Back to GetFilings.com
================================================================================
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
750 Lexington Avenue, New York, New York 10022
(Address of principal executive office) (Zip Code)
(212) 753-5340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
------------------- -----------------------------------------
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, $1.00 par value, outstanding as of
March 1, 2000: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: None
================================================================================
PDV AMERICA, INC.
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
- -------------------------------------------------------------------------------------------------------------------
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.....................................................................ii
PART I
ITEMS 1. and 2. Business and Properties.......................................................................1
ITEM 3. Legal Proceedings............................................................................17
ITEM 4. Submission of Matters to a Vote of Security Holders..........................................18
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters........................19
ITEM 6. Selected Financial Data......................................................................19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........20
ITEM 7 A. Quantitative and Qualitative Disclosures About Market Risk...................................27
ITEM 8. Financial Statements and Supplementary Data..................................................30
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........30
PART III
ITEM 10. Directors And Executive Officers Of The Registrant...........................................31
ITEM 11. Executive Compensation.......................................................................31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management...............................31
ITEM 13. Certain Relationships and Related Transactions...............................................31
PART IV
ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K.......................................35
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 Year 2000 matters, capital
expenditures and investments related to environmental compliance and strategic
planning, purchasing patterns of refined products and capital resources
available to the Companies (as defined herein) are forward looking statements.
In addition, when used in this document, the words "anticipate", "estimate",
"prospect" and similar expressions are used to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties, such
as increased inflation, continued access to capital markets and commercial bank
financing on favorable terms, increases in regulatory burdens, changes in prices
or demand for the Companies' products as a result of competitive actions or
economic factors and changes in the cost of crude oil, feedstocks, blending
components or refined products. Such statements are also subject to the risks of
increased costs in related technologies and such technologies producing
anticipated results. Should one or more of these risks or uncertainties, among
others, materialize, actual results may vary materially from those estimated,
anticipated or projected. Although PDV America, Inc. believes that the
expectations reflected by such forward looking statements are reasonable based
on information currently available to the Companies, no assurances can be given
that such expectations will prove to have been correct.
ii
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 a wholly owned subsidiary, effective April 2, 1997, of PDV
Holding, Inc. ("PDV Holding"), a Delaware corporation. The Company's ultimate
parent is Petroleos de Venezuela, S.A. (together with one or more of its
subsidiaries, referred to herein as "PDVSA"), the national oil company of the
Bolivarian 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, 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
(Consolidated Financial Statemens of PDV America - Note 8 of Item 14a), the
results of operations of PDVMR on a consolidated basis since May 1, 1997 and the
financial position of PDVMR at December 31, 1998 and 1999. See "--PDV Midwest
Refining, L.L.C."
1
PDV America's aggregate net interest in rated crude oil refining
capacity is 858 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, 1999.
PDV America Refining Capacity
Net PDV
Total Rated America
Crude Ownership In
PDV America Refining Refining
Location Owner Interest Capacity Capacity
-------------------------- -------------- -------------- --------------
% MBPD MBPD
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 41 265 109
Lemont, IL PDVMR 100 167 167
-------------- --------------
Total Rated Refining
Capacity as of December 31,
1999 1,014 858
============== ==============
- --------------------
(1) Initial interest acquired on July 1, 1993. CITGO has a one-time option,
exercisable after January 1, 2000 but not later than September 30, 2000, to
increase for an additional investment, its participation interest up to a
maximum of 50%. See "CITGO-Refining-LYONDELL-CITGO". See also "Factors
Affecting Forward Looking Statements".
The following table shows sales revenues and volumes of PDV America for
the three years in the period ended December 31, 1999.
PDV America Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
1999 1998 1997 1999 1998 1997
------------- ------------- ------------- ------------- ------------- --------------
($ in millions) (MM gallons)
Gasoline $7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel/#2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial
products 1,041 952 1,178 2,306 2,658 1,961
Lubricants and waxes 482 441 467 285 230 239
------------- ------------- ------------- ------------- ------------- --------------
Total refined product
sales $13,182 $10,718 $13,419 23,714 23,617 21,190
Other sales 150 242 203 - - -
------------- ------------- ------------- ------------- ------------- --------------
Total sales $13,332 $10,960 $13,622 23,714 23,617 21,190
============= ============= ============= ============= ============= ==============
2
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, 1999.
PDV America Refinery Production (1)
Year Ended December 31,
----------------------------------------------------------------------
1999(2) 1998(2) 1997(3) (4)
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity at year end 858 858 853
Refinery Input
Crude oil 753 84% 763 83% 675 81%
Other feedstocks 146 16% 159 17% 159 19%
----------- ----------- ----------- ----------- ---------- -----------
Total 899 100% 922 100% 834 100%
=========== =========== =========== =========== ========== ===========
Product Yield
Light fuels
Gasoline 401 44% 413 44% 381 45%
Jet fuel 72 8% 69 7% 68 8%
Diesel/#2 fuel 173 19% 175 19% 144 17%
Asphalt 42 5% 45 5% 42 5%
Petrochemicals and industrial products 219 24% 231 25% 206 25%
----------- ----------- ----------- ----------- ---------- -----------
Total 907 100% 933 100% 841 100%
=========== =========== =========== =========== ========== ===========
Utilization of Rated Refining Capacity 88% 89% 79%
- --------------------
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 41.25% of the Houston refinery for 1999 and 1998.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) 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.
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, over some of which individual petroleum refining and marketing
companies have little 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. 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 health of local and worldwide economies,
although weather patterns and taxation relative to other energy sources also
play significant parts. Generally, U.S. refiners compete for sales on the basis
of price and brand image and, in some areas, product quality.
3
CITGO
CITGO refines, markets and transports gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, refined waxes, asphalt and other refined products
throughout the United States, primarily east of the Rocky Mountains. CITGO's
transportation fuel customers include primarily CITGO branded wholesale
marketers, convenience stores and airlines located mainly east of the Rocky
Mountains. Asphalt is principally marketed to independent paving contractors on
the East Coast of the United States. Lubricants are sold, principally in the
United States, to independent marketers, mass marketers and industrial
customers. Petrochemical, feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States. Petroleum
coke is sold primarily in international markets.
Refining
CITGO's aggregate net interest in rated crude oil refining capacity is
691 thousand barrels per day ("MBPD"). The following table shows the capacity of
each U.S. refinery in which CITGO holds an interest and CITGO's share of such
capacity as of December 31, 1999.
Total Rated Net CITGO
Crude Ownership In
CITGO Refining Refining
Location Owner Interest Capacity Capacity
-------------------------- -------------- -------------- --------------
(%) (MBPD) (MBPD)
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 41 265 109
-------------- --------------
Total Rated Refining
Capacity as of December 31,
1999 847 691
============== ==============
- --------------------
(1) Initial interest acquired on July 1, 1993. CITGO has a one-time option,
exercisable after January 1, 2000 but not later than September 30, 2000, to
increase for an additional investment, its participation interest up to a
maximum of 50%. See "CITGO--Refining--LYONDELL-CITGO". See also "Factors
Affecting Forward Looking Statements".
