<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
File No. 333-3226
Prospectus Supplement
(To Prospectus Dated May 17, 1996)
$200,000,000
CITGO PETROLEUM CORPORATION [CITGO LOGO]
7 7/8% SENIOR NOTES DUE 2006
The 7 7/8% Senior Notes Due 2006 (the "Notes") of CITGO Petroleum Corporation
("CITGO" or the "Company") will mature on May 15, 2006. Interest on the Notes is
payable semi-annually on May 15 and November 15, beginning November 15, 1996.
The Notes may not be redeemed prior to maturity.
The Notes will be general unsecured senior obligations of the Company. The Notes
will be effectively subordinated to all obligations (including trade payables)
of the Company's subsidiaries. At December 31, 1995, the Company's subsidiaries
had balance sheet liabilities of approximately $606 million. The subsidiaries
also have other liabilities (including contingent liabilities) which may be
substantial.
The Notes will be represented by one or more Global Securities registered in the
name of the nominee of The Depository Trust Company, which will act as the
Depositary. Interests in the Notes represented by Global Securities will be
shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its direct and indirect participants. Except as
described herein, Notes in definitive form will not be issued. Settlement will
be made in immediately available funds. The Global Securities will trade in the
Depositary's Same-Day Funds Settlement System until Maturity, and secondary
market trading activity in the Global Securities will therefore settle in
immediately available funds.
The Notes have been approved for listing on the New York Stock Exchange, subject
to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THE PROSPECTUS FOR A DISCUSSION OF
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- ------------------------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT COMPANY(1)(2)
<S> <C> <C> <C>
Per Note.............................. 99.847% .750% 99.097%
Total................................. $199,694,000 $1,500,000 $198,194,000
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest from May 15, 1996, to date of delivery.
(2) Before deducting expenses payable by the Company estimated to be $600,000.
The Notes are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Notes will be made through the facilities of The Depository
Trust Company on or about May 23, 1996.
SALOMON BROTHERS INC CHASE SECURITIES INC.
The date of this Prospectus Supplement is May 20, 1996.
<PAGE> 2
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER
THE COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by this reference the Registration
Statement on Form 10 filed with the Commission by the Company pursuant to the
Exchange Act (File No. 1-14380).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus Supplement
and prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus Supplement and to be part hereof
from the date of filing of such documents. Any statement contained herein or in
a document incorporated or deemed to be incorporated herein by reference shall
be deemed to be modified or superseded for purposes of the Registration
Statement and this Prospectus Supplement to the extent that a statement
contained herein or in any other subsequently filed incorporated document or in
any accompanying prospectus supplement modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus Supplement.
THE COMPANY WILL FURNISH WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROSPECTUS SUPPLEMENT IS DELIVERED, UPON WRITTEN
OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY AND ALL OF THE EXCHANGE ACT
REPORTS INCORPORATED HEREIN BY REFERENCE (NOT INCLUDING EXHIBITS TO SUCH REPORTS
UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH
REPORTS) AND ANY OTHER DOCUMENTS SPECIFICALLY IDENTIFIED HEREIN AS INCORPORATED
BY REFERENCE INTO THE REGISTRATION STATEMENT TO WHICH THIS PROSPECTUS SUPPLEMENT
RELATES, OR INTO ANOTHER EXCHANGE ACT REPORT OF THE COMPANY. REQUESTS SHOULD BE
ADDRESSED TO: CITGO PETROLEUM CORPORATION, ONE WARREN PLACE, 6100 SOUTH YALE
AVENUE, TULSA, OKLAHOMA 74136, ATTENTION: CORPORATE SECRETARY (TELEPHONE: (918)
495-5540).
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<PAGE> 3
THE COMPANY
OVERVIEW
CITGO Petroleum Corporation is a privately-held company engaged in the
refining, marketing and transportation of petroleum products including gasoline,
diesel fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes.
CITGO is a direct wholly-owned subsidiary of PDV America, Inc., a Delaware
corporation ("PDV America"), and an indirect wholly-owned subsidiary of
Petroleos de Venezuela, S.A. ("PDVSA").
PDVSA, the national oil company of the Republic of Venezuela, is the
world's second largest oil company, behind only Saudi Aramco, according to
rankings published by Petroleum Intelligence Weekly, based on a combination of
factors, including reserves, production capacity and refined product sales. At
December 31, 1995, PDVSA's proved crude oil reserves of approximately 64.8
billion barrels were the largest of any company or country in the Western
hemisphere (larger, for example, than the 22.4 billion barrels of proved crude
oil reserves located in the United States). PDVSA does not and will not
guarantee or otherwise be responsible for the payment of any obligations of
CITGO, including CITGO's obligations with respect to the Notes.
CITGO owns and operates two modern, highly complex crude oil refineries
(Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt refineries
(Paulsboro, New Jersey, and Savannah, Georgia) with a combined aggregate rated
crude oil refining capacity of 572 thousand barrels per day ("MBPD"). The Lake
Charles refinery is the sixth largest in the United States. The Lake Charles
refinery and the Corpus Christi refinery have Solomon Process Complexity Ratings
of 15.2 and 15.8, respectively (as compared to an average of 12.6 for U.S.
refineries in the most recently available Solomon Associates, Inc. survey). The
Solomon Process Complexity Rating is an industry measure of a refinery's ability
to produce higher value-added products. CITGO also owns a minority interest in
LYONDELL-CITGO Refining Company, Ltd. ("LYONDELL-CITGO"), a limited liability
company that owns and operates a refinery in Houston, Texas, with a rated crude
oil refining capacity of 265 MBPD.
CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into
long-term crude oil supply agreements with PDVSA, expiring between 2006 and
2013, which allow CITGO to purchase crude oil and other feedstocks at each of
its refineries. The long-term crude oil supply agreements 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) certain
deemed refining costs adjustable for inflation; (ii) certain actual costs,
including transportation charges, import duties and taxes and (iii) a deemed
margin which varies according to the grade of crude oil or feedstock. Deemed
margins under certain of the supply agreements are adjusted periodically by a
formula based in part upon the rate of inflation. These crude oil supply
agreements are designed to provide a relatively stable level of gross margin on
crude oil supplied by PDVSA in order to reduce the volatility of earnings and
cash flows from the refining operations of CITGO. This supply represented
approximately two-thirds of the crude oil processed in refineries operated by
CITGO in 1995.
CITGO markets branded gasoline through over 14,000 independently owned and
operated CITGO branded retail outlets (including 12,286 retail outlets owned or
operated by approximately 750 independent branded distributors and 1,752
7-Eleven convenience stores) located throughout the United States, primarily
east of the Rocky Mountains. In 1995, the National Petroleum News ranked CITGO
second in the number of branded outlets and third in domestic gasoline market
share with 8.2%, up from approximately 4.5% in 1989. The number of independent
distributor-owned or operated CITGO branded retail outlets increased
approximately 7%, 6% and 13% in 1995, 1994, and 1993, respectively. Gasoline
sales accounted for 61%, 57% and 58% of CITGO's total sales revenues in 1995,
1994, and 1993, respectively. To supply its marketing network, CITGO not only
uses the gasoline production from its refineries but also purchases gasoline
from others. In 1995, CITGO sold approximately 11.1 billion gallons of gasoline.
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<PAGE> 4
CITGO sells jet fuel directly to airline customers at 22 airports,
including such major hub cities as Chicago, Dallas/Fort Worth, New York and
Miami. CITGO also sells diesel/#2 fuel through wholesale rack sales to
distributors as well as in bulk through contract sales or on a spot basis.
CITGO's delivery of light products is accomplished in part through 52
refined product terminals located throughout CITGO's primary market territory.
Of these terminals, 40 were wholly owned by CITGO and 12 were jointly owned as
of December 31, 1995. Active exchange relationships give CITGO access to over
370 other refined product terminals.
CITGO sells petrochemicals and industrial products in bulk to a variety of
U.S. manufacturers as raw materials for finished goods. Sulfur is sold to the
U.S. and international fertilizer industry; cycle oils are sold for feedstocks
processing and blending; natural gas liquids are sold to the U.S. fuel and
petrochemical industry; petroleum coke is sold primarily in international
markets for use as kiln and boiler fuel; and residual fuel blendstocks are sold
to a variety of fuel oil blenders and customers. The majority of CITGO's cumene
production is sold to a phenol production plant owned by a partnership 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.
CITGO sells a variety of lubricants, including automotive lubricants and
industrial lubricants and waxes, to independent distributors, mass marketers and
industrial customers. CITGO markets many different types, grades and container
sizes of lubricant and wax products, with the bulk of these sales consisting of
automotive oil and lubricants and industrial lubricants. CITGO markets the
largest portion of its wax production as coating material for the corrugated
container industry. In 1995 CITGO acquired Cato Oil & Grease ("Cato"), a lubes
blending, manufacturing and packaging operation. Cato's extensive lines of
lubricating fluids and grease will continue to be marketed under the Mystik and
Cato brands.
CITGO markets asphalt through 10 terminals located along the East Coast,
from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to
independent contractors for use in the construction and resurfacing of roadways.
CITGO owns and operates a 959 mile crude oil pipeline system and three
product pipelines with a combined total of approximately 1,100 miles. CITGO also
owns minority 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
products markets, as well as dividend income. One of these pipelines, Colonial
Pipeline, is owned 13.98% by CITGO and is the largest refined product pipeline
in the United States. It transports gasoline, jet fuel and diesel/#2 fuel from
the Gulf Coast to the mid-Atlantic states, a major market area for CITGO.
