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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------- -----------
COMMISSION FILE NUMBER 001-12138
PDV AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297556
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 LEXINGTON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive office) (Zip Code)
(212) 753-5340
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of each Exchange on which registered
- ---------------------------- -----------------------------------------
7 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 [ ]
The registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore omitting (i) certain information otherwise
required by Item 10 of Form 10-K relating to Directors and Executive Officers as
permitted by General Instruction (I)(2)(c) and (ii) certain information
otherwise required by Item 11 of Form 10-K relating to executive compensation as
permitted by General Instruction (I)(2)(c).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K: NOT APPLICABLE
Aggregate market value of the voting stock held by non-affiliates of the registrant: NOT APPLICABLE
Number of shares of Common Stock, $1.00 par value, outstanding as of March 1, 2001: 1,000
DOCUMENTS INCORPORATED BY REFERENCE: None
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PDV AMERICA, INC.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS................................................................... ii
PART I......................................................................................................... 1
ITEMS 1. and 2. Business and Properties............................................................... 1
ITEM 3. Legal Proceedings............................................................................. 16
ITEM 4. Submission of Matters to a Vote of Security Holders........................................... 17
PART II........................................................................................................ 18
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 18
ITEM 6. Selected Financial Data....................................................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 19
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 25
ITEM 8. Financial Statements and Supplementary Data................................................... 28
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 28
PART III....................................................................................................... 29
ITEM 10. Directors and Executive Officers of the Registrant........................................... 29
ITEM 11. Executive Compensation....................................................................... 29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management............................... 29
ITEM 13. Certain Relationships and Related Transactions............................................... 29
PART IV........................................................................................................ 32
ITEM 14. Exhibits, Financial Statements and Reports on Form 8-K....................................... 32
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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 capital expenditures and
investments related to environmental compliance and strategic planning,
purchasing patterns of refined products and capital resources available to the
PDV America and its subsidiaries are forward-looking statements. In addition,
when used in this document, the words "anticipate," "estimate," "prospect" and
similar expressions are used to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the products of PDV America and its subsidiaries as a result of competitive
actions or economic factors and changes in the cost of crude oil, feedstocks,
blending components or refined products. Such statements are also subject to the
risks of increased costs in related technologies and such technologies producing
anticipated results. Should one or more of these risks or uncertainties
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although PDV America believes that the expectations
reflected by such forward-looking statements are reasonable based on information
currently available to the PDV America and its subsidiaries, no assurances can
be given that such expectations will prove to have been correct.
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
OVERVIEW
PDV America, Inc. ("PDV America" and, together with its subsidiaries,
the "Companies") was incorporated in 1986 in the State of Delaware and,
effective April 2, 1997, is a wholly owned subsidiary of PDV Holding, Inc. ("PDV
Holding"), a Delaware corporation. PDV America's ultimate parent is Petroleos de
Venezuela, S.A. (together with one or more of its subsidiaries, referred to
herein as "PDVSA"), the national oil company of the Bolivarian Republic of
Venezuela. Through its wholly owned operating subsidiaries, CITGO Petroleum
Corporation ("CITGO") and PDV Midwest Refining L.L.C. ("PDVMR"), 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.
PDV America's aggregate net interest in rated crude oil refining
capacity is 858 thousand barrels per day ("MBPD"). The following table shows the
capacity of each U.S. refinery in which PDV America holds an interest and PDV
America's share of such capacity as of December 31, 2000.
PDV AMERICA REFINING CAPACITY
NET PDV
TOTAL RATED AMERICA
CRUDE OWNERSHIP IN
PDV AMERICA REFINING REFINING
LOCATION OWNER INTEREST CAPACITY CAPACITY
-------------- ----------- ----------- ------------
% MBPD MBPD
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX LYONDELL-CITGO 41 265 109
Lemont, IL PDVMR 100 167 167
------- --------
Total Rated Refining
Capacity as of December 31, 2000 1,014 858
======= ========
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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, 2000.
PDV AMERICA REFINERY PRODUCTION(1)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000(2) 1999(2) 1998(2)
------------------------- ------------------------ -----------------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 858 858 858
Refinery Input
Crude oil 791 83% 753 84% 763 83%
Other feedstocks 157 17% 146 16% 159 17%
---------- ---------- ---------- ---------- ---------- ----------
Total 948 100% 899 100% 922 100%
========== ========== ========== ========== ========== ==========
Product Yield
Light fuels
Gasoline 419 44% 401 44% 413 44%
Jet fuel 79 8% 72 8% 69 7%
Diesel/#2 fuel 182 19% 173 19% 175 19%
Asphalt 47 5% 42 5% 45 5%
Petrochemicals and industrial products 230 24% 219 24% 231 25%
---------- ---------- ---------- ---------- ---------- ----------
Total 957 100% 907 100% 933 100%
========== ========== ========== ========== ========== ==========
UTILIZATION OF RATED REFINING CAPACITY 92% 88% 89%
- ----------
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes 41.25% of the Houston refinery for 2000, 1999 and 1998.
COMPETITIVE NATURE OF THE PETROLEUM REFINING BUSINESS
The petroleum refining industry is cyclical and highly volatile,
reflecting capital intensity with high fixed and low variable costs. Petroleum
industry operations and profitability are influenced by a large number of
factors, over some of which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products. The U.S. petroleum refining
industry is in a period of consolidation. A number of former competitors have
combined their operations. Demand for crude oil and crude oil products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play
significant parts. Generally, U.S. refiners compete for sales on the basis of
price and brand image and, in some areas, product quality.
CITGO
CITGO and its subsidiaries are engaged in the refining, marketing and
transportation of 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. CITGO's transportation
fuel customers include primarily CITGO branded wholesale marketers, convenience
stores and airlines located mainly east of the Rocky Mountains. Asphalt is
generally marketed to independent paving contractors on the East and Gulf Coasts
and in the Midwest of the United States. Lubricants are sold, principally in the
United States, to independent marketers, mass marketers and industrial
customers. CITGO plans to begin marketing lubricants, gasoline and distillates
in various Latin American markets.
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Petrochemical feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States. Petroleum
coke is sold primarily in international markets.
REFINING
CITGO's aggregate net interest in rated crude oil refining capacity is
691 MBPD. The following table shows the capacity of each U.S. refinery in which
CITGO holds an interest and CITGO's share of such capacity as of December 31,
2000.
TOTAL RATED NET CITGO
CRUDE OWNERSHIP IN
CITGO REFINING REFINING
LOCATION OWNER INTEREST CAPACITY CAPACITY
-------------- -------- ----------- ------------
(%) (MBPD) (MBPD)
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX LYONDELL-CITGO 41 265 109
----- -----
Total Rated Refining
Capacity as of December 31, 2000 847 691
===== =====
The following table shows CITGO's aggregate interest in refining
capacity, refinery input and product yield for the three years in the period
ended December 31, 2000.
CITGO REFINERY PRODUCTION(1)(2)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 691 691 691
Refinery Input
Crude oil 638 82% 607 82% 615 81%
Other feedstocks 139 18% 129 18% 144 19%
--- --- --- --- --- ---
Total 777 100% 736 100% 759 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 330 42% 317 43% 334 43%
Jet fuel 78 10% 70 9% 66 9%
Diesel/#2 fuel 142 18% 136 18% 134 17%
Asphalt 47 6% 42 6% 45 6%
Petrochemicals and industrial products 189 24% 179 24% 193 25%
--- --- --- --- --- ---
Total 786 100% 744 100% 772 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 92% 88% 89%
- ----------
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes 41.25% of the Houston refinery production.
CITGO produces its light fuels and petrochemicals primarily through its
Lake Charles, Louisiana and Corpus Christi, Texas refineries. Asphalt refining
operations are carried out through CITGO's
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Paulsboro and Savannah refineries. CITGO obtains refined products from its joint
venture refinery in Houston.
Lake Charles, Louisiana Refinery. This refinery has a rated refining
capacity of 320 MBPD and is capable of processing large volumes of heavy crude
oil into a flexible slate of refined products, including significant quantities
of high-octane unleaded gasoline and reformulated gasoline. The Lake Charles
refinery has a Solomon Process Complexity Rating of 17.6 (as compared to an
average of 13.6 for U.S. refineries in the most recently available Solomon
Associates, Inc. survey). The Solomon Process Complexity Rating is an industry
measure of a refinery's ability to produce higher value products. A higher
Solomon Process Complexity Rating indicates a greater capability to produce such
products.
The following table shows the rated refining capacity, refinery input
and product yield at the Lake Charles refinery for the three years in the period
ended December 31, 2000.
