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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________
Commission File Number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
750 Lexington Avenue
New York, New York 10022
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (212) 753-5340
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
- --------------------------------------------------------------------------------
7-1/4% Senior Notes, Due 1998 New York Stock Exchange, Inc.
7-3/4% Senior Notes, Due 2000 New York Stock Exchange, Inc.
7-7/8% Senior Notes, Due 2003 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K:
Not Applicable.
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Not Applicable
Number of shares of Common Stock outstanding as of March 1, 1998: 1,000
DOCUMENTS INCORPORATED BY REFERENCE
None
Table of Contents
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS..................................ii
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.......................................1
ITEM 3. LEGAL PROCEEDINGS....................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS................................24
ITEM 6. SELECTED FINANCIAL DATA..............................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................38
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................39
ITEM 11. EXECUTIVE COMPENSATION..............................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K..............43
i
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Specifically, all statements under the captions "Items 1 and
2--Business and Properties" and "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to increases in
production capacity and related capital expenditures and investments,
environmental compliance and remediation and related capital expenditures, and
future capital expenditures in general are forward looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the Company's products as a result of competitive actions or economic
factors and changes in the cost of crude oil, feedstocks, blending components or
refined products. Such statements are also subject to increased costs in related
technologies and such technologies producing anticipated results, as well as
performance by third parties in accordance with contractual terms and
specifications, in particular, but without limitation, with respect to
construction contracts and indemnification agreements. Should one or more of
these risks or uncertainties, among others, some of which may be unforeseen at
this time, materialize, actual results may vary materially from those estimated,
anticipated or projected. Specifically, capital costs could increase, projects
could be delayed or anticipated related improvements in capacity or performance
may not be fully realized. Although the Company believes that the expectations
reflected by such forward looking statements are reasonable based on information
currently available to the Company, no assurances can be given that such
expectations will prove to have been correct.
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Overview
PDV America, Inc. ("PDV America" or the "Company" and,
together with its subsidiaries, the "Companies") was incorporated in 1986 in the
State of Delaware and is an indirect wholly owned subsidiary of Petroleos de
Venezuela, S.A. (together with one or more of its subsidiaries, referred to
herein as "PDVSA"), the national oil company of the Republic of Venezuela.
Through its wholly owned operating subsidiaries, CITGO Petroleum Corporation
("CITGO") and PDV Midwest Refining L.L.C. ("PDVMR") (see below), PDV America
refines, markets and transports petroleum products, including gasoline, diesel
fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes, mainly
within the continental United States east of the Rocky Mountains.
Prior to May 1, 1997, the Company had a 50% interest in The
UNO-VEN Company ("UNO-VEN"), an Illinois general partnership. As of May 1, 1997,
pursuant to a Partnership Interest Retirement Agreement (as defined herein),
certain UNO-VEN assets were transferred to PDMVR. Accordingly, the Company's
consolidated financial statements reflect the equity in earnings of UNO-VEN
through April 30, 1997 (see Note 9 of Notes to Consolidated Financial
Statements), the results of operations of PDVMR on a consolidated basis since
May 1, 1997 and the financial position of PDVMR at December 31, 1997. See "--PDV
Midwest Refining, L.L.C."
PDV America's aggregate net interest in rated crude oil
refining capacity is 853 thousand barrels per day ("MBPD"). The following table
shows the capacity of each U.S. refinery in which PDV America holds an interest
and PDV America's share of such capacity as of December 31, 1997.
PDV America Refining Capacity
Net PDV
America
Total Interest
Rated In
Crude Rated
PDV America Refining Refining
Owner Interest Capacity Capacity
---------------- --------------------------------------------------
(%) (MBPD) (MBPD)
Refinery Interests Held By PDV America
as of December 31, 1997
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX (1) LYONDELL-CITGO 42 265 111
Lemont, IL (2) PDVMR 100 160 160
=== === ===
Total Rated Refining Capacity
as of December 31, 1997 1,007 853
===== ===
- -------------------------
(1) The initial interest in LYONDELL-CITGO was acquired on July 1, 1993.
CITGO's interest in LYONDELL-CITGO at December 31, 1997 approximates 42%.
CITGO has an option exercisable for 18 months from April 1, 1997 to
increase, for an additional investment, its participation interest up to a
maximum of 50%. See "--CITGO--Refining--LYONDELL-CITGO".
(2) Formerly, this refinery was owned by UNO-VEN in which the Company had a 50%
interest. On May 1, 1997, the refinery and certain assets and liabilities
were transferred to PDVMR. See "--PDV Midwest Refining, L.L.C."
2
The following table shows aggregate refined product sales
revenues and volumes (excluding lubricants and waxes) of PDV America for the
three years in the period ended December 31, 1997.
PDV America Refined Product Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
-------------------------------------------------------------------
1997(2) 1996(1) 1995(1) 1997(2) 1996(1) 1995(1)
-------------------------------------------------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $7,918 $7,927 $6,761 12,117 11,995 11,747
Jet Fuel 1,188 1,506 1,181 2,005 2,372 2,282
Diesel/#2 fuel 2,509 2,522 1,508 4,358 4,052 3,023
Asphalt 398 257 238 749 569 503
Industrial Products and
Petrochemicals 1,201 936 904 2,021 1,660 1,810
-------------------------------------------------------------------
Total $13,214 $13,148 $10,592 21,250 20,648 19,365
===================================================================
- -------------------------
(1) Includes all of CITGO (excluding lubricants and waxes) and 50% of UNO-VEN
refined product sales.
(2) Includes all of CITGO (excluding lubricants and waxes) and 50% of UNO-VEN
refined product sales for the period from January 1, 1997 to April 30,
1997. See "--PDV Midwest Refining, L.L.C."
3
The following table shows PDV America's aggregate interest in refining
capacity, refinery input and product yield for the three years in the period
ended December 31, 1997.
PDV America Refinery Production
Year Ended December 31,
-----------------------------------------------------------
1997(2)(3) 1996(1)(4) 1995(1)(5)(7)
-----------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity(6) 853 683 681
Refinery Input
Crude oil 675 80.9% 561 81.2% 543 80.8%
Other feedstocks 159 19.1 130 18.8 129 19.2
--- ------ --- ------ --- ------
Total 834 100.0% 691 100.0% 672 100.0%
=== ===== === ===== === =====
Product Yield
Light fuels
Gasoline 387 45.7% 313 44.9% 310 45.7%
Jet Fuel 72 8.5 70 10.0 66 9.7
Diesel/#2 fuel 146 17.2 122 17.5 118 17.4
Asphalt 42 5.0 34 4.9 32 4.7
Petrochemical and Industrial Products 200 23.6 158 22.7 152 22.5
--- ------ --- ------ --- ------
Total 847 100.0% 697 100.0% 678 100.0%
=== ===== === ===== === =====
- -------------------------
(1) For 1996 and 1995, includes all of CITGO and 50% of UNO-VEN refinery
production, except as otherwise noted.
(2) For 1997, includes all of CITGO refinery production, 50% of UNO-VEN
refinery production through April 30, 1997 and all of PDVMR
refinery production beginning May 1, 1997 through December 31, 1997.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) Includes a weighted average of 12.89% of the Houston refinery for 1996.
(5) Includes a weighted average of 11.45% of the Houston refinery for 1995.
(6) At year end.
(7) Does not include Paulsboro Unit 1 for 1995. See "--CITGO--Refining--
Paulsboro Refinery".
Competitive Nature of the Petroleum Refining Business
The petroleum refining industry is cyclical and highly
volatile, reflecting capital intensity with high fixed and low variable costs.
Petroleum industry operations and profitability are influenced by a large number
of factors, which individual petroleum refining and marketing companies cannot
entirely control. Governmental regulations and policies, particularly in the
areas of taxation, energy and the environment, have a significant impact on
petroleum industry activities, regulating how companies conduct their operations
and formulate their products, and, in some cases, directly limiting their
profits. The U.S. petroleum refining industry has entered a period of
consolidation, in which a number of former competitors have combined their
operations. Demand for crude oil and its products is largely driven by the
condition of local and worldwide economies, although weather patterns and
taxation relative to other energy sources can also be significant factors.
Generally, U.S. refiners compete for sales on the basis of price and brand image
and, in some product areas, product quality.
4
CITGO
CITGO refines, markets and transports gasoline, diesel fuel,
jet fuel, petrochemicals, lubricants, refined waxes, asphalt and other refined
products, and markets gasoline through over 14,000 CITGO branded independently
owned and operated retail outlets located throughout the United States,
primarily east of the Rocky Mountains. CITGO also markets jet fuel primarily to
airline customers. A variety of lubricants and waxes are sold to independent
marketers, mass marketers and industrial customers. Petrochemicals and
industrial products are sold directly to various manufacturers and industrial
companies throughout the United States. Asphalt is marketed primarily to
independent paving contractors.
Refining
CITGO produces its light fuels and petrochemicals primarily
through its Lake Charles and Corpus Christi refineries. Asphalt refining
operations are carried out through CITGO's Paulsboro and Savannah refineries.
Lake Charles Refinery. The Lake Charles refinery, located in
Lake Charles, Louisiana, was originally built in 1944 and, since then, has been
continuously upgraded. Today it is a modern, complex, high conversion refinery
and is one of the largest in the United States. It has a rated refining capacity
of 320 MBPD and is capable of processing large volumes of heavy crude oil into a
flexible slate of refined products, including significant quantities of
high-octane unleaded gasoline and, due to recent modifications, reformulated
gasoline. The Lake Charles refinery has a Solomon Process Complexity Factor of
17.0 (as compared to an average of 13.8 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey). The Solomon Process Complexity
Rating is an industry measure of a refinery's ability to produce higher
value-added products. A higher rating indicates a greater capability to produce
such products.