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<PAGE> 5
USE OF PROCEEDS
The net proceeds from the sale of the Notes are estimated to be
approximately $197.9 million (after deducting underwriting discounts and
estimated offering expenses to be paid by the Company). The Company intends to
use the net proceeds from the sale of the Notes offered hereby for the repayment
of borrowings under the Company's revolving credit facility. The revolving
credit facility matures on December 31, 1999 and the interest rate payable on
outstanding indebtedness was 5.825% as of March 31, 1996. Prior to such use, the
net proceeds from the sale of the Notes will be placed in temporary investments.
The repayment of borrowings under the Company's revolving credit facility
will not permanently reduce the Company's borrowing capacity thereunder. The
Company may in the future borrow additional amounts under its revolving credit
facility to fund capital expenditures, to fund working capital requirements or
for other corporate purposes.
CAPITALIZATION
The following table sets forth the capitalization of the Company and its
consolidated subsidiaries as of December 31, 1995, and as adjusted to give
effect to the issuance of the Notes offered hereby.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ACTUAL AS ADJUSTED
------ -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Bank Debt(1).......................................................... $ 433 $ 235
Existing Senior Notes................................................. 353 353
Master Shelf Agreement................................................ 260 260
Tax-Exempt Bonds...................................................... 191 191
Other................................................................. 43 43
7 7/8% Senior Notes due 2006.......................................... -- 200
------ ------
Total Debt.................................................. 1,280 1,282
Capital Lease Obligations............................................. 152 152
------ ------
Total Debt and Capital Leases............................... 1,432 1,434
Shareholders' Equity.................................................. 1,732 1,732
------ ------
Total Capitalization........................................ $3,164 $ 3,166
====== ======
</TABLE>
- ---------------
(1) The repayment of borrowings under the Company's revolving credit facility
will not permanently reduce the Company's borrowing capacity thereunder. The
Company expects in the future to borrow additional amounts under such
facility.
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<PAGE> 6
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected historical consolidated
financial and operating data of the Company as of the end of and for each of the
five years in the period ended December 31, 1995. The following table should be
read in conjunction with the consolidated financial statements of the Company
for the years ended December 31, 1995 and 1994 and for each of the three years
in the period ended December 31, 1995 included elsewhere in this Prospectus
Supplement and the consolidated financial statements as of December 31, 1993,
1992 and 1991 and for each of the two years in the period ended December 31,
1992 not presented herein. The consolidated financial statements for each of the
years in the five-year period ended December 31, 1995 have been audited by
Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993(1) 1992 1991
------- ------ ------ ------ ------
($ IN MILLIONS, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.............................................................. $10,522 $9,247 $9,107 $9,173 $8,922
Equity in earnings (losses) of affiliates.......................... 34 29 30 25 32
Other income (expense), net........................................ (7) (10) (4) (7) (3)
------- ------ ------ ------ ------
Total revenue................................................ 10,549 9,266 9,133 9,191 8,951
Cost of sales and operating expenses............................... 10,066 8,731 8,654 8,787 8,495
Selling, general and administrative expenses....................... 162 157 138 137 125
------- ------ ------ ------ ------
Operating income................................................. 321 378 341 267 331
Interest income.................................................... 4 3 1 1 3
Interest expense, including capital lease.......................... 107 78 79 77 105
Minority interest.................................................. 2 2 2 2 1
------- ------ ------ ------ ------
Income before income taxes, extraordinary items and cumulative
effect of accounting changes................................... 216 301 261 189 228
Income taxes....................................................... 80 110 99 69 77
------- ------ ------ ------ ------
Income before extraordinary items and cumulative effect of
accounting changes............................................. 136 191 162 120 151
Extraordinary items(2)............................................. 4 (2) -- -- (8)
Cumulative effect of accounting changes(3)......................... -- (4) -- (87) --
------- ------ ------ ------ ------
Net income................................................... $ 140 $ 185 $ 162 $ 33 $ 143
======= ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES................................... 2.76x 3.85x 3.71x 2.94x 2.92x
OTHER FINANCIAL DATA:
Depreciation and amortization(4)................................... $ 165 $ 157 $ 174 $ 147 $ 112
Capital expenditures............................................... 314 350 345 284 240
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................................... $ 4,924 $4,440 $3,866 $3,488 $3,259
Long-term debt (excluding current portion)......................... 1,159 1,008 912 1,057 849
Total debt......................................................... 1,255 1,068 915 1,057 853
Capital lease obligation (total)................................... 152 162 170 178 184
Shareholder's equity............................................... 1,732 1,577 1,350 1,004 992
OPERATING DATA:
Rated refining capacity (at end of period) (MBPD)(5)............... 604 601 599 544 544
Refined product sales (millions of gallons)........................ 18,344 17,173 16,097 14,788 13,118
Gasoline sales (millions of gallons)............................... 11,075 9,747 9,380 8,694 7,615
Number of CITGO branded outlets (at end of period)................. 14,038 13,117 12,546 11,953 11,319
</TABLE>
- ---------------
(1) Includes operations of the Savannah asphalt refinery since April 30, 1993.
(2) Represents extraordinary gain on early extinguishment of debt (net of
related income taxes of $2 million) in 1995; extraordinary charge for early
extinguishment of debt (net of related income tax benefits of $1 million) in
1994; and extraordinary charge for early extinguishment of debt (net of
related income taxes of $5 million) in 1991.
(3) Represents the cumulative effect of the accounting changes relating to the
adoption of SFAS 112 in 1994 (net of related income taxes of $3 million) and
SFAS 106 in 1992 (net of related income taxes of $51 million).
(4) Includes amortization of refinery turnaround costs.
(5) Includes CITGO's proportionate share of refining capacity of LYONDELL-CITGO
based on CITGO's equity interest in LYONDELL-CITGO. Due to the complex
processing required to refine heavy crude oil, the economic refining
capacity of the refineries to process heavy crude oil, such as that
purchased from PDVSA under long-term supply contracts, is generally less
than rated capacity. See "Business and Properties -- Refining."
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<PAGE> 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 CITGO should be read in conjunction with the consolidated
financial statements of CITGO included elsewhere herein.
Petroleum industry operations and profitability are influenced by a large
number of factors, some over which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products, and, in some cases, limiting
their profits directly. Demand for crude oil and refined products is largely
driven by the condition of local and worldwide economies, although weather
patterns and taxation relative to other energy sources also play a significant
part. Due to the seasonality of refined products markets and refinery
maintenance schedules, results of operations for any quarter of a calendar year
are not necessarily indicative of results to be expected for a full year.
CITGO's consolidated operating results are affected by these industry factors
and by Company-specific factors, such as the success of wholesale marketing
programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of CITGO.
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 prices 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 CITGO's consolidated operating results therefore depends in part on
how quickly refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a corresponding
increase in refined product prices, a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, or
a substantial or prolonged decrease in demand for refined products could have a
significant negative effect on the Company's earnings and cash flows. Under a
contract extending to 2006, CITGO sells gasoline to and performs related
services for 7-Eleven convenience stores, which sales were $772 million in 1995.
Due to the pricing provisions in this contract, CITGO generally realizes lower
margins on sales of gasoline to the 7-Eleven convenience stores and as a result,
this contract does not materially contribute to the Company's operating income.
CITGO purchases a significant amount of its crude oil requirements from PDVSA
under long-term supply agreements (expiring in the years 2006 through 2013).
These supply agreements are designed to reduce the volatility of earnings and
cash flows from CITGO's refining operations by providing a relatively stable
level of gross margin on crude oil supplied by PDVSA. This supply represented
approximately two-thirds of the crude oil processed in refineries operated by
CITGO in 1995. The sale of petrochemicals has been a significant contributor to
CITGO's income during the last two years; however, CITGO expects that industry
profit margins relating to petrochemicals will decrease from 1995 levels in the
near term. For the three years ended December 31, 1995, inflation was not a
significant factor in the operations of CITGO. As a result of these factors, the
earnings and cash flows of CITGO may experience substantial fluctuations.
Effective January 1, 1992, the supply agreements between PDVSA and CITGO
with respect to the Lake Charles, Corpus Christi and Paulsboro refineries were
modified to reduce the price levels to be paid by CITGO by a fixed amount per
barrel of crude oil purchased from PDVSA. Such reductions were
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<PAGE> 8
intended to defray CITGO's costs of certain environmental compliance
expenditures. This modification resulted in a decrease in the cost of crude oil
purchased under these agreements of approximately $70 million per year for the
years 1992 through 1994 as compared to the amount that would otherwise have been
payable thereunder. This modification was to expire at December 31, 1996;
however, in 1995, PDVSA and CITGO agreed to adjust this modification so that the
1992 fixed amount per barrel would be reduced and the adjusted modification
would not expire until December 31, 1999. The effect of this adjustment to the
original modification was to increase the cost of crude oil purchased under
these agreements by approximately $22 million in 1995 as compared to the amount
that would otherwise have been payable thereunder based on the original
modification (resulting in a net decrease of approximately $48 million from the
amount otherwise payable under the agreement prior to the 1992 original
modification). The Company anticipates that the effect of the adjustments to the
original modifications will be to increase the price of crude oil purchased from
PDVSA under these agreements by approximately $45 million in 1996 (resulting in
a net decrease of approximately $25 million from the amount otherwise payable
under the agreement prior to the 1992 original modification) and to reduce the
price of crude oil purchased from PDVSA under these agreements by approximately
$25 million per year in 1997 through 1999, in each case as compared to the
original modification and without giving effect to any other factors that may
affect the price payable for crude oil under these agreements. Due to the
pricing formula under the supply agreements, the aggregate price actually paid
for crude oil purchased from PDVSA under these agreements in each of these years
will depend primarily upon the then current prices for refined products and
certain actual costs of CITGO. These estimates are also based on the assumption
that CITGO will purchase the base volumes of crude oil under the agreements.