LAKE CHARLES REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 320 320 320
Refinery Input
Crude oil 319 87% 298 89% 288 84%
Other feedstocks 48 13% 36 11% 54 16%
--- --- --- --- --- ---
Total 367 100% 334 100% 342 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 187 50% 171 50% 187 54%
Jet fuel 70 19% 63 18% 59 17%
Diesel/#2 fuel 58 15% 53 16% 47 13%
Petrochemicals and industrial products 59 16% 54 16% 55 16%
--- --- --- --- --- ---
Total 374 100% 341 100% 348 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 100% 93% 90%
Approximately 42%, 33% and 66% of the total crude runs at the Lake
Charles refinery, in the years 2000, 1999 and 1998, respectively, consisted of
crude oil with an average API gravity of 24 degrees or less. The volume of heavy
crude oil available under crude supply agreements to CITGO in 2000 and 1999 was
less than in previous years. As a result, the crude oil slates refined in 2000
and 1999 were lighter than in previous years. See "Items 1. and 2. Business and
Properties - CITGO - Crude Oil and Refined Product Purchases."
The Lake Charles refinery's Gulf Coast location provides it with access
to crude oil deliveries from multiple sources. Imported crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, while
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port and to
terminal facilities in the Houston area through which it can receive crude oil
deliveries. For delivery of refined products, the refinery is connected through
the Lake Charles Pipeline directly to the Colonial and Explorer Pipelines, which
are the major refined product pipelines supplying the northeast and midwest
regions of the United States, respectively. The refinery also uses adjacent
terminals and docks, which provide access for ocean tankers and barges to load
refined products for shipment.
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The Lake Charles refinery's main petrochemical products are propylene
and benzene. Industrial products include sulphur, residual fuels and petroleum
coke.
Located adjacent to the Lake Charles refinery is a lubricants refinery,
Cit-Con Oil Corporation ("Cit-Con"), owned 65% by CITGO and 35% by Conoco, Inc.
("Conoco"). The Cit-Con refinery is operated by CITGO. Primarily because of its
specific design, the Cit-Con refinery produces high quality oils and waxes, and
is one of the few stand-alone lubricants refineries in the petroleum industry.
Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from
Conoco's Lake Charles refinery. Finished refined products are shared on the same
pro rata basis by CITGO and Conoco.
Corpus Christi, Texas Refinery. The Corpus Christi refinery is an
efficient and highly complex facility, capable of processing high volumes of
heavy crude oil into a flexible slate of refined products, with a Solomon
Process Complexity Rating of 16.7 (as compared to an average 13.6 for U.S.
refineries in the most recently available Solomon Associates, Inc. survey). This
refinery complex consists of the East and West Plants, located within five miles
of each other.
The following table shows rated refining capacity, refinery input and
product yield at the Corpus Christi refinery for the three years in the period
ended December 31, 2000.
CORPUS CHRISTI REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998
------------------ ------------------ -----------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 150 150 150
Refinery Input
Crude oil 149 70% 148 70% 152 71%
Other feedstocks 65 30% 62 30% 61 29%
--- --- --- --- --- ---
Total 214 100% 210 100% 213 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 95 46% 96 46% 97 46%
Diesel/#2 fuel 58 27% 55 27% 58 27%
Petrochemicals and industrial products 58 27% 56 27% 57 27%
--- --- --- --- --- ---
Total 211 100% 207 100% 212 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 99% 99% 101%
Corpus Christi crude runs during 2000, 1999 and 1998 consisted of 79%,
81% and 100%, respectively, heavy sour Venezuelan crude. The average API gravity
of the composite crude slate run at the Corpus Christi refinery is approximately
24 degrees. Crude oil supplies are delivered directly to the Corpus Christi
refinery through the Port of Corpus Christi. See "Items 1. and 2. Business and
Properties - CITGO - Crude Oil and Refined Product Purchases."
CITGO operates the West Plant under a sublease agreement from Union
Pacific Corporation ("Union Pacific"). The basic term of the sublease agreement
ends on January 1, 2004, but CITGO may renew the sublease agreement 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. See Consolidated
Financial Statements of PDV America - Note 13 in Item 14a.
5
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The Corpus Christi refinery's main petrochemical products include
cumene, cyclohexane, methyl tertiary butyl ether and aromatics (including
benzene, toluene and xylene). PDV America produces a significant quantity of
cumene, an important petrochemical product used in the engineered plastics
industry.
LYONDELL-CITGO Refining LP. Subsidiaries of CITGO and Lyondell Chemical
Company ("Lyondell") are partners in LYONDELL-CITGO Refining LP
("LYONDELL-CITGO"), which owns and operates a sophisticated 265 MBPD refinery
previously owned by Lyondell and located on the ship channel in Houston, Texas.
At December 31, 2000, CITGO's investment in LYONDELL-CITGO was $518 million. In
addition, at December 31, 2000, CITGO held notes receivable from LYONDELL-CITGO
of $35 million. See Consolidated Financial Statements of PDV America -- Note 2
in Item 14a.
A substantial amount of the crude oil processed by this refinery is
supplied by PDVSA under a long-term crude oil supply contract through the year
2017. For the year 2000, PDVSA deliveries of crude oil to LYONDELL-CITGO were
less than the contractual volume due to PDVSA's declaration of force majeure
pursuant to the crude oil supply contract. This required LYONDELL-CITGO to
obtain alternative sources of crude oil supply as replacement. On October 1,
2000, the force majeure condition was terminated and PDVSA deliveries of crude
oil returned to contract levels. On February 9, 2001, PDVSA notified
LYONDELL-CITGO that effective February 1, 2001, it had again declared force
majeure pursuant to the crude oil supply contract. Under a force majeure
declaration, PDVSA may reduce the amount of crude oil that it would otherwise be
required to supply under the crude oil supply contract. If PDVSA reduces its
delivery of crude oil, LYONDELL-CITGO may be required to use alternative sources
to obtain its required supply of crude oil, and this may result in reduced
operating margins. The effect of PDVSA's declaration of force majeure on
LYONDELL-CITGO's crude oil supply, operating results and the duration of this
situation are not known at this time. CITGO purchases substantially all of the
gasoline, diesel and jet fuel produced at this refinery under a long-term supply
contract. See Consolidated Financial Statements of PDV America - Notes 2, 3 and
16 in Item 14a.
CRUDE OIL AND REFINED PRODUCT PURCHASES
CITGO owns no crude oil reserves or production facilities, and must
therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including a
number of affiliated companies. See "Item 13. Certain Relationships and Related
Transactions."
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Crude Oil Purchases. The following chart shows CITGO's purchases of
crude oil for the three years in the period ended December 31, 2000:
CITGO CRUDE OIL PURCHASES
CITGO CRUDE OIL PURCHASES
LAKE CHARLES, LA CORPUS CHRISTI, TX PAULSBORO, NJ SAVANNAH, GA
2000 1999 1998 2000 1999 1998 2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(MBPD) (MBPD) (MBPD) (MBPD)
SUPPLIERS
PDVSA 104 104 134 143 118 153 47 42 52 22 19 17
PEMEX 49 54 51 2 14 -- -- -- -- -- -- --
Occidental -- -- 20 -- -- -- -- -- -- -- -- --
Other sources 165 142 88 6 15 -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- --- --- --- --- --- ---
Total 318 300 293 151 147 153 47 42 52 22 19 17
==== ==== ==== ==== ==== ==== === === === === === ===
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of CITGO's refineries.
The following table shows the base and incremental volumes of crude oil
contracted for delivery and the volumes of crude oil actually delivered under
these contracts in the three years ended December 31, 2000.
CITGO CRUDE OIL SUPPLY CONTRACTS WITH PDVSA
VOLUMES OF
CRUDE OIL PURCHASED CONTRACT
CONTRACT CRUDE FOR THE YEAR ENDED EXPIRATION
OIL VOLUME DECEMBER 31, DATE
----------------------- -------------------------------- ----------
BASE INCREMENTAL (1) 2000 1999 1998 DATE
---- --------------- ---- ---- ---- ----------
(MBPD) (MBPD) (YEAR)
LOCATION
Lake Charles, LA (2) 120 50 110 101 121 2006
Corpus Christi, TX (2) 130 -- 118 108 128 2012
Paulsboro, NJ (2) 30 -- 28 22 35 2010
Savannah, GA (2) 12 -- 12 11 12 2013
- ----------
(1) The supply agreement for the Lake Charles refinery gives PDVSA the
right to sell to CITGO incremental volumes up to the maximum amount
specified in the table, subject to certain restrictions relating to the
type of crude oil to be supplied, refining capacity and other
operational considerations at the refinery.
