10-Q 1 h00993e10vq.txt PVD AMERICA, INC.- PERIOD ENDED: SEPTEMBER 30,2002 ================================================================================ United States SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ COMMISSION FILE NUMBER 001-12138 PDV AMERICA, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0297556 -------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136 --------------------------------------------------------------- (Address of principal executive office) (Zip Code) (918) 495-4000 -------------- (Registrant's telephone number, including area code) N. A. ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $1.00 PAR VALUE 1,000 ----------------------------- ----- (Class) (outstanding at October 31, 2002) ================================================================================ PDV AMERICA, INC. QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

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 the Companies (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. 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 the Companies' 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, the Companies purchase a significant portion of their crude oil requirements from Petroleos de Venezuela, S.A. ("PDVSA" which may also be used to refer to one or more of its subsidiaries), their ultimate parent corporation, under long-term supply agreements, and could be adversely affected by social, economic and political conditions in Venezuela. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date of this Report. PDV America undertakes 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) --------------------------------------------------------------------------------

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) --------------------------------------------------------------------------------

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) --------------------------------------------------------------------------------

See notes to condensed consolidated financial statements. 4 PDV AMERICA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) --------------------------------------------------------------------------------

See notes to condensed consolidated financial statements. 5 PDV AMERICA, INC. AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2002 AND 2001 -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The financial information for PDV America, Inc. ("PDV America") subsequent to December 31, 2001 and with respect to the interim three-month and nine-month periods ended September 30, 2002 and 2001 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 nine-month periods ended September 30, 2002 and 2001 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, 2001 on Form 10-K, dated March 29, 2002, 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"), as well as CITGO's wholly-owned subsidiaries, VPHI Midwest, Inc. ("VPHI") and its wholly owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR") and Cit-Con Oil Corporation, which was 65% owned by CITGO through December 31, 2001 (collectively, "the Companies"). On January 1, 2002, CITGO acquired the outstanding 35 percent interest in Cit-Con from Conoco, Inc. The principal asset of Cit-Con is a lubricants refinery in Lake Charles, Louisiana. This transaction did not have a material effect on the consolidated financial position or results of operations of PDV America. The legal entity, Cit-Con Oil Corporation, was dissolved effective April 1, 2002. On January 1, 2002, PDV America contributed all of the common stock of VPHI to CITGO. This transaction had no effect on the consolidated financial statements of PDV America. Certain reclassifications have been made to the September 30, 2001 financial statements to conform to the classifications used for the periods ended September 30, 2002. 2. CHANGE IN ACCOUNTING PRINCIPLE On January 1, 2001 the Companies adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). The statement, as amended, 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. Under the transition provisions of SFAS No. 133, on January 1, 2001 the Companies recorded an after-tax, cumulative-effect-type transition benefit of $13.6 million to net income related to derivatives that existed on that date and an after-tax, cumulative-effect-type transition charge of $1.5 million to accumulated other comprehensive income. 6 3. INVENTORIES Inventories, primarily at LIFO, consist of the following:

4. SHORT-TERM BANK LOANS As of September 30, 2002, the Company had established $140 million of uncommitted, unsecured, short-term borrowing facilities with various banks. Interest rates on these facilities are determined daily based upon the federal funds' interest rates. Maturity options vary up to 30 days. The Company had $119 million and $0 of borrowings outstanding under these facilities at September 30, 2002 and December 31, 2001, respectively. 7 5. LONG-TERM DEBT AND FINANCING ARRANGEMENTS