The following table summarizes the sources of CITGO's sales revenue and
sales volumes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------
1995 1994 1993 1995 1994 1993
------- ------ ------ ------ ------ ------
($ IN MILLIONS) (MILLIONS OF GALLONS)
<S> <C> <C> <C> <C> <C> <C>
Gasoline............................. $ 6,367 $5,252 $5,256 11,075 9,747 9,380
Jet fuel............................. 1,163 1,102 1,019 2,249 2,131 1,827
Diesel/#2 fuel....................... 1,356 1,491 1,566 2,730 3,067 3,005
Petrochemicals, industrial products
and other products................. 831 707 602 1,572 1,509 1,247
Asphalt.............................. 238 194 179 503 506 430
Lubricants and waxes................. 404 370 370 215 213 208
------- ------ ------ ------ ------ ------
Total refined product
sales.................... $10,359 $9,116 $8,992 18,344 17,173 16,097
Other sales.......................... 163 131 115 -- -- --
------- ------ ------ ------ ------ ------
Total sales................ $10,522 $9,247 $9,107 18,344 17,173 16,097
======= ====== ====== ====== ====== ======
</TABLE>
The following table summarizes CITGO's cost of sales and operating
expenses.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C>
Crude oil............................................... $ 2,428 $2,180 $2,254
Refined products........................................ 5,504 4,547 4,329
Intermediate feedstocks................................. 898 854 838
Refining and manufacturing costs........................ 755 725 693
Other operating costs and expenses and inventory
changes............................................... 481 425 540
------- ------ ------
Total cost of sales and operating expenses.... $10,066 $8,731 $8,654
======= ====== ======
</TABLE>
RECENT RESULTS
Based on preliminary reports, the Company estimates that its revenues,
operating income and net income for the calendar quarter ended March 31, 1996
were $2.6 billion, $49.2 million and $14.8 million,
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<PAGE> 9
respectively, as compared with revenues, operating income and net income for the
calendar quarter ended March 31, 1995 of $2.4 billion, $98.8 million and $50.5
million, respectively. Operating income for the first quarter of 1996 was
significantly lower than operating income for the corresponding quarter of 1995
due primarily to (i) a decrease in profitability on the sale of petrochemicals
in the first quarter of 1996 from the cyclically higher profitability on the
sale of petrochemicals realized in the first quarter of 1995 and (ii) the
increased cost of crude oil in the first quarter of 1996 as compared with the
first quarter of 1995 as a result of the price adjustments in the PDVSA crude
oil agreements that became effective on July 1, 1995. See "-- Overview" above.
RESULTS OF OPERATIONS -- 1995 COMPARED TO 1994
Sales increased by $1,275 million, or 14%, from 1994 to 1995. The increase
was due to higher sales volumes and a slight increase in market prices. Sales
volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel), excluding bulk
sales made for logistical reasons, were up 8% from 1994 to 1995 and their
average unit price increased $0.03. Gasoline sales volumes increased primarily
due to successful marketing efforts, including the net addition of approximately
920 new independently-owned CITGO branded retail outlets since December 31,
1994. Petrochemical sales volume rose 3% from 1994 to 1995. This increase,
combined with an average increase in unit prices of $0.14 resulted in a 19%
increase in petrochemical sales revenue from 1994 to 1995. Industrial products
sales volumes increased 14% and average unit prices increased, resulting in a
32% increase in industrial products sales revenue from 1994 to 1995. Asphalt
sales increased 23% from 1994 to 1995. The increase was primarily due to
increases in sales prices. Lubricants and wax sales increased 9% from 1994 to
1995 due to increases in sales prices.
Equity in earnings (losses) of affiliates increased by approximately $5
million, or 17%, from $29 million in 1994 to $34 million in 1995. This increase
was due to increases in equity in earnings of joint interest pipelines and
LYONDELL-CITGO of $2 million and $8 million, respectively, offset by a $6
million decrease in equity earnings of Nelson Industrial Steam Company
("NISCO"). The decrease in NISCO earnings in 1995 was attributable to higher
interest costs in 1995 as a result of the NISCO debt refinancing in September
1994.
Cost of sales and operating expenses increased by $1,335 million, or 15%,
from 1994 to 1995. Higher crude oil costs in 1995 as compared to 1994, resulted
from a 13% increase in crude oil prices in 1995 as compared to 1994, or
approximately $1.74 per barrel which includes approximately $0.13 per barrel
related to the 1995 adjustments of the PDVSA crude and feedstock supply
agreements discussed in the overview, even though volumes were down 2%. Higher
refined product costs in 1995 as compared to 1994 resulted from a 7% increase in
refined product purchase prices and a 14% increase in purchased volumes. The
increased purchased volumes were primarily due to increased sales to branded
distributors.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. The refined
product purchases represented 50%, 52% and 55% of cost of sales for the years
1993, 1994 and 1995, respectively. CITGO estimates that margins on purchased
products, on average, are somewhat lower than margins on produced products due
to the fact that CITGO can only receive the marketing portion of the total
margin received on the produced refined products. However, purchased products
are not segregated from CITGO produced products and margins may vary due to
market conditions and other factors beyond the Company's control. As such, it is
difficult to measure the effects on profitability of changes in volumes of
purchased products. CITGO anticipates its purchased product requirements will
continue to increase, in volume and as a percentage of refined products sold, in
order to meet marketing demands, although in the near term, other than normal
refinery turnaround maintenance, CITGO does not anticipate operational actions
or market conditions which might cause a material change in anticipated
purchased product requirements; however, there could be events beyond the
control of CITGO which impact the volume of refined products purchased.
S-9
<PAGE> 10
In addition, in the third quarter of 1995, CITGO entered into a contract
with National Response Corporation ("NRC") for marine oil spill removal services
capability and terminated its relationship with the previous provider of that
service. While CITGO paid a cancellation fee of approximately $16 million in
connection with such termination, which is included in cost of sales and
operating expenses, management expects that its contract with NRC will result in
cost savings. Also, a fire damaged an operating unit at CITGO's Corpus Christi
refinery during the third quarter of 1995. There were no injuries. Property and
business interruption insurance policies were in place and mitigated the losses.
Approximately $6 million has been charged to cost of sales to cover, among other
things, the deductible under property insurance policies. The fire did not
materially affect the operations of CITGO.
The gross margin for 1995 was $456 million, or 4.3%, compared to $516
million, or 5.6% for 1994. The 1995 gross margin percentage was adversely
affected by the PDVSA agreement changes, the oil spill removal services
termination fee, the Corpus Christi fire and increased volumes of refined
product purchases as a percentage of sales volume.
Selling, general and administrative expenses increased $6 million, or 4%,
due primarily to increases in marketing expenses partially offset by the
amortization of unrecognized net gain on postretirement benefit obligations
during 1995.
Interest expense increased $30 million from 1994 to 1995. The increase was
due to a decrease of the amount of interest capitalized for 1995 as compared to
1994 and an increase in the level of outstanding debt due to the acquisition of
Cato and investments in LYONDELL-CITGO.
CITGO's provision for income taxes in 1995 was $80 million, representing an
effective tax rate of 37%. In 1994, CITGO's provision for income taxes was $110
million, representing an effective tax rate of 37%.
Net income of $140 million for 1995 included an after-tax extraordinary
gain of $3.4 million on early extinguishment of debt. Net income of $185 million
for 1994 included an after-tax charge of $4.5 million due to the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 112, "Employers'
Accounting for Postemployment Benefits", and an extraordinary after-tax charge
of $1.6 million for the write-off of deferred loan fees and other costs related
to early extinguishment of debt reported by NISCO.
RESULTS OF OPERATIONS -- 1994 COMPARED TO 1993
Sales increased by $140 million, or 2%, from 1993 to 1994. The increase was
due to higher sales volumes which were partially offset by lower market prices.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel), excluding
bulk sales made for logistical reasons, were up 5% from 1993 to 1994 and their
average unit price was down only $0.03 per gallon. Gasoline sales volumes
increased primarily due to successful marketing efforts, including the net
addition of 572 new independently-owned CITGO branded retail outlets since
December 31, 1993. Other product sales include sales of petrochemicals and
industrial products and asphalt, sales volumes for which increased 21% and 18%,
respectively, from 1993 to 1994. Average unit prices of these products
decreased, but were more than offset by sales volume increases. Petrochemical
sales volume alone rose 18% from 1993 to 1994. This increase, combined with an
average increase in unit prices of $0.06 per gallon, resulted in a 27% increase
in petrochemical sales revenue from 1993 to 1994.
Equity in earnings (losses) of affiliates decreased by approximately $1
million, from $30 million in 1993 to $29 million in 1994, due to a decrease in
equity in earnings of NISCO of $3 million, partially offset by increases in
equity in earnings of pipelines of $1 million and LYONDELL-CITGO of $1 million.
