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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 MARCH 31, 2003
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)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
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(Registrant's telephone number, including area code)
N. A.
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Act): Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
- ----------------------------- -----
(Class) (outstanding at April 30, 2003)
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PDV AMERICA, INC.
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS..................................................................... 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2003 and
December 31, 2002................................................................................... 2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three-Month Periods Ended March 31, 2003 and 2002................................................... 3
Condensed Consolidated Statement of Shareholder's Equity - Three-Month Period
Ended March 31, 2003................................................................................ 4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 2003 and 2002............................................................................. 5
Notes to the Condensed Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 24
Item 4. Controls and Procedures............................................................................. 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................... 29
Item 6. Exhibits and Reports on Form 8-K.................................................................... 29
SIGNATURES....................................................................................................... 30
CERTIFICATIONS................................................................................................... 31
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Specifically, all statements under
the caption "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" pertaining to capital expenditures and
investments related to environmental compliance, strategic planning, purchasing
patterns of refined products and capital resources available to PDV America,
Inc. ("PDV America", "our Company", "we", "us", "our", or similar references)
are forward looking statements. In addition, when used in this document, the
words "anticipate," "estimate," "project," "believe" and similar expressions are
used to identify forward looking statements.
Those forward looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from the forward looking
statements. Those risks and uncertainties include changes in the availability
and cost of crude oil, feedstocks, blending components and refined products;
changes in prices or demand for our products as a result of competitive actions
or economic factors; changes in environmental and other regulatory requirements,
which may affect operations, operating costs and capital expenditure
requirements; costs and uncertainties associated with technological change and
implementation; inflation; and continued access to capital markets and
commercial bank financing on favorable terms. In addition, we purchase a
significant portion of our crude oil requirements from Petroleos de Venezuela,
S.A. (as defined herein), our ultimate parent corporation, under long-term
supply agreements, and could be adversely affected by social, economic and
political conditions in Venezuela. (See Exhibit 99.4 to the Form 8-K filed by
PDV America on February 25, 2003 for additional information concerning risk
factors).
Readers are cautioned not to place undue reliance on these forward
looking statements, which speak only as of the date of this Report. We undertake
no obligation to publicly release any revision to these forward looking
statements to reflect events or circumstances after the date of this Report.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
--------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 494,912 $ 40,337
Accounts receivable, net 1,035,596 905,178
Due from affiliates 79,985 86,066
Inventories 854,261 1,090,915
Current portion of notes receivable from PDVSA 500,000 500,000
Prepaid expenses and other 67,103 76,384
----------- -----------
Total current assets 3,031,857 2,698,880
NOTES RECEIVABLE FROM AFFILIATE 298,000 298,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,780,652 3,750,239
RESTRICTED CASH 23,522 23,486
INVESTMENTS IN AFFILIATES 676,452 716,469
OTHER ASSETS 323,369 310,188
----------- -----------
$ 8,133,852 $ 7,797,262
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 507,470 $ 830,769
Payables to affiliates 537,879 387,634
Taxes other than income 220,985 229,072
Other 269,166 299,810
Income taxes payable 76,284 -
Current portion of long-term debt 531,170 690,325
Current portion of capital lease obligation 22,713 22,713
----------- -----------
Total current liabilities 2,165,667 2,460,323
LONG-TERM DEBT 1,561,520 1,109,861
CAPITAL LEASE OBLIGATION 24,251 24,251
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 266,506 247,762
OTHER NONCURRENT LIABILITIES 217,107 213,637
DEFERRED INCOME TAXES 896,447 862,191
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 1,495,592 1,372,456
Accumulated other comprehensive loss (25,674) (25,655)
----------- -----------
Total shareholder's equity 3,002,354 2,879,237
----------- -----------
$ 8,133,852 $ 7,797,262
=========== ===========
See notes to condensed consolidated financial statements.
2
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
---- ----
REVENUES:
Net sales $ 6,227,716 $ 3,622,355
Sales to affiliates 147,965 49,067
----------- -----------
6,375,681 3,671,422
Equity in earnings of affiliates 13,624 18,934
Interest income from affiliates 16,544 16,544
Insurance recoveries 117,714 94,706
Other income (expense) - net 15,035 (6,453)
----------- -----------
6,538,598 3,795,153
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $2,041,581 and $1,238,848 from affiliates) 6,205,790 3,708,903
Selling, general and administrative expenses 73,795 76,804
Interest expense, excluding capital lease 33,261 26,069
Capital lease interest charge 1,321 1,893
----------- -----------
6,314,167 3,813,669
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 224,431 (18,516)
INCOME TAXES (BENEFIT) 80,795 (6,665)
----------- -----------
NET INCOME (LOSS) 143,636 (11,851)
----------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME:
Cash flow hedges:
Reclassification adjustment for derivative losses included
in net income, net of related income taxes of $43 and $44 77 78
Foreign currency translation loss, net of related
income taxes of $(54) (96) -
----------- -----------
OTHER COMPREHENSIVE (LOSS) INCOME (19) 78
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 143,617 $ (11,773)
=========== ===========
See notes to condensed consolidated financial statements.
3
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ------ ------- -------- ------------- -----
BALANCE, DECEMBER 31, 2002 1 $ 1 $ 1,532,435 $ 1,372,456 $ (25,655) $ 2,879,237
Net income - - - 143,636 - 143,636
Dividends paid - - - (20,500) - (20,500)
Other comprehensive loss - - - - (19) (19)
--------- -------- ----------- ----------- ----------- -----------
BALANCE, MARCH 31, 2003 1 $ 1 $ 1,532,435 $ 1,495,592 $ (25,674) $ 3,002,354
========= ======== =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES $ 306,002 $ 63,985
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (90,425) (120,510)
Proceeds from sales of property, plant and equipment 1,582 276
Increase in restricted cash (37) -
Investments in LYONDELL-CITGO Refining LP (14,900) (15,400)
Investments in and advances to other affiliates (1,250) (2,967)
----------- -----------
Net cash used in investing activities (105,030) (138,601)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans - 90,000
Net repayments of revolving bank loans (279,300) (66,500)
Payments on loans from affiliates (9,000) -
Proceeds from senior notes due 2011 546,590 -
Proceeds from senior secured term loan 200,000 -
(Payments on) proceeds from issuance of tax-exempt bonds (75,000) 25,000
Payments on taxable bonds - (25,000)
Payments on master shelf agreement senior notes (50,000) (25,000)
Repurchase of senior notes due 2006 (47,500) -
Debt issuance costs (11,687) -
Dividends paid (20,500) -
----------- -----------
Net cash provided by (used in) financing activities 253,603 (1,500)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 454,575 (76,116)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 40,337 116,069
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 494,912 $ 39,953
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash (received) paid during the period for:
Interest, net of amounts capitalized $ 28,918 $ 29,079
=========== ===========
Income taxes (net of refund of $50,000 in 2002) $ (45,801) $ (45,561)
=========== ===========
See notes to condensed consolidated financial statements.
5
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH PERIODS ENDED MARCH 31, 2003 AND 2002
1. BASIS OF PRESENTATION
The financial information for PDV America, Inc. ("PDV America") subsequent
to December 31, 2002 and with respect to the interim three-month periods
ended March 31, 2003 and 2002 is unaudited. In management's opinion, such
interim information contains all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
such periods. The results of operations for the three-month periods ended
March 31, 2003 and 2002 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, 2002 on Form 10-K, dated
March 28, 2003, for additional information.
