs
for the three months ended June 30, 2000. It is estimated that force majeure
provisions in the Company's crude oil supply contracts resulted in an increase
in crude oil costs for the three months and six months ended June 30, 1999 of
$13 million and $17 million, respectively. During the six months ended June 30,
2000, PDVSA did not deliver naphtha pursuant to two of the contracts. This
resulted in an increase in naphtha costs, net of deemed margin, by $2 million
and $3 million for the three months and six months
14
<PAGE>
ended June 30, 2000. There was no shortfall in the naphta deliveries in the six
months ended June 30, 1999. (See "Related Party Transactions.")
The Company purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 55% and 52% of total cost of sales and
operating expenses for the second quarters of 2000 and 1999, respectively, and
53% for the first six months of 2000 and 1999. 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 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. In the near term, other than normal
refinery turnaround maintenance, the Company does not anticipate operational
actions or market conditions which might cause a material change in anticipated
purchased product requirements; however, there could be events beyond the
control of the Company which impact the volume of refined products purchased.
See also "Factors Affecting Forward Looking Statements."
Gross margin. The gross margin for the three-month period ended June
30, 2000 was approximately $212 million or 3.7%, compared to $128 million or
4.0% for the same period in 1999. The gross margin for the six-month period
ended June 30, 2000 was $339 million or 3.2%, compared to $331 million or 6.1%
for the same period in 1999. In the three-month period ended June 30, 2000, the
revenue and cost per gallon component increased approximately 71%. In the
six-month period ended June 30, 2000, the revenue per gallon component increased
approximately 89% while the cost per gallon component increased approximately
94%. Inventories at December 31, 1998 had been revalued resulting in a charge of
$172 million to the results of operations for the year 1998. The sale of these
revalued inventories during the first quarter of 1999 is the principal factor in
the higher gross margins realized during the first quarter of 1999. At June 30,
2000 and 1999 estimated net market values of inventories exceeded historical
cost, and accordingly, no valuation reserve was necessary.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased in the second quarter of 2000 by 6%, from $60
million in the second quarter of 1999 to $56 million in the second quarter of
2000. Selling, general and administrative expenses decreased in the first six
months of 2000 by 13%, from $118 million in the first six months of 1999 to $103
million in the first six months of 2000. The decrease is principally due to the
decrease in professional and consulting fees and the recovery of the bad debt
reserve related to credit card receivables. The recovery was in connection with
the sale of CITGO's proprietary consumer credit card receivables and related
credit card program on March 1, 2000 as described below.
15
<PAGE>
Liquidity and Capital Resources
For the six-month period ended June 30, 2000, the Company's
consolidated net cash provided by operating activities totaled approximately
$489 million. Operating cash flows were derived from net income of $123 million,
depreciation and amortization of $138 million, and changes in other assets and
liabilities of $228 million.
Net cash used in investing activities totaled $93 million for the
six-month period ended June 30, 2000 consisting primarily of capital
expenditures of $62 million (compared to $119 million for the same period in
1999). The decline in capital expenditures in the first six months of 2000
compared to the first six months of 1999 is due primarily to projects which are
progressing more slowly than anticipated. Total capital expenditures for the
year are currently estimated to be approximately $160 million. This is
approximately 65% of 1999 capital expenditures. In addition, CITGO has loaned
$25 million to LYONDELL-CITGO in the six-month period ended June 30, 2000.
Net cash used in financing activities totaled $456 million for the
six-month period ended June 30, 2000 consisting primarily of $462 million net
repayment on revolving bank loans and available borrowing capacity under PDVMR's
revolving credit facility of $100 million.
As of June 30, 2000, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $550 million, $186 million of uncommitted
short-term borrowing facilities with various banks and available borrowing
capacity under PDVMR's revolving credit facility of $100 million. Additionally,
the remaining $400 million from CITGO's shelf registration with the Securities
and Exchange Commission for $600 million of debt securities may be offered and
sold from time to time. The Company's management believes that the Company 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. In addition, PDV America
intends that payments received from PDVSA under the Mirror Notes will provide
funds to service PDV America's Senior Notes. The Company periodically evaluates
other sources of capital in the marketplace and anticipates that long-term
capital requirements will be satisfied with current capital resources and future
financing arrangements, including the issuance of debt securities. The Company's
ability to obtain such financing will depend on numerous factors, including
market conditions and the perceived creditworthiness of the Company at that
time.
On March 1, 2000, CITGO sold its proprietary consumer credit card
receivables and related credit card program to Associates First Capital
Corporation ("Associates"). In this transaction, Associates acquired
approximately $19 million in receivables from CITGO and $113 million from Royal
Bank of Canada which had previously been purchased from CITGO under a revolving
sale facility. In addition, Associates acquired 1.2 million active consumer
accounts. The sale did not affect CITGO's commercial or fleet credit card
programs.
In April 2000, CITGO amended an agreement to sell trade accounts
receivable on an ongoing basis and without recourse. The amendment increased the
amount of such receivables that can be sold to $225 million. The amended
agreement has a minimum term of one year and is renewable for successive annual
terms by mutual agreement. $225 million has been sold under this amended
agreement as of June 30, 2000. Proceeds from the sale were used for general
corporate purposes.
The Company is in compliance with its obligations under its debt
financing arrangements at June 30, 2000.
