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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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 001-12138
PDV AMERICA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297556
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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)
N.A.
(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) the information otherwise
required by Item 601 of Regulation S-K relating to a list of subsidiaries of the
registrant as permitted by General Instruction (I)(2)(b), (ii) 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 (iii)
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 and non-voting common stock
held by non-affiliates of the registrant as of June 28, 2002: NONE
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes [ ] No [X]
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, 2003)
DOCUMENTS INCORPORATED BY REFERENCE: None
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PDV AMERICA, INC.
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
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PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS................................... 1
PART I.
Items 1. and 2. Business and Properties....................................... 2
Item 3. Legal Proceedings.................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders................ 17
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 18
Item 6. Selected Financial Data............................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......... 34
Item 8. Financial Statements and Supplementary Data........................ 39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 39
PART III.
Item 10. Directors and Executive Officers of the Registrant................. 40
Item 11. Executive Compensation............................................. 40
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 40
Item 13. Certain Relationships and Related Transactions..................... 41
Item 14. Controls and Procedures............................................ 43
PART IV.
Item 15. Exhibits, Financial Statements and Reports on Form 8-K............. 44
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 caption "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 the Companies (as defined herein) are forward
looking statements. In addition, when used in this document, the words
"anticipate," "estimate," "project," "believe" and similar expressions are used
to identify forward looking statements.
Those forward looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from the forward looking
statements. Those risks and uncertainties include changes in the availability
and cost of crude oil, feedstocks, blending components and refined products;
changes in prices or demand for the Companies' products as a result of
competitive actions or economic factors; changes in environmental and other
regulatory requirements, which may affect operations, operating costs and
capital expenditure requirements; costs and uncertainties associated with
technological change and implementation; inflation; and continued access to
capital markets and commercial bank financing on favorable terms. In addition,
the Companies purchase a significant portion of their crude oil requirements
from Petroleos de Venezuela, S.A. (as defined herein), their ultimate parent
corporation, under long-term supply agreements, and could be adversely affected
by social, economic and political conditions in Venezuela. (See Exhibit 99.4 to
the Form 8-K filed by PDV America, Inc. on February 25, 2003 for additional
information concerning risk factors).
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
this 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 subsidiary, CITGO Petroleum
Corporation ("CITGO"), 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. The Companies operate as a single segment.
(See Consolidated Financial Statements of PDV America in Item 15a).
PDV America does not have an Internet address and thus is not able to
make copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q
or current reports on Form 8-K available in that manner. It expects to become a
non-reporting SEC registrant following the August 1, 2003 final principal
payment on its outstanding 7-7/8% senior notes. Copies of its annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to those reports filed or furnished pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 can be obtained from the SEC's web site
at www.sec.gov and from PDV America, free of charge, by contacting PDV America
at (918) 495-4000.
PDV America's transportation fuel customers include primarily CITGO
branded independent wholesale marketers, major convenience store chains 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
sells 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.
On January 1, 2002, PDV America made a contribution to the capital of
CITGO of all of the common stock of PDV America's wholly owned subsidiary, VPHI
Midwest, Inc. ("VPHI"). This transaction had no effect on 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
REFINING
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 refinery in which PDV America holds an interest and PDV America's share
of such capacity as of December 31, 2002.
PDV AMERICA REFINING CAPACITY
TOTAL NET
RATED PDV AMERICA SOLOMON
CRUDE OWNERSHIP PROCESS
PDV AMERICA REFINING IN REFINING COMPLEXITY
OWNER INTEREST CAPACITY CAPACITY RATING
-------------- ---------- -------- ----------- ----------
(%) (MBPD) (MBPD)
LOCATION
Lake Charles, LA CITGO 100 320 320 17.7
Corpus Christi, TX CITGO 100 157 157 16.3
Lemont, IL CITGO 100 167 167 11.7
Paulsboro, NJ CITGO 100 84 84 -
Savannah, GA CITGO 100 28 28 -
Houston, TX LYONDELL-CITGO 41 265 109 15.0
-------- -----------
Total Rated Crude Refining Capacity 1,021 865
======== ===========
The Lake Charles, Corpus Christi and Lemont refineries and the Houston
refinery each have the capability to process large volumes of heavy crude oil
into a flexible slate of refined products. They have Solomon Process Complexity
Ratings of 17.7, 16.3, 11.7 and 15.0, respectively, as compared to an average of
13.9 for U.S. refineries in the most recently available Solomon Associates, Inc.
survey. The rating is an industry measure of a refinery's ability to produce
higher value products, with a higher rating indicating a greater capability to
produce such products.
3
The following table shows PDV America's aggregate interest in refining
capacity, refinery input, and product yield for the three years ended December
31, 2002.
PDV AMERICA REFINERY PRODUCTION (1)
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CRUDE CAPACITY AT YEAR END 865 865 865
Refinery Input
Crude oil 674 84% 737 83% 791 83%
Other feedstocks 131 16% 150 17% 157 17%
----- ----- ----- ----- ----- -----
Total 805 100% 887 100% 948 100%
===== ===== ===== ===== ===== =====
Product Yield
Light fuels
Gasoline 379 46% 375 42% 419 44%
Jet fuel 76 9% 76 8% 79 8%
Diesel/#2 fuel 153 19% 172 19% 182 19%
Asphalt 16 2% 44 6% 47 5%
Petrochemicals and industrial products 194 24% 228 25% 230 24%
----- ----- ----- ----- ----- -----
Total 818 100% 895 100% 957 100%
===== ===== ===== ===== ===== =====
UTILIZATION OF RATED CRUDE REFINING CAPACITY 78% 85% 91%
- ----------
(1) Includes 41.25% of the Houston refinery production.
CITGO produces its light fuels and petrochemicals primarily through its
Lake Charles, Corpus Christi and Lemont 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.
4
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 following table shows the rated refining capacity, refinery input,
product yield and selected operating data at the Lake Charles refinery for the
three years ended December 31, 2002.
LAKE CHARLES REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CRUDE CAPACITY AT YEAR END 320 320 320
Refinery Input
Crude oil 320 92% 317 90% 319 87%
Other feedstocks 28 8% 37 10% 48 13%
----- ----- ----- ----- ----- -----
Total 348 100% 354 100% 367 100%
===== ===== ===== ===== ===== =====
Product Yield
Light fuels
Gasoline 184 51% 175 48% 187 50%
Jet fuel 68 19% 67 19% 70 19%
Diesel/#2 fuel 45 13% 62 17% 58 15%
Petrochemicals and industrial products 60 17% 57 16% 59 16%
----- ----- ----- ----- ----- -----
Total 357 100% 361 100% 374 100%
===== ===== ===== ===== ===== =====
Utilization of Rated Crude Refining Capacity 100% 99% 100%
Per barrel of throughput (dollars per barrel)
Gross Margin (1) $4.16 $5.83 N/A
Operating Expense (2) $2.87 $2.77 $2.66
- ----------
N/A: Information not available
(1) Gross margin consists of the estimated product yield value less refinery
input costs divided by total refinery input volumes.
(2) Operating expense consists of total refinery operating expenses less
depreciation and amortization divided by total refinery input volumes.