The Companies' revolving bank loan agreements with various banks mature in May 2003 and consist of (i) a $400 million, five-year, revolving bank loan; (ii) a $150 million, 364-day, revolving bank loan; and (iii) a $25 million, 364-day, revolving bank loan. The Companies intend to replace the revolving bank loans when they mature. On March 20, 2002, the Companies issued $25 million of tax exempt revenue bonds due 2032. The proceeds were used to redeem $25 million of taxable Gulf Coast Environmental facilities revenue bonds due 2032. On May 3, 2002, the Companies issued $7.7 million of tax exempt environmental facilities revenue bonds due 2032. On June 28, 2002, the Companies 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 $34 million at September 30, 2002 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 is preparing for a debt offering of up to $250 million from its remaining $400 million shelf registration with the Securities and Exchange Commission. Net proceeds to be received from the sale of the debt securities will be used for general corporate purposes, including capital expenditures and repayment of indebtedness. 8 6. 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. On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective February 1, 2001, it had declared force majeure under the contract described above. Under a force majeure declaration, PDVSA may reduce the amount of crude oil that it would otherwise be required to supply under the agreement. When PDVSA reduces its delivery of crude oil under the crude oil supply contract, LYONDELL-CITGO may obtain alternative sources of crude oil which may result in increased crude costs. As of December 31, 2001, PDVSA deliveries of crude oil to LYONDELL-CITGO had not been reduced due to PDVSA's declaration of force majeure. On January 22, 2002, PDVSA notified LYONDELL-CITGO that pursuant to the February 9, 2001 declaration of force majeure, effective March 1, 2002, PDVSA expected to deliver approximately 20 percent less than the contract volume. Deliveries remained approximately 20 percent less than contract volume through June 30, 2002. Beginning in July 2002, contract volumes delivered increased and deliveries are returning to contractual levels. PDVSA delivered approximately 95 percent of the contractual crude oil volume during the third quarter of 2002. In the nine months ended September 30, 2002, PDVSA delivered approximately 89 percent of the contractual crude oil volume. Crude oil was purchased in the market to replace the volume not delivered under the contract. CITGO has notes receivable from LYONDELL-CITGO which total $35 million at September 30, 2002 and December 31, 2001. The notes bear interest at market rates. Principal and interest are due July 1, 2003. CITGO presently expects that the term of these notes will be extended as a part of the total debt restructuring described below; accordingly, these notes are included in 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:

LYONDELL-CITGO's 18-month term loan and working capital revolver will mature in January 2003. The Owners have engaged an underwriter and expect to replace these two credit facilities prior to the existing maturity date. 10 7. 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. A class action lawsuit brought by four former marketers of the UNO-VEN Company ("UNO-VEN") in U.S. District Court in Wisconsin 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 Unocal's interest in UNO-VEN has resulted in the judge granting PDVMR's motion for summary judgment. The plaintiffs are appealing the summary judgment. PDVMR and its parent, VPHI, jointly and severally, have agreed to indemnify UNO-VEN and certain other related entities against certain liabilities and claims, including this matter. A lawsuit is pending against PDVMR and CITGO in Illinois state court which claims 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 Companies believe they will be able to resolve these claims for a non-material amount. The electricity supplier to the refinery is seeking recovery from the Companies of alleged underpayments for electricity. The Companies have denied all allegations and are pursuing their defenses. In May 1997, a fire occurred at CITGO's Corpus Christi refinery. Approximately seventeen related lawsuits were filed in federal and state courts in Corpus Christi, Texas against CITGO on behalf of approximately 9,000 individuals alleging property damages, personal injury and punitive damages. In September 2002, CITGO reached an agreement to settle substantially all of the claims related to this incident for an amount that will not have a material financial impact on CITGO. Litigation is pending in federal court in Lake Charles, Louisiana against CITGO by a number of current and former refinery employees and applicants asserting claims of racial discrimination in connection with CITGO's employment practices. A trial involving two plaintiffs resulted in verdicts for CITGO. The Court granted CITGO summary judgment with respect to another group of claims; these rulings have been affirmed by the Fifth Circuit Court of Appeals. Trials of the remaining cases are set to begin in December 2003. CITGO does not expect that the ultimate resolution of these cases will have an adverse material effect on its financial condition or results of operations. CITGO is among refinery defendants to state and federal lawsuits in New York and a state action in Illinois alleging contamination of water supplies by methyl tertiary butyl ether ("MTBE"), a component of gasoline. 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. 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 1358"). In July 2002, the court in the MDL case denied plaintiffs' motion for class certification. In August 2002, a New York state court judge handling two separate but related individual MTBE lawsuits dismissed plaintiffs' 11 product liability claims, leaving only traditional nuisance and trespass claims for leakage from underground storage tanks at gasoline stations near plaintiffs' water wells. 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, where the matter is still pending. 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 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 is awaiting review by the Court of International Trade. Approximately 310 lawsuits are currently pending against the Companies in state and federal courts, primarily in Louisiana, Texas, and Illinois. The cases were brought by former employees and contractor employees seeking damages for asbestos related illnesses allegedly resulting from exposure at refineries owned or operated by the Companies in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these cases, there are multiple defendants. In some cases, the Companies are indemnified by or have the right to seek indemnification for losses and expense that they may incur from prior owners of the refineries or employers of the claimants. The Companies do not believe that the resolution of the cases will have an adverse material effect on their financial condition or results of operations. ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The Companies are subject to various federal, state and local environmental laws and regulations which may require the Companies to take 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. 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 the Lake Charles refinery by 1994. A mutually acceptable closure plan was filed with the LDEQ in 1993. CITGO and its former owner 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 addressed the requirements and schedule for proceeding to develop and implement 12 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 Natural Resources Conservation Commission ("TNRCC") conducted a multi-media investigation of the Corpus Christi Refinery during the second quarter of 2002 and has issued a Notice of Enforcement to the Companies which identifies approximately 35 items of alleged violations of Texas environmental regulations. The Companies anticipate that penalties will be proposed with respect to these matters, but no amounts have yet been specified. In June 1999, CITGO and numerous other industrial companies received notice from the U.S. EPA that the U.S. 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 U.S. EPA made a demand for payment of its past investigation costs from CITGO and other PRPs and 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, subsequent remedial actions and natural resource damages. CITGO disagrees with the U.S. EPA's allegations and 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 Federal 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 under the New Source Review provisions of the Clean Air Act. The NOV's to CITGO followed inspections and formal Information Requests regarding the Lake Charles, Louisiana and Corpus Christi, Texas refineries and the Lemont, Illinois refinery which at the time was operated by CITGO but not owned by CITGO. At the U.S. EPA's request, CITGO is engaged in settlement discussions, but is prepared to contest the NOVs if settlement discussions fail. If CITGO settles or is found to have violated the provisions cited in the NOVs, it would be subject to possible penalties and significant capital expenditures for installation or upgrading of pollution control equipment or technologies. In June 