(2) Volumes purchased as shown on this table do not equal purchases from
PDVSA (shown in the previous table) as a result of transfers between
refineries of contract crude purchases included here and spot purchases
from PDVSA which are included in the previous table.
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO for a fixed period,
usually 20 to 25 years. The supply agreements differ somewhat for each entity
and each CITGO refinery but generally incorporate formula prices based on the
market value of a slate of refined products deemed to be produced for each
particular grade of crude oil or feedstock, less (1) certain deemed refining
costs; (2) certain actual costs, including transportation charges, import duties
and taxes; and (3) a deemed margin, which varies according to the grade of crude
oil or feedstock delivered. Under each supply agreement, deemed margins and
deemed costs are adjusted periodically by a formula primarily based on the rate
of inflation. Because deemed operating costs and the slate of refined products
deemed to be produced for a given barrel of crude oil or other feedstock do not
necessarily reflect the actual costs and yields in any period, the actual
refining margin earned by
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CITGO under the various supply agreements will vary depending on, among other
things the efficiency with which CITGO conducts its operations during such
period.
These crude supply agreements contain force majeure provisions which
entitle the supplier to reduce the quantity of crude oil and feedstocks
delivered under the crude supply agreements under specified circumstances. For
the year 2000, PDVSA deliveries of crude oil to CITGO were less than contractual
base volumes due to PDVSA's declaration of force majeure pursuant to all of the
long-term crude oil supply contracts related to CITGO's refineries. Therefore,
the Company has been required to use alternative sources of crude oil. As a
result, CITGO estimates that crude oil costs for the year ended December 31,
2000 were higher by $5 million from what would have otherwise been the case.
However, on October 1, 2000, the force majeure condition was terminated and
deliveries of crude oil returned to contract levels. On February 9, 2001, PDVSA
notified CITGO that it again declared force majeure, effective February 1, 2001,
under each of the long-term crude oil supply agreements it has with CITGO. The
effect of PDVSA's declaration of force majeure on CITGO's crude oil supply,
operating results and the duration of this situation are not known at this time.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the such
contracts and oblige the supplier to pay CITGO the deemed margin under that
contract for each barrel of reduced crude oil and feedstocks. During 2000 and
1999, PDVSA did not deliver naphtha pursuant to one of the contracts and made
contractually specified deemed margin payments in lieu thereof. The financial
effect was an increase in costs of $10 million and $4 million in 2000 and 1999,
respectively, from what would have otherwise been the case.
Prior to 1995, certain deductible costs were used in the CITGO supply
agreement formulas, aggregating approximately $70 million per year, which were
to cease being deductible after 1996. Commencing in the third quarter of 1995, a
portion of such deductions was deferred from 1995 and 1996 to the years 1997
through 1999. The effect of the adjustments to the original modifications was to
reduce the cost of crude oil purchased from PDVSA by approximately $21 million
in 1999 and $25 million in 1998 as compared to the original modification and
without giving effect to any other factors that may affect the amount payable
for crude oil under these agreements.
Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDV Marina, S.A., a wholly owned subsidiary of
PDVSA. In 2000, 83% of the PDVSA contract crude oil delivered to the Lake
Charles and Corpus Christi refineries was delivered on tankers operated by this
PDVSA subsidiary.
Throughout 1998, 1999 and 2000, CITGO purchased crude oil under a
90-day evergreen agreement with an affiliate of Petroleos Mexicanos ("PEMEX").
This agreement was terminated effective February 28, 2001.
CITGO was a party to a contract with an affiliate of Occidental
Petroleum Corporation for the purchase of light, sweet crude oil to produce
lubricants. This contract expired on August 31, 1998. CITGO also purchases sweet
crude oil under long-standing relationships with numerous other producers.
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Refined Product Purchases. CITGO is required to purchase refined
products to supplement the production of the Lake Charles and Corpus Christi
refineries in order to meet demand of CITGO's marketing network. The following
table shows CITGO's purchases of refined products for the three years in the
period ended December 31, 2000.
CITGO REFINED PRODUCT PURCHASES
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
----- ----- ----
(MBPD)
LIGHT FUELS
Gasoline 705 691 581
Jet fuel 82 77 69
Diesel/ #2 fuel 306 279 208
----- ----- ---
Total 1,093 1,047 858
===== ===== ===
As of December 31, 2000, CITGO purchased substantially all of the
gasoline, diesel and jet fuel produced at the LYONDELL-CITGO refinery under a
long-term contract that extends through the year 2017. LYONDELL-CITGO was a
major supplier in 2000 providing CITGO with 116 MBPD of gasoline, 71 MBPD of
diesel/#2 fuel, 19 MBPD of jet fuel and 5 MBPD of other products. See "Items 1.
and 2. Business and Properties - CITGO - Refining - LYONDELL-CITGO Refining LP."
As of May 1, 1997, CITGO began purchasing, under a contract with a
sixty-month term, substantially all of the refined products produced at the PDV
Midwest Refining, L.L.C. ("PDVMR") refinery. During the period ended December
31, 2000, the PDVMR refinery, located in Lemont, Illinois, provided CITGO with
89 MBPD of gasoline, 42 MBPD of diesel/#2 fuel and 1 MBPD of jet fuel.
In October 1997, an affiliate of PDVSA acquired a 50% equity interest
in a refinery in Chalmette, Louisiana, Chalmette Refining, L.L.C. ("Chalmette"),
and assigned to CITGO its option to purchase up to 50% of the refined products
produced at the refinery through December 31, 2000. CITGO exercised this option
during 2000 and acquired approximately 67 MBPD of refined products from the
refinery, approximately one-half of which was gasoline. The affiliate did not
assign this option to CITGO for 2001.
In October 1998 an affiliate of PDVSA acquired a 50% equity interest in
HOVENSA, L.L.C. ("HOVENSA"), a joint venture that owns and operates a refinery
in St. Croix, U.S. Virgin Islands. Under the related product sales agreement,
the PDVSA affiliate has appointed CITGO as its agent in designating which of its
affiliates shall from time to time take deliveries of the refined products
available to it. The product sales agreement will be in effect for the life of
the joint venture, subject to termination events based on default or mutual
agreement. Pursuant to the above arrangement, CITGO acquired approximately 125
MBPD of refined products from the refinery during 2000, approximately one-half
of which was gasoline.
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MARKETING
CITGO's major products are light fuels (including gasoline, jet fuel,
and diesel fuel), industrial products and petrochemicals, asphalt, lubricants
and waxes. The following table shows revenues and volumes of each of these
product categories for the three years ended December 31, 2000.
CITGO REFINED PRODUCT SALES REVENUES AND VOLUMES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ ---------------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------ ------ ------
($ IN MILLIONS) (MM GALLONS)
LIGHT FUELS
Gasoline $ 12,447 $ 7,691 $ 6,252 13,648 13,115 13,241
Jet fuel 2,065 1,129 828 2,367 2,198 1,919
Diesel / #2 fuel 4,750 2,501 1,945 5,565 5,057 4,795
ASPHALT 546 338 300 812 753 774
PETROCHEMICALS AND INDUSTRIAL PRODUCTS 1,740 1,024 937 2,153 2,063 2,440
LUBRICANTS AND WAXES 552 482 441 279 285 230
-------- -------- -------- ------ ------ ------
TOTAL $ 22,100 $ 13,165 $ 10,703 24,824 23,471 23,399
======== ======== ======== ====== ====== ======
Light Fuels. Gasoline sales accounted for 56% of CITGO's refined
product sales in 2000, and 58% in the years 1999 and 1998. CITGO markets CITGO
branded gasoline through 13,663 independently owned and operated CITGO branded
retail outlets (including 11,563 branded retail outlets owned and operated by
approximately 798 independent marketers and 2,100 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 48%, 45% and 48% of the volume of CITGO branded
gasoline sold in 2000, 1999 and 1998, respectively. See "Items 1. and 2.
Business and Properties - CITGO - Crude Oil and Refined Product Purchases -
Refined Product Purchases."
CITGO's strategy is to enhance the value of the CITGO brand by
delivering quality products and services to the consumer through a large network
of independently owned and operated CITGO branded retail locations. This is
accomplished through a commitment to quality, dependability and excellent
customer service to its independent marketers, which constitute CITGO's primary
distribution channel.
Sales to independent branded marketers typically are made under
contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year 2006.
Under this contract, CITGO arranges all transportation and delivery of motor
fuels and handles all product ordering. CITGO also acts as processing agent for
the purpose of facilitating and implementing orders and purchases from
third-party suppliers. CITGO receives a processing fee for such services.
