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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
750 Lexington Avenue
New York, New York 10022
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (212) 753-5340
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------------------------------------------------------
7-1/4% Senior Notes, Due 1998 New York Stock Exchange, Inc.
7-3/4% Senior Notes, Due 2000 New York Stock Exchange, Inc.
7-7/8% Senior Notes, Due 2003 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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 __
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K:
Not Applicable.
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Not Applicable
Number of shares of Common Stock outstanding as of March 1, 1998: 1,000
DOCUMENTS INCORPORATED BY REFERENCE
None
Table of Contents
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS..................................ii
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.......................................1
ITEM 3. LEGAL PROCEEDINGS....................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................24
ITEM 6. SELECTED FINANCIAL DATA..............................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................39
ITEM 11. EXECUTIVE COMPENSATION..............................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..............43
i
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Specifically, all statements under the captions "Items 1 and
2--Business and Properties" and "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to increases in
production capacity and related capital expenditures and investments,
environmental compliance and remediation and related capital expenditures, and
future capital expenditures in general are forward looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the Company's products as a result of competitive actions or economic
factors and changes in the cost of crude oil, feedstocks, blending components or
refined products. Such statements are also subject to increased costs in related
technologies and such technologies producing anticipated results, as well as
performance by third parties in accordance with contractual terms and
specifications, in particular, but without limitation, with respect to
construction contracts and indemnification agreements. Should one or more of
these risks or uncertainties, among others, some of which may be unforeseen at
this time, materialize, actual results may vary materially from those estimated,
anticipated or projected. Specifically, capital costs could increase, projects
could be delayed or anticipated related improvements in capacity or performance
may not be fully realized. Although the Company believes that the expectations
reflected by such forward looking statements are reasonable based on information
currently available to the Company, no assurances can be given that such
expectations will prove to have been correct.
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Overview
PDV America, Inc. ("PDV America" or the "Company" and,
together with its subsidiaries, the "Companies") was incorporated in 1986 in the
State of Delaware and is an indirect wholly owned subsidiary of Petroleos de
Venezuela, S.A. (together with one or more of its subsidiaries, referred to
herein as "PDVSA"), the national oil company of the Republic of Venezuela.
Through its wholly owned operating subsidiaries, CITGO Petroleum Corporation
("CITGO") and PDV Midwest Refining L.L.C. ("PDVMR") (see below), PDV America
refines, markets and transports petroleum products, including gasoline, diesel
fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes, mainly
within the continental United States east of the Rocky Mountains.
Prior to May 1, 1997, the Company had a 50% interest in The
UNO-VEN Company ("UNO-VEN"), an Illinois general partnership. As of May 1, 1997,
pursuant to a Partnership Interest Retirement Agreement (as defined herein),
certain UNO-VEN assets were transferred to PDMVR. Accordingly, the Company's
consolidated financial statements reflect the equity in earnings of UNO-VEN
through April 30, 1997 (see Note 9 of Notes to Consolidated Financial
Statements), the results of operations of PDVMR on a consolidated basis since
May 1, 1997 and the financial position of PDVMR at December 31, 1997. See "--PDV
Midwest Refining, L.L.C."
PDV America's aggregate net interest in rated crude oil
refining capacity is 853 thousand barrels per day ("MBPD"). The following table
shows the capacity of each U.S. refinery in which PDV America holds an interest
and PDV America's share of such capacity as of December 31, 1997.
PDV America Refining Capacity
Net PDV
America
Total Interest
Rated In
Crude Rated
PDV America Refining Refining
Owner Interest Capacity Capacity
---------------- --------------------------------------------------
(%) (MBPD) (MBPD)
Refinery Interests Held By PDV America
as of December 31, 1997
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX (1) LYONDELL-CITGO 42 265 111
Lemont, IL (2) PDVMR 100 160 160
=== === ===
Total Rated Refining Capacity
as of December 31, 1997 1,007 853
===== ===
- -------------------------
(1) The initial interest in LYONDELL-CITGO was acquired on July 1, 1993.
CITGO's interest in LYONDELL-CITGO at December 31, 1997 approximates 42%.
CITGO has an option exercisable for 18 months from April 1, 1997 to
increase, for an additional investment, its participation interest up to a
maximum of 50%. See "--CITGO--Refining--LYONDELL-CITGO".
(2) Formerly, this refinery was owned by UNO-VEN in which the Company had a 50%
interest. On May 1, 1997, the refinery and certain assets and liabilities
were transferred to PDVMR. See "--PDV Midwest Refining, L.L.C."
2
The following table shows aggregate refined product sales
revenues and volumes (excluding lubricants and waxes) of PDV America for the
three years in the period ended December 31, 1997.
PDV America Refined Product Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
-------------------------------------------------------------------
1997(2) 1996(1) 1995(1) 1997(2) 1996(1) 1995(1)
-------------------------------------------------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $7,918 $7,927 $6,761 12,117 11,995 11,747
Jet Fuel 1,188 1,506 1,181 2,005 2,372 2,282
Diesel/#2 fuel 2,509 2,522 1,508 4,358 4,052 3,023
Asphalt 398 257 238 749 569 503
Industrial Products and
Petrochemicals 1,201 936 904 2,021 1,660 1,810
-------------------------------------------------------------------
Total $13,214 $13,148 $10,592 21,250 20,648 19,365
===================================================================
- -------------------------
(1) Includes all of CITGO (excluding lubricants and waxes) and 50% of UNO-VEN
refined product sales.
(2) Includes all of CITGO (excluding lubricants and waxes) and 50% of UNO-VEN
refined product sales for the period from January 1, 1997 to April 30,
1997. See "--PDV Midwest Refining, L.L.C."
3
The following table shows PDV America's aggregate interest in refining
capacity, refinery input and product yield for the three years in the period
ended December 31, 1997.
PDV America Refinery Production
Year Ended December 31,
-----------------------------------------------------------
1997(2)(3) 1996(1)(4) 1995(1)(5)(7)
-----------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity(6) 853 683 681
Refinery Input
Crude oil 675 80.9% 561 81.2% 543 80.8%
Other feedstocks 159 19.1 130 18.8 129 19.2
--- ------ --- ------ --- ------
Total 834 100.0% 691 100.0% 672 100.0%
=== ===== === ===== === =====
Product Yield
Light fuels
Gasoline 387 45.7% 313 44.9% 310 45.7%
Jet Fuel 72 8.5 70 10.0 66 9.7
Diesel/#2 fuel 146 17.2 122 17.5 118 17.4
Asphalt 42 5.0 34 4.9 32 4.7
Petrochemical and Industrial Products 200 23.6 158 22.7 152 22.5
--- ------ --- ------ --- ------
Total 847 100.0% 697 100.0% 678 100.0%
=== ===== === ===== === =====
- -------------------------
(1) For 1996 and 1995, includes all of CITGO and 50% of UNO-VEN refinery
production, except as otherwise noted.
(2) For 1997, includes all of CITGO refinery production, 50% of UNO-VEN
refinery production through April 30, 1997 and all of PDVMR
refinery production beginning May 1, 1997 through December 31, 1997.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) Includes a weighted average of 12.89% of the Houston refinery for 1996.
(5) Includes a weighted average of 11.45% of the Houston refinery for 1995.
(6) At year end.
(7) Does not include Paulsboro Unit 1 for 1995. See "--CITGO--Refining--
Paulsboro Refinery".
Competitive Nature of the Petroleum Refining Business
The petroleum refining industry is cyclical and highly
volatile, reflecting capital intensity with high fixed and low variable costs.
Petroleum industry operations and profitability are influenced by a large number
of factors, which individual petroleum refining and marketing companies cannot
entirely control. Governmental regulations and policies, particularly in the
areas of taxation, energy and the environment, have a significant impact on
petroleum industry activities, regulating how companies conduct their operations
and formulate their products, and, in some cases, directly limiting their
profits. The U.S. petroleum refining industry has entered a period of
consolidation, in which a number of former competitors have combined their
operations. Demand for crude oil and its products is largely driven by the
condition of local and worldwide economies, although weather patterns and
taxation relative to other energy sources can also be significant factors.
Generally, U.S. refiners compete for sales on the basis of price and brand image
and, in some product areas, product quality.
4
CITGO
CITGO refines, markets and transports gasoline, diesel fuel,
jet fuel, petrochemicals, lubricants, refined waxes, asphalt and other refined
products, and markets gasoline through over 14,000 CITGO branded independently
owned and operated retail outlets located throughout the United States,
primarily east of the Rocky Mountains. CITGO also markets jet fuel primarily to
airline customers. A variety of lubricants and waxes are sold to independent
marketers, mass marketers and industrial customers. Petrochemicals and
industrial products are sold directly to various manufacturers and industrial
companies throughout the United States. Asphalt is marketed primarily to
independent paving contractors.
Refining
CITGO produces its light fuels and petrochemicals primarily
through its Lake Charles and Corpus Christi refineries. Asphalt refining
operations are carried out through CITGO's Paulsboro and Savannah refineries.
Lake Charles Refinery. The Lake Charles refinery, located in
Lake Charles, Louisiana, was originally built in 1944 and, since then, has been
continuously upgraded. Today it is a modern, complex, high conversion refinery
and is one of the largest in the United States. It has a rated refining capacity
of 320 MBPD and is capable of processing large volumes of heavy crude oil into a
flexible slate of refined products, including significant quantities of
high-octane unleaded gasoline and, due to recent modifications, reformulated
gasoline. The Lake Charles refinery has a Solomon Process Complexity Factor of
17.0 (as compared to an average of 13.8 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey). The Solomon Process Complexity
Rating is an industry measure of a refinery's ability to produce higher
value-added products. A higher rating indicates a greater capability to produce
such products.
5
The following table shows the refining capacity, refinery
input and product yield at the Lake Charles refinery for the three years in the
period ended December 31, 1997.
Lake Charles Refinery Production
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 320 320 320
Refinery Input
Crude oil 291 87.9% 274 85.1% 275 85.4%
Other feedstocks 40 12.1 48 14.9 47 14.6
--- ------ --- ------ --- ------
Total 331 100.0% 322 100.0% 322 100.0%
--- ------ --- ------ --- ------
Product Yield
Light fuels
Gasoline 177 52.4% 164 50.3% 164 50.0%
Jet Fuel 60 17.7 62 19.0 58 17.7
Diesel/#2 fuel 45 13.3 38 11.7 42 12.8
Petrochemicals and Industrial Products 56 16.6 62 19.0 64 19.5
--- ------ --- ------ --- ------
Total 338 100.0% 326 100.0% 328 100.0%
--- ------ --- ------ --- ------
Utilization of Rated Refining Capacity 91% 86% 86%
- -------------------------
(1) At year end.
Approximately 63%, 67% and 64% of the total crude runs at the
Lake Charles refinery, in the years 1997, 1996 and 1995, respectively, consisted
of crude oil with an average API gravity of 24 degrees or less. Due to the
complex processing required to refine such crude oil, the Lake Charles
refinery's economic crude oil throughput capacity is approximately 290 MBPD,
which is approximately 90% of its rated capacity of 320 MBPD.
The Lake Charles refinery's Gulf Coast location provides it
with access to crude oil deliveries from multiple sources. Imported crude oil
and feedstocks supplies are delivered by ship directly to the Lake Charles
refinery, and domestic crude oil supplies are delivered by pipeline and barge.
In addition, the refinery is connected by pipelines to the Louisiana Offshore
Oil Port ("LOOP") and to terminal facilities in the Houston area through which
it can receive crude oil deliveries if the Lake Charles docks are temporarily
inaccessible. For delivery of refined products, the refinery is connected
through the Lake Charles Pipeline directly to the Colonial and Explorer
Pipelines, which are the major refined product pipelines supplying the northeast
and midwest regions of the United States, respectively. The refinery also uses
adjacent terminals and docks, which provide access for ocean tankers and barges.
The Lake Charles refinery's main petrochemical products are
propylene and benzene. Propylene production was 6.0, 5.0 and 5.7 MBPD, and
benzene production was 3.8, 3.2 and 4.1 MBPD,
6
in each case for the years 1997, 1996 and 1995, respectively. Industrial
products include sulphur, residual fuels and petroleum coke.
Located adjacent to the Lake Charles refinery is a lubricants
refinery operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"),
which is owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily
because of its specific design, the Cit-Con refinery produces extremely high
quality oils and waxes and is one of the few in the industry designed as a
stand-alone lubricants refinery. Subsequent to enhancements made in 1995, the
refinery currently has a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of
wax, and is one of the largest rated capacity paraffinic lubricants refineries
in the United States. For the years 1997, 1996 and 1995, utilization at the
Cit-Con refinery was 101%, 100% and 101%, respectively, of its rated capacity.
Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from
Conoco's nearby refinery. Finished refined products are shared on the same pro
rata basis by CITGO and Conoco. During 1997, new high efficiency lubricant base
oil production capacity, including a joint venture Conoco-Pennzoil plant, came
on-stream, creating a surplus in lubricant base oil supply and diminishing base
oil production profitability. CITGO has evaluated Cit-Con's competitive position
in light of this new competition and believes that Cit-Con can continue to
produce attractive returns on capital employed if certain operating strategies
are followed. These strategies include maximizing the production of high value
wax and heavier base oils, strict control of operating expenses, and close
operational integration with CITGO's downstream finished lubricants marketing
program.
Corpus Christi Refinery. The Corpus Christi refinery complex
consists of the East and West Plants, located within five miles of each other in
Corpus Christi, Texas. Construction began on the East Plant in 1937, and it was
extensively reconstructed and modernized during the 1970's and 1980's. The West
Plant was completed in 1983. The Corpus Christi refinery is an efficient and
highly complex facility, capable of processing high volumes of heavy crude oil
into a flexible slate of refined products, with a Solomon Process Complexity
Factor of 20.5 (as compared to an average of 13.8 for U.S. refineries in the
most recently available Solomon Associates, Inc. survey).
7
The following table shows rated refining capacity, refinery
input and product yield at the Corpus Christi refinery for the three years in
the period ended December 31, 1997.
Corpus Christi Refinery Production
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 150 140 140
Refinery Input
Crude oil 115 59.3% 133 66.8% 121 64.7%
Other feedstocks 79 40.7 66 33.2 66 35.3
--- ------ --- ------ --- ------
Total 194 100.0% 199 100.0% 187 100.0%
--- ------ --- ------ --- ------
Product Yield
Light fuels
Gasoline 93 47.9% 93 47.0% 90 48.4%
Diesel/#2 fuel 45 23.2 59 29.8 53 28.5
Petrochemicals and Industrial Products 56 28.9 46 23.2 43 23.1
--- ------ --- ------ --- ------
Total 194 100.0% 198 100.0% 186 100.0%
--- ------ --- ------ --- ------
Utilization of Rated Refining Capacity 77% 95% 86%
- -------------------------
(1) At year end.
Corpus Christi crude runs during 1997 consisted of 100% heavy
sour Venezuelan crude. Crude oil supplies are delivered directly to the Corpus
Christi refinery through the Port of Corpus Christi. The decline in utilization
of rated refining capacity in 1997 as compared to 1996 is a result of a major
turnaround in 1997 and an increase in the rated refining capacity.
CITGO operates the West Plant under a sublease agreement (the
"Sublease") from Union Pacific Corporation ("Union Pacific"). The basic term of
the Sublease ends on January 1, 2004, but CITGO may renew the Sublease for
successive renewal terms through January 31, 2011. CITGO has the right to
purchase the West Plant from Union Pacific at the end of the basic term, the end
of any renewal term, or on January 31, 2011, at a nominal price.
During the last several years, CITGO has increased the
capacity of the Corpus Christi refinery to produce petrochemical products. The
Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, methyl tertiary butyl ether ("MTBE") and aromatics (including
benzene, toluene and xylene). The Company produces a significant quantity of
cumene, an important petrochemical product used in the engineered plastics
market. The production of xylene, a basic building block used in the manufacture
of consumer plastics, allows the refinery to take advantage of its reforming
capacity while staying within the gasoline specifications of the Clean Air Act
Amendments of 1990.
8
Paulsboro Refinery. The Paulsboro refinery, located in
Paulsboro, New Jersey, is an asphalt refinery. The Paulsboro refinery consists
of Unit I, with a rated capacity of 44 MBPD, and Unit II, with a rated capacity
of 40 MBPD.
Unit II, originally constructed in 1980 to produce asphalt
from high sulphur, heavy crude oil high in naphthenic acid, is a combination
atmospheric and vacuum distillation facility. The crude oil purchased by CITGO
from PDVSA to supply Unit II's crude oil requirements is particularly well
suited for the production of asphalt. Unit II produced an average of 21.0, 20.5
and 19.1 MBPD of asphalt in the years 1997, 1996 and 1995, respectively, which
accounted for 58% of Unit II's total production in each year. The remaining Unit
II production in 1997, 1996 and 1995 consisted of distillate products such as
naphthas, marine diesel oil and vacuum gas oils, which, in the aggregate,
averaged approximately 14.4, 14.5 and 13.7 MBPD, respectively, in such years.
Unit II crude oil runs were 36, 35 and 33 MBPD, or a utilization rate of 90%,
88% and 83%, in 1997, 1996 and 1995, respectively.
Unit I was constructed in 1979 primarily to process low
sulphur, light crude oil but has been modified to run heavier crudes such as
Boscan. The unit produces naphthas, diesel/#2 and #6 fuels and asphalt. Unit I
is run primarily when there is demand for toll processing of sweet crudes at
attractive economics and to produce asphalt. Crude oil runs for third party
processing in 1997, 1996 and 1995 averaged 0.0, 0.0 and 2.1 MBPD, respectively,
representing processing utilization rates of 0%, 0% and 5%, respectively. In
1997, 1996 and 1995, 13.6, 3.4 and 2.6 MBPD of crude oil were run on Unit I for
CITGO's own account, producing 8.9, 2.4 and 1.9 MBPD of asphalt and 4.7, 0.9 and
0.8 MBPD of other products, respectively.
Savannah Refinery. The Savannah Refinery, located near
Savannah, Georgia, is an asphalt refinery. CITGO acquired the Savannah Refinery
on April 30, 1993. The facility includes two crude distillation units, with a
combined rated capacity of 28 MBPD. The primary crude oil run by the refinery is
Boscan.
The units produced an average of 12.3, 11.4 and 10.5 MBPD of
asphalt in the years ended December 31, 1997, 1996 and 1995, respectively, which
accounted for 75%, 76% and 77% of total production, in such years. An additional
4.1, 3.7 and 3.4 MBPD of production included naphthas and light, medium and
heavy gas oils in 1997, 1996 and 1995, respectively. Total crude runs in the
years ended December 31, 1997, 1996 and 1995, respectively, were 16.4, 15.1 and
13.7 MBPD, respectively, for utilization rates of 59%, 54% and 49%.
LYONDELL-CITGO. On July 1, 1993, subsidiaries of CITGO and
Lyondell Petrochemical Company ("Lyondell") executed definitive agreements with
respect to CITGO's investment in LYONDELL-CITGO Refining Company, Ltd.
("LYONDELL-CITGO"), which owns and operates a sophisticated 265 MBPD refinery
previously owned by Lyondell and located on the ship channel in Houston, Texas.
Through December 31, 1997, CITGO had invested approximately $625 million
(excluding reinvested earnings) in LYONDELL-CITGO. See Note 2 of Notes to
Consolidated Financial Statements. A refinery enhancement project to increase
the refinery's heavy crude oil high conversion capacity from approximately 135
MBPD to 200 MBPD had an in-service date of March 1, 1997. The crude oil
processed by this refinery is supplied by PDVSA under a long-term crude oil
supply contract through the year 2017. CITGO purchases substantially all of the
refined products produced at this refinery under a long-term contract. See Note
4 of Notes to Consolidated Financial Statements. CITGO's participation interest
in LYONDELL-CITGO increased from approximately 13% at December
9
31, 1996 to approximately 42% on April 1, 1997, in accordance with agreements
between the owners concerning such interest. CITGO has a one-time option for 18
months from April 1, 1997, to increase, for an additional investment, its
participation interest to 50%.
Crude Oil and Refined Product Purchases
CITGO owns no crude oil reserves or production facilities, and
must therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including
LYONDELL-CITGO, PDVMR and Chalmette Refining, L.L.C. ("Chalmette"). See "Item
13. Certain Relationships and Related Transactions".
Crude Oil Purchases. The following chart shows CITGO's
purchases of crude oil for the three years in the period ended December 31,
1997:
CITGO Crude Oil Purchases
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
Suppliers (MBPD) (MBPD) (MBPD) (MBPD)
- ---------
PDVSA 130 142 150 117 130 122 49 39 35 14 17 14
PEMEX 61 44 33 0 0 0 0 0 0 0 0 0
Occidental 40 43 43 0 0 0 0 0 0 0 0 0
Other Sources 57 45 52 0 3 0 0 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------
Total 288 274 278 117 133 122 49 39 35 14 17 14
=== === === === === === == == == == == ==
CITGO's largest supplier of crude oil is PDVSA, and 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. See "Item 13--Certain
Relationships and Related Transactions". The following table shows the base and
incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1997.