4
The following table shows CITGO's aggregate interest in refining capacity,
refinery input and product yield for the three years in the period ended
December 31, 1999.
CITGO Refinery Production (1)
Year Ended December 31,
----------------------------------------------------------------------
1999(2) 1998(2) 1997(3)
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity at year end 691 691 693
Refinery Input
Crude oil 607 82% 615 81% 548 79%
Other feedstocks 129 18% 144 19% 143 21%
----------- ----------- ----------- ----------- ---------- -----------
Total 736 100% 759 100% 691 100%
=========== =========== =========== =========== ========== ===========
Product Yield
Light fuels
Gasoline 317 43% 334 43% 309 44%
Jet fuel 70 9% 66 9% 66 9%
Diesel/#2 fuel 136 18% 134 17% 112 16%
Asphalt 42 6% 45 6% 42 6%
Petrochemicals and industrial products 179 24% 193 25% 174 25%
----------- ----------- ----------- ----------- ---------- -----------
Total 744 100% 772 100% 703 100%
=========== =========== =========== =========== ========== ===========
Utilization of Rated Refining Capacity 88% 89% 79%
- --------------------
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 41.25% of the Houston refinery for 1999 and 1998.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
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. CITGO also owns
an interest in and obtains refined products from a refinery in Houston.
Lake Charles, Louisiana Refinery. This refinery 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 reformulated gasoline. The Lake Charles
refinery has a Solomon Process Complexity Rating of 17.6 (as compared to an
average of 13.6 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 products. A higher
Solomon Process Complexity Rating indicates a greater capability to produce such
products.
5
The following table shows the rated refining capacity, refinery input
and product yield at the Lake Charles refinery for the three years in the period
ended December 31, 1999.
Lake Charles Refinery Production
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity at year end 320 320 320
Refinery Input
Crude oil 298 89% 288 84% 291 88%
Other feedstocks 36 11% 54 16% 40 12%
----------- ----------- ----------- ---------- ----------- -----------
Total 334 100% 342 100% 331 100%
=========== =========== =========== ========== =========== ===========
Product Yield
Light fuels
Gasoline 171 50% 187 54% 177 52%
Jet fuel 63 18% 59 17% 60 18%
Diesel/#2 fuel 53 16% 47 13% 45 13%
Petrochemicals and industrial products 54 16% 55 16% 56 17%
----------- ----------- ----------- ---------- ----------- -----------
Total 341 100% 348 100% 338 100%
=========== =========== =========== ========== =========== ===========
Utilization of Rated Refining Capacity 93% 90% 91%
Approximately 33%, 66% and 63% of the total crude runs at the Lake
Charles refinery, in the years 1999, 1998 and 1997, 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 91% of its rated capacity of 320 MBPD. The volume of heavy crude
oil available to CITGO in 1999 was less than in previous years. As a result, the
crude oil slate refined in 1999 was lighter. (See "Items 1. and 2. Business and
Properties--Crude Oil and Refined Product Purchases").
The Lake Charles refinery's Gulf Coast location provides it with access
to crude oil deliveries from multiple sources; imported crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, while
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port 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 to load refined products for
shipment.
The Lake Charles refinery's main petrochemical products are propylene
and benzene. 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 high quality oils and waxes, and
is one of the few in the industry designed as a stand-alone lubricants refinery.
Feedstocks
6
are supplied 65% from CITGO's Lake Charles refinery and 35% from Conoco's Lake
Charles refinery. Finished refined products are shared on the same pro rata
basis by CITGO and Conoco.
Corpus Christi, Texas Refinery. 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 Rating of 16.7 (as compared to an average 13.6 for U.S.
refineries in the most recently available Solomon Associates, Inc. survey). This
refinery complex consists of the East and West Plants, located within five miles
of each other.
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, 1999.
Corpus Christi Refinery Production
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
----------------------- ---------------------- -----------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity at year end 150 150 150
Refinery Input
Crude oil 148 70% 152 71% 115 59%
Other feedstocks 62 30% 61 29% 79 41%
----------- ----------- ----------- ---------- ----------- -----------
Total 210 100% 213 100% 194 100%
=========== =========== =========== ========== =========== ===========
Product Yield
Light fuels
Gasoline 96 46% 97 46% 93 48%
Diesel/#2 fuel 55 27% 58 27% 45 23%
Petrochemicals and industrial products 56 27% 57 27% 56 29%
----------- ----------- ----------- ---------- ----------- -----------
Total 207 100% 212 100% 194 100%
=========== =========== =========== ========== =========== ===========
Utilization of Rated Refining Capacity 99% 101% 77%
Corpus Christi crude runs during 1999 and 1998 consisted of 81% and
100%, respectively, heavy sour Venezuelan crude. The average API gravity of the
composite crude slate run at the Corpus Christi refinery is approximately 24
degrees. Crude oil supplies are delivered directly to the Corpus Christi
refinery through the Port of Corpus Christi. The relatively low utilization of
rated refining capacity in 1997 is a result of a major turnaround in that year.
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.
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 industry.
LYONDELL-CITGO Refining LP. Subsidiaries of CITGO and Lyondell Chemical
Company ("Lyondell") are partners in LYONDELL-CITGO Refining LP
("LYONDELL-CITGO"), which owns
7
and operates a sophisticated 265 MBPD refinery previously owned by Lyondell and
located on the ship channel in Houston, Texas. At December 31, 1999, CITGO's
investment in LYONDELL-CITGO was $560 million. In addition, at December 31,
1999, CITGO held notes receivable from LYONDELL-CITGO of $28 million. (See
Consolidated Financial Statements of PDV America -- Note 3 in Item 14a). A
substantial amount of the crude oil processed by this refinery is supplied by
PDVSA under a long-term crude oil supply agreement through the year 2017. CITGO
purchases substantially all of the gasoline, diesel and jet fuel produced at
this refinery under a long-term contract. (See Consolidated Financial Statements
of PDV America -- Notes 2 and 3 in Item 14a).
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, PDV Midwest Refining, L.L.C. ("PDVMR"), Chalmette Refining,
L.L.C. ("Chalmette") and Hovensa, L.L.C. ("HOVENSA"). (See "Item 13 -- Certain
Relationships and Related Transactions").
8
Crude Oil Purchases. The following chart shows CITGO's purchases of
crude oil for the three years in the period ended December 31, 1999:
CITGO Crude Oil Purchases
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
------------------------ ------------------------ ------------------------ ------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997 1999 1998 1997
------- -------- ------- ------- ------- -------- -------- ------- ------- ------- ----------------
(MBPD) (MBPD) (MBPD) (MBPD)
Suppliers
PDVSA 104 134 130 118 153 117 42 52 49 19 17 14
PEMEX 54 51 61 14 - - - - - - - -
Occidental - 20 40 - - - - - - - - -
Other sources 142 88 57 15 - - - - - - - -
------- -------- ------- ------- ------- -------- -------- ------- ------- ------- ----------------
Total 300 293 288 147 153 117 42 52 49 19 17 14
======= ======== ======= ======= ======= ======== ======== ======= ======= ======= ======== =======
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of CITGO's refineries. 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, 1999.