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.
5
The Lake Charles refinery complex also includes a lubricants refinery
which produces high quality oils and waxes, and is one of the few in the
industry designed as a stand-alone lubricants refinery.
Corpus Christi, Texas Refinery. The Corpus Christi refinery processes
heavy crude oil into a flexible slate of refined products. 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, product
yield and selected operating data at the Corpus Christi refinery for the three
years ended December 31, 2002.
CORPUS CHRISTI REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CRUDE CAPACITY AT YEAR END 157 157 150
Refinery Input
Crude oil 154 73% 154 71% 149 70%
Other feedstocks 57 27% 64 29% 65 30%
----- ----- ----- ----- ----- -----
Total 211 100% 218 100% 214 100%
===== ===== ===== ===== ===== =====
Product Yield
Light fuels
Gasoline 93 44% 90 42% 95 46%
Diesel/#2 fuel 59 28% 57 26% 58 27%
Petrochemicals and industrial products 58 28% 69 32% 58 27%
----- ----- ----- ----- ----- -----
Total 210 100% 216 100% 211 100%
===== ===== ===== ===== ===== =====
Utilization of Rated Crude Refining Capacity 98% 98% 99%
Per barrel of throughput (dollars per barrel)
Gross Margin (1) $4.37 $5.67 N/A
Operating expense (2) $2.32 $2.33 $2.25
- ----------
N/A: Information not available
(1) Gross margin consists of the estimated product yield value less refinery
input costs divided by total refinery input volumes.
(2) Operating expense consists of total refinery operating expenses less
depreciation and amortization divided by total refinery input volumes.
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 15 in Item 15a).
The Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, and aromatics (including benzene, toluene and xylene).
6
Lemont, Illinois Refinery. The Lemont refinery processes primarily heavy
Canadian crude oil into a flexible slate of refined products.
The following table shows the rated refining capacity, refinery input,
product yield and selected operating data at the Lemont refinery for the three
years ended December 31, 2002.
LEMONT REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-----------------------------------------------
2002 2001 2000
------------- ------------- -------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
RATED REFINING CRUDE CAPACITY AT YEAR END 167 167 167
Refinery Input
Crude oil 69 73% 98 78% 153 89%
Other feedstocks 25 27% 28 22% 18 11%
----- ----- ----- ----- ----- -----
Total 94 100% 126 100% 171 100%
===== ===== ===== ===== ===== =====
Product Yield
Light fuels
Gasoline 54 59% 68 56% 89 52%
Jet Fuel -- 0% -- 0% 1 1%
Diesel/#2 fuel 16 17% 24 20% 40 23%
Petrochemicals and industrial products 22 24% 30 24% 41 24%
----- ----- ----- ----- ----- -----
Total 92 100% 122 100% 171 100%
===== ===== ===== ===== ===== =====
Utilization of Rated Refining Crude Capacity 41% 59% 92%
Per barrel of throughput (dollars per barrel)
Gross margin (1) $3.23 $7.12 N/A
Operating expense (2) $4.70 $3.17 $2.16
- ----------
N/A: Information not available
(1) Gross margin consists of the estimated product yield value less refinery
input costs divided by total refinery input volumes.
(2) Operating expense consists of total refinery operating expenses less
depreciation and amortization divided by total refinery input volumes.
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 was
operational in May 2002. See Consolidated Financial Statements of PDV America
for further information.
7
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,
2002, CITGO's investment in LYONDELL-CITGO was $518 million. In addition, at
December 31, 2002, CITGO held a note receivable from LYONDELL-CITGO in the
approximate amount of $35 million. (See Consolidated Financial Statements of PDV
America -- Note 4 in Item 15a). 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. For the year ended December 31, 2002,
LYONDELL-CITGO constituted a significant investment for CITGO in a
50-percent-or-less-owned person under SEC regulations. See separate financial
statements for LYONDELL-CITGO in Item 15a.
PDVSA has invoked its contractual right to declare a force majeure under
the supply agreement with LYONDELL-CITGO at certain points in each of 2002, 2001
and 2000 for varying periods of time for various reasons. As a result of these
declarations, PDVSA was relieved of its obligation to deliver crude oil under
the supply agreement and LYONDELL-CITGO had to purchase crude oil from alternate
sources, which resulted in increased volatility to operating margins. (See
Consolidated Financial Statements of PDV America -- Note 4 in Item 15a).
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").
Crude Oil Purchases. The following chart shows CITGO's purchases of crude
oil for the three years ended December 31, 2002:
CITGO CRUDE OIL PURCHASES
LAKE CHARLES, LA CORPUS CHRISTI, TX LEMONT, IL PAULSBORO, NJ SAVANNAH, GA
---------------------- ---------------------- ---------------------- ---------------------- ---------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
(MBPD) (MBPD) (MBPD) (MBPD) (MBPD)
SUPPLIERS
PDVSA 125 136 104 126 138 143 11 13 14 36 39 47 22 22 22
Other sources 190 185 214 29 10 8 62 78 140 7 3 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total 315 321 318 155 148 151 73 91 154 43 42 47 22 22 22
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====
8
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 Lake Charles, Corpus Christi, Paulsboro and
Savannah 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, 2002.
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) 2002 2001 2000 DATE
------ --------------- ------ ------ ------ ----------
(MBPD) (MBPD) (YEAR)
LOCATION
Lake Charles, LA (2) 120 70 109 117 110 2006
Corpus Christi, TX (2) 130 -- 114 126 118 2012
Paulsboro, NJ (2) 30 -- 27 26 28 2010
Savannah, GA (2) 12 -- 12 12 12 2013
- ----------
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right
to sell to CITGO incremental volumes up to the maximum amount specified in
the table, subject to certain restrictions relating to the type of crude
oil to be supplied, refining capacity and other operational considerations
at the refinery.
(2) Volumes purchased as shown on this table do not equal purchases from PDVSA
(shown in the previous table) as a result of transfers between refineries
of contract crude purchases included here and spot purchases from PDVSA
which are included in the previous table.
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO for a fixed period. The
supply agreements differ somewhat for each refinery but generally incorporate
formula prices based on the market value of a slate of refined products deemed
to be produced from each particular grade of crude oil or feedstock, less (i)
specified deemed refining costs; (ii) specified actual costs, including
transportation charges, actual cost of natural gas and electricity, import
duties and taxes; and (iii) a deemed margin, which varies according to the grade
of crude oil or feedstock delivered. Under each supply agreement, deemed margins
and deemed costs are adjusted periodically by a formula primarily based on the
rate of inflation. Because deemed operating costs and the slate of refined
products deemed to be produced for a given barrel of crude oil or other
feedstock do not necessarily reflect the actual costs and yields in any period,
the actual refining margin earned by 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
excuse the performance by either party of its obligations under the agreement
under specified circumstances. PDVSA has invoked the force majeure provisions
and reduced the volume of crude oil supplied under the contracts at certain
points during each of 2000, 2001 and 2002 for varying periods of time for a
variety of reasons. As a result of these declarations of force majeure, CITGO
was required to obtain crude oil from alternative sources, which resulted in
increased volatility in its operating margins. CITGO was notified that effective
March 6, 2003, PDVSA ended its declaration of force majeure under the crude oil
supply agreements. (See Consolidated Financial Statements of PDV America - Note
2 in Item 15a for a description of events that led to further disruption of
supplies in December 2002).