10
CITGO Crude Oil Supply Contracts with PDVSA
Volumes of Crude
Oil Purchased
Contract Crude For the Year Ended Contract
Oil Volume December 31, Expiration
---------------------- -------------------------- ----------
Base Incremental(1) 1997 1996 1995 Date
---------------------- -------------------------- ----------
(MBPD) (MBPD) (year)
Location
Lake Charles, LA 120 50 115(2) 121(2) 125(2) 2006
Corpus Christi, TX 130 -- 125(2) 130 122 2012
Paulsboro, NJ 30 -- 35(2) 34(2) 35 2010
Savannah, GA 12 -- 12(2) 11(2) 14 2013
Houston, TX (3) 200 -- 216 134 136 2017
- --------------------
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right to
sell to CITGO incremental volumes up to the maximum amount specified in the
table, subject to certain restrictions relating to the type of crude oil to
be supplied, refining capacity and other operational considerations at the
refinery.
(2) Volumes purchased under the supply contracts do not equal total purchases
from PDVSA as a result of spot purchases or transfers between refineries.
(3) CITGO acquired a participation interest in LYONDELL-CITGO, the owner of the
Houston refinery, on July 1, 1993. In connection with such transaction,
LYONDELL-CITGO entered into a long-term crude oil supply agreement with
PDVSA that provided for delivery volumes of 135 MBPD until the completion
of a refinery enhancement project at which time the delivery volumes
increased to a range from 200 MBPD to 230 MBPD.
Most of the crude oil and feedstocks purchased by CITGO from
PDVSA are delivered on tankers owned by PDV Marina, S.A. ("PDV Marina"), a
wholly owned subsidiary of PDVSA, or by other PDVSA subsidiaries. In 1997, 81%
of the PDVSA contract crude oil delivered to the Lake Charles and Corpus Christi
refineries was delivered on tankers operated by PDVSA subsidiaries.
CITGO purchases additional crude oil under a 90-day evergreen
agreement with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries
are particularly well-suited to refine PEMEX's Maya heavy, sour crude oil, which
is similar in many respects to several types of Venezuelan crude oil. Effective
January 1995, the PEMEX crude contract was for 23 MBPD of Maya crude for the
first six months of 1995 and 17 MBPD for the last six months of 1995. Effective
January 1996, PEMEX increased the crude contract to 27 MBPD of Maya crude, which
increased to 35 MBPD effective July 1996. Effective January 1, 1997, PEMEX
increased the crude contract to 52 MBPD of Maya crude. This contract also
includes 8 MBPD of Olmeca, light sour crude for 1995 and 10 MBPD for 1996 and
1997.
CITGO is a party to a contract with an affiliate of Occidental
Petroleum Corporation ("Occidental") for the purchase of light, sweet crude oil
to produce lubricants. Purchases under this contract, which expires on August
31, 1998, averaged 47 MBPD in 1997. CITGO also purchases sweet crude oil under
long-standing relationships with numerous other producers.
Refined Product Purchases. CITGO is required to purchase
refined products to supplement the production of the Lake Charles and Corpus
Christi refineries in order to meet the demand of CITGO's marketing network.
During 1997, CITGO's shortage in gasoline production approximated
11
356 MBPD. However, due to logistical needs, timing differences and product grade
imbalances, CITGO purchased approximately 518 MBPD of gasoline and sold into the
spot market or to refined product traders or other refiners approximately 154
MBPD of gasoline. The following table shows CITGO's purchases of refined
products for the three years in the period ended December 31, 1997.
CITGO Refined Product Purchases
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
(MBPD)
Light Fuels
Gasoline 518 484 471
Jet Fuel 74 92 87
Diesel/#2 fuel 190 153 90
---------------------------------------------------------
Total 782 729 648
=========================================================
As of December 31, 1997, CITGO purchased substantially all of
the refined products produced at the LYONDELL-CITGO refinery under a long-term
contract through the year 2017. LYONDELL-CITGO was a major supplier in 1997
providing CITGO with 111 MBPD of gasoline, 68 MBPD of distillate and 17 MBPD of
jet fuel. See "--Refining--LYONDELL-CITGO".
An affiliate of PDVSA entered into an agreement to acquire a
50% equity interest in a refinery in Chalmette, Louisiana, in October 1997 and
has assigned to CITGO its option to purchase up to 50% of the refined products
produced at the refinery through December 31, 1998. See Note 4 of Notes to
Consolidated Financial Statements. CITGO exercised this option on November 1,
1997. For the period November 1 through December 31, 1997, CITGO purchased 32
MBPD of gasoline, 24 MBPD of distillate and 10 MBPD of jet fuel.
Marketing
CITGO's major products are light fuels (including gasoline,
jet fuel and diesel fuel), industrial products, petrochemicals, asphalt,
lubricants and waxes. The following table shows revenue of each of these product
categories for the three years in the period ended December 31, 1997.
CITGO Refined Product Sales Revenues
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
($ in millions, except as otherwise indicated)
Light Fuels $11,376 84.8% $11,252 88.1% $8,886 85.8%
Petrochemicals,
Industrial Products
and Other Products 1,172 8.7 846 6.6 831 8.0
Asphalt 398 3.0 257 2.0 238 2.3
Lubricants and Waxes 467 3.5 426 3.3 404 3.9
------------------------------------------------------------------------
Total $13,413 100.0% $12,781 100.0% $10,359 100.0%
========================================================================
12
Light Fuels. CITGO markets gasoline, jet fuel and other
distillates through an extensive marketing network. The following table provides
a breakdown of the sales made by type of product for the three years in the
period ended December 31, 1997.
CITGO Light Fuel Sales
Year Ended December 31, Year Ended December 31,
----------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
----------------------------- ---------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $7,754 $7,451 $6,367 11,953 11,308 11,075
Jet Fuel 1,183 1,489 1,163 2,000 2,346 2,249
Diesel/#2 fuel 2,439 2,312 1,356 4,288 3,728 2,730
----------------------------- ---------------------------
Total $11,376 $11,252 $8,886 18,241 17,382 16,054
----------------------------- ---------------------------
Gasoline sales accounted for 58%, 58% and 61% of CITGO's
refined product sales in the years 1997, 1996 and 1995, respectively. CITGO
markets CITGO branded gasoline through over 14,000 independently owned and
operated CITGO branded retail outlets (including 13,048 branded retail outlets
owned and operated by approximately 818 independent marketers and 1,798
7-Eleven(TM) convenience stores) located throughout the United States, primarily
east of the Rocky Mountains. CITGO purchases gasoline to supply its marketing
network, as the gasoline production from the Lake Charles and Corpus Christi
refineries was only equivalent to approximately 47%, 49% and 53% of the volume
of CITGO branded gasoline sold in 1997, 1996 and 1995, respectively. See
"--Crude Oil and Refined Product Purchases--Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand in
order to obtain premium pricing for its products by appealing to consumer
preference for quality petroleum products and services. This is accomplished
through a commitment to quality, dependability and customer service to its
independent marketers, which constitute CITGO's primary distribution channel.
The number of independent marketer-owned or operated CITGO branded retail
outlets has grown significantly since 1986 when there were approximately 7,000
independently owned and operated branded outlets, including 7-Eleven(TM)
convenience stores, and has increased approximately 2%, 3% and 7% in 1997, 1996
and 1995, respectively.
In 1994, CITGO began offering to its marketers a program to
enhance their retail outlets with new card reader pumps which allow customers to
pay for their gasoline at the pumps with their credit cards instead of going
inside to pay. As of December 31, 1997, approximately 4,500 retail outlets had
installed the card reader pumps.
Sales to independent branded marketers typically are made
under contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year 2006.
Under this contract, CITGO arranges all transportation and delivery of motor
fuels and handles all product ordering. CITGO also acts as processing agent for
the purpose of facilitating and implementing orders and purchases from
third-party suppliers. CITGO receives a processing fee for such services.
13
CITGO markets jet fuel directly to airline customers at 26
airports, including such major hub cities as Atlanta, Chicago, Dallas/Fort
Worth, New York and Miami. Jet fuel sales volume to airline customers have
decreased approximately 16% in 1997 after increasing 6% and 2% in the years 1996
and 1995, respectively. The volume decrease in 1997 is due primarily to a change
in focus to selling only CITGO's own production of jet fuel. The increases in
1996 and 1995 were due to higher levels of purchases by existing customers and
to sales to new customers. Sales of bonded jet fuel, which are exempt from
import duties as well as certain state and local taxes, have decreased from 579
million gallons in 1995 (accounting for 31% of total jet fuel sales volume to
airline customers) to 408 million gallons in 1997 (accounting for over 24% of
total jet fuel sales volume to airline customers.
Growth in wholesale rack sales to marketers has been the
primary focus of diesel/#2 marketing efforts. Such marketing efforts have
resulted in increases in wholesale rack sales volume from approximately 1,283
million gallons in 1995 to approximately 1,754 million gallons in 1997. The
remaining diesel/#2 fuel production is sold either in bulk through contract
sales (primarily as heating oil in the Northeast) or on a spot basis.
CITGO's delivery of light fuels to its customers is
accomplished in part through 52 refined product terminals located throughout
CITGO's primary market territory. Of these terminals, 38 are wholly owned by
CITGO and 14 are jointly owned. Sixteen of CITGO's product terminals have
waterborne docking facilities, which greatly enhance the flexibility of CITGO's
logistical system. In addition, CITGO operates nine terminals owned by PDVMR in
the Midwest. Refined product terminals owned or operated by CITGO provide a
total capacity of approximately 24 million barrels. Also, CITGO has active
exchange relationships with over 270 other refined product terminals, providing
flexibility and timely response to distribution needs.
Petrochemicals and Industrial Products. CITGO sells
petrochemicals in bulk to a variety of U.S. manufacturers as raw materials for
finished goods. Sulphur is sold to the U.S. and international fertilizer
industry; cycle oils are sold for feedstock processing and blending; natural gas
liquids are sold to the U.S. fuel and petrochemical industry; petroleum coke is
sold primarily in international markets through a joint venture for use as kiln
and boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil
blenders and customers. The majority of CITGO's cumene production is sold to
Mount Vernon Penol Plant Partnership (see "Item 13. Certain Relationships and
Related Transactions"), a joint venture phenol production plant in which CITGO
is a limited partner. The phenol plant produces phenol and acetone for sale
primarily to the principal partner in the phenol plant for the production of
plastics.
Asphalt. CITGO markets asphalt through 15 terminals located
along the East Coast, from Savannah, Georgia to Albany, New York. Asphalt is
sold primarily to independent contractors for use in the construction and
resurfacing of roadways. Demand for asphalt in the Northeastern United States
declines substantially in the winter months as a result of weather conditions.
Lubricants and Waxes. CITGO markets many different types,
grades and container sizes of lubricants and wax products, with the bulk of
sales consisting of automotive oil and lubricants and industrial lubricants.
Other major lubricant products include 2-cycle engine oil and automatic
transmission fluid.
CITGO sells its finished lubricant products through three
classes of trade: (i) independent marketers that specialize in lubricant sales
(representing 80% of 1997 sales), (ii) mass merchandisers
14
(representing 6% of 1997 sales) and (iii) direct sales to large industrial end
users (representing 14% of 1997 sales). CITGO emphasizes sales to independent
marketers in its lubricants marketing because of the higher margins realized
from these sales. Large industrial end users include steel manufacturers for
industrial lubricants and automobile manufacturers for "original equipment"
quantities of automotive oils and fluids.
CITGO markets the largest portion of its wax production as
coating materials for the corrugated container industry. CITGO also provides wax
for the manufacture of candles, drinking cups, waxed papers and a variety of
building and rubber products.
Pipeline Operations
CITGO owns and operates 364 miles of crude oil pipeline
systems and approximately 1,100 miles of products pipeline systems. The crude
oil pipeline provides CITGO with access to gathering systems throughout major
production areas in Louisiana and Texas that provide the Lake Charles refinery
with domestic crude oil to supplement waterborne activities. CITGO also has
joint equity interests in three crude oil pipeline companies with a total of
nearly 5,400 miles of crude oil pipeline plus equity interest in six refined
product pipeline companies with a total of approximately 8,000 miles of
pipeline. These pipeline interests provide CITGO with access to substantial
refinery feedstocks and reliable transportation to refined product markets, as
well as cash flows from dividends. One of the refined product pipelines in which
CITGO has an interest, Colonial Pipeline, is the largest refined product
pipeline in the United States transporting gasoline, jet fuel and diesel/#2 fuel
from the Gulf Coast to the mid-Atlantic and eastern seaboard states.
In early 1997, CITGO sold approximately 520 miles of crude oil
gathering/trunk lines in Texas and Louisiana.
Employees
CITGO and its subsidiaries have a total of approximately 5,300
employees, approximately 1,900 of whom are covered by 17 union contracts.
Approximately 1,700 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant blending and
packaging plant and at other refined product terminals.
Effective February 28, 1998, the stock of Petro-Chemical
Transport, Inc. ("PCT"), a wholly owned subsidiary of CITGO, was sold. As a
result of this sale, approximately 420 employees were terminated. PCT's
operations were not material to CITGO.
PDV Midwest Refining, L.L.C.
Since 1989, the Company through various subsidiaries has had a
50% interest in UNO-VEN. On May 1, 1997 pursuant to the Partnership Interest
Retirement Agreement, PDV America and Union Oil Company of California ("UNOCAL")
transferred certain assets and liabilities of UNO-VEN to PDVMR, a subsidiary of
the Company, as a result of the liquidation of the Company's 50% ownership
interest in UNO-VEN. The assets included a 160 thousand barrel per day refinery
in Lemont, Illinois, as well as eleven product distribution terminals and 89
retail sites located in the Midwest. CITGO
15
operates these facilities and purchases substantially all of the products
produced at the refinery. See Note 9 of Notes to Consolidated Financial
Statements.
The foregoing transaction increased the assets of the
consolidated Companies by $494 million on May 1, 1997, net of the Companies'
carrying amount of its investment in UNO-VEN. PDVMR's sales of $942 million for
the period May 1, 1997 to December 31, 1997 were primarily to CITGO and,
accordingly, these were eliminated in consolidation. However, the operations of
PDVMR, including its investment in Needle-Coker (as defined below) for the
period from May 1, 1997 to December 31, 1997, contributed approximately $43
million to PDV America's consolidated income before interest and taxes in 1997,
as compared to the Companies' equity in the earnings of UNO-VEN of $23 million
and $15 million for 1996 and 1995, respectively.
Refining
The Lemont refinery, which in its present configuration began
operations in 1970, is one of the most recently designed and constructed
refineries in the United States. Its high conversion design enables it to
convert its crude oil input with high sulphur and high metal content into
transportation fuels, primarily gasoline, diesel fuel and jet fuel. The Lemont
refinery has a Solomon Process Complexity factor of 11.3 (as compared to an
average of 13.8 for U.S. refineries in the most recently available Solomon
Associates, Inc. survey). The Lemont refinery has a rated capacity of 160 MBPD
of crude oil and is capable of processing heavy crude oil with significant
operating flexibility, converting sour crudes into a flexible slate of higher
value-added refined products, such as high octane unleaded gasoline. During
1997, the Lemont refinery increased utilization due primarily to improved
maintenance of operating equipment and efficient methods of operation.
16
The following table shows refining capacity, refinery input
and product yield at the Lemont refinery for the three years in the period ended
December 31, 1997.
Lemont Refinery Production
Year Ended December 31,
------------------------------------------------
1997 1996 1995
\ ------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 160 153 153
Refinery Input
Crude oil 155 89.1% 146 88.4% 139 87.4%
Other feedstocks 19 10.9 19 11.6 20 12.6
-------------------------------------------------
Total 174 100.0% 165 100.0% 159 100.0%
=================================================
Product Yield
Light fuels
Gasoline 93 54.1% 87 53.0% 86 54.5%
Jet Fuel 7 4.1% 7 4.3 8 5.1
Diesel/#2 Fuel 41 23.8% 37 22.6 34 21.4
Industrial Products &
Petrochemicals 31 18.0% 33 20.1 30 19.0
-------------------------------------------------
Total 172 100.0% 164 100.0% 158 100.0%
=================================================
Utilization of Rated
Refining Capacity 97% 95% 91%
- -----------------------
(1) At year end.
Sour crude oil runs were 100% of the total crude runs in each
of the years 1997, 1996 and 1995. PDVMR currently intends to continue to process
sour crude oil exclusively.
Petrochemical products at the Lemont refinery include benzene,
toluene and xylene, plus a range of ten different aliphatic solvents.
PDVMR owns a 25% interest in a partnership which operates a
needle coke production facility adjacent to the Lemont refinery (the "Needle
Coker"). The remaining 75% interest is held by various subsidiaries of UNOCAL.
The Needle Coker, which began production in 1985 and has a production capacity
of 117,000 tons per year, converts certain residual crude products into a highly
specialized form of coke known as "calcined needle coke". This product is used
exclusively as a raw material in the manufacturing of graphite electrodes, which
are used in electric arc furnaces to melt down and refine scrap steel. In 1997,
the Needle Coker produced approximately 110,000 tons of calcined needle coke.
17
Crude Oil and Refined Product Purchases
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
significant portion of the crude oil refined at the Lemont refinery is supplied
by PDVSA to PDVMR under a crude oil supply agreement, effective as of April 23,
1997, that expires in the year 2002 and thereafter is renewable annually. For
the eight months ended December 31, 1997, PDVMR purchased 78 MBPD under this
agreement. The contract calls for delivery of a guaranteed volume of 100 MBPD;
however, PDVMR is not required to purchase a set minimum. Prior to that date and
the subsequent transfer of assets from UNO-VEN to PDVMR as discussed above,
UNO-VEN purchased crude oil from PDVSA under an agreement with a base volume of
135 MBPD. For the first four months of 1997 and in 1996 and 1995, UNO-VEN
purchased 160, 143 and 135 MBPD, respectively, under this contract. Crude oil is
supplied to the Lemont refinery mainly through the LOCAP/Capline/Chicap common
carrier pipeline system, which connects the Lemont refinery to the LOOP, where
vessels discharge. The refinery also has access to two alternate pipeline
systems for the delivery of crude oil from the Gulf Coast and Canada. PDVMR does
not have any direct equity interest in any crude oil pipelines.
Marketing
Subsequent to the transfer of assets on May 1, 1997,
substantially all of PDVMR's products are sold to and marketed by CITGO. The
following table shows UNO-VEN's revenues from each of its product categories for
the two years in the period ended December 31, 1996 and the four months ended
April 30, 1997.
UNO-VEN Refined Product Sales
Four Months
Ended April 30, Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
($ in millions, except as otherwise indicated)
Light Fuels $476 86.2% $1,406 85.7% $1,126 85.5%
Industrial Products
and Petrochemicals 57 10.3 179 10.9 145 11.0
Lubricants 19 3.5 56 3.4 46 3.5
-----------------------------------------------------
Total $552 100.0% $1,641 100.0% $1,317 100.0%
=====================================================
18
The following table provides a breakdown of the light fuel
sales made by product type for the two years in the period ended December 31,
1996 and for the four months ended April 30, 1997.
UNO-VEN Light Fuel Sales
Four Four
Months Months
Ended Year Ended Ended Year Ended
April 30, December 31, April 30, December 31
-----------------------------------------------------------
1997 1996 1995 1997 1996 1995
-----------------------------------------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $327 $952 $787 $474 $1,374 $1,341
Jet Fuel 9 34 35 9 52 66
Diesel#2 fuel 140 420 304 219 647 585
-------------------------------------------------------------
Total $476 $1,406 $1,126 $702 $2,073 $1,992
=============================================================
Service Agreement with CITGO
CITGO operates the Lemont refinery in accordance with a
Refinery Operating Agreement (the "Refinery Operating Agreement") between CITGO
and PDVMR. The Refinery Operating Agreement sets out the duties, obligations and
responsibilities of the operator and the Company with respect to the operation
of the refinery. CITGO provides all administrative functions to the Company,
including cash management, legal and accounting services. The term of the
agreement is 60 months, commencing May 1, 1997, and shall be automatically
renewed for periods of 12 months (subject to early termination as provided in
the Refinery Operating Agreement).
Environment and Safety
Environment-General
Beginning in 1994, the U.S. refining industry was required to
comply with stringent product specifications under the 1990 Clean Air Act
("CAA") Amendments for reformulated gasoline and low sulphur diesel fuel, which
necessitated additional capital and operating expenditures, and altered
significantly the U.S. refining industry and the return realized on refinery
investments. In addition, numerous other factors affect the Company's plans with
respect to environmental compliance and related expenditures. See "Factors
Affecting Forward Looking Statements".