Cost of sales and operating expenses increased by $77 million, or 1%, from
1993 to 1994. Lower crude oil costs in 1994 as compared to 1993 resulted from a
7% decline in crude oil prices in 1994 as compared to 1993, even though volumes
were up 3%. Higher intermediate feedstock costs, attributable to higher volumes
purchased, partially offset the lower crude oil costs. Refinery production was
higher in 1994 than in 1993; however, due to the increased sales volumes
mentioned above, refined product
S-10
<PAGE> 11
purchases increased as well. The increase in refined product purchase volumes
was partially offset by lower refined product prices.
The gross margin for 1994 was $516 million, or 5.6%, compared to $453
million, or 5.0%, for 1993. The 1993 margin was adversely affected by higher
depreciation and amortization costs of approximately $16 million due to
turnaround maintenance expense and a loss on trading of commodity options of
approximately $20 million.
Selling, general and administrative expenses increased by $19 million, or
14%, due primarily to increases in salaries and benefits and expenses related to
CITGO's branded distributor marketing programs and other marketing related
expenditures.
Interest expense was approximately the same in 1994 and 1993.
CITGO's provision for income taxes in 1994 was $110 million, representing
an effective tax rate of 37%. In 1993, CITGO's provision for income taxes was
$99 million, representing an effective tax rate of 38%.
Net income of $185 million in 1994 included an after-tax extraordinary
charge of $1.6 million for the early extinguishment of debt reported by NISCO
and an after-tax charge of $4.5 million due to the adoption of SFAS No. 112,
"Employers' Accounting for Postemployment Benefits".
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1995, CITGO's net cash provided by
operating activities totaled approximately $330 million, primarily reflecting
$140 million of net income, $165 million of depreciation and amortization, and
net changes in other items of $25 million. Accounts receivable and due from
affiliates increased approximately $77 million due to increased sales volumes
and higher prices. Accounts payable and other current liabilities increased by
approximately $133 million due to higher trade payables and payables to
affiliates resulting from higher volumes of crude oil and products purchased and
higher prices, excise tax increases and increases in various other accruals and
reserves.
Net cash used in investing activities in 1995 totaled $497 million
consisting of capital expenditures of $314 million, investments in
LYONDELL-CITGO of $179 million, and investment in Cato of $47 million, offset by
a reduction in restricted cash of $42 million, which were funds received from
tax-exempt financings that were used to pay for certain refinery facilities.
During the same period, net cash provided by financing activities totaled
approximately $171 million, comprised primarily of proceeds of $100 million from
a master shelf agreement, the issuance of $91 million in tax-exempt revenue
bonds, $95 million of net borrowings under CITGO's revolving bank facility, and
$15 million of capital contributions, less the repayment of $7 million on a term
bank loan, the repayment of $47 million of senior notes, the early
extinguishment of $47 million of Louisiana wastewater facility revenue bonds for
cash of $40 million, net repayment of short term bank loans of $28 million and
other uses of $8 million.
CITGO anticipates that its capital expenditures for the years 1996-2000
will total approximately $1.6 billion, exclusive of investments in
LYONDELL-CITGO. These include:
<TABLE>
<S> <C>
Strategic(1)......................................................... $1,020 million
Maintenance.......................................................... 250 million
Regulatory/Environmental(2).......................................... 330 million
--------------
Total...................................................... $1,600 million
==============
</TABLE>
- ---------------
(1) includes approximately $258 million in ongoing capital projects, to be
funded from operating cash flow and existing bank facilities.
(2) includes approximately $195 million in capital expenditures to modify
refinery operations to produce reformulated fuels, as mandated by the Clean
Air Act Amendments of 1990.
S-11
<PAGE> 12
In addition, as of December 31, 1995, CITGO is committed to make additional
investments in LYONDELL-CITGO consisting of (i) $30 million at the in-service
date of the refinery enhancement project, which is currently scheduled for the
first quarter of 1997, and (ii) up to an additional approximately $150 million
through the in-service date provided that the project costs do not exceed 110
percent of current estimates. In addition, CITGO is committed to fund up to $22
million for certain maintenance and environmental costs to the extent that such
costs exceed certain estimates. CITGO expects to fund the Company's remaining
commitment through cash generated from operations and available credit
facilities.
CITGO's actual capital expenditures and actual investments in
LYONDELL-CITGO during this period may vary substantially from the foregoing
estimates due to a variety of factors, including changes to cost estimates
relating to specific projects, changes in prices for crude oil, feedstocks,
blending components or refined products, changes in technology, changes in
economic and industry conditions and changes in regulatory requirements.
As of December 31, 1995, the Company and its subsidiaries had an aggregate
of $1,280 million of indebtedness outstanding that matures on various dates
through the year 2026. As of December 31, 1995, the Company's contractual
commitments to make principal payments on this indebtedness were $120.2 million,
$95.2 million and $95.2 million for 1996, 1997 and 1998, respectively. The
Company's bank credit facility consists of a $117.6 million term loan, payable
in quarterly installments of principal and interest through December 1999, and a
$675 million revolving credit facility maturing in December 1999, of which $290
million was outstanding at December 31, 1995. One of CITGO's subsidiaries has a
separate credit agreement under which $42.8 million was outstanding at December
31, 1995. The Company's other principal indebtedness consists of (i) $260
million in outstanding principal amount of senior notes issued pursuant to a
master shelf agreement with an insurance company (of which notes in the
aggregate principal amount of $100 million were issued in 1995), (ii) $352.7
million in outstanding principal amount of senior notes issued in 1991, and
(iii) $191.3 million in outstanding principal amount of obligations related to
tax exempt bonds issued by various governmental units. See Note 10 to
Consolidated Financial Statements.
As of December 31, 1995, capital resources available to CITGO include cash
generated by operations, available borrowing capacity of $385 million under
CITGO's revolving credit facility and $155 million in unused availability under
uncommitted short-term borrowing facilities with various banks. CITGO believes
that it has sufficient capital resources to carry out planned capital spending
programs, including regulatory and environmental projects in the near term, and
to meet currently anticipated future obligations as they arise. CITGO
periodically evaluates other sources of capital in the marketplace and
anticipates long-term capital requirements will be satisfied with current
capital resources and future financing arrangements, including the issuance of
debt securities.
CITGO's debt instruments impose significant restrictions on CITGO's ability
to incur additional debt, place liens on property, sell or acquire fixed assets
and make restricted payments, including dividends.
CITGO is a member of the PDV America, Inc. consolidated Federal income tax
return. CITGO has a tax allocation agreement with PDV America, Inc. which is
designed to provide PDV America, Inc. with sufficient cash to pay its
consolidated income tax liabilities.
DERIVATIVE, COMMODITY AND FINANCIAL INSTRUMENTS
CITGO enters into petroleum futures contracts primarily to reduce its
inventory exposure to market risk. The Company also buys and sells commodity
options for delivery and receipt of crude oil and refined products. Such
contracts are entered into through major brokerage houses and traded on national
exchanges and can be settled in cash or through delivery of the commodity.
Such activity generally qualifies for hedge accounting. In order for a
transaction to qualify as a hedge, the Company requires that the item to be
hedged expose the Company to price risk and that the commodity contract reduce
that risk and be designated as a hedge. The high correlation between price
S-12
<PAGE> 13
movements of a product and the commodity contract in that product is well
demonstrated in the petroleum industry and generally the Company relies on those
historical relationships and on periodic comparisons of market price changes to
price changes of futures and options contracts accounted for as hedges. Gains or
losses on contracts which qualify as hedges are recognized when the related
inventory is sold or the hedged transaction is consummated. Changes in the
market value of futures and option positions which do not qualify as hedges are
recorded as gains or losses in the period in which they occur.
Since the contracts described above generally qualify as hedges and
correlate to price movements of crude oil and refined products, gains or losses
resulting from market changes in these contracts generally will be offset by
losses or gains on CITGO's hedged inventory or future purchases and sales.
Unrealized and deferred gains and losses on these contracts at December 31, 1995
and 1994 and the effects on cost of sales and pretax earnings for 1995 and 1994
were not material. At times, the Company enters into commodity option agreements
that are not related to the hedging program discussed above. This activity and
its results were not material in 1995 or 1994; 1993 cost of sales includes an
approximate $20 million loss from this activity. Since 1993, the Company has
significantly restricted its non-hedging activities in these instruments.
The Company has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to manage
well defined interest rate and commodity price risks arising out of the
Company's core activities.
The Company has entered into various interest rate swap and cap agreements
to manage its risk related to interest rate changes on its debt. Premiums paid
for purchased interest rate swap and cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are included in
other assets. The interest rate differentials received or paid by the Company
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place or are recognized immediately if the hedged
borrowings are no longer held.
