Back to GetFilings.com
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 001-12138
PDV AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297556
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
(Address of principal executive office) (Zip Code)
(918) 495-4000
(Registrant's telephone number, including area code)
750 LEXINGTON AVENUE, NEW YORK, NEW YORK 10022
(Former name, former address and former fiscal year,
if changed since last report)
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
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
----------------------------- -----
(Class) (outstanding at February 28, 2002)
DOCUMENTS INCORPORATED BY REFERENCE: None
PDV AMERICA, INC.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS....................................................... 1
PART I.
Items 1. and 2. Business and Properties........................................................... 2
Item 3. Legal Proceedings....................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders..................................... 19
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 20
Item 6. Selected Financial Data................................................................. 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 21
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.............................. 30
Item 8. Financial Statements and Supplementary Data............................................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................................. 34
PART III.
Item 10. Directors and Executive Officers of the Registrant...................................... 34
Item 11. Executive Compensation.................................................................. 34
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 34
Item 13. Certain Relationships and Related Transactions.......................................... 35
PART IV.
Item 14. Exhibits, Financial Statements and Reports on Form 8-K.................................. 38
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Specifically, all statements under
the captions "Items 1 and 2 - Business and Properties" and "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" pertaining to capital expenditures and investments related to
environmental compliance, strategic planning, purchasing patterns of refined
products and capital resources available to PDV America and its subsidiaries (as
defined below) are forward looking statements. In addition, when used in this
document, the words "anticipate", "estimate", "prospect" and similar expressions
are used to identify forward-looking statements. Those statements are subject to
risks and uncertainties, such as increased inflation, continued access to
capital markets and commercial bank financing on favorable terms, increases in
environmental and other regulatory burdens, outcomes of currently contested
matters, 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.
Those statements are also subject to the risks of increased costs in related
technologies and those technologies producing anticipated results. Should one or
more of these risks or uncertainties, among others, materialize, actual results
may vary materially from those estimated, anticipated or projected. Readers are
cautioned not to place undue reliance on these forward looking statements, which
speak only as of the date of this Report. PDV America and its subsidiaries
undertake no obligation to publicly release any revision to these forward
looking statements to reflect events or circumstances after the date of the
Report.
1
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"). PDV America's ultimate parent is Petroleos de Venezuela, S.A.
("PDVSA", which may also be used herein to refer to one or more of its
subsidiaries), the national oil company of the Bolivarian Republic of Venezuela.
PDV America, through its wholly-owned operating subsidiaries, CITGO Petroleum
Corporation ("CITGO") and PDV Midwest Refining, L.L.C. ("PDVMR"), is 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.
PDV America'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 has commenced operations to sell
lubricants, gasoline, and distillates in various Latin American markets.
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.
PDVMR's direct parent is VPHI Midwest, Inc. ("VPHI"). On January 1, 2002,
PDV America contributed all of the common stock of VPHI to CITGO. This
transaction had no effect on the operations of the Companies or the consolidated
financial statements of PDV America.
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 how companies conduct their operations and formulate their
products. Demand for crude oil and its products is largely driven by the
condition of local and worldwide economies, although weather patterns and
taxation relative to other energy sources also play significant parts.
Generally, U.S. refiners compete for sales on the basis of price, brand image
and, in some areas, product quality.
2
PDV America's aggregate net interest in rated crude oil refining capacity
is 865 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, 2001.
PDV AMERICA REFINING CAPACITY
TOTAL NET
RATED PDV AMERICA
CRUDE OWNERSHIP
PDV AMERICA REFINING IN REFINING
OWNER INTEREST CAPACITY CAPACITY
----- -------- -------- --------
(%) (MBPD) (MBPD)
LOCATION
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 157 157
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, 2001 1,021 865
===== ===
3
The following table shows PDV America's aggregate interest in refining
capacity, refinery input, and product yield for the three years in the period
ended December 31, 2001.
PDV AMERICA REFINERY PRODUCTION (1) (2)
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
------------- ------------- ------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 865 858 858
Refinery Input
Crude oil 737 83% 791 83% 753 84%
Other feedstocks 150 17% 157 17% 146 16%
--- --- --- --- --- ---
Total 887 100% 948 100% 899 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 375 42% 419 44% 401 44%
Jet fuel 76 8% 79 8% 72 8%
Diesel/#2 fuel 172 19% 182 19% 173 19%
Asphalt 44 5% 47 5% 42 5%
Petrochemicals and industrial products 228 25% 230 24% 219 24%
--- --- --- --- --- ---
Total 895 100% 957 100% 907 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 85% 92% 88%
----------
(1) Includes all of CITGO refinery production, except as otherwise
noted.
(2) Includes 41.25% of the Houston refinery production.
4
CITGO
REFINING
CITGO's aggregate net interest in rated crude oil refining capacity is 698
thousand barrels per day ("MBPD"). The following table shows the capacity of
each U.S. refinery in which CITGO holds an interest and CITGO's share of such
capacity as of December 31, 2001.
CITGO REFINING CAPACITY
Total Net
Rated CITGO
Crude Ownership
CITGO Refining In Refining
Owner Interest Capacity Capacity
----- -------- -------- --------
(%) (MBPD) (MBPD)
LOCATION
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 157 157
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, 2001 854 698
=== ===
5
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, 2001.
CITGO REFINERY PRODUCTION (1) (2)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 698 691 691
Refinery Input
Crude oil 639 84% 638 82% 607 82%
Other feedstocks 122 16% 139 18% 129 18%
--- --- --- --- --- ---
Total 761 100% 777 100% 736 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 307 40% 330 42% 317 43%
Jet fuel 76 10% 78 10% 70 9%
Diesel/#2 fuel 148 19% 142 18% 136 18%
Asphalt 44 6% 47 6% 42 6%
Petrochemicals and industrial products 198 25% 189 24% 179 24%
--- --- --- --- --- ---
Total 773 100% 786 100% 744 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 92% 92% 88%
- ----------
(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 and Corpus Christi refineries. Asphalt refining operations are
carried out through CITGO's Paulsboro and Savannah refineries. CITGO purchases
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 17.7 (as compared to an
average of 13.9 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.
6
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, 2001.