In addition, the Companies are subject to various federal,
state and local environmental laws and regulations which may require the
Companies to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by the Companies or other
parties. Management believes the Companies are in compliance with these laws and
regulations in all material respects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
19
The Companies' accounting policy establishes environmental
reserves as probable site restoration and remediation obligations become
reasonably capable of estimation. At December 31, 1997 and 1996, the Companies
had approximately $58 million and $56 million, respectively, of environmental
accruals included in other noncurrent liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, the Companies' management believes that these accruals are
sufficient to address the Companies' environmental clean-up obligations.
Conditions which require additional expenditures may exist for
various Companies' sites including, but not limited to, the Companies' operating
refinery complexes, closed refineries, service stations and crude oil and
petroleum product storage terminals. The amount of such future expenditures, if
any, is indeterminable.
Environment-CITGO
In 1992, an agreement was reached between CITGO and a former
owner concerning a number of environmental issues. Pursuant to this agreement,
the former owner will continue to share the costs of certain specific
environmental remediation and certain tort liability actions based on ownership
periods and specific terms of the agreement. Also, in 1992, CITGO reached an
agreement with a state agency to cease usage of certain surface impoundments at
CITGO's Lake Charles, Louisiana refinery by 1994. A mutually acceptable closure
plan was filed with the state in 1993. CITGO and a 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 a state agency revising
the 1993 closure plan. A ruling on this proposal is expected in 1998 and actual
closure is expected to be completed during 2000.
While CITGO is named as a potentially responsible party
("PRP") at a number of "Superfund" sites, pursuant to the abovementioned 1992
agreement, OXY USA, Inc. and Occidental have agreed to indemnify CITGO with
respect to Superfund damages where offsite hazardous waste disposal occurred
prior to September 1, 1983. Based on publicly available information, PDV America
believes that Occidental has the financial capability to fulfill all of its
responsibilities under this agreement. Accordingly, PDV America believes that
CITGO's offsite liability exposure under the federal Superfund and similar state
laws with respect to these sites is not material. In addition, under the 1992
agreement, CITGO assumed responsibility for certain other environmental
contamination at certain terminal properties in return for cash payments and
other agreements.
During 1994 and 1995, CITGO Asphalt Refining Company ("CARCO")
received two Notices of Violation and two Compliance Orders from the U.S.
Environmental Protection Agency ("EPA") relating to the operation of certain
units at the Paulsboro Refinery. A Consent Order resolving these issues was
entered by a federal court in February 1997. Under the terms of the Consent
Order, CARCO paid a $1,230,000 penalty. The Consent Order will terminate January
30, 1998.
On September 30, 1996, CITGO received a Notice of Violation
from the EPA, Washington, D.C. alleging violations of the CAA in the Chicago
Gary Lake County, Illinois-Indiana-Wisconsin area, arising from the sale of
gasoline that failed to meet the applicable minimum or maximum oxygen content. A
Settlement Agreement resolving this matter was entered into with the EPA in
December, 1997. Under the terms of the Settlement Agreement, CITGO paid a
penalty of $15,869.
20
Increasingly stringent regulatory provisions periodically
require additional capital expenditures. During 1997, CITGO expended
approximately $32 million for environmental and regulatory capital improvements
in its operations. PDV America currently anticipates that CITGO will spend
approximately $290 million for environmental and regulatory capital projects
over the five-year period 1998-2002. These estimates may vary due to a variety
of factors. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Environment - PDVMR
In accordance with the Partnership Interest Retirement
Agreement, the Company, VPHI Midwest, Inc., a subsidiary of the Company, and
PDVMR took on joint and several liability for all environmental matters relating
to past operations of UNO-VEN.
During 1997, PDVMR expended approximately $2 million for
environmental and regulatory capital improvements in its operations and
currently anticipates spending approximately $34 million for environmental and
regulatory capital projects over the five-year period 1998-2002. These estimates
may vary due to a variety of factors. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Safety
Due to the nature of petroleum refining and distribution, both
CITGO and PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs, and PDV America believes that both companies are in
substantial compliance with occupational health and safety laws.
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of
business are pending against the Companies. Included among these is litigation
against CITGO by a number of current and former employees and applicants on
behalf of themselves and a class of similarly situated persons asserting claims
under federal and state laws of racial discrimination in connection with the
employment practices at CITGO's Lake Charles, Louisiana refining complex. The
plaintiffs seek injunctive relief and monetary damages and have appealed the
Court's denial of class certification. The initial trials on this litigation are
not currently included in the trial docket.
In a case currently pending in the United States District
Court for the Northern District of Illinois, Oil Chemical & Atomic Workers,
Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert
claims against the Company, PDVSA, CITGO, PDVMR, and UNOCAL pursuant to Section
301 of the Labor Management Relations Act ("LMRA"). This complaint alleges that
the Company and the other defendants constitute a single employer, joint
employers or alter-egos for the purposes of the LMRA, and are therefore bound by
the terms of a collective bargaining agreement between UNO-VEN and Local 7-517
covering certain production and maintenance employees at a Lemont, Illinois
petroleum refinery. On May 1, 1997, in a transaction involving the former
partners of
21
UNO-VEN, the Lemont refinery was transferred to PDVMR. Pursuant to an operating
agreement with PDVMR, CITGO became the operator of the Lemont refinery, and
employed the substantial majority of employees previously employed by UNO-VEN
pursuant to its initial terms and conditions of employment, but did not assume
the existing labor agreement. The union seeks compensation for monetary
differences in medical, pension and other benefits between the CITGO and UNO-VEN
plans and reinstatement of all UNO-VEN benefit plans. The union also seeks to
require CITGO to abide by the terms of the collective bargaining agreement
between the union and UNO-VEN. As an alternative claim against all defendants
but CITGO, the union alleges that if the labor agreement is not binding on
CITGO, there was a violation of the Federal Workers Adjustment Retraining and
Notification Act by failure to give 60 days' written notice of termination to
approximately 400 UNO-VEN employees; this would allegedly entitle such workers
to 60 days' pay and benefits, which are estimated to be approximately $6
million. The trial of this case currently is set for July 1998.
On May 12, 1997, an explosion and fire occurred at CITGO's
Corpus Christi refinery. There were no reports of serious personal injuries.
Affected units were shut down for repair and were returned to full service in
early August, 1997. The Company has property damage and business interruption
insurance which related to this event. As a result, the property damage and
business interruption did not have a material adverse effect on the Company's
financial condition or results of operations. There are presently five lawsuits
against CITGO pending in federal and state courts in Corpus Christi, Texas,
alleging property damage, personal injury and punitive damages allegedly arising
from the incident and other similar lawsuits have been threatened. Approximately
6,000 individual claims have been received by CITGO allegedly arising from the
incident.
A class action lawsuit is pending against the Company and
other operators and owners of nearby heavy industrial facilities which was filed
in state court in Corpus Christi, Texas in 1993 on behalf of property owners in
the vicinity of these facilities. The certification of this case as a class
action in 1995 was appealed to the Texas Supreme Court and a decision is
pending. This lawsuit asserts property damage claims and diminution in property
values allegedly resulting from environmental contamination in the air, soil,
and groundwater, occasioned by ongoing operations of the Company's Corpus
Christi refinery and the respective industrial facilities of the other
defendants. Two related personal injury and wrongful death lawsuits were filed
in 1996 and are in preliminary stages of discovery at this time. In 1997, CITGO
signed an agreement to settle the property damage class action lawsuit for
approximately $17.3 million which included the purchase of approximately 290
properties in an adjacent neighborhood. Of this amount, $15.7 was expensed in
1997. CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear the CITGO's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
CITGO. For these reasons, CITGO opposed the approval and enforcement of the
settlement agreement as proposed to be revised and enforcement has now been
stayed pending a ruling by the Texas Supreme Court. If the settlement agreement
is enforced, CITGO could be liable for the full settlement amount of $17.3
million. CITGO is pursuing an independent program to purchase the properties
which were the subject of the purchase provisions of the settlement agreement.
In June 1997, CITGO settled litigation with a contractor
which had claimed additional compensation for sludge removal and treatment at
CITGO's Lake Charles, Louisiana refinery. The
22
settlement did not have a material effect on CITGO's financial position or
results of operations. CITGO believes that it has no further exposures to losses
related to this matter.
In July 1997, the Texas Natural Resources Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's
rules relating to operating a hazardous waste management unit without permit and
recommended a penalty of $699,200. CITGO Refining disagrees with these
allegations and the proposed penalties and is negotiating with the TNRCC to
settle this matter.
In addition, the Companies are subject to various federal,
state and local environmental laws and regulations which may require the
Companies to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by the Companies or other
parties. Management believes the Companies are in compliance with these laws and
regulations in all material aspects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
PDV America, VPHI Midwest, Inc. and PDVMR jointly and
severally, have agreed to indemnify UNO-VEN and certain other related entities
against certain liabilities and claims. See "Business -- Environment and Safety
- -- Environment -- PDVMR".
The Companies are vigorously contesting or pursuing, as
applicable, such lawsuits and claims and the Companies believe that its
positions are sustainable. The Companies have recorded accruals for losses they
consider probable and reasonably estimable. However, due to uncertainties
involved in litigation, including the significant matters noted above, the
ultimate outcomes are not reasonably predictable, and the losses, if any, are
not reasonably estimable. If such lawsuits and claims were to be determined in a
manner adverse to the Companies, and in amounts in excess of the Companies'
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Companies results of operations in a given
reporting period. The term "reasonably possible" is used herein to mean that the
chance of a future transaction or event occurring is more than remote but less
than likely. However, based upon management's current assessments of these
lawsuits and claims and that provided by counsel in such matters and the capital
resources available to the Companies, management believes that the ultimate
resolution of these lawsuits and claims would not exceed the aggregate of the
amounts accrued in respect of such lawsuits and claims and the insurance
coverages available to the Companies by a material amount and are not expected
to have a material adverse effect on the Companies' consolidated financial
position, results of operation, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not Applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded. All of the
Company's common stock is held by PDV Holding, Inc. ("PDV Holding"), a Delaware
corporation, whose ultimate parent is PDVSA. PDV America did not declare or pay
any dividends in 1997 and 1996. In January 1998, PDV America declared and paid a
dividend of $110 million to PDV Holding.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical
consolidated financial and operating data of PDV America as of the end of and
for each of the five years in the period ended December 31, 1997. The following
table should be read in conjunction with the consolidated financial statements
of PDV America as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, included in Item 8, which have been
audited by Deloitte & Touche LLP, independent auditors. The audited consolidated
financial statements of PDV America for each of the five years in the period
ended December 31, 1997 have been prepared on the basis of United States
generally accepted accounting principles. The consolidated financial statements
of PDV America at December 31, 1995, 1994 and 1993 and for the years ended
December 31, 1994 and 1993, not separately presented herein, have also been
audited.
24
Year Ended December 31,
-----------------------------------------------------------------------------
1997(9) 1996 1995(7) 1994 1993(8)
-----------------------------------------------------------------------------
($ in millions)
Income Statement Data
Sales $13,622 $12,952 $10,522 $9,247 $9,112
Equity in earnings (losses) of affiliates (1) 69 45 48 55 52
Net revenues 13,754 13,071 10,647 9,374 9,193
Income before extraordinary charges
and cumulative effect of accounting
changes 228 138 143 205 155
Extraordinary gain (charges) (2) -- -- 3 (2) --
Cumulative effect of accounting
changes (3) -- -- -- (4) (235)
Net income (loss) 228 138 146 199 (80)
Ratio of Earnings to Fixed Charges (4) 2.30x 1.94x 2.04x 2.65x 2.57x
Balance Sheet Data
Total assets $7,244 $6,938 $6,220 $5,770 $5,138
Long-term debt (excluding current
portion) (5) 2,164 2,595 2,297 2,155 2,069
Total debt (6) 2,526 2,755 2,428 2,279 2,117
Shareholder's equity 2,589 2,111 1,973 1,812 1,584
- -------------------------
(1) Includes the equity in the earnings of UNO-VEN of $0.4 million, $23
million, $15 million, $27 million and $22 million for the four months ended
April 30, 1997 and the years ended December 31, 1996, 1995, 1994 and 1993,
respectively.
(2) Represents extraordinary gain or (charges) for the early extinguishment of
debt (net of related income tax provision of $2 million and income tax
benefits of $1 million in 1995 and 1994, respectively).
(3) Represents the cumulative effect of the accounting change to Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits" in 1994 (net of related income tax benefits of $3
million), the cumulative effect of the accounting change to SFAS No. 109,
"Accounting for Income Taxes" in 1993 and the cumulative effect of the
accounting change to SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" in 1992 (net of related income
tax benefits of $51 million).
(4) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes and cumulative effect of
accounting changes plus fixed charges (excluding capitalized interest),
amortization of previously capitalized interest and certain adjustments to
equity in income of affiliates. "Fixed charges" include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of
operating lease rent expense deemed to be representative of interest.
(5) Includes long-term debt to third parties, note payable to affiliate and
capital lease obligations.
(6) Includes short-term bank loans, current portion of capital lease
obligations and long-term debt, long-term debt, capital lease obligations
and note payable to affiliate.
(7) Includes operations of Cato Oil and Grease Company since May 1, 1995.
(8) Includes operations of the Savannah Asphalt Refinery since April 30, 1993.
(9) Includes operations of PDVMR since May 1, 1997.
25
ITEM 7. 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
Consolidated Financial Statements of PDV America included elsewhere herein.
Petroleum industry operations and profitability are influenced
by a large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
directly limiting their profits. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. PDV America's consolidated operating results are affected both
by industry-specific factors and by company-specific factors such as the success
of wholesale marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the
refining and marketing business in the United States are primarily dependent
upon producing and selling quantities of refined products at margins sufficient
to cover fixed and variable costs. The refining and marketing business is
characterized by high fixed costs resulting from the significant capital outlays
associated with refineries, terminals and related facilities. This business is
also characterized by substantial fluctuations in variable costs, particularly
costs of crude oil, feedstocks and blending components, and the prices realized
for refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
In general, prices for refined products are significantly
influenced by the price of crude oil, feedstocks and blending components.
Although an increase or decrease in the price for crude oil, feedstocks and
blending components generally results in a corresponding change in prices for
refined products, there is usually a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to changes in crude
oil, feedstock or blending component prices. A substantial or prolonged increase
in crude oil prices without a corresponding increase in refined product prices,
a substantial or prolonged decrease in refined product prices without a
corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect
on the Company's earnings and cash flows, including inventory valuation
adjustments. PDV America is insulated to a substantial degree from the price
volatility that the industry experiences due to the pricing mechanism in the
long-term crude oil supply agreements (expiring in the year 2002 through 2013)
that it has with PDVSA, which are designed to provide a relatively stable level
of gross margin on crude oil supplied by PDVSA. CITGO's supply agreements are
designed to reduce the volatility of earnings and cash flows from CITGO's
refining operations by providing a relatively stable level of gross margin on
crude oil supplied by PDVSA. This supply represented approximately 58% of the
crude oil processed in refineries operated by CITGO, including PDVMR, in the
year ended December 31, 1997. However, CITGO also purchases significant
26
volumes of refined products to supplement the production from its refineries to
meet marketing demands and to resolve logistical issues. PDV America's earnings
and cash flows are also affected by the cyclical nature of petrochemical prices.
Inflation was not a significant factor in the operations of PDV America for the
three years ended 1997. As a result of these factors, the earnings and cash
flows of PDV America may experience substantial fluctuations.
CITGO's revenues accounted for over 99% of PDV America's
consolidated revenues in 1997, 1996 and 1995. PDVMR's sales of $942 million for
the period May 1, 1997 to December 31, 1997 were primarily to CITGO and,
accordingly, these were eliminated in consolidation. However, the operations of
PDVMR, including its investment in Needle-Coker, contributed approximately $53
million to the Companies' consolidated gross margin and $43 million to PDV
America's consolidated income before interest and taxes in 1997.
Effective January 1, 1992, the supply agreements between PDVSA
and CITGO with respect to the Lake Charles, Corpus Christi and Paulsboro
refineries were modified to reduce the price levels to be paid by CITGO by a
fixed amount per barrel of crude oil purchased from PDVSA. Such reductions were
intended to defray CITGO's costs of certain environmental compliance
expenditures. This modification resulted in a decrease in the cost of crude oil
purchased under these agreements of approximately $70 million per year for the
years 1992 through 1994 as compared to the amount that would otherwise have been
payable thereunder. This modification was to expire at December 31, 1996;
however, in 1995, PDVSA and CITGO agreed to adjust this modification so that the
1992 fixed amount per barrel would be reduced and the adjusted modification
would not expire until December 31, 1999. The effect of this adjustment to the
original modification was to increase the cost of crude oil purchased under
these agreements by approximately $22 million and $44 million in 1995 and 1996,
respectively, as compared to the amount that would otherwise have been payable
thereunder based on the original modification (resulting in a net decrease of
approximately $48 million and $26 million in 1995 and 1996, respectively, from
the amount otherwise payable under the agreement prior to the 1992 original
modification). In 1997, the effect of the adjustments to the original
modifications was to reduce the price of crude oil purchased from PDVSA by
approximately $25 million. CITGO anticipates that the effect of the adjustments
to the original modifications will be to reduce the price of crude oil purchased
from PDVSA under these agreements by approximately $25 million per year in 1998
through 1999, in each case as compared to the original modification and without
giving effect to any other factors that may affect the price payable for crude
oil under these agreements. Due to the pricing formula under the supply
agreements, the aggregate price actually paid for crude oil purchased from PDVSA
under these agreements in each of these years will depend primarily upon the
current prices for refined products and certain actual costs of CITGO. These
estimates are also based on the assumption that CITGO will purchase the base
volumes of crude oil under the agreements.
In July 1997, the Company's senior management implemented a
Transformation Program designed to ensure that numerous expense controls,
business information systems and business efficiency initiatives underway are
effectively coordinated to achieve desired results. Included in this program are
reviews of the Company's business units, assets, strategies, and business
processes. These combined actions include expected personnel reductions (the
"Separation Programs"). The cost of the Separation Programs is approximately $22
million for the year ended December 31, 1997. In addition, as part of the
Transformation Program, the first phase of Systems Applications and Products in
Data Processing ("SAP") implementation, which includes the Company's financial
reporting systems went into production on January 1, 1998. Additional SAP
modules are to be implemented throughout 1998 and 1999.
27
The following table summarizes the sources of PDV America's
sales revenues and volumes.
PDV America Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline ....................... $ 7,754 $ 7,451 $ 6,367 11,953 11,308 11,075
Jet fuel ....................... 1,183 1,489 1,163 2,000 2,346 2,249
Diesel/#2 fuel ................. 2,439 2,312 1,356 4,288 3,728 2,730
Petrochemicals, industrial
products and other ............ 1,172 846 831 1,940 1,408 1,572
Asphalt ........................ 398 257 238 749 569 503
Lubricants and waxes ........... 467 426 404 239 220 215
------- ------- ------- ------- ------- -------
Total refined product sales $13,413 $12,781 $10,359 21,169 19,579 18,344
Other sales .................... 209 171 163 -- -- --
------- ------- ------- ------- ------- -------
Total sales ........... $13,622 $12,952 $10,522 21,169 19,579 18,344
======= ======= ======= ======= ======= =======
The following table summarizes PDV America's cost of sales and operating
expenses.
PDV America Cost of Sales and Operating Expense
Year Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
($ in millions)
Crude oil .............................................. $ 3,552 $ 3,053 $ 2,428
Refined products ....................................... 6,739 7,139 5,504
Intermediate feedstocks ................................ 1,240 1,000 898
Refining and manufacturing costs ....................... 940 801 755
Other operating costs and expenses and inventory changes 527 498 481
------- ------- -------
Total cost of sales and operating expenses ............. $12,998 $12,491 $10,066
======= ======= =======
Results of Operations -- 1997 Compared to 1996
Sales revenues and volumes. Sales increased by $670 million,
representing a 5% increase from 1996 to 1997. The increase was due to an
increase in sales volumes of 8% partially offset by an decrease in average sales
prices of 3%. Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet
fuel), excluding bulk sales made for logistical reasons, were up 7% from 1996 to
1997 and their average unit price decreased $0.02. Gasoline sales volumes
increased primarily due to successful marketing efforts, including the net
addition of approximately 335 new independently owned CITGO branded outlets
since December 31, 1996, as well as additional marketers obtained through the
transaction relating to UNO-VEN. See "Business -- PDV Midwest Refining, LLC."
Petrochemical sales volume rose 30% from 1996 to 1997. This increase, combined
with an average increase in unit prices of $0.02, resulted in a 33% increase in
petrochemical sales revenue from 1996 to 1997. Petrochemical sales volumes
increased primarily due to the increased production of xylenes, refinery grade
propylene and polymer grade propylene due to favorable economics. Industrial
products sales volumes increased 40% and average unit prices increased $0.03 for
a 48% increase in industrial products sales revenue from 1996 to 1997. The
increase in industrial products sales volumes was due to the availability of
product for sale from the
28
PDVMR refinery. Asphalt sales revenue increased 55% from 1996 to 1997. The
increase was primarily due to increases in sales volumes, up 32% from 1996 to
1997 and an 18% increase in sales price. The increase in asphalt sales volume is
due primarily to the Company's efforts in production and marketing to take
advantage of Sun Oil Company's withdrawal from the East Coast asphalt market.