The condensed consolidated financial statements include the accounts of PDV
America and its wholly owned subsidiaries, CITGO Petroleum Corporation
("CITGO"), and PDV USA, Inc. ("PDV USA"), collectively, ("the Companies").
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN 46 defines variable interest entities and how an enterprise should
assess its interests in a variable interest entity to decide whether to
consolidate that entity. The interpretation requires certain minimum
disclosures with respect to variable interest entities in which an
enterprise holds significant variable interest but which it does not
consolidate. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as
of the beginning of the applicable interim or annual period, and it applies
to nonpublic enterprises as of the end of the applicable annual period. FIN
46 may be applied prospectively with a cumulative-effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements for one or more years with a cumulative-effect
adjustment as of the beginning of the first year restated. The Companies
expect that the application of FIN 46 to variable interest entities in
which they acquired an interest before February 1, 2003 will not have a
material impact on their financial position or results of operations.
On January 1, 2003 the Companies adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No.
143) which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Companies
have identified certain asset retirement obligations that are within the
scope of the standard, including obligations imposed by certain state laws
pertaining to closure and/or removal of storage tanks, contractual removal
obligations included in certain easement and right-of-way agreements
associated with the Companies' pipeline operations, and contractual removal
obligations relating to a refinery processing unit located within a
third-party entity's facility. The Companies cannot currently determine a
reasonable estimate of the fair value of their asset retirement obligations
due to the fact that the related assets have indeterminate useful lives
which preclude development of assumptions about the potential timing of
settlement dates. Such obligations will be recognized in the period in
which sufficient information exists to estimate a range of potential
settlement dates. Accordingly, the adoption of SFAS No. 143 did not impact
the Companies' financial position or results of operations.
6
2. ACCOUNTS RECEIVABLE
Credit rating downgrades from the three major rating agencies during
January 2003, caused a termination event under CITGO's accounts receivables
sale facility existing at that time, which ultimately led to the repurchase
of $125 million in accounts receivable and cancellation of the facility on
January 31, 2003. That facility had a maximum size of $225 million, of
which $125 million was used at the time of cancellation. On February 28,
2003, a new accounts receivable sales facility was established. This
facility allows for the non-recourse sale of certain accounts receivable to
independent third parties. A maximum of $200 million in accounts receivable
may be sold at any one time.
3. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
----------- ------------
(000S OMITTED)
Refined products $ 587,291 $ 781,495
Crude oil 178,770 221,422
Materials and supplies 88,200 87,998
----------- -----------
$ 854,261 $ 1,090,915
=========== ===========
7
4. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
MARCH 31,
2003 DECEMBER 31,
(UNAUDITED) 2002
----------- ------------
(000S OMITTED)
Revolving bank loans $ - $ 279,300
Senior Secured Term Loan 200,000 -
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7-7/8% 149,929 199,898
Senior Notes due 2003 with interest rate of 7-7/8% 499,806 499,661
Senior Notes, $550 million face amount, due 2011 with
interest rate of 11-3/8% 546,626 -
Private Placement Senior Notes, due 2003 to 2006 with
interest rate of 9.30% 45,455 45,455
Master Shelf Agreement Senior Notes, due 2003 to
2009 with interest rates from 7.17% to 8.94% 185,000 235,000
Tax Exempt Bonds, due 2004 to 2032 with variable
and fixed interest rates 350,874 425,872
Taxable Bonds, due 2026 to 2028 with variable interest rates 115,000 115,000
----------- -----------
2,092,690 1,800,186
Current portion of long-term debt (531,170) (690,325)
----------- -----------
$ 1,561,520 $ 1,109,861
=========== ===========
CITGO's revolving bank loan agreements with various banks consist of (i) a
$260 million, three-year, revolving bank loan, maturing in December 2005;
(ii) a $260 million, 364-day, revolving bank loan, maturing in December
2003; and (iii) a $25 million, 364-day, revolving bank loan, maturing in
May 2003. The $25 million revolving bank loan, expiring in May 2003, will
not be renewed. CITGO intends to replace both of the $260 million revolving
bank loans when they mature.
On May 3, 2002, CITGO issued $7.7 million of tax exempt environmental
facilities revenue bonds due 2032. On June 28, 2002, CITGO issued $30
million of tax exempt environmental facilities revenue bonds due 2032. The
proceeds from both of these issuances will be used for capital projects at
the Lemont refinery. Restricted cash of $24 million at March 31, 2003
represents highly liquid investments held in trust accounts in accordance
with these bond agreements. Funds are released solely for financing the
qualified capital expenditures as defined in the bond agreements. CITGO
repurchased the $7.7 million of tax exempt bonds in May of 2003.
On February 27, 2003, CITGO closed on a three year $200 million, senior
secured term loan. Security is provided by CITGO's 15.8 percent equity
interest in Colonial Pipeline and 6.8 percent equity interest in Explorer
Pipeline.
On February 27, 2003 CITGO issued $550 million aggregate principal amount
of 11-3/8 percent unsecured senior notes due February 1, 2011. In
connection with this debt issuance, CITGO redeemed $50 million principal
amount of its Senior Notes due 2006.
8
The tax-exempt bonds are supported by letters of credit. Some of the
providers of these letters of credit indicated they would not renew such
letters of credit. As a result, CITGO repurchased tax-exempt bonds that
were supported by these letters of credit in the amounts of $75 million in
March 2003, $25 million in April 2003 and approximately $8 million in May
2003.
5. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%)
and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery
processes heavy crude oil supplied by PDVSA under a long-term supply
contract that expires in 2017. CITGO purchases substantially all of the
gasoline, diesel and jet fuel produced at the refinery under a long-term
contract.
At various times since April 1998, PDVSA, pursuant to its contractual
rights, declared force majeure and reduced deliveries of crude oil to
LYONDELL-CITGO; this required LYONDELL-CITGO to obtain alternative sources
of crude oil supply in replacement, which resulted in lower operating
margins. Most recently, LYONDELL-CITGO received notice of force majeure
from PDVSA in December 2002. Crude oil was purchased in the spot market to
replace the volume not delivered under the contract during December 2002.
By February 2003, crude oil deliveries had returned to contract volumes and
the force majeure was lifted March 6, 2003.
CITGO has a note receivable from LYONDELL-CITGO which totals $35 million at
March 31, 2003 and December 31, 2002. The note bears interest at market
rates. Principal and interest are due in December 2004. Accordingly, this
note is included in the balance sheet caption other assets in the
accompanying consolidated balance sheets.