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) 1999 1998 1997 Date
--------- ----------------- --------- --------- -------- -------------
(MBPD) (MBPD) (year)
Location
Lake Charles, LA (2) 120 50 101(3) 121 115 2006
Corpus Christi, TX (2) 130 - 108(3) 128 125 2012
Paulsboro, NJ (2) 30 - 22(3) 35 35 2010
Savannah, GA (2) 12 - 11(3) 12 12 2013
Houston, TX (4) 200 - 173 223 216 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 as shown on this table do not equal purchases
from PDVSA (shown in the previous table) as a result of transfers
between refineries of contract crude purchases included here and
spot purchases which are included in the previous table.
(3) The crude supply contracts include force majeure clauses that have
been exercised. Exercise of these clauses requires that the
Company locate alternative sources of supply for its crude oil
requirements, which has resulted in higher crude oil costs.
(4) 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 that
extends from 200 MBPD to 230 MBPD.
9
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO for a fixed period,
usually 20 to 25 years. The supply agreements differ somewhat for each entity
and each CITGO refinery but generally incorporate formula prices based on the
market value of a slate of refined products deemed to be produced for 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 crude supply agreements contain force majeure provisions which
entitle the supplier to reduce the quantity of crude oil and feedstocks
delivered under the crude supply agreements under specified circumstances. As of
December 31, 1999, PDVSA deliveries of crude oil to CITGO were less than
contractual base volumes due to PDVSA's declaration of force majeure pursuant to
all of the long-term crude oil supply contracts related to CITGO's refineries.
Therefore, the Company has been required to use alternative sources of crude
oil. As a result, CITGO estimates that crude oil costs for the year ended
December 31, 1999 were higher by $55 million from what would have otherwise been
the case. It is not possible to forecast the future financial impacts of these
reductions in crude oil deliveries on CITGO's costs because the correlation
between crude oil and refined product prices is not constant over time.
Additionally, because of among other things, changes in crude oil economics, the
duration of force majeure cannot be forecasted.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude supply
agreements and oblige the supplier to pay CITGO the deemed margin under that
contract for each barrel of reduced crude oil and feedstocks. During the second
half of 1999, PDVSA did not deliver naphtha pursuant to one of the contracts and
made contractually specified deemed margin payments in lieu thereof. The
financial effect was an increase in costs by $4 million from what would have
otherwise been the case.
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 was deferred from 1995 and 1996 to the years 1997 through
1999. The effect of the adjustments to the original modifications was to reduce
the cost of crude oil purchased from PDVSA by approximately $21 million in 1999,
$25 million in 1998 and $25 million in 1997, as compared to the original
modification and without giving effect to any other factors that may affect the
amount payable for crude oil under these agreements.
Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDV Marina, S.A., a wholly-owned subsidiary of
PDVSA. In 1999, 91% of the PDVSA contract crude oil delivered to the Lake
Charles and Corpus Christi refineries was delivered on tankers operated by this
PDVSA subsidiary.
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.
CITGO was a party to a contract with an affiliate of Occidental
Petroleum Corporation ("Occidental") for the purchase of light, sweet crude oil
to produce lubricants. This contract expired on
10
August 31, 1998. 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 demand of CITGO's marketing network. During 1999,
CITGO's shortage in gasoline production approximated 344 MBPD. However, due to
logistical needs, timing differences and product grade imbalances, CITGO
purchased approximately 691 MBPD of gasoline and sold into the spot market, or
to refined product traders or other refineries approximately 245 MBPD of
gasoline. The following table shows CITGO's purchases of refined products for
the three years in the period ended December 31, 1999.
CITGO Refined Product Purchases
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
(MBPD)
Light Fuels
Gasoline 691 581 518
Jet fuel 77 69 74
Diesel/#2 fuel 279 208 190
-------------- ------------- -------------
Total 1,047 858 782
============== ============= =============
As of December 31, 1999, CITGO purchased substantially all of the
gasoline, diesel and jet fuel produced at the LYONDELL-CITGO refinery under a
long-term contract which extends through the year 2017. LYONDELL-CITGO was a
major supplier in 1999 providing CITGO with 117 MBPD of gasoline, 68 MBPD of
diesel/#2 fuel and 18 MBPD of jet fuel. See "--Refining--LYONDELL-CITGO".
As of May 1, 1997, CITGO began purchasing, under a contract with a
sixty-month term, substantially all of the refined products produced at the
PDVMR refinery. During 1999, the PDVMR refinery, located in Lemont, Illinois,
provided CITGO with 84 MBPD of gasoline, 38 MBPD of diesel/#2 fuel and 2 MBPD of
jet fuel.
An affiliate of PDVSA acquired 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, 2000. CITGO acquired approximately 66 MBPD of refined products from
the refinery during 1999, approximately one-half of which was gasoline.
In October 1998 an affiliate of PDVSA acquired a 50% equity interest in
HOVENSA (a joint venture that owns and operates a refinery in St. Croix, U.S.
Virgin Islands) and has the right under a product sales agreement to assign
periodically to CITGO, or other related parties, its option to purchase 50% of
the refined products produced by HOVENSA (less a certain portion of such
products that HOVENSA will market directly in the local and Caribbean markets).
In addition, under the product sales agreement, the PDVSA affiliate has
appointed CITGO as its agent in designating which of its affiliates shall from
time to time take deliveries of the refined products available to it. The
product sales agreement will be in effect for the life of the joint venture,
subject to termination events based on default or mutual agreement. Pursuant to
the above arrangement, CITGO acquired approximately 118 MBPD of refined products
from the refinery during 1999, approximately one-half of which was gasoline.
11
Marketing
CITGO's major products are light fuels (including gasoline, jet fuel,
and diesel fuel), industrial products and petrochemicals, asphalt, lubricants
and waxes. The following table shows revenue and volumes of each of these
product categories for the three years in the period ended December 31, 1999.
CITGO Refined Product Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ---------- ----------- -----------
($ in millions) (MM gallons)
Light fuels
Gasoline $ 7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel / #2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial products 1,024 937 1,172 2,063 2,440 1,940
Lubricants and waxes 482 441 467 285 230 239
----------- ----------- ----------- ---------- ----------- -----------
Total $13,165 $10,703 $13,413 23,471 23,399 21,169
=========== =========== =========== ========== =========== ===========
Light Fuels. Gasoline sales accounted for 58% of CITGO's refined
product sales in the years 1999, 1998 and 1997. CITGO markets CITGO branded
gasoline through approximately 13,500 independently owned and operated CITGO
branded retail outlets (including 11,471 branded retail outlets owned and
operated by approximately 816 independent marketers and 2,027 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 45%, 48% and 47% of the volume of CITGO branded
gasoline sold in 1999, 1998 and 1997, respectively. See "--Crude Oil and Refined
Product Purchases -- Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand 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.