Lubricants and wax sales revenue increased 10% from 1996 to 1997 due to
increases in both sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings
of affiliates increased by approximately $24 million, or 53% from $45 million in
1996 to $69 million in 1997. This increase was due primarily to a $43 million
increase in CITGO's equity earnings of LYONDELL-CITGO which was due primarily to
the change in CITGO's interest in LYONDELL-CITGO which increased from
approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997 and
the improvement in LYONDELL-CITGO's operations since completion of its refinery
enhancement project during the first quarter of 1997. Also, subsequent to the
transfer of UNO-VEN assets, the Companies have recorded $4 million of equity in
the earnings of Needle-Coker from the period from May 1, 1997 to December 31,
1997. These were offset by a $23 million decrease in the equity in earnings of
UNO-VEN from $23 million in 1996 to $.5 million for the first four months of
1997. See "--PDV Midwest Refining, LLC" under "Business and Properties" and Note
9 of Notes to Consolidated Financial Statements.
Interest income. Interest income from PDVSA represents
interest income on the $1 billion notes receivable (hereafter "Mirror Notes")
from PDVSA. The Mirror Notes were issued by PDVSA to PDV America in August 1993,
in connection with the Company's issuance of $1 billion of Senior Notes.
Other income (expense). Other income (expense) was $(14.5)
million for the year ended December 31, 1997 as compared to $(3.4) million for
the same period in 1996. The 1997 amount includes $8.7 million in loss reserves
on a lubricants plant and retail properties, a $5.8 write-off of a capital
project, $5.8 million in fees related to the sale of trade accounts, notes and
credit card receivables in June and November 1997 and a $2.6 million write-off
of miscellaneous assets. These items were offset by a net $8.3 million property
insurance recovery relating to the Corpus Christi alkylation unit fire during
the third quarter and a $1.3 million gain on the sale of pipeline assets in the
first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $507 million, or 4% from 1996 to 1997. Lower
crude oil purchases in 1997 as compared to 1996 resulted from a 7% decrease in
crude oil prices in 1997 as compared to 1996, and a 3% decrease in purchased
volumes in 1997 as compared to 1996. Higher intermediate feedstock purchases
were attributable to an 18% increase in volumes purchased, partially offset by
2% decrease in prices. Refinery production was higher in 1997 than 1996;
however, due to the increased sales volumes mentioned above, refined product
purchases increased 7%. The increase in refined product purchases includes a 10%
increase in volumes offset by 3% lower refined product prices. The increases in
refining and manufacturing costs are due primarily to increased costs of
purchased fuel and electricity at CITGO's Lake Charles refinery.
The Companies purchase refined products to supplement the
production from their refineries to meet marketing demands and resolve
logistical issues. The refined product purchases represented 52% and 57% of cost
of sales for the years 1997 and 1996, respectively. These refined product
purchases included purchases from LYONDELL-CITGO and Chalmette. The Companies
estimate that margins on purchased products, on average, are lower than margins
on produced products
29
due to the fact that the Companies can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from the Companies 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. The Companies anticipate their purchased product
requirements will continue to increase, in volume and as a percentage of refined
products sold, in order to meet marketing demands, although in the near term,
other than normal refinery turnaround maintenance, the Companies do not
anticipate operational actions or market conditions that might cause a material
change in anticipated purchased product requirements; however, there could be
events beyond the Companies' control that impact the volume of refined products
purchased. See also "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for 1997 was $625 million, or
4.6%, compared to $461 million, or 3.6% for 1996. Gross margins in 1997 were
positively affected by high crude runs during periods of strong refining margins
as well as asphalt and petrochemical activities (in each case, as discussed
above) and the positive contribution from PDVMR's refining operations.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased $42 million, or 25%, due primarily to
increased selling expenses in 1997 including the effect of the change in focus
of the Company's marketing programs initiated in April 1996, and increases in
several other areas including purchasing, administrative services, information
systems corporate executive, credit card and other charges, none of which
increased more than $6 million individually, but in the aggregate increased
approximately $30 million for the year. Additionally, the effect of including
PDVMR's expenses from May 1, 1997 to December 31, 1997 contributed to the
increase.
Interest expense. Interest expense increased $15 million from
1996 to 1997. The increase was primarily due to the public debt and certain
industrial revenue bonds which were outstanding for the entire year in 1997
compared to only a partial year during 1996 and CITGO's revolving bank loan
which had a higher outstanding balance during most of 1997 as compared to 1996.
The increase was also due to debt related to PDVMR.
Income taxes. PDV America's provision for income taxes in 1997
was $106 million, representing an effective tax rate of 32%. In 1996, PDV
America's provision for income taxes was $78 million, representing an effective
tax rate of 36%. The decrease is due primarily to the favorable resolution with
the Internal Revenue Service of a significant tax issue, related to
environmental expenditures, in the second quarter of 1997. The decrease was
partially offset by the recording of a valuation allowance related to a capital
loss carryforward that will more likely than not expire in 1998.
Net income. Net income was $228 million for 1997 and $138
million for 1996.
Results of Operations--1996 Compared to 1995
Sales revenues and volumes. Sales increased by $2,430 million,
representing a 23% increase from 1995 to 1996. The increase was primarily due to
an increase in sales volumes of 7% and an average increase in sales prices of
16%. Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, were up 10% from 1995 to 1996,
and their average unit price increased $0.10. Gasoline sales volumes increased
primarily due to successful marketing
30
efforts, including the net addition of approximately 470 new independently owned
CITGO branded outlets since December 31, 1995. Petrochemical sales volume rose
14% from 1995 to 1996. This increase was offset by an average decrease in unit
prices of $0.16, resulting in a 3% decrease in petrochemical sales revenue from
1995 to 1996. Industrial products sales volumes decreased 31% and average unit
prices increased $0.02 resulting in a 27% decrease in industrial products sales
revenue from 1995 to 1996. Asphalt sales revenues increased 8% from 1995 to
1996. The increase was primarily due to increases in sales volumes. Lubricants
and wax sales revenues increased 5% from 1995 to 1996 due to increases in both
sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings
(losses) of affiliates decreased by approximately $3 million, representing a 7%
decrease, from $48 million in 1995 to $45 million in 1996. This decrease was
primarily due to a $13 million decrease in equity earnings of LYONDELL-CITGO,
partially offset by an increase in the earnings of UNO-VEN of $9 million. Almost
all of the shortfall in LYONDELL-CITGO's earnings was due to lower fuels
margins, lower aromatics prices, higher natural gas prices, operating problems
in the first half of the year and the impact of the expansion project startup on
existing operations. The increase in the earnings of UNO-VEN is due primarily to
higher refining product margins.
Interest income. Interest income from PDVSA represents
interest income on the Mirror Notes from PDVSA. The Mirror Notes were issued by
PDVSA to PDV America in August 1993, in connection with the Company's issuance
of $1 billion of Senior Notes.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $2,425 million, representing a 24% increase,
from 1995 to 1996. Higher crude oil purchases in 1996 as compared to 1995
resulted from a 22% increase in crude oil prices in 1996 as compared to 1995, or
approximately $3.21 per barrel which includes approximately $0.13 per barrel
related to the 1995 adjustments of the PDVSA crude and feedstock supply
agreements discussed in the overview, and a 3% increase in volumes in 1996 as
compared to 1995. Higher costs of intermediate feedstock purchases were
attributable to a 20% increase in prices, partially offset by a 7% decrease in
volumes purchased. Refinery production was higher in 1996 as compared to 1995;
however, due to the increased sales volumes mentioned above, the cost of refined
product purchases increased 30%. The increase in refined product purchases
results from a 13% increase in volumes and a 15% increase in refined product
prices. The increases in refining and manufacturing costs are due primarily to
increased costs of purchased fuel and electricity at CITGO's Lake Charles and
Corpus Christi refineries as well as the additional manufacturing costs related
to the lubricants plant acquired in May 1995.
CITGO purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 55% and 57% of cost of sales for the years
1995 and 1996, respectively. CITGO estimates that margins on purchased products,
on average, are lower than margins on produced products due to the fact that
CITGO can only receive the marketing portion of the total margin received on the
produced refined products. However, purchased products are not segregated from
CITGO-produced products and margins may vary due to market conditions and other
factors beyond the Company's control. As such, it is difficult to measure the
effects on profitability of changes in volumes of purchased products. CITGO
anticipates its purchased product requirements will continue to increase, in
volume and as a percentage of refined products sold, in order to meet marketing
demands. CITGO does not anticipate operational actions or market conditions in
the near
31
term (other than normal refinery turnaround maintenance) which might cause a
material change in anticipated purchased product requirements; however, there
could be events beyond the control of CITGO which impact the volume of refined
products purchased. See also "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for 1996 was $461 million, or
3.6%, compared to $456 million, or 4.3%, for 1995. Gross margins in 1996 were
adversely affected by refinery operations in the first quarter, the scheduled
modifications to the pricing provisions in the crude and feedstock supply
agreements, the decline in petrochemical profitability, increased volumes of
refined products purchased as a percentage of sales volume and increased costs
of purchased fuel and electricity at the refineries throughout the year (in each
case, as discussed above).
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $3 million, representing a 2% increase,
due primarily to increases in salaries and benefits and increased marketing
expenses in 1996 including the effect of the change in focus of CITGO's
marketing programs initiated in April 1996. The primary program in effect
through March 1996 was designed to increase the number of branded outlets and
improve CITGO's overall image. Accordingly, costs were and continue to be
expensed as incurred. The program initiated in April 1996 primarily focuses on
defending market share and increasing volumes sold to existing marketers by
providing an incentive which is earned over time. The accounting for the new
program recognizes the program expenses when the incentives are earned.
Interest expense. Interest expense increased $7.8 million from
1995 to 1996. The increase was due primarily to increased borrowings, offset by
a slightly lower weighted average interest rate on indebtedness.
Income taxes. PDV America's provision for income taxes in 1996
was $78 million, representing an effective tax rate of 36%. In 1995, PDV
America's provision for income taxes was $84 million, representing an effective
tax rate of 37%.
Net income. Net income was $138 million for 1996. Net income
of $146 million for 1995 included an after-tax extraordinary gain of $3 million
on early extinguishment of debt.
Liquidity and Capital Resources
For the year ended December 31, 1997, PDV America's net cash
provided by operating activities totaled approximately $447 million, primarily
reflecting $228 million of net income and $241 million of depreciation and
amortization, offset by net cash used by other items of $22 million. The more
significant changes in other items included the decrease in accounts receivable,
including receivables from affiliates, of approximately $325 million, partially
offset by the increase in accounts payable and other liabilities, including
payables to affiliates, of approximately $320 million and the increase of other
assets of approximately $87 million. The decrease in accounts receivable is due
primarily to the sale of $125 million of CITGO's trade accounts receivable in
June 1997 and the sale of $150 million in credit card receivables in November
1997, proceeds of which were used primarily to make payments on the revolving
bank debt. The decrease in accounts payable is related primarily to a reduction
in the payable related to crude oil and refined products purchased.
32
Net cash used in investing activities in 1997 totaled $298
million, consisting primarily of capital expenditures of $264 million and
investments in LYONDELL-CITGO of $46 million and a loan to LYONDELL-CITGO of
$16.5 million offset by $28 million of proceeds from sales of property, plant
and equipment.
During the same period, consolidated net cash used in
financing activities totaled approximately $146 million, consisting primarily of
proceeds of approximately $250 million from a capital contribution from PDV
America's parent, PDV Holding, which was more than offset by the repayment of
$135 of UNO-VEN notes, repayments of revolving bank loans of $106 million,
repayments of short term bank loans of $50 million, and payments on private
placement notes of $59 million.
The Companies currently estimate capital expenditures for the
years 1998-2002 will total approximately $1.6 billion, exclusive of investments
in LYONDELL-CITGO, as shown in the following table.
Estimated Capital Expenditures - 1998 through 2002(1)
Strategic $ 736 million
Maintenance 381 million
Regulatory/Environmental 475 million
--------------
Total $1,592 million
(1) These estimates may change as future regulatory events unfold.
PDV America's $1 billion senior notes issued in 1993 are
comprised of (i) $250 million 7 1/4% Senior Notes due August 1, 1998, (ii) $250
million of 7 3/4% Senior Notes due August 1, 2000 and (iii) $500 million 7 7/8%
Senior Notes due August 1, 2003 (collectively the "Senior Notes"). Interest on
these notes is payable in semiannual installments of $38 million, representing
approximately $77 million for 1997. PDV America intends to repay the $250
million Senior Notes due August 1, 1998 with the proceeds received from the
maturity of $250 million of Mirror Notes due from PDVSA on July 31, 1998.
As of December 31, 1997, CITGO had an aggregate of $1,257
million of indebtedness outstanding that matures on various dates through the
year 2026. As of December 31, 1997, the contractual commitments to make
principal payments on this indebtedness were $98.2 million, $211.5 million and
$47.1 million for 1998, 1999 and 2000, respectively. The bank credit facility
consists of a $58.8 million term loan, payable in quarterly installments of
principal and interest through December 1999, and a $675 million revolving
credit facility maturing in December 1999, of which $135 million was outstanding
at December 31, 1997. Cit-Con has a separate credit agreement under which $28.6
million was outstanding at December 31, 1997. Other principal indebtedness
consists of (i) $199.7 million in senior notes issued in 1996, (ii) $260 million
in senior notes issued pursuant to a master shelf agreement with an insurance
company, (iii) $235 million in senior notes issued in 1991, (iv) $218.3 million
in obligations related to tax exempt bonds issued by various governmental units,
and (v) $118 million in obligations related to taxable bonds issued by a
governmental unit. See Note 11 of Notes to Consolidated Financial Statements.
The debt instruments of PDV America, PDVMR and CITGO impose
significant restrictions on PDV America's, PDVMR's and CITGO's ability to incur
additional debt, grant liens, make investments, sell or acquire fixed assets,
make restricted payments and engage in other transactions.
33
In addition, restrictions exist over the payment of dividends and other
distributions to PDV America. PDV America and CITGO were in compliance with all
their respective covenants under such debt instruments at December 31, 1997.
As of December 31, 1997, capital resources available to the
Companies included cash on hand, available borrowing capacity under CITGO's
revolving credit facility of $540 million and $3 million for PDVMR in unused
availability under 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. The Companies' management believes
that they have sufficient capital resources to carry out planned capital
spending programs, including regulatory and environmental projects in the near
terms, anticipated operating needs, debt service and to meet currently
anticipated future obligations as they arise. In addition, PDV America intends
that payments received from PDVSA under the Mirror Notes will provide funds to
service PDV America's Senior Notes. The Companies periodically evaluate other
sources of capital in the marketplace and anticipate that long-term capital
requirements will be satisfied with current capital resources and future
financing arrangements. 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 "Factors Affecting Forward
Looking Statements".
PDV America and its direct subsidiaries are also party to a
tax allocation agreement, which is designed to provide PDV America with
sufficient cash to pay its consolidated income tax liabilities.
Derivative Commodity and Financial Instruments
In 1995, 1996 and 1997, the Company used commodity and
financial instrument derivatives to manage defined commodity price and interest
rate risks, which arose out of the Company's core activities. The Company had
only limited involvement with other derivative financial instruments and did not
use them for trading purposes. Beginning in 1998, the Company has been
reevaluating its use of derivative commodity and financial instruments;
therefore, non-hedging activity may increase.
The Company enters into petroleum futures contracts, options
and other over the counter commodity derivatives, primarily to hedge a portion
of the price risk associated with crude oil and refined products. In order for a
transaction to qualify for hedge accounting, the Company requires that the item
to be hedged exposes the Company to price risk and that the commodity contract
reduces that risk and is designated as a hedge. The high correlation between
price movements of a product and the commodity contract in that product is well
demonstrated in the petroleum industry and, generally, the Company relies on
those historical relationships and on periodic comparisons of market price
changes to price changes of futures and options contracts accounted for as
hedges. Gains or losses on contracts which qualify as hedges are recognized when
the related inventory is sold or the hedged transaction is consummated. Changes
in the market value of commodity derivatives which are not hedges are recorded
as gains or losses in the period in which they occur.
The Company also enters into various interest rate swap and
cap agreements to manage its risk related to interest rate changes on its debt.
Premiums paid for purchased interest rate swap and cap agreements are amortized
to interest expense over the terms of the agreements. Unamortized premiums are
included in other assets. The interest rate differentials received or paid by
the Company
34
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place, or are recognized immediately if the hedged
borrowings are no longer held.
The Company's commodity derivatives are generally entered into
through major brokerage houses and traded on national exchanges and can be
settled in cash or through delivery of the commodity. Such contracts generally
qualify for hedge accounting and correlate to market price movements of crude
oil and refined products. Resulting gains and losses, therefore, will generally
be offset by gains and losses on the Company's hedged inventory or future
purchases and sales. The company's derivative commodity activity is closely
monitored by management and contract periods are generally less than 30 days.
Unrealized and deferred gains and losses on these contracts at December 31, 1997
and 1996 and the effects on cost of sales and pretax earnings for 1997, 1996 and
1995 were not material. At times during 1996 and 1995, the Company entered into
commodity derivatives activities that were not related to the hedging program
discussed above. This activity and its results were not material in 1996 or
1995. There was no such activity in 1997.
CITGO has entered into the following interest rate swap
agreements to reduce the impact of interest rate changes on its variable
interest rate debt:
CITGO Interest Rate Swap Agreements
Expiration Fixed Rate Notional Principal Amount
Variable Rate Index Date Paid 1997 1996
- ------------------- --------------- --------- ----------------------------
(in thousands)
One-month LIBOR September 1998 4.85% $ 25,000 $ 25,000
One-month LIBOR November 1998 5.09 25,000 25,000
One-month LIBOR May 2000 6.28 25,000 25,000
J. J. Kenny May 2000 4.72 25,000 25,000
J. J. Kenny February 2005 5.30 12,000 12,000
J. J. Kenny February 2005 5.27 15,000 15,000
J. J. Kenny February 2005 5.49 15,000 15,000
------------ ----------
$ 142,000 $ 142,000
============ ========--
PDVMR has non-taxable variable rate pollution control bonds,
with interest, currently paid monthly. The bonds have one payment at maturity in
the year 2008 to retire the principal, and principal and interest payments are
guaranteed by a $20.3 million letter of credit. An interest rate swap agreement,
based upon a notional amount of $19.9 million fixes the variable rate at 5.36%
until October 26, 1998.
The fair value of the interest rate swap agreements in place
at December 31, 1997, based on the estimated amount that CITGO would receive or
pay to terminate the agreement as of that date, taking into account current
interest rates was an unrealized loss of approximately $2.9 million. In
connection with the determination of such fair market value, the Companies
consider the creditworthiness of the counterparties but no adjustment was
determined to be necessary as a result.
Interest expense includes $0.8 million, $1.1 million and $0.1
million in 1997, 1996 and 1995, respectively, related to interest paid on these
agreements. During 1995, CITGO converted $25 million of variable rate debt to
fixed rate borrowings and terminated the interest rate swap agreement
35
matched to the variable rate debt. Other income in 1995 included a $2.4 million
gain related to the termination of this interest rate swap agreement. There were
no transactions of this type in 1996 or 1997.
During 1995, CITGO entered into a 9% interest rate cap
agreement with a notional principal amount of $25 million, a reference rate of
three-month LIBOR, and an expiration date of February 1997. The effect of this
agreement was not material to the Company's consolidated results of operations
in 1997, 1996 or 1995.
Neither CITGO nor the counterparties are required to
collateralize their obligations under these derivative commodity and financial
instruments. CITGO is exposed to credit loss in the event of nonperformance by
the counterparties to these agreements, but has no off-balance-sheet credit risk
of accounting loss for the notional amounts. CITGO does not anticipate
nonperformance by the counterparties, which consist primarily of major financial
institutions, at December 31, 1997.
New Accounting Standards
Environmental expenditures that relate to current or future
revenues are expensed or capitalized as appropriate. Expenditures that relate to
an existing condition caused by past operations and do not contribute to current
or future revenue generation are expensed. Liabilities are recorded when
environmental assessments and/or cleanups are probable and the costs can be
reasonably estimated. Environmental liabilities are not discounted to their
present value. Subsequent adjustments, to estimates to the extent required, may
be made as more refined information becomes available. Effective January 1,
1997, the Company adopted Statement of Position 96-1 - "Environmental
Remediation Liabilities" ("SOP 96-1"). The statement provides guidance on
environmental liabilities and disclosures. The adoption of SOP 96-1 did not have
a material effect on the consolidated financial position or results of
operations of the Company.