9
CITGO accounts for its investment in LYONDELL-CITGO using the equity method
of accounting and records its share of the net earnings of LYONDELL-CITGO
based on allocations of income agreed to by the Owners which differ from
participation interests. Cash distributions are allocated to the Owners
based on participation interest. Information on CITGO's investment in
LYONDELL-CITGO follows:
(000s omitted)
March 31, December 31,
2003 2002
----------- -----------
(Unaudited)
Carrying value of investment $ 480,052 $ 518,279
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 271,000 $ 357,000
Non current assets 1,365,000 1,400,000
Current liabilities:
Distributions payable to partners 74,000 181,000
Other 298,000 333,000
Noncurrent liabilities (including debt of $450,000
at March 31, 2003 and December 31, 2002) 841,000 840,000
Partners' capital 423,000 403,000
Three Months Ended March 31,
----------------------------
2003 2002
------------ ------------
(Unaudited)
Equity in net income $ 9,110 $ 14,438
Cash distribution received 62,238 16,715
Summary of LYONDELL-CITGO's operating results:
Revenue $ 1,183,128 $ 706,718
Gross profit 49,664 60,312
Net income 28,180 41,297
On December 11, 2002, LYONDELL-CITGO completed a refinancing of its working
capital revolver and its term bank loan. The new term loan and working
capital revolver will mature in June 2004.
10
6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the
ordinary course of business are pending against the Companies. The
Companies record accruals for potential losses when, in management's
opinion, such losses are probable and reasonably estimable. If known
lawsuits and claims were to be determined in a manner adverse to the
Companies, and in amounts greater than the Companies' accruals, then such
determinations could have a material adverse effect on the Companies'
results of operations in a given reporting period. The most significant
lawsuits and claims are discussed below.
CITGO settled a lawsuit against PDVMR and CITGO in Illinois state court
which claimed damages as a result of PDVMR invoicing a partnership in which
it is a partner, and an affiliate of the other partner of the partnership,
allegedly excessive charges for electricity utilized by these entities'
facilities located adjacent to the Lemont, Illinois refinery. The
electricity supplier to the refinery is seeking recovery from CITGO of
alleged underpayments for electricity. CITGO has denied all allegations and
is pursuing its defenses.
In September 2002, a state District Court in Corpus Christi, Texas has
ordered CITGO to pay property owners and their attorneys approximately $6
million based on alleged settlement of class action property damage claims
as a result of alleged air, soil and groundwater contamination from
emissions released from CITGO's Corpus Christi, Texas refinery. CITGO will
appeal the ruling to the Texas Court of Appeals.
CITGO is one of several refinery defendants to state and federal lawsuits
in New York and state actions in Illinois and California alleging
contamination of water supplies by methyl tertiary butyl ether ("MTBE"), a
component of gasoline. The plaintiffs claim that MTBE is a defective
product and that refiners failed to adequately warn customers and the
public about risks associated with the use of MTBE in gasoline. These
actions allege that MTBE poses public health risks and seek testing,
damages and remediation of the alleged contamination. The plaintiffs filed
putative class action lawsuits in federal courts in Illinois, California,
Florida and New York. CITGO was named as a defendant in all but the
California case. The federal cases were all consolidated in a Multidistrict
Litigation case in the United States District Court for the Southern
District of New York ("MDL"). In July 2002, the court in the MDL case
denied plaintiffs' motion for class certification. The California
plaintiffs in the MDL action then dismissed their federal lawsuit and
refiled in state court in California. Subsequently, the remaining MDL
plaintiffs settled with CITGO and its codefendants for an amount that does
not have a material impact on CITGO's financial condition or results of
operations. CITGO anticipates a similar settlement of the California
lawsuit. In August 2002, a New York state court judge handling two separate
but related individual MTBE lawsuits dismissed plaintiffs' product
liability claims, leaving only traditional nuisance and trespass claims for
leakage from underground storage tanks at gasoline stations near
plaintiffs' water wells. Subsequently, a putative class action involving
the same leaking underground storage tanks has been filed. CITGO
anticipates filing a motion to dismiss the product liability claims and
will also oppose class certification. Also, in late October 2002, The
County of Suffolk, New York, and the Suffolk County Water Authority filed
suit in state court, claiming MTBE contamination of that county's water
supply. The Illinois state action has been brought on behalf of a class of
contaminated well owners in Illinois and a second class of all well owners
within a defined distance of leaking underground storage tanks. The judge
in the Illinois state court action is expected to hear plaintiffs' motion
for class certification in that case sometime within the next year.
In August 1999, the U.S. Department of Commerce rejected a petition filed
by a group of independent oil producers to apply antidumping measures and
countervailing duties against imports of crude oil from Venezuela, Iraq,
Mexico and Saudi Arabia. The petitioners appealed this decision before the
U.S. Court of International Trade based in New York. On September 19, 2000,
the Court of International Trade remanded the case to the Department of
Commerce with instructions to reconsider its August 1999 decision. The
Department of Commerce was required to make a revised decision as to
whether or not to
11
initiate an investigation within 60 days. The Department of Commerce
appealed to the U.S. Court of Appeals for the Federal Circuit, which
dismissed the appeal as premature on July 31, 2001. The Department of
Commerce issued its revised decision, which again rejected the petition, in
August 2001. The revised decision was affirmed by the Court of
International Trade on December 17, 2002. In February 2003, the independent
oil producers appealed the decision of the Court of International Trade.
CITGO has been named as a defendant in approximately 122 asbestos lawsuits
pending in state and federal courts, primarily in Louisiana, Texas and
Illinois. These cases, most of which involve multiple defendants, are
brought by former employees or contractor employees seeking damages for
asbestos related illnesses allegedly caused, at least in part, from
exposure at refineries owned or operated by CITGO in Lake Charles,
Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these
cases, the plaintiffs' alleged exposure occurred over a period of years
extending back to a time before CITGO owned or operated the premises at
issue. In some cases, CITGO is indemnified by or has the right to seek
indemnification for losses and expenses that CITGO may incur from prior
owners of the refineries or employers of the claimants. In other cases,
including approximately 96 actions where CITGO has not been sued but prior
owners of the CITGO refineries have been sued, these prior owners have
asserted indemnification rights against CITGO. CITGO does not believe that
the resolution of these cases will have an adverse material effect on its
financial condition or results of operations.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The U.S. refining industry is
required to comply with increasingly stringent product specifications under
the 1990 Clean Air Act Amendments for reformulated gasoline and low sulphur
gasoline and diesel fuel that have necessitated additional capital and
operating expenditures, and altered significantly the U.S. refining
industry and the return realized on refinery investments. Also, regulatory
interpretations by the U.S. EPA regarding "modifications" to refinery
equipment under the New Source Review ("NSR") provisions of the Clean Air
Act have created uncertainty about the extent to which additional capital
and operating expenditures will be required and administrative penalties
imposed.
In addition, the Companies are subject to various other federal, state and
local environmental laws and regulations that may require the Companies to
take additional compliance actions and also actions to remediate the
effects on the environment of prior disposal or release of petroleum,
hazardous substances and other waste and/or pay for natural resource
damages. Maintaining compliance with environmental laws and regulations
could require significant capital expenditures and additional operating
costs. Also, numerous other factors affect the Companies' plans with
respect to environmental compliance and related expenditures. See "Factors
Affecting Forward Looking Statements."