9
The supply agreements provide that if the supplier does not supply CITGO
with the volume of crude oil and feedstock required under that agreement and
that failure is not excused by force majeure, then the supplier must pay CITGO
the deemed margin, in the case of the Lake Charles supply agreement, and the
deemed margin and the applicable fixed cost, in the case of the Corpus Christi
supply agreement, for the amount of crude oil and feedstock not supplied. During
2000, 2001 and 2002, PDVSA did not deliver naphtha pursuant to certain contracts
and has made or will make contractually specified payments in lieu thereof.
Refined Product Purchases. CITGO is required to purchase refined products
to supplement the production of the Lake Charles, Corpus Christi and Lemont
refineries in order to meet demand of CITGO's marketing network and to resolve
logistical issues. The following table shows CITGO's purchases of refined
products for the three years ended December 31, 2002.
CITGO REFINED PRODUCT PURCHASES
YEAR ENDED DECEMBER 31,
--------------------------
2002 2001 2000
------ ------ ------
(MBPD)
LIGHT FUELS
Gasoline 689 640 616
Jet fuel 61 74 81
Diesel/ #2 fuel 239 264 264
------ ------ ------
Total 989 978 961
====== ====== ======
As of December 31, 2002, 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. LYONDELL-CITGO was a major
supplier in 2002 providing CITGO with 114 MBPD of gasoline, 84 MBPD of diesel/#2
fuel, and 18 MBPD of jet fuel. See "--Refining--LYONDELL-CITGO Refining LP".
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 100 MBPD of refined products from the refinery
during 2002, approximately one-half of which was gasoline.
10
MARKETING
CITGO's major products are light fuels (including gasoline, jet fuel, and
diesel fuel), industrial products and petrochemicals, asphalt, lubricants and
waxes. The following table shows revenues and volumes of each of these product
categories for the three years ended December 31, 2002.
CITGO REFINED PRODUCT SALES REVENUES AND VOLUMES
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------------------ ------------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- ---------- ---------- ----------
($ IN MILLIONS) (GALLONS IN MILLIONS)
LIGHT FUELS
Gasoline $ 11,758 $11,316 $12,447 15,026 13,585 13,648
Jet fuel 1,402 1,660 2,065 2,003 2,190 2,367
Diesel / #2 fuel 3,462 3,984 4,750 5,031 5,429 5,565
ASPHALT 597 502 546 902 946 812
PETROCHEMICALS AND INDUSTRIAL PRODUCTS 1,485 1,490 1,763 2,190 2,297 2,404
LUBRICANTS AND WAXES 561 536 552 261 240 279
---------- ---------- ---------- ---------- ---------- ----------
Total $ 19,265 $19,488 $22,123 25,413 24,687 25,075
========== ========== ========== ========== ========== ==========
Light Fuels. Gasoline sales accounted for 61% of CITGO's refined product
sales in 2002, 58% in 2001, and 56% in 2000. CITGO markets CITGO branded
gasoline through approximately 13,000 independently owned and operated CITGO
branded retail outlets (including more than 11,000 branded retail outlets owned
and operated by approximately 700 independent marketers and more than 2,000
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, Corpus Christi and
Lemont refineries was only equivalent to approximately 54%, 55% and 62% of the
volume of CITGO branded gasoline sold in 2002, 2001 and 2000, respectively. See
"--Crude Oil and Refined Product Purchases -- Refined Product Purchases".
The following table includes wholesale fuel sales, wholesale margin and
marketing expenses relating to those sales.
Year Ended December 31,
-------------------------------------
2002 2001 2000
----------- ---------- ----------
(In millions, except as noted)
Wholesale fuel sales (gallons) 13,758 13,500 N/A
Wholesale marketing margin (1) (cents per gallon) $ 0.011 $ 0.022 N/A
Marketing expenses $ 112.5 $ 94.3 N/A
- ----------
N/A: Information not available
(1) The wholesale marketing margin is equal to the net unit revenue for all
wholesale sales less all unit acquisition costs including transportation,
terminalling and additive costs and the cost of product. Internally
produced products are acquired by wholesale marketing at spot market
prices. Other product is acquired by wholesale marketing at various term
and spot prices. Wholesale marketing margin is the weighted average margin
on wholesale sales of gasoline, turbine fuel and diesel.
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
enhancement is accomplished through a commitment to quality, dependability and
11
excellent customer service to its independent marketers, which constitute
CITGO's primary distribution channel.
Sales to independent branded marketers typically are made under contracts
that range from three to seven years. Sales to 7-Eleven(TM) convenience stores
are made under a contract that extends through the year 2006. Under this
contract, CITGO arranges all transportation and delivery of motor fuels and
handles all product ordering. CITGO also acts as processing agent for the
purpose of facilitating and implementing orders and purchases from third-party
suppliers. CITGO receives a processing fee for such services.
CITGO markets jet fuel directly to airline customers at 20 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth and
Miami.
CITGO's delivery of light fuels to its customers is accomplished in part
through 55 refined product terminals located throughout CITGO's primary market
territory. Of these terminals, 44 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. 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 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. Operations are in Puerto Rico, Mexico,
Ecuador, Chile and Brazil. However, CILA is reviewing and may revise its plans
for these and other countries in Latin America.
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 six 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
12
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 1,500 of whom are covered by union contracts. Most of the union
employees are employed in refining operations. The remaining union employees are
located primarily at a lubricant plant and various refined product terminals.
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 gasoline and diesel fuel that have
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. EPA 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 and
administrative penalties imposed.
In addition, the Companies are subject to various other federal, state and
local environmental laws and regulations that 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 "Forward Looking Statements."
The Companies' accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably capable
of estimation. The Companies believe the amounts provided in their 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, an agreement was reached between CITGO and the Louisiana
Department of Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at the Lake Charles refinery by 1994. A mutually acceptable closure
plan was filed with the LDEQ in 1993. CITGO and the former owner of the refinery
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 the LDEQ
revising the 1993 closure plan. In 1998 and 2000, CITGO submitted further
revisions as requested by the LDEQ. The LDEQ issued an administrative order in
June 2002 that addressed the requirements and schedule for proceeding to develop
and implement the corrective action or closure plan for these surface
impoundments and related waste units. Compliance with the terms of the
administrative order has begun.