Effective for the Company's year ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards No. 129, "Disclosure
of Information About Capital Structure" ("SFAS No. 129"). SFAS No. 129
establishes standards for disclosing information about the Company's capital
structure. The adoption of this standard related to disclosure within the
financial statements and did not have a material effect on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") which is effective for the Company's
fiscal year ending December 31, 1998. The statement addresses the reporting and
display of comprehensive income and its components. The Company does not
currently believe the adoption of SFAS No. 130 will result in material
differences between comprehensive income and net income.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 31") which is effective for the fiscal year
ending December 31, 1998. SFAS No. 131 modifies current segment reporting
requirements and establishes, for public companies, criteria for reporting
disclosures about a company's products and services, geographic areas and major
customers in annual and interim financial statements. The Company is unable to
determine the full extent of disclosure changes that may result from adoption of
SFAS No.
36
131 because of the potential for change as a result of the Company's
Transformation Program (see discussion on page 26), which began in July 1997.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132. "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") which is effective for the Company's
fiscal year ending December 31, 1998. The statement revises current employers'
disclosure requirements for pensions and other postretirement benefits. It does
not change the measurement or recognition of those plans.
Year 2000 Compliance
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000 Compliance
issue. As the year 2000 approaches, such systems may be unable to accurately
process certain data-based information.
The Companies are replacing major elements of their
information systems by implementing Systems, Applications and Products in Data
Processing ("SAP"). The first phase of SAP implementation, which included the
financial reporting systems, was brought into production on January 1, 1998.
Additional SAP modules will be implemented throughout 1998 and 1999. The total
estimated cost of the SAP implementation is approximately $111 million which
includes software, hardware reengineering and change management. Costs incurred
relating to this project are either capitalized or expensed as incurred in
accordance with generally accepted accounting principles. Management has
determined that SAP is an appropriate solution to the Year 2000 Compliance issue
related to the systems on which SAP is implemented.
The Companies estimate that $1 million will be spent in 1998
and 1999 to address the Year 2000 Compliance issue by testing, upgrading or
replacing its information systems which will not be replaced by SAP. In
addition, approximately $3 million will be spent in 1998 and 1999 to determine
the nature and cost of upgrades or replacements necessary to address the Year
2000 Compliance issue in equipment other than information systems and to assess
the extent to which the Company is vulnerable to any third party Year 2000
Compliance issues. These efforts are led by a CITGO team supplemented by
external resources. The cost to upgrade and/or replace such equipment and to
address any third party Year 2000 Compliance issues is not known at this time.
Although management believes solutions and alternatives to the Year 2000
Compliance issue in these systems will be identified, there is no guarantee
thereof or that the systems which will not be replaced by SAP and other
equipment will all be Year 2000 compliant before the end of 1999. This could
result in a system failure or disruptions of operations which may have a
material adverse effect on the Company. Further, there can be no guarantee that
the systems of other companies on which the Company's systems rely will be
upgraded or replaced on a timely basis, or that a failure to convert by another
company or a conversion that is incompatible with the Company's systems would
not have a material adverse effect on the Company.
37
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and the Independent Auditors' Report are
included in Item 14a of this report. The Quarterly Results of Operations are
reported in Note 17 of Notes to Consolidated Financial Statements included in
Item 14a.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The directors and executive officers of PDV America are as
follows:
Name Age Position
- ---- --- --------
Claus Graf 59 Chairman of the Board and Director
Alonso Velasco 56 President, Chief Executive and Financial
Officer and Director
Angel E. Olmeta 60 Vice President and Director
Jose M. Portas 61 Secretary and Director
Francisco Bustillos 45 Treasurer and Chief Accounting Officer
Directors are elected to serve until their successors are duly
elected and qualified. Executive officers are appointed by and serve at the
discretion of the Board of Directors.
Claus Graf has been a director of PDV America and Chairman of
the Board since October 1994. In March 1994, Mr. Graf was appointed a Vice
President of PDVSA. From 1991 to 1994, he served as a Vice President of
Corpoven, S.A., and, prior to that time, he was Production and Exploration
Coordinator of PDVSA.
Alonso Velasco has been a director of PDV America since 1991
and President, Chief Executive and Financial Officer since 1993. Mr. Velasco was
Control and Finance Coordinator of PDVSA from 1991 until March 1994, at which
time he was appointed a director of PDVSA. Between 1987 and 1991, he was a
director of Interven, S.A., an affiliate of PDVSA.
Angel E. Olmeta has been a director of PDV America and Vice
President since October 1994. Mr. Olmeta has been a director of CITGO since 1986
and was its Executive Vice President and Chief Operating Officer from 1991 until
1994. He was Managing Director of Petroleos de Venezuela (USA) Corp. in New York
from 1987 to 1991.
Jose M. Portas has been a director of PDV America since 1986
and Secretary since 1987. Mr. Portas worked with various subsidiaries of PDVSA
in Venezuela from 1976 until 1986.
Francisco Bustillos has been Treasurer and Chief Accounting
Officer of PDV America since March 1996. Mr. Bustillos was appointed the
Corporate Finance Functional Manager of PDVSA in November 1995. Prior to that
time, he was a Finance Manager with Maraven, S.A., an affiliate of PDVSA, and,
throughout his career, he has held numerous positions in accounting and finance
at Maraven, S.A. and other PDVSA affiliates.
PDV America's Board of Directors currently has no committees.
39
ITEM 11. EXECUTIVE COMPENSATION
For the year ended December 31, 1997, the directors and
executive officers of PDV America received compensation in the aggregate of
approximately $1,000,000.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
PDV America is a wholly owned indirect subsidiary of PDVSA. As
a result, PDVSA, either directly or indirectly, nominates and selects the
members of the Board of Directors of PDV America and its subsidiaries. Certain
members of the Board of Directors of PDV America are also directors or executive
officers of PDVSA.
CITGO and PDVMR have entered into several transactions with
PDVSA or other affiliates of PDVSA, including crude oil and feedstock supply
agreements, agreements for the purchase of refined products and transportation
agreements. These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO and PDVMR for a fixed
period, ranging from five to 25 years. The supply agreements differ somewhat for
each entity and each refinery but generally incorporate formula prices based on
the market value of a slate of refined products deemed to be produced from each
particular grade of crude oil or feedstock, less (i) certain deemed refining
costs; (ii) certain actual costs, including transportation charges, import
duties and taxes; and (iii) a deemed margin, which varies according to the grade
of crude oil or feedstock delivered. Under each supply agreement, deemed margins
and deemed costs are adjusted periodically by a formula primarily based on the
rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period,
the actual refining margin earned by a purchaser under the various supply
agreements will vary depending on, among other things, the efficiency with which
such purchaser conducts its operations during such period. These supply
agreements are designed to reduce the inherent earnings volatility of the
refining and marketing operations of CITGO and PDVMR. Prior to 1995, certain
costs were used in the CITGO supply agreement formulas, aggregating
approximately $70 million per year, which were to cease being deductible after
1996. Commencing in the third quarter of 1995, a portion of such deductions were
deferred from 1995 and 1996 to the years 1997 through 1999. As a result of the
deferral, crude oil costs for 1995 increased by approximately $22 million, which
is included in cost of sales and operating expenses, and will increase
approximately $44 million for the year 1996 under these agreements. In 1997, the
effect of the adjustments to the original modifications was to reduce the price
of crude oil purchased from PDVSA by approximately $25 million. The Company
anticipates that the effect of the adjustments to the original modifications
will be to reduce the price of crude oil purchased from PDVSA under these
agreements by approximately $25 million per year in 1998 and 1999, in each case
as compared to the original modification and without giving effect to any other
factors that may affect the price payable for crude oil under these agreements.
Due to the pricing formula under the supply agreements, the aggregate price
actually paid for crude oil purchased from PDVSA under these agreements in each
of these years will depend primarily upon the current prices for refined
products and certain actual
40
costs of CITGO. These estimates are also based on the assumption that CITGO will
purchase the base volumes of crude oil under the agreements.
LYONDELL-CITGO is a Texas limited liability company which owns
and operates a 265 MBPD refinery in Houston, Texas. LYONDELL-CITGO was formed in
1993 by subsidiaries of CITGO and Lyondell, referred to as the owners. CITGO
contributed cash during the years 1993 through 1997 for a participation interest
and other commitments related to LYONDELL-CITGO's refinery enhancement project
and Lyondell contributed the Houston refinery and related assets for the
remaining participation interest. The refinery enhancement project to increase
the refinery's heavy crude oil high conversion capacity was substantially
completed at the end of 1996 with an in-service date of March 1, 1997. The heavy
crude oil processed by the Houston refinery is supplied by PDVSA under a
long-term crude oil supply contract through the year 2017, and CITGO purchases
substantially all of the refined products produced at the Houston refinery under
a long-term contract. See Note 2 of Notes to Consolidated Financial Statements.
CITGO's participation interest in LYONDELL-CITGO increased
from approximately 13% at December 31, 1996 to approximately 42% on April 1,
1997, in accordance with agreements between the owners concerning such interest.
CITGO has a one-time option for 18 months from April 1, 1997 to increase, for an
additional investment, its participation interest to 50%.
CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The
notes bear interest at market rates and are due July 1, 2003. These notes are
included in other assets at December 31, 1997.
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.
On May 1, 1997, PDV America and UNOCAL closed a transaction
relating to UNO-VEN. The transaction transferred certain assets and liabilities
to PDV Midwest Refining LLC ("PDVMR"), a subsidiary of PDV America in
liquidation of PDV America's 50% ownership interest in UNO-VEN. The assets
include a refinery in Lemont, Illinois, as well as product distribution
terminals and retail sites located in the Midwest. CITGO operates these
facilities and purchases the products produced at the refinery. See Note 4 of
Notes to Consolidated Financial Statements. A portion of the crude oil processed
by PDVMR is supplied by PDVSA under a long-term crude supply contract.
An affiliate of PDVSA entered into an agreement to acquire a
50% equity interest in a refinery in Chalmette, Louisiana ("Chalmette"), in
October 1997 and has assigned to CITGO its option to purchase up to 50% of the
refined products produced at the refinery through December 31, 1998. See Note 4
of Notes to Consolidated Financial Statements. CITGO exercised this option on
November 1, 1997 and is acquiring approximately 66 MBPD of refined products from
the refinery, approximately one-half of which is gasoline.
Under such long-term supply agreements and refined product
purchase agreements, CITGO, PDVMR and LYONDELL-CITGO purchased approximately $2
billion, $0.3 billion and $0.9 billion respectively, of crude oil, feedstocks
and refined products at market related prices from
41
PDVSA in 1997. At December 31, 1997, $172 million was included in PDV America's
current payable to affiliates as a result of these transactions.
The Companies also purchase refined products from various
other affiliates, including LYONDELL-CITGO and Chalmette, under various supply
agreements. These agreements incorporate various formula prices based on
published market prices and other factors. Such purchases totaled $1.9 billion
for 1997. At December 31, 1997, $40 million was included in payables to
affiliates as a result of these transactions.
The notes receivable from PDVSA are unsecured and consist of
$250 million 7.35% Notes Due August 1, 1998, (ii) $250 million 7.75% Notes due
August 1, 2000 and (iii) $500 million 7.995% Notes Due 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. For the year ended December 31,
1997, approximately $78 million of interest income is attributable to such notes
with $32 million included in due from affiliates at December 31, 1997. Due to
the related notes of these notes receivable, it is not practicable to estimate
their fair value.
CITGO had refined product, feedstock and crude oil and other
product sales of $221 million to affiliates, including the Mount Vernon Phenol
Plant Partnership and LYONDELL-CITGO, in 1997. At December 31, 1997, $23 million
was included in "Due from affiliates" as a result of these transactions.
The Company has entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these services was
$0.9 million in 1997.
Under a separate guarantee of rent agreement, PDVSA has
guaranteed payment of rent, stipulated loss value and termination value due
under the lease of the Corpus Christi Refinery West Plant facilities. See Note
15 of Notes to Consolidated Financial Statements.
PDV America and its direct subsidiaries are parties to a tax
allocation agreement, which is designed to provide PDV America with sufficient
cash to pay its consolidated income tax liabilities.
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND
REPORTS ON FORM 8-K
a. Certain Documents Filed as Part of this Report
(1) Financial Statements:
Page
----
Independent Auditors' Report..................................
Consolidated Balance Sheets at December 31, 1997
and 1996.................................................
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.........................
Consolidated Statements of Shareholder's Equity
for the years ended December 31, 1997, 1996
and 1995.................................................
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996
and 1995.................................................
Notes to Consolidated Financial Statements....................
(2) Financial Statement Schedules:
Schedule I - Condensed Financial Information of the Registrant
(3) Exhibits:
The Exhibit Index in part c., below, lists the exhibits that are
filed as part of, or incorporated by reference into, this report.
b. Reports on Form 8-K
None.
c. Exhibits
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of PDV America
*4.1 Indenture, dated as of August 1, 1993, among PDV America,
Propernyn, PDVSA and Citibank, N.A., as trustee, relating to
- --------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
43
PDV America's 7-1/4% Senior Notes Due 1998, 7-3/4%
Senior Notes Due 2000 and 7-7/8% Senior Notes Due 2003
*4.2 Form of Senior Note (included in Exhibit 4.1)
*10.1 Crude Supply Agreement, dated as of September 30, 1986,
between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
*10.2 Supplemental Crude Supply Agreement, dated as of
September 30, 1986, between CITGO Petroleum Corporation
and Petroleos de Venezuela, S.A.
*10.3 Crude Oil and Feedstock Supply Agreement, dated as of
March 31, 1987, between Champlin Refining Company and
Petroleos de Venezuela, S.A.
*10.4 Supplemental Crude Oil and Feedstock Supply Agreement,
dated as of March 31, 1987, between Champlin Refining
Company and Petroleos de Venezuela, S.A.
*10.5 Contract for the Purchase/Sale of Boscan Crude Oil,
dated as of June 2, 1994 between Tradecal, S.A., and
CITGO Asphalt Refining Company
*10.6 Restated Contract for the Purchase/Sale of Heavy/Extra
Heavy Crude Oil, dated December 28, 1990, among Maraven,
S.A., Lagoven, S.A.. and Seaview Oil Company
*10.7 Sublease Agreement, dated as of March 31, 1987, between
Champlin Petroleum Company, as Sublessor, and Champlin
Refining Company, as Sublessee
*10.8 Operating Agreement, dated as of May 1, 1984, among
Cit-Con Oil Corporation, CITGO Petroleum Corporation and
Conoco, Inc.
*10.9 Amended and Restated Limited Liability Company
Regulations of LYONDELL-CITGO Refining Company, Ltd.
dated July 1, 1993
*10.10 Contribution Agreement among Lyondell Petrochemical
Company, LYONDELL-CITGO Refining Company, Ltd. and
Petroleos de Venezuela, S.A.
___________
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
44
*10.11 Crude Oil Supply Agreement, dated as of May 5, 1993,
between LYONDELL-CITGO Refining Company, Ltd. and Lagoven,
S.A.
*10.12 Supplemental Supply Agreement, dated as of May 5, 1993,
between LYONDELL-CITGO Refining Company, Ltd. and
Petroleos de Venezuela, S.A.
*10.13 The UNO-VEN Company Partnership Agreement, dated as of
December 4, 1989, between Midwest 76, Inc. and VPHI
Midwest, Inc.
*10.14 Supply Agreement, dated as of December 1, 1989, between
The UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.15 Supplemental Supply Agreement, dated as of December 1,
1989, between The UNO-VEN Company and Petroleos de
Venezuela, S.A.
*10.16 Tax Allocation Agreement, dated as of June 24, 1993,
among PDV America, Inc., VPHI Midwest, Inc., CITGO
Petroleum Corporation and PDV USA, Inc., as amended.
**10.17 Amendment and Supplement to Supply Agreement, dated as
of May 11, 1994, between The UNO-VEN Company and
Tradecal, S.A., as assignee of Petroleos de Venezuela,
S.A.
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Registrant.
27.1 Financial Data Schedule
d. Financial Statement Schedules
The schedules filed by the Company are listed in Item 14a above as
required.
___________
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act 1934, the Registrant has caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on March 30, 1998.
PDV AMERICA, INC.
By /s/Alonso Velasco
--------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
By /s/ Claus Graf Chairman of the Board, March 30, 1998
-------------------------- Director
Claus Graf
By /s/ Alonso Velasco President, Chief Executive March 30, 1998
------------------------ and Financial Officer,
Alonso Velasco Director
By /s/ Jose M. Portas Secretary, Director March 30, 1998
------------------------
Jose M. Portas
By /s/ Francisco Bustillos Treasurer, Chief March 30, 1998
---------------------------- Accounting Officer
Francisco Bustillos
46
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
PDV America, Inc.
We have audited the accompanying consolidated balance sheets
of PDV America, Inc. and subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of income, shareholder's
equity and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index as Item 14(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of PDV America, Inc.
and subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements, taken as a whole,
present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
February 13, 1998
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 35,268 $ 32,845
Accounts receivable, net 666,264 1,004,098
Due from affiliates 55,883 60,123
Inventories 1,000,498 833,191
Current portion of notes receivables from PDVSA 250,000 --
Prepaid expenses and other 20,872 25,093
---------- ----------
Total current assets 2,028,785 1,955,350
NOTES RECEIVABLE FROM PDVSA 750,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,427,983 2,786,941
RESTRICTED CASH 6,920 9,369
INVESTMENTS IN AFFILIATES 841,323 1,040,525
OTHER ASSETS 188,511 146,142
---------- ----------
TOTAL $7,243,522 $6,938,327
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 3,000 $ 53,000
Accounts payable 491,977 530,758
Due to affiliates 231,152 275,551
Taxes other than income 180,143 200,863
Other current liabilities 275,086 237,115
Income taxes payable -- 21,137
Current portion of long-term debt 345,099 95,240
Current portion of capital lease obligation 13,140 11,778
---------- ----------
Total current liabilities 1,539,597 1,425,442
LONG-TERM DEBT 2,047,708 2,465,336
CAPITAL LEASE OBLIGATION 116,586 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 199,765 183,370
OTHER NONCURRENT LIABILITIES 234,710 196,979
DEFERRED INCOME TAXES 487,727 399,768
MINORITY INTEREST 28,337 26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock, $1.00 par value - authorized, issued and outstanding,
1000 shares 1 1
Additional capital 1,482,435 1,232,435
Retained earnings 1,106,656 878,639
---------- ----------
Total shareholder's equity 2,589,092 2,111,075
---------- ----------
TOTAL $7,243,522 $6,938,327
========== ==========
See notes to consolidated financial statements.
- 2 -
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1997
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
REVENUES: $ 13,394,608 $ 12,698,366 $ 10,279,579
Net sales 227,595 253,694 242,581
------------ ------------ ------------
Sales to affiliates
13,622,203 12,952,060 10,522,160
Equity in earnings (losses) of affiliates - net 68,930 44,906 48,130
Interest income from PDVSA 77,725 77,725 77,725
Other income (expense) - net (14,487) (3,373) (1,289)
------------ ------------ ------------
13,754,371 13,071,318 10,646,726
------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $4,275,607; $4,001,471 and $3,321,128 from
affiliates) 12,997,592 12,491,003 10,066,012
Selling, general and administrative expenses 211,423 169,159 165,693
Interest expense:
Capital leases 15,597 16,818 17,913
Other 193,868 177,544 168,633
Minority interest 1,706 1,013 1,993
------------ ------------ ------------
13,420,186 12,855,537 10,420,244
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 334,185 215,781 226,482
INCOME TAXES 106,168 77,758 83,996
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 228,017 138,023 142,486
EXTRAORDINARY ITEM:
Gain related to the early extinguishment of debt, net of
related income taxes of $2,160 -- -- 3,380
------------ ------------ ------------
NET INCOME $ 228,017 $ 138,023 $ 145,866
============ ============ ============
See notes to consolidated financial statements.
- 3 -
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(Amounts in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Additional Retained Shareholder's
Shares Amount Capital Earnings Equity
BALANCE, JANUARY 1, 1995 1 $ 1 $ 1,217,435 $ 594,750 $ 1,812,186
Capital contributions received from
Parent - - 15,000 - 15,000
Net income - - - 145,866 145,866
---------- ---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 1 1 1,232,435 740,616 1,973,052
Net income - - - 138,023 138,023
---------- ---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 1 1 1,232,435 878,639 2,111,075
Capital contributions received from
Parent - - 250,000 - 250,000
Net income - - - 228,017 228,017
---------- ---------- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 1 $ 1 $ 1,482,435 $ 1,106,656 $ 2,589,092
========== ========== ============ ============ ============
See notes to consolidated financial statements.