The Companies' accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably
capable of estimation. The Companies believe the amounts provided in their
consolidated financial statements, as prescribed by generally accepted
accounting principles, are adequate in light of probable and estimable
liabilities and obligations. However, there can be no assurance that the
actual amounts required to discharge alleged liabilities and obligations
and to comply with applicable laws and regulations will not exceed amounts
provided for or will not have a material adverse affect on their
consolidated results of operations, financial condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at its Lake Charles refinery by 1994. A mutually acceptable
closure plan was filed with the LDEQ in 1993. CITGO and the former owner of
the refinery are participating in the closure and sharing the related costs
based on estimated contributions of waste and ownership periods. The
remediation commenced in December 1993. In 1997, CITGO presented a proposal
to the LDEQ revising the 1993 closure plan. In 1998 and 2000, CITGO
submitted further revisions as requested by the LDEQ. The LDEQ issued an
administrative order in June 2002 that
12
addressed the requirements and schedule for proceeding to develop and
implement the corrective action or closure plan for these surface
impoundments and related waste units. Compliance with the terms of the
administrative order has begun.
The Texas Commission on Environmental Quality ("TCEQ") conducted a two-day
multi-media investigation of the Corpus Christi Refinery during 2002 and
has issued a notice of enforcement to CITGO identifying 31 items of alleged
violations of Texas environmental regulations. CITGO anticipates that
penalties will be proposed with respect to these matters, but no amounts
have yet been specified.
In March 2003, the TCEQ notified CITGO about a proposed penalty for failure
to maintain equipment upset records, to obtain authority for certain sulfur
dioxide and hydrogen sulfide emissions and to comply with certain air
limitations at its Corpus Christi refinery during 2000 and 2001. CITGO
disputes these findings and has appealed the proposed penalty.
In June 1999, CITGO and numerous other industrial companies received notice
from the U.S. EPA that the U.S. EPA believed that CITGO and these other
companies have contributed to contamination in the Calcasieu Estuary, in
the proximity of Lake Charles, Calcasieu Parish, Louisiana and are
potentially responsible parties ("PRPs") under the Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA"). The
U.S. EPA made a demand for payment of its past investigation costs from
CITGO and other PRPs and since 1999 has been conducting a remedial
investigation/feasibility study ("RI/FS") under its CERCLA authority. The
U.S. EPA released the draft of the remedial investigation phase of the
report in early May 2003. CITGO and other PRPs may be potentially
responsible for the costs of the RI/FS, subsequent remedial actions and
natural resource damages. CITGO is reviewing the recent remedial
investigation phase of the report and its implications. Meanwhile, CITGO
disagrees with the U.S. EPA's earlier allegations and still intends to
contest this matter.
In January and July 2001, CITGO received notices of violation ("NOVs") from
the U.S. EPA alleging violations of the Clean Air Act. The NOVs are an
outgrowth of an industry-wide and multi-industry U.S. EPA enforcement
initiative alleging that many refineries and electric utilities modified
air emission sources without obtaining permits or installing new control
equipment under the NSR provisions of the Clean Air Act. The NOVs followed
inspections and formal information requests regarding CITGO's Lake Charles,
Louisiana, Corpus Christi, Texas and Lemont, Illinois refineries. Since
mid-2002, CITGO has been engaged in global settlement negotiations with the
United States. The settlement negotiations have focused on different levels
of air pollutant emission reductions and the merits of various types of
control equipment to achieve those reductions. No settlement agreement, or
agreement in principal, has been reached. Based primarily on the costs of
control equipment reported by the United States and other petroleum
companies and the types and number of emission control devices that have
been agreed to in previous petroleum companies' NSR settlements with the
United States, CITGO estimates that the capital costs of a settlement with
the United States could range from $130 million to $200 million. Any such
capital costs would be incurred over a period of years, anticipated to be
from 2003 to 2008. Also, this cost estimate range, while based on current
information and judgment, is dependent on a number of subjective factors,
including the types of control devices installed, the emission limitations
set for the units, the year the technology may be installed, and possible
future operational changes. CITGO also may be subject to possible
penalties. If settlement discussions fail, CITGO is prepared to contest the
NOVs. If CITGO is found to have violated the provisions cited in the NOVs,
it estimates the capital expenditures and penalties that might result could
range up to $290 million, to be incurred over a period of years.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants ("NESHAPS")
regulations covering benzene emissions from wastewater treatment operations
at CITGO's Lemont, Illinois refinery. CITGO is in settlement discussions
with the
13
U.S. EPA. CITGO believes this matter will be consolidated with the matters
described in the previous paragraph.
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging various violations of the Louisiana
air quality regulations at CITGO's Lake Charles, Louisiana refinery. CITGO
is in settlement discussions with the LDEQ.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of the Companies'
facilities and operations. Those audits have the potential to reveal
matters that those authorities believe represent non-compliance in one or
more respects with regulatory requirements and for which those authorities
may seek corrective actions and/or penalties in an administrative or
judicial proceeding. Based upon current information, the Companies are not
aware that any such audits or their findings have resulted in the filing of
such a proceeding or are the subject of a threatened filing with respect to
such a proceeding, nor do the Companies believe that any such audit or
their findings will have a material adverse effect on their future business
and operating results, other than matters described above.
Conditions which require additional expenditures may exist with respect to
the Companies' various sites including, but not limited to, their operating
refinery complexes, former refinery sites, service stations and crude oil
and petroleum product storage terminals. Based on currently available
information, the Companies cannot determine the amount of any such future
expenditures.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of March 31, 2003
CITGO's petroleum commodity derivatives included exchange traded futures
contracts, forward purchase and sale contracts, exchange traded and
over-the-counter options and over-the-counter swaps. At March 31, 2003, the
balance sheet captions prepaid expenses and other current assets and other
current liabilities include $14 million and $24 million, respectively,
related to the fair values of open commodity derivatives.
CITGO has also entered into various interest rate swaps to manage CITGO's
risk related to interest rate changes on its debt. The fair value of the
interest rate swap agreements in place at March 31, 2003, based on the
estimated amount that CITGO would receive or pay to terminate the
agreements as of that date and taking into account current interest rates,
was a loss of $3 million, the offset of which is recorded in the balance
sheet caption other current liabilities. In connection with the
determination of fair market value, CITGO considered the creditworthiness
of the counterparties, but no adjustment was determined to be necessary as
a result.
14
GUARANTEES - As of March 31, 2003, CITGO has guaranteed the debt of others
in a variety of circumstances including letters of credit issued for an
affiliate, bank debt of an affiliate, bank debt of an equity investment,
bank debt of customers and customer debt related to the acquisition of
marketing equipment as shown in the following table:
(000S OMITTED)
Letters of credit $32,979
Bank debt
Affiliate 10,000
Equity investment 5,500
Customers 4,471
Financing debt of customers
Equipment acquisition 2,556
-------
Total $55,506
=======
In each case, if the debtor fails to meet its obligation, CITGO would be
obligated to make the required payment. The guarantees related to letters
of credit, affiliate's bank debt and equity investment bank debt expire in
2003. The guarantees related to customer bank debt expire between 2004 and
2009. The guarantees related to financing debt associated with equipment
acquisition by customers expire between 2003 and 2007. CITGO has not
recorded any amounts on its balance sheet relating to these guarantees.
In the event of debtor default on the letters of credit, CITGO has been
indemnified by PDV Holding, Inc. ("PDV Holding"), the direct parent of PDV
America. In the event of debtor default on the affiliate's and equity
investment bank debt, CITGO has no recourse. In the event of debtor default
on customer bank debt, CITGO generally has recourse to personal guarantees
from principals or liens on property, except in one case, in which the
guaranteed amount is $170 thousand, CITGO has no recourse. In the event of
debtor default on financing debt incurred by customers, CITGO would receive
an interest in the equipment being financed after making the guaranteed
debt payment.