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.
CITGO markets jet fuel directly to airline customers at 27 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York
and Miami.
CITGO's delivery of light fuels to its customers is accomplished in
part through 50 refined product terminals located throughout CITGO's primary
market territory. Of these terminals, 38 are wholly-owned by CITGO and 12 are
jointly owned. Fourteen of CITGO's product terminals have waterborne docking
facilities, which greatly enhance the flexibility of CITGO's logistical system.
In addition, CITGO operates and delivers refined products from seven terminals
owned by PDVMR
12
in the Midwest. Refined product terminals owned or operated by CITGO provide a
total storage capacity of approximately 22 million barrels. Also, CITGO has
active exchange relationships with over 300 other refined product terminals,
providing flexibility and timely response capability to meet distribution needs.
Petrochemicals and Industrial Products. CITGO sells petrochemicals in
bulk to a variety of U.S. manufacturers as raw material for finished goods. The
majority of CITGO's cumene production is sold to Mount Vernon Phenol Plant
Partnership ("MVPPP"), 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. Sulphur is sold to the U.S. and international fertilizer industries;
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.
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 U.S. peaks in the summer
months.
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.
Pipeline Operations
CITGO owns and operates 142 miles of crude oil pipeline systems and
approximately 1,021 miles of products pipeline systems. CITGO also has equity
interests in two crude oil pipeline companies with a total of approximately
1,929 miles of pipeline plus equity interests in five refined product pipeline
companies with a total of approximately 8,437 miles of pipeline. CITGO's
pipeline interests provide it 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 refined products from the Gulf Coast to the mid-Atlantic and
eastern seaboard states.
Employees
CITGO and its subsidiaries have a total of approximately 4,200
employees, approximately 1,700 of who are covered by 15 union contracts.
Approximately 1,600 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant plant and
various refined product terminals.
PDV Midwest Refining, L.L.C.
Refining
PDVMR produces light fuels, petrochemicals and industrial products at
its refinery in Lemont, Illinois. The refinery has a crude distillation capacity
of 167 MBPD and has a Solomon Process Complexity Rating of 11.6 (as compared to
an average of 13.6 for U.S. refineries in the most recently available Solomon
Associates, Inc., survey).
13
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, 1999.
Lemont Refinery Production
Year Ended December 31,
----------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity at year end 167 167 160
Refinery Input
Crude oil 146 90% 148 91% 151 89%
Other feedstocks 17 10% 15 9% 17 11%
------------ ----------- ------------ ----------- ----------- ------------
Total 163 100% 163 100% 168 100%
============ =========== ============ =========== =========== ============
Product Yield
Light fuels 84 51% 79 49% 87 52%
Gasoline 2 1% 3 2% 3 2%
Jet fuel 37 23% 41 25% 39 24%
Diesel/#2 fuel 40 25% 38 24% 37 22%
------------ ----------- ------------ ----------- ----------- ------------
Industrial Products & Petrochemicals 163 100% 161 100% 166 100%
============ =========== ============ =========== =========== ============
Total
Utilization of Rated Refining Capacity 87% 89% 94%
The average API gravity of the composite crude slate run at the Lemont
refinery is approximately 27 degrees. Crude oil is supplied to the refinery by
pipeline.
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
coker production facility adjacent to the Lemont refinery (the "Needle Coker").
The remaining 75% interest is held by various subsidiaries of Union Oil Company
of California.
Crude Oil Purchases
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
portion of the crude oil refined at the Lemont refinery is supplied by PDVSA
under a crude oil supply agreement, effective as of April 23, 1997, that expires
in the year 2002 and thereafter is renewable annually. The contract calls for
delivery of a guaranteed volume of up to 100 MBPD; however, PDVMR is not
required to purchase a set minimum. In 1999, the crude oil processed at the
Lemont refinery was 21 percent Venezuelan, 62 percent Canadian and 17 percent
from other sources.
Marketing
Subsequent to the transfer of assets on May 1, 1997, substantially all
of PDVMR's products are sold to and marketed by CITGO. (See "Item 13. Certain
Relationships and Related Transactions".)
14
Employees
PDVMR has no employees. CITGO operates the Lemont refinery and provides
all administrative functions to the Company pursuant to a Refinery Operating
Agreement (as defined below).
Refinery Operating 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). (See "Item 13--Certain Relationships and
Related Transactions".)
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 Companies' 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 aspects. Maintaining compliance with environmental laws and regulations
in the future could require significant capital expenditures and additional
operating costs.
Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, the Companies' management believes that its
current accruals are sufficient to address the Companies' environmental clean-up
obligations. Conditions which require additional expenditures may exist for
various of the 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, 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 its
former owner are participating in the closure and sharing the related costs
based on estimated contributions of waste and ownership periods. The remediation
commenced in December 1993. In 1997, CITGO presented a proposal to a state
agency revising the 1993 closure plan. In 1998 and 2000, CITGO submitted further
revisions as requested by the state agency. A ruling on the proposal, as
amended, is expected in 2000 with final closure to begin in 2002.
15
In 1992, an agreement was reached between CITGO and its former owner
concerning a number of environmental issues. The agreement consisted, in part,
of payments to CITGO totaling $46 million. 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.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
an environmental compliance review at the Corpus Christi refinery in the first
and second quarters of 1998. In January 1999, the TNRCC issued to CITGO a Notice
of Violation ("NOV") arising from this review and in October 1999 proposed fines
of approximately $1.6 million related to the NOV. Most of the alleged violations
refer to recordkeeping and reporting issues, failure to meet required emission
levels, and failure to properly monitor emissions. TNRCC issued to CITGO another
NOV in December 1999 based on its 1999 audit which cites items similar to those
cited earlier and the agency has tentatively suggested that the two audits
should be combined for resolution. CITGO intends to vigorously protest the
alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency, ("EPA") that the EPA
believes these companies have contributed to contamination in the Calcasieu
Estuary, in the proximity of Lake Charles, Calcasieu Parish, Louisiana and are
Potentially Responsible Parties ("PRPs") under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA"). The EPA made a demand for
payment of its past investigation costs from CITGO and other PRPs and advised it
intends to conduct a Remedial Investigation/Feasibility Study ("RI/FS") under
its CERCLA authority. CITGO and other PRPs may be potentially responsible for
the costs of the RI/FS. CITGO disagrees with the EPA's allegations and intends
to contest this matter.
In October 1999, the EPA issued a NOV to CITGO for violations of
federal regulations regarding reformulated gasoline found during a May 1998
inspection at CITGO's Braintree, Massachusetts terminal and recommended a
penalty of $218,500. CITGO intends to vigorously contest the alleged violations
and proposed fines.
Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, CITGO management believes that its accruals are
sufficient to address its environmental obligations. Conditions which require
additional expenditures may exist with respect to various Company sites
including, but not limited to, CITGO's operating refinery complexes, closed
refineries, service station sites and crude oil and petroleum product storage
terminals. The amount of such future expenditures, if any, is indeterminable.
Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 1999, CITGO spent approximately $81
million for environmental and regulatory capital improvements in its operations.
Management currently estimates that CITGO will spend approximately $350 million
for environmental and regulatory capital projects over the five-year period
2000-2004. 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". See also "Factors Affecting
Forward Looking Statements".
Environment -- PDVMR
In accordance with the Partnership Interest Retirement Agreement, the
Company, VPHI Midwest, Inc., a subsidiary of the Company, and PDVMR assumed
joint and several liability for all environmental matters relating to past
operations of UNO-VEN.
16
In November 1999, the Attorney General's Officer of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois against PDV
Midwest Refining and CITGO Petroleum Corporation alleging damages from several
releases to the air of contaminants from the Lemont, Illinois refinery. The
initial complaint addressed alleged violations and potential compliance actions.
The Attorney General's office later made a demand for penalties of approximately
$150,000. While CITGO and PDVMR disagree with the Attorney General's alleged
violations and proposed penalty demand, they are cooperating with the agency and
anticipate reaching an agreement with the agency to resolve this lawsuit by late
2000.
Safety
Due to the nature of petroleum refining and distribution, CITGO and
PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs. PDV America believes that it is 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. The Companies record accruals for potential
losses when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to the Companies, and in amounts greater than the accruals of the
Companies, then such determinations could have a material adverse effect on the
results of operations of the Companies in a given reporting period. However, in
management's opinion, the ultimate resolution of these lawsuits and claims will
not exceed, by a material amount, the amount of the accruals and the insurance
coverage available to the Companies. This opinion is based upon management's and
counsel's current assessment of these lawsuits and claims. The most significant
lawsuits and claims are discussed below.
Litigation is pending in federal court in Lake Charles, Louisiana,
against CITGO by a number of current and former Lake Charles refinery employees
and applicants asserting claims of racial discrimination in connection with
CITGO's employment practices. The first trial in this case, which involved two
plaintiffs, began in October 1999 and resulted in verdicts for CITGO. The Court
granted CITGO's motion for summary judgment with respect to another group of
claims; an appeal of this ruling is expected. Trials of the remaining cases are
currently stayed.
The case brought in the United States District Court for the Northern
District of Illinois by the Oil Chemical & Atomic Workers, Local 7-517 against
UNO-VEN, CITGO, PDVSA, PDV America, and Union Oil Company of California pursuant
to Section 301 of the Labor Management Relations Act ("LMRA") resulted in the
court's ruling in favor of all defendants on Motions for Summary Judgment in
June, 1998; this ruling was affirmed on appeal and the case is now terminated.
In the case of Francois Oil Company, Inc. versus Stop-N'-Go of Madison,
Inc., et al. filed in federal district court in Wisconsin, Stop-N'-Go, a former
UNO-VEN marketer, sued UNO-VEN for $1 million, alleging that UNO-VEN had
fraudulently induced it to breach a supply contract with Francois Oil. UNO-VEN's
motion for summary judgment was granted in September, 1998; this ruling was
affirmed on appeal, terminating this case.
Four former UNO-VEN marketers have filed a class action complaint
against UNO-VEN alleging improper termination of the UNO-VEN Marketer Sales
Agreement under the Petroleum Marketing
17
Practices Act in connection with PDVMR's 1997 acquisition of Unocal's interest
in UNO-VEN. The lawsuit is pending in U.S. District Court in Wisconsin and is in
the discovery phase.
PDVMR and the Company, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities and
claims, including the preceding two matters.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property damages
related to the above noted incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively were not material.
There are presently seventeen lawsuits filed on behalf of approximately 9,000
individuals arising out of this incident in federal and state courts in Corpus
Christi alleging property damages, personal injury and punitive damages. A trial
of one of the federal court lawsuits in October 1998 involving ten bellwether
plaintiffs, out of approximately 400 plaintiffs, resulted in a verdict for
CITGO. The remaining plaintiffs in this case have agreed to settle for an
immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas, state court
against CITGO and other operators and owners of nearby industrial facilities
which claims damages for reduced value of residential properties located in the
vicinity of the industrial facilities as a result of air, soil and groundwater
contamination. CITGO has contracted to purchase all of the 275 properties
included in the lawsuit which are in an area adjacent to CITGO's Corpus Christi
refinery and settle the property damage claims relating to these properties.
Related to this purchase, $15.7 million was expensed in 1997. The trial judge
recently ruled, over CITGO's objections, that a settlement agreement CITGO
entered into in September 1997 and subsequently withdrew from, which provided
for settlement of the remaining property damage claims for $5 million, is
enforceable, CITGO believes this ruling is erroneous and will appeal. The trial
against CITGO of these remaining claims will be postponed indefinitely. Two
related personal injury and wrongful death lawsuits were filed against the same
defendants in 1996, one of which is scheduled for trial in 2000. A trial date
for the other case has not been set.
CITGO is among defendants to lawsuits in California, North Carolina and
New York alleging contamination of water supplies by methyl tertiary butyl ether
("MTBE"), a component of gasoline. The action in California was filed in
November 1998 by the South Tahoe Public Utility District and CITGO was added as
a defendant in February 1999. The North Carolina case, filed in January 1999,
and the New York case, filed in January 2000, are putative class actions on
behalf of owners of water wells and other drinking water supplies in the states.
All of these actions allege that MTBE poses public heath risks. These matters
are in early stages of discovery. CITGO has denied all of the allegations and is
pursuing its defenses.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
18
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., a Delaware corporation whose ultimate
parent is PDVSA. In 1999, PDV America declared and paid dividends of $22 million
to PDV Holding, Inc.
ITEM 6. Selected Financial Data
The following table sets forth certain selected historical consolidated
financial and operating data of PDV America as of the end of and for each of the
five years in the period ended December 31, 1999. The following table should be
read in conjunction with the consolidated financial statements of PDV America as
of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, included in "Item 8. Financial Statements and
Supplementary Data".
Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995(1)
----------- ----------- ----------- ----------- -----------
($ in millions)
Income Statement Data
Sales $13,332 $10,960 $13,622 $12,952 $10,522
Equity in earnings (losses) of affiliates 22 82 69 45 48
Net revenues 13,410 11,107 13,754 13,071 10,647
Income before extraordinary gain 142 231 228 138 143
Extraordinary gain(2) - - - - 3
Net income 142 231 228 138 146
Other comprehensive income (loss) (3) - - - -
Comprehensive income 139 231 228 138 146
Ratio of Earnings to Fixed Charges (3) 2.52x 3.06x 2.58x 1.91x 2.02x
Balance Sheet Data
Total assets $7,746 $7,075 $7,244 $6,938 $ 6,220
Long-term debt (excluding current portion)(4) 2,096 2,174 2,164 2,595 2,297
Total debt (5) 2,442 2,273 2,526 2,755 2,428
Shareholder's equity 2,718 2,601 2,589 2,111 1,973
- --------------------
(1) Includes operations of Cato Oil & Grease Company since May 1, 1995.