CITGO markets jet fuel directly to airline customers at 27 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York
and Miami.
CITGO's delivery of light fuels to its customers is accomplished in
part through 48 refined product terminals located throughout CITGO's primary
market territory. Of these terminals, 38 are wholly owned by CITGO and ten are
jointly owned. Twelve of CITGO's product terminals have waterborne docking
facilities, which greatly enhance the flexibility of CITGO's logistical system.
In addition, CITGO operates and delivers refined products from seven terminals
owned by PDVMR in the Midwest. Refined product terminals owned or operated by
CITGO provide a total storage capacity of
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approximately 22 million barrels. Also, CITGO has active exchange relationships
with over 300 other refined product terminals, providing flexibility and timely
response capability to meet distribution needs.
Petrochemicals and Industrial Products. CITGO sells petrochemicals in
bulk to a variety of U.S. manufacturers as raw material for finished goods. The
majority of CITGO's cumene production is sold to a joint venture phenol
production plant in which CITGO is a limited partner. The phenol plant produces
phenol and acetone for sale primarily to the principal partner in the phenol
plant for the production of plastics. Sulphur is sold to the U.S. and
international fertilizer industries; cycle oils are sold for feedstock
processing and blending; natural gas liquids are sold to the U.S. fuel and
petrochemical industry; petroleum coke is sold primarily in international
markets, through a joint venture, for use as kiln and boiler fuel; and residual
fuel blendstocks are sold to a variety of fuel oil blenders.
Asphalt. CITGO markets asphalt through 18 terminals. Asphalt is
generally marketed to independent paving contractors on the East and Gulf Coasts
and in the Midwest of the United States for use in the construction and
resurfacing of roadways. Demand for asphalt in the Northeastern U.S. peaks in
the summer months.
Lubricants and Waxes. CITGO markets many different types, grades and
container sizes of lubricants and wax products, with the bulk of sales
consisting of automotive oil and lubricants and industrial lubricants. Other
major lubricant products include 2-cycle engine oil and automatic transmission
fluid.
INTERNATIONAL OPERATIONS
CITGO International Latin America, Inc., a wholly owned subsidiary headquartered
in Venezuela, is planning the expansion of the PDVSA and CITGO brands into
various Latin American markets which will include wholesale and retail sales of
lubricants, gasoline and distillates.
PIPELINE OPERATIONS
CITGO owns and operates a crude oil pipeline and three products
pipeline systems. CITGO also has equity interests in three crude oil pipeline
companies and five refined product pipeline companies. CITGO's pipeline
interests provide it with access to substantial refinery feedstocks and reliable
transportation to refined product markets, as well as cash flows from dividends.
One of the refined product pipelines in which CITGO has an interest, Colonial
Pipeline, is the largest refined product pipeline in the United States,
transporting refined products from the Gulf Coast to the mid-Atlantic and
eastern seaboard states.
EMPLOYEES
CITGO and its subsidiaries have a total of approximately 4,200
employees, approximately 1,600 of whom are covered by 15 union contracts. Most
of the union employees are employed in refining operations. The remaining union
employees are located primarily at a lubricant plant and various refined product
terminals.
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PDV MIDWEST REFINING, L.L.C.
REFINING
PDVMR produces light fuels, petrochemicals and industrial products at
its refinery in Lemont, Illinois. The refinery has a crude distillation capacity
of 167 MBPD and has a Solomon Process Complexity Rating of 11.6 (as compared to
an average of 13.6 for U.S. refineries in the most recently available Solomon
Associates, Inc., survey).
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, 2000.
LEMONT REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ -----------------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 167 167 167
Refinery Input
Crude oil 153 89% 146 90% 148 91%
Other feedstocks 18 11% 17 10% 15 9%
---------- ---------- ---------- ---------- ---------- ----------
Total 171 100% 163 100% 163 100%
========== ========== ========== ========== ========== ==========
Product Yield
Light fuels
Gasoline 89 52% 84 51% 79 49%
Jet fuel 1 1% 2 1% 3 2%
Diesel/#2 fuel 40 23% 37 23% 41 25%
Industrial Products
&Petrochemicals 41 24% 40 25% 38 24%
---------- ---------- ---------- ---------- ---------- ----------
Total 171 100% 163 100% 161 100%
========== ========== ========== ========== ========== ==========
UTILIZATION OF RATED REFINING CAPACITY 92% 87% 89%
The average API gravity of the composite crude slate run at the Lemont
refinery is approximately 26 degrees. Crude oil is supplied to the refinery by
pipeline.
Petrochemical products at the Lemont refinery include benzene, toluene
and xylene, plus a range of ten different aliphatic solvents.
PDVMR owns a 25% interest in a partnership that operates a needle coker
production facility, The Needle Coker Company ("Needle Coker"), adjacent to the
Lemont refinery. The remaining 75% interest in Needle Coker is held by various
subsidiaries of Union Oil Company of California.
CRUDE OIL PURCHASES
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
portion of the crude oil refined at the Lemont refinery is supplied by PDVSA
under a crude oil supply contract, effective as of April 23, 1997, that expires
in the year 2002 and, thereafter, is renewable annually. The contract calls for
delivery of a guaranteed volume by PDVSA of up to 100 MBPD. However, PDVMR is
not required to purchase a minimum volume. In 2000, the crude oil processed at
the Lemont refinery was 7% Venezuelan, 83% Canadian and 10% from other sources.
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MARKETING
Substantially all of PDVMR's products are sold to and marketed by
CITGO. See "Item 13. Certain Relationships and Related Transactions."
EMPLOYEES
PDVMR has no employees. CITGO operates the Lemont refinery and provides
all administrative functions to PDVMR pursuant to a refinery operating
agreement.
REFINERY OPERATING AGREEMENT WITH CITGO
CITGO operates the Lemont refinery in accordance with a refinery
operating agreement with PDVMR. The refinery operating agreement sets out the
duties, obligations and responsibilities of CITGO and PDVMR with respect to the
operation of the Lemont refinery. CITGO provides all administrative functions to
PDVMR, 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 in accordance
with the provisions of such agreement. See "Item 13. - Certain Relationships and
Related Transactions."
ENVIRONMENT AND SAFETY
ENVIRONMENT -- GENERAL
Beginning in 1994, the U.S. refining industry was required to comply
with stringent product specifications under the 1990 amendments to the Federal
Clean Air Act relating to reformulated gasoline and low sulphur diesel fuel.
These amendments resulted in additional capital and operating expenditures, and
significantly altered the U.S. refining industry and the return realized on
refinery investments. In addition to these amendments, numerous other factors
affect the Companies' plans with respect to environmental compliance and related
expenditures. See "Factors Affecting Forward-Looking Statements."
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. The
management believes that the Companies are in compliance with these laws and
regulations in all material aspects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, the Companies' management believes that its
current accruals are sufficient to address the Companies' environmental clean-up
obligations. Conditions which require additional expenditures may exist for
various of the Companies' sites including, but not limited to, the Companies'
operating refinery complexes, closed refineries, service stations and crude oil
and petroleum product storage terminals. The amount of such future expenditures,
if any, is indeterminable.
ENVIRONMENT -- CITGO
In 1992, CITGO reached an agreement with a state agency to cease usage
of certain surface impoundments at CITGO's Lake Charles refinery by 1994. A
mutually acceptable closure plan was filed with the state in 1993. CITGO and the
former owner of the Lake Charles refinery are participating in the closure and
sharing the related costs based on estimated contributions of waste and
ownership periods.
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The remediation commenced in December 1993. In 1997, CITGO presented a proposal
to a state agency revising the 1993 closure plan. In 1998 and 2000, CITGO
submitted further revisions as requested by the state agency. A ruling on the
proposal, as amended, is expected in 2001 with final closure to begin in 2002.
In 1992, an agreement was reached between CITGO and the former owner of
the Lake Charles refinery concerning a number of environmental issues. The
agreement consisted, in part, of payments to CITGO totaling $46 million. The
former owner will continue to share the costs of certain specific environmental
remediation and certain tort liability actions based on ownership periods and
specific terms of the agreement.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998 and
1999. TNRCC has issued notices of violation related to each of the reviews and
has proposed fines of approximately $970,000 based on the 1998 review and
$700,000 based on the 1999 review. The first notice of violation was issued in
January 1999 and the second notice of violation was issued in December 1999.