CITGO has granted indemnities to the buyers in connection with past sales
of product terminal facilities. These indemnities provide that CITGO will
accept responsibility for claims arising from the period in which CITGO
owned the facilities. Due to the uncertainties in this situation, CITGO is
not able to estimate a liability relating to these indemnities.
CITGO has not recorded a liability on its balance sheet relating to product
warranties because historically, product warranty claims have not been
significant.
7. RELATED PARTY TRANSACTIONS
CITGO purchases approximately one-half of the crude oil processed in its
refineries from subsidiaries of PDVSA under long-term supply agreements.
These supply agreements extend through the year 2006 for the Lake Charles
refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi
refinery and 2013 for the Savannah refinery.
These crude supply agreements contain force majeure provisions which excuse
the performance by either party of its obligations under the agreement
under specified circumstances. PDVSA has invoked the force majeure
provisions and reduced the volume of crude oil supplied under the contracts
at various times since
15
April 1998 for a variety of reasons. As a result of these declarations of
force majeure, CITGO was required to obtain crude oil from alternative
sources, which resulted in increased volatility in its operating margins.
CITGO was notified that effective March 6, 2003, PDVSA ended its most
recent declaration of force majeure under the crude oil supply agreements.
In August 2002, two affiliates entered into agreements to advance excess
cash to CITGO from time to time under demand notes for amounts of up to a
maximum of $10 million with PDV Texas, Inc. ("PDV Texas") and $10 million
with PDV Holding. The notes bear interest at rates equivalent to 30-day
LIBOR plus .875% payable quarterly. At March 31, 2003, no amounts were
outstanding under these agreements.
PDV America has notes receivable from PDVSA that are unsecured and are
comprised of $500 million of 7.995 percent notes maturing on August 1,
2003. Interest on these notes is payable semiannually by PDVSA to PDV
America on February 1 and August 1 of each year, less one business day.
Management currently believes that PDVSA will pay these notes in full on
the due date. While PDVSA's obligation remains unchanged, PDV America may
pay a dividend of up to $500 million concurrent with PDVSA's repayment of
the notes receivable or may settle these notes receivable through
declaration of a non-cash dividend, in either case subject to certain
restrictions imposed by the indenture governing CITGO's 11-3/8% senior
notes issued February 27, 2003.
8. INSURANCE RECOVERIES
On August 14, 2001, a fire occurred at the crude oil distillation unit of
the Lemont refinery. The crude unit was destroyed and the refinery's other
processing units were temporarily taken out of production. A new crude unit
was operational at the end of May 2002.
On September 21, 2001, a fire occurred at the hydrocracker unit of the Lake
Charles refinery. The hydrocracker unit was damaged and operations at other
processing units were temporarily affected. Operation of the other refinery
units returned to normal on October 16, 2001. Operations at the
hydrocracker resumed on November 22, 2001.
The Companies recognize property damage insurance recoveries in excess of
the amount of recorded losses and related expenses, and business
interruption insurance recoveries when such amounts are realized. During
the three-month periods ended March 31, 2003 and 2002, the Companies
recorded $118 million and $95 million, respectively, of insurance
recoveries related to these fires. The Companies received cash proceeds of
$47 million and $101 million during the three-month periods ended March 31,
2003 and 2002. The Companies expect to recover additional amounts related
to the Lemont refinery event subject to final settlement negotiations.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements included elsewhere herein. Reference is made
to our Annual Report for the fiscal year ended December 31, 2002 on Form 10-K,
dated March 28, 2003, for additional information and a description of critical
accounting policies and factors which may cause substantial fluctuations in our
earnings and cash flows.
In the quarter ended March 31, 2003, we generated net income of $143.6
million on total revenue of $6.5 billion compared to a net loss of $11.9 million
on total revenue of $3.8 billion for the same period last year. (See "Gross
margin").
RESULTS OF OPERATIONS
The following table summarizes the sources of our sales revenues and
sales volumes for the three-month periods ended March 31, 2003 and 2002:
PDV AMERICA SALES REVENUES AND VOLUMES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
2003 2002 2003 2002
---- ---- ---- ----
($ in millions) (gallons in millions)
Gasoline $3,362 $2,110 3,366 3,340
Jet fuel 517 310 539 532
Diesel/#2 fuel 1,668 758 1,725 1,319
Asphalt 70 41 92 77
Petrochemicals and industrial products 567 298 616 499
Lubricants and waxes 142 130 66 59
--------------- --------------
Total refined product sales 6,326 3,647 6,404 5,826
Other sales and adjustments 50 24
--------------- --------------
Total sales $6,376 $3,671 6,404 5,826
=============== ==============
17
The following table summarizes our cost of sales and operating expenses
for the three-month periods ended March 31, 2003 and 2002:
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
THREE MONTHS
ENDED MARCH 31,
--------------------------
2003 2002
----------- -----------
($ in millions)
Crude oil $ 1,780 $ 892
Refined products 3,506 2,130
Intermediate feedstocks 458 266
Refining and manufacturing costs 314 283
Other operating costs, expenses and inventory changes 148 138
----------- -----------
Total cost of sales and operating expenses $ 6,206 $ 3,709
=========== ===========
Sales revenues and volumes. Sales increased $2.7 billion, or
approximately 74%, in the three-month period ended March 31, 2003 as compared to
the same period in 2002. This was due to an increase in average sales price of
58% and an increase in sales volume of 10%. (See PDV America Sales Revenues and
Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $5 million for the three-month period ended March 31, 2003 as
compared to the same period in 2002. The decrease was primarily due to the
decrease in the earnings of LYONDELL-CITGO, our share of which decreased $5
million from $14 million in the first quarter of 2002 to $9 million in the first
quarter of 2003.
Insurance recoveries. The insurance recoveries of $118 million included
in the first quarter of 2003 and $95 million included in the first quarter of
2002 relate primarily to a fire which occurred on August 14, 2001 at the Lemont
refinery. The crude unit was destroyed and the refinery's other processing units
were temporarily taken out of production. These recoveries are, in part,
reimbursements for expenses incurred in 2002 and 2001 to mitigate the effect of
the fire on our earnings. We expect to recover additional amounts related to
this event subject to final settlement negotiations.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2.5 billion or 67%, in the quarter ended March 31, 2003
as compared to the same period in 2002. PDVSA's reduction of deliveries of crude
oil related to its declaration of force majeure on its crude oil supply
agreements did not have a significant effect on the crude oil component of cost
of sales and operating expenses in the first quarter 2003 or 2002. (See PDV
America Cost of Sales and Operating Expenses table above.)