16
<PAGE>
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). In June 2000, Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("SFAS No. 138"), an amendment of
SFAS No. 133, was issued. The statement, as amended by SFAS No. 138, establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives, at fair value,
as either assets or liabilities in the statement of financial position with an
offset either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. The Company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 133, as amended by SFAS No. 138, which is required no later than
January 1, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Introduction. The Company has exposure to price fluctuations of crude
oil and refined products as well as fluctuations in interest rates. To manage
these exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which the Company operates and
finances its assets. The Company does not attempt to manage the price risk
related to all of its inventories of crude oil and refined products. As a
result, at June 30, 2000, The Company was exposed to the risk of broad market
price declines with respect to a substantial portion of its crude oil and
refined product inventories. The following disclosures do not attempt to
quantify the price risk associated with such commodity inventories.
Commodity Instruments. The Company balances its crude oil and petroleum product
supply/demand and manages a portion of its price risk by entering into petroleum
commodity derivatives. Generally, CITGO's risk management strategies qualify as
hedges, however, certain strategies that CITGO may use on commodity positions do
not qualify as hedges.
17
<PAGE>
<TABLE>
<CAPTION>
Non Trading Commodity Derivatives
Open Positions at June 30, 2000
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value (2) Value
--------- ---------- ---- --------- --------- ------
($ in millions)
--------- ------
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Sold 2000 100 $ 4.1 $ 4.2
OTC Swap Options Purchased 2000 500 $ - $ -
OTC Swap Options Sold 2000 500 $ - $ -
OTC Swaps (Pay Floating/Received Fixed)(4) 2000 1,500 $ 55.7 $ 58.6
Heating Oil(1) Futures Purchased 2000 188 $ 9.0 $ 10.1
Futures Purchased 2001 337 $ 6.9 $ 7.6
Futures Sold 2000 25 $ 0.9 $ 0.9
OTC Swaps (Pay Floating/Received Fixed)(4) 2000 29 $ 0.8 $ 0.6
Crude Oil(1) Futures Sold 2000 300 $ 9.2 $ 9.8
OTC Swaps (Pay Floating/Received Fixed)(4) 2000 3,400 $104.9 $110.5
Natural Gas(3) Futures Purchased 2000 23 $ 0.9 $ 1.0
----------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
(4) Floating price based on market index designated in contract; fixed price agreed upon at date of contract.
</TABLE>
<TABLE>
<CAPTION>
Non Trading Commodity Derivatives
Open Positions at June 30, 1999
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value (2) Value
--------- ---------- ---- --------- --------- ------
($ in millions)
--------- ------
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Purchased 1999 5 $ 0.1 $0.1
Futures Sold 1999 25 $ 0.5 $0.6
Heating Oil(1) Futures Purchased 1999 242 $ 4.7 $5.0
Futures Purchased 2000 12 $ 0.2 $0.3
Futures Sold 1999 50 $ 1.0 $1.0
OTC Swaps 1999 14 $ 0.3 $0.3
OTC Swaps 2000 17 $ 0.3 $0.4
Natural Gas(3) Futures Purchased 1999 79 $ 1.6 $2.0
----------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
</TABLE>
18
<PAGE>
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40% to 60% fixed rate debt to total fixed and floating
rate debt. These instruments have the effect of changing the interest rate with
the objective of minimizing CITGO's long-term costs. At June 30, 2000, CITGO's
primary exposures were to U.S. dollar, LIBOR and U.S. Treasury rates.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
Non Trading Interest Rate Derivatives
Open Positions at June 30, 2000
<TABLE>
<CAPTION>
Notional
Expiration Fixed Rate Principal
Variable Rate Index Date Paid Amount
------------------- ---- ---- ------
($ in millions)
<S> <C> <C> <C>
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
---
$42
===
</TABLE>
Non Trading Interest Rate Derivatives
Open Positions at June 30, 1999
<TABLE>
<CAPTION>
Notional
Expiration Fixed Rate Principal
Variable Rate Index Date Paid Amount
------------------- ---- ---- ------
($ in millions)
<S> <C> <C> <C>
One-month LIBOR May 2000 6.28% $25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
---
$92
===
</TABLE>
The fair value of the interest rate swap agreements in place at June
30, 2000, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1 million.
19
<PAGE>
For debt obligations, the table below presents principal cash flows and related
weighted average interest rates by expected maturity dates. Weighted average
variable rates are based on implied forward rates in the yield curve at the
reporting date.
Debt Obligations
At June 30, 2000
<TABLE>
<CAPTION>
Expected Average
Fixed Average Fixed Variable Variable
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- ----------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
2000 $ 290 7.94% $ 38 7.04%
2001 40 9.11% 7 7.46%
2002 36 8.78% - 7.99%
2003 560 7.98% - 8.27%
2004 31 8.02% 16 8.52%
Thereafter 391 8.02% 484 9.29%
------- ----- ----- -----
Total $1,348 8.04% $ 545 9.09%
======= ===== ===== =====
Fair Value $1,345 $ 545
======= =====
</TABLE>
Debt Obligations
At June 30, 1999
<TABLE>
<CAPTION>
Expected
Fixed Average Fixed Variable Average Variable
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- ----------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
1999 $ 40 9.11% $ 138 5.49%
2000 290 7.94% 7 6.06%
2001 40 9.11% 7 6.81%
2002 36 8.78% 113 7.17%
2003 559 7.98% 100 7.53%
Thereafter 422 8.02% 500 9.23%
------- ----- ----- -----
Total $1,387 8.07% $ 865 8.12%
======= ===== ===== =====
Fair Value $1,328 $ 865
======= =====
</TABLE>
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 5 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
---------- --------------
27 Financial Data Schedule (filed electronically
only)
(b) Reports on Form 8-K:
--------------------
None.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDV AMERICA, INC.
Date: August 11, 2000 /s/ Luis Centeno
----------------------------------------
Luis Centeno
President, Chief Executive and Financial
Officer and Director
Date: August 11, 2000 /s/ Jose I. Moreno
----------------------------------------
Jose I. Moreno
Secretary and Director
22