CITGO has entered into the following interest rate swap agreements to
reduce the impact of interest rate changes on its variable interest rate debt:
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL
AMOUNT
FIXED RATE --------------------
VARIABLE RATE INDEX EXPIRATION DATE PAID 1995 1994
--------------------------------- --------------- ---------- -------- -------
(%) (IN THOUSANDS)
<S> <C> <C> <C> <C>
One-month LIBOR.................. September 1998 4.85 $ 25,000 $25,000
One-month LIBOR.................. September 1998 4.77 -- 25,000
One-month LIBOR.................. November 1998 5.09 25,000 25,000
One-month LIBOR.................. May 2000 6.28 25,000 --
J.J. Kenny....................... May 2000 4.72 25,000 --
J.J. Kenny....................... February 2005 5.30 12,000 --
J.J. Kenny....................... February 2005 5.27 15,000 --
J.J. Kenny....................... February 2005 5.49 15,000 --
-------- -------
$142,000 $75,000
======== =======
</TABLE>
The fair value of the interest rate swap agreements in place at December
31, 1995, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date, taking into account current interest
rates, was an unrealized loss of approximately $3 million. In connection with
the determination of such fair market value, the Company considered the credit
worthiness of the counterparties but no adjustment was determined to be
necessary.
Interest expense includes $0.1 million, $0.4 million and $0.3 million in
1995, 1994 and 1993, respectively, related to interest paid on these agreements.
During 1995, CITGO converted $25 million of
S-13
<PAGE> 14
variable rate debt to fixed rate borrowings and terminated the interest rate
swap agreement matched to the variable rate debt. Other income in 1995 includes
a $2.4 million gain related to the termination of this interest rate swap
agreement.
During 1995, CITGO entered into a 9% interest rate cap agreement with a
notional amount of $25 million, a reference rate of three-month LIBOR and an
expiration date of February 1997. Other interest rate cap agreements to which
CITGO was a party expired in November 1994. The effect of these agreements was
not material in 1995 or 1994.
The Company from time to time enters into refined product price collars and
crackspread hydrocarbon swaps. No premiums are required for these agreements.
Gains and losses under these agreements, which primarily fix margins on
anticipated sales, are accrued as receivables or payables and as adjustments of
the carrying amount of inventories. The amounts are recognized in income through
cost of sales when the related refined products are sold, unless an earlier
write-down is required to recognize anticipated nonrecovery of deferred amounts.
The Company believes the market risk associated with these agreements is not
significant. At December 31, 1995, CITGO had no such agreements in place.
Neither CITGO nor the counterparties are required to collateralize their
obligations under these derivative commodity and financial instruments. CITGO is
exposed to credit loss in the event of nonperformance by the counterparties to
these agreements, but has no off-balance-sheet credit risk of accounting loss
for the notional amounts. CITGO does not anticipate nonperformance by the
counterparties, which consist primarily of major financial institutions at
December 31, 1995.
NEW ACCOUNTING STANDARD
In March 1995, SFAS No. 121 "Accounting for Impairment of Long-lived Assets
and for Long-lived Assets to be Disposed of" was issued and contains significant
changes to current accounting practices that must be adopted for fiscal years
beginning after December 15, 1995. SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS 121 also requires that
such assets to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. Based on a preliminary review, management believes
that the effect of adopting SFAS 121 in 1996 will not be material to CITGO's
financial position or results of operations.
S-14
<PAGE> 15
BUSINESS
OVERVIEW
CITGO is a privately-held company engaged in the refining, marketing and
transportation of petroleum products including gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, asphalt and refined waxes. CITGO is a direct
wholly-owned subsidiary of PDV America and an indirect wholly-owned subsidiary
of PDVSA.
PDVSA, the national oil company of the Republic of Venezuela, is the
world's second largest oil company, behind only Saudi Aramco, according to
rankings published by Petroleum Intelligence Weekly, based on a combination of
factors, including reserves, production capacity and refined product sales. At
December 31, 1995, PDVSA's proved crude oil reserves of approximately 64.8
billion barrels were the largest of any company or country in the Western
hemisphere (larger, for example, than the 22.4 billion barrels of proved crude
oil reserves located in the United States). PDVSA does not and will not
guarantee or otherwise be responsible for the payment of any obligations of
CITGO, including CITGO's obligations with respect to the Notes.
CITGO owns and operates two modern, highly complex crude oil refineries
(Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt refineries
(Paulsboro, New Jersey, and Savannah, Georgia) with a combined aggregate rated
crude oil refining capacity of 572 MBPD. The Lake Charles refinery is the sixth
largest in the United States. The Lake Charles refinery and the Corpus Christi
refinery have Solomon Process Complexity Ratings of 15.2 and 15.8, respectively
(as compared to an average of 12.6 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey). The Solomon Process Complexity
Rating is an industry measure of a refinery's ability to produce higher
value-added products. CITGO also owns a minority interest in LYONDELL-CITGO, a
limited liability company that owns and operates a refinery in Houston, Texas,
with a rated crude oil refining capacity of 265 MBPD.
CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into
long-term crude oil supply agreements with PDVSA, expiring between 2006 and
2013, which allow CITGO to purchase crude oil and other feedstocks at each of
its refineries. The long-term crude oil supply agreements 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) certain
deemed refining costs adjustable for inflation, (ii) certain actual costs,
including transportation charges, import duties and taxes and (iii) a deemed
margin which varies according to the grade of crude oil or feedstock delivered.
Deemed margins under certain of the supply agreements are adjusted periodically
by a formula based in part upon the rate of inflation. These crude oil supply
agreements are designed to provide a relatively stable level of gross margin on
crude oil supplied by PDVSA in order to reduce the volatility of earnings and
cash flows from the refining operations of CITGO. This supply represented
approximately two-thirds of the crude oil processed in refineries operated by
CITGO in 1995.
CITGO markets branded gasoline through over 14,000 independently owned and
operated CITGO branded retail outlets (including 12,286 retail outlets owned or
operated by approximately 750 independent branded distributors and 1,752
7-Eleven convenience stores) located throughout the United States, primarily
east of the Rocky Mountains. In 1995, the National Petroleum News ranked CITGO
second in the number of branded outlets and third in domestic gasoline market
share with 8.2%, up from approximately 4.5% in 1989. The number of independent
distributor-owned or operated CITGO branded retail outlets increased
approximately 7%, 6% and 13% in 1995, 1994, and 1993, respectively. Gasoline
sales accounted for 61%, 57% and 58% of CITGO's total sales revenues in 1995,
1994, and 1993, respectively. To supply its marketing network, CITGO not only
uses the gasoline production from its refineries but also purchases gasoline
from others. In 1995, CITGO sold approximately 11.1 billion gallons of gasoline.
CITGO sells jet fuel directly to airline customers at 22 airports,
including such major hub cities as Chicago, Dallas/Fort Worth, New York and
Miami. CITGO also sells diesel/#2 fuel through wholesale rack sales to
distributors as well as in bulk through contract sales or on a spot basis.
S-15
<PAGE> 16
CITGO's delivery of light products is accomplished in part through 52
refined product terminals located throughout CITGO's primary market territory.
Of these terminals, 40 were wholly owned by CITGO and 12 were jointly owned as
of December 31, 1995. Active exchange relationships give CITGO access to over
370 other refined product terminals.
CITGO sells petrochemicals and industrial products in bulk to a variety of
U.S. manufacturers as raw materials for finished goods. Sulfur is sold to the
U.S. and international fertilizer industry; cycle oils are sold for feedstocks
processing and blending; natural gas liquids are sold to the U.S. fuel and
petrochemical industry; petroleum coke is sold primarily in international
markets for use as kiln and boiler fuel; and residual fuel blendstocks are sold
to a variety of fuel oil blenders and customers. The majority of CITGO's cumene
production is sold to a phenol production plant owned by a partnership 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.
CITGO sells a variety of lubricants, including automotive lubricants and
industrial lubricants and waxes, to independent distributors, mass marketers and
industrial customers. CITGO markets many different types, grades and container
sizes of lubricant and wax products, with the bulk of these sales consisting of
automotive oil and lubricants and industrial lubricants. CITGO markets the
largest portion of its wax production as coating material for the corrugated
container industry. In 1995, CITGO acquired Cato, a lubes blending,
manufacturing and packaging operation. Cato's extensive lines of lubricating
fluids and grease continue to be marketed under the Mystik and Cato brands.
CITGO markets asphalt through 10 terminals located along the East Coast,
from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to
independent contractors for use in the construction and resurfacing of roadways.
CITGO owns and operates a 959 mile crude oil pipeline system and three
product pipelines with a combined total of approximately 1,100 miles. CITGO also
owns minority 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
products markets, as well as dividend income. One of these pipelines, Colonial
Pipeline, is owned 13.98% by CITGO and is the largest refined product pipeline
in the United States. It transports gasoline, jet fuel and diesel/#2 fuel from
the Gulf Coast to the mid-Atlantic states, a major market area for CITGO.
STRATEGY
The Company intends to seek growth in the refining and marketing segment of
the petroleum industry by focusing on the costs it can control, mitigating the
costs it cannot control and focusing on the gasoline and lubricant distributor
class of trade. The Company's principal business strategies, which have remained
generally unchanged since 1985, allow it to compete in a very volatile and
mature industry.
- Enhance and grow the CITGO brand
Enhancing and growing the CITGO brand has been the primary focus for CITGO
since 1985. While competitors were busy building company-owned stores,
CITGO was focusing on building a solid distributor base for the sale of
light fuels. Today, over 750 CITGO distributors service more than 14,000
branded retail outlets, and it is by this particular focus that CITGO has
gained prominence in the light fuels market. CITGO intends to enhance and
grow the CITGO brand in the future by relying on the branded distributor
segment of business. This growth is expected to be mostly from existing
distributors with the objective of becoming their primary supplier.