The Texas Commission on Environmental Quality ("TCEQ"), formerly known as
the Texas Natural Resources Conservation Commission, conducted a two-day
multi-media investigation of the
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Corpus Christi Refinery during 2002 and has issued a Notice of Enforcement to
CITGO which identifies 31 items of alleged violations of Texas environmental
regulations. CITGO anticipates that penalties will be proposed with respect to
these matters, but no amounts have yet been specified.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. EPA that the U.S. EPA believes that CITGO and these other
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 January and July 2001, CITGO received Notices of Violation ("NOVs")
from the U.S. EPA alleging violations of the Federal 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 or installing new control equipment
under the NSR provisions of the Clean Air Act. The NOVs followed inspections and
formal Information Requests regarding CITGO's Lake Charles, Louisiana, Corpus
Christi, Texas and the Lemont, Illinois refineries. Since mid-2002, CITGO has
been engaged in global settlement negotiations with the United States. The
settlement negotiations have focused on different levels of air pollutant
emission reductions and the merits of various types of control equipment to
achieve those reductions. No settlement agreement, or agreement in principal,
has been reached. Based primarily on the costs of control equipment reported by
the United States and other petroleum companies and the types and number of
emission control devices that have been agreed to in previous petroleum
companies' NSR settlements with the United States, CITGO estimates that the
capital costs of a settlement with the United States could range from $130
million to $200 million. Any such capital costs would be incurred over a period
of years, anticipated to be from 2003 to 2008. Also, this cost estimate range,
while based on current information and judgment, is dependent on a number of
subjective factors, including the types of control devices installed, the
emission limitations set for the units, the year the technology may be
installed, and possible future operational changes. CITGO also may be subject to
possible penalties. If settlement discussions fail, CITGO is prepared to contest
the NOVs. If CITGO is found to have violated the provisions cited in the NOVs,
CITGO estimates the capital expenditures and penalties that might result could
range up to $290 million to be incurred over a period of years.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations covering
benzene emissions from wastewater treatment operations at the Lemont, Illinois
refinery. 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 June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air quality
regulations at the Lake Charles, Louisiana refinery. CITGO is in settlement
discussions with the LDEQ.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of the Companies' facilities
and operations. Those audits have the potential to reveal matters that those
authorities believe represent non-compliance in one or more respects with
regulatory requirements and for which those authorities may seek corrective
actions and/or penalties in an administrative or judicial proceeding. Other than
matters described above, based upon current information, the Companies are not
aware that any such audits or their findings have resulted in the filing of such
a proceeding or are the subject of a threatened filing with respect to such a
proceeding, nor do the
14
Companies believe that any such audit or their findings will have a material
adverse effect on their future business and operating results.
Conditions which require additional expenditures may exist with respect to
various sites of the Companies including, but not limited to, the Companies'
operating refinery complexes, former refinery sites, service stations and crude
oil and petroleum product storage terminals. Based on currently available
information, the Companies cannot determine the amount of any such future
expenditures.
Increasingly stringent environmental regulatory provisions and obligations
periodically require additional capital expenditures. During 2002, CITGO spent
approximately $148 million for environmental and regulatory capital improvements
in its operations. Management currently estimates that CITGO will spend
approximately $1.3 billion for environmental and regulatory capital projects
over the five-year period 2003-2007. 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 federal and state occupational health and safety laws
and regulations. The Companies maintain comprehensive safety, training and
maintenance programs.
15
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.
A class action lawsuit brought by four former marketers of the UNO-VEN
Company ("UNO-VEN") in U.S. District Court in Wisconsin 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 has resulted in the judge granting the Companies' motion for
summary judgment. The plaintiffs appealed the summary judgment and the Seventh
Circuit of the U.S. Court of Appeals has affirmed the judgment. The time for an
appeal to the U.S. Supreme court has expired, and therefore, this action is
concluded.
The Companies have settled a lawsuit against PDVMR and CITGO in Illinois
state court which claimed damages as a result of PDVMR invoicing a partnership
in which it is a partner, and an affiliate of the other partner of the
partnership, allegedly excessive charges for electricity utilized by these
entities' facilities located adjacent to the Lemont, Illinois refinery. The
electricity supplier to the refinery is seeking recovery from the Companies of
alleged underpayments for electricity. The Companies have denied all allegations
and are pursuing their defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery.
Approximately seventeen related lawsuits were filed in federal and state courts
in Corpus Christi, Texas against CITGO on behalf of a number of individuals,
currently estimated to be approximately 5,000, alleging property damages,
personal injury and punitive damages. In September 2002, CITGO reached an
agreement to settle substantially all of the claims related to this incident for
an amount that will not have a material financial impact on the Companies.
In September 2002, a state District Court in Corpus Christi, Texas has
ordered CITGO to pay property owners and their attorneys approximately $6
million based on alleged settlement of class action property damage claims as a
result of alleged air, soil and groundwater contamination from emissions
released from CITGO's Corpus Christi, Texas refinery. CITGO has appealed the
ruling to Texas Court of Appeals.
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
plaintiffs' claims, which rulings were appealed and affirmed by the Fifth
Circuit Court of Appeals. Trials of the remaining cases are set to begin in
December 2003. CITGO does not expect that the ultimate resolution of these cases
will have an adverse material effect on its financial condition or results of
operations.
CITGO is one of several refinery defendants to state and federal lawsuits
in New York and state actions in Illinois and California alleging contamination
of water supplies by methyl tertiary butyl ether ("MTBE"), a component of
gasoline. Plaintiffs claim that MTBE is a defective product and that refiners
failed to adequately warn customers and the public about risks associated with
the use of MTBE in gasoline. These actions allege that MTBE poses public health
risks and seek testing, damages and remediation of the alleged contamination.
Plaintiffs filed putative class action lawsuits in federal courts in Illinois,
California, Florida and New York. CITGO was named as a defendant in all but the
California case. The federal cases were all consolidated in a Multidistrict
Litigation case in the United States
16
District Court for the Southern District of New York ("MDL"). In July 2002, the
court in the MDL case denied plaintiffs' motion for class certification. The
California plaintiffs in the MDL action then dismissed their federal lawsuit and
refiled in state court in California. CITGO does not expect that the resolution
of the MDL and California lawsuits will have a material impact on CITGO's
financial condition or results of operations. In August 2002, a New York state
court judge handling two separate but related individual MTBE lawsuits dismissed
plaintiffs' product liability claims, leaving only traditional nuisance and
trespass claims for leakage from underground storage tanks at gasoline stations
near plaintiffs' water wells. Subsequently, a putative class action involving
the same leaking underground storage tanks has been filed. CITGO anticipates
filing a motion to dismiss the product liability claims and will also oppose
class certification. Also, in late October 2002, The County of Suffolk, New
York, and the Suffolk County Water Authority filed suit in state court, claiming
MTBE contamination of that county's water supply. The Illinois state action has
been brought on behalf of a class of contaminated well owners in Illinois and a
second class of all well owners within a defined distance of leaking underground
storage tanks. The judge in the Illinois state court action is expected to hear
plaintiffs' motion for class certification in that case sometime within the next
year.
In August 1999, the U.S. Department of Commerce rejected a petition filed
by a group of independent oil producers to apply antidumping measures and
countervailing duties against imports of crude oil from Venezuela, Iraq, Mexico
and Saudi Arabia. The petitioners appealed this decision before the U.S. Court
of International Trade based in New York. On September 19, 2000, the Court of
International Trade remanded the case to the Department of Commerce with
instructions to reconsider its August 1999 decision. The Department of Commerce
was required to make a revised decision as to whether or not to initiate an
investigation within 60 days. The Department of Commerce appealed to the U.S.