We purchase refined products to supplement the production from our
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 56% of total cost of sales and operating expenses
for the first quarter 2003 and 57% for the first quarter of 2002. We estimate
margins on purchased products, on average, are lower than margins on produced
products due to the fact that we can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from our produced products and margins may vary due
to market conditions and other factors
18
beyond our control. As such, it is not practical to measure the effects on
profitability of changes in volumes of purchased products. In the near term,
other than normal refinery turnaround maintenance, we do not anticipate
operational actions or market conditions which might cause a material change in
anticipated purchased product requirements; however, there could be events
beyond our control 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 March
31, 2003 was approximately 2.7 cents per gallon, compared to a negative gross
margin of approximately (0.7) cents per gallon for the same period in 2002. The
revenue per gallon component in the three-month period ended March 31, 2003
increased approximately 58% and the cost per gallon component increased
approximately 52%. As a result, the gross margin increased approximately 3.3
cents on a per gallon basis in the quarter ended March 31, 2003 compared to the
same period in 2002. The gross margin is directly affected by changes in selling
prices relative to changes in costs. An increase or decrease in the price for
crude oil, feedstocks and blending products generally results in a corresponding
increase or decrease in prices for refined products. Generally, the effect of
changes in crude oil and feedstock prices on our consolidated operating results
therefore depends in part on how quickly refined product prices adjust to
reflect these changes. However, in the first quarter of 2002, there was a
substantial increase in refined product costs without an equivalent increase in
sales price resulting in a significant negative impact on our gross margin and
earnings.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased 4% from $77 million in the first quarter of
2002 to $74 million in the first quarter of 2003.
Interest expense. Interest expense increased by $7 million in the
three-month period ended March 31, 2003 as compared to the same period in 2002.
This was primarily due to the net increase in the outstanding debt balance and
higher overall interest rates resulting from the issuance of the $550 million
senior notes and the closing of the $200 million term loan in February 2003.
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net cash provided by operating activities totaled
approximately $306 million for the three-month period ended March 31, 2003.
Operating cash flows were derived primarily from net income of $144 million,
depreciation and amortization of $80 million and changes in operating assets and
liabilities of $82 million. The more significant changes in operating assets and
liabilities include a decrease in inventory, an increase in income taxes
payable, and an increase in deferred taxes offset, in part, by a decrease in
current liabilities and an increase in notes and accounts receivable.
Net cash used in investing activities in the three month period ended
March 31, 2003 totaled $105 million consisting primarily of capital expenditures
of $90 million.
Net cash provided by financing activities totaled $254 million for the
three-month period ended March 31, 2003, consisting primarily of the proceeds
from Senior Notes due in 2011 of $547 million and the proceeds from the senior
secured term loan of $200 million. These proceeds were offset by the payment of
$279 million on revolving bank loans, the repurchase of $50 million of Senior
Notes due 2006 for a cash payment of $47.5 million, the payment of $50 million
on master shelf agreement notes, the repurchase of $75 million of tax-exempt
bonds, the repayment of loans from affiliates of $9 million, $12 million in debt
issuance costs associated with the Senior Notes due 2011 and the payment of
dividends of $21 million.
As of March 31, 2003, capital resources available to us included cash
generated by operations and available borrowing capacity under our committed
bank facilities of $545 million. Our $25 million revolving bank loan maturing in
May 2003 will not be renewed. Additionally, the remaining $400 million from our
shelf registration with the Securities and Exchange Commission for $600 million
of debt securities may be offered and
19
sold from time to time. Our Company's management believes that we have
sufficient capital resources to carry out planned capital spending programs,
including regulatory and environmental projects in the near term and to meet
currently anticipated future obligations as they arise. We 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. Our ability
to obtain such financing will depend on numerous factors, including market
conditions and our perceived creditworthiness at that time. (See also "Factors
Affecting Forward Looking Statements".)
Our various debt instruments require maintenance of a specified minimum
net worth and impose restrictions on our ability to:
- incur additional debt unless we meet specified interest coverage and
debt to capitalization ratios;
- place liens on our property, subject to specified exceptions;
- sell assets, subject to specified exceptions;
- make restricted payments, including dividends, repurchases of capital
stock and specified investments; and
- merge, consolidate or transfer assets.
We are in compliance with our obligations under our debt financing
arrangements at March 31, 2003.
Upon the occurrence of a change of control of CITGO, as defined in the
Indenture governing our 11-3/8% Senior Notes due February 1, 2011, the holders
of those notes have the right to require CITGO to repurchase them at a price
equal to 101% of the principal amount thereof plus accrued interest. In
addition, CITGO's bank credit agreements provide that, unless lenders holding
two-thirds of the commitments thereunder otherwise agree, a change in control of
CITGO, as defined in those agreements, will constitute a default under those
credit agreements.
Internally generated cash flow, together with borrowings available under
our credit facilities, are expected to be sufficient to fund capital
expenditures. In addition, we have taken steps to reduce our capital
expenditures in 2003 by approximately $250 million, resulting in budgeted total
2003 expenditures of $460 million, and will reassess the economics of the
postponed projects at a later date. Finally, we are continuing to review the
timing and amount of scheduled expenditures under our planned capital spending
programs, including regulatory and environmental projects in the near term.
CITGO is required by various state regulations to demonstrate financial
responsibility for environmental liability coverage, closure and post-closure
care related to its facilities. Historically, CITGO has satisfied the
requirements based upon the credit rating of its bonds and various financial
ratios. CITGO's credit rating and 2002 financial ratios did not satisfy the
requirements of one state and as a result, CITGO is required to present an
alternate form of financial responsibility assurance. Possible options include,
among other things, a letter of credit, an insurance policy, placing cash in a
trust account or filing a request for a variance from the regulations of that
state. Presently, CITGO is evaluating its options.
We have outstanding letters of credit that support tax-exempt bonds that
were issued previously for our benefit. Some of the providers of these
outstanding letters of credit have indicated that they will not renew such
letters of credit. As a result, we repurchased $75 million of tax-exempt bonds
that were supported by these letters of credit in March 2003, $25 million in
April 2003 and $8 million in May 2003. We expect that we will
20
seek to reissue these tax-exempt bonds, with replacement letters of credit in
support, if we are able to obtain such letters of credit from other financial
institutions or, alternatively, we will seek to replace these tax-exempt bonds
with new tax-exempt bonds that will not require letter of credit support. As of
May 1, 2003, we have an additional $239 million of letters of credit outstanding
that back or support other bond issues that we have issued through governmental
entities, which are subject to renewal during the twelve month period ending
March 31, 2004. We have not received any notice from the issuers of these
additional letters of credit indicating an intention not to renew. Currently, we
are working with a financial institution to renew a $127 million letter of
credit facility that expires in June 2003 which supports $120 million of
tax-exempt bonds. However, we cannot be certain that any of our letters of
credit will be renewed, that we will be successful in obtaining replacements if
they are not renewed, that any replacement letters of credit will be on terms as
advantageous as those we currently hold or that we will be able to arrange for
replacement tax-exempt bonds that will not require letter of credit support.
In August 2002, two of our affiliates entered into agreements to advance
excess cash to CITGO from time to time under demand notes. These notes provide
for maximum amounts of $10 million from PDV Texas, Inc. and $10 million from PDV
Holding. At March 31, 2003, no amounts were outstanding under these notes.
We have undertaken the following to supplement and improve our
liquidity:
- On February 27, 2003 we issued $550 million aggregate principal amount
of 11-3/8 percent unsecured senior notes due February 1, 2011.