1999, a NOV was issued by the U.S. EPA alleging violations of the National Emission Standards for Hazardous Air Pollutants regulations covering benzene emissions from wastewater treatment operations at the Lemont, Illinois refinery operated by CITGO. CITGO is in settlement discussions with the 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 violations of the Louisiana air quality regulations at the 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' and their subsidiaries' 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, except for events otherwise described in 13 their Annual Report on Form 10-K for the year ended December 31, 2001 or in this Quarterly Report on Form 10-Q for the period ended September 30, 2002. Conditions which require additional expenditures may exist with respect to various sites of the Companies including, but not limited to, the Companies' operating refinery complexes, former refinery sites, service stations and crude oil and petroleum product storage terminals. The amount of such future expenditures, if any, is indeterminable. DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of September 30, 2002 the Companies' 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 September 30, 2002, the balance sheet captions prepaid expenses and other current assets and other current liabilities include $26 million and $13 million, respectively, related to the fair values of open commodity derivatives. The Companies have also entered into various interest rate swaps to manage their risk related to interest rate changes on their debt. The fair value of the interest rate swap agreements in place at September 30, 2002, based on the estimated amount that the Companies would receive or pay to terminate the agreements as of that date and taking into account current interest rates, was a loss of $4 million, the offset of which is recorded in the balance sheet caption other current liabilities. In connection with the determination of fair market value, the Companies consider the creditworthiness of the counterparties, but no adjustment was determined to be necessary as a result. 8. 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 which entitle PDVSA to reduce the quantity of crude oil and feedstocks delivered under the crude oil supply agreements under specified circumstances. On February 9, 2001, PDVSA notified CITGO that it had declared force majeure, effective February 1, 2001, under each of the long-term crude oil supply agreements it has with CITGO. Under a force majeure declaration, PDVSA may reduce the amount of crude oil that it would otherwise be required to supply under these agreements. When PDVSA reduces its delivery of crude oil under these crude oil supply agreements, CITGO may obtain alternative sources of crude oil which may result in increased crude costs or increase its purchases of refined products. During 2001, PDVSA deliveries of crude oil to CITGO were slightly less than contractual base volumes due to this declaration of force majeure. Therefore, CITGO was required to obtain alternative sources of crude oil, which resulted in lower operating margins. On January 22, 2002, PDVSA notified CITGO that pursuant to the February 9, 2001 declaration of force majeure, effective March 1, 2002, PDVSA expected to deliver approximately 20 percent less than the contract volume. Deliveries remained approximately 20 percent less than contract volume through June 30, 2002. Beginning in July 2002, contract volumes delivered increased and deliveries are returning to contractual levels. PDVSA delivered approximately 98 percent of the contractual crude oil volume during the third quarter of 2002. In the nine months ended September 30, 2002, PDVSA delivered approximately 91 percent of the contractual crude oil volume. As a result, CITGO estimates that crude oil costs during the quarter ended September 30, 2002 were increased by $1 million and during the nine months ended September 30, 2002 were increased by $22 million. 14 In August 2002, two affiliates entered into agreements to advance excess cash to the Companies 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, Inc. ("PDV Holding"). The notes bear interest at rates equivalent to 30-day LIBOR plus .875% payable quarterly. Amounts outstanding on these notes at September 30, 2002 were $5 million and $4 million from PDV Texas and PDV Holding, respectively and are included in payables to affiliates in the accompanying consolidated balance sheet. 9. INSURANCE RECOVERIES The insurance recoveries of $46 million included in the quarter ended September 30, 2002 and $257 million included in the nine-months ended September 30, 2002, relate primarily to a fire which occurred on August 14, 2001 at the Lemont refinery. These recoveries are, in part, reimbursements for expenses incurred in 2002 to mitigate the effect of the fire on the Companies' earnings. The Companies received cash proceeds of $49 million during the quarter ended September 30, 2002 and $292 million during the nine months ended September 30, 2002, a portion of which were applied to receivables recorded during 2001. The Companies expect to recover additional amounts related to this event subject to final settlement negotiations. 15 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, 2001 on Form 10-K, dated March 29, 2002, for additional information and a description of critical accounting policies and factors which may cause substantial fluctuations in the earnings and cash flows of PDV America. On January 1, 2002, PDV America contributed all of the common stock of VPHI to CITGO. This transaction had no effect on the consolidated financial statements of PDV America. In the quarter ended September 30, 2002, PDV America generated net income of $60.8 million on total revenue of $5.5 billion compared to net income of $76.2 million on total revenue of $5.2 billion for the same period last year. In the nine months ended September 30, 2002, PDV America generated net income of $149.0 million on total revenue of $14.2 billion compared to net income of $449.7 million on total revenue of $16.0 billion for the same period last year. (See "Gross margin"). 16 RESULTS OF OPERATIONS The following table summarizes the sources of PDV America's sales revenues and sales volumes for the three-month and nine-month periods ended September 30, 2002 and 2001: PDV AMERICA SALES REVENUES AND VOLUMES