LAKE CHARLES REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 320 320 320
Refinery Input
Crude oil 317 90% 319 87% 298 89%
Other feedstocks 37 10% 48 13% 36 11%
--- --- --- --- --- ---
Total 354 100% 367 100% 334 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 175 48% 187 50% 171 50%
Jet fuel 67 19% 70 19% 63 18%
Diesel/#2 fuel 62 17% 58 15% 53 16%
Petrochemicals and industrial products 57 16% 59 16% 54 16%
--- --- --- --- --- ---
Total 361 100% 374 100% 341 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 99% 100% 93%
Approximately 40%, 42% and 33% of the total crude runs at the Lake Charles
refinery, in the years 2001, 2000 and 1999, respectively, consisted of crude oil
with an average API gravity of 24 degrees or less. (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.
The Lake Charles refinery's main petrochemical products are propylene and
benzene. Industrial products include sulphur, residual fuels and petroleum coke.
Located adjacent to the Lake Charles refinery is a lubricants refinery
operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"), which is
owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). The Cit-Con refinery
produces high quality oils and waxes, and is one of the few in the industry
designed as a stand-alone lubricants refinery. Feedstocks 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.
7
On January 1, 2002, CITGO acquired Conoco's 35 percent interest in
Cit-Con. CITGO plans to continue to operate this facility solely for its own
account.
Corpus Christi, Texas Refinery. The Corpus Christi refinery processes
heavy crude oil into a flexible slate of refined products, and has a Solomon
Process Complexity Rating of 16.3 (as compared to an average 13.9 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, 2001.
CORPUS CHRISTI REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 157 150 150
Refinery Input
Crude oil 154 71% 149 70% 148 70%
Other feedstocks 63 29% 65 30% 62 30%
--- --- --- --- --- ---
Total 217 100% 214 100% 210 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 90 42% 95 46% 96 46%
Diesel/#2 fuel 57 26% 58 27% 55 27%
Petrochemicals and industrial products 69 32% 58 27% 56 27%
--- --- --- --- --- ---
Total 216 100% 211 100% 207 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 98% 99% 99%
Corpus Christi crude runs during 2001, 2000 and 1999 consisted of 81%, 79%
and 81%, respectively, heavy sour Venezuelan crude. The average API gravity of
the composite crude slate run at the Corpus Christi refinery is approximately 24
degrees. (See "Items 1. and 2. Business and Properties-- CITGO --Crude Oil and
Refined Product Purchases"). Crude oil supplies are delivered directly to the
Corpus Christi refinery through the Port of Corpus Christi.
CITGO operates the West Plant under a sublease agreement (the "Sublease")
from Union Pacific Corporation ("Union Pacific"). The basic term of the Sublease
ends on January 1, 2004, but CITGO may renew the Sublease for successive renewal
terms through January 31, 2011. CITGO has the right to purchase the West Plant
from Union Pacific at the end of the basic term, the end of any renewal term, or
on January 31, 2011 at a nominal price. (See Consolidated Financial Statements
of PDV America - Note 14 in Item 14a).
The Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, and aromatics (including benzene, toluene and xylene).
8
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 265 MBPD refinery previously owned
by Lyondell and located on the ship channel in Houston, Texas. At December 31,
2001, CITGO's investment in LYONDELL-CITGO was $508 million. In addition, at
December 31, 2001, CITGO held notes receivable from LYONDELL-CITGO of $35
million. (See Consolidated Financial Statements of PDV America -- Note 3 in Item
14a). A substantial amount of the crude oil processed by this refinery is
supplied by PDVSA under a long-term crude oil supply agreement that expires in
the year 2017.
In April 1998, PDVSA; pursuant to its contractual rights, declared force
majeure and reduced deliveries of crude oil to LYONDELL-CITGO; this required
LYONDELL-CITGO to obtain alternative sources of crude oil supply in replacement,
which resulted in lower operating margins. 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 under the contract
described above. As of December 31, 2001, PDVSA deliveries of crude oil to
LYONDELL-CITGO have not been reduced due to PDVSA's declaration of force
majeure. On January 22, 2002, PDVSA notified LYONDELL-CITGO that pursuant to the
February 9, 2001 declaration of force majeure, effective March 1, 2002, PDVSA
expects to deliver approximately 20 percent less than the contract volume and
that force majeure will be in effect until at least June 2002. If PDVSA reduces
its delivery of crude oil under these crude oil supply agreements,
LYONDELL-CITGO will be required to use alternative sources of crude oil which
may result in reduced operating margins. The effect of this declaration on
LYONDELL-CITGO's crude oil supply and the duration of this situation are not
known at this time. (See Consolidated Financial Statements of PDV America --
Notes 3 and 4 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 marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including a
number of affiliated companies. (See "Item 13. Certain Relationships and Related
Transactions").
9
Crude Oil Purchases. The following chart shows CITGO's purchases of crude
oil for the three years in the period ended December 31, 2001:
CITGO CRUDE OIL PURCHASES
LAKE CHARLES, LA CORPUS CHRISTI, TX PAULSBORO, NJ SAVANNAH, GA
---------------------- ---------------------- -------------------- --------------------
2001 2000 1999 2001 2000 1999 2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(MBPD) (MBPD) (MBPD) (MBPD)
Suppliers
PDVSA 136 104 104 138 143 118 42 47 42 22 22 19
Other sources 185 214 196 10 8 29 -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 321 318 300 148 151 147 42 47 42 22 22 19
==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ==== ====
CITGO's largest single 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, 2001.
CITGO CRUDE OIL SUPPLY CONTRACTS WITH PDVSA
Volumes of
Crude Oil Purchased
Contract Crude For the Year Ended
Oil Volume December 31, Contract
----------------------- ---------------------- Expiration
Base Incremental (1) 2001 2000 1999 Date
---- --------------- ---- ---- ---- -----------
(MBPD) (MBPD) (year)
Location
Lake Charles, LA (2) 120 50 117 110 101 2006
Corpus Christi, TX (2) 130 -- 126 118 108 2012
Paulsboro, NJ (2) 30 -- 26 28 22 2010
Savannah, GA (2) 12 -- 12 12 11 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 (i) certain deemed refining
costs; (ii) certain actual costs, including transportation charges, import
duties and taxes; and (iii) a deemed margin, which varies according to the grade
of crude oil or
10
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 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. As a result,
the Company was required to obtain alternative sources of crude oil, which
resulted in lower operating margins. 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, effective February 1,
2001, it had declared force majeure under the four contracts described above.