- On February 27, 2003, we closed on a three year $200 million, senior
secured term loan. Security is provided by our 15.8 percent equity
interest in Colonial Pipeline and our 6.8 percent equity interest in
Explorer Pipeline.
- On February 28, 2003, a new accounts receivable sales facility was
established. This facility allows for the non-recourse sale of certain
accounts receivable to independent third parties. A maximum of $200
million in accounts receivable may be sold at any one time. This new
facility does not contain any covenants that trigger increased costs or
burdens as a result of a change in our securities ratings.
- On April 25, 2003, we completed a transaction that will provide
approximately $50 million of liquidity from the transfer of title to a
third party of certain of our refined products at the time those
products are delivered into the custody of interstate pipelines. The
terms of this transaction include an option to acquire like volumes of
refined products from the third party at prevailing prices at
predetermined transfer points. The sale of refined products will begin
in May 2003.
- We have reduced our planned capital expenditures in 2003 by
approximately $250 million.
PDV America's and CITGO's senior unsecured debt ratings, as currently
assessed by the three major debt rating agencies, are as follows:
PDV
America CITGO
------- -----
Moody's Investor's Services Caa1 Ba3
Standard & Poor's Ratings Group B BB-
Fitch Investors Services, Inc. B- B+
21
CITGO's secured debt ratings, as currently assessed by the three major
debt rating agencies, are as follows:
Moody's Investor's Services Ba2
Standard & Poor's Ratings Group BB
Fitch Investors Services, Inc. Not Rated
PDV America has notes receivable from PDVSA that are unsecured and are
comprised of $500 million of 7.995 percent notes maturing on August 1, 2003.
Interest on these notes is payable semiannually by PDVSA to PDV America on
February 1 and August 1 of each year, less one business day. Management
currently believes that PDVSA will pay these notes in full on the due date.
While PDVSA's obligation remains unchanged, PDV America may pay a dividend of up
to $500 million concurrent with PDVSA's repayment of the notes receivable or may
settle these notes receivable through declaration of a non-cash dividend, in
either case subject to certain restrictions imposed by the indenture governing
CITGO's 11-3/8% senior notes issued February 27, 2003.
Our debt instruments do not contain any covenants that trigger increased
costs or burdens as a result of a change in our securities ratings. However,
certain of our guarantee agreements, which support approximately $20 million of
affiliate letters of credit, require us to cash collateralize the applicable
letters of credit upon a reduction of our credit rating below a stated level.
We believe that we have adequate liquidity from existing sources to
support our operations for the foreseeable future. We are continuing to review
our operations for opportunities to reduce operating and capital expenditures.
NEW ACCOUNTING STANDARDS
On January 1, 2003, we adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143)
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. We have identified certain asset retirement obligations
that are within the scope of the standard, including obligations imposed by
certain state laws pertaining to closure and/or removal of storage tanks,
contractual removal obligations included in certain easement and right-of-way
agreements associated with our pipeline operations, and contractual removal
obligations relating to a refinery processing unit located within a third-party
entity's facility. We cannot currently determine a reasonable estimate of the
fair value of our asset retirement obligations due to the fact that the related
assets have indeterminate useful lives which preclude development of assumptions
about the potential timing of settlement dates. Such obligations will be
recognized in the period in which sufficient information exists to estimate a
range of potential settlement dates. Accordingly, the adoption of SFAS No. 143
did not impact our financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant variable
interest but which it does not consolidate. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003. FIN 46 applies to public enterprises
as of the
22
beginning of the applicable interim or annual period, and it applies to
nonpublic enterprises as of the end of the applicable annual period. FIN 46 may
be applied prospectively with a cumulative-effect adjustment as of the date on
which it is first applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of the beginning of
the first year restated. We expect that the application of FIN 46 to variable
interest entities in which they acquired an interest before February 1, 2003
will not have a material impact on their financial position or results of
operations.
PROPOSED ACCOUNTING CHANGE
The American Institute of Certified Public Accountants ("AICPA") has
issued a "Statement of Position" exposure draft on cost capitalization that is
expected to require companies to expense the non-capital portion of major
maintenance costs as incurred. The statement is expected to require that any
existing unamortized deferred non-capital major maintenance costs be expensed
immediately. This statement also has provisions which will change the method of
determining depreciable lives. The impact on future depreciation expense is not
determinable at this time. The exposure draft indicates that this change will be
required to be adopted for fiscal years beginning after June 15, 2003, and that
the effect of expensing existing unamortized deferred non-capital major
maintenance costs will be reported as a cumulative effect of an accounting
change in the consolidated statement of income. Currently, the AICPA is
discussing the future of this exposure draft with the FASB. The final accounting
requirements and timing of required adoption are not known at this time. At
March 31, 2003, we have included turnaround costs of $200 million in other
assets. Our management has not determined the amount, if any, of these costs
that could be capitalized under the provisions of the exposure draft.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. We have exposure to price fluctuations of crude oil and
refined products as well as fluctuations in interest rates. To manage these
exposures, our management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which we operate and finance our
assets. We do not attempt to manage the price risk related to all of our
inventories of crude oil and refined products. As a result, at March 31, 2003,
we were exposed to the risk of broad market price declines with respect to a
substantial portion of our crude oil and refined product inventories. The
following disclosures do not attempt to quantify the price risk associated with
such commodity inventories.
Commodity Instruments. We balance our crude oil and petroleum product
supply/demand and manage a portion of our price risk by entering into petroleum
commodity derivatives. Generally, our risk management strategies qualified as
hedges through December 31, 2000. Effective January 1, 2001, our policy is to
elect hedge accounting only under limited circumstances involving derivatives
with initial terms of 90 days or greater and notional amounts of $25 million or
greater. At March 31, 2003, none of our commodity derivatives were accounted for
as hedges.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2003
CONTRACT MARKET
VALUE VALUE(4)
MATURITY NUMBER OF ----- --------
DATE CONTRACTS ($ in millions)
COMMODITY DERIVATIVE ---- --------- --------------------
- --------- ----------
No Lead Gasoline(1) Futures Purchased 2003 20 $ 0.8 $ 0.8
Forward Purchase Contracts 2003 3,307 $ 133.0 $ 132.2
Forward Sales Contracts 2003 2,685 $ 100.6 $ 103.2
Distillates(1) Futures Purchased 2003 583 $ 17.6 $ 18.3
Futures Purchased 2004 141 $ 4.2 $ 4.3
Futures Sold 2003 25 $ 0.8 $ 0.8
OTC Swaps (Pay Fixed/Receive Float)(3) 2003 120 $ - $ (0.2)
Forward Purchase Contracts 2003 1,717 $ 79.4 $ 73.6
Forward Sale Contracts 2003 2,320 $ 78.3 $ 74.4
Crude Oil(1) Listed Put Options Purchased 2003 150 $ - $ -
Listed Put Options Sold 2003 600 $ - $ (0.2)
Forward Purchase Contracts 2003 2,681 $ 81.7 $ 76.6
Forward Sale Contracts 2003 777 $ 23.6 $ 22.6
Natural Gas(2) Listed Call Options Purchased 2003 25 $ - $ -
Listed Call Options Sold 2003 25 $ - $ (0.1)
Gas Crack(1) OTC Swaps (Pay Float/Receive Fixed)(3) 2003 550 $ - $ (0.1)
Heat Crack(1) OTC Swaps (Pay Fixed/Receive Float)(3) 2003 1,150 $ - $ (1.3)
OTC Swaps (Pay Float/Receive Fixed)(3) 2003 1,650 $ - $ 0.8
- --------------------------
(1) 1,000 barrels per contract
(2) Ten-thousands of mmbtu per contract
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
(4) Based on actively quoted prices.