- Retain competitiveness of CITGO refineries by producing higher valued
products from lower valued heavy crude oil
In the refining industry, it is essential to achieve lower costs and
improve product quality and yields. CITGO has made significant refinery
investments in its wholly-owned refineries, as well as in
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<PAGE> 17
the joint venture LYONDELL-CITGO refinery, so that heavy Venezuelan crudes
can be processed into high quality valued-added products.
- Reduce imbalance resulting from growing product demand by increasing
supply through refinery conversion enhancement
In order to satisfy demand for petroleum products as well as to increase
CITGO's market share, CITGO's objective is to process increasing amounts
of crude oil into higher value-added products in the most cost efficient
manner. Significant capital expenditures are planned for CITGO's
refineries in order to enhance their conversion capabilities.
- Seek growth through continued petrochemical upgrading
The petrochemicals business segment has been a significant contributor to
CITGO's income during the last two years; however, CITGO expects that
profit margins in the petrochemical business segment will decrease from
1995 levels in the near term. In order to counteract this, CITGO plans to
reduce petrochemical costs and promote growth in higher value-added
products such as mixed xylenes, cumene and propylene. In addition, capital
improvement projects to improve processing efficiency at both Corpus
Christi and Lake Charles are scheduled for completion by 1998.
- Optimize profitability in the lubricants business
The Lubricants and Specialty Products business division has been a stable
contributor to CITGO's profitability for at least the past five years.
Furthermore, the acquisition of Cato during 1995 enhanced CITGO's strength
in the lubricants market. In order to further strengthen CITGO's market
presence, however, it will be necessary to increase both finished
lubricants and wax sales. CITGO is reviewing the feasibility of improving
manufacturing efficiency through technological improvements and cost
reductions while continuing to evaluate various possible responses to the
expanded supply of base oils which are expected to be available on the
Gulf Coast in the near future.
REFINING
CITGO and its subsidiaries own and operate two modern, highly complex crude
oil refineries and two asphalt refineries that have an aggregate rated crude oil
refining capacity of 572 MBPD. The two crude oil refineries, located in Lake
Charles, Louisiana and Corpus Christi, Texas, produce light fuels (gasoline, jet
fuel and diesel/#2 fuel oil), industrial products and petrochemicals. The two
asphalt refineries, located in Paulsboro, New Jersey and Savannah, Georgia,
produce asphalt for use primarily in the construction and resurfacing of
roadways. All of the Company's refineries are located in areas that qualify as
foreign trade zones for purposes of certain import duties and state taxes. CITGO
also owns a minority interest in LYONDELL-CITGO, which owns and operates a
refinery located in Houston, Texas that has a rated crude oil refining capacity
of 265 MBPD.
The following table shows the rated capacity of each refinery in which
CITGO holds an interest and CITGO's share of such capacity.
<TABLE>
<CAPTION>
RATED REFINING CAPACITY
-----------------------------------
NET
CITGO CITGO
REFINERY OWNER GROSS PERCENTAGE INTEREST
-------------------------------- -------------- ------ ---------- ---------
(MBPD) (%) (MBPD)
<S> <C> <C> <C> <C>
Lake Charles, LA................ CITGO 320(1) 100 320
Corpus Christi, TX.............. CITGO 140(1) 100 140
Paulsboro, NJ................... CITGO 84 100 84
Savannah, GA.................... CITGO 28 100 28
Houston, TX..................... LYONDELL-CITGO 265 12(2) 32
------ ---------
Total Rated Refining Capacity......... 837 604
======= =======
</TABLE>
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<PAGE> 18
- ---------------
(1) CITGO estimates that the actual capacity of the Lake Charles and Corpus
Christi refineries to refine heavy crude of the type currently being
refined, on an economical basis, is approximately 290 MBPD and 130 MBPD,
respectively.
(2) Represents CITGO's participation interest in LYONDELL-CITGO. At December 31,
1995, CITGO's equity interest in LYONDELL-CITGO entitled CITGO to
participate in approximately 12% of the profits of LYONDELL-CITGO. This
participation percentage is expected to increase to approximately 40% as a
result of additional planned investments and reinvested earnings by CITGO
through the in-service date, currently scheduled for the first quarter of
1997, of a refinery enhancement project. The Company has an option to
increase the participation percentage up to 50% that may be exercised within
18 months of the in-service date. In connection with CITGO's investment in
LYONDELL-CITGO, CITGO and LYONDELL-CITGO entered into an agreement pursuant
to which CITGO purchases substantially all of the refined products produced
at the LYONDELL-CITGO refinery. See "-- LYONDELL-CITGO."
The following table shows CITGO's aggregate interest in refining capacity,
refinery input and product yield for the three years in the period ended
December 31, 1995, which aggregate interest includes CITGO's proportionate share
of refining capacity, refinery input and product yield of LYONDELL-CITGO based
on CITGO's relative participation interests for each of these years. See
"-- LYONDELL-CITGO."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995(1) 1994(1) 1993(1)(2)
------------ ------------ ------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(3)................... 604 601 599
Refinery Input:
Crude oil.................................. 473 79.9% 474 78.7% 454 78.5%
Other feedstocks........................... 119 20.1% 128 21.3% 124 21.5%
--- ------ --- ------ --- ------
Total.............................. 592 100.0% 602 100.0% 578 100.0%
==== ======= ==== ======= ==== =======
Product Yield(4):
Light fuels
Gasoline................................ 267 44.6% 279 45.8% 267 45.7%
Jet Fuel................................ 61 10.2% 55 9.0% 48 8.2%
Diesel/#2 fuel oil...................... 101 16.9% 110 18.0% 114 19.5%
Asphalt.................................... 32 5.4% 30 4.9% 29 5.0%
Petrochemicals and industrial products .... 137 22.9% 136 22.3% 126 21.6%
--- ------ --- ------ --- ------
Total.............................. 598 100.0% 610 100.0% 584 100.0%
==== ======= ==== ======= ==== =======
</TABLE>
- ---------------
(1) Includes a weighted average of 11.45% and 10.48% of the refining capacity,
refining input and product yield of the LYONDELL-CITGO refinery for 1995
and 1994, respectively, and a weighted average of 5% of such items related
to the LYONDELL-CITGO refinery for the last six months of 1993.
(2) Includes the Savannah refinery from its date of purchase on April 30, 1993.
(3) Rated capacity at year end. Due to the specific gravity of the crude oil
generally processed at the Lake Charles and Corpus Christi refineries,
CITGO estimates that the actual capacity of these refineries to refine
heavy crude of the type currently being refined, on an economical basis, is
approximately 290 MBPD and 130 MBPD, respectively.
(4) Does not include Paulsboro refinery Unit 1. See "--Paulsboro Refinery."
S-18
<PAGE> 19
Lake Charles Refinery. The Lake Charles refinery, located in Lake Charles,
Louisiana, was originally built in 1944 and since then has been continuously
upgraded. As a result of these upgrades, the refinery is a modern, complex, high
conversion refinery. The refinery is the sixth largest in the United States,
with a rated refining capacity of 320 MBPD, and is capable of processing large
volumes of crude oil into a flexible slate of refined products, including
significant quantities of high-octane unleaded gasoline and, due to recent
modifications, the new reformulated gasoline. The Lake Charles refinery has a
Solomon Process Complexity Factor of 15.2 (as compared to an average of 12.6 for
U.S. refineries in the most recently available Solomon Associates, Inc. survey).
The Solomon Process Complexity Rating is an industry measure of a refinery's
ability to produce higher value-added products. A higher rating indicates a
greater capability to produce such products. The Lake Charles refinery's major
process units and their respective capacities are as follows:
<TABLE>
<CAPTION>
NUMBER AGGREGATE
UNIT TYPE OF UNITS CAPACITY
---------------------------------------------------------------- -------- ---------
(MBPD)
<S> <C> <C>
Atmospheric crude distillation.................................. 3 320
Vacuum distillation............................................. 2 81
Catalytic cracking.............................................. 3 130
Catalytic reforming............................................. 3 102
Hydrocracking................................................... 1 40
Hydrotreating (distillates)..................................... 3 53
Hydrotreating (naphtha)......................................... 3 102
Alkylation (sulfuric)........................................... 1 23
Delayed coking.................................................. 2 94
MTBE............................................................ 1 3
TAME............................................................ 1 3
Petrochemical units:
Sulfolane (benzene)........................................... 1 5
Propylene fractionation....................................... 1 6
</TABLE>
The Lake Charles refinery has more than one unit in a number of different
process areas. This "multiple stream capacity" allows it to continue to operate
even while one unit or group of units is shut down. The Lake Charles refinery
has significant flexibility to take advantage of market opportunities through
the ability to shift production between low and high sulfur diesel, diesel and
jet fuel, and jet fuel and naphtha, depending on market prices and demand.
Flexibility in gasoline blending and logistics allows the refinery to make a
variety of gasoline grades, from conventional to reformulated, depending on
market pricing.