5
The following table shows the refining capacity, refinery
input and product yield at the Lake Charles refinery for the three years in the
period ended December 31, 1997.
Lake Charles Refinery Production
Year Ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 320 320 320
Refinery Input
Crude oil 291 87.9% 274 85.1% 275 85.4%
Other feedstocks 40 12.1 48 14.9 47 14.6
--- ------ --- ------ --- ------
Total 331 100.0% 322 100.0% 322 100.0%
--- ------ --- ------ --- ------
Product Yield
Light fuels
Gasoline 177 52.4% 164 50.3% 164 50.0%
Jet Fuel 60 17.7 62 19.0 58 17.7
Diesel/#2 fuel 45 13.3 38 11.7 42 12.8
Petrochemicals and Industrial Products 56 16.6 62 19.0 64 19.5
--- ------ --- ------ --- ------
Total 338 100.0% 326 100.0% 328 100.0%
--- ------ --- ------ --- ------
Utilization of Rated Refining Capacity 91% 86% 86%
- -------------------------
(1) At year end.
Approximately 63%, 67% and 64% of the total crude runs at the
Lake Charles refinery, in the years 1997, 1996 and 1995, respectively, consisted
of crude oil with an average API gravity of 24 degrees or less. Due to the
complex processing required to refine such crude oil, the Lake Charles
refinery's economic crude oil throughput capacity is approximately 290 MBPD,
which is approximately 90% of its rated capacity of 320 MBPD.
The Lake Charles refinery's Gulf Coast location provides it
with access to crude oil deliveries from multiple sources. Imported crude oil
and feedstocks supplies are delivered by ship directly to the Lake Charles
refinery, and domestic crude oil supplies are delivered by pipeline and barge.
In addition, the refinery is connected by pipelines to the Louisiana Offshore
Oil Port ("LOOP") and to terminal facilities in the Houston area through which
it can receive crude oil deliveries if the Lake Charles docks are temporarily
inaccessible. For delivery of refined products, the refinery is connected
through the Lake Charles Pipeline directly to the Colonial and Explorer
Pipelines, which are the major refined product pipelines supplying the northeast
and midwest regions of the United States, respectively. The refinery also uses
adjacent terminals and docks, which provide access for ocean tankers and barges.
The Lake Charles refinery's main petrochemical products are
propylene and benzene. Propylene production was 6.0, 5.0 and 5.7 MBPD, and
benzene production was 3.8, 3.2 and 4.1 MBPD,
6
in each case for the years 1997, 1996 and 1995, respectively. Industrial
products include sulphur, residual fuels and petroleum coke.
Located adjacent to the Lake Charles refinery is a lubricants
refinery operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"),
which is owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily
because of its specific design, the Cit-Con refinery produces extremely high
quality oils and waxes and is one of the few in the industry designed as a
stand-alone lubricants refinery. Subsequent to enhancements made in 1995, the
refinery currently has a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of
wax, and is one of the largest rated capacity paraffinic lubricants refineries
in the United States. For the years 1997, 1996 and 1995, utilization at the
Cit-Con refinery was 101%, 100% and 101%, respectively, of its rated capacity.
Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from
Conoco's nearby refinery. Finished refined products are shared on the same pro
rata basis by CITGO and Conoco. During 1997, new high efficiency lubricant base
oil production capacity, including a joint venture Conoco-Pennzoil plant, came
on-stream, creating a surplus in lubricant base oil supply and diminishing base
oil production profitability. CITGO has evaluated Cit-Con's competitive position
in light of this new competition and believes that Cit-Con can continue to
produce attractive returns on capital employed if certain operating strategies
are followed. These strategies include maximizing the production of high value
wax and heavier base oils, strict control of operating expenses, and close
operational integration with CITGO's downstream finished lubricants marketing
program.
Corpus Christi Refinery. The Corpus Christi refinery complex
consists of the East and West Plants, located within five miles of each other in
Corpus Christi, Texas. Construction began on the East Plant in 1937, and it was
extensively reconstructed and modernized during the 1970's and 1980's. The West
Plant was completed in 1983. The Corpus Christi refinery is an efficient and
highly complex facility, capable of processing high volumes of heavy crude oil
into a flexible slate of refined products, with a Solomon Process Complexity
Factor of 20.5 (as compared to an average of 13.8 for U.S. refineries in the
most recently available Solomon Associates, Inc. survey).
7
The following table shows rated refining capacity, refinery
input and product yield at the Corpus Christi refinery for the three years in
the period ended December 31, 1997.
Corpus Christi Refinery Production
Year Ended December 31,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 150 140 140
Refinery Input
Crude oil 115 59.3% 133 66.8% 121 64.7%
Other feedstocks 79 40.7 66 33.2 66 35.3
--- ------ --- ------ --- ------
Total 194 100.0% 199 100.0% 187 100.0%
--- ------ --- ------ --- ------
Product Yield
Light fuels
Gasoline 93 47.9% 93 47.0% 90 48.4%
Diesel/#2 fuel 45 23.2 59 29.8 53 28.5
Petrochemicals and Industrial Products 56 28.9 46 23.2 43 23.1
--- ------ --- ------ --- ------
Total 194 100.0% 198 100.0% 186 100.0%
--- ------ --- ------ --- ------
Utilization of Rated Refining Capacity 77% 95% 86%
- -------------------------
(1) At year end.
Corpus Christi crude runs during 1997 consisted of 100% heavy
sour Venezuelan crude. Crude oil supplies are delivered directly to the Corpus
Christi refinery through the Port of Corpus Christi. The decline in utilization
of rated refining capacity in 1997 as compared to 1996 is a result of a major
turnaround in 1997 and an increase in the rated refining capacity.
CITGO operates the West Plant under a sublease agreement (the
"Sublease") from Union Pacific Corporation ("Union Pacific"). The basic term of
the Sublease ends on January 1, 2004, but CITGO may renew the Sublease for
successive renewal terms through January 31, 2011. CITGO has the right to
purchase the West Plant from Union Pacific at the end of the basic term, the end
of any renewal term, or on January 31, 2011, at a nominal price.
During the last several years, CITGO has increased the
capacity of the Corpus Christi refinery to produce petrochemical products. The
Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, methyl tertiary butyl ether ("MTBE") and aromatics (including
benzene, toluene and xylene). The Company produces a significant quantity of
cumene, an important petrochemical product used in the engineered plastics
market. The production of xylene, a basic building block used in the manufacture
of consumer plastics, allows the refinery to take advantage of its reforming
capacity while staying within the gasoline specifications of the Clean Air Act
Amendments of 1990.
8
Paulsboro Refinery. The Paulsboro refinery, located in
Paulsboro, New Jersey, is an asphalt refinery. The Paulsboro refinery consists
of Unit I, with a rated capacity of 44 MBPD, and Unit II, with a rated capacity
of 40 MBPD.
Unit II, originally constructed in 1980 to produce asphalt
from high sulphur, heavy crude oil high in naphthenic acid, is a combination
atmospheric and vacuum distillation facility. The crude oil purchased by CITGO
from PDVSA to supply Unit II's crude oil requirements is particularly well
suited for the production of asphalt. Unit II produced an average of 21.0, 20.5
and 19.1 MBPD of asphalt in the years 1997, 1996 and 1995, respectively, which
accounted for 58% of Unit II's total production in each year. The remaining Unit
II production in 1997, 1996 and 1995 consisted of distillate products such as
naphthas, marine diesel oil and vacuum gas oils, which, in the aggregate,
averaged approximately 14.4, 14.5 and 13.7 MBPD, respectively, in such years.
Unit II crude oil runs were 36, 35 and 33 MBPD, or a utilization rate of 90%,
88% and 83%, in 1997, 1996 and 1995, respectively.
Unit I was constructed in 1979 primarily to process low
sulphur, light crude oil but has been modified to run heavier crudes such as
Boscan. The unit produces naphthas, diesel/#2 and #6 fuels and asphalt. Unit I
is run primarily when there is demand for toll processing of sweet crudes at
attractive economics and to produce asphalt. Crude oil runs for third party
processing in 1997, 1996 and 1995 averaged 0.0, 0.0 and 2.1 MBPD, respectively,
representing processing utilization rates of 0%, 0% and 5%, respectively. In
1997, 1996 and 1995, 13.6, 3.4 and 2.6 MBPD of crude oil were run on Unit I for
CITGO's own account, producing 8.9, 2.4 and 1.9 MBPD of asphalt and 4.7, 0.9 and
0.8 MBPD of other products, respectively.
Savannah Refinery. The Savannah Refinery, located near
Savannah, Georgia, is an asphalt refinery. CITGO acquired the Savannah Refinery
on April 30, 1993. The facility includes two crude distillation units, with a
combined rated capacity of 28 MBPD. The primary crude oil run by the refinery is
Boscan.
The units produced an average of 12.3, 11.4 and 10.5 MBPD of
asphalt in the years ended December 31, 1997, 1996 and 1995, respectively, which
accounted for 75%, 76% and 77% of total production, in such years. An additional
4.1, 3.7 and 3.4 MBPD of production included naphthas and light, medium and
heavy gas oils in 1997, 1996 and 1995, respectively. Total crude runs in the
years ended December 31, 1997, 1996 and 1995, respectively, were 16.4, 15.1 and
13.7 MBPD, respectively, for utilization rates of 59%, 54% and 49%.
LYONDELL-CITGO. On July 1, 1993, subsidiaries of CITGO and
Lyondell Petrochemical Company ("Lyondell") executed definitive agreements with
respect to CITGO's investment in LYONDELL-CITGO Refining Company, Ltd.