24
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2002
CONTRACT MARKET
VALUE VALUE(4)
MATURITY CONTRACTED ----- --------
DATE VOLUME ($ in millions)
COMMODITY DERIVATIVE ---- --------- --------------------
- --------- ----------
No Lead Gasoline(1) Futures Purchased 2002 441 $ 15.1 $ 15.4
Futures Sold 2002 577 $ 18.6 $ 20.0
Forward Purchase Contracts 2002 2,826 $ 86.5 $ 93.1
Forward Sale Contracts 2002 1,350 $ 41.9 $ 45.3
Distillates(1) Futures Purchased 2002 926 $ 25.1 $ 26.7
Futures Purchased 2003 152 $ 3.9 $ 4.4
Futures Sold 2002 882 $ 22.5 $ 25.1
Forward Purchase Contracts 2002 1,500 $ 39.6 $ 41.1
Forward Sale Contracts 2002 2,050 $ 52.7 $ 57.1
Crude Oil(1) Futures Purchased 2002 965 $ 22.1 $ 25.3
Futures Sold 2002 856 $ 21.4 $ 22.5
Futures Sold 2003 90 $ 2.2 $ 2.2
Listed Options Purchased 2002 1,550 $ - $ 0.9
Listed Options Sold 2002 1,550 $ - $ (0.4)
OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 1,260 $ - $ (1.0)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2002 1,830 $ - $ 1.7
Forward Purchase Contracts 2002 5,021 $ 120.7 $ 132.4
Forward Sale Contracts 2002 5,042 $ 119.0 $ 133.0
Natural Gas(2) Futures Sold 2002 40 $ 1.3 $ 1.3
- ----------------------
(1) 1,000 barrels per contract
(2) Ten-thousands of mmbtu per contract
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
(4) Based on actively quoted prices.
25
Debt Related Instruments. We have fixed and floating U.S. currency
denominated debt. We use interest rate swaps to manage our debt portfolio toward
a benchmark of 40 to 70 percent 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 our long-term costs. At March 31, 2003 and 2002, our
primary exposures were to LIBOR and floating rates on tax exempt bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2003 AND 2002
NOTIONAL
FIXED PRINCIPAL
VARIABLE RATE INDEX EXPIRATION DATE RATE PAID AMOUNT
- ------------------- --------------- --------- ------
($ in millions)
J.J. Kenny February 2005 5.30% $ 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
----
$ 42
====
Changes in the fair value of these agreements are recorded in other
income (expense). The fair value of the interest rate swap agreements in place
at March 31, 2003, based on the estimated amount that we would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was a loss of $3 million, the offset of which is recorded in the
balance sheet caption other current liabilities.
26
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT MARCH 31, 2003
EXPECTED
EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2003 $ 511 7.91% $ - -
2004 31 8.02% 16 6.68%
2005 11 9.30% - -
2006 201 8.10% 200 8.47%
2007 50 8.94% 12 8.92%
Thereafter 731 10.41% 330 10.54%
------ ----- ----- -----
Total $1,535 9.17% $ 558 9.65%
====== ===== ===== =====
Fair Value $1,566 $ 558
====== =====
DEBT OBLIGATIONS
AT MARCH 31, 2002
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2002 $ 11 9.30% $ 115 3.45%
2003 560 7.98% 300 5.15%
2004 31 8.02% 16 6.52%
2005 12 9.30% - -
2006 252 8.06% - -
Thereafter 128 7.85% 484 9.85%
----- ---- ----- -----
Total $ 994 8.01% $ 915 7.45%
===== ==== ===== =====
Fair Value $ 987 $ 915
===== =====
27
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Report, PDV America's
management, including the principal financial officer who is also acting as the
principal executive officer, evaluated PDV America's disclosure controls and
procedures related to the recording, processing, summarization and reporting of
information in PDV America's periodic reports that it files with the Securities
and Exchange Commission (SEC). These disclosure controls and procedures have
been designed to ensure that (a) material information relating to PDV America,
including its consolidated subsidiaries, is made known to PDV America's
management, including this officer, by other employees of PDV America and its
subsidiaries, and (b) this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
SEC's rules and forms. Due to the inherent limitations of control systems, not
all misstatements may be detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. PDV America's controls and
procedures can only provide reasonable, not absolute, assurance that the above
objectives have been met. Also, PDV America does not control or manage certain
of its unconsolidated entities and as such, the disclosure controls and
procedures with respect to such entities are more limited than those it
maintains with respect to its consolidated subsidiaries.
As of March 31, 2003, this officer concluded that the design of the
disclosure controls and procedures provide reasonable assurance that they can
accomplish their objectives.
There have been no significant changes in PDV America's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 6 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Quarterly Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Securities and Exchange
Commission on January 21, 2003 in regard to the disruption in CITGO's
supply of crude oil as a result of the general strike in Venezuela.
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 6, 2003. The purpose of this filing was to furnish
information about CITGO included in various disclosures to prospective
investors in connection with CITGO's offering of $550 million of senior
unsecured notes.
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 21, 2003. The purpose of this report was to file
CITGO's financial statements for the year ended December 31, 2002.
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 25, 2003. The purpose of this filing was to update
information in our report on Form 8-K dated February 6, 2003, about CITGO
included in various disclosures to prospective investors in connection with
CITGO's offering of $550 million of senior unsecured notes.
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 27, 2003 regarding information about enhancements to
CITGO's liquidity.
A report on Form 8-K was filed with the Securities and Exchange
Commission on February 28, 2003. The purpose of this report was to furnish
information about CITGO included in a News Release announcing enhancements
to CITGO's liquidity.
A report on Form 8-K was filed with the Securities and Exchange
Commission on May 2, 2003. The purpose of this report was to furnish
information included in our News Release about CITGO's first quarter 2003
results.
A report on Form 8-K/A was filed with the Securities and Exchange
Commission on May 6, 2003. The purpose of this report was to amend
information in our report on Form 8-K dated May 2, 2003.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PDV AMERICA, INC.
Date: May 13, 2003 /s/ Luis Davila
------------------------------
Luis Davila
Chief Financial Officer and
Acting Chief Executive Officer
Date: May 13, 2003 /s/ Paul Largess
------------------------------
Paul Largess
Chief Accounting Officer and
Treasurer
30
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Luis Davila, Chief Financial Officer of PDV America (the "Registrant"),
certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
March 31, 2003 of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
31
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 13, 2003 /s/ Luis Davila
------------------------------
Name: Luis Davila
Title: Chief Financial Officer
32
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Luis Davila, Acting Chief Executive Officer of PDV America (the
"Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
March 31, 2003 of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
33
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 13, 2003 /s/ Luis Davila
------------------------------
Name: Luis Davila
Title: Acting Chief Executive Officer
34
EXHIBIT INDEX
Exhibits
Exhibit 99.1 Quarterly Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.