S-19
<PAGE> 20
The following table shows the refining capacity, refinery input and product
yield at the Lake Charles refinery for the three years in the period ended
December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(1)............... 320 320 320
Refinery Input:
Crude oil.............................. 275 85.4% 274 83.0% 271 83.1%
Other feedstocks....................... 47 14.6% 56 17.0% 55 16.9%
--- ----- --- ----- --- -----
Total.......................... 322 100.0% 330 100.0% 326 100.0%
=== ===== === ===== === =====
Product Yield:
Light fuels
Gasoline............................ 164 50.0% 169 50.0% 163 49.3%
Jet Fuel............................ 58 17.7% 52 15.4% 47 14.2%
Diesel/#2 fuel...................... 42 12.8% 50 14.8% 54 16.3%
Petrochemicals and industrial
products............................ 64 19.5% 67 19.8% 67 20.2%
--- ----- --- ----- --- -----
Total(2)....................... 328 100.0% 338 100.0% 331 100.0%
=== ===== === ===== === =====
Utilization.............................. 86% 86% 85%
</TABLE>
- ---------------
(1) Rated refining capacity at year end.
(2) Total product yields exceed crude oil refining capacity due to the use of
other feedstocks, in addition to crude oil, in the refining process and the
volumetric increases which can result from the refining process.
Approximately 64%, 68% and 64% of the total crude runs at the Lake Charles
refinery in the years 1995, 1994 and 1993, respectively, consisted of crude oil
with an average API gravity of 24 degrees or less. Due to the complex
processing required to refine such heavy crude oil, the Lake Charles refinery's
economic crude oil throughput capacity is approximately 290 MBPD, which is
approximately 90% of its rated capacity of 320 MBPD.
The Lake Charles refinery's Gulf Coast location provides it with access to
crude oil deliveries from multiple sources. Imported crude oil and feedstocks
supplies are delivered by ship directly to the Lake Charles refinery, and
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port
("LOOP") and to terminal facilities in the Houston area through which it can
receive crude oil deliveries if the Lake Charles docks are temporarily
inaccessible. For delivery of refined products, the refinery is connected
through the Lake Charles Pipeline directly to the Colonial Pipeline and the
Explorer Pipeline, which are the major refined product pipelines supplying the
Northeast and Midwest regions of the United States, respectively. The refinery
also uses adjacent terminals and docks, which provide access for ocean tankers
and barges.
The Lake Charles refinery's main petrochemical products are propylene and
benzene. Propylene production was 5.7, 5.2 and 4.7 MBPD, and benzene production
was 4.1, 3.8 and 3.8 MBPD, in each case for the years 1995, 1994 and 1993,
respectively. Industrial products include sulfur, residual fuels and petroleum
coke.
Located adjacent to the Lake Charles refinery is a lubricants refinery
operated by CITGO and owned by Cit-Con Oil Corporation, which is owned 65% by
CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily because of its specific
design, the Cit-Con refinery produces high quality oils and waxes, and is one of
the few in the industry designed as a stand-alone lubricants refinery. It
currently has a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of wax, and
is the sixth largest rated capacity paraffinic lubricants refinery in the United
States. For the years 1995, 1994 and 1993, the refinery capacity utilization of
the Cit-Con refinery was 101%, 110%, and 107%, respectively. Feedstocks are
supplied
S-20
<PAGE> 21
65% from CITGO's Lake Charles refinery and 35% from Conoco's nearby refinery.
Finished refined products are shared on the same pro rata basis by CITGO and
Conoco. Conoco is a participant in a project to build a new refinery that will
produce base oils. CITGO anticipates that such refinery will be more efficient
than the Cit-Con refinery and, as a result, such new refinery may be able to
produce base oils at a lower cost than those produced at the Cit-Con refinery.
CITGO is reviewing the feasibility of improving the manufacturing efficiency of
the Cit-Con refinery through technological improvements and cost reductions
while continuing to evaluate various other responses to the expanded supply of
base oils which are expected to be available in the Gulf Coast area when such
new refinery is placed in service.
Corpus Christi Refinery. The Corpus Christi refinery complex consists of
the East and West Plants, located within five miles of each other in Corpus
Christi, Texas. Construction began on the East Plant in 1937, and it was
extensively reconstructed and modernized during the 1970's and 1980's. The West
plant was completed in 1983. The Corpus Christi refinery is an efficient and
highly complex facility, capable of processing high volumes of crude oil into a
flexible slate of refined products, with a Solomon Process Complexity Factor of
15.8 (as compared to an average 12.6 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey). The Corpus Christi refinery has a
rated capacity of 140 MBPD, and its major process units and their respective
capacities are as follows:
<TABLE>
<CAPTION>
NUMBER
OF AGGREGATE
UNIT TYPE UNITS CAPACITY
---------------------------------------------------------------- ------ ---------
(MBPD)
<S> <C> <C>
Atmospheric crude distillation.................................. 1 140
Vacuum distillation............................................. 1 67
Fluidized catalytic cracking.................................... 2 78
Platforming..................................................... 2 54
Hydrotreating (distillates)..................................... 1 42
Hydrotreating (naphtha)......................................... 2 60
Hydrotreating (gasoils)......................................... 1 65
Alkylation (hydrofluoric)....................................... 1 19
Delayed coking.................................................. 1 34
MTBE............................................................ 1 2
Petrochemical units:
UDEX extraction (benzene, toluene, xylene).................... 1 7
Cumene........................................................ 1 8
Cyclohexane................................................... 1 3
Aromatics disproportionation.................................. 1 3
</TABLE>
S-21
<PAGE> 22
The following table shows refining capacity, refinery input and product
yield at the Corpus Christi refinery for the three years in the period ended
December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ------------ ------------
(MBPD, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(1)............... 140 140 140
Refinery Input:
Crude oil.............................. 121 64.7% 128 66.3% 127 65.8%
Other feedstocks....................... 66 35.3% 65 33.7% 66 34.2%
--- ----- --- ----- --- -----
Total.......................... 187 100.0% 193 100.0% 193 100.0%
=== ===== === ===== === =====
Product Yield:
Light fuels
Gasoline............................ 90 48.4% 99 51.0% 99 51.6%
Diesel/#2 fuel...................... 53 28.5% 55 28.4% 57 29.7%
Petrochemicals and industrial
products............................ 43 23.1% 40 20.6% 36 18.7%
--- ----- --- ----- --- -----
Total(2)....................... 186 100.0% 194 100.0% 192 100.0%
=== ===== === ===== === =====
Utilization.............................. 86% 91% 91%
</TABLE>
- ---------------
(1) Rated capacity at year end.
(2) Total product yields exceed crude oil refining capacity in 1994 due to the
use of other feedstocks, in addition to crude oil, in the refining process
and the volumetric increases which can result from the refining process.
All of the crude oil processed at the Corpus Christi refinery is heavy
Venezuelan crude oil having a high sulfur content. Due to the complex processing
required to refine such heavy sour crude oil, the Corpus Christi refinery's
economic crude oil throughput capacity is approximately 130 MBPD, which is
approximately 93% of its rated capacity of 140 MBPD. Crude oil supplies are
delivered directly to the Corpus Christi refinery through the Port of Corpus
Christi.
CITGO operates the West Plant under a sublease agreement (the "Sublease")
from Union Pacific Corporation ("Union Pacific"). The basic term of the Sublease
ends on January 1, 2004, but CITGO may renew the Sublease for successive renewal
terms through January 31, 2011. CITGO has the right to purchase the West Plant
from Union Pacific at the end of the basic term, the end of any renewal term, or
on January 31, 2011, at a nominal price.
During the last several years, CITGO has increased the capacity of the
Corpus Christi refinery to produce petrochemical products. The Corpus Christi
refinery's main petrochemical products include cumene, cyclohexane, MTBE and
aromatics (including benzene, toluene, and xylene). The Company produces a
significant quantity of cumene, an important petrochemical product used in the
engineered plastics market. The production of xylene, a basic building block
used in the manufacture of consumer plastics, allows the refinery to take
advantage of its reforming capacity while staying within the new, more stringent
gasoline specifications of the Clean Air Act Amendments of 1990.
Paulsboro Refinery. This asphalt refinery, purchased in 1991, is located in
Paulsboro, New Jersey. The refinery consists of Unit I, with a rated capacity of
44 MBPD, and Unit II, with a rated capacity of 40 MBPD.
Unit II, originally constructed in 1980 to produce asphalt from higher
sulfur, heavy crude oil high in naphthenic acid, is a combination atmospheric
and vacuum distillation facility. The crude oil purchased by CITGO from PDVSA to
supply Unit II's crude oil requirements is particularly well suited for the
production of asphalt. Unit II produced an average of 19.1, 19.4 and 16.4 MBPD
of asphalt in the years 1995, 1994, and 1993, respectively, which accounted for
58%, 57% and 57% of Unit II's total production in such years. The remaining Unit
II production in 1995, 1994 and 1993 consisted of distillate products such as
S-22
<PAGE> 23
naphthas, marine diesel oil and vacuum gas oils, which in the aggregate averaged
approximately 13.7, 14.9 and 12.5 MBPD, respectively, in such years. Unit II
crude oil runs averaged 33, 34 and 29 MBPD resulting in a utilization rate of
83%, 85% and 73% of rated capacity in 1995, 1994, and 1993, respectively.
Unit I was constructed in 1979 to process low sulfur, light crude oil. The
unit produces naphthas and diesel/#2 and #6 fuels. Unit I is run primarily when
there is demand for toll processing of sweet crudes at attractive economics.
Crude oil runs for third party processing in 1995, 1994 and 1993 averaged 2.1,
0.0 and 0.8 MBPD, respectively. In 1995, 2.6 MBPD of crude oil was run on Unit I
for CITGO's own account, producing 1.9 MBPD of asphalt and 0.8 MBPD of other
products.