17 The following table summarizes PDV America's cost of sales and operating expenses for the three-month and nine-month periods ended September 30, 2002 and 2001: PDV AMERICA COST OF SALES AND OPERATING EXPENSES

Sales revenues and volumes. Sales increased $243 million, or approximately 5%, in the three-month period ended September 30, 2002 as compared to the same period in 2001. This was due to an increase in average sales price of 2% and an increase in sales volume of 3%. Sales decreased $2 billion, or approximately 13%, in the nine-month period ended September 30, 2002 as compared to the same period in 2001. This was due to a decrease in average sales price of 13%. (See PDV America Sales Revenues and Volumes table above.) Equity in earnings of affiliates. Equity in earnings of affiliates decreased by $9 million for the three-month period ended September 30, 2002 and decreased by $20 million for the nine-month period ended September 30, 2002 as compared to the same periods in 2001. The decrease for the three month period was primarily due to the change in the earnings of LYONDELL-CITGO, CITGO's share of which decreased $12 million, from $30 million in the third quarter of 2001 to $18 million in the third quarter of 2002. The decrease for the nine-month period was primarily due to the decrease in the earnings of LYONDELL-CITGO and Nelson Industrial Steam Company ("NISCO"). CITGO's share of LYONDELL-CITGO's earnings decreased $14 million, from $70 million in the first nine months of 2001 to $56 million in the first nine months of 2002. CITGO's share of NISCO's earnings decreased $11 million, from $8 million in the first nine months of 2001 to $(3) million in the first nine months of 2002. The decrease in LYONDELL-CITGO's earnings was primarily due to a reduction of contract crude supply and lower margins on crude purchased in the spot market. The decrease in NISCO's earnings was primarily related to a decrease in electricity rates from the prior year. Insurance recoveries. The insurance recoveries of $46 million included in the three months ended September 30, 2002 and $257 million included in the nine months ended September 30, 2002, relate primarily to a fire which occurred on August 14, 2001 at the Lemont refinery. These recoveries are, in part, reimbursements for expenses incurred in 2002 to mitigate the effect of the fire on the Companies' earnings. The Companies expect to recover additional amounts related to this event subject to final settlement negotiations. 18 Cost of sales and operating expenses. Cost of sales and operating expenses increased by $319 million or 6%, in the quarter ended September 30, 2002 as compared to the same period in 2001. Cost of sales and operating expenses decreased by $1.3 billion or 9%, in the nine months ended September 30, 2002 as compared to the same period in 2001. (See PDV America Cost of Sales and Operating Expenses table above.) The Companies purchase refined products to supplement the production from their refineries to meet marketing demands and resolve logistical issues. Refined product purchases represented 54% and 56% of total cost of sales and operating expenses for the third quarters of 2002 and 2001, respectively and 53% and 55% for the first nine months of 2002 and 2001, respectively. PDV America estimates that margins on purchased products, on average, are lower than margins on produced products due to the fact that PDV America can only receive the marketing portion of the total margin received on the produced refined products. However, purchased products are not segregated from PDV America produced products and margins may vary due to market conditions and other factors beyond the Companies' 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, PDV America 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 PDV America 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 September 30, 2002 was approximately 1.7 cents per gallon, compared to approximately 2.9 cents per gallon for the same period in 2001. The gross margin for the nine-month period ended September 30, 2002 was less than one cent per gallon, compared to approximately 4.6 cents per gallon for the same period in 2001. In the three-month period ended September 30, 2002, the revenue per gallon component increased approximately 2% while the cost per gallon component increased approximately 4%. As a result, the gross margin decreased approximately 1.2 cents on a per gallon basis in the quarter ended September 30, 2002 compared to the same period in 2001. In the nine-month period ended September 30, 2002, the revenue per gallon component decreased approximately 13% while the cost per gallon component decreased approximately 10%. As a result, the gross margin decreased approximately 3.6 cents on a per gallon basis in the nine months ended September 30, 2002 compared to the same period in 2001. 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 PDV America's consolidated operating results therefore depends in part on how quickly refined product prices adjust to reflect these changes. In the first nine months of 2002, there was a substantial decrease in refined product sales prices without an equivalent decrease in costs resulting in a significant negative impact on PDV America's gross margin and earnings. Selling, general and administrative expenses. Selling, general and administrative expenses decreased from $74 million in the third quarter of 2001 to $68 million in the third quarter of 2002, or 8%. Selling, general and administrative expenses increased from $213 million in the first nine months of 2001 to $220 million in the same period in 2002, or 3%. The decrease for the quarter is primarily related to a decrease in incentive compensation. The increase for the nine-month period is primarily related to sponsorship fees, media fees and the start-up expenses related to international operations. 19 LIQUIDITY AND CAPITAL RESOURCES For the nine-month period ended September 30, 2002, the Companies' consolidated net cash provided by operating activities totaled approximately $502 million. Operating cash flows were derived from net income of $149 million, depreciation and amortization of $222 million and changes in operating assets and liabilities of $131 million. The more significant changes in operating assets and liabilities included the increase in accounts receivable, including receivables from affiliates, of approximately $153 million, the decrease in prepaid expenses of $86 million, the increase in income taxes payable of $65 million, and the increase in accounts payable and other current liabilities, including payables to affiliates, of approximately $120 million. Additionally, other long-term assets, which mainly consist of costs of major refinery turnaround maintenance, increased $88 million. Net cash used in investing activities totaled $559 million for the nine-month period ended September 30, 2002 consisting primarily of capital expenditures of $478 million (compared to $144 million for the same period in 2001), the increase of restricted cash of $34 million, and investments in affiliates of $48 million. The capital expenditures during the nine-month period of 2002 relate primarily to crude unit reconstruction at the Lemont refinery. On August 14, 2001, a fire occurred at the crude distillation unit of the Lemont refinery. The crude unit was destroyed and the refinery's other processing units were temporarily taken out of production. The new crude unit was operational at the end of May 2002. Net cash used in financing activities totaled $32 million for the nine-month period ended September 30, 2002 consisting primarily of the payment of $154 million on revolving bank loans, the payment of $25 million on master shelf agreement notes, the payment of $25 million on taxable bonds, the payment of capital lease obligations of $10 million and the net repayments of other debt of $8 million. These payments are offset in part by $119 million in proceeds from short term borrowings, $63 million in proceeds from tax exempt bonds, and $9 million in proceeds from loans from affiliates. As of September 30, 2002, capital resources available to the Companies included cash generated by operations, available borrowing capacity under CITGO's committed bank facilities of $287 million and $21 million of uncommitted short-term borrowing facilities with various banks. 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. CITGO is preparing for a debt offering of up to $250 million from this shelf registration. PDV America management believes that the Companies 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 and other planned expenditures as they arise. In addition, PDV America intends that payment received from its notes receivable from PDVSA will provide funds to service PDV America's $500 million of 7.875% Senior Notes. PDV America 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 Companies' ability to obtain such financing will depend on numerous factors, including market conditions and the perceived creditworthiness of the Companies at that time. (See also "Factors Affecting Forward Looking Statements".) 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 expires in June 2003 and is renewable for successive annual terms by mutual agreement. 20 PDV America's and CITGO's senior unsecured debt ratings, as assessed by the three major credit rating agencies, are as follows:

The Companies' debt instruments do not contain any provisions which trigger acceleration of payment or decreases in available borrowing capacity as a result of changes in credit ratings. The Companies are in compliance with their obligations under their debt financing arrangements at September 30, 2002. NEW ACCOUNTING STANDARDS In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which is fully effective in fiscal years beginning after December 15, 2001, although certain provisions of SFAS No. 142 were applicable to goodwill and other intangible assets acquired in transactions completed after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and requires that goodwill and intangibles with an indefinite life no longer be amortized but instead be periodically reviewed for impairment. The adoption of SFAS No. 142 did not materially impact the Companies' financial position or results of operations. In June 2001, the FASB issued 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. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Companies have not determined the impact on their financial statements that may result from the adoption of SFAS No. 143. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") which addresses financial accounting and reporting for the impairment or disposal of long-lived assets by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by broadening the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this statement generally are to be applied prospectively; therefore, the adoption of SFAS No. 144 did not impact the Companies' financial position or results of operations. PROPOSED ACCOUNTING CHANGES The American Institute of Certified Public Accountants 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 21 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 deferred major maintenance costs will be reported as a cumulative effect of an accounting change in the consolidated statement of income. At September 30, 2002, the Companies had included turnaround costs of $136 million in other assets. The Companies' management has not determined the amount, if any, of these costs that could be capitalized under the provisions of the exposure draft. In May 2002, the FASB issued an exposure draft of a proposed interpretation, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". This proposed interpretation would elaborate on the disclosures made by a guarantor in its financial statements about its obligations under certain guarantees that it issued. It would also require a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligations it has undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of the proposed interpretation are expected to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are expected to be effective for financial statements of interim or annual periods ending after December 15, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction. CITGO 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 CITGO operates and finances its assets. CITGO does not attempt to manage the price risk related to all of its inventories of crude oil and refined products. As a result, at September 30, 2002, CITGO 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. CITGO balances its crude oil and petroleum product supply/demand and manages a portion of its price risk by entering into petroleum commodity derivatives. 22 NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT SEPTEMBER 30, 2002