Court of Appeals for the Federal Circuit, which dismissed the appeal as
premature on July 31, 2001. The Department of Commerce issued its revised
decision, which again rejected the petition, in August 2001. The revised
decision was affirmed by the Court of International Trade on December 17, 2002.
The independent oil producers may or may not appeal the Court of International
Trade's decision.
Approximately 140 lawsuits are currently pending in state and federal
courts, primarily in Louisiana and Texas arising from asbestos related illness,
in which CITGO is a named defendant. The cases were brought by former employees
and contractor employees seeking damages for asbestos related illnesses
allegedly resulting from exposure at refineries owned or operated by CITGO in
Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of
these cases, there are multiple defendants. In some cases, CITGO is indemnified
by or has the right to seek indemnification for losses and expenses that it may
incur from prior owners of the refineries or employers of the claimants. CITGO
does not believe that the resolution of the cases will have an adverse material
effect on its financial condition or results of operations.
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.
17
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 2002, PDV America did not declare
or pay any dividends.
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, 2002. The following table should be
read in conjunction with the consolidated financial statements of PDV America as
of December 31, 2002 and 2001, and for each of the three years in the period
ended December 31, 2002, included in "Item 8. Financial Statements and
Supplementary Data".
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
INCOME STATEMENT DATA
Net sales and sales to affiliates $ 19,358 $ 19,601 $ 22,157 $ 13,334 $ 10,960
Equity in earnings of affiliates 101 109 59 22 82
Other income (including insurance recoveries) 387 (2) (24) (27) (9)
Net revenues 19,913 19,774 22,269 13,413 11,107
Income before cumulative effect of change
in accounting principle 198 410 336 142 231
Net income 198 423 336 142 231
Other comprehensive income (loss) (22) (1) 1 (3) --
Comprehensive income 175 422 337 139 231
Ratio of Earnings to Fixed Charges (1) 3.10 x 5.55 x 4.37 x 2.44 x 2.97 x
BALANCE SHEET DATA
Total assets $ 7,797 $ 7,352 $ 7,635 $ 7,746 $ 7,075
Long-term debt (excluding current portion)(2) 1,134 1,850 1,586 2,096 2,174
Total debt (3) 1,847 1,978 1,697 2,442 2,273
Shareholder's equity 2,879 2,704 2,789 2,718 2,601
- ----------
(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.
18
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. Although the pricing formulas under CITGO's crude supply agreements
with PDVSA are designed to protect CITGO from pricing volatility, CITGO receives
only approximately 50% of its crude oil requirements under these agreements.
Therefore, a substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, or a substantial or prolonged
decrease in refined product prices without a corresponding decrease in crude oil
prices, or a substantial or prolonged decrease in demand for refined products
could have a significant negative effect on PDV America's earnings and cash
flows.
As noted above, CITGO purchases a significant amount of its crude oil
requirements for its Lake Charles, Corpus Christi, Paulsboro and Savannah
refineries from PDVSA under long-term supply agreements (expiring in the years
2006 through 2013). This supply represented approximately 50% of the crude oil
processed in those refineries in the year ended December 31, 2002. These crude
supply agreements contain force majeure provisions which entitle PDVSA to reduce
the quantity of crude oil and feedstocks delivered under the crude supply
agreements under specified circumstances. For the years 2001 and 2002, PDVSA
deliveries of crude oil to CITGO were less than contractual base volumes due to
PDVSA's declaration of force majeure pursuant to all of the long-term crude oil
supply contracts related to CITGO's refineries. Therefore, CITGO was required to
obtain alternative sources of crude oil, which resulted in lower operating
margins.
19
A nation-wide work stoppage by opponents of President Hugo Chavez began in
Venezuela on December 2, 2002, and disrupted most activity in that country,
including the operations of PDVSA. CITGO continued to be able to locate and
purchase adequate crude oil, albeit at higher prices than under CITGO's supply
contracts with PDVSA, to maintain normal operations at its refineries and to
meet its refined products commitments to its customers. The reduction in supply
and purchase of crude oil from alternative sources had the effect of increasing
CITGO's crude oil cost and decreasing CITGO's gross margin and profit margin
from what it would have been if the crude oil was received under CITGO's
long-term crude oil supply contracts with PDVSA. CITGO received only 43% of its
contracted crude oil from PDVSA under the supply contracts in December 2002. As
a result, CITGO estimates that crude oil costs for the month of December 2002
were $20 million higher than what would have otherwise been the case. In
February 2003, CITGO received approximately 100% of its contracted crude oil
volumes under those agreements. In addition, in February CITGO scheduled the
purchase of approximately 2.5 million barrels of crude oil from PDVSA at market
prices; these volumes were delivered in early March. CITGO has received
confirmation from PDVSA that they expect to deliver the full contract volume
during March 2003 under the crude oil supply agreements. Finally, CITGO was
notified that effective March 6, 2003, PDVSA ended its declaration of force
majeure under the crude oil supply agreements.
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, 2002.
The cost and available coverage level of property damage and business
interruption insurance to the Companies 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
responds 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 and are recorded without consideration of potential
recoveries from third parties. 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
20
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. The Companies will continue to review their
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.
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 costs 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.
Pensions. The Companies' pension cost and liability are based on actuarial
calculations, which are dependent on assumptions concerning discount rates,
expected rates of return on plan assets, employee turnover, estimated retirement
dates, salary levels at retirement and mortality rates. In addition, differences
between actual experience and the assumptions also affect the actuarial
calculations. While management believes that the assumptions used are
appropriate, differences in actual experience or changes in assumptions may
significantly affect the Companies' future pension cost and liability.
21
RESULTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 2002
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,
--------------------------------------- -----------------------------------
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ---------- ---------- ----------
(IN MILLIONS) (GALLONS IN MILLIONS)
Gasoline $ 11,758 $ 11,316 $ 12,447 15,026 13,585 13,648
Jet fuel 1,402 1,660 2,065 2,003 2,190 2,367
Diesel / #2 fuel 3,462 3,984 4,750 5,031 5,429 5,565
Asphalt 597 502 546 902 946 812
Petrochemicals and industrial products 1,485 1,490 1,763 2,190 2,297 2,404
Lubricants and waxes 561 536 552 261 240 279
----------- ----------- ----------- ---------- ---------- ----------
Total refined product sales $ 19,265 $ 19,488 $ 22,123 25,413 24,687 25,075
Other sales 93 113 34 -- -- --
----------- ----------- ----------- ---------- ---------- ----------
Total sales $ 19,358 $ 19,601 $ 22,157 25,413 24,687 25,075
=========== =========== =========== ========== ========== ==========
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,
2002 2001 2000
------------- ------------ ------------
($ IN MILLIONS)
Crude oil $ 5,098 $ 4,898 $ 6,784
Refined products 11,077 10,686 11,638
Intermediate feedstocks 1,489 1,496 1,573
Refining and manufacturing costs 1,233 1,113 1,058
Other operating costs and expenses and inventory changes 314 542 317
------------- ------------ ------------
Total cost of sales and operating expenses $ 19,211 $ 18,735 $ 21,370
============= ============ ============
RESULTS OF OPERATIONS -- 2002 COMPARED TO 2001
Sales revenues and volumes. Sales decreased $243 million, representing a
1% decrease from 2001 to 2002. This was due to a decrease in average sales price
of 4% offset by an increase in sales volume of 3%. (See PDV America Sales
Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by approximately $8 million, or 7% from $109 million in 2001 to $101
million in 2002. An increase in earnings of $4 million attributable to
LYONDELL-CITGO was more than offset by a $12 million reduction in earnings from
PDV America's other investments. For the year ended December 31, 2002,
LYONDELL-CITGO constituted a significant investment for CITGO in a
50-percent-or-less-owned person under SEC regulations. See separate financial
statements for LYONDELL-CITGO in Item 15a.