Most of the alleged violations refer to recordkeeping and reporting issues,
failure to meet required emission levels, and failure to properly monitor
emissions. CITGO is currently reviewing the alleged violations and intends to
vigorously protest the alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency, stating that the agency
believes these companies have contributed to contamination in the Calcasieu
Estuary, in the proximity of Lake Charles, Calcasieu Parish, Louisiana and are
potentially responsible parties under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). The Environmental Protection Agency
made a demand for payment of its past investigation costs from CITGO and other
potentially responsible parties and advised it intends to conduct a remedial
investigation/feasibility study under its CERCLA authority. CITGO and other
potentially responsible parties may be potentially responsible for the costs of
the remedial investigation/feasibility study. CITGO disagrees with the
Environmental Protection Agency's allegations and intends to contest this
matter.
In January 2001, CITGO received notice of violation from the
Environmental Protection Agency alleging violations of the Federal Clean Air
Act. The notices of violation resulted from inspections and formal information
requests regarding CITGO's compliance with the Federal Clean Air Act. The
notices of violation cover CITGO's Lake Charles, Louisiana and Corpus Christi,
Texas refineries and the Lemont, Illinois refinery operated by CITGO. For the
Lake Charles and Lemont facilities, the notices of violations allege, among
other things, violations of the "New Source Review" provisions of the Federal
Clean Air Act, which address installation and permitting of new and modified air
emission sources. For the Corpus Christi facility, the notice of violation
alleges violations of various monitoring, leak detection and repair requirements
of the Federal Clean Air Act. If CITGO were to be found to have violated the
provisions cited in the notices of violation, it could be subject to possible
significant penalties and capital expenditures for installation or upgrading of
pollution control equipment or technologies. The likelihood of an unfavorable
outcome and the amount or range of any potential loss cannot reasonably be
estimated at this time.
In October 1999, the Louisiana Department of Environmental Quality
issued to CITGO a notice of violation and potential penalty notice alleging
violation of benzene NESHAPS regulations covering benzene emissions from
wastewater treatment operations at CITGO's Lake Charles, Louisiana refinery and
requested additional information. CITGO anticipates resolving this for an
immaterial amount.
Conditions which require additional expenditures may exist with respect
to various CITGO sites including, but not limited to, CITGO's operating refinery
complexes, closed refineries, service stations
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and crude oil and petroleum product storage terminals. The amount of such future
expenditures, if any, is indeterminable.
Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 2000, CITGO spent approximately $28
million for environmental and regulatory capital improvements in its operations.
CITGO's management currently estimates that CITGO will spend approximately $658
million for environmental and regulatory capital projects over the five-year
period 2001-2005. These estimates may vary due to a variety of factors. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources." See also "Factors Affecting
Forward-Looking Statements."
ENVIRONMENT -- PDVMR
Prior to May 1, 1997, PDV America had a 50% interest in The UNO-VEN
Company ("UNO-VEN"), an Illinois general partnership. As of May 1, 1997,
pursuant to a partnership interest retirement agreement, certain UNO-VEN assets
were transferred to PDMVR. In accordance with this partnership interest
retirement agreement, PDV America, VPHI Midwest, Inc., a subsidiary of PDV
America, and PDVMR assumed joint and several liability for all environmental
matters relating to past operations of UNO-VEN.
In November 1999, the Attorney General's office of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois against
PDVMR and CITGO alleging damages from several releases to the air of
contaminants from the Lemont, Illinois refinery. The initial complaint addressed
alleged violations and potential compliance actions. The Attorney General's
office later made a demand for penalties of approximately $150,000. While CITGO
and PDVMR disagree with the Attorney General's alleged violations and proposed
penalty demand, they are cooperating with the agency and anticipate reaching an
agreement with the agency to resolve this lawsuit by the end of the first
quarter 2001.
In January 2001, PDVMR received a notice of violation from the
Environmental Protection Agency alleging violations of the Federal Clean Air
Act. The notice of violation resulted from inspections and formal information
requests regarding PDVMR's compliance with the Federal Clean Air Act. The notice
of violation alleges, among other things, violations of the "New Source Review"
provisions of the Federal Clean Air Act, which addresses installation and
permitting of new and modified air emission sources. If PDVMR were to be found
to have violated the provisions cited in the notice of violation, it could be
subject to possible significant penalties and capital expenditures for
installation or upgrading of pollution control equipment or technologies. The
likelihood of an unfavorable outcome and the amount or range of any potential
loss cannot reasonably be estimated at this time.
SAFETY
Due to the nature of petroleum refining and distribution, CITGO and
PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs. PDV America believes that it is in substantial compliance
with occupational health and safety laws.
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ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business
are pending against PDV America. PDV America records accruals for potential
losses when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to PDV America, and in amounts greater than PDV America `s accruals,
then such determinations could have a material adverse effect on PDV America's
results of operations in a given reporting period. However, in the management's
opinion, the ultimate resolution of these lawsuits and claims will not exceed,
by a material amount, the amount of the accruals and the insurance coverage
available to PDV America. This opinion is based upon management's and counsel's
current assessment of these lawsuits and claims. The most significant lawsuits
and claims are discussed below.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery. No
serious personal injuries were reported. Approximately 1,300 claims have been
resolved for immaterial amounts. There are 17 related lawsuits pending in the
Corpus Christi, Texas state court against CITGO, on behalf of approximately
9,000 individuals alleging property damages, personal injury and punitive
damages. None of these are presently scheduled for trial.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO which claims damages for reduced value of residential properties
as a result of alleged air, soil and groundwater contamination. CITGO has
purchased 275 adjacent properties included in the lawsuit and settled those
related property damage claims. CITGO has contested an agreement that purported
to provide for settlement of the remaining property damage claims for $5 million
payable by it. Motions by CITGO and the plaintiffs for a summary judgment
related to the enforcement of this agreement are currently under consideration
by the court.
One of two lawsuits alleging wrongful death and personal injury filed
in 1996 against CITGO and other industrial facilities in Corpus Christi, Texas
state court was settled by CITGO for an immaterial amount. The other case,
brought by persons who claim that exposure to refinery hydrocarbon emissions
have caused various forms of illnesses, including multiple forms of cancer, is
scheduled for trial in 2002.
Litigation is pending in federal court in Lake Charles, Louisiana
against CITGO by a number of current and former refinery employees and
applicants asserting claims of racial discrimination in connection with CITGO's
employment practices. A trial involving two plaintiffs resulted in verdicts for
the Company. The Court granted CITGO a summary judgment with respect to another
group of claims; this judgment has been appealed to the Fifth Circuit Court of
Appeals. No trials of the remaining cases are set pending this appeal.
CITGO is among defendants to class action lawsuits in North Carolina,
New York and Illinois alleging contamination of water supplies by methyl
tertiary butyl ether, a component of gasoline. These actions allege that methyl
tertiary butyl ether poses public health risks and seek damages as well as
remediation of the alleged contamination. These matters are in early stages of
discovery. The Illinois case has been transferred to New York and consolidated
with the case pending in New York. CITGO has denied all of the allegations and
is pursuing its defenses.
In 1999, a group of U.S. independent oil producers filed petitions
under the U.S. antidumping and countervailing duty laws against imports of crude
oil from Venezuela, Iraq, Mexico and Saudi Arabia. These laws provide for the
imposition of additional duties on imports of merchandise if (1) the U.S.
Department of Commerce, after investigation, determines that the merchandise has
been sold to the Untied States at dumped prices or has benefited from
countervailing subsidies, and (2) the U.S. International Trade Commission
determines that the imported merchandise has caused or threatened
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material injury to the U.S. industry producing like product. The amount of the
additional duties imposed is generally equal to the amount of the dumping margin
and subsidies found on the imports on which the duties are assessed. No duties
are owed on imports made prior to the formal initiation of an investigation by
the Department of Commerce. In 1999, prior to initiation of a formal
investigation, the Department of Commerce dismissed the petitions. In 2000, the
U.S. Court of International Trade overturned this decision and remanded the case
to the Department of Commerce for reconsideration; this has been appealed.
Four former UNO-VEN marketers have filed a class action complaint
against UNO-VEN alleging an improper termination of the UNO-VEN Marketer Sales
Agreement under the Petroleum Marketing Practices Act in connection with PDVMR's
acquisition of the Union Oil Company of California's interest in UNO-VEN in
1997. This class action has been certified for liability purposes. The lawsuit
is pending in U.S. District Court in Wisconsin. PDVMR has filed a motion for
summary judgment. PDVMR and PDV America, jointly and severally, have agreed to
indemnify UNO-VEN and certain other related entities against certain liabilities
and claims, including this matter.