(2) Represents extraordinary gain or (charges) for the early extinguishment of
debt (net of related income tax provision of $2 million) in 1995.
(3) 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.
(4) Includes long-term debt to third parties, note payable to affiliate and
capital lease obligations.
(5) Includes short-term bank loans, current portion of capital lease
obligations and long-term debt, long-term debt and capital lease
obligations.
19
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,
limiting their profits directly. 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 by
these industry-specific factors and by company-specific factors, such as the
success of 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 in 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 increase or decrease in prices for refined
products, generally there is 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 reflect these
changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or 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 Companies' earnings and cash
flows. CITGO purchases a significant amount of its crude oil requirements from
PDVSA under long-term supply agreements (expiring in the years 2006 through
2013). This supply represented approximately 48% of the crude oil processed in
refineries operated by CITGO in the year ended December 31, 1999. The crude
supply contracts include force majeure clauses that have been exercised. The
exercise of these clauses requires that the Company use alternative sources of
supply for its crude oil requirements, and such action resulted in higher crude
oil costs. (See Items 1. And 2. Business and Properties -- Crude Oil and Refined
Product Purchases). CITGO also purchases significant 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. As a result of the
factors described above, the earnings and cash flows of PDV America may
experience substantial fluctuations. Inflation was not a significant factor in
the operations of PDV America during the three years ended December 31, 1999.
20
CITGO's revenues accounted for approximately 99% of PDV America's
consolidated revenues in 1999, 1998 and 1997. PDVMR's sales of $1,205 million
for the period ended December 31, 1999 were primarily to CITGO and, accordingly,
these were eliminated in consolidation.
The following table summarizes the sources of PDV America's sales
revenues and volumes.
PDV America Sales Revenue and Volumes
Year Ended December 31, Year Ended December 31,
------------------------------------- -------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ----------- ----------- ---------- ----------
($ in millions) (MM gallons)
Gasoline $ 7,691 $ 6,252 $ 7,754 13,115 13,241 11,953
Jet fuel 1,129 828 1,183 2,198 1,919 2,000
Diesel / #2 fuel 2,501 1,945 2,439 5,057 4,795 4,288
Asphalt 338 300 398 753 774 749
Petrochemicals and industrial products 1,041 952 1,178 2,306 2,658 1,961
Lubricants and waxes 482 441 467 285 230 239
----------- ----------- ----------- ----------- ---------- ----------
Total refined product sales $13,182 $10,718 $13,419 23,714 23,617 21,190
Other sales 150 242 203 - - -
----------- ----------- ----------- ----------- ---------- ----------
Total sales $13,332 $10,960 $13,622 23,714 23,617 21,190
=========== =========== =========== =========== ========== ==========
The following table summarizes PDV America's cost of sales and
operating expenses.
PDV America Cost of Sales and Operating Expenses
Year Ended December 31,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
($ in millions)
Crude oil $ 3,804 $ 2,571 $ 3,552
Refined products 6,640 5,102 6,739
Intermediate feedstocks 990 900 1,240
Refining and manufacturing costs 999 949 940
Other operating costs and expenses and inventory changes 374 784 527
------------ ------------ ------------
Total cost of sales and operating expenses $ 12,807 $ 10,306 $ 12,998
============ ============ ============
Results of Operations -- 1999 Compared to 1998
Sales revenues and volumes. Sales increased $2,372 million,
representing a 22% increase from 1998 to 1999. This was due to an increase in
average sales price of 22% while sales volume remained flat. (See PDV America
Sales Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by approximately $60 million, or 73% from $82 million in 1998 to $22
million in 1999. The decrease was primarily due to the change in the earnings of
LYONDELL-CITGO, CITGO's share of which decreased $58 million, from $59 million
in 1998 to $1 million in 1999. The decrease in LYONDELL-CITGO earnings was due
primarily to reduced processing of extra heavy crude oil as a result of lower
allocations and deliveries and a less favorable mix of extra heavy Venezuelan
crude oil by PDVSA, partially offset by increased
21
processing of spot crude; costs and lower operating rates related to outages of
a coker unit and a fluid catalytic cracker unit; and a charge related to
LYONDELL-CITGO's renegotiated labor agreement.
Other income (expense). Other expense was $27 million for the year
ended December 31, 1999 as compared to $9 million for the same period in 1998.
The difference was primarily due to: (1) a $3 million gain on the sale of
Petro-Chemical Transport in 1998, (2) in September 1999, CITGO's interest in the
Texas New Mexico Pipeline was sold for a loss of $(2) million, and (3) a $7
million loss related to the sale of various PDVMR properties.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2,501 million, or 24%, from 1999 to 1998. (See PDV
America Cost of Sales and Operating Expenses table above.)
The Companies purchase refined products to supplement the production
from their refineries to meet marketing demands and resolve logistical issues.
The refined product purchases represented 52% and 50% of cost of sales for the
years 1999 and 1998, respectively. These refined product purchases included
purchases from LYONDELL-CITGO, Chalmette and HOVENSA. The Companies estimate
that margins on purchased products, on average, are lower than margins on
produced products 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. In the near term,
other than normal refinery turnaround maintenance, the Companies do not
anticipate operational actions or market conditions which might cause a material
change in anticipated purchased product requirements; however, there could be
events beyond the control of the Companies which impact the volume of refined
products purchased. See also "Factors Affecting Forward Looking Statements".
As a result of the invocation of the force majeure clause in its crude
oil supply contracts, the Companies estimate that the cost of crude oil
purchased in 1999 increased by $55 million from what would have otherwise been
the case.
Gross margin. The gross margin for 1999 was $525 million, or 3.9%,
compared to $655 million, or 6.0%, for 1998. In 1999, the revenue per gallon
component increased approximately 22% while the cost per gallon component
increased approximately 23%. As a result, the gross margin decreased
approximately one-tenth of a cent on a per gallon basis in 1999 compared to
1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $21 million, or 8% in 1999, as a result of the
Companies' efforts to reduce such expenses and the reduction in employee
incentive compensation.
Income taxes. PDV America's provision for income taxes in 1999 was $58
million, representing an effective tax rate of 29%. In 1998, PDV America's
provision for income taxes was $131 million, representing an effective tax rate
of 36%. The effective tax rate for the current year is unusually low due to a
favorable resolution in the second quarter of 1999 of a significant tax issue in
the last Internal Revenue Service audit. During the years under audit, deferred
taxes were recorded for certain environmental expenses deducted in the tax
returns pending final determination by the Internal Revenue Service. The
deductions were allowed on audit and, accordingly, the deferred tax liability of
approximately $11 million was reversed with a corresponding benefit to tax
expense.
22
Results of Operations -- 1998 Compared to 1997
Sales revenues and volumes. Sales decreased by $2,662 million,
representing a 20% decrease from 1997 to 1998. This was due to a decrease in
average sales price of 28% partially offset by an increase in sales volumes of
12%. (See PDV America Sales Revenues and Volumes table above.)