("LYONDELL-CITGO"), which owns and operates a sophisticated 265 MBPD refinery
previously owned by Lyondell and located on the ship channel in Houston, Texas.
Through December 31, 1997, CITGO had invested approximately $625 million
(excluding reinvested earnings) in LYONDELL-CITGO. See Note 2 of Notes to
Consolidated Financial Statements. A refinery enhancement project to increase
the refinery's heavy crude oil high conversion capacity from approximately 135
MBPD to 200 MBPD had an in-service date of March 1, 1997. The crude oil
processed by this refinery is supplied by PDVSA under a long-term crude oil
supply contract through the year 2017. CITGO purchases substantially all of the
refined products produced at this refinery under a long-term contract. See Note
4 of Notes to Consolidated Financial Statements. CITGO's participation interest
in LYONDELL-CITGO increased from approximately 13% at December
9
31, 1996 to approximately 42% on April 1, 1997, in accordance with agreements
between the owners concerning such interest. CITGO has a one-time option for 18
months from April 1, 1997, to increase, for an additional investment, its
participation interest to 50%.
Crude Oil and Refined Product Purchases
CITGO owns no crude oil reserves or production facilities, and
must therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including
LYONDELL-CITGO, PDVMR and Chalmette Refining, L.L.C. ("Chalmette"). See "Item
13. Certain Relationships and Related Transactions".
Crude Oil Purchases. The following chart shows CITGO's
purchases of crude oil for the three years in the period ended December 31,
1997:
CITGO Crude Oil Purchases
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
---------------------------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995 1997 1996 1995
---------------------------------------------------------------------------------------------------------------
Suppliers (MBPD) (MBPD) (MBPD) (MBPD)
- ---------
PDVSA 130 142 150 117 130 122 49 39 35 14 17 14
PEMEX 61 44 33 0 0 0 0 0 0 0 0 0
Occidental 40 43 43 0 0 0 0 0 0 0 0 0
Other Sources 57 45 52 0 3 0 0 0 0 0 0 0
---------------------------------------------------------------------------------------------------------------
Total 288 274 278 117 133 122 49 39 35 14 17 14
=== === === === === === == == == == == ==
CITGO's largest supplier of crude oil is PDVSA, and CITGO has
entered into long-term crude oil supply agreements with PDVSA with respect to
the crude oil requirements for each of CITGO's refineries. See "Item 13--Certain
Relationships and Related Transactions". The following table shows the base and
incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1997.
10
CITGO Crude Oil Supply Contracts with PDVSA
Volumes of Crude
Oil Purchased
Contract Crude For the Year Ended Contract
Oil Volume December 31, Expiration
---------------------- -------------------------- ----------
Base Incremental(1) 1997 1996 1995 Date
---------------------- -------------------------- ----------
(MBPD) (MBPD) (year)
Location
Lake Charles, LA 120 50 115(2) 121(2) 125(2) 2006
Corpus Christi, TX 130 -- 125(2) 130 122 2012
Paulsboro, NJ 30 -- 35(2) 34(2) 35 2010
Savannah, GA 12 -- 12(2) 11(2) 14 2013
Houston, TX (3) 200 -- 216 134 136 2017
- --------------------
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right to
sell to CITGO incremental volumes up to the maximum amount specified in the
table, subject to certain restrictions relating to the type of crude oil to
be supplied, refining capacity and other operational considerations at the
refinery.
(2) Volumes purchased under the supply contracts do not equal total purchases
from PDVSA as a result of spot purchases or transfers between refineries.
(3) CITGO acquired a participation interest in LYONDELL-CITGO, the owner of the
Houston refinery, on July 1, 1993. In connection with such transaction,
LYONDELL-CITGO entered into a long-term crude oil supply agreement with
PDVSA that provided for delivery volumes of 135 MBPD until the completion
of a refinery enhancement project at which time the delivery volumes
increased to a range from 200 MBPD to 230 MBPD.
Most of the crude oil and feedstocks purchased by CITGO from
PDVSA are delivered on tankers owned by PDV Marina, S.A. ("PDV Marina"), a
wholly owned subsidiary of PDVSA, or by other PDVSA subsidiaries. In 1997, 81%
of the PDVSA contract crude oil delivered to the Lake Charles and Corpus Christi
refineries was delivered on tankers operated by PDVSA subsidiaries.
CITGO purchases additional crude oil under a 90-day evergreen
agreement with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries
are particularly well-suited to refine PEMEX's Maya heavy, sour crude oil, which
is similar in many respects to several types of Venezuelan crude oil. Effective
January 1995, the PEMEX crude contract was for 23 MBPD of Maya crude for the
first six months of 1995 and 17 MBPD for the last six months of 1995. Effective
January 1996, PEMEX increased the crude contract to 27 MBPD of Maya crude, which
increased to 35 MBPD effective July 1996. Effective January 1, 1997, PEMEX
increased the crude contract to 52 MBPD of Maya crude. This contract also
includes 8 MBPD of Olmeca, light sour crude for 1995 and 10 MBPD for 1996 and
1997.
CITGO is a party to a contract with an affiliate of Occidental
Petroleum Corporation ("Occidental") for the purchase of light, sweet crude oil
to produce lubricants. Purchases under this contract, which expires on August
31, 1998, averaged 47 MBPD in 1997. CITGO also purchases sweet crude oil under
long-standing relationships with numerous other producers.
Refined Product Purchases. CITGO is required to purchase
refined products to supplement the production of the Lake Charles and Corpus
Christi refineries in order to meet the demand of CITGO's marketing network.
During 1997, CITGO's shortage in gasoline production approximated
11
356 MBPD. However, due to logistical needs, timing differences and product grade
imbalances, CITGO purchased approximately 518 MBPD of gasoline and sold into the
spot market or to refined product traders or other refiners approximately 154
MBPD of gasoline. The following table shows CITGO's purchases of refined
products for the three years in the period ended December 31, 1997.
CITGO Refined Product Purchases
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
(MBPD)
Light Fuels
Gasoline 518 484 471
Jet Fuel 74 92 87
Diesel/#2 fuel 190 153 90
---------------------------------------------------------
Total 782 729 648
=========================================================
As of December 31, 1997, CITGO purchased substantially all of
the refined products produced at the LYONDELL-CITGO refinery under a long-term
contract through the year 2017. LYONDELL-CITGO was a major supplier in 1997
providing CITGO with 111 MBPD of gasoline, 68 MBPD of distillate and 17 MBPD of
jet fuel. See "--Refining--LYONDELL-CITGO".
An affiliate of PDVSA entered into an agreement to acquire a
50% equity interest in a refinery in Chalmette, Louisiana, in October 1997 and
has assigned to CITGO its option to purchase up to 50% of the refined products
produced at the refinery through December 31, 1998. See Note 4 of Notes to
Consolidated Financial Statements. CITGO exercised this option on November 1,
1997. For the period November 1 through December 31, 1997, CITGO purchased 32
MBPD of gasoline, 24 MBPD of distillate and 10 MBPD of jet fuel.
Marketing
CITGO's major products are light fuels (including gasoline,
jet fuel and diesel fuel), industrial products, petrochemicals, asphalt,
lubricants and waxes. The following table shows revenue of each of these product
categories for the three years in the period ended December 31, 1997.
CITGO Refined Product Sales Revenues
Year Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
($ in millions, except as otherwise indicated)
Light Fuels $11,376 84.8% $11,252 88.1% $8,886 85.8%
Petrochemicals,
Industrial Products
and Other Products 1,172 8.7 846 6.6 831 8.0
Asphalt 398 3.0 257 2.0 238 2.3
Lubricants and Waxes 467 3.5 426 3.3 404 3.9
------------------------------------------------------------------------
Total $13,413 100.0% $12,781 100.0% $10,359 100.0%
========================================================================
12
Light Fuels. CITGO markets gasoline, jet fuel and other
distillates through an extensive marketing network. The following table provides
a breakdown of the sales made by type of product for the three years in the
period ended December 31, 1997.
CITGO Light Fuel Sales
Year Ended December 31, Year Ended December 31,
----------------------------- ---------------------------
1997 1996 1995 1997 1996 1995
----------------------------- ---------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $7,754 $7,451 $6,367 11,953 11,308 11,075
Jet Fuel 1,183 1,489 1,163 2,000 2,346 2,249
Diesel/#2 fuel 2,439 2,312 1,356 4,288 3,728 2,730
----------------------------- ---------------------------
Total $11,376 $11,252 $8,886 18,241 17,382 16,054
----------------------------- ---------------------------
Gasoline sales accounted for 58%, 58% and 61% of CITGO's
refined product sales in the years 1997, 1996 and 1995, respectively. CITGO
markets CITGO branded gasoline through over 14,000 independently owned and
operated CITGO branded retail outlets (including 13,048 branded retail outlets
owned and operated by approximately 818 independent marketers and 1,798
7-Eleven(TM) convenience stores) located throughout the United States, primarily
east of the Rocky Mountains. CITGO purchases gasoline to supply its marketing
network, as the gasoline production from the Lake Charles and Corpus Christi
refineries was only equivalent to approximately 47%, 49% and 53% of the volume
of CITGO branded gasoline sold in 1997, 1996 and 1995, respectively. See
"--Crude Oil and Refined Product Purchases--Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand in
order to obtain premium pricing for its products by appealing to consumer
preference for quality petroleum products and services. This is accomplished
through a commitment to quality, dependability and customer service to its
independent marketers, which constitute CITGO's primary distribution channel.