A lawsuit is pending against PDVMR and CITGO in Illinois state court,
which claims damages as a result of PDVMR's invoicing one of its partnerships
and an affiliate of the other partner of such partnership, allegedly excessive
charges for electricity utilized by the partnership's facilities located
adjacent to PDVMR's Lemont, Illinois refinery. The Companies have denied all
allegations and is pursuing their defenses.
See also "Items 1. and 2. Business and Properties - Environment and
Safety" for information regarding various enforcement actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PDV America's common stock is not publicly traded. All of PDV America's
common stock is held by PDV Holding, Inc., a Delaware corporation, whose
ultimate parent is PDVSA. In 2000, PDV America declared and paid dividends of
$266 million to PDV Holding, Inc.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial and operating data of PDV America as of the end of and for each of the
five years ended December 31, 2000. The following table should be read in
conjunction with the consolidated financial statements of PDV America as of
December 31, 2000 and 1999, and for each of the three years ended December 31,
2000, included in "Item 8. Financial Statements and Supplementary Data."
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
($ IN MILLIONS)
INCOME STATEMENT DATA
Sales $22,157 $13,332 $10,960 $13,622 $12,952
Equity in earnings (losses) of affiliates 59 22 82 69 45
Net revenues 22,269 13,410 11,107 13,754 13,071
Income before extraordinary gain 336 142 231 228 138
Net income 336 142 231 228 138
Other comprehensive income (loss) 1 (3) - - -
Comprehensive income 337 139 231 228 138
RATIO OF EARNINGS TO FIXED CHARGES (1) 4.56x 2.52x 3.06x 2.58x 1.91x
BALANCE SHEET DATA
Total assets $7,635 $7,746 $7,075 $7,244 $6,938
Long-term debt (excluding current portion) 1,586 2,096 2,174 2,164 2,595
(2)
Total debt (3) 1,697 2,442 2,273 2,526 2,755
Shareholder's equity 2,789 2,718 2,601 2,589 2,111
- ----------
(1) 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.
(2) Includes long-term debt to third parties, note payable to affiliate and
capital lease obligations.
(3) Includes short-term bank loans, current portion of capital lease
obligations and long-term debt, long-term debt and capital lease
obligations.
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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 (see
"Items 1. and 2. Business and Properties - Environment and Safety"), have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products, and, in some cases, limiting
their profits directly. Demand for crude oil and refined products is largely
driven by the condition of local and worldwide economies, although weather
patterns and taxation relative to other energy sources also play a significant
part. PDV America's consolidated operating results are affected by these
industry-specific factors and by company-specific factors, such as the success
of marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and in the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
In general, prices for refined products are significantly influenced by
the price of crude oil, feedstocks and blending components. Although an increase
or decrease in the price for crude oil, feedstocks and blending components
generally results in a corresponding increase or decrease in prices for refined
products, generally there is a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to reflect these
changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or a substantial or prolonged
decrease in refined product prices without a corresponding decrease in crude oil
prices, or a substantial or prolonged decrease in demand for refined products
could have a significant negative effect on PDV America's earnings and cash
flows. CITGO purchases a significant amount of its crude oil requirements from
PDVSA under long-term supply contracts expiring in the years 2006 through 2013.
The supply of crude oil from PDVSA represented approximately 50% of the crude
oil processed in refineries operated by CITGO in the year ended December 31,
2000. These crude supply contracts contain force majeure provisions which
entitle the supplier to reduce the quantity of crude oil and feedstocks
delivered under the crude supply agreements under specified circumstances. For
the year 2000, PDVSA deliveries of crude oil to CITGO were less than contractual
base volumes due to PDVSA's declaration of force majeure pursuant to all of the
long-term crude oil supply contracts related to CITGO's refineries. Therefore,
CITGO has been required to use alternative sources of crude oil. As a result,
CITGO estimates that crude oil costs for the year ended December 31, 2000 were
higher by $5 million from what would have otherwise been the case. However, on
October 1, 2000, the force majeure condition was terminated and deliveries of
crude oil returned to contract levels. See Items 1. and 2. Business and
Properties - CITGO - Crude Oil and Refined Product Purchases. CITGO also
purchases significant volumes of refined products to supplement the production
from its refineries to meet marketing demands and to resolve logistical issues.
CITGO's earnings and cash flows are also affected by the cyclical nature of
petrochemical prices. As a result of the factors
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described above, the earnings and cash flows of CITGO may experience substantial
fluctuations. Inflation was not a significant factor in the operations of CITGO
during the three years ended December 31, 2000.
CITGO's revenues accounted for over 99% of PDV America's consolidated
revenues in 2000, 1999 and 1998. PDVMR's sales of $2,067 million for the period
ended December 31, 2000 were primarily to CITGO and, accordingly, these were
eliminated in consolidation.
The following table summarizes the sources of PDV America's sales
revenues and volumes.
PDV AMERICA SALES REVENUE AND VOLUMES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------------------
2000 1999 1998 2000 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
($ IN MILLIONS) (MM GALLONS)
Gasoline $ 12,447 $ 7,691 $ 6,252 13,648 13,115 13,241
Jet fuel 2,065 1,129 828 2,367 2,198 1,919
Diesel / #2 fuel 4,750 2,501 1,945 5,565 5,057 4,795
Asphalt 546 338 300 812 753 774
Petrochemicals and industrial products 1,763 1,041 952 2,404 2,306 2,658
Lubricants and waxes 552 482 441 279 285 230
---------- ---------- ---------- ---------- ---------- ----------
Total refined product sales $ 22,123 $ 13,182 $ 10,718 25,075 23,714 23,617
Other sales 34 152 242 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total sales $ 22,157 $ 13,334 $ 10,960 25,075 23,714 23,617
========== ========== ========== ========== ========== ==========
The following table summarizes PDV America's cost of sales and
operating expenses.
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
YEAR ENDED DECEMBER 31,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
($ IN MILLIONS)
Crude oil $ 6,784 $ 3,804 $ 2,571
Refined products 11,308 6,640 5,102
Intermediate feedstocks 1,573 990 900
Refining and manufacturing costs 1,058 999 949
Other operating costs and expenses and inventory changes 647 374 784
----------- ----------- -----------
Total cost of sales and operating expenses $ 21,370 $ 12,807 $ 10,306
=========== =========== ===========
RESULTS OF OPERATIONS -- 2000 COMPARED TO 1999
Sales revenues and volumes. Sales increased $8,823 million,
representing a 66% increase from 1999 to 2000. This was due to an increase in
average sales price of 57% and an increase in sales volume of 6%.
Equity in earnings of affiliates. Equity in earnings of affiliates
increased by approximately $37 million, or 168%, from $22 million in 1999 to $59
million in 2000. The increase was primarily due to the change in the earnings of
LYONDELL-CITGO, CITGO's share of which increased $40 million, from $1 million in
1999 to $41 million in 2000. The increase in LYONDELL-CITGO earnings was due
primarily to increased deliveries and an improved mix of crude oil, higher spot
margins, reflecting a stronger
20
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gasoline market in 2000, and higher margins for reformulated gasoline due to
industry supply shortages. These improvements were partly offset by higher fuels
and utility costs and interest expense.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $8,571 million, or 67%, from 1999 to 2000. See PDV
America's Cost of Sales and Operating Expenses table above.
PDV America purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 53% and 52% of cost of sales for the years
2000 and 1999, respectively. These refined product purchases included purchases
from LYONDELL-CITGO, Chalmette and HOVENSA. PDV America estimates that margins
on purchased products, on average, are lower than margins on produced products
due to the fact that PDV America can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from PDV America produced products and margins may
vary due to market conditions and other factors beyond PDV America's control. As
such, it is difficult to measure the effects on profitability of changes in
volumes of purchased products. In the near term, other than normal refinery
turnaround maintenance, PDV America does not anticipate operational actions or
market conditions to cause a material change in anticipated purchased product
requirements. However, there could be events beyond the control of PDV America
that may impact the volume of refined products purchased. See "Factors Affecting
Forward-Looking Statements."
As a result of purchases of crude oil supplies from alternate sources
due to PDVSA's invocation of the force majeure provisions in its crude oil
supply contracts, PDV America estimates that its cost of crude oil purchased in
2000 increased by $5 million from what would have otherwise been the case.
Gross margin. The gross margin for 2000 was $787 million, or 3.5% of
net sales, compared to $535 million, or 4.0% of net sales, for 1999. The gross
margin increased from 2.3 cents per gallon in 1999 to 3.1 cents per gallon in
2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $19 million, or 8%, in 2000, primarily as a
result of a reduction in bad debt expense due to the sale of PDV America's
consumer credit card business in March 2000.