During 2001, PDVSA deliveries of crude oil to CITGO were slightly less than
contractual base volumes due to this declaration of force majeure. Therefore,
the Company was required to obtain alternative sources of crude oil, which
resulted in lower operating margins. On January 22, 2002, PDVSA notified CITGO
that pursuant to the February 9, 2001 declaration of force majeure, effective
March 1, 2002, PDVSA expects to deliver approximately 20 percent less than the
contract volume and PDVSA indicated that force majeure will be in effect until
at least June 2002. If PDVSA reduces its delivery of crude oil under these crude
oil supply agreements, CITGO will be required to obtain alternative sources of
crude oil which may result in reduced operating margins. The effect of this
declaration on CITGO's crude oil supply 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 crude supply
agreements and oblige the supplier to pay CITGO the deemed margin under that
contract for each barrel of reduced crude oil and feedstocks. During the second
half of 1999 and throughout 2000 and 2001, PDVSA did not deliver naphtha
pursuant to certain contracts and has made or will make contractually specified
payments in lieu thereof.
CITGO purchases sweet crude oil under long-standing relationships with
numerous producers.
Refined Product Purchases. CITGO is required to purchase refined products
to supplement the production of the Lake Charles and Corpus Christi refineries
in order to meet demand of CITGO's marketing network. The following table shows
CITGO's purchases of refined products for the three years in the period ended
December 31, 2001.
CITGO REFINED PRODUCT PURCHASES
YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
----- ----- -----
(MBPD)
Light Fuels
Gasoline 708 705 691
Jet fuel 74 82 77
Diesel/ #2 fuel 291 306 279
----- ----- -----
Total 1,073 1,093 1,047
===== ===== =====
As of December 31, 2001, CITGO purchased substantially all of the
gasoline, diesel/ #2 fuel, and jet fuel produced at the LYONDELL-CITGO refinery
under a contract which extends through the year 2017.
11
LYONDELL-CITGO was a major supplier in 2001 providing CITGO with 101 MBPD of
gasoline, 69 MBPD of diesel/#2 fuel, and 20 MBPD of jet fuel. (See "Items 1. and
2. Business and Properties--CITGO--Refining--LYONDELL-CITGO").
As of May 1, 1997, CITGO began purchasing substantially all of the refined
products produced at the Lemont refinery. During the period ended December 31,
2001, the Lemont refinery provided CITGO with 68 MBPD of gasoline and 27 MBPD of
diesel/#2 fuel.
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,
CITGO acquired approximately 106 MBPD of refined products from the refinery
during 2001, approximately one-half of which was gasoline.
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 in the period ended December 31, 2001.
CITGO REFINED PRODUCT SALES REVENUES AND VOLUMES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
($ IN MILLIONS) (GALLONS IN MILLIONS)
LIGHT FUELS
Gasoline $11,316 $12,447 $ 7,691 13,585 13,648 13,115
Jet fuel 1,660 2,065 1,129 2,190 2,367 2,198
Diesel / #2 fuel 3,984 4,750 2,501 5,429 5,565 5,057
ASPHALT 502 546 338 946 812 753
PETROCHEMICALS AND INDUSTRIAL PRODUCTS 1,510 1,740 1,024 2,308 2,153 2,063
LUBRICANTS AND WAXES 536 552 482 240 279 285
------- ------- ------- ------ ------ ------
Total $19,508 $22,100 $13,165 24,698 24,824 23,471
======= ======= ======= ====== ====== ======
Light Fuels. Gasoline sales accounted for 58% of CITGO's refined product
sales in 2001, 56% in 2000, and 58% in 1999. CITGO markets CITGO branded
gasoline through 13,397 independently owned and operated CITGO branded retail
outlets (including 11,204 branded retail outlets owned and operated by
approximately 783 independent marketers and 2,193 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 44%, 48% and 45% of the volume of CITGO branded
gasoline sold in 2001, 2000 and 1999, 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
12
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 24 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, 37 are wholly-owned by CITGO and 11 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 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 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. CITGO delivers asphalt
through three wholly-owned terminals and twenty-three leased terminals. Demand
for asphalt in the Northeast 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, through its wholly-owned subsidiary, CITGO International Latin
America, Inc. ("CILA"), is introducing the PDVSA and CITGO brands into various
Latin American markets which will include wholesale and retail sales of
lubricants, gasoline and distillates. Initial operations are underway in Puerto
Rico and Ecuador.
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 4,300 employees,
approximately 1,600 of whom are covered by union contracts. Most of the union
employees are employed in refining operations.
13
The remaining union employees are located primarily at a lubricant plant and
various refined product terminals.
PDV MIDWEST REFINING, L.L.C.
REFINING
Lemont, Illinois Refinery . The Lemont refinery processes heavy crude oil
into a flexible slate of refined products. The refinery has a rated refining
capacity of 167 MBPD and has a Solomon Process Complexity Rating of 11.7 (as
compared to an average of 13.9 for U.S. refineries in the most recently
available Solomon Associates, Inc., survey).
The following table shows the rated refining capacity, refinery input and
product yield at the Lemont refinery for the three years in the period ended
December 31, 2001.
LEMONT REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
------------- ------------- ------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CAPACITY AT YEAR END 167 167 167
Refinery Input
Crude oil 98 78% 153 89% 146 90%
Other feedstocks 28 22% 18 11% 17 10%
--- --- --- --- --- ---
Total 126 100% 171 100% 163 100%
=== === === === === ===
Product Yield
Light fuels
Gasoline 68 55% 89 52% 84 51%
Jet fuel 0 0% 1 1% 2 1%
Diesel/#2 fuel 24 20% 40 23% 37 23%
Industrial Products & Petrochemicals 30 25% 41 24% 40 25%
--- --- --- --- --- ---
Total 122 100% 171 100% 163 100%
=== === === === === ===
UTILIZATION OF RATED REFINING CAPACITY 59% 92% 87%
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.
On August 14, 2001, a fire occurred at the crude oil distillation unit of
the Lemont refinery. The crude unit was destroyed and the refinery's other
processing units were temporarily taken out of production. A new crude unit is
expected to be operational in April 2002. Operations have resumed by using
purchased feedstocks for processing units downstream from the crude unit. PDVMR
has insurance coverage for this type of an event and has submitted a notice of
loss to its insurance carriers related to the fire, including a claim under its
business interruption coverage. (See Consolidated Financial Statements of PDV
America - Note 17 in Item 14a).