- 4 -
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 228,017 $ 138,023 $ 145,866
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain from early extinguishment of debt - - (3,380)
Depreciation and amortization 240,523 192,585 167,885
Provision for losses on accounts receivable 17,827 13,275 9,070
Deferred income taxes 82,145 5,159 18,777
Distributions in excess of (less than) equity in earnings
(losses) of affiliates 33,506 (8,672) (19,090)
Postretirement benefits (10,605) 15,465 (7,404)
Other adjustments 7,397 2,549 3,661
Change in operating assets and liabilities, exclusive of
acquisitions of businesses:
Accounts receivable 328,000 (199,333) (68,072)
Due from affiliates (2,642) 1,253 (9,340)
Inventories (95,107) (47,916) 2,212
Prepaid expenses and other current assets 6,380 6,525 (38,764)
Accounts payable and other current liabilities (246,846) 92,265 36,995
Income taxes payable (15,934) 3,725 3,076
Due to affiliates (73,417) 98,580 27,185
Other assets (86,934) (83,874) (24,565)
Other liabilities 34,417 35,833 85,809
----------------- --------------- --------------
Net cash provided by operating activities 446,727 265,442 329,921
----------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (264,377) (437,763) (314,230)
Proceeds from sales of property, plant and equipment 28,194 3,929 843
Decrease (increase) in restricted cash 2,449 (8,111) 41,629
Investments in LYONDELL-CITGO Refining Company,
Ltd. (45,635) (142,638) (178,875)
Loans to LYONDELL-CITGO Refining Company, Ltd. (16,509) - -
Investments in subsidiary and advances to other affiliates (2,442) (10) (46,805)
----------------- --------------- --------------
Net cash used in investing activities (298,320) (584,593) (497,438)
----------------- --------------- --------------
(Continued)
- 5 -
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) borrowings from revolving bank loan $(106,000) $ 60,000 $ 95,000
Net (repayments of) proceeds from short-term bank loans (50,000) 28,000 (28,500)
Payments on term bank loan (29,412) (29,412) (7,353)
Payments on private placement senior notes (58,685) (58,685) (47,321)
Proceeds from issuance of senior notes -- 199,694 --
Proceeds from master shelf agreement -- -- 100,000
Proceeds from issuance of taxable bonds -- 120,000 --
Proceeds from issuance of tax-exempt bonds -- 25,000 90,700
Payments on tax-exempt bonds -- -- (40,237)
Payments of capital lease obligations (11,778) (11,252) (9,017)
(Repayments) borrowings of other debt (5,109) (7,143) 2,397
Capital contributions received from parent 250,000 -- 15,000
Payment of UNO-VEN notes (135,000) -- --
--------- --------- ---------
Net cash (used in) provided by financing activities (145,984) 326,202 170,669
--------- --------- ---------
INCREASE IN CASH AND
CASH EQUIVALENTS 2,423 7,051 3,152
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 32,845 25,794 22,642
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 35,268 $ 32,845 $ 25,794
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 212,355 $ 197,798 $ 175,515
========= ========= =========
Income taxes, net of refunds of $1,449; $546 and $3,682
in 1997, 1996 and 1995, respectively $ 48,639 $ 58,492 $ 64,204
========= ========= =========
See notes to consolidated financial statements. (Concluded)
- 6 -
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - PDV America, Inc. (the "Company") was
incorporated on November 14, 1986 and is a wholly-owned subsidiary,
effective April 21, 1997, of PDV Holding, Inc. ("PDV Holding"), a
Delaware corporation (see below). The Company's ultimate parent is
Petroleos de Venezuela, S.A.
("PDVSA"), the national oil company of the Republic of Venezuela.
On April 21, 1997, Propernyn B.V. ("Propernyn"), a Dutch limited
liability company whose ultimate parent is PDVSA and which held all of
the Company's common stock, contributed its shares of the Company to PDV
Holding.
Description of Business - The Companies (as defined below) manufacture or
refine and market quality transportation fuels as well as lubricants,
refined waxes, petrochemicals, asphalt and other industrial products.
CITGO (as defined below) owns and operates two modern, highly complex
crude oil refineries (Lake Charles, Louisiana, and Corpus Christi, Texas)
and two asphalt refineries (Paulsboro, New Jersey, and Savannah, Georgia)
with a combined aggregate rated crude oil refining capacity of 527
thousand barrels per day ("MBPD"), CITGO also owns a minority interest in
LYONDELL-CITGO Refining Company Ltd., a limited liability company that
owns and operates a refinery in Houston, Texas, with a rated crude oil
refining capacity of 265 MBPD. CITGO also operates a 153 MBPD refinery in
Lemont, Illinois, owned by PDVMR (as defined below). CITGO's assets also
include a 65 percent owned lubricant and wax plant, pipelines and equity
interests in pipelines and equity interests in pipeline companies and
petroleum storage terminals. Transportation fuel customers include
primarily CITGO branded wholesale marketers, convenience stores and
airlines located primarily east of the Rocky Mountains. Lubricants are
sold to independent marketers, mass marketers and industrial customers
and petrochemical feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries
(including CITGO Petroleum Corporation ("CITGO") and its wholly-owned
subsidiaries, Cit-Con Oil Corporation, which is 65 percent owned and VPHI
Midwest, Inc. ("Midwest") and its wholly-owned subsidiary, PDV Midwest
Refining, L.L.C. ("PDVMR") (collectively, the "Companies"). All material
intercompany transactions and accounts have been eliminated.
Prior to May 1, 1997, Midwest had a 50 percent interest in the UNO-VEN
Company ("UNO-VEN"), an Illinois general partnership. Beginning May 1,
1997, pursuant to the Partnership Interest Retirement Agreement (Note 9),
PDVMR now owns certain UNO-VEN assets, as defined. Accordingly, the
consolidated financial statements reflect the equity in earnings of
UNO-VEN through April 30, 1997 (see Note 9) and the results of operations
of PDVMR on a consolidated basis since May 1, 1997.
- 7 -
The Companies' investments in affiliates are accounted for by the equity
method. The excess of the investments over the equity in the underlying
net assets of the affiliates is amortized on a straight-line basis over
40 years, which is based upon the estimated useful lives of the
affiliates' assets.
Estimates, Risks and Uncertainties - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Companies are sensitive to domestic and international political,
legislative, regulatory and legal environments. Significant changes in
the prices or availability of crude oil and refined products could have a
significant impact on the results of operations for any particular year.
Revenue Recognition - Revenue is recognized upon transfer of title to
products sold, based upon the terms of delivery.
Supply and Marketing Activities - The Companies engage in the buying and
selling of crude oil to supply their refineries. The net results of this
activity are recorded in cost of sales. The Companies also engage in the
buying and selling of refined products to facilitate the marketing of
their refined products.
The results of this activity are recorded in cost of sales and sales.
Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the Companies' last-in, first-out ("LIFO") method.
Exchanges that are settled through payment or receipt of cash are
accounted for as purchases or sales.
Excise Taxes - The Companies collect excise taxes on sales of gasoline
and other motor fuels. Excise taxes of approximately $3.2 billion, $2.7
billion and $2.2 billion were collected from customers and paid to
various governmental entities in 1997, 1996 and 1995, respectively.
Excise taxes are not included in sales.
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid short-term investments and bank deposits with initial maturities
of three months or less.
Restricted Cash - Restricted cash represents highly liquid short-term
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing environmental
facilities as defined in the bond agreements.
Inventories - Crude oil and refined product inventories are stated at the
lower of cost or market and cost is primarily determined using the LIFO
inventory method. Materials and supplies are valued primarily using the
average cost method.
Property, Plant and Equipment - Property, plant and equipment is reported
at cost, less accumulated depreciation. Depreciation is based upon the
estimated useful lives of the related assets using the straight-line
method. Depreciable lives are generally as follows: buildings and
leaseholds - 10 to 25 years; machinery and equipment - 3 to 25 years; and
vehicles - 3 to 10 years.
- 8 -
Upon disposal or retirement of property, plant and equipment, the cost
and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income.
The Companies capitalize interest on projects when construction takes
considerable time and entails major expenditures. Such interest is
allocated to property, plant and equipment and amortized over the
estimated useful lives of the related assets. Capitalized interest
totaled $7.8 million, $12 million and $5 million in 1997, 1996 and 1995,
respectively.
The Company periodically evaluates the carrying values of its property,
plant and equipment and other long-lived assets for circumstances which
may indicate impairment.
Commodity and Interest Rate Derivatives - The Companies use commodity and
financial instrument derivatives to manage defined interest rate and
commodity price risks arising out of the Companies' core activities. The
Companies have only limited involvement with other derivative financial
instruments, and do not use them for trading purposes.
The Companies enter into petroleum futures contracts, options and other
over the counter commodity derivatives, primarily to hedge a portion of
the price risk associated with crude oil and refined products. In order
for a transaction to qualify for hedge accounting, the Companies require
that the item to be hedged exposes the Companies to price risk and that
the commodity contract reduces that risk and is designated as a hedge.
The high correlation between price movements of a product and the
commodity contract in that product is well demonstrated in the petroleum
industry and, generally, the Companies rely on those historical
relationships and on periodic comparisons of market price changes to
price changes of futures and options contracts accounted for as hedges.
Gains or losses on contracts which qualify as hedges are recognized when
the related inventory is sold or the hedged transaction is consummated.
Changes in the market value of commodity derivatives which are not hedges
are recorded as gains or losses in the period in which they occur.
The Companies also enter into various interest rate swap and cap
agreements to manage their risk related to interest rate changes on their
debt. Premiums paid for purchased interest rate swap and cap agreements
are amortized to interest expense over the terms of the agreements.
Unamortized premiums are included in other assets. The interest rate
differentials received or paid by the Companies related to these
agreements are recognized as adjustments to interest expense over the
term of the agreements. Gains or losses on terminated swap agreements are
either amortized over the original term of the swap agreement if the
hedged borrowings remain in place or are recognized immediately if the
hedged borrowings are no longer held.
Refinery Maintenance - Costs of major refinery turnaround maintenance are
charged to operations over the estimated period between turnarounds.
Turnaround periods range approximately from one to eight years.
Unamortized costs are included in other assets. Amortization of refinery
turnaround costs is included in depreciation and amortization expense.
Amortization was $57 million, $53 million, and $43 million for 1997, 1996
and 1995, respectively. Ordinary maintenance is expensed as incurred.
Environmental Expenditures - Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past
operations and do not contribute to current or future revenue generation
are expensed. Liabilities are recorded when environmental assessments
and/or cleanups are probable, and the costs can be reasonably estimated.
Environmental liabilities are not discounted to their present value.
Subsequent adjustments to
- 9 -
estimates, to the extent required, may be made as more refined
information becomes available. Effective January 1, 1997, the Company
adopted Statement of Position 96-1 - "Environmental Remediation
Liabilities" ("SOP 96-1"). The statement provides guidance on
environmental liabilities and disclosures. The adoption of SOP 96-1 did
not have a material effect on the consolidated financial position or
results of operations of the Company.
Income Taxes - The Companies account for income taxes using an asset and
liability approach, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."
Capital Structure - Effective for the year ended December 31, 1997, the
Company adopted Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129").
SFAS No. 129 establishes standards for disclosing information about the
Company's capital structure. The adoption of this standard related to
disclosure within the financial statements and did not have a material
effect on the Company's financial statements.
Comprehensive Income - In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"), which is
effective for the Company's fiscal year ending December 31, 1998. The
statement addresses the reporting and display of comprehensive income and
its components. The Company does not currently believe the adoption of
SFAS No. 130 will result in material differences between comprehensive
income and net income.
Segments - In June 1997, FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which is effective for the Company's fiscal year
ending December 31, 1998. SFAS No. 131 modifies current segment reporting
requirements and establishes, for public companies, criteria for
reporting disclosures about a company's products and services, geographic
areas and major customers in annual and interim financial statements. The
Company has not yet determined the full extent of disclosure changes that
may result from adoption of SFAS No. 131.
2. INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD.
LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") is a Texas
limited liability company which owns and operates a 265 thousand barrel
per day refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by
subsidiaries of CITGO and Lyondell Petrochemical Company ("Lyondell"),
referred to as the owners. CITGO has contributed cash during the years
1993 through 1997 for a participation interest and other commitments
related to LYONDELL-CITGO's refinery enhancement project, and Lyondell
contributed the Houston refinery and related assets for the remaining
participation interest. The refinery enhancement project to increase the
refinery's heavy crude oil high conversion capacity was substantially
completed at the end of 1996 with an in-service date of March 1, 1997.
The heavy crude oil processed by the Houston refinery is supplied by a
subsidiary of PDVSA under a long-term crude oil supply contract through
2017, and CITGO purchases substantially all of the refined products
produced at the Houston refinery under a long-term contract (Note 4).
CITGO's participation interest in LYONDELL-CITGO increased from 13% at
December 31, 1996, to approximately 42% on April 1, 1997, in accordance
with agreements between the owners concerning
- 10 -
such interest. CITGO has a one-time option for 18 months from April 1,
1997, to increase, for an additional investment, its participation to
50%.
CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The notes bear
interest at market rates and are due July 1, 2003. These notes are
included in other assets as December 31, 1997. CITGO accounts for its
investment in LYONDELL-CITGO using the equity method of accounting and
records its share of the net earnings of LYONDELL-CITGO based on
allocations of income agreed to by the owners. Information on CITGO's
investment in LYONDELL-CITGO follows:
1997 1996 1995
(000's Omitted)
Investment at December 31 $630,060 $604,729 $460,360
Participation interest at December 31 42% 13% 12%
Equity in net income 44,429 1,254 14,142
Distributions received 64,734 -- --
Notes receivable 16,509 -- --
3. ACQUISITION OF BUSINESS
On May 1, 1995, CITGO purchased Cato Oil & Grease Company ("Cato"). Cato
is primarily engaged in the manufacture and distribution of lubricants.
The results of operations of Cato are included in the accompanying
financial statements since the date of acquisition. Pro forma results of
operations for this business are not material to the Companies'
consolidated statement of income. The total cost of this acquisition was
$46.8 million, which was allocated as follows:
Property, plant and equipment $27,000,000
Inventory 8,643,000
Accounts receivable 6,144,000
Other assets (net) 5,018,500
-----------
$46,805,500
4. RELATED PARTY TRANSACTIONS
CITGO purchases approximately two-thirds of the crude oil processed in
CITGO 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. CITGO
purchased $2.9 billion, $2.4 billion, and $1.9 billion of crude oil,
feedstocks and other products from wholly-owned subsidiaries of PDVSA in
1997, 1996 and 1995, respectively under these and other purchase
agreements.
The crude oil supply contracts incorporate formula prices based on the
market value of a number of refined products deemed to be produced from
each particular crude oil, less (i) certain deemed refining costs
adjustable for inflation, (ii) certain actual costs, including
transportation charges, import duties and taxes and (iii) a deemed
margin, which varies according to the grade of crude oil. Effective
January 1,
- 11 -
1992, the supply agreements with respect to CITGO's Lake Charles, Corpus
Christi and Paulsboro refineries were modified to reduce the price levels
to be paid by CITGO by a fixed amount per barrel of crude oil purchased
from PDVSA. Such reductions were intended to defray CITGO's costs of
certain environmental compliance expenditures. This modification resulted
in a decrease in the cost of crude oil purchased under these agreements
of approximately $70 million per year for the years 1992 through 1994 as
compared to the amount that would otherwise have been payable thereunder.
This modification was to expire at December 31, 1996; however, in the
third quarter of 1995, PDVSA and CITGO agreed to adjust this modification
so that the 1992 fixed amount per barrel would be reduced and the
adjusted modification would not expire until December 31, 1999. The
impact of this adjustment was an increase in crude cost of $44 million
for 1996 and $22 million for 1995, over what would otherwise have been
payable under the original 1992 modification. The effect of the
adjustments to the original modifications reduced the price of crude oil
purchased from PDVSA under these agreements by $25 million in 1997 and it
is anticipated by management that the effect of the adjustments to the
original modifications will be to reduce the price of crude oil purchased
from PDVSA under these agreements by $25 million per year in 1998 and
1999, in each case without giving effect to any other factors that may
affect the price payable for crude oil under these agreements. Due to the
pricing formula under the supply agreements, the aggregate price actually
paid for crude oil purchased from PDVSA under these agreements in each of
these years will depend primarily upon the then current prices for
refined products and certain actual costs of CITGO. These estimates are
also based on the assumption that CITGO will purchase the base volumes of
crude oil under the agreements. At December 31, 1997 and 1996, $138
million and $237 million, respectively, were included in payables to
affiliates as a result of these transactions.
CITGO also purchases refined products from various other affiliates
including LYONDELL-CITGO, PDVMR and Chalmette under long-term contracts.
These agreements incorporate various formula prices based on published
market prices and other factors. Such purchases totaled $1.9 billion,
$1.6 billion, and $1.4 billion for 1997, 1996 and 1995, respectively. At
December 31, 1997 and 1996, $59 million and $38 million, respectively,
were included in payables to affiliates as a result of these
transactions.
CITGO had refined product, feedstock, and other product sales of $221
million, $190 million and $210 million to affiliates in 1997, 1996 and
1995, respectively. The Company also sold crude oil to affiliates of $3
million, $64 million and $32 million in 1997, 1996 and 1995,
respectively. At December 31, 1997 and 1996, $23 million and $28 million,
respectively, were included in due from affiliates as a result of these
and related transactions.
Pursuant to the Refinery Agreement with PDVMR (Note 9), on May 1, 1997,
CITGO has been appointed operator of the Lemont refinery. The term of the
agreement is 60 months and shall be automatically renewed for periods of
12 months (subject to early termination as provided in the agreement).
CITGO employed the substantial majority of employees previously employed
by UNO-VEN and, as a result, CITGO assumed a liability for post
retirement benefits other than pensions of $27 million related to those
employees.
PDVMR is party to a Contract For Purchase and Sale Of Crude Oil dated
April 23, 1997, with Maraven S.A. ("Maraven"), a corporation organized
and existing, at the date of the contract, under the laws of the Republic
of Venezuela, and CITGO. In accordance with the contract, Maraven (or its
successor) is obligated to provide a base volume of up to 100,000 barrels
per day of Venezuelan crude, and CITGO as operator is responsible for
administering the purchase of additional volumes of crude for the
refinery. The Venezuelan crude is priced in accordance with a formula
based upon posted crude prices less a
- 12 -
quality differential. Maraven (or its successor), CITGO and PDVMR can
change the amount and type of crude supplied in order to capture
additional economic opportunities. The term of the agreement is sixty
months with renewal periods of twelve months.
During 1995, the Company entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these services
was $0.9 million, $0.3 million and $1.3 million in 1997, 1996 and 1995,
respectively.
Under a separate guarantee of rent agreement, PDVSA has guaranteed
payment of rent, stipulated loss value and terminating value due under
the lease of the Corpus Christi refinery facilities described in Note 15.
The notes receivable from PDVSA are unsecured and are comprised of $250
million of 7.35% notes maturing on August 1, 1998, $250 million of 7.75%
notes maturing on August 1, 2000, and $500 million of 7.995% notes
maturing on August 1, 2003. Interest on these notes is payable
semiannually by PDVSA to the Company on February 1 and August 1 of each
year, less one business day. For each of the years ended December 31,
1997, 1996 and 1995, approximately $78 million of interest income is
attributable to such notes with $32 million included in due from
affiliates at December 31, 1997 and 1996. Due to the related party nature
of these notes receivable, it is not practicable to estimate their fair
value.
An affiliate of PDVSA entered into an agreement to acquire a 50 percent
equity interest in a refinery in Chalmette, Louisiana ("Chalmette") in
October 1997 and has assigned to CITGO its option to purchase up to 50
percent of the refined products produced at the refinery through December
31, 1998. CITGO exercised this option on November 1, 1997, and is
acquiring approximately 80 thousand barrels per day of refined products
from the refinery, approximately one-half of which is gasoline.
5. ACCOUNTS RECEIVABLE
1997 1996
(000's Omitted)
Trade $ 580,247 $ 770,069
Credit card 45,896 203,329
Other 65,374 48,406
------------- -------------
691,517 1,021,804
Less allowance for uncollectible accounts (25,253) (17,706)
------------- -------------
$ 666,264 $ 1,004,098
============= =============
Sales are made primarily on account, based on pre-approved unsecured
credit terms established by management, except sales to airlines, which
are made primarily on a prepaid basis. CITGO also has a proprietary
credit card program and a Companion VISA bank card program, which allow
retail
- 13 -
consumers to purchase fuel and convenience items at CITGO branded
outlets. Allowances for uncollectible accounts are established based on
several factors, which include, but are not limited to, analysis of
specific customers, historical trends, current economic conditions and
other information.
Effective June 27, 1997 and November 19, 1997, the Company established
two new limited purpose subsidiaries, CITGO Funding Corporation and CITGO
Funding Corporation II, which entered into agreements to sell, on an
ongoing basis and without recourse, up to a maximum of $125 million of
trade accounts receivable and $150 million of credit card receivables at
any one point in time. These agreements have a minimum term of one year
expiring in June 1998 and November 1998, respectively, and are renewable
for successive one year terms by mutual agreement. Fees and expenses
related to the agreements were recorded as Other Expense and were $5.8
million for the year ended December 31, 1997. Proceeds of approximately
$275 million from the initial sales were used primarily to make payments
on the Company's revolving bank loan.