The number of independent marketer-owned or operated CITGO branded retail
outlets has grown significantly since 1986 when there were approximately 7,000
independently owned and operated branded outlets, including 7-Eleven(TM)
convenience stores, and has increased approximately 2%, 3% and 7% in 1997, 1996
and 1995, respectively.
In 1994, CITGO began offering to its marketers a program to
enhance their retail outlets with new card reader pumps which allow customers to
pay for their gasoline at the pumps with their credit cards instead of going
inside to pay. As of December 31, 1997, approximately 4,500 retail outlets had
installed the card reader pumps.
Sales to independent branded marketers typically are made
under contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year 2006.
Under this contract, CITGO arranges all transportation and delivery of motor
fuels and handles all product ordering. CITGO also acts as processing agent for
the purpose of facilitating and implementing orders and purchases from
third-party suppliers. CITGO receives a processing fee for such services.
13
CITGO markets jet fuel directly to airline customers at 26
airports, including such major hub cities as Atlanta, Chicago, Dallas/Fort
Worth, New York and Miami. Jet fuel sales volume to airline customers have
decreased approximately 16% in 1997 after increasing 6% and 2% in the years 1996
and 1995, respectively. The volume decrease in 1997 is due primarily to a change
in focus to selling only CITGO's own production of jet fuel. The increases in
1996 and 1995 were due to higher levels of purchases by existing customers and
to sales to new customers. Sales of bonded jet fuel, which are exempt from
import duties as well as certain state and local taxes, have decreased from 579
million gallons in 1995 (accounting for 31% of total jet fuel sales volume to
airline customers) to 408 million gallons in 1997 (accounting for over 24% of
total jet fuel sales volume to airline customers.
Growth in wholesale rack sales to marketers has been the
primary focus of diesel/#2 marketing efforts. Such marketing efforts have
resulted in increases in wholesale rack sales volume from approximately 1,283
million gallons in 1995 to approximately 1,754 million gallons in 1997. The
remaining diesel/#2 fuel production is sold either in bulk through contract
sales (primarily as heating oil in the Northeast) or on a spot basis.
CITGO's delivery of light fuels to its customers is
accomplished in part through 52 refined product terminals located throughout
CITGO's primary market territory. Of these terminals, 38 are wholly owned by
CITGO and 14 are jointly owned. Sixteen of CITGO's product terminals have
waterborne docking facilities, which greatly enhance the flexibility of CITGO's
logistical system. In addition, CITGO operates nine terminals owned by PDVMR in
the Midwest. Refined product terminals owned or operated by CITGO provide a
total capacity of approximately 24 million barrels. Also, CITGO has active
exchange relationships with over 270 other refined product terminals, providing
flexibility and timely response to distribution needs.
Petrochemicals and Industrial Products. CITGO sells
petrochemicals in bulk to a variety of U.S. manufacturers as raw materials for
finished goods. Sulphur is sold to the U.S. and international fertilizer
industry; cycle oils are sold for feedstock processing and blending; natural gas
liquids are sold to the U.S. fuel and petrochemical industry; petroleum coke is
sold primarily in international markets through a joint venture for use as kiln
and boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil
blenders and customers. The majority of CITGO's cumene production is sold to
Mount Vernon Penol Plant Partnership (see "Item 13. Certain Relationships and
Related Transactions"), a joint venture phenol production plant in which CITGO
is a limited partner. The phenol plant produces phenol and acetone for sale
primarily to the principal partner in the phenol plant for the production of
plastics.
Asphalt. CITGO markets asphalt through 15 terminals located
along the East Coast, from Savannah, Georgia to Albany, New York. Asphalt is
sold primarily to independent contractors for use in the construction and
resurfacing of roadways. Demand for asphalt in the Northeastern United States
declines substantially in the winter months as a result of weather conditions.
Lubricants and Waxes. CITGO markets many different types,
grades and container sizes of lubricants and wax products, with the bulk of
sales consisting of automotive oil and lubricants and industrial lubricants.
Other major lubricant products include 2-cycle engine oil and automatic
transmission fluid.
CITGO sells its finished lubricant products through three
classes of trade: (i) independent marketers that specialize in lubricant sales
(representing 80% of 1997 sales), (ii) mass merchandisers
14
(representing 6% of 1997 sales) and (iii) direct sales to large industrial end
users (representing 14% of 1997 sales). CITGO emphasizes sales to independent
marketers in its lubricants marketing because of the higher margins realized
from these sales. Large industrial end users include steel manufacturers for
industrial lubricants and automobile manufacturers for "original equipment"
quantities of automotive oils and fluids.
CITGO markets the largest portion of its wax production as
coating materials for the corrugated container industry. CITGO also provides wax
for the manufacture of candles, drinking cups, waxed papers and a variety of
building and rubber products.
Pipeline Operations
CITGO owns and operates 364 miles of crude oil pipeline
systems and approximately 1,100 miles of products pipeline systems. The crude
oil pipeline provides CITGO with access to gathering systems throughout major
production areas in Louisiana and Texas that provide the Lake Charles refinery
with domestic crude oil to supplement waterborne activities. CITGO also has
joint equity interests in three crude oil pipeline companies with a total of
nearly 5,400 miles of crude oil pipeline plus equity interest in six refined
product pipeline companies with a total of approximately 8,000 miles of
pipeline. These pipeline interests provide CITGO with access to substantial
refinery feedstocks and reliable transportation to refined product markets, as
well as cash flows from dividends. One of the refined product pipelines in which
CITGO has an interest, Colonial Pipeline, is the largest refined product
pipeline in the United States transporting gasoline, jet fuel and diesel/#2 fuel
from the Gulf Coast to the mid-Atlantic and eastern seaboard states.
In early 1997, CITGO sold approximately 520 miles of crude oil
gathering/trunk lines in Texas and Louisiana.
Employees
CITGO and its subsidiaries have a total of approximately 5,300
employees, approximately 1,900 of whom are covered by 17 union contracts.
Approximately 1,700 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant blending and
packaging plant and at other refined product terminals.
Effective February 28, 1998, the stock of Petro-Chemical
Transport, Inc. ("PCT"), a wholly owned subsidiary of CITGO, was sold. As a
result of this sale, approximately 420 employees were terminated. PCT's
operations were not material to CITGO.
PDV Midwest Refining, L.L.C.
Since 1989, the Company through various subsidiaries has had a
50% interest in UNO-VEN. On May 1, 1997 pursuant to the Partnership Interest
Retirement Agreement, PDV America and Union Oil Company of California ("UNOCAL")
transferred certain assets and liabilities of UNO-VEN to PDVMR, a subsidiary of
the Company, as a result of the liquidation of the Company's 50% ownership
interest in UNO-VEN. The assets included a 160 thousand barrel per day refinery
in Lemont, Illinois, as well as eleven product distribution terminals and 89
retail sites located in the Midwest. CITGO
15
operates these facilities and purchases substantially all of the products
produced at the refinery. See Note 9 of Notes to Consolidated Financial
Statements.
The foregoing transaction increased the assets of the
consolidated Companies by $494 million on May 1, 1997, net of the Companies'
carrying amount of its investment in UNO-VEN. PDVMR's sales of $942 million for
the period May 1, 1997 to December 31, 1997 were primarily to CITGO and,
accordingly, these were eliminated in consolidation. However, the operations of
PDVMR, including its investment in Needle-Coker (as defined below) for the
period from May 1, 1997 to December 31, 1997, contributed approximately $43
million to PDV America's consolidated income before interest and taxes in 1997,
as compared to the Companies' equity in the earnings of UNO-VEN of $23 million
and $15 million for 1996 and 1995, respectively.
Refining
The Lemont refinery, which in its present configuration began
operations in 1970, is one of the most recently designed and constructed
refineries in the United States. Its high conversion design enables it to
convert its crude oil input with high sulphur and high metal content into
transportation fuels, primarily gasoline, diesel fuel and jet fuel. The Lemont
refinery has a Solomon Process Complexity factor of 11.3 (as compared to an
average of 13.8 for U.S. refineries in the most recently available Solomon
Associates, Inc. survey). The Lemont refinery has a rated capacity of 160 MBPD
of crude oil and is capable of processing heavy crude oil with significant
operating flexibility, converting sour crudes into a flexible slate of higher
value-added refined products, such as high octane unleaded gasoline. During
1997, the Lemont refinery increased utilization due primarily to improved
maintenance of operating equipment and efficient methods of operation.
16
The following table shows refining capacity, refinery input
and product yield at the Lemont refinery for the three years in the period ended
December 31, 1997.
Lemont Refinery Production
Year Ended December 31,
------------------------------------------------
1997 1996 1995
\ ------------------------------------------------
(MBPD, except as otherwise indicated)
Rated Refining Capacity (1) 160 153 153
Refinery Input
Crude oil 155 89.1% 146 88.4% 139 87.4%
Other feedstocks 19 10.9 19 11.6 20 12.6
-------------------------------------------------
Total 174 100.0% 165 100.0% 159 100.0%
=================================================
Product Yield
Light fuels
Gasoline 93 54.1% 87 53.0% 86 54.5%
Jet Fuel 7 4.1% 7 4.3 8 5.1
Diesel/#2 Fuel 41 23.8% 37 22.6 34 21.4
Industrial Products &
Petrochemicals 31 18.0% 33 20.1 30 19.0
-------------------------------------------------
Total 172 100.0% 164 100.0% 158 100.0%
=================================================
Utilization of Rated
Refining Capacity 97% 95% 91%
- -----------------------
(1) At year end.
Sour crude oil runs were 100% of the total crude runs in each
of the years 1997, 1996 and 1995. PDVMR currently intends to continue to process
sour crude oil exclusively.