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
14
100 MBPD. However, PDVMR is not required to purchase a minimum volume. In 2001,
the crude oil processed at the Lemont refinery was 9% Venezuelan, 80% Canadian
and 11% from other sources.
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.
ENVIRONMENT AND SAFETY
Environment
The U.S. refining industry is required to comply with increasingly
stringent product specifications under the 1990 Clean Air Act Amendments for
reformulated gasoline and low sulphur diesel fuel which has necessitated
additional capital and operating expenditures, and altered significantly the
U.S. refining industry and the return realized on refinery investments. Also,
regulatory interpretations by the U.S. Environmental Protection Agency regarding
"modifications" to refinery equipment under the "New Source Review" ("NSR")
provisions of the Clean Air Act have created uncertainty about the extent to
which additional capital and operating expenditures will be required.
In addition, the Companies are subject to various other federal, state and
local environmental laws and regulations which may require the Companies to take
additional compliance actions and also actions to remediate the effects on the
environment of prior disposal or release of petroleum, hazardous substances and
other waste and/or pay for natural resource damages. Maintaining compliance with
environmental laws and regulations could require significant capital
expenditures and additional operating costs. Also, numerous other factors affect
the Companies' plans with respect to environmental compliance and related
expenditures. See "Factors Affecting Forward Looking Statements".
15
The Companies' accounting policies establish environmental reserves as
probable site restoration and remediation obligations become reasonably capable
of estimation. The Companies believe the amounts provided in the consolidated
financial statements, as prescribed by generally accepted accounting principles,
are adequate in light of probable and estimable liabilities and obligations.
However, there can be no assurance that the actual amounts required to discharge
alleged liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a material
adverse affect on the Companies' consolidated results of operations, financial
condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of
Environmental Quality to cease usage of certain surface impoundments at CITGO's
Lake Charles refinery by 1994. A mutually acceptable closure plan was filed with
the state in 1993. CITGO and its former owner are participating in the closure
and sharing the related costs based on estimated contributions of waste and
ownership periods. The remediation commenced in December 1993. In 1997, CITGO
presented a proposal to a state agency revising the 1993 closure plan. In 1998
and 2000, CITGO submitted further revisions as requested by the Louisiana
Department. A ruling on the proposal, as amended, is expected in 2002 with final
closure to begin later in 2002.
The Texas Natural Resources Conservation Commission conducted
environmental compliance reviews at the Corpus Christi refinery in 1998 and
1999. The Texas Commission issued Notices of Violation ("NOV") 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 NOV was issued in
January 1999 and the second NOV 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
engaged in settlement discussions, but is prepared to contest the alleged
violations and proposed fines if a reasonable settlement cannot be reached.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. EPA that the U.S. EPA believes these companies have
contributed to contamination in the Calcasieu Estuary, in the proximity of Lake
Charles, Calcasieu Parish, Louisiana and are Potentially Responsible Parties
("PRPs") under the Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"). The U.S. EPA made a demand for payment of its past
investigation costs from CITGO and other PRPs and is conducting a Remedial
Investigation/Feasibility Study ("RI/FS") under its CERCLA authority. CITGO and
other PRPs may be potentially responsible for the costs of the RI/FS, subsequent
remedial actions and natural resource damages. CITGO disagrees with the U.S.
EPA's allegations and intends to contest this matter.
In October 1999, the Louisiana Department of Environmental Quality issued
to CITGO a NOV and Potential Penalty alleging violation of the National Emission
Standards for Hazardous Air Pollutants ("NESHAPS") regulations covering benzene
emissions from wastewater treatment operations at CITGO's Lake Charles,
Louisiana refinery and requested additional information. CITGO is in settlement
discussions and anticipates resolving this matter in the near future.
In January and July 2001, CITGO received NOVs from the U.S. EPA alleging
violations of the Clean Air Act. The NOVs are an outgrowth of an industry-wide
and multi-industry U.S. EPA enforcement initiative alleging that many refineries
and electric utilities modified air emission sources without obtaining permits
under the New Source Review provisions of the Clean Air Act. The NOVs to CITGO
followed inspections and formal Information Requests regarding CITGO's Lake
Charles, Louisiana and Corpus Christi, Texas refineries and the Lemont, Illinois
refinery operated by CITGO. At the U.S. EPA's request, CITGO is engaged in
settlement discussions, but is prepared to contest the NOVs if settlement
discussions fail. If CITGO settles or is found to have violated the provisions
cited in the NOVs, it would be subject to possible penalties and significant
capital expenditures for installation or upgrading of pollution control
equipment or technologies.
16
In June 1999, a NOV was issued by the U.S. EPA alleging violations of the
NESHAPS regulations covering benzene emissions from wastewater treatment
operations at the Lemont, Illinois refinery operated by CITGO. CITGO is in
settlement discussions with the U.S. EPA. CITGO believes this matter will be
consolidated with the matters described in the previous paragraph.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues which provides, in part, that 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.
Conditions which require additional expenditures may exist with respect to
various of the Companies' sites including, but not limited to, 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.
Increasingly stringent environmental regulatory provisions and obligations
periodically require additional capital expenditures. During 2001, the Companies
spent approximately $34 million for environmental and regulatory capital
improvements in their operations. Management currently estimates that the
Companies will spend approximately $1.2 billion for environmental and regulatory
capital projects over the five-year period 2002-2006, which includes capital
expenditures relating to the Lemont refinery of approximately $480 million.
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".
Safety
Due to the nature of petroleum refining and distribution, the Companies
are subject to stringent occupational health and safety laws and regulations.
The Companies maintain comprehensive safety, training and maintenance programs.
17
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business are
pending against the Companies. The Companies record accruals for potential
losses when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to the Companies, and in amounts greater than the Companies' accruals,
then such determinations could have a material adverse effect on the Companies'
results of operations in a given reporting period. The most significant lawsuits
and claims are discussed below.