------------------------ (1) Thousands of barrels (2) Ten-thousands of mmbtu (3) Floating price based on market index designated in contract; fixed price agreed upon at date of contract. 23 NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT SEPTEMBER 30, 2001

------------------------- (1) Thousands of barrels (2) Ten-thousands of mmbtu (3) Floating price based on market index designated in contract; fixed price agreed upon at date of contract. 24 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 preferred mix of 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 September 30, 2002 and 2001, CITGO's 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 SEPTEMBER 30, 2002 AND 2001

The fair value of the interest rate swap agreements in place at September 30, 2002, 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 $4 million. 25 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 SEPTEMBER 30, 2002

DEBT OBLIGATIONS AT SEPTEMBER 30, 2001

26 ITEM 4. CONTROLS AND PROCEDURES The certifying officers of PDV America are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for PDV America and have (i) designed such disclosure controls and procedures to ensure that material information relating to PDV America, including its consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this quarterly report is being prepared; and (ii) evaluated the effectiveness of the Companies' disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on this evaluation, the chief executive officer and the chief financial officer of PDV America have concluded that the Companies' disclosure controls and procedures were effective during the quarter being reported on in this quarterly report. PDV America's certifying officers have indicated that there were no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their most recent evaluation, including any significant deficiencies or material weaknesses that would require corrective actions. 27 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The required information is incorporated by reference into Part II of this Report from Note 7 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 Certificate Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: None. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PDV AMERICA, INC. Date: November 8, 2002 /s/ Carlos Jorda ------------------------------------------ Carlos Jorda President and Chief Executive Officer Date: November 8, 2002 /s/ Paul Largess ------------------------------------------ Paul Largess Chief Accounting Officer and Treasurer 29 CERTIFICATIONS QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Carlos Jorda, President and Chief Executive Officer of PDV America, Inc. ("PDV America"), certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2002 of PDV America; 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 PDV America as of, and for, the periods presented in this quarterly report; 4. PDV America'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 PDV America and we have: a) designed such disclosure controls and procedures to ensure that material information relating to PDV America, 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 PDV America'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 our evaluation as of the Evaluation Date; 5. PDV America's other certifying officer and I have disclosed, based on our most recent evaluation, to PDV America's auditors and the audit committee of PDV America'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 PDV America's ability to record, process, summarize and report financial data and have identified for PDV America'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 PDV America's internal controls; and 30 6. PDV America'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. Date: November 8, 2002 /s/ Carlos Jorda ------------------------ ------------------------------ Name: Carlos Jorda Title: Chief Executive Officer 31 QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Luis Davila, Chief Financial Officer of PDV America, Inc. ( "PDV America"), certify that: 1. I have reviewed this quarterly report on Form 10-Q for the quarter ended September 30, 2002 of PDV America; 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 PDV America as of, and for, the periods presented in this quarterly report; 4. PDV America'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 PDV America and we have: a) designed such disclosure controls and procedures to ensure that material information relating to PDV America, 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 PDV America'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 our evaluation as of the Evaluation Date; 5. PDV America's other certifying officer and I have disclosed, based on our most recent evaluation, to PDV America's auditors and the audit committee of PDV America'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 PDV America's ability to record, process, summarize and report financial data and have identified for PDV America'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 PDV America's internal controls; and 32 6. PDV America'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. Date: November 8, 2002 /s/ Luis Davila ------------------------ ---------------------------------- Name: Luis Davila Title: Chief Financial Officer 33 EXHIBIT INDEX

PDV AMERICA INC 10-Q