Petrochemical products at the Lemont refinery include benzene,
toluene and xylene, plus a range of ten different aliphatic solvents.
PDVMR owns a 25% interest in a partnership which operates a
needle coke production facility adjacent to the Lemont refinery (the "Needle
Coker"). The remaining 75% interest is held by various subsidiaries of UNOCAL.
The Needle Coker, which began production in 1985 and has a production capacity
of 117,000 tons per year, converts certain residual crude products into a highly
specialized form of coke known as "calcined needle coke". This product is used
exclusively as a raw material in the manufacturing of graphite electrodes, which
are used in electric arc furnaces to melt down and refine scrap steel. In 1997,
the Needle Coker produced approximately 110,000 tons of calcined needle coke.
17
Crude Oil and Refined Product Purchases
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
significant portion of the crude oil refined at the Lemont refinery is supplied
by PDVSA to PDVMR under a crude oil supply agreement, effective as of April 23,
1997, that expires in the year 2002 and thereafter is renewable annually. For
the eight months ended December 31, 1997, PDVMR purchased 78 MBPD under this
agreement. The contract calls for delivery of a guaranteed volume of 100 MBPD;
however, PDVMR is not required to purchase a set minimum. Prior to that date and
the subsequent transfer of assets from UNO-VEN to PDVMR as discussed above,
UNO-VEN purchased crude oil from PDVSA under an agreement with a base volume of
135 MBPD. For the first four months of 1997 and in 1996 and 1995, UNO-VEN
purchased 160, 143 and 135 MBPD, respectively, under this contract. Crude oil is
supplied to the Lemont refinery mainly through the LOCAP/Capline/Chicap common
carrier pipeline system, which connects the Lemont refinery to the LOOP, where
vessels discharge. The refinery also has access to two alternate pipeline
systems for the delivery of crude oil from the Gulf Coast and Canada. PDVMR does
not have any direct equity interest in any crude oil pipelines.
Marketing
Subsequent to the transfer of assets on May 1, 1997,
substantially all of PDVMR's products are sold to and marketed by CITGO. The
following table shows UNO-VEN's revenues from each of its product categories for
the two years in the period ended December 31, 1996 and the four months ended
April 30, 1997.
UNO-VEN Refined Product Sales
Four Months
Ended April 30, Year Ended December 31,
-----------------------------------------------------
1997 1996 1995
-----------------------------------------------------
($ in millions, except as otherwise indicated)
Light Fuels $476 86.2% $1,406 85.7% $1,126 85.5%
Industrial Products
and Petrochemicals 57 10.3 179 10.9 145 11.0
Lubricants 19 3.5 56 3.4 46 3.5
-----------------------------------------------------
Total $552 100.0% $1,641 100.0% $1,317 100.0%
=====================================================
18
The following table provides a breakdown of the light fuel
sales made by product type for the two years in the period ended December 31,
1996 and for the four months ended April 30, 1997.
UNO-VEN Light Fuel Sales
Four Four
Months Months
Ended Year Ended Ended Year Ended
April 30, December 31, April 30, December 31
-----------------------------------------------------------
1997 1996 1995 1997 1996 1995
-----------------------------------------------------------
($ in millions) (MM gallons)
Light Fuels
Gasoline $327 $952 $787 $474 $1,374 $1,341
Jet Fuel 9 34 35 9 52 66
Diesel#2 fuel 140 420 304 219 647 585
-------------------------------------------------------------
Total $476 $1,406 $1,126 $702 $2,073 $1,992
=============================================================
Service Agreement with CITGO
CITGO operates the Lemont refinery in accordance with a
Refinery Operating Agreement (the "Refinery Operating Agreement") between CITGO
and PDVMR. The Refinery Operating Agreement sets out the duties, obligations and
responsibilities of the operator and the Company with respect to the operation
of the refinery. CITGO provides all administrative functions to the Company,
including cash management, legal and accounting services. The term of the
agreement is 60 months, commencing May 1, 1997, and shall be automatically
renewed for periods of 12 months (subject to early termination as provided in
the Refinery Operating Agreement).
Environment and Safety
Environment-General
Beginning in 1994, the U.S. refining industry was required to
comply with stringent product specifications under the 1990 Clean Air Act
("CAA") Amendments for reformulated gasoline and low sulphur diesel fuel, which
necessitated additional capital and operating expenditures, and altered
significantly the U.S. refining industry and the return realized on refinery
investments. In addition, numerous other factors affect the Company's plans with
respect to environmental compliance and related expenditures. See "Factors
Affecting Forward Looking Statements".
In addition, the Companies are subject to various federal,
state and local environmental laws and regulations which may require the
Companies to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by the Companies or other
parties. Management believes the Companies are in compliance with these laws and
regulations in all material respects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
19
The Companies' accounting policy establishes environmental
reserves as probable site restoration and remediation obligations become
reasonably capable of estimation. At December 31, 1997 and 1996, the Companies
had approximately $58 million and $56 million, respectively, of environmental
accruals included in other noncurrent liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, the Companies' management believes that these accruals are
sufficient to address the Companies' environmental clean-up obligations.
Conditions which require additional expenditures may exist for
various Companies' sites including, but not limited to, the Companies' operating
refinery complexes, closed refineries, service stations and crude oil and
petroleum product storage terminals. The amount of such future expenditures, if
any, is indeterminable.
Environment-CITGO
In 1992, an agreement was reached between CITGO and a former
owner concerning a number of environmental issues. Pursuant to this agreement,
the former owner will continue to share the costs of certain specific
environmental remediation and certain tort liability actions based on ownership
periods and specific terms of the agreement. Also, in 1992, CITGO reached an
agreement with a state agency to cease usage of certain surface impoundments at
CITGO's Lake Charles, Louisiana refinery by 1994. A mutually acceptable closure
plan was filed with the state in 1993. CITGO and a former owner are
participating in the closure and sharing the related costs based on estimated
contributions of waste and ownership periods. The remediation commenced in
December 1993. In 1997, CITGO presented a proposal to a state agency revising
the 1993 closure plan. A ruling on this proposal is expected in 1998 and actual
closure is expected to be completed during 2000.
While CITGO is named as a potentially responsible party
("PRP") at a number of "Superfund" sites, pursuant to the abovementioned 1992
agreement, OXY USA, Inc. and Occidental have agreed to indemnify CITGO with
respect to Superfund damages where offsite hazardous waste disposal occurred
prior to September 1, 1983. Based on publicly available information, PDV America
believes that Occidental has the financial capability to fulfill all of its
responsibilities under this agreement. Accordingly, PDV America believes that
CITGO's offsite liability exposure under the federal Superfund and similar state
laws with respect to these sites is not material. In addition, under the 1992
agreement, CITGO assumed responsibility for certain other environmental
contamination at certain terminal properties in return for cash payments and
other agreements.
During 1994 and 1995, CITGO Asphalt Refining Company ("CARCO")
received two Notices of Violation and two Compliance Orders from the U.S.
Environmental Protection Agency ("EPA") relating to the operation of certain
units at the Paulsboro Refinery. A Consent Order resolving these issues was
entered by a federal court in February 1997. Under the terms of the Consent
Order, CARCO paid a $1,230,000 penalty. The Consent Order will terminate January
30, 1998.
On September 30, 1996, CITGO received a Notice of Violation
from the EPA, Washington, D.C. alleging violations of the CAA in the Chicago
Gary Lake County, Illinois-Indiana-Wisconsin area, arising from the sale of
gasoline that failed to meet the applicable minimum or maximum oxygen content. A
Settlement Agreement resolving this matter was entered into with the EPA in
December, 1997. Under the terms of the Settlement Agreement, CITGO paid a
penalty of $15,869.
20
Increasingly stringent regulatory provisions periodically
require additional capital expenditures. During 1997, CITGO expended
approximately $32 million for environmental and regulatory capital improvements
in its operations. PDV America currently anticipates that CITGO will spend
approximately $290 million for environmental and regulatory capital projects
over the five-year period 1998-2002. These estimates may vary due to a variety
of factors. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Environment - PDVMR
In accordance with the Partnership Interest Retirement
Agreement, the Company, VPHI Midwest, Inc., a subsidiary of the Company, and
PDVMR took on joint and several liability for all environmental matters relating
to past operations of UNO-VEN.
During 1997, PDVMR expended approximately $2 million for
environmental and regulatory capital improvements in its operations and
currently anticipates spending approximately $34 million for environmental and
regulatory capital projects over the five-year period 1998-2002. These estimates
may vary due to a variety of factors. See "Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Safety
Due to the nature of petroleum refining and distribution, both
CITGO and PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs, and PDV America believes that both companies are in
substantial compliance with occupational health and safety laws.
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of
business are pending against the Companies. Included among these is litigation
against CITGO by a number of current and former employees and applicants on
behalf of themselves and a class of similarly situated persons asserting claims
under federal and state laws of racial discrimination in connection with the
employment practices at CITGO's Lake Charles, Louisiana refining complex. The
plaintiffs seek injunctive relief and monetary damages and have appealed the
Court's denial of class certification. The initial trials on this litigation are
not currently included in the trial docket.