Four former marketers of the UNO-VEN Company ("UNO-VEN") have filed a
class action complaint against UNO-VEN alleging improper termination of the
UNO-VEN Marketer Sales Agreement under the Petroleum Marketing Practices Act in
connection with PDVMR's 1997 acquisition of Unocal's interest in UNO-VEN. 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. The Companies, including PDVMR, 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 a partnership in which it is a
partner, and an affiliate of the other partner of the partnership, alleging
excessive charges for electricity utilized by these entities' facilities located
adjacent to the Lemont, Illinois refinery. PDVMR has denied all allegations and
is pursuing its defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery. No
serious personal injuries were reported. There are seventeen related lawsuits
pending in Corpus Christi, Texas state court against CITGO on behalf of
approximately 9,000 individuals alleging property damages, personal injury and
punitive damages. A trial of the claims of approximately 20 plaintiffs is
scheduled for April 2002. Approximately 1,300 claims have been resolved for
immaterial amounts.
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. Over CITGO's objections, the trial court has
recently ruled that an agreement by CITGO that purported to provide for
settlement of the remaining property damage claims for $5 million payable by it
is enforceable. CITGO will appeal this decision.
A lawsuit alleging wrongful death and personal injury filed in 1996
against CITGO and other industrial facilities in Corpus Christi, Texas state
court was brought by persons who claim that exposure to refinery hydrocarbon
emissions caused various forms of illness. The lawsuit is scheduled for trial in
September 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 CITGO. The
Court granted CITGO summary judgment with respect to another group of claims;
these rulings have been affirmed by the Fifth Circuit Court of Appeals. Trials
of the remaining cases will be set in the future.
CITGO is among defendants to class action and individual lawsuits in North
Carolina, New York and Illinois alleging contamination of water supplies by
methyl tertiary butyl ether ("MTBE"), a component of gasoline. These actions
allege that MTBE poses public health risks and seek testing, damages and
remediation of the alleged contamination. These matters are in early stages of
discovery. One of the Illinois cases 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.
18
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 ("DOC"), after investigation, determines that the
merchandise has been sold to the United 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 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
DOC. In 1999, prior to initiation of a formal investigation, the DOC dismissed
the petitions. In 2000, the U.S. Court of International Trade ("CIT") reversed
this decision and remanded the case to the DOC for reconsideration. In August
2001, the DOC again dismissed the petitions. This matter is now pending before
the CIT for a decision to affirm or remand for further consideration.
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.
19
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. In 2001, PDV America declared and
paid dividends of $508 million.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial and operating data of PDV America as of the end of and for each of the
five years in the period ended December 31, 2001. The following table should be
read in conjunction with the consolidated financial statements of PDV America as
of December 31, 2001 and 2000, and for each of the three years in the period
ended December 31, 2001, included in "Item 8. Financial Statements and
Supplementary Data".
YEAR ENDED DECEMBER 31,
-------- ------- -------- ------- -------
2001 2000 1999 1998 1997
-------- ------- -------- ------- -------
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA
Sales $ 19,601 $22,157 $ 13,332 $10,960 $13,622
Equity in earnings of affiliates 109 59 22 82 69
Net revenues 19,774 22,269 13,410 11,107 13,754
Net income 423 336 142 231 228
Other comprehensive income (loss) (1) 1 (3) -- --
Comprehensive income 422 337 139 231 228
Ratio of Earnings to Fixed Charges (1) 5.92 x 4.56 x 2.52 x 3.06 x 2.58 x
BALANCE SHEET DATA
Total assets $ 7,352 $ 7,635 $ 7,746 $ 7,075 $ 7,244
Long-term debt (excluding current portion)(2) 1,850 1,586 2,096 2,174 2,164
Total debt (3) 1,978 1,697 2,442 2,273 2,526
Shareholder's equity 2,704 2,789 2,718 2,601 2,589
- ----------
(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 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.
20
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 refining industry operations and profitability are influenced by
a large number of factors, some of which individual petroleum refining and
marketing companies cannot control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment (as to which,
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. Demand for crude oil and refined
products is largely driven by the condition of local and worldwide economies,
although weather patterns and taxation relative to other energy sources also
play a significant part. PDV America's consolidated operating results are
affected by these industry-specific factors and by company-specific factors,
such as the success of marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and in the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of the Companies.
In general, prices for refined products are significantly influenced by
the price of crude oil, feedstocks and blending components. Although an increase
or decrease in the price for crude oil, feedstocks and blending components
generally results in a corresponding increase or decrease in prices for refined
products, generally there is a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to reflect these
changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or a substantial or prolonged
decrease in refined product prices without a corresponding decrease in crude oil
prices, or a substantial or prolonged decrease in demand for refined products
could have a significant negative effect on the Companies' earnings and cash
flows.
CITGO purchases a significant amount of its crude oil requirements from
PDVSA under long-term supply agreements (expiring in the years 2006 through
2013). This supply represented approximately 53% of the crude oil processed in
refineries operated by CITGO in the year ended December 31, 2001. 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 2001, PDVSA deliveries of
crude oil to CITGO were slightly 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 was required to
obtain alternative sources of crude oil, which resulted in lower operating
margins. On January 22, 2002, PDVSA notified CITGO that pursuant to the February
9, 2001 declaration of force majeure, effective March 1, 2002, PDVSA expects to
deliver approximately 20 percent less than the contract volume and PDVSA
indicated that force majeure will be in effect until at least June 2002. If
PDVSA reduces its delivery of crude oil under these crude oil supply agreements,
CITGO will be required to obtain alternative sources of crude oil which may
result in reduced operating margins. The effect of this declaration on CITGO's
crude oil supply and the duration of this
21
situation are not known at this time. (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 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, 2001.
CITGO's revenue accounted for over 99% of PDV America's consolidated
revenues in 2001, 2000 and 1999. PDVMR's sales of $1.4 billion for the period
ended December 31, 2001 were primarily to CITGO and, accordingly, these were
eliminated in consolidation.
The cost and available coverage level of property and business
interruption insurance is driven, in part, by company specific and industry
factors. It is also affected by national and international events. The present
environment for the Companies is one characterized by increased cost of
coverage, higher deductibles, and some restrictions in coverage terms. This has
the potential effect of lower profitability in the near term.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with Accounting
Principles Generally Accepted in the United States of America requires that
management apply accounting policies and make estimates and assumptions that
affect results of operations and the reported amounts of assets and liabilities.
The following areas are those that management believes are important to the
financial statements and which require significant judgment and estimation
because of inherent uncertainty.