6. INVENTORIES
1997 1996
(000's Omitted)
Refined product $ 734,261 $ 616,527
Crude oil 196,349 165,564
Materials and supplies 69,888 51,100
---------- ----------
$1,000,498 $ 833,191
========== ==========
At December 31, 1997, replacement costs approximated LIFO carrying
values. As of December 31, 1996, replacement costs exceeded LIFO carrying
values by approximately $294 million.
7. PROPERTY, PLANT AND EQUIPMENT
1997 1996
(000's Omitted)
Land $ 153,448 $ 113,158
Building 512,012 440,175
Machinery and equipment 3,350,957 2,420,803
Vehicles 47,952 42,977
Construction in process 135,406 373,006
---------- ----------
4,199,775 3,391,119
---------- ----------
Less accumulated depreciation and amortization 771,792 604,178
---------- ----------
$3,427,983 $2,786,941
========== ==========
- 14 -
Depreciation expense for 1997, 1996 and 1995 was $178 million, $136
million and $122 million, respectively.
In 1997, CITGO incurred property damages from a fire at the Company's
Corpus Christi, Texas refinery (Note 14). As a result, CITGO capitalized
$14.5 million of replacement machinery and equipment. Other income
(expense) included $9.4 million of insurance recoveries related to this
event.
Other income (expense) includes gains and losses on disposals and
retirements of property, plant and equipment. Such net losses were
approximately $14 million, $2 million and $4 million in 1997, 1996, and
1995, respectively.
8. CITGO'S INVESTMENTS IN AFFILIATES
In addition to LYONDELL-CITGO (Note 2), CITGO's investments in affiliates
consist of equity interests of 6.8 to 50 percent in joint interest
pipelines and terminals, including a 13.98 percent interest in Colonial
Pipeline Company; a 49.5 percent partnership interest in Nelson
Industrial Steam Company ("NISCO"), which is a qualified cogeneration
facility; and a 49 percent partnership interest in Mount Vernon Phenol
Plant. The carrying value of these investments exceeded CITGO's equity in
the underlying net assets by approximately $155 million and $160 million
at December 31, 1997 and 1996, respectively.
Due to various financing and capital transactions and net losses, at
December 31, 1997 and 1996, NISCO has a partnership deficit. At December
31, 1997 and 1996, CITGO's share of this deficit, as a general partner,
was $49.6 million and $47 million, respectively, which is included in
other noncurrent liabilities in the accompanying consolidated balance
sheets.
Information on CITGO's investments, including LYONDELL-CITGO, follows:
1997 1996 1995
(000's Omitted)
Investments in affiliates (excluding NISCO) $813,923 $790,576 $650,360
Equity in net income of affiliates 64,460 21,481 33,530
Dividends and distributions received from affiliates 91,742 31,157 29,040
Selected financial information provided by the affiliates is summarized
as follows:
1997 1996 1995
(000's Omitted)
Summary of financial position:
Current assets $ 511,848 $ 543,692 $ 547,479
Noncurrent assets 2,830,568 2,859,091 2,345,695
Current liabilities 627,296 697,046 596,723
Noncurrent liabilities 2,025,709 1,999,276 1,659,729
Summary of operating results:
Revenues $4,076,429 $4,158,684 $3,900,653
Gross profit 628,559 475,227 574,103
Net income 371,006 242,434 344,817
- 15 -
9. DISTRIBUTION OF UNO-VEN ASSETS
Since 1989, the Company through various subsidiary's had a 50% interest
in UNO-VEN. On May 1, 1997 pursuant to a Partnership Interest Retirement
Agreement, PDV America and Union Oil Company of California ("UNOCAL")
transferred certain assets and liabilities of UNO-VEN to PDVMR, a
subsidiary of the Company, as a result of the liquidation of the
Company's 50% ownership interest in UNO-VEN .The assets included a 153
thousand barrel per day refinery in Lemont, Illinois, as well as eleven
product distribution terminals and 89 retail sites located in the
Midwest. CITGO operates these facilities and purchases the products
produced at the refinery (Note 4).
In connection with the transaction, the Company received a capital
contribution of $250,000,000 from PDV Holding, the Company's parent. This
contribution was used, in part, to pay off UNO-VEN's senior notes and to
provide working capital.
The transaction, for accounting purposes, has been treated as a purchase
and, accordingly, the allocation of fair values to the underlying assets
and liabilities acquired is based upon management's estimates and
appraisals. Pro forma results of operations for this acquisition were not
material.
The allocation of the Company's basis in the partnership and the
acquisition cost was as follows:
(000's Omitted)
Accounts receivable $ 26,300
Inventory 72,200
Property, plant and equipment 576,800
Investment in The Needle Coker Company 28,800
Other assets 35,300
Working capital facility with bank (13,000)
Other current liabilities (257,600)
Long-term debt (154,900)
Other noncurrent liabilities (68,700)
---------
PDVMR's equity $ 245,200
=========
Information with respect to UNO-VEN for the four months ended April 30,
1997 and as of and for the years ended December 31, 1996 and 1995 is as
follows:
1997 1996 1995
(000's Omitted)
Investment in UNO-VEN N/A $249,949 $231,600
Equity in net income $ 450 23,425 14,600
Distributions received from UNO-VEN 5,194 5,076 --
- 16 -
Financial information of UNO-VEN is as follows:
1997 1996 1995
(000's Omitted)
Summary of financial position:
Current assets N/A $ 360,900 $ 319,800
Noncurrent assets N/A 562,700 570,100
Current liabilities N/A 265,800 259,600
Noncurrent liabilities N/A 158,000 167,100
Summary of operating results:
Revenues $ 567,500 $1,663,277 $1,352,100
Gross profit 37,400 150,000 139,000
Net income 900 46,890 29,200
Under a long-term crude oil supply agreement, terminated by UNO-VEN's
liquidation, and vessel transportation contracts, UNO-VEN purchased $964
million and $684 million of crude oil from a wholly-owned subsidiary of
PDVSA in 1996 and 1995, respectively. The terms and pricing formulas were
similar to the Company's subsidiaries' crude oil supply agreements (see
Note 4).
UNO-VEN bought and sold refined products from/to Unocal. Agreements
underlying these transactions defined the obligations and
responsibilities of the parties. Pricing was in accordance with formulas
based, in part, upon market-related prices of finished products. UNO-VEN
also had a number of agreements with Unocal covering certain marketing,
administrative, and technical functions.
10. SHORT-TERM BANK LOANS
As of December 31, 1997, CITGO has established $215 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, and maturity options vary up to 30
days. The weighted average interest rates actually incurred in 1997, 1996
and 1995 were 5.9 percent, 5.7 percent and 6.2 percent, respectively.
CITGO had $3 million and $53 million of borrowings outstanding under
these facilities at December 31, 1997 and 1996, respectively.
- 17 -
11. LONG-TERM DEBT
1997 1996
(000's Omitted)
Senior notes:
7.25% Senior Notes $250 million face amount due 1998 $ 249,859 $ 249,631
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 497,330 496,967
Shelf registration:
7.875% Senior Notes $200 million face amount due 2006 199,745 199,715
Revolving bank loans:
Bank of America 135,000 350,000
Various Banks 122,000 --
Term bank loan 58,823 88,235
Private Placement:
8.75% Series A Senior Notes due 1998 18,750 37,500
9.03% Series B Senior Notes due 2001 114,286 142,857
9.30% Series C Senior Notes due 2006 102,273 113,637
Master Shelf Agreement:
8.55% Senior Notes due 2002 25,000 25,000
8.68% Senior Notes due 2003 50,000 50,000
7.29% Senior Notes due 2004 20,000 20,000
8.59% Senior Notes due 2006 40,000 40,000
8.94% Senior Notes due 2007 50,000 50,000
7.17% Senior Notes due 2008 25,000 25,000
7.22% Senior Notes due 2009 50,000 50,000
Tax Exempt Bonds:
Pollution control revenue bonds due 2004 15,800 15,800
Port facilities revenue bonds due 2007 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023 3,020 3,020
Louisiana wastewater facility revenue bonds due 2024 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal revenue bonds due 2026 25,000 25,000
Louisiana wastewater facility revenue bonds due 2026 2,000 --
Pollution control bonds due 2008 19,850 --
Taxable Louisiana wastewater facility revenue bonds due 2026 118,000 120,000
Citi-Con bank credit agreement 28,571 35,714
----------- -----------
2,392,807 2,560,576
Less current portion of long-term debt (345,099) (95,240)
----------- -----------
$ 2,047,708 $ 2,465,336
=========== ===========
- 18 -
In August 1993, the Company issued $1 billion principal amount of Senior
Notes (the "Senior Notes") with interest rates ranging from 7.25 to 7.875
percent with due dates ranging from 1998 to 2003. Interest on the Senior
Notes is payable semiannually, commencing February 1, 1994. The Senior
Notes represent senior unsecured indebtedness of the Company, and are
structurally subordinated to the liabilities of the Company's
subsidiaries. The Senior Notes are guaranteed by Propernyn and PDVSA. The
Senior Notes contain certain covenants that restrict, among other things,
the ability of the Company and its subsidiaries to incur additional debt,
to pay dividends, place liens on property, and sell certain assets. The
Company was in compliance with the debt covenants at December 31, 1997.
In April 1996, CITGO filed a registration statement with the Securities
and Exchange Commission relating to the shelf registration of $600
million of debt securities that may be offered and sold from time to
time. In May 1996, the registration became effective and CITGO sold a
tranche of debt securities with an aggregate offering price of $200
million. On October 28, 1997, CITGO entered into a Selling Agency
Agreement with Salomon Brothers Inc. and Chase Securities Inc. providing
for the sale of up to an additional $235 million in aggregate principal
amount of notes in tranches from time to time by CITGO under the shelf
registration.
CITGO's credit agreement with various banks consists of a $125 million
term loan and a $675 million revolving loan. The term loan is unsecured,
has various interest rate options (year-end rate of 6.6 percent and 6.8
percent at December 31, 1997 and 1996, respectively) and principal
amounts are payable in quarterly installments. The revolving loan is
unsecured, has various borrowing maturities and interest rate options
(year-end rate of 6.9 percent and 6.7 percent at December 31, 1997 and
1996, respectively), and is committed through December 31, 1999.
PDVMR has a revolving credit facility with a consortium of banks which is
committed through April 28, 2002 and allows for borrowings up to $125
million at various interest rates. Inventories and accounts receivable of
PDVMR are pledged as collateral. The facility contains certain covenants
that impose limitations on the PDVMR for paying distributions, incurring
additional debt, placing liens on property, making loans, and modifying
or terminating certain supplies and operating agreements (Note 4). PDVMR
was in compliance with these covenants at December 31, 1997. The interest
rate at December 31, 1997 was 6.72%.
At December 31, 1997, CITGO has outstanding approximately $235 million of
privately placed, unsecured Senior Notes (the "Notes"). Principal amounts
are payable in annual installments commencing in November 1995 for the
Series A and Series B Notes and November 1996 for the Series C Notes.
Interest is payable semiannually in May and November.
At December 31, 1997, CITGO has outstanding $260 million of privately
placed senior notes under an unsecured Master Shelf Agreement with an
insurance company. The notes have various fixed interest rates and
maturities.
The various agreements above contain certain covenants that, depending
upon the level of the Companies' capitalization and earnings, could
impose limitations on the Companies for paying dividends, incurring
additional debt, placing liens on property, and selling fixed assets. The
Companies were in compliance with the debt covenants at December 31,
1997.
Through state entities, CITGO has issued $27.6 million of industrial
development bonds for certain Lake Charles, Louisiana port facilities and
pollution control equipment and $190.7 million of environmental revenue
bonds to finance a portion of the Company's environmental facilities at
its Lake Charles, Louisiana
- 19 -
and Corpus Christi, Texas refineries and at the LYONDELL-CITGO refinery.
These bonds are secured by letters of credit. The bonds bear interest at
various floating rates which ranged from 3.7 percent to 3.9 percent at
December 31, 1997, and 4.1 percent to 5.1 percent at December 31, 1996.
During 1995, CITGO repurchased approximately $47 million of the Louisiana
Revenue Bonds due in 2023 at a discount, resulting in an extraordinary
gain of approximately $3.4 million, net of related income taxes of
approximately $2.2 million.
Through a state entity, CITGO has issued and currently outstanding $118
million of taxable environmental revenue bonds to finance a portion of
CITGO's environmental facilities at its Lake Charles, Louisiana refinery.
Such bonds are secured by a letter of credit and have a floating interest
rate which was 5.8 percent and 5.5 percent at December 31, 1997 and 1996,
respectively. At the option of CITGO and upon the occurrence of certain
specified conditions, all or any portion of such taxable bonds may be
converted to tax-exempt bonds. At December 31, 1997, $2 million of the
original $ 120 million had been converted to tax-exempt bonds.
PDVMR has non-taxable variable rate pollution control bonds, with
interest, currently paid monthly. The bonds have one payment at maturity
in the year 2008 to retire the principal, and principal and interest
payments are guaranteed by a $20.3 million letter of credit. An interest
rate swap agreement, based upon a notional amount of $19.9 million fixes
the variable rate at 5.36 percent until October 26, 1998.
The Cit-Con bank credit agreement consists of a term loan collateralized
by throughput agreements of the owner companies. The loan contains
various interest rate options (weighted average effective rates of 6.5
percent and 6.3 percent at December 31, 1997 and 1996, respectively), and
requires quarterly principal payments through December 2001.
Future maturities of long-term debt as of December 31, 1997 are:
1998-$345.1 million; 1999-$211.5 million; 2000-$297.1 million; 2001-$47.1
million; 2002-$158.4 million; and $1,333.6 million thereafter.
The Company has entered into the following interest rate swap agreements
to reduce the impact of interest rate changes on its variable interest
rate debt:
CITGO's interest rate swap agreements:
Notional Principal Amount
Expiration Fixed Rate 1997 1996
Variable Rate Index Date Paid (000's Omitted)
One-month LIBOR September 1998 4.85% $ 25,000 $ 25,000
One-month LIBOR November 1998 5.09 25,000 25,000
One-month LIBOR May 2000 6.28 25,000 25,000
J.J. Kenny May 2000 4.72 25,000 25,000
J.J. Kenny February 2005 5.30 12,000 12,000
J.J. Kenny February 2005 5.27 15,000 15,000
J.J. Kenny February 2005 5.49 15,000 15,000
-------- --------
$142,000 $142,000
======== ========
- 20 -
PDVMR's interest rate swap agreements:
Notional Principal Amount
Expiration Fixed Rate 1997
Date Paid
Variable Rate Index (000's Omitted)
J.J. Kenny October 26, 1998 5.36% $ 19,850
========
Interest expense includes $0.8 million, $1.1 million, and $0.1 million in
1997, 1996 and 1995, respectively, related to interest paid on these
agreements. During 1995, CITGO converted $25 million of variable rate
debt to fixed rate borrowings and terminated the interest rate swap
agreement matched to the variable rate debt. Other income in 1995
includes a $2.4 million gain related to the termination of this interest
rate swap agreement.
12. EMPLOYEE BENEFIT PLANS
Employee Savings - CITGO sponsors three qualified defined contribution
retirement and savings plans covering substantially all eligible salaried
and hourly employees. Participants make voluntary contributions to the
plans and CITGO makes contributions, including matching of employee
contributions, based on plan provisions. CITGO charged $19 million, $16
million and $16 million to operations related to its contributions to
these plans in 1997, 1996 and 1995, respectively.
Pension Benefits - CITGO sponsors three qualified noncontributory defined
benefit pension plans, two of which cover eligible hourly employees and
one of which covers eligible salaried employees. CITGO also sponsors
three nonqualified defined benefit plans for certain eligible employees.
The qualified plans' assets include corporate securities, a fixed income
mutual fund, two collective funds and a short-term investment fund. The
nonqualified plans are not funded.
CITGO's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible
limits. The nonqualified plans are funded as necessary to pay retiree
benefits. The plan benefits for each of the qualified pension plans are
primarily based on an employee's years of plan service and compensation
as defined by each plan.
The Company's net periodic pension costs for these plans included the
following components:
1997 1996 1995
(000's Omitted)
Service cost-benefits earned during the year $ 15,759 $ 13,356 $ 11,498
Interest cost on projected benefit obligation 14,246 12,787 11,496
Actual return on plan assets (42,727) (24,645) (34,784)
Net amortization and deferral 25,818 10,068 23,777
-------- -------- --------
Net periodic pension cost $ 13,096 $ 11,566 $ 11,987
======== ======== ========
- 21 -
The following table summarizes the funded status of these plans and the
related amounts recognized in the Company's consolidated financial
statements:
1997 1996
Overfunded Underfunded Overfunded Underfunded
Qualified Nonqualified Qualified Nonqualified
Plans Plans Plans Plans
(000's Omitted) (000's Omitted)
Plan assets at fair value $ 221,261 $ -- $ 184,236 $ --
--------- --------- --------- ---------
Actuarial present value of benefit obligation:
Vested benefits (137,532) (15,910) (114,259) (13,643)
Nonvested benefits (21,647) (68) (18,569) (85)
--------- --------- --------- ---------
Accumulated benefit obligation (159,179) (15,978) (132,828) (13,728)
Effect of projected long-term compensation
increases (58,121) (208) (46,140) (380)
--------- --------- --------- ---------
Total projected benefit obligation ("PBO")
(217,300) (16,186) (178,968) (14,108)
--------- --------- --------- ---------
Plan assets in excess of (less than) PBO $ 3,961 $ (16,186) $ 5,268 $ (14,108)
========= ========= ========= =========
Pension liability recognized in the
consolidated balance sheets $ (37,976) $ (15,978) $ (27,974) $ (13,728)
Amounts not recognized:
Prior service costs 1,533 (1,719) 1,731 (1,956)
Net gain at date of adoption 1,548 -- 1,816 --
Net amount resulting from plan experience
and net changes in actuarial assumptions 38,856 (2,607) 29,695 (1,582)
Additional minimum liability
-- 4,118 -- 3,158
--------- --------- --------- ---------
Funded (underfunded) status as of year end $ 3,961 $ (16,186) $ 5,268 $ (14,108)
========= ========= ========= =========
The underfunded plans relate to the plans in which assets at fair value
are exceeded by the accumulated benefit obligation.
- 22 -
Following are the significant assumptions used in determining the costs
and funded status of these plans:
1997 1996 1995
Discount rate:
Pension costs 7.5% 7.5% 8.0%
Benefit obligations 7.0 7.5 7.5
Rate of long-term compensation increase:
Pension costs 5.0 5.0 5.0
Benefit obligations 5.0 5.0 5.0
Expected long-term rate of return on assets 9.0 8.5 8.5
Postretirement Benefits Other Than Pensions - In addition to pension
benefits, the Companies also provide certain health care and life
insurance benefits for eligible salaried and hourly employees at
retirement. These benefits, which accrue during the period an employee
provides services, are subject to deductibles, copayment provisions and
other limitations and are primarily funded on a pay-as-you-go basis. The
Company reserves the right to change or to terminate the benefits at any
time.
The following sets forth the funded status of the accumulated
postretirement benefit obligation reconciled with amounts reported in the
Company's consolidated balance sheet:
1997 1996
(000's Omitted)
Accumulated postretirement benefit obligation ("APBO"):
Retirees $ 60,958 $ 45,793
Fully eligible active employees 45,533 38,955
Other active employees
73,915 64,402
---------- ----------
Total APBO 180,406 149,150
Trust assets at fair value
889 843
------- -------
APBO in excess of trust assets 179,517 148,307
Plus unrecognized net gain
23,948 38,763
---------- ----------
Postretirement benefit liability recognized in the consolidated balance sheets
includes $3.7 million in other current
liabilities at December 31, 1997 and 1996, respectively $ 203,465 $ 187,070
=========== ===========
- 23 -
The Company's net periodic postretirement benefit cost (credit) included
the following components:
1997 1996 1995
(000's Omitted)
Service cost - benefits earned during the year $ 6,786 $ 7,047 $ 5,819
Interest cost on APBO 12,359 11,982 12,089
Actual return on trust assets (47) (50) (43)
Other - amortization of unrecognized net gain
(27,581) - (21,603)
--------- --------- ---------
Net periodic postretirement benefit cost (credit) $ (8,483) $ 18,979 $ (3,738)
========= ========= =========
The amortization of unrecognized net gain (or loss) is due to changes in
the APBO resulting from experience different from that assumed and from
changes in assumptions. Gains (or losses) are recognized as a component
of net postretirement benefit cost by the amount the beginning of year
unrecognized net gain (or loss) exceeds 7.5 percent of the APBO.