In a case currently pending in the United States District
Court for the Northern District of Illinois, Oil Chemical & Atomic Workers,
Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert
claims against the Company, PDVSA, CITGO, PDVMR, and UNOCAL pursuant to Section
301 of the Labor Management Relations Act ("LMRA"). This complaint alleges that
the Company and the other defendants constitute a single employer, joint
employers or alter-egos for the purposes of the LMRA, and are therefore bound by
the terms of a collective bargaining agreement between UNO-VEN and Local 7-517
covering certain production and maintenance employees at a Lemont, Illinois
petroleum refinery. On May 1, 1997, in a transaction involving the former
partners of
21
UNO-VEN, the Lemont refinery was transferred to PDVMR. Pursuant to an operating
agreement with PDVMR, CITGO became the operator of the Lemont refinery, and
employed the substantial majority of employees previously employed by UNO-VEN
pursuant to its initial terms and conditions of employment, but did not assume
the existing labor agreement. The union seeks compensation for monetary
differences in medical, pension and other benefits between the CITGO and UNO-VEN
plans and reinstatement of all UNO-VEN benefit plans. The union also seeks to
require CITGO to abide by the terms of the collective bargaining agreement
between the union and UNO-VEN. As an alternative claim against all defendants
but CITGO, the union alleges that if the labor agreement is not binding on
CITGO, there was a violation of the Federal Workers Adjustment Retraining and
Notification Act by failure to give 60 days' written notice of termination to
approximately 400 UNO-VEN employees; this would allegedly entitle such workers
to 60 days' pay and benefits, which are estimated to be approximately $6
million. The trial of this case currently is set for July 1998.
On May 12, 1997, an explosion and fire occurred at CITGO's
Corpus Christi refinery. There were no reports of serious personal injuries.
Affected units were shut down for repair and were returned to full service in
early August, 1997. The Company has property damage and business interruption
insurance which related to this event. As a result, the property damage and
business interruption did not have a material adverse effect on the Company's
financial condition or results of operations. There are presently five lawsuits
against CITGO pending in federal and state courts in Corpus Christi, Texas,
alleging property damage, personal injury and punitive damages allegedly arising
from the incident and other similar lawsuits have been threatened. Approximately
6,000 individual claims have been received by CITGO allegedly arising from the
incident.
A class action lawsuit is pending against the Company and
other operators and owners of nearby heavy industrial facilities which was filed
in state court in Corpus Christi, Texas in 1993 on behalf of property owners in
the vicinity of these facilities. The certification of this case as a class
action in 1995 was appealed to the Texas Supreme Court and a decision is
pending. This lawsuit asserts property damage claims and diminution in property
values allegedly resulting from environmental contamination in the air, soil,
and groundwater, occasioned by ongoing operations of the Company's Corpus
Christi refinery and the respective industrial facilities of the other
defendants. Two related personal injury and wrongful death lawsuits were filed
in 1996 and are in preliminary stages of discovery at this time. In 1997, CITGO
signed an agreement to settle the property damage class action lawsuit for
approximately $17.3 million which included the purchase of approximately 290
properties in an adjacent neighborhood. Of this amount, $15.7 was expensed in
1997. CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear the CITGO's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
CITGO. For these reasons, CITGO opposed the approval and enforcement of the
settlement agreement as proposed to be revised and enforcement has now been
stayed pending a ruling by the Texas Supreme Court. If the settlement agreement
is enforced, CITGO could be liable for the full settlement amount of $17.3
million. CITGO is pursuing an independent program to purchase the properties
which were the subject of the purchase provisions of the settlement agreement.
In June 1997, CITGO settled litigation with a contractor
which had claimed additional compensation for sludge removal and treatment at
CITGO's Lake Charles, Louisiana refinery. The
22
settlement did not have a material effect on CITGO's financial position or
results of operations. CITGO believes that it has no further exposures to losses
related to this matter.
In July 1997, the Texas Natural Resources Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's
rules relating to operating a hazardous waste management unit without permit and
recommended a penalty of $699,200. CITGO Refining disagrees with these
allegations and the proposed penalties and is negotiating with the TNRCC to
settle this matter.
In addition, the Companies are subject to various federal,
state and local environmental laws and regulations which may require the
Companies to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by the Companies or other
parties. Management believes the Companies are in compliance with these laws and
regulations in all material aspects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
PDV America, VPHI Midwest, Inc. and PDVMR jointly and
severally, have agreed to indemnify UNO-VEN and certain other related entities
against certain liabilities and claims. See "Business -- Environment and Safety
- -- Environment -- PDVMR".
The Companies are vigorously contesting or pursuing, as
applicable, such lawsuits and claims and the Companies believe that its
positions are sustainable. The Companies have recorded accruals for losses they
consider probable and reasonably estimable. However, due to uncertainties
involved in litigation, including the significant matters noted above, the
ultimate outcomes are not reasonably predictable, and the losses, if any, are
not reasonably estimable. If such lawsuits and claims were to be determined in a
manner adverse to the Companies, and in amounts in excess of the Companies'
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Companies results of operations in a given
reporting period. The term "reasonably possible" is used herein to mean that the
chance of a future transaction or event occurring is more than remote but less
than likely. However, based upon management's current assessments of these
lawsuits and claims and that provided by counsel in such matters and the capital
resources available to the Companies, management believes that the ultimate
resolution of these lawsuits and claims would not exceed the aggregate of the
amounts accrued in respect of such lawsuits and claims and the insurance
coverages available to the Companies by a material amount and are not expected
to have a material adverse effect on the Companies' consolidated financial
position, results of operation, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not Applicable.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded. All of the
Company's common stock is held by PDV Holding, Inc. ("PDV Holding"), a Delaware
corporation, whose ultimate parent is PDVSA. PDV America did not declare or pay
any dividends in 1997 and 1996. In January 1998, PDV America declared and paid a
dividend of $110 million to PDV Holding.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical
consolidated financial and operating data of PDV America as of the end of and
for each of the five years in the period ended December 31, 1997. The following
table should be read in conjunction with the consolidated financial statements
of PDV America as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, included in Item 8, which have been
audited by Deloitte & Touche LLP, independent auditors. The audited consolidated
financial statements of PDV America for each of the five years in the period
ended December 31, 1997 have been prepared on the basis of United States
generally accepted accounting principles. The consolidated financial statements
of PDV America at December 31, 1995, 1994 and 1993 and for the years ended
December 31, 1994 and 1993, not separately presented herein, have also been
audited.
24
Year Ended December 31,
-----------------------------------------------------------------------------
1997(9) 1996 1995(7) 1994 1993(8)
-----------------------------------------------------------------------------
($ in millions)
Income Statement Data
Sales $13,622 $12,952 $10,522 $9,247 $9,112
Equity in earnings (losses) of affiliates (1) 69 45 48 55 52
Net revenues 13,754 13,071 10,647 9,374 9,193
Income before extraordinary charges
and cumulative effect of accounting
changes 228 138 143 205 155
Extraordinary gain (charges) (2) -- -- 3 (2) --
Cumulative effect of accounting
changes (3) -- -- -- (4) (235)
Net income (loss) 228 138 146 199 (80)
Ratio of Earnings to Fixed Charges (4) 2.30x 1.94x 2.04x 2.65x 2.57x
Balance Sheet Data
Total assets $7,244 $6,938 $6,220 $5,770 $5,138
Long-term debt (excluding current
portion) (5) 2,164 2,595 2,297 2,155 2,069
Total debt (6) 2,526 2,755 2,428 2,279 2,117
Shareholder's equity 2,589 2,111 1,973 1,812 1,584
- -------------------------
(1) Includes the equity in the earnings of UNO-VEN of $0.4 million, $23
million, $15 million, $27 million and $22 million for the four months ended
April 30, 1997 and the years ended December 31, 1996, 1995, 1994 and 1993,
respectively.
(2) Represents extraordinary gain or (charges) for the early extinguishment of
debt (net of related income tax provision of $2 million and income tax
benefits of $1 million in 1995 and 1994, respectively).
(3) Represents the cumulative effect of the accounting change to Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Postemployment Benefits" in 1994 (net of related income tax benefits of $3
million), the cumulative effect of the accounting change to SFAS No. 109,
"Accounting for Income Taxes" in 1993 and the cumulative effect of the
accounting change to SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions" in 1992 (net of related income
tax benefits of $51 million).
(4) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes and cumulative effect of
accounting changes plus fixed charges (excluding capitalized interest),
amortization of previously capitalized interest and certain adjustments to
equity in income of affiliates. "Fixed charges" include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of
operating lease rent expense deemed to be representative of interest.
(5) Includes long-term debt to third parties, note payable to affiliate and
capital lease obligations.
(6) Includes short-term bank loans, current portion of capital lease
obligations and long-term debt, long-term debt, capital lease obligations
and note payable to affiliate.
(7) Includes operations of Cato Oil and Grease Company since May 1, 1995.
(8) Includes operations of the Savannah Asphalt Refinery since April 30, 1993.
(9) Includes operations of PDVMR since May 1, 1997.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion of the financial condition and
results of operations of PDV America should be read in conjunction with the
Consolidated Financial Statements of PDV America included elsewhere herein.
Petroleum industry operations and profitability are influenced
by a large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
directly limiting their profits. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. PDV America's consolidated operating results are affected both
by industry-specific factors and by company-specific factors such as the success
of wholesale marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the
refining and marketing business in the United States are primarily dependent
upon producing and selling quantities of refined products at margins sufficient
to cover fixed and variable costs. The refining and marketing business is
characterized by high fixed costs resulting from the significant capital outlays
associated with refineries, terminals and related facilities. This business is
also characterized by substantial fluctuations in variable costs, particularly
costs of crude oil, feedstocks and blending components, and the prices realized
for refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
In general, prices for refined products are significantly
influenced by the price of crude oil, feedstocks and blending components.