Environmental Expenditures. The costs to comply with environmental
regulations are significant. Environmental expenditures incurred currently that
relate to present or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed. The
Companies constantly monitor their compliance with environmental regulations and
respond promptly to issues raised by regulatory agencies. Liabilities are
recorded when environmental assessments and/or cleanups are probable and the
costs can be reasonably estimated. Environmental liabilities are not discounted
to their present value. Subsequent adjustments to estimates, to the extent
required, may be made as more refined information becomes available.
Commodity and Interest Rate Derivatives. The Companies enter into
petroleum futures contracts, options and other over-the-counter commodity
derivatives, primarily to reduce their inventory purchase and product sale
exposure to market risk. In the normal course of business, the Companies also
enter into certain petroleum commodity forward purchase and sale contracts,
which qualify as derivatives. The Companies also enter into various interest
rate swap agreements to manage their risk related to interest rate changes on
their debt. Effective January 1, 2001, fair values of derivatives are recorded
in other current assets or other current liabilities, as applicable, and
changes in the fair value of derivatives not designated in hedging relationships
are recorded in income. Effective January 1, 2001, the Companies' policy is
to elect hedge accounting only under limited circumstances involving
derivatives with initial terms of 90 days or greater and notional amounts of
$25 million or greater. PDV America will continue to review its accounting
treatment of derivatives and may elect hedge accounting under certain
circumstances in the future.
Litigation and Injury Claims. Various lawsuits and claims arising in the
ordinary course of business are pending against the Companies. The status of
these lawsuits and claims are continually reviewed by external and internal
legal counsel. These reviews provide the basis for which the Companies determine
whether or not to record accruals for potential losses. Accruals for losses are
recorded when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to the Companies, and in amounts greater than the Companies' accruals,
then such determinations could have a material adverse effect on the Companies'
results of operations in a given reporting period.
22
Health Care Costs. The cost of providing health care to current employees
and retired employees continues to increase at a significant rate. Historically,
the Companies have absorbed the majority of these cost increases which reduce
profitability and increase the Companies' liability. There is no indication that
the trend in health care costs will be reversed in future periods. The
Companies' liability for such health care cost is based on actuarial
calculations that could be subject to significant revision as the underlying
assumptions regarding future health care costs and interest rates change.
The following table summarizes the sources of PDV America's sales revenues
and volumes.
PDV AMERICA SALES REVENUES AND VOLUMES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ------------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------ ------ ------
($ IN MILLIONS) (GALLONS IN MILLIONS)
Gasoline $11,316 $12,447 $ 7,691 13,585 13,648 13,115
Jet fuel 1,660 2,065 1,129 2,190 2,367 2,198
Diesel / #2 fuel 3,984 4,750 2,501 5,429 5,565 5,057
Asphalt 502 546 338 946 812 753
Petrochemicals and industrial products 1,490 1,763 1,041 2,297 2,404 2,306
Lubricants and waxes 536 552 482 240 279 285
------- ------- ------- ------ ------ ------
Total refined product sales $19,488 $22,123 $13,182 24,687 25,075 23,714
Other sales 113 34 152 -- -- --
------- ------- ------- ------ ------ ------
Total sales $19,601 $22,157 $13,334 24,687 25,075 23,714
======= ======= ======= ====== ====== ======
The following table summarizes PDV America's cost of sales and operating
expenses.
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
YEAR ENDED DECEMBER 31,
2001 2000 1999
------- ------- -------
($ IN MILLIONS)
Crude oil $ 4,898 $ 6,784 $ 3,804
Refined products 10,284 11,308 6,640
Intermediate feedstocks 1,496 1,573 990
Refining and manufacturing costs 1,113 1,058 999
Other operating costs and expenses and inventory changes 944 647 366
------- ------- -------
Total cost of sales and operating expenses $18,735 $21,370 $12,799
======= ======= =======
RESULTS OF OPERATIONS -- 2001 COMPARED TO 2000
Sales revenues and volumes. Sales decreased $2.6 billion, representing a
12% decrease from 2000 to 2001. This was due to a decrease in average sales
price of 11% and a decrease in sales volume of 2%. (See PDV America Sales
Revenues and Volumes table above.)
23
Equity in earnings of affiliates. Equity in earnings of affiliates
increased by approximately $50 million, or 85% from $59 million in 2000 to $109
million in 2001. The increase was primarily due to the change in the earnings of
LYONDELL-CITGO, CITGO's share of which increased $33 million, from $41 million
in 2000 to $74 million in 2001. LYONDELL-CITGO's increased earnings in 2001 are
primarily due to higher refining margins offset by the impact of lower crude
processing rates due to an unplanned production unit outage and a major
turnaround, and higher natural gas costs in the first quarter of 2001. The
earnings for 2000 were impacted by a major planned turnaround which occurred
during the second quarter of 2000.
Cost of sales and operating expenses. Cost of sales and operating expenses
decreased by $2.6 billion, or 12%, from 2000 to 2001. (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 55% and 53% of cost of sales for the years
2001 and 2000. These refined product purchases included purchases from
LYONDELL-CITGO 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 which might cause a material change in anticipated purchased product
requirements; however, there could be events beyond the control of PDV America
which impact the volume of refined products purchased. (See also "Factors
Affecting Forward Looking Statements".)
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
2001 increased by $6 million from what would have otherwise been the case.
Gross margin. The gross margin for 2001 was $867 million, or 4.4% of net
sales, compared to $787 million, or 3.5% of net sales, for 2000. The gross
margin increased from 3.1 cents per gallon in 2000 to 3.5 cents per gallon in
2001 as a result of general market conditions.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $66 million, or 29% in 2001, primarily as a
result of an increase in incentive compensation, promotion expenses, and the
start-up expenses related to an international operation in 2001.
Interest expense. Interest expense decreased $28 million, or 20% in 2001,
primarily due to lower interest rates and lower average debt outstanding during
2001, which was driven, in large part, by a $250 million senior note payment
made in August 2000.
Income taxes. PDV America's provision for income taxes in 2001 was $214
million, representing an effective tax rate of 34%. In 2000, PDV America's
provision for income taxes was $183 million, representing an effective tax rate
of 35%.
24
RESULTS OF OPERATIONS --2000 COMPARED TO 1999
Sales revenues and volumes. Sales increased $8.8 billion, 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%. (See PDV America Sales
Revenues and Volumes table above.)