Increases in the per capita costs of covered health care benefits of 8.0
percent, 10.0 percent and 11.0 percent were assumed for 1997, 1996 and
1995, respectively, gradually decreasing to a 5.5 percent ultimate rate
by the year 2002. Increasing the assumed health care cost trend rates by
one percentage point in each future year would increase the accumulated
postretirement benefit obligation as of December 31, 1997 by $32.4
million and increase the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost for 1997 by $4.0
million. Discount rates of 7.5 percent, 7.5 percent and 8.0 percent for
1997, 1996 and 1995, respectively, were used to determine the net
periodic postretirement cost. Discount rates of 7.0 percent and 7.5
percent for 1997 and 1996, respectively were used to determine the
accumulated postretirement benefit obligation.
Employee Separation Programs - During 1997, CITGO's senior management
implemented a Transformation Program designed to ensure that numerous
expense control, business information systems and business efficiency
initiatives underway are effectively coordinated to achieve desired
results. Included in this program are reviews of CITGO's business units,
assets, strategies, and business processes. These combined actions
include expected personnel reductions (the "Separation Programs"). The
cost of the Separation Programs is approximately $22 million for the year
ended December 31, 1997.
In accordance with the transfer of UNO-VEN's assets to PDVMR (Note 9),
PDVMR assumed the responsibility for UNO-VEN's pension plans, which
include both a qualified and a nonqualified plan which were frozen at
their current levels on April 30, 1997. The plans cover former UNO-VEN
employees who were eligible for participation in the plans as of April
30, 1997. At December 31, 1997, plan assets consisted of equity
securities, bonds and cash.
Pension costs for the period May 1, 1997 to December 31, 1997 for the
plans include the following components:
Qualified Nonqualified
Plans Plans
(000's Omitted)
Interest cost on projected benefit obligation $ 2,800 $ 100
Actual return on plan assets (8,400) -
Net amortization and deferral 4,700 -
----------- ------
Net periodic pension (benefit) cost $ (900) $ 100
=========== ==========
- 24 -
The following table shows the plans' funded position at December 31,
1997:
Qualified Nonqualified
Plans Plans
(000's Omitted)
Plan assets at fair value $ 65,800 $ -
Projected benefit obligations (60,200) (800)
Unrecognized net losses - 100
------------- ------------
Pension asset (accrued pension costs) recognized in the balance sheet $ 5,600 $ (700)
============= ============
The assumed rates used to measure the plans' projected benefit
obligations and the expected earnings of the plans' assets were as
follow:
Discount rate 7.0%
Expected long-term rate of return on assets 9.5%
13. INCOME TAXES
The provisions for income taxes are comprised of the following:
1997 1996 1995
---- ---- ----
(000's Omitted)
Current:
Federal $ 24,369 $ 69,698 $ 60,152
State (346) 2,901 5,067
---------- ---------- ----------
24,023 72,599 65,219
Deferred 82,145 5,159 18,777
---------- ---------- ---------
$ 106,168 $ 77,758 $ 83,996
========== ========= =========
The Federal statutory tax rate differs from the effective rate due to the
following:
1997 1996 1995
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 2.7 3.2 3.4
Dividend exclusions (2.3) (3.5) (3.2)
Tax settlement (4.9) - -
Other 1.2 1.3 1.9
--------- -------- ------
Effective tax rate 31.7% 36.0% 37.1%
========= ===== =====
The effective tax rate during 1997 decreased due primarily to the
favorable resolution of a significant tax issue, related to environmental
expenditures, with the IRS in 1997. The decrease was partially offset by
- 25 -
the recording of a valuation allowance related to a capital loss
carryforward that will more likely then not expire in 1998.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax liability as
of December 31, 1997 and 1996 are as follows:
December 31,
1997 1996
(000's Omitted)
Deferred tax liabilities:
Property, plant and equipment $ 546,726 $466,889
Inventories 88,079 70,420
Investments in affiliates 93,201 70,368
Other 47,082 30,513
-------- --------
775,088 638,190
------- -------
Deferred tax assets:
Postretirement benefit obligations 72,412 77,905
Marketing and promotional accruals 19,139 23,236
Employee benefit accruals 34,229 30,027
Alternative minimum tax credit carryforward 74,117 59,543
Other 91,940 60,762
------- -------
291,837 251,473
------- -------
Net deferred tax liability (of which $4,476 and
$13,051 is included in prepaid expenses and other
at December 31, 1997 and 1996, respectively) $ 483,251 $ 386,717
========= =========
The Company's alternative minimum tax credit carryforwards are available
to offset regular Federal income taxes in future years without
expiration, subject to certain alternative minimum tax limitations.
At December 31, 1997, the Company has capital loss carryforwards of $
13.8 million, $ 9.6 million of which expire in 1998, $0.4 million of
which expire in 2000, $2.3 million of which expire in 2001 and $1.5
million which expire in 2002. At December 31, 1997, a valuation allowance
of $1.4 million has been established related to this carryforward.
14. 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 are vigorously contesting or pursuing, as applicable, such
lawsuits and claims and believes that its positions are sustainable. The
Companies have recorded accruals for losses it considers to be probable
and reasonably estimable. However, due to the uncertainties involved in
litigation, there are cases, including the significant matters noted
below, in which the outcome is not reasonably predictable, and the
losses, if any, are not reasonably estimable. If
- 26 -
such lawsuits and claims were to be determined in a manner adverse to the
Companies, and in amounts in excess of the Companies' accruals, it is
reasonably possible that such determinations could have a material
adverse effect on the Companies results of operations in a given
reporting period. The term "reasonably possible" is used herein to mean
that the chance of a future transaction or event occurring is more than
remote but less than likely. However, based upon management's current
assessments of these lawsuits and claims and that provided by counsel in
such matters, and the capital resources available to the Companies,
management of the Companies believes that the ultimate resolution of
these lawsuits and claims would not exceed, by a material amount, the
aggregate of the amounts accrued in respect of such lawsuits and claims
and the insurance coverages available to the Companies and, therefore,
should not have a material adverse effect on the Companies' financial
condition, results of operations or liquidity.
Included among these lawsuits and claims is litigation against CITGO by a
number of current and former employees and applicants on behalf of
themselves and a class of similarly situated persons asserting claims
under federal and state laws of racial discrimination in connection with
the employment practices at CITGO's Lake Charles refining complex; the
plaintiffs seek injunctive relief and monetary damages and have appealed
the Court's denial of class certification; the initial trials relating to
this litigation are not currently included in the trial docket.
In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical and Atomic Workers, Local
7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert
claims against CITGO, PDVSA, the Company, PDVMR and UNOCAL pursuant to
Section 301 of the Labor Management Relations Act ("LMRA"). This
complaint alleges that CITGO and the other defendants constitute a single
employer, joint employers or alter-egos for purposes of the LMRA, and are
therefore bound by the terms of a collective bargaining agreement between
UNO-VEN and Local 7-517 covering certain production and maintenance
employees at a Lemont, Illinois, petroleum refinery. On May 1, 1997, in a
transaction involving the former partners of UNO-VEN, the Lemont refinery
was transferred to PDVMR. Pursuant to an operating agreement with PDVMR,
CITGO became the operator of the Lemont refinery, and employed the
substantial majority of employees previously employed by UNO-VEN pursuant
to its initial employment terms, but did not assume the existing labor
agreement. The union seeks compensation for monetary differences in
medical, pension and other benefits between the CITGO and UNO-VEN plans
and reinstatement of all of the UNO-VEN benefit plans. The union also
seeks to require CITGO to abide by the terms of the collective bargaining
agreement between the union and UNO-VEN. As an alternative claim against
all defendants but CITGO, the union alleges that if the labor agreement
is not binding on CITGO, there was a violation of the Federal Workers
Adjustment Retraining and Notification Act by failure to give 60 days
written notice of termination to approximately 400 UNO-VEN employees;
this would allegedly entitle such workers to 60 days pay and benefits,
which is estimated to be approximately $6 million.
PDVMR and PDV America, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities
and claims, including the preceding two matters.
On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected
units were shut down for repair and were returned to full service in
early August 1997. CITGO has property damage and business interruption
insurance which related to this event. As a result, the property damage
and business interruption did not have a material adverse effect on the
Companies' financial condition or results of operations. There are
presently five lawsuits against CITGO pending in federal and state courts
in Corpus Christi, Texas, alleging property damage, personal injury and
punitive damages allegedly arising from the incident and other similar
- 27 -
lawsuits have been threatened. Approximately 6,000 individual claims have
been received by the Company allegedly arising from the incident.
Additionally, there is a class action lawsuit pending against CITGO and
other operators and owners of nearby industrial facilities which was
filed in state court in Corpus Christi, Texas, in 1993 on behalf of
property owners in the vicinity of these facilities. The certification of
this case as a class action in 1995 was appealed by CITGO and other
parties. This lawsuit asserts property damage claims and diminution in
property values allegedly resulting from environmental contamination in
the air, soil, and groundwater, occasioned by ongoing operations of
CITGO's Corpus Christi refinery and the respective industrial facilities
of the other defendants. Two related personal injury and wrongful death
lawsuits were filed in 1996 and are in preliminary stages of discovery at
this time. In 1997 CITGO signed an agreement to settle the property
damage class action lawsuit for approximately $17.3 million, which
included the purchase of approximately 290 properties in an adjacent
neighborhood. Of this amount, $15.7 million was expensed in 1997.
CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear CITGO's appeal of the trial court's class
certification order. This decision raised questions as to whether the
trial court had authority to proceed with the settlement. Additionally,
the trial court sought to impose additional conditions upon the
settlement, which were unacceptable to CITGO. For these reasons, CITGO
opposed the approval and enforcement of the settlement agreement as
proposed to be revised, and enforcement has now been stayed pending a
ruling by the Texas Supreme Court. If the settlement agreement is
enforced, CITGO could be liable for the full settlement amount of $17.3
million. CITGO is pursuing an independent program to purchase the
properties which were the subject of the purchase provision of the
settlement agreement.
In June 1997, CITGO settled litigation with a contractor who had claimed
additional compensation for sludge removal and treatment at CITGO's Lake
Charles, Louisiana, refinery. The settlement did not have a material
effect on CITGO's financial position or results of operations. CITGO
believes that it has no further exposures to losses related to this
matter.
Environmental Compliance and Remediation - The Companies are subject to
various federal, state and local environmental laws and regulations which
may require the Companies to take action to correct or improve the
effects on the environment of prior disposal or release of petroleum
substances by the Companies or other parties. Management believes the
Companies are in compliance with these laws and regulations in all
material respects. Maintaining compliance with environmental laws and
regulations in the future could require significant capital expenditures
and additional operating costs.
In 1992, CITGO reached an agreement with a state agency to cease usage of
certain surface impoundments at CITGO's Lake Charles refinery by 1994. A
mutually acceptable closure plan was filed with the state in 1993. CITGO
and a 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 a state agency revising the 1993 closure plan. A
ruling on this proposal is expected in 1998 and actual closure is
expected to be completed during 2000.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues. The agreement consisted, in
part, of payments to CITGO totaling $46 million.
- 28 -
The former owner will continue to share the costs of certain specific
environmental remediation and certain tort liability actions based on
ownership periods and specific terms of the agreement.
At December 31, 1997 and 1996 the Companies had $58 million and $56
million, respectively, of environmental accruals included in other
noncurrent liabilities. Based on currently available information,
including the continuing participation of former owners in remediation
actions and other environmental-related matters, management believes
these accruals are adequate. Conditions which require additional
expenditures may exist for various Companies' sites including, but not
limited to, the Companies' operating refinery complexes, closed
refineries, service stations and crude oil and petroleum product storage
terminals. The amount of such future expenditures, if any, is
indeterminable.
Capital Expenditures - The Company's anticipated capital expenditures,
excluding CITGO's investments in LYONDELL-CITGO, for the five-year period
1998 to the year 2002 total approximately $1.6 billion (unaudited). The
expenditures include environmental and regulatory capital projects as
well as strategic capital expenditures. At December 31, 1997, authorized
expenditures on incomplete capital projects totaled approximately $173.3
million.
Supply Agreements - CITGO purchases the crude oil processed at its
refineries and also purchases refined products to supplement the
production from its refineries to meet market demands and resolve
logistical issues. In addition to supply agreements with various
affiliates (Note 4), CITGO has various other crude oil, refined product
and feedstock purchase agreements with unaffiliated entities with terms
ranging from monthly to annual renewal. CITGO believes these sources of
supply are reliable and adequate for its current requirements.
Throughput Agreements - CITGO has throughput agreements with certain
pipeline affiliates (Note 8). These throughput agreements may be used to
secure obligations of the pipeline affiliates. Under these agreements,
CITGO may be required to provide its pipeline affiliates with additional
funds through advances against future charges for the shipping of
petroleum products. CITGO currently ships on these pipelines and has not
been required to advance funds in the past. At December 31, 1997, CITGO
has no fixed and determinable, unconditional purchase obligations under
these agreements.
Marine Spill Response Arrangements - During the third quarter of 1995
CITGO entered into a contract with National Response Corporation for
marine oil removal services capability and terminated its relationship
with the previous provider of that service. CITGO paid a cancellation fee
of approximately $16 million, which is included in cost of sales and
operating expenses in 1995.
Commodity Derivative Activity - The Companies' commodity derivatives are
generally entered into through major brokerage houses and traded on
national exchanges and although usually settled in cash, can be settled
through delivery of the commodity. Such contracts generally qualify for
hedge accounting and correlate to price movements of crude oil and
refined products. Resulting gains or losses, therefore, will generally be
offset by gains and losses on the Companies' hedged inventory or future
purchases and sales. The Companies' derivative commodity activity is
closely monitored by management and contract periods are generally less
than 30 days. Unrealized and deferred gains and losses on these contracts
at December 31, 1997 and 1996 and the effects on cost of sales and pretax
earnings for 1997, 1996 and 1995 were not material. At times during 1996
and 1995, the Companies entered into commodity derivatives activities
that were not related to the hedging program discussed above. This
activity and its results were not material in 1996 or 1995. There was no
such activity in 1997.
- 29 -
Other Credit and Off-Balance-Sheet Risk Information as of December 31,
1997 - CITGO has guaranteed approximately $12 million of debt of certain
of its marketers and an affiliate. Such debt is substantially
collateralized by assets of these entities. CITGO and PDVMR have
outstanding letters of credit totaling approximately $388 million which
includes $366 million related to their tax-exempt bonds, taxable revenue
bonds and pollution control bonds (Note 11). CITGO has also acquired
surety bonds totaling $42 million primarily due to requirements of
various government entities. CITGO does not expect liabilities to be
incurred related to such guarantees, letters of credit or surety bonds.
Neither CITGO nor the counterparties are required to collateralize their
obligations under interest rate swaps or caps or over-the-counter
derivative commodity agreements. CITGO is exposed to credit loss in the
event of nonperformance by the counterparties to these agreements, but
has no off-balance-sheet risk of accounting loss for the notional
amounts. CITGO does not anticipate nonperformance by the counterparties,
which consist primarily of major financial institutions at December 31,
1997.
Management considers the market risk to the Companies related to its
commodity and interest rate derivatives to be insignificant during the
periods presented.
15. LEASES
CITGO leases certain of its Corpus Christi refinery facilities under a
long-term lease. The basic term of the lease expires on January 1, 2004;
however, CITGO may renew the lease until January 31, 2011, the date of
its purchase option. Capitalized costs included in property, plant and
equipment related to the leased assets were approximately $209 million at
December 31, 1997 and 1996. Accumulated amortization related to the
leased assets was approximately $94 million and $86 million at December
31, 1997 and 1996, respectively. Amortization is included in depreciation
expense.
The Companies also have various noncancellable operating leases,
primarily for product storage facilities, office space, computer
equipment and vehicles. Rent expense on all operating leases totaled $39
million, $33 million and $33 million in 1997, 1996 and 1995,
respectively. Future minimum lease payments for the capital lease and
noncancellable operating leases are as follows:
- 30 -
Capital Operating
Year Lease Leases Total
(000's Omitted)
1998 $ 27,375 $ 27,900 $ 55,275
1999 27,375 21,229 48,604
2000 27,375 18,336 45,711
2001 27,375 16,491 43,866
2002 27,375 15,794 43,169
Thereafter 63,375 17,286 80,661
---------- ---------- ----------
Total minimum lease payments $ 200,250 $ 117,036 $ 317,286
========= ========== =========
Amount representing interest (70,524)
Present value of minimum lease payments 129,726
Current portion 13,140
=========
$ 116,586
=========
16. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Companies, using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the
Companies could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, and restricted cash
approximate fair values because of the short maturity of these
instruments. The carrying amounts and estimated fair values of the
Companies' other financial instruments are as follows:
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
(000's Omitted) (000's Omitted)
Liabilities:
Short-term bank loans $ 3,000 $ 3,000 $ 53,000 $ 53,000
Long-term debt 2,392,807 2,454,728 2,560,576 2,597,556
Derivative and Off-Balance
Sheet Financial Instruments-
Unrealized Gains (Losses):
Interest rate swap agreements - (3,225) - (1,093)
Guarantees of debt - (59) - (60)
Letters of credit - (1,848) - (1,741)
Surety bonds - (119) - (100)
- 31 -
Short-Term Bank Loans and Long-Term Debt - The fair value of short-term
bank loans and long-term debt is based on interest rates that are
currently available to the Companies for issuance of debt with similar
terms and remaining maturities, except for the Company's $1 billion
principle amount senior notes which were based upon quoted market prices.
Interest Rate Swap and Cap Agreements - The fair value of these
agreements is based on the estimated amount that CITGO and PDVMR would
receive or pay to terminate the agreements at the reporting date, taking
into account current interest rates and the current creditworthiness of
the counterparties.
Guarantees, Letters of Credit and Surety Bonds - The estimated fair value
of contingent guarantees of third-party debt, letters of credit and
surety bonds is based on fees currently charged for similar one-year
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date, and current estimates of fair value may differ significantly
from the amounts presented herein.
17. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996 (in thousands):
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Sales $3,262,726 $3,440,392 $3,564,105 $3,354,980
========== ========== ========== ==========
Cost of sales and operating
expenses $3,177,759 $3,255,776 $3,313,878 $3,250,179
========== ========== ========== ==========
Net income $ 15,048 $ 77,993 $ 104,331 $ 30,645
=========== =========== ========== ===========
1996 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Sales $2,607,195 $3,333,996 $3,310,456 $3,700,413
========== ========== ========== ==========
Cost of sales and operating
expenses $2,521,101 $3,229,290 $3,186,413 $3,554,199
========== ========== ========== ==========
Net income $ 14,755 $ 36,002 $ 36,212 $ 51,054
=========== =========== =========== ===========
18. SUBSEQUENT EVENT
On January 27, 1998, a cash dividend of $110 million was paid to PDV
Holding, Inc.
- 32 -
* * * * * *
- 33 -
SCHEDULE I
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Dollars in thousands)
Financial Position of Registrant
December 31,
------------
1997 1996
---------- ----------
Assets
Investment in and advances to affiliates $2,572,090 $2,090,010
Notes receivable from PDVSA 1,000,000 1,000,000
Other assets 47,112 50,653
---------- ----------
$3,619,202 $3,140,663
========== ==========
Liabilities and shareholder's equity
Long-term debt $ 997,189 $ 996,598
==========
Other liabilities 32,921 32,990
Shareholder's equity 2,589,092 2,111,075
---------- ----------
$3,619,202 $3,140,663
========== ==========
Operations of the Registrant
Year Ended December 31,
-----------------------
1997 1996 1995
-------- -------- --------
Revenues
Interest income from PDVSA $ 77,725 $ 77,725 $ 77,725
Other income 8,954 8,231 9,168
-------- -------- --------
86,679 85,956 86,893
-------- -------- --------
Expenses
Interest expense 80,338 80,075 79,830
Other 2,771 2,676 3,020
-------- -------- --------
83,109 82,751 82,850
-------- -------- --------
Equity in net income of subsidiaries 225,703 136,008 139,959
-------- -------- --------
Income before income taxes, extraordinary charge and
cumulative effect of accounting changes 229,273 139,213 144,002
Provision for income taxes 1,256 1,190 1,516
-------- -------- --------
Income before extraordinary charge and cumulative effect of
accounting change 228,017 138,023 142,486
Extraordinary gain - early extinguishment of debt 3,380
-------- -------- --------
Net income $228,017 $138,023 $145,866
======== ======== ========
SCHEDULE I
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Dollars in thousands)
Cash Flows of the Registrant
Year Ended December 31,
-----------------------
1997 1996 1995
--------- --------- ---------
Cash provided by operating activities $ 3,361 $ 5,517 $ 6,021
--------- --------- ---------
Cash used in investing activities
Investments in and advances to subsidiaries (254,239) (5,343) (21,317)
--------- --------- ---------
(254,239) (5,343) (21,317)
--------- --------- ---------
Cash provided by financing activities
Capital contribution from parent 250,000 -- 15,000
--------- --------- ---------
250,000 0 15,000
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (878) 174 (296)
Cash and cash equivalents - beginning of year 5,381 5,207 5,503
========= ========= =========
Cash and cash equivalents - end of year $ 4,503 $ 5,381 $ 5,207
========= ========= =========