Equity in earnings (losses) of affiliates. Equity in earnings of
affiliates increased by approximately $13 million, or 18.8% from $69 million in
1997 to $82 million in 1998. This increase was due primarily to a $14 million
increase in CITGO's equity in earnings of LYONDELL-CITGO as a result of 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. (See Consolidated
Financial Statements of PDV America - Note 2 in Item 14a.)
Cost of sales and operating expenses. Cost of sales and operating
expenses decreased by $2,692 million, or 21% from 1997 to 1998. (See PDV America
Cost of Sales and Operating Expense table above.)
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 50% and 52% of the cost of sales for
the years 1998 and 1997, respectively. These refined product purchases included
purchases from LYONDELL-CITGO, Chalmette and HOVENSA. The Companies estimate
that margins on purchased products, on average, are lower than margins on
products 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 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 which
might cause a material change in anticipated purchased product requirements;
however, there could be events beyond the control of the Companies which impact
the volume of refined products purchased. See also "Factors Affecting Forward
Looking Statements".
Gross margin. The gross margin for 1998 was $655 million compared to
$625 million for 1997. Gross margins in 1998 were positively affected by a 12%
increase in sales volume partially offset by an erosion of gross margin on a per
gallon basis which included a lower of cost or market adjustment of $172
million.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $47 million, or 22% in 1998. The increase was
due primarily to salary and related burden allocations as well as increases in
advertising expense and depreciation.
Interest expense. Interest expense decreased $29 million from 1997 to
1998. The decrease was primarily due to the decrease in average debt outstanding
related to a decrease in working capital requirements and the deferral of a
significant 1998 excise tax payment, as well as the repayment of $250 million of
the Company's Senior Notes on August 1, 1998. Also the average interest rate
decreased due to a decrease in key rates and replacement of higher rate debt
with lower rate debt.
Income taxes. PDV America's provision for income taxes in 1998 was $131
million, representing an effective tax rate of 36%. In 1997, PDV America's
provision for income taxes was $106 million,
23
representing an effective tax rate of 32%. The relatively low rate in 1997 was
due primarily to the favorable resolution of a significant tax issue with the
Internal Revenue Service in the second quarter of 1997. The resolution resulted
in the reduction of a contingency reserve previously established related to this
matter. The decrease was partially offset by the recording of a valuation
allowance related to a capital loss carryforward. In 1998 the effective tax rate
decreased slightly compared to the 1996 rate due to a decrease in state taxes.
Liquidity and Capital Resources
For the year ended December 31, 1999, PDV America's net cash provided
by operating activities totaled approximately $225 million, primarily reflecting
$142 million of net income, $277 million of depreciation and amortization and
the net effect of other items of $(194) million. The more significant changes in
other items included the increase in accounts receivable, including receivables
from affiliates, of approximately $457 million, the increase in inventories of
approximately $263 million, the increase in accounts payable and other current
liabilities, including payables to affiliates, of approximately $406 million and
the increase of other assets of approximately $66 million.
Net cash used in investing activities in 1999 totaled $287 million
consisting primarily of capital expenditures of $248 million, loans to
LYONDELL-CITGO of $25 million and loan to PDVSA Finance of $38 million.
During the same period, consolidated net cash provided by financing
activities totaled approximately $141 million comprised primarily of $252
million of proceeds from revolving bank loans, offset by net repayments of other
debt of $89 million and a $22 million dividend paid to PDV Holding, Inc.
The Companies currently estimate that their capital expenditures for
the years 2000 through 2004 will total approximately $2 billion. These include:
PDV America Estimated Capital Expenditures - 2000 through 2004 (1)
Strategic $ 657 million
Maintenance 483 million
Regulatory / Environmental 712 million
-----------------
Total $1,852 million
=================
--------------------
(1) These estimates may change as future regulatory events unfold.
See "Factors Affecting Forward Looking Statements".
PDV America's notes receivable from PDVSA are unsecured and are
comprised of $250 million of 7.75% notes maturing on August 1, 2000 and $500
million of 7.995% notes maturing on August 1, 2003.
The notes receivables from affiliate (PDVSA Finance Ltd., a wholly
owned subsidiary of PDVSA), are unsecured and are comprised of two $130 million
8.558% notes maturing on November 10, 2013 and a $38 million 10.395% note
maturing on May 15, 2014.
As of December 31, 1999, PDV America and its subsidiaries had an
aggregate of $2,340 million of indebtedness outstanding that matures on various
dates through the year 2029. As of December 31, 1999, the Companies' contractual
commitments to make principal payments on this indebtedness were $330 million,
$72 million and $111 million for 2000, 2001 and 2002, respectively.
24
PDV America's $750 million senior notes issued in 1993 are comprised of
(i) $250 million of 7.75% Senior Notes due August 1, 2000 and (ii) $500 million
7.875% Senior Notes due August 1, 2003 (collectively, the "Senior Notes").
Interest on these notes is payable in semiannual installments. PDV America
repaid on August 1, 1998 the $250 million 7.25% 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.
CITGO's bank credit facility consists of a $400 million, five-year,
revolving bank loan and a $150 million, 364-day, revolving bank loan, both of
which are unsecured and have various borrowing maturities, of which $345 million
was outstanding at December 31, 1999. Cit-Con has a separate credit agreement
under which $14 million was outstanding at December 31, 1999. The Company's
other principal indebtedness consists of (i) $200 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) $137 million in senior notes issued
in 1991, (iv) $306 million in obligations related to tax exempt bonds issued by
various governmental units, and (v) $178 million in obligations related to
taxable bonds issued by a governmental unit. (See Consolidated Financial
Statements of PDV America -- Note 1 and 10 in Item 14a.)
PDVMR's bank credit facility consists of a $125 million revolving
credit facility, committed through April 2002, of which $117 million was
outstanding at December 31, 1999. Other indebtedness consists of $20 million in
pollution control bonds. (See Consolidated Financial Statements of PDV America
- -- Note 10 in Item 14a.)
As of December 31, 1999, capital resources available to the Companies
included cash provided by operations, available borrowing capacity of $205
million under CITGO's revolving credit facility and $184 million in unused
availability under uncommitted short-term borrowing facilities with various
banks and $8 million in unused availability under PDVMR's revolving credit
facility 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 believe that they have sufficient capital resources to carry out
planned capital spending programs, including regulatory and environmental
projects in the near term, and to meet currently anticipated future obligations
as they arise. 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 long-term capital requirements will be satisfied with
current capital resources and future financing arrangements, including the
issuance of debt securities. The Companies' ability to obtain such financing
will depend on numerous factors, including market conditions and the perceived
creditworthiness of the Companies at that time. See "Factors Affecting Forward
Looking Statements".
The debt instruments of PDV America, PDVMR and CITGO impose
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. In addition, restrictions
exist over the payment of dividends and other distributions to PDV America from
CITGO. PDV America, PDVMR and CITGO were in compliance with all their respective
covenants under such debt instruments at December 31, 1999.
The Companies are members of the PDV Holding, Inc. consolidated Federal
income tax return. CITGO has a tax allocation agreement with PDV America, which
is designed to provide PDV America with sufficient cash to pay its consolidated
income tax liabilities.