Although an increase or decrease in the price for crude oil, feedstocks and
blending components generally results in a corresponding change in prices for
refined products, there is usually a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to changes in crude
oil, feedstock or blending component prices. A substantial or prolonged increase
in crude oil prices without a corresponding increase in refined product prices,
a substantial or prolonged decrease in refined product prices without a
corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect
on the Company's earnings and cash flows, including inventory valuation
adjustments. PDV America is insulated to a substantial degree from the price
volatility that the industry experiences due to the pricing mechanism in the
long-term crude oil supply agreements (expiring in the year 2002 through 2013)
that it has with PDVSA, which are designed to provide a relatively stable level
of gross margin on crude oil supplied by PDVSA. CITGO's supply agreements are
designed to reduce the volatility of earnings and cash flows from CITGO's
refining operations by providing a relatively stable level of gross margin on
crude oil supplied by PDVSA. This supply represented approximately 58% of the
crude oil processed in refineries operated by CITGO, including PDVMR, in the
year ended December 31, 1997. However, CITGO also purchases significant
26
volumes of refined products to supplement the production from its refineries to
meet marketing demands and to resolve logistical issues. PDV America's earnings
and cash flows are also affected by the cyclical nature of petrochemical prices.
Inflation was not a significant factor in the operations of PDV America for the
three years ended 1997. As a result of these factors, the earnings and cash
flows of PDV America may experience substantial fluctuations.
CITGO's revenues accounted for over 99% of PDV America's
consolidated revenues in 1997, 1996 and 1995. PDVMR's sales of $942 million for
the period May 1, 1997 to December 31, 1997 were primarily to CITGO and,
accordingly, these were eliminated in consolidation. However, the operations of
PDVMR, including its investment in Needle-Coker, contributed approximately $53
million to the Companies' consolidated gross margin and $43 million to PDV
America's consolidated income before interest and taxes in 1997.
Effective January 1, 1992, the supply agreements between PDVSA
and CITGO with respect to the Lake Charles, Corpus Christi and Paulsboro
refineries were modified to reduce the price levels to be paid by CITGO by a
fixed amount per barrel of crude oil purchased from PDVSA. Such reductions were
intended to defray CITGO's costs of certain environmental compliance
expenditures. This modification resulted in a decrease in the cost of crude oil
purchased under these agreements of approximately $70 million per year for the
years 1992 through 1994 as compared to the amount that would otherwise have been
payable thereunder. This modification was to expire at December 31, 1996;
however, in 1995, PDVSA and CITGO agreed to adjust this modification so that the
1992 fixed amount per barrel would be reduced and the adjusted modification
would not expire until December 31, 1999. The effect of this adjustment to the
original modification was to increase the cost of crude oil purchased under
these agreements by approximately $22 million and $44 million in 1995 and 1996,
respectively, as compared to the amount that would otherwise have been payable
thereunder based on the original modification (resulting in a net decrease of
approximately $48 million and $26 million in 1995 and 1996, respectively, from
the amount otherwise payable under the agreement prior to the 1992 original
modification). In 1997, the effect of the adjustments to the original
modifications was to reduce the price of crude oil purchased from PDVSA by
approximately $25 million. CITGO anticipates that the effect of the adjustments
to the original modifications will be to reduce the price of crude oil purchased
from PDVSA under these agreements by approximately $25 million per year in 1998
through 1999, in each case as compared to the original modification and without
giving effect to any other factors that may affect the price payable for crude
oil under these agreements. Due to the pricing formula under the supply
agreements, the aggregate price actually paid for crude oil purchased from PDVSA
under these agreements in each of these years will depend primarily upon the
current prices for refined products and certain actual costs of CITGO. These
estimates are also based on the assumption that CITGO will purchase the base
volumes of crude oil under the agreements.
In July 1997, the Company's senior management implemented a
Transformation Program designed to ensure that numerous expense controls,
business information systems and business efficiency initiatives underway are
effectively coordinated to achieve desired results. Included in this program are
reviews of the Company's business units, assets, strategies, and business
processes. These combined actions include expected personnel reductions (the
"Separation Programs"). The cost of the Separation Programs is approximately $22
million for the year ended December 31, 1997. In addition, as part of the
Transformation Program, the first phase of Systems Applications and Products in
Data Processing ("SAP") implementation, which includes the Company's financial
reporting systems went into production on January 1, 1998. Additional SAP
modules are to be implemented throughout 1998 and 1999.
27
The following table summarizes the sources of PDV America's
sales revenues and volumes.
PDV America Sales Revenues and Volumes
Year Ended December 31, Year Ended December 31,
----------------------------- ----------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline ....................... $ 7,754 $ 7,451 $ 6,367 11,953 11,308 11,075
Jet fuel ....................... 1,183 1,489 1,163 2,000 2,346 2,249
Diesel/#2 fuel ................. 2,439 2,312 1,356 4,288 3,728 2,730
Petrochemicals, industrial
products and other ............ 1,172 846 831 1,940 1,408 1,572
Asphalt ........................ 398 257 238 749 569 503
Lubricants and waxes ........... 467 426 404 239 220 215
------- ------- ------- ------- ------- -------
Total refined product sales $13,413 $12,781 $10,359 21,169 19,579 18,344
Other sales .................... 209 171 163 -- -- --
------- ------- ------- ------- ------- -------
Total sales ........... $13,622 $12,952 $10,522 21,169 19,579 18,344
======= ======= ======= ======= ======= =======
The following table summarizes PDV America's cost of sales and operating
expenses.
PDV America Cost of Sales and Operating Expense
Year Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
($ in millions)
Crude oil .............................................. $ 3,552 $ 3,053 $ 2,428
Refined products ....................................... 6,739 7,139 5,504
Intermediate feedstocks ................................ 1,240 1,000 898
Refining and manufacturing costs ....................... 940 801 755
Other operating costs and expenses and inventory changes 527 498 481
------- ------- -------
Total cost of sales and operating expenses ............. $12,998 $12,491 $10,066
======= ======= =======
Results of Operations -- 1997 Compared to 1996
Sales revenues and volumes. Sales increased by $670 million,
representing a 5% increase from 1996 to 1997. The increase was due to an
increase in sales volumes of 8% partially offset by an decrease in average sales
prices of 3%. Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet
fuel), excluding bulk sales made for logistical reasons, were up 7% from 1996 to
1997 and their average unit price decreased $0.02. Gasoline sales volumes
increased primarily due to successful marketing efforts, including the net
addition of approximately 335 new independently owned CITGO branded outlets
since December 31, 1996, as well as additional marketers obtained through the
transaction relating to UNO-VEN. See "Business -- PDV Midwest Refining, LLC."
Petrochemical sales volume rose 30% from 1996 to 1997. This increase, combined
with an average increase in unit prices of $0.02, resulted in a 33% increase in
petrochemical sales revenue from 1996 to 1997. Petrochemical sales volumes
increased primarily due to the increased production of xylenes, refinery grade
propylene and polymer grade propylene due to favorable economics. Industrial
products sales volumes increased 40% and average unit prices increased $0.03 for
a 48% increase in industrial products sales revenue from 1996 to 1997. The
increase in industrial products sales volumes was due to the availability of
product for sale from the
28
PDVMR refinery. Asphalt sales revenue increased 55% from 1996 to 1997. The
increase was primarily due to increases in sales volumes, up 32% from 1996 to
1997 and an 18% increase in sales price. The increase in asphalt sales volume is
due primarily to the Company's efforts in production and marketing to take
advantage of Sun Oil Company's withdrawal from the East Coast asphalt market.
Lubricants and wax sales revenue increased 10% from 1996 to 1997 due to
increases in both sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings
of affiliates increased by approximately $24 million, or 53% from $45 million in
1996 to $69 million in 1997. This increase was due primarily to a $43 million
increase in CITGO's equity earnings of LYONDELL-CITGO which was due primarily to
the change in CITGO's interest in LYONDELL-CITGO which increased from
approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997 and
the improvement in LYONDELL-CITGO's operations since completion of its refinery
enhancement project during the first quarter of 1997. Also, subsequent to the
transfer of UNO-VEN assets, the Companies have recorded $4 million of equity in
the earnings of Needle-Coker from the period from May 1, 1997 to December 31,
1997. These were offset by a $23 million decrease in the equity in earnings of
UNO-VEN from $23 million in 1996 to $.5 million for the first four months of
1997. See "--PDV Midwest Refining, LLC" under "Business and Properties" and Note
9 of Notes to Consolidated Financial Statements.
Interest income. Interest income from PDVSA represents
interest income on the $1 billion notes receivable (hereafter "Mirror Notes")
from PDVSA. The Mirror Notes were issued by PDVSA to PDV America in August 1993,
in connection with the Company's issuance of $1 billion of Senior Notes.
Other income (expense). Other income (expense) was $(14.5)
million for the year ended December 31, 1997 as compared to $(3.4) million for
the same period in 1996. The 1997 amount includes $8.7 million in loss reserves
on a lubricants plant and retail properties, a $5.8 write-off of a capital
project, $5.8 million in fees related to the sale of trade accounts, notes and
credit card receivables in June and November 1997 and a $2.6 million write-off
of miscellaneous assets. These items were offset by a net $8.3 million property
insurance recovery relating to the Corpus Christi alkylation unit fire during
the third quarter and a $1.3 million gain on the sale of pipeline assets in the
first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $507 million, or 4% from 1996 to 1997. Lower
crude oil purchases in 1997 as compared to 1996 resulted from a 7% decrease in
crude oil prices in 1997 as compared to 1996, and a 3% decrease in purchased
volumes in 1997 as compared to 1996. Higher intermediate feedstock purchases
were attributable to an 18% increase in volumes purchased, partially offset by
2% decrease in prices. Refinery production was higher in 1997 than 1996;
however, due to the increased sales volumes mentioned above, refined product
purchases increased 7%. The increase in refined product purchases includes a 10%
increase in volumes offset by 3% lower refined product prices. The increases in
refining and manufacturing costs are due primarily to increased costs of
purchased fuel and electricity at CITGO's Lake Charles refinery.