Income taxes. PDV America's provision for income taxes in 2000 was $183
million, representing an effective tax rate of 35%. In 1999, PDV America's
provision for income taxes was $58 million, representing an effective tax rate
of 29%. The effective tax rate for the 1999 tax-year was unusually low due to a
favorable resolution in the second quarter of 1999 of a significant tax issue in
the last Internal Revenue Service audit. During the years under that audit,
deferred taxes were recorded for certain environmental expenses deducted in the
tax returns pending final determination by the Internal Revenue Service. The
deductions were allowed on audit and, accordingly, the deferred tax liability of
approximately $11 million was reversed with a corresponding benefit to tax
expense.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
Sales revenues and volumes. Sales increased $2,372 million,
representing a 22% increase from 1998 to 1999. This was due to an increase in
average sales price of 22% while sales volume remained flat. See PDV America
Sales Revenues and Volumes table above.
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by approximately $60 million, or 73%, from $82 million in 1998 to $22
million in 1999. The decrease was primarily due to the change in the earnings of
LYONDELL-CITGO, CITGO's share of which decreased $58 million, from $59 million
in 1998 to $1 million in 1999. The decrease in LYONDELL-CITGO earnings was due
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primarily to reduced processing of extra heavy crude oil as a result of lower
allocations and deliveries and a less favorable mix of extra heavy Venezuelan
crude oil by PDVSA, partially offset by increased processing of spot crude,
costs and lower operating rates related to outages of a coker unit and a fluid
catalytic cracker unit and a charge related to LYONDELL-CITGO's renegotiated
labor agreement.
Other income (expense). Other expense was $27 million for the year
ended December 31, 1999 as compared to $9 million for the same period in 1998.
The difference was primarily due to: (1) a $3 million gain on the sale of
Petro-Chemical Transport in 1998, (2) a loss of $2 million on the sale of
CITGO's interest in the Texas New Mexico Pipeline and (3) a $7 million loss
related to the sale of various PDVMR properties.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2,501 million, or 24%, from 1999 to 1998. See PDV America
Cost of Sales and Operating Expenses table above.
PDV America purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 52% and 50% of cost of sales for the years
1999 and 1998, respectively. These refined product purchases included purchases
from LYONDELL-CITGO, Chalmette and HOVENSA. PDV America estimates that margins
on purchased products, on average, are lower than margins on produced products
due to the fact that PDV America can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from PDV America's produced products and margins may
vary due to market conditions and other factors beyond PDV America's control. As
such, it is difficult to measure the effects on profitability of changes in
volumes of purchased products. In the near term, other than normal refinery
turnaround maintenance, PDV America does not anticipate operational actions or
market conditions to cause a material change in anticipated purchased product
requirements. However, there could be events beyond the control of PDV America
that may impact the volume of refined products purchased.
As a result of purchases of crude oil supplies from alternate sources
due to the supplier's invocation of the force majeure provisions in its crude
oil supply contracts, PDV America estimates that its cost of crude oil purchased
in 1999 increased by $55 million from what would have otherwise been the case.
Gross margin. The gross margin for 1999 was $525 million, or 3.9%,
compared to $655 million, or 6.0%, for 1998. In 1999, the revenue per gallon
component increased approximately 22% while the cost per gallon component
increased approximately 23%. As a result, the gross margin decreased
approximately one-tenths of a cent on a per gallon basis in 1999 compared to
1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $21 million, or 8%, in 1999, as a result of
the Companies' efforts to reduce such expenses and the reduction in employee
incentive compensation.
Income taxes. PDV America's provision for income taxes in 1999 was $58
million, representing an effective tax rate of 29%. In 1998, PDV America's
provision for income taxes was $131 million, representing an effective tax rate
of 36%. The effective tax rate for the current year is unusually low due to a
favorable resolution in the second quarter of 1999 of a significant tax issue in
the last Internal Revenue Service audit. During the years under audit, deferred
taxes were recorded for certain environmental expenses deducted in the tax
returns pending final determination by the Internal Revenue Service. The
deductions were allowed on audit and, accordingly, the deferred tax liability of
approximately $11 million was reversed with a corresponding benefit to tax
expense.
22
26
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2000, PDV America's net cash provided
by operating activities totaled approximately $830 million, primarily reflecting
$336 million of net income, $292 million of depreciation and amortization and
the net effect of other items of $202 million. The more significant changes in
other items included the increase in accounts receivable, including receivables
from affiliates, of approximately $(340) million and the increase in accounts
payable and other current liabilities, including payables to affiliates, of
approximately $442 million.
Net cash provided by investing activities in 2000 totaled $96 million
consisting primarily of proceeds from notes receivables from PDVSA of $250
million, partially offset by capital expenditures of $122 million and
investments in LYONDELL-CITGO of $18 million.
During the same period, consolidated net cash used in financing
activities totaled approximately $1,019 million comprised primarily of $462
million of repayments of revolving bank loans, payments on senior indebtedness
of $250 million and a $266 million dividend.
PDV America currently estimates that its capital expenditures for the
years 2001 through 2005 will total approximately $2.2 billion. These include:
PDV AMERICA ESTIMATED CAPITAL EXPENDITURES - 2001 THROUGH 2005 (1)
Strategic $ 740 million
Maintenance 449 million
Regulatory / Environmental 1,056 million
---------------
Total $ 2,245 million
===============
- ----------
(1) These estimates may change as future regulatory events unfold See
"Factors Affecting Forward-Looking Statements".
PDV America's notes receivable from PDVSA is unsecured and is comprised
of $500 million of 7.995% notes maturing on August 1, 2003.
PDV America's notes receivables from PDVSA Finance Ltd., a wholly owned
subsidiary of PDVSA, are unsecured and are comprised of $130 million of 8.558%
notes maturing on November 10, 2013 and a $38 million 10.395% note maturing on
May 15, 2014.
As of December 31, 1999, PDV America and its subsidiaries had an
aggregate of $1,603 million of indebtedness outstanding, maturing on various
dates through the year 2029. As of December 31, 2000, the contractual
commitments of PDV America and its subsidiaries to make principal payments on
this indebtedness were $85 million, $36 million and $560 million for 2001, 2002
and 2003, respectively.
PDV America issued $500 million of 7.875% of senior notes in 1993.
Interest on these notes is payable in semiannual installments. In August 1998,
PDV America repaid the $250 million 7.25% Senior Notes due August 1, 1998 with
the proceeds received from the maturity of $250 million of mirror notes due from
PDVSA on July 31, 1998. On August 1, 2000, PDV America repaid $250 million
Senior Notes due August 1, 2000 with proceeds from the maturity of $250 million
of mirror notes due from PDVSA on July 31, 2000.
CITGO's bank credit facility consists of a $400 million, five-year,
revolving bank loan and a $150 million, 364-day, revolving bank loan, both of
which are unsecured and have various borrowing maturities, of which none was
outstanding at December 31, 2000. Cit-Con has a separate credit agreement under
which $7 million was outstanding at December 31, 2000. CITGO's other principal
indebtedness consists of (1) $200 million in senior notes issued in 1996, (2)
$260 million in senior notes
23
27
issued pursuant to a master shelf agreement with an insurance company, (3) $97
million in senior notes issued in 1991, (4) $310 million in obligations related
to tax exempt bonds issued by various governmental units, and (5) $174 million
in obligations related to taxable bonds issued by various governmental units.
See Consolidated Financial Statements of PDV America - Note 9 in Item 14a.
PDVMR's bank credit facility consists of a $100 million revolving
credit facility, committed through April 2002, of which none was outstanding at
December 31, 2000. Other indebtedness consists of $20 million in pollution
control bonds. See Consolidated Financial Statements of PDV America - Note 9 in
Item 14a.
As of December 31, 2000, capital resources available to PDV America and
its subsidiaries included cash provided by operations, available borrowing
capacity of $550 million under CITGO's revolving credit facility and $182
million in unused availability under uncommitted short-term borrowing facilities
with various banks and $100 million in unused availability under PDVMR's
revolving credit facility with various banks. Additionally, the remaining $400
million from CITGO's shelf registration with the Securities and Exchange
Commission for $600 million of debt securities may be offered and sold from time
to time. PDV America believes that its has sufficient capital resources to carry
out planned capital spending programs, including regulatory and environmental
projects in the near term, and to meet currently anticipated future obligations
as they arise. In addition, PDV America intends that payments received from its
notes receivables from PDVSA will provide funds to service PDV America's 7.875%
senior notes. PDV America periodically evaluates other sources of capital in the
marketplace. PDV America intends to provide for its long-term capital
requirements using current capital resources and will consider future financing
arrangements (including the issuance of debt securities) if necessary. PDV
America's ability to obtain such future financing will depend on numerous
factors, including market conditions and the perceived creditworthiness of PDV
America at that time. See "Factors Affecting Forward-Looking Statements."