25
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives, at fair value,
as either assets or liabilities in the statement of financial position with an
offset either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. The company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 133, which is required no later than January 1, 2001.
Impending Accounting Change
The Securities and Exchange Commission ("SEC") has recently indicated
that they intend to issue a summary of their views regarding accounting for
planned major maintenance activities (See Consolidated Financial Statements of
PDV America -- Note 1 in Item 14a). Such summary is expected, in part, to defer
the issuance of guidance related to certain aspects of accounting for major
maintenance activities pending completion of a project dealing with cost
capitalization that will be conducted by the Accounting Standards Executive
Committee ("AcSEC") of the American Institute of Certified Public Accountants.
At December 31, 1999 the Companies had capitalized approximately $107 million of
such costs, all or a portion of which may be required to be written off through
an immediate charge to income as a result of the SEC and/or AcSEC conclusions.
Pending issuance of the SEC summary, the Companies plan to continue their policy
of deferring and amortizing such costs.
Year 2000 Readiness
The inability of computers, software and other equipment using
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 issue. Such systems may
be unable to accurately process certain date-based information. To mitigate any
adverse impact this may cause, the Companies have established a company wide
Year 2000 Project to address the issue of computer programs and embedded
computer chips which may be unable to correctly function with the Year 2000. In
addition, the Companies updated major elements of their information systems by
implementing programs purchased from Systems, Applications and Products in Data
Processing ("SAP"). The first phase of SAP implementation, which included the
financial reporting and materials management modules, was brought into
production on January 1, 1998. Additional SAP modules including plant
maintenance work order and cost tracking were implemented throughout 1998. The
light oils product scheduling, inventory and billing module and the human
resources module were brought into production on June 1 and July 1, 1999,
respectively. The total cost of the SAP implementation was approximately $125
million, which included software, hardware, reengineering and change management.
Management has determined that SAP is an appropriate solution to the Year 2000
issue related to the systems for which SAP was implemented. Such systems
comprise approximately 80 percent of CITGO's total information systems.
Remaining business software systems were made Year 2000 ready through the Year
2000 Project or they were replaced.
The Companies did not experience any significant business disruptions
or malfunctions in their operating or business systems during the transition
from 1999 to 2000. Based on operations since January 1, 2000, the Companies do
not expect any significant impact to their ongoing business as a result of Year
2000 issues. It is possible, however, that the full impact of the date
transition has not been fully recognized. For example, it is possible that
date-related issues such as quarterly or year-end processing issues may occur.
The Companies believe that any such problems are likely to be minor and
correctable.
26
In addition, the Company could still be negatively affected if its customers or
suppliers are adversely affected by similar date-related issues. The Companies
are currently not aware of any significant Year 2000 or similar problems that
have arisen for their customers and suppliers.
Excluding SAP implementation, the Companies expended $18 million on
Year 2000 readiness efforts through year-end 1999. These expenditures included
identifying and remediating potential Year 2000 problems, and the associated
program administration and labor costs incurred.
Item 7 A. Quantitative and Qualitative Disclosures About Market Risk
Introduction. The Companies have exposure to price fluctuations of
crude oil and refined products as well as fluctuations in interest rates. To
manage these exposures, management has defined certain benchmarks consistent
with its preferred risk profile for the environment in which the Companies
operate and finance their assets. The Companies do not attempt to manage the
price risk related to all of their inventories of crude oil and refined
products. As a result, at December 31, 1999, the Companies were exposed to the
risk of broad market price declines with respect to a substantial portion of
their crude oil and refined product inventories. The following disclosures do
not attempt to quantify the price risk associated with such commodity
inventories.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply / demand and manages a portion of its price risk by entering into
petroleum commodity derivatives. Generally, CITGO's risk management strategies
qualify as hedges, however, certain strategies that CITGO may use on commodity
positions do not qualify as hedges.
Non Trading Commodity Derivatives
Open Positions at December 31, 1999
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value(2) Value
--------- ---------- ---- --------- -------- -----
($ in millions)
---------------------------------
No Lead Gasoline(1) Futures Purchased 2000 60 $ 1.7 $ 1.7
Futures Sold 2000 225 $ 6.1 $ 6.4
Swaps 2000 300 $ 8.1 $ 7.8
Heating Oil(1) Futures Purchased 2000 217 $ 5.7 $ 6.0
Futures Purchased 2001 6 $ 0.1 $ 0.1
Futures Sold 2000 450 $ 12.5 $ 12.8
Swaps 2000 336 $ 7.7 $ 7.7
Crude Oil(1) Swaps 2000 600 $ 13.4 $ 14.3
Natural Gas(3) Futures Purchased 2000 6 $ 0.1 $ 0.1
- ------------------
(1) 1,000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
27
Non Trading Commodity Derivatives
Open Positions at December 31, 1999
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value(2) Value
--------- ---------- ---- --------- -------- -----
($ in millions)
---------------------------------
No Lead Gasoline(1) Futures Purchased 1999 500 $ 8.0 $ 8.0
Heating Oil(1) Futures Purchased 1999 371 $ 7.0 $ 6.0
Futures Sold 1999 110 $ 2.0 $ 2.0
- ------------------
(1) 1,000 barrels per contract
(2) Weighted average price
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At December 31,
1999, CITGO's primary exposures were to U.S. dollar, LIBOR and U.S. Treasury
rates.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
Non Trading Interest Rate Derivatives
Open Positions at December 31, 1999 and 1998
National
Fixed Principal
Variable Rate Index Expiration Date Rate Paid Amount
------------------- --------------- --------- ------
($ in millions)
One-month LIBOR May 2000 6.28% $ 25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
---------------
$ 92
===============
The fair value of the interest rate swap agreements in place at
December 31, 1999, based on the estimated amount that CITGO would receive or pay
to terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1.3 million.
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
28
Debt Obligations
At December 31, 1999
Expected
Expected Fixed Average Fixed Variable Average Variable
Maturities Rate Debt Interest Rate Rate Debt Interest Rate
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2000 $ 290 7.94% $ 40 5.72%
2001 40 9.11% 32 6.11%
2002 36 8.78% 75 6.22%
2003 560 7.98% 345 6.25%
2004 31 8.02 16 6.29%
Thereafter 391 8.02% 484 6.41%
------------ ------------ ------------ ---------
Total $ 1,348 8.04% $ 992 6.30%
============ ============ ============ =========
Fair Value $ 1,288 $ 992
============ =======
Debt Obligations
At December 31, 1998
Expected
Expected Fixed Average Fixed Variable Average Variable
Maturities Rate Debt Interest Rate Rate Debt Interest Rate
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
1999 $ 40 9.11% $ 44 5.01%
2000 290 7.94% 7 5.09%
2001 40 9.11% 7 5.23%
2002 36 8.78% 45 5.31%
2003 559 7.98% 165 5.44%
Thereafter 422 8.02% 501 6.00%
------------ ------------