The Companies purchase refined products to supplement the
production from their refineries to meet marketing demands and resolve
logistical issues. The refined product purchases represented 52% and 57% of cost
of sales for the years 1997 and 1996, respectively. These refined product
purchases included purchases from LYONDELL-CITGO and Chalmette. The Companies
estimate that margins on purchased products, on average, are lower than margins
on produced products
29
due to the fact that the Companies can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from the Companies produced products and margins may
vary due to market conditions and other factors beyond the Companies' control.
As such, it is difficult to measure the effects on profitability of changes in
volumes of purchased products. The Companies anticipate their purchased product
requirements will continue to increase, in volume and as a percentage of refined
products sold, in order to meet marketing demands, although in the near term,
other than normal refinery turnaround maintenance, the Companies do not
anticipate operational actions or market conditions that might cause a material
change in anticipated purchased product requirements; however, there could be
events beyond the Companies' control that impact the volume of refined products
purchased. See also "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for 1997 was $625 million, or
4.6%, compared to $461 million, or 3.6% for 1996. Gross margins in 1997 were
positively affected by high crude runs during periods of strong refining margins
as well as asphalt and petrochemical activities (in each case, as discussed
above) and the positive contribution from PDVMR's refining operations.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased $42 million, or 25%, due primarily to
increased selling expenses in 1997 including the effect of the change in focus
of the Company's marketing programs initiated in April 1996, and increases in
several other areas including purchasing, administrative services, information
systems corporate executive, credit card and other charges, none of which
increased more than $6 million individually, but in the aggregate increased
approximately $30 million for the year. Additionally, the effect of including
PDVMR's expenses from May 1, 1997 to December 31, 1997 contributed to the
increase.
Interest expense. Interest expense increased $15 million from
1996 to 1997. The increase was primarily due to the public debt and certain
industrial revenue bonds which were outstanding for the entire year in 1997
compared to only a partial year during 1996 and CITGO's revolving bank loan
which had a higher outstanding balance during most of 1997 as compared to 1996.
The increase was also due to debt related to PDVMR.
Income taxes. PDV America's provision for income taxes in 1997
was $106 million, representing an effective tax rate of 32%. In 1996, PDV
America's provision for income taxes was $78 million, representing an effective
tax rate of 36%. The decrease is due primarily to the favorable resolution with
the Internal Revenue Service of a significant tax issue, related to
environmental expenditures, in the second quarter of 1997. The decrease was
partially offset by the recording of a valuation allowance related to a capital
loss carryforward that will more likely than not expire in 1998.
Net income. Net income was $228 million for 1997 and $138
million for 1996.
Results of Operations--1996 Compared to 1995
Sales revenues and volumes. Sales increased by $2,430 million,
representing a 23% increase from 1995 to 1996. The increase was primarily due to
an increase in sales volumes of 7% and an average increase in sales prices of
16%. Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, were up 10% from 1995 to 1996,
and their average unit price increased $0.10. Gasoline sales volumes increased
primarily due to successful marketing
30
efforts, including the net addition of approximately 470 new independently owned
CITGO branded outlets since December 31, 1995. Petrochemical sales volume rose
14% from 1995 to 1996. This increase was offset by an average decrease in unit
prices of $0.16, resulting in a 3% decrease in petrochemical sales revenue from
1995 to 1996. Industrial products sales volumes decreased 31% and average unit
prices increased $0.02 resulting in a 27% decrease in industrial products sales
revenue from 1995 to 1996. Asphalt sales revenues increased 8% from 1995 to
1996. The increase was primarily due to increases in sales volumes. Lubricants
and wax sales revenues increased 5% from 1995 to 1996 due to increases in both
sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings
(losses) of affiliates decreased by approximately $3 million, representing a 7%
decrease, from $48 million in 1995 to $45 million in 1996. This decrease was
primarily due to a $13 million decrease in equity earnings of LYONDELL-CITGO,
partially offset by an increase in the earnings of UNO-VEN of $9 million. Almost
all of the shortfall in LYONDELL-CITGO's earnings was due to lower fuels
margins, lower aromatics prices, higher natural gas prices, operating problems
in the first half of the year and the impact of the expansion project startup on
existing operations. The increase in the earnings of UNO-VEN is due primarily to
higher refining product margins.
Interest income. Interest income from PDVSA represents
interest income on the Mirror Notes from PDVSA. The Mirror Notes were issued by
PDVSA to PDV America in August 1993, in connection with the Company's issuance
of $1 billion of Senior Notes.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $2,425 million, representing a 24% increase,
from 1995 to 1996. Higher crude oil purchases in 1996 as compared to 1995
resulted from a 22% increase in crude oil prices in 1996 as compared to 1995, or
approximately $3.21 per barrel which includes approximately $0.13 per barrel
related to the 1995 adjustments of the PDVSA crude and feedstock supply
agreements discussed in the overview, and a 3% increase in volumes in 1996 as
compared to 1995. Higher costs of intermediate feedstock purchases were
attributable to a 20% increase in prices, partially offset by a 7% decrease in
volumes purchased. Refinery production was higher in 1996 as compared to 1995;
however, due to the increased sales volumes mentioned above, the cost of refined
product purchases increased 30%. The increase in refined product purchases
results from a 13% increase in volumes and a 15% increase in refined product
prices. The increases in refining and manufacturing costs are due primarily to
increased costs of purchased fuel and electricity at CITGO's Lake Charles and
Corpus Christi refineries as well as the additional manufacturing costs related
to the lubricants plant acquired in May 1995.
CITGO purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 55% and 57% of cost of sales for the years
1995 and 1996, respectively. CITGO estimates that margins on purchased products,
on average, are lower than margins on produced products due to the fact that
CITGO can only receive the marketing portion of the total margin received on the
produced refined products. However, purchased products are not segregated from
CITGO-produced products and margins may vary due to market conditions and other
factors beyond the Company's control. As such, it is difficult to measure the
effects on profitability of changes in volumes of purchased products. CITGO
anticipates its purchased product requirements will continue to increase, in
volume and as a percentage of refined products sold, in order to meet marketing
demands. CITGO does not anticipate operational actions or market conditions in
the near
31
term (other than normal refinery turnaround maintenance) which might cause a
material change in anticipated purchased product requirements; however, there
could be events beyond the control of CITGO which impact the volume of refined
products purchased. See also "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for 1996 was $461 million, or
3.6%, compared to $456 million, or 4.3%, for 1995. Gross margins in 1996 were
adversely affected by refinery operations in the first quarter, the scheduled
modifications to the pricing provisions in the crude and feedstock supply
agreements, the decline in petrochemical profitability, increased volumes of
refined products purchased as a percentage of sales volume and increased costs
of purchased fuel and electricity at the refineries throughout the year (in each
case, as discussed above).
Selling, general and administrative expenses. Selling, general
and administrative expenses increased by $3 million, representing a 2% increase,
due primarily to increases in salaries and benefits and increased marketing
expenses in 1996 including the effect of the change in focus of CITGO's
marketing programs initiated in April 1996. The primary program in effect
through March 1996 was designed to increase the number of branded outlets and
improve CITGO's overall image. Accordingly, costs were and continue to be
expensed as incurred. The program initiated in April 1996 primarily focuses on
defending market share and increasing volumes sold to existing marketers by
providing an incentive which is earned over time. The accounting for the new
program recognizes the program expenses when the incentives are earned.
Interest expense. Interest expense increased $7.8 million from
1995 to 1996. The increase was due primarily to increased borrowings, offset by
a slightly lower weighted average interest rate on indebtedness.
Income taxes. PDV America's provision for income taxes in 1996
was $78 million, representing an effective tax rate of 36%. In 1995, PDV
America's provision for income taxes was $84 million, representing an effective
tax rate of 37%.
Net income. Net income was $138 million for 1996. Net income
of $146 million for 1995 included an after-tax extraordinary gain of $3 million
on early extinguishment of debt.
Liquidity and Capital Resources
For the year ended December 31, 1997, PDV America's net cash
provided by operating activities totaled approximately $447 million, primarily
reflecting $228 million of net income and $241 million of depreciation and
amortization, offset by net cash used by other items of $22 million. The more
significant changes in other items included the decrease in accounts receivable,
including receivables from affiliates, of approximately $325 million, partially
offset by the increase in accounts payable and other liabilities, including
payables to affiliates, of approximately $320 million and the increase of other
assets of approximately $87 million. The decrease in accounts receivable is due
primarily to the sale of $125 million of CITGO's trade accounts receivable in
June 1997 and the sale of $150 million in credit card receivables in November
1997, proceeds of which were used primarily to make payments on the revolving
bank debt. The decrease in accounts payable is related primarily to a reduction
in the payable related to crude oil and refined products purchased.
32
Net cash used in investing activities in 1997 totaled $298
million, consisting primarily of capital expenditures of $264 million and
investments in LYONDELL-CITGO of $46 million and a loan to LYONDELL-CITGO of
$16.5 million offset by $28 million of proceeds from sales of property, plant
and equipment.
During the same period, consolidated net cash used in
financing activities totaled approximately $146 million, consisting primarily of
proceeds of approximately $250 million from a capital contribution from PDV
America's parent, PDV Holding, which was more than offset by the repayment of
$135 of UNO-VEN notes, repayments of revolving bank loans of $106 million,
repayments of short term bank loans of $50 million, and payments on private
placement notes of $59 million.
The Companies currently estimate capital exp