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 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 $8.6 billion, or 67%, from 1999 to 2000. (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 53% and 52% of cost of sales for the years
2000 and 1999, respectively. These refined product purchases included purchases
from LYONDELL-CITGO 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 which might cause a material change in anticipated purchased product
requirements; however, there could be events beyond the control of PDV America
which impact the volume of refined products purchased. See also "Factors
Affecting Forward Looking Statements".
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
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 the Companies'
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.
25
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 2001, PDV America's net cash provided by
operating activities totaled approximately $623 million, primarily reflecting
$423 million of net income, $291 million of depreciation and amortization and
the net effect of other items of $(91) million. The more significant changes in
other items included the decrease in accounts receivable, including receivables
from affiliates, of approximately $445 million and the decrease in accounts
payable and other current liabilities, including payables to affiliates, of
approximately $605 million. The average price per gallon of refined products
sold by the Companies declined by approximately $0.30 between December 2000
and December 2001. This decline is the primary reason for the decrease in
accounts receivable. The average price per barrel of crude oil purchased by the
Companies declined by approximately $9.44 between December 2000 and December
2001. In the same time period, the average price per gallon of refined products
purchased by the Companies declined by approximately 29 cents. The price
declines are the primary reason for the decrease in accounts payable.
Net cash used in investing activities in 2001 totaled $293 million
consisting primarily of capital expenditures of $253 million and investments in
LYONDELL-CITGO of $32 million.
During the same period, consolidated net cash used by financing activities
totaled approximately $235 million resulting primarily from net borrowings of
$392 million on revolving bank loans, dividend payments in the amount of $508
million, net repayments of other debt totaling $92 million, and capital lease
payments of $27 million.
PDV America currently estimates that its capital expenditures for the
years 2002 through 2006 will total approximately $2.5 billion. These include:
PDV AMERICA ESTIMATED CAPITAL EXPENDITURES - 2002 THROUGH 2006 (1)
Strategic $ 777 million
Maintenance 525 million
Regulatory / Environmental 1,154 million
---------------
Total $ 2,456 million
===============
----------
(1) These estimates may change as future regulatory events
unfold. See "Factors Affecting Forward Looking
Statements".
As of December 31, 2001, PDV America and its subsidiaries had an aggregate
of $1.9 billion of indebtedness outstanding that matures on various dates
through the year 2029. As of December 31, 2001, the Company's contractual
commitments to make principal payments on this indebtedness were $108 million,
$880 million and $47 million for 2002, 2003 and 2004, respectively.
In August 1993, PDV America issued $1 billion principal amount of Senior
Notes with interest rates ranging from 7.25 percent to 7.875 percent with due
dates ranging from 1998 to 2003. Interest on these notes is payable
semiannually, commencing February 1994. The Senior Notes represent senior
unsecured indebtedness of PDV America, and are structurally subordinated to the
liabilities of PDV America's subsidiaries. The Senior Notes are guaranteed by
PDVSA and Propernyn B.V., a Dutch limited liability company whose ultimate
parent is PDVSA. 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 7.75% Senior Notes due August 1, 2000 with
proceeds from the maturity of $250 million of Mirror Notes due from PDVSA on
July 31, 2000.
26
CITGO's bank credit facilities consist of a $400 million, five year,
revolving bank loan, a $150 million, 364-day, revolving bank loan, and a $25
million, 364-day, revolving bank loan, all of which are unsecured and have
various borrowing maturities. At December 31, 2001, $360 million was outstanding
under these credit agreements. CITGO's other principal indebtedness consists of
(i) $200 million in senior notes issued in 1996, (ii) $260 million in senior
notes issued pursuant to a master shelf agreement with an insurance company,
(iii) $57 million in private placement senior notes issued in 1991, (iv) $338
million in obligations related to tax exempt bonds issued by various
governmental units, and (v) $146 million in obligations related to taxable bonds
issued by various governmental units. (See Consolidated Financial Statements of
PDV America -- Note 9 and 10 in Item 14a.)
PDVMR's bank credit facility consisted of a $75 million revolving credit
facility, committed through April 2002, of which $32 million was outstanding at
December 31, 2001. Inventories and accounts receivable of PDVMR were pledge as
collateral. The weighted average interest rate at December 31, 2001 was 2.5%.
PDVMR cancelled this facility effective January 23, 2002. Other indebtedness
consists of $20 million in pollution control bonds. See Consolidated Financial
Statements of PDV America - Note 10 in Item 14a.
The following table summarizes future payments for the Companies'
contractual obligations at December 31, 2001.
CONTRACTUAL OBLIGATIONS
AT DECEMBER 31, 2001
LESS THAN 1 YEARS YEARS AFTER 5
TOTAL YEAR 2-3 4-5 YEARS
----------- ------------ ---------- --------- ---------
($ IN MILLIONS)
Long-Term Debt $ 1,911 $ 108 $ 927 $ 262 $ 614
Capital Lease Obligations 67 20 25 6 16
Operating Leases 170 47 65 40 18
----------- ------------ ---------- --------- ---------
Total Contractual Cash Obligations $ 2,148 $ 175 $ 1,017 $ 308 $ 648
=========== ============ ========== ========= =========
(See Consolidated Financial Statements of PDV America--Notes 10 and 14 in Item
14a).
The following table summarizes the Companies' contingent commitments
at December 31, 2001.
OTHER COMMERCIAL COMMITMENTS
AT DECEMBER 31, 2001
EXPIRATION
----------------------------------------------------------
TOTAL AMOUNTS LESS THAN 1 YEARS YEARS OVER 5
COMMITTED YEAR 2-3 4-5 YEARS
------------- ------------ ---------- --------- ---------
($ IN MILLIONS)
Letters of Credit(1) $ 19 $ 19 $ -- $ -- $ --
Guarantees 134 63 66 4 1
Surety Bonds 73 56 14 3 --
----------- ------------ ---------- --------- ---------
Total Commercial Commitments $ 226 $ 138 $ 80 $ 7 $ 1
=========== ============ ========== ========= =========
- ----------
(1) The Companies have outstanding letters of credit totaling approximately
$536 million which includes $497 million related to CITGO's tax-exempt
and taxable revenue bonds and $20 million related to PDVMR's pollution
control bonds included in Long-Term Debt in the table of Contractual
Obligations above.