22
Insurance recoveries. The insurance recoveries of $407 million and $53
million included in the years ended December 31, 2002 and 2001, respectively,
relate primarily to a fire which occurred on August 14, 2001 at the Lemont
refinery. These recoveries are, in part, reimbursements for expenses incurred in
2002 and 2001 to mitigate the effect of the fire on the Companies' earnings. The
Companies expect to recover additional amounts related to this event subject to
final settlement negotiations.
Other income (expense), net. Other income (expense) increased $36 million,
or 65% from $(55) million in 2001 to $(19) million in 2002. The increase is due
primarily to the fact that during 2001, the Companies recorded property losses
and related expenses totaling $54 million in other income (expense) related to
fires at the Lemont refinery and the Lake Charles refinery.
Cost of sales and operating expenses. Cost of sales and operating expenses
increased by $476 million, or 3%, from 2001 to 2002. (See PDV America Cost of
Sales and Operating Expenses table above.)
The Companies purchase refined products to supplement the production from
their refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 58% of cost of sales for 2002 and 57% for
2001. These refined product purchases included purchases from LYONDELL-CITGO and
HOVENSA. The Companies estimate that margins on purchased products, on average,
are lower than margins on produced products due to the fact that the Companies
can only receive the marketing portion of the total margin received on the
produced refined products. However, purchased products are not segregated from
the Companies produced products and margins may vary due to market conditions
and other factors beyond the Companies' control. As such, it is difficult to
measure the effects on profitability of changes in volumes of purchased
products. In the near term, other than normal refinery turnaround maintenance,
the Companies do not anticipate operational actions or market conditions which
might cause a material change in anticipated purchased product requirements;
however, there could be events beyond the control of the Companies which impact
the volume of refined products purchased. (See also "Factors Affecting Forward
Looking Statements".)
As a result of purchases of crude oil supplies from alternate sources due
to PDVSA's invocation of the force majeure provisions in its crude oil supply
contracts, the Companies estimate that their cost of crude oil purchased in 2002
increased by $42 million from what would have otherwise been the case.
Gross margin. The gross margin for 2002 was $147 million, or 0.8% of net
sales, compared to $867 million, or 4.4% of net sales, for 2001. The gross
margin decreased from 3.5 cents per gallon in 2001 to 0.6 cents per gallon in
2002 as a result of general market conditions and factors relating specifically
to the Companies including operating problems, weather related shut downs and
crude oil supply disruptions under contracts with PDVSA.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $8 million, or 3% in 2002, primarily as a
result of a decrease in compensation offset in part by increases in marketing
expenses.
Interest Expense. Interest expense decreased $2 million, or 2% in 2002,
primarily due to the decline in interest rates on CITGO's variable rate debt.
Income taxes. PDV America's provision for income taxes in 2002 was $102
million, representing an effective tax rate of 34%. In 2001, PDV America's
provision for income taxes was $214 million, representing an effective tax rate
of 34%.
23
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.)
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.)
The Companies purchase refined products to supplement the production from
their refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 57% and 54% of cost of sales for the years
2001 and 2000. These refined product purchases included purchases from
LYONDELL-CITGO and HOVENSA. The Companies estimate that margins on purchased
products, on average, are lower than margins on produced products due to the
fact that the Companies can only receive the marketing portion of the total
margin received on the produced refined products. However, purchased products
are not segregated from the Companies produced products and margins may vary due
to market conditions and other factors beyond the Companies' control. As such,
it is difficult to measure the effects on profitability of changes in volumes of
purchased products. In the near term, other than normal refinery turnaround
maintenance, the Companies do not anticipate operational actions or market
conditions which might cause a material change in anticipated purchased product
requirements; however, there could be events beyond the control of the Companies
that 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 PDVSA's invocation of the force majeure provisions in its crude oil supply
contracts, the Companies estimate that their 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
LIQUIDITY AND CAPITAL RESOURCES
Consolidated net cash provided by operating activities totaled
approximately $844 million for the year ended December 31, 2002. Operating cash
flows were derived primarily from net income of $198 million, depreciation and
amortization of $301 million and changes in working capital of $256 million. The
change in working capital is primarily the result of increases in payables to
affiliates and trade payables and a decrease in prepaid taxes offset, in part,
by an increase in prepaid turnaround charges.
Net cash used in investing activities in 2002 totaled $789 million
consisting primarily of capital expenditures of $712 million. These capital
expenditures include $220 million in spending to rebuild the crude distillation
unit of the Lemont refinery due to a fire on August 14, 2001. The crude unit was
destroyed and the refinery's other processing units were temporarily taken out
of production. The new crude unit was operational in May 2002.
Net cash used in financing activities totaled $131 million for the year
2002, consisting primarily of the payment of $112 million on revolving bank
loans, the payment of $25 million on master shelf agreement notes, the payment
of $31 million on taxable bonds, the payment of capital lease obligations of $20
million and the net repayments of other debt of $20 million. These payments were
offset in part by $9 million in proceeds from loans from affiliates and $69
million in proceeds from tax-exempt bonds.
As of December 31, 2002, PDV America and its subsidiaries had an aggregate
of $1.8 billion of indebtedness outstanding that matures on various dates
through the year 2032. As of December 31, 2002, the Companies' contractual
commitments to make principal payments on this indebtedness were $690 million,
$47 million and $161 million for 2003, 2004 and 2005, 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. At December 31, 2002, the outstanding balance of $499.7 million,
due on August 1, 2003, is included in current portion of long-term debt.
As of December 31, 2002, CITGO's bank credit facilities consisted of a
$260 million, three year, revolving bank loan, a $260 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, 2002,
$279 million was outstanding under these credit agreements. As of December 31,
2002, CITGO's other principal indebtedness consisted of (i) $200 million in
senior notes issued in 1996, (ii) $235 million in senior notes issued pursuant
to a master shelf agreement with an insurance company, (iii) $45 million in
private placement senior notes issued in 1991, (iv) $426 million in obligations
related to tax exempt bonds issued by various governmental units, and (v) $115
million in obligations related to taxable bonds issued by various governmental
units. (See Consolidated Financial Statements of PDV America - Notes 10 and 11
in Item 15a.)
The Companies' various debt instruments require maintenance of a specified
minimum net worth and impose restrictions on their ability to:
- incur additional debt unless it meets specified interest coverage and
debt to capitalization ratios;
25
- place liens on its property, subject to specified exceptions;
- sell assets, subject to specified exceptions;
- make restricted payments, including dividends, repurchases of capital
stock and specified investments; and
- Merge, consolidate or transfer assets.