The debt instruments of PDV America, PDVMR and CITGO impose
restrictions on PDV America's, PDVMR's and CITGO's ability to incur additional
debt, grant liens, make investments, sell or acquire fixed assets, make
restricted payments and engage in other transactions. In addition, restrictions
exist over the payment of dividends and other distributions to PDV America from
CITGO. PDV America, PDVMR and CITGO were in compliance with all their respective
covenants under such debt instruments at December 31, 2000.
PDV America and its subsidiaries form a part of PDV Holding's
consolidated Federal income tax return. CITGO has a tax allocation agreement
with PDV America, which is designed to provide PDV America with sufficient cash
to pay its consolidated income tax liabilities.
IMPENDING ACCOUNTING CHANGE
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). In June 2000, the
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No.
133, was issued. The statement, as amended, establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives, at fair value, as either assets or
liabilities in the statement of financial position with an offset either to
shareholder's equity and comprehensive income or income depending upon the
classification of the derivative. Some of PDV America's derivative instruments
identified at January 1, 2001 under the provisions of SFAS No. 133 had been
previously designated in hedging relationships that addressed the variable cash
flow exposure of forecasted transactions. Under the transition provisions of
SFAS No. 133, on January 1, 2001 PDV America will record an after-tax,
cumulative-effect-type transition charge of $1.5 million to accumulated other
comprehensive income related to these derivatives. Some of PDV America's
derivative instruments
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identified at January 1, 2001 under the provisions of SFAS No. 133 had been
previously designated in hedging relationships that addressed the fair value of
certain forward purchase and sale commitments. Under the transition provisions
of SFAS No. 133, on January 1, 2001, PDV America will record fair value
adjustments to the subject derivatives and related commitments resulting in the
recording of a net after-tax, cumulative-effect-type transition charge of $0.2
million to net income. The remaining derivatives identified at January 1, 2001
under the provisions of SFAS No. 133, consisting of certain forward purchases
and sales, had not previously been considered derivatives under accounting
principles generally accepted in the United States of America. Under the
transition provisions of SFAS No. 133, on January 1, 2001, PDV America will
record an after-tax, cumulative-effect-type benefit of $13.8 million to net
income related to these derivatives.
PDV America has determined that hedge accounting will not be elected
for derivatives existing at January 1, 2001. Future changes in the fair value of
those derivatives will be recorded in income. Prospectively, PDV America plans
to elect hedge accounting only under limited circumstances involving derivatives
with initial terms of 90 days or greater and notional amounts of $25 million or
greater.
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is expected
to require companies to expense the non-capital portion of major maintenance
costs as incurred. The statement is expected to require that any existing
deferred non-capital major maintenance costs be expensed immediately. The
exposure draft indicates that this change will be required to be adopted for
years beginning after December 15, 2001, and will be reported as a cumulative
effect of an accounting change in the consolidated statement of income. At
December 31, 2000, PDV America had included turnaround costs of $96 million in
other assets. The management of PDV America has not determined the amount, if
any, of these costs that could be capitalized under the provisions of the
exposure draft.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PDV America and its subsidiaries are exposed to price fluctuations of
crude oil and refined products as well as fluctuations in interest rates. To
manage these exposures, management has defined certain benchmarks consistent
with its preferred risk profile for the environment in which the Companies
operate and finance their assets. The Companies do not attempt to manage the
price risk related to all of their inventories of crude oil and refined
products. As a result, at December 31, 2000, the Companies were exposed to the
risk of broad market price declines with respect to a substantial portion of
their crude oil and refined product inventories. The following disclosures do
not attempt to quantify the price risk associated with such commodity
inventories.
COMMODITY INSTRUMENTS
CITGO balances its crude oil and petroleum product supply and demand
and manages a portion of its price risk by entering into petroleum commodity
derivatives. Generally, CITGO's risk management strategies qualified as hedges
through December 31, 2000. However, certain strategies that CITGO used on
commodity positions during 1998 did not qualify as hedges.
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NON-TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 2000
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE (2) VALUE
- -------------------- ----------------------------------- -------- --------- --------- ---------
($ in millions)
---------------------
No Lead Gasoline (1) Futures Purchased 2001 25 $ 0.8 $ 0.8
Heating Oil (1) Futures Purchased 2001 1533 $ 53.9 $ 55.6
Futures Purchased 2002 16 $ 0.5 $ 0.5
Futures Sold 2001 579 $ 21.2 $ 21.7
OTC Swaps (Pay Fixed/Receive Float) 2001 9 $ -- $ 0.1
OTC Swaps (Pay Float/Receive Fixed) 2001 500 $ -- $ (0.5)
Crude Oil (1) Futures Purchased 2001 579 $ 15.9 $ 15.5
Futures Sold 2001 800 $ 23.4 $ 21.4
- ----------
(1) 1,000 barrels per contract
(2) Weighted average price
NON-TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 1999
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE (2) VALUE
- -------------------- ------------------ -------- --------- --------- ----------
($ in millions)
------------------------
No Lead Gasoline (1) Futures Purchased 2000 60 $ 1.7 $ 1.7
Futures Sold 2000 225 $ 6.1 $ 6.4
Swaps 2000 300 $ -- $ (0.3)
Heating Oil (1) Futures Purchased 2000 217 $ 5.7 $ 6.0
Futures Purchased 2001 6 $ 0.1 $ 0.1
Futures Sold 2000 450 $ 12.5 $ 12.8
Swaps 2000 336 $ -- $ --
Crude Oil (1) Swaps 2000 600 $ -- $ 0.9
Natural Gas (3) Futures Purchased 2000 6 $ 0.1 $ 0.1
- ----------
(1) 1,000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
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DEBT RELATED INSTRUMENTS
CITGO has fixed and floating U.S. currency denominated debt. CITGO uses
interest rate swaps to manage its debt portfolio toward a benchmark of 40% to
60% fixed rate debt to total fixed and floating rate debt. These instruments
have the effect of changing the interest rate with the objective of minimizing
CITGO's long-term costs. At December 31, 2000, CITGO's primary exposures were to
LIBOR and floating rates on tax-exempt bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected contractual maturity dates. Notional amounts are used
to calculate the contractual payments to be exchanged under the contracts.
NON-TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 2000
NOTIONAL
FIXED PRINCIPAL
VARIABLE RATE INDEX EXPIRATION DATE RATE PAID AMOUNT
- ------------------- --------------- --------- ---------------
($ in millions)
J.J. Kenny February 2005 5.30% $ 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
----
$ 42
====
NON-TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 1999 AND 1998
NATIONAL
FIXED PRINCIPAL
VARIABLE RATE INDEX EXPIRATION DATE RATE PAID AMOUNT
- ------------------- --------------- --------- ---------
($ in millions)
One-month LIBOR May 2000 6.28% $ 25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
--------
$ 92
=========
The fair value of the interest rate swap agreements in place at
December 31, 2000, based on the estimated amount that CITGO would receive or pay
to terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $2.0 million.
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For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT DECEMBER 31, 2000
EXPECTED
EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ---------- --------- ------------- --------- ----------------
($ in millions) ($ in millions)
2001 $ 40 9.11% $ 45 6.79%
2002 36 8.78% 0 6.78%
2003 560 7.98% 0 7.02%
2004 31 8.02% 16 7.36%
2005 12 9.30% 0 7.70%
Thereafter $ 379 7.99% $ 484 8.86%
-------- -------- -------- --------
Total $ 1,058 8.07% $ 545 8.65%
======== ======== ======== ========
Fair Value $ 1,042 $ 545
======== ========
DEBT OBLIGATIONS
AT DECEMBER 31, 1999
EXPECTED
EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ---------- ---------- ------------- ---------- ---------------
($ in millions) ($ in millions)
2000 $ 290 7.94% $ 40 6.89%
2001 40 9.11% 32 7.55%
2002 36 8.78% 75 7.93%
2003 560 7.98% 345 8.24%
2004 31 8.02 16 8.54%
Thereafter 391 8.02% 484 9.73%
---------- ---------- ---------- ----------
Total $ 1,348 8.04% $ 992 8.87%
========== ========== ========== ==========
Fair Value $ 1,288 $ 992
========== ==========
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PDV America's Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and the Independent Auditors' Report are
included in Item 14a of this annual report. PDV America's quarterly results of
operations are reported in Consolidated Financial Statements - Note 15, included
in Item 14a.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
2