(See Consolidated Financial Statements of PDV America--Note 13 in Item 14a).
27
As of December 31, 2001, capital resources available to PDV America and
its subsidiaries included cash provided by operations, available borrowing
capacity of $135 million under CITGO's revolving credit facility and $190
million in unused availability under uncommitted short-term borrowing facilities
with various banks. Additionally, the remaining $400 million from CITGO's shelf
registration with the Securities and Exchange Commission for $600 million of
debt securities may be offered and sold from time to time. PDV America believes
that it 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 $500 million of 7.875% Senior
Notes. PDV America periodically evaluates other sources of capital in the
marketplace and anticipates long-term capital requirements will be satisfied
with current capital resources and future financing arrangements, including the
issuance of debt securities. PDV America's ability to obtain such 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 Companies' debt instruments impose restrictions on the Companies'
ability to incur additional debt, place liens on property, sell or acquire fixed
assets, and make restricted payments, including dividends.
As of December 31, 2001, PDV America's senior unsecured debt ratings, as
assessed by the three major credit rating agencies, were as follows:
Fitch BBB-
Moody's Baa3
Standard & Poor's BB
The Companies' debt instruments do not contain any provisions which trigger
acceleration of payment or decreases in available borrowing capacity as a
result of changes in credit ratings.
PDV America and its subsidiaries form a part of the PDV Holding
consolidated Federal income tax return. CITGO has a tax allocation agreement
with PDV Holding, which is designed to provide PDV Holding with sufficient cash
to pay its consolidated income tax liabilities. (See Consolidated Financial
Statements of PDV America -- Note 1 and Note 4 in Item 14a).
IMPENDING ACCOUNTING CHANGES
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141") which addresses financial accounting and reporting for business
combinations and requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method. Use of the pooling of
interest method is no longer permitted. The adoption of SFAS No. 141 did not
impact the Companies' financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which is fully
effective in fiscal years beginning after December 15, 2001, although certain
provisions of SFAS No. 142 are applicable to goodwill and other intangible
assets acquired in transactions completed after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and requires that goodwill and intangibles with an indefinite
life no longer be amortized but instead be periodically reviewed for impairment.
The adoption of SFAS No. 142 will not materially impact the Companies' financial
position or results of operations.
28
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Companies have not
determined the impact on their financial statements that may result from the
adoption of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets by requiring that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discontinued operations to include more disposal transactions. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The provisions
of this statement generally are to be applied prospectively; therefore, the
adoption of SFAS No. 144 will not impact the Companies' financial position or
results of operations.
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
unamortized 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 June 15, 2002, and that the effect of
expensing existing unamortized deferred non-capital major maintenance costs will
be reported as a cumulative effect of an accounting change in the consolidated
statement of income. At December 31, 2001, the Companies had included turnaround
costs of $107 million in other assets. The Companies management has not
determined the amount, if any, of these costs that could be capitalized under
the provisions of the exposure draft.
29
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. PDV America and its subsidiaries have exposure to price
fluctuations of crude oil and refined products as well as fluctuations in
interest rates. To manage these exposures, management has defined certain
benchmarks consistent with its preferred risk profile for the environment in
which the Companies operate and finance their assets. The Companies do not
attempt to manage the price risk related to all of their inventories of crude
oil and refined products. As a result, at December 31, 2001, 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. PDV America balances its crude oil and petroleum
product supply/demand and manages a portion of its price risk by entering into
petroleum commodity derivatives. Generally, PDV America's risk management
strategies qualified as hedges through December 31, 2000. Effective January 1,
2001, the Companies' policy is to elect hedge accounting only under limited
circumstances involving derivatives with initial terms of 90 days or greater and
notional amounts of $25 million or greater. At December 31, 2001, none of the
Companies' commodity derivatives were accounted for as hedges.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 2001
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(4)
--------- ---------- ---- --------- ----- --------
($ in millions)
-------------------
No Lead Gasoline (1) Futures Purchased 2002 994 $ 25.4 $ 25.0
Futures Sold 2002 332 $ 8.3 $ 8.1
Forward Purchase Contracts 2002 4,095 $ 95.8 $ 94.0
Forward Sale Contracts 2002 3,148 $ 71.2 $ 73.2
Distillates (1) Futures Purchased 2002 1,483 $ 43.4 $ 34.6
Futures Purchased 2003 94 $ 2.4 $ 2.3
Futures Sold 2002 943 $ 25.3 $ 21.8
OTC Options Purchased 2002 30 $ -- $ --
OTC Options Sold 2002 30 $ (0.1) $ (0.1)
Forward Purchase Contracts 2002 1,123 $ 25.2 $ 24.9
Forward Sale Contracts 2002 2,536 $ 56.3 $ 56.4
Crude Oil (1) Futures Purchased 2002 517 $ 12.6 $ 10.4
Futures Sold 2002 649 $ 12.7 $ 12.9
OTC Swaps (Pay Float/Receive Fixed)(3) 2002 2 $ -- $ 0.3
OTC Swaps (Pay Fixed/Receive Float)(3) 2002 1 $ -- $ --
Forward Purchase Contracts 2002 6,652 $130.3 $135.2
Forward Sale Contracts 2002 6,268 $135.1 $137.0
Natural Gas (2) Futures Sold 2002 55 $ 1.6 $ 1.4
OTC Options Sold 2002 20 $ -- $ (0.1)
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
(4) Based on actively quoted prices.
30
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 2000
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(3)
--------- ---------- ---- --------- ----- --------
($ in millions)
-------------------
No Lead Gasoline (1) Futures Purchased 2001 25 $ 0.8 $ 0.8
Heating Oil (1) Futures Purchased 2001 1,533 $ 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)(2) 2001 9 $ -- $ 0.1
OTC Swaps (Pay Float/Receive Fixed)(2) 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) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract
(3) Based on actively quoted prices.
31
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At December 31,
2001, CITGO's primary exposures were to LIBOR and floating rates on tax exempt
bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT DECEMBER 31, 2001 AND 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
====
The fair value of the interest rate swap agreements in place at December
31, 2001, 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 $2.8 million.
32
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT DECEMBER 31, 2001
EXPECTED
EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
---------- --------- ------------- --------- -------------
($ in millions) ($ in millions)