Upon the occurrence of a change of control of CITGO, as defined in the Indenture
governing CITGO's 11-3/8% Senior Notes due February 1, 2011, the holders of
those notes have the right to require CITGO to repurchase them at a price equal
to 101% of the principal amount thereof plus accrued interest. In addition,
CITGO's bank credit agreements provide that, unless lenders holding two-thirds
of the commitments thereunder otherwise agree, a change in control of CITGO, as
defined in those agreements, will constitute a default under those credit
agreements.
The Companies are in compliance with their obligations under their debt
financing arrangements at December 31, 2002.
Capital expenditure projected amounts for 2003 and 2004 through 2007 are
as follows:
PDV AMERICA ESTIMATED CAPITAL EXPENDITURES - 2003 THROUGH 2007
2004-
2003 2007
PROJECTED (1) PROJECTED
--------------- ---------
(IN MILLIONS)
Strategic $ 88 $ 535
Maintenance 91 502
Regulatory / Environmental 269 1,037
--------------- ---------
Total $448 $2,074
=============== =========
- ----------
(1) Reflects reduction in 2003 projected capital expenditures discussed below.
These estimates may change as future regulatory events unfold. See
"Factors Affecting Forward Looking Statements."
Estimated capital expenditures necessary to comply with the Clean Air Act
and other environmental laws and regulations are summarized below. See "Factors
Affecting Forward Looking Statements."
BEYOND
2003 2004 2005 2006 2006
-------- -------- -------- -------- --------
Tier 2 gasoline $231 $125 $ 82 $ 10 $ --
Ultra low sulfur diesel (1) 3 33 179 155 249
Other environmental (2) 35 51 81 92 81
-------- -------- -------- -------- --------
Total regulatory/environmental $269 $209 $342 $257 $ 330
======== ======== ======== ======== ========
- ----------
(1) Spending on Ultra Low Sulfur Diesel ("ULSD") assumes the EPA will require
ULSD for on-road diesel in 2006 and ULSD for off-road diesel use in 2008.
These regulations are not final and spending could be reduced if certain
alternative regulatory schemes proposed by EPA are adopted.
(2) Other environmental spending assumes $162.9 million in spending to comply
with New Source Review standards under the Clean Air Act.
26
Internally generated cash flow, together with borrowings available under
the Companies' credit facilities, are expected to be sufficient to fund these
capital expenditures. In addition, the Companies have taken steps to reduce
their capital expenditures in 2003 by approximately $250 million and will
reassess the economics of the postponed projects at a later date. Finally, the
Companies are continuing to review the timing and amount of scheduled
expenditures under their planned capital spending programs, including regulatory
and environmental projects in the near term.
The Companies believe that they will have sufficient capital resources to
carry out planned capital spending programs, including regulatory and
environmental projects in the near term, and to meet currently anticipated
future obligations and other planned expenditures as they arise. The Companies
periodically evaluate other sources of capital in the marketplace and
anticipates that long-term capital requirements will be satisfied with current
capital resources and future financing arrangements, including the issuance of
debt securities. The Companies' ability to obtain such financing will depend on
numerous factors, including market conditions and the perceived creditworthiness
of the Companies at that time. See also "Factors Affecting Forward Looking
Statements."
PDV America and its subsidiaries form a part of the PDV Holding
consolidated Federal income tax return. The Companies have 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 5 in Item
15a).
The Companies' liquidity has been adversely affected recently as a result
of events directly and indirectly associated with the disruption in CITGO's
Venezuelan crude oil supply from PDVSA. That disruption affected a portion of
the crude oil supplies that CITGO received from PDVSA, requiring it to replace
those supplies from other sources at higher prices and on payment terms
generally less favorable than the terms under CITGO's supply agreements with
PDVSA. CITGO received approximately 43% and 91% of CITGO's contracted crude oil
volumes from PDVSA during December and January, respectively. In February 2003,
CITGO received approximately 100% of CITGO's contracted crude oil volumes under
those agreements. In addition, CITGO was able to purchase approximately 2.5
million barrels of crude oil from PDVSA during February at market prices.
Finally, CITGO received confirmation from PDVSA that they expect to deliver the
full contract volume during March 2003 under the crude oil supply agreements.
During this supply disruption, CITGO was successful in covering any shortfall
with spot market purchases, but those purchases generally required payment 15
days sooner than would be the case for comparable deliveries under CITGO's
supply agreements with PDVSA. This shortening of CITGO's payment cycle has
increased its cash needs and reduced its liquidity. Also, a number of trade
creditors have sought to tighten credit payment terms on purchases that CITGO
makes from them. That tightening would further increase its cash needs and
further reduce its liquidity.
In addition, all three major rating agencies lowered CITGO's and PDV
America's credit ratings based upon, among other things, concerns regarding the
supply disruption. One of the downgrades caused a termination event under
CITGO's existing accounts receivables sale facility, which ultimately led to the
repurchase of $125 million in accounts receivable and the cancellation of the
facility on January 31, 2003. That facility had a maximum size of $225 million,
of which $125 million was used at the time of cancellation. In the ordinary
course of business CITGO maintains uncommitted short-term lines of credit with
several commercial banks. Effective following the debt ratings downgrade, these
uncommitted lines of credit are not currently available. CITGO's committed
revolving credit facilities remain available.
Letter of credit providers for $76 million of CITGO's outstanding letters
of credit have indicated that they will not renew such letters of credit. These
letters of credit support approximately $75 million of tax-exempt bond issues
that were issued previously for CITGO's benefit. In March 2003, CITGO
repurchased these tax-exempt revenue bonds. CITGO expects that it will seek to
reissue these tax-exempt bonds with replacement letters of credit in support if
it is able to obtain such letters of credit from other financial
27
institutions or, alternatively, it will seek to replace these tax-exempt bonds
with new tax-exempt bonds that will not require letter of credit support. CITGO
has an additional $231 million of letters of credit outstanding that back or
support other bond issues that it has issued through governmental entities,
which are subject to renewal during 2003. CITGO has not received any notice from
the issuers of these additional letters of credit indicating an intention not to
renew. However, CITGO cannot be certain that any of its letters of credit will
be renewed, that it will be successful in obtaining replacements if they are not
renewed, that any replacement letters of credit will be on terms as advantageous
as those it currently holds or that it will be able to arrange for replacement
tax-exempt bonds that will not require letter of credit support.
In August 2002, two affiliates entered into agreements to advance excess
cash to CITGO from time to time under demand notes. These notes provide for
maximum amounts of $10 million from PDV Texas, Inc. and $10 million from PDV
Holding. If a demand were to be made under these notes, it would further tighten
CITGO's liquidity. At December 31, 2002, the outstanding amounts under these
notes were $5 million and $4 million, respectively. On February 27, 2003, CITGO
repaid $5 million to PDV Texas, Inc. and $4 million to PDV Holding.
Operating cash flow represents a primary source for meeting CITGO's
liquidity requirements; however, the termination of its accounts receivable sale
facility, the possibility of additional tightened payment terms and the possible
need to replace non-renewing letters of credit prompted CITGO to undertake
arrangements to supplement and improve its liquidity. To date, CITGO has
undertaken the following:
- On February 27, 2003 CITGO issued $550 million aggregate principal
amount of 11-3/8 percent unsecured senior notes due February 1, 2011.
- On February 27, 2003, CITGO closed on a three year $200 million, senior
secured term loan. Security is provided by CITGO's 15.8 percent equity
interest in Colonial Pipeline and CITGO's 6.8 percent equity interest in
Explorer Pipeline.
- On February 28, 2003, a new accounts receivable sales facility was
established. This facility allows for the non-recourse sale of certain
accounts receivable to independent third parties. A maximum of $200
million in accounts receivable may be sold at any one time. This new
facility does not contain any covenants that trigger increased costs or
burdens as a result of a change in CITGO's securities ratings.
- CITGO has reduced its planned capital expenditures in 2003 by
approximately $250 million.
In addition, CITGO is working on a transaction that, if consummated, will
provide CITGO with up to $100 million from the transfer of title to a third
party of certain of CITGO's refined products at the time those products are
delivered into the custody of interstate pipelines. CITGO would expect the terms
of any such agreement to include an option to acquire like volumes of refined
products from the third party at prevailing prices at predetermined transfer
points.
CITGO has an effective shelf-registration statement with the SEC under
which it can publicly offer up to $400 million principal amount of debt
securities. Notwithstanding that availability, CITGO may not be able to access
the public market if and when it would like to do so. Due, at the time, to the
prospect of the Venezuelan work stoppage, in December 2002, CITGO postponed a
planned offering of up to $250 million of unsecured notes from its
shelf-registration statement.
28
PDV America's and CITGO's senior unsecured debt ratings, as currently
assessed by the three major debt rating agencies, are as follows:
PDV
America CITGO
Moody's Investor's Services Caa1 Ba3
Standard & Poor's Ratings Group B+ B+
Fitch Investors Services, Inc. B- B+
CITGO's secured debt ratings, as currently assessed by the three major
debt rating agencies, are as follows:
Moody's Investor's Services Ba2
Standard & Poor's Ratings Group BB-
Fitch Investors Services, Inc. Not Rated
In connection with their recent downgrades of the Companies debt
ratings, the three major rating agencies have all noted concerns regarding the
continuing Venezuelan oil supply disruption. Moody's and Fitch have announced
that they continue to keep the Companies' securities on negative watch. S&P
recently changed its review to developing from negative, but noted the
importance of improved crude oil shipping volumes and external financing to
restoring liquidity. Moody's also noted concern that PDV America may need
substantial assistance from CITGO in order to pay off $500 million of notes
maturing in August 2003. PDV America holds a $500 million mirror note due from
PDVSA which is designed to provide sufficient liquidity to PDV America to make
this payment. While PDVSA's obligation remains unchanged, CITGO may use a
portion of the net proceeds from the sale of its 11-3/8% senior notes (described
above) to pay a portion of a dividend of up to $500 million to PDV America to
provide funds for the repayment of PDV America's notes due August 2003, if CITGO
satisfies the conditions under the indenture governing its 11-3/8% senior notes
to make such a dividend.
The Companies' debt instruments do not contain any covenants that
trigger increased costs or burdens as a result of a change in its securities
ratings. However, certain of CITGO's guarantee agreements, which support
approximately $20 million of affiliate letters of credit, require CITGO to cash
collateralize the applicable letters of credit upon a reduction of CITGO's
credit rating below a stated level.
29
As of February 28, 2003, PDV America and its subsidiaries had a total
of $2.5 billion of indebtedness outstanding that matures on various dates
through the year 2032:
(000's omitted)
Revolving bank loans $ 285,000
Term loan 200,000
Senior Notes $200 million face amount, due 2006
with interest rate of 7.875% 149,925
Senior Notes due 2003 with interest rate of 7.875% 499,757
Senior Notes $550 million face amount, due 2011
with interest rate of 11.375% 546,590
Private Placement Senior Notes, due 2003 to 2006
with interest rate of 9.30% 45,455
Master Shelf Agreement Senior Notes, due 2003 to 2009
with interest rates from 7.17% to 8.94% 235,000
Tax-Exempt Bonds, due 2004 to 2032 with variable and
fixed interest rates 425,872
Taxable Bonds, due 2026 to 2028 with variable interest rates 115,000
----------
$2,502,599
==========
As of February 28, 2003, the Companies had $929 million in cash and
cash equivalents. CITGO intends to eliminate the amount of debt outstanding
under its revolving bank loans by the end of March 2003.
As of February 28, 2003 CITGO had net accounts payable of approximately
$361.9 million related to crude oil and refined product purchases from PDVSA for
which CITGO had not received invoices and which were outside the normal payment
terms. Through March 15, 2003, CITGO had paid $184.9 million to PDVSA for the
February accounts payable. Accounts receivable from a subsidiary of PDVSA for
sales made by CITGO that were past due on February 28, 2003 totaled $19.2
million.
PDV America believes that it has adequate liquidity from existing
sources to support its operations for the foreseeable future. The Companies are
continuing to review their operations for opportunities to reduce operating and
capital expenditures.
On February 27, 2003, the Company paid a dividend in the amount of
$20.5 million to its parent, PDV Holding.
30
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table summarizes future payments for PDV America's
contractual obligations at December 31, 2002.
CONTRACTUAL OBLIGATIONS
AT DECEMBER 31, 2002
EXPIRATION
------------------------------------------
LESS THAN YEAR YEAR OVER 5
TOTAL 1 YEAR 2-3 4-5 YEARS
------ -------- ------ ------ ------
($ in millions)
Long-Term Debt $1,800 $ 690 $ 209 $ 313 $ 588
Capital Lease Obligations 47 23 5 6 13
Operating Leases 255 106 101 35 13
------ ------ ------ ------ ------
Total Contractual Cash Obligations $2,102 $ 819 $ 315 $ 354 $ 614
====== ====== ====== ====== ======
(See Consolidated Financial Statements of PDV America -- Notes 11 and 15 in Item
15a).
The following table summarizes PDV America's contingent commitments at
December 31, 2002.
OTHER COMMERCIAL COMMITMENTS
AT DECEMBER 31, 2002
EXPIRATION
TOTAL -------------------------------------
AMOUNTS LESS THAN YEAR YEAR OVER 5
COMMITTED 1 YEAR 2-3 4-5 YEARS
--------- ------ --- --- -----
($ in millions)
Letters of Credit (1) $ 3 $ 3 $ -- $ -- $ --
Guarantees 73 67 2 3 1
Surety Bonds 71 58 11 2 --
---- ---- ---- ---- ----
Total Commercial Commitments $147 $128 $ 13 $ 5 $ 1
==== ==== ==== ==== ====
- ----
(1) The Company has outstanding letters of credit totaling approximately $451
million, which includes $448 million related to the Company's tax-exempt
and taxable revenue bonds shown in the table of contractual obligations
above.
(See Consolidated Financial Statements of PDV America -- Note 14 in Item 15a).
31
NEW ACCOUNTING STANDARDS
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 did not materially impact the
Companies' financial position or results of operations.
On January 1, 2003 the Companies adopted 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. The Companies have i