Savannah Refinery. On April 30, 1993, CITGO purchased an asphalt refinery
located near Savannah, Georgia, one asphalt distribution terminal and throughput
rights at two additional distribution terminals. The Savannah refinery and the
related distribution terminals have been integrated with CITGO's existing
asphalt operations. The 100 acre facility is located on the Savannah River. The
facility includes two crude distillation units, with a combined rated capacity
of 28 MBPD. The primary crude oil run by the refinery is Boscan, a heavy
Venezuelan crude oil that is rich in asphalt.
The units produced an average of 10.5 MBPD of asphalt in the year ended
December 31, 1995, which accounted for 77% of total production. An additional
3.4 MBPD of production included naphthas and light, medium and heavy gas oils.
Total crude runs for the period averaged 13.7 MBPD, for a utilization rate of
49% of rated capacity.
LYONDELL-CITGO. In July 1993, CITGO and Lyondell Petrochemical Company
("Lyondell") executed agreements pursuant to which Lyondell contributed a 265
MBPD refinery and related assets to LYONDELL-CITGO, a newly formed limited
liability company, and CITGO and Lyondell agreed to provide certain amounts
necessary to fund a refinery enhancement project to increase the refinery's
heavy crude oil conversion capacity from approximately 130 MBPD of 22 degrees
average API gravity crude oil to approximately 200 MBPD of 17 degrees average
API gravity crude oil. The refinery enhancement project is expected to be
completed at the end of 1996, with an in-service date occurring in the first
quarter of 1997.
In connection with this project, PDVSA entered into a long-term contract
with LYONDELL-CITGO to supply 135 MBPD of heavy Venezuelan crude oil to the
refinery until the completion date of the refinery enhancement project, at which
time PDVSA will be required to supply 200 MBPD of such crude oil. The supply
agreement, which extends through 2017, incorporates formula prices based on the
market value of a slate of refined products deemed to be produced from each
particular grade of crude oil, less (i) certain deemed refining costs adjustable
for inflation, (ii) certain actual costs, including transportation charges,
import duties and taxes, and (iii) a deemed margin, which varies according to
the grade of crude oil delivered. See "-- Crude Oil Supply." LYONDELL-CITGO also
purchases crude oil from third parties to supplement the PDVSA supplies. In
addition, CITGO entered into a long-term contract with LYONDELL-CITGO to
purchase substantially all of the refined products produced at the refinery
through the year 2017 at market related prices, thereby significantly reducing
CITGO's need to purchase refined products from third party sources to supply its
distribution network. See "-- Marketing -- Refined Product Purchases."
The Company anticipates that the total cost of the refinery enhancement
project will be approximately $1 billion, of which approximately $600 million
had been expended as of December 31, 1995. At such date, CITGO had invested an
aggregate of $461 million (including reinvested earnings), of which $258 million
was funded through equity contributions from PDV America. As of December 31,
1995, CITGO was committed to make additional investments in LYONDELL-CITGO
consisting of (i) $30 million at the in-service date of the refinery enhancement
project and (ii) up to an additional approximately $150 million through the
in-service date provided that the total refinery enhancement project costs do
not exceed 110% of the current estimate. In addition, CITGO is required to fund
certain fees, expenses and interest on LYONDELL-CITGO's initial $200 million
construction loan, and is committed to fund up to $22 million for certain
maintenance and environmental costs to the extent that such costs exceed certain
estimates. CITGO does not currently expect that its aggregate investments in
LYONDELL-CITGO will
S-23
<PAGE> 24
exceed $630 million (exclusive of reinvested earnings) through the in-service
date. At December 31, 1995, CITGO had an approximate 12% participation interest
in the profits and losses of LYONDELL-CITGO. CITGO's expected aggregate
investment in LYONDELL-CITGO, plus its share of LYONDELL-CITGO's earnings (which
must be reinvested through the completion date of such project), will give CITGO
an approximate 40% participation interest in the profits and losses of
LYONDELL-CITGO. CITGO also has the option, exercisable on one occasion within 18
months after the in-service date, to increase its participation in the profits
and losses of LYONDELL-CITGO up to a maximum of 50% which, if exercised, would
require CITGO to make an additional investment in LYONDELL-CITGO.
CRUDE OIL SUPPLY
CITGO owns no crude oil reserves or production facilities, and must
therefore rely on purchases of crude oil and feedstocks for its refinery
operations. The following chart shows CITGO's purchases of crude oil (for
refining) for the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
LAKE CHARLES, LA CORPUS CHRISTI, TX PAULSBORO, NJ SAVANNAH, GA(1)
-------------------- -------------------- -------------------- --------------------
1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(MBPD) (MBPD) (MBPD) (MBPD)
PDVSA..................... 150 129 125 122 128 127 35 36 31 14 12 14
PEMEX..................... 33 63 65 0 0 0 0 0 0 0 0 0
Occidental................ 43 42 41 0 0 0 0 0 0 0 0 0
Other Sources............. 52 40 40 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total............. 278 274 271 122 128 127 35 36 31 14 12 14
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) CITGO acquired the Savannah refinery on April 30, 1993.
CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to each of CITGO's
refineries. In addition, LYONDELL-CITGO has entered into a long-term crude oil
supply agreement with PDVSA with respect to its refinery. The following table
shows the base and incremental volumes of crude oil contracted for delivery and
the volumes of crude oil purchased from PDVSA under these agreements in the
three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
VOLUMES OF CRUDE OIL
PURCHASED UNDER PDVSA
PDVSA AGREEMENTS FOR THE
SUPPLY AGREEMENT YEAR ENDED DECEMBER
OIL VOLUME 31, YEAR OF
--------------------- ---------------------- AGREEMENT
REFINERY BASE INCREMENTAL(1) 1995 1994 1993 EXPIRATION
--------------------------------- ---- -------------- ---- ---- ---- ---------
(MBPD) (MBPD)
<S> <C> <C> <C> <C> <C> <C>
Lake Charles, LA................. 120 50 126 (2) 125 (2) 125 2006
Corpus Christi, TX............... 130 N/A 122 126 127 2012
Paulsboro, NJ.................... 30 N/A 35 36 31 2010
Savannah, GA(3).................. 12 N/A 13 12 14 2013
Houston, TX(4)................... 135 N/A 136 135 131 2017
</TABLE>
- ---------------
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right to
sell to CITGO incremental volumes up to the maximum amount specified in the
table, subject to certain restrictions relating to the type of crude oil to
be supplied, refining capacity and other operational considerations at the
refinery.
(2) Volumes purchased under the supply agreements do not equal the purchases
from PDVSA shown in the previous table as a result of spot purchases.
(3) CITGO acquired the Savannah refinery on April 30, 1993.
(4) CITGO acquired an equity interest in LYONDELL-CITGO, the owner of the
Houston refinery, on July 1, 1993. In connection with such transaction,
LYONDELL-CITGO entered into a long-term crude
S-24
<PAGE> 25
oil supply agreement with PDVSA that provides for delivery volumes of 135
MBPD until the completion of a planned refinery enhancement project at
which time the delivery volumes will increase to 200 MBPD.
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO for a fixed period,
usually 20 to 25 years from the inception of the agreement. These supply
agreements are designed to reduce the inherent earnings volatility of the
refining operations of CITGO. The supply agreements 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) certain deemed
refining costs, (ii) certain actual costs, including transportation charges,
import duties and taxes and (iii) a deemed margin, which varies according to the
grade of crude oil or feedstock delivered. Under each supply agreement, deemed
costs are adjusted periodically by a formula primarily based on the rate of
inflation. In addition, deemed margins under certain of the supply agreements
are adjusted periodically by a formula based in part 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.
Effective January 1, 1992, the supply agreements between PDVSA and CITGO
with respect to the Lake Charles, Corpus Christi and Paulsboro refineries were
modified to reduce the price levels to be paid by CITGO by a fixed amount per
barrel of crude oil purchased from PDVSA. Such reductions were intended to
defray CITGO's costs of certain environmental compliance expenditures. This
modification resulted in a decrease in the cost of crude oil purchased under
these agreements of approximately $70 million per year for the years 1992
through 1994 as compared to the amount that would otherwise have been payable
thereunder. This modification was to expire at December 31, 1996; however, in
1995, PDVSA and CITGO agreed to adjust this modification so that the 1992 fixed
amount per barrel would be reduced and the adjusted modification would not
expire until December 31, 1999. The effect of this adjustment to the original
modification was to increase the cost of crude oil purchased under these
agreements by approximately $22 million in 1995 as compared to the amount that
would otherwise have been payable thereunder based on the original modification
(resulting in a net decrease of approximately $48 million from the amount
otherwise payable under the agreement prior to the 1992 original modification).
The Company anticipates that the effect of the adjustments to the original
modifications will be to increase the price of crude oil purchased from PDVSA
under these agreements by approximately $45 million in 1996 (resulting in a net
decrease of approximately $25 million from the amount otherwise payable under
the agreement prior to the 1992 original modification) and to reduce the price
of crude oil purchased from PDVSA under these agreements by approximately $25
million per year in 1997 through 1999, in each case as compared to the original
modification and without giving effect to any other factors that may affect the
price payable for crude oil under these agreements. Due to the pricing formula
under the supply agreements, the aggregate price actually paid for crude oil
purchased from PDVSA under these agreements in each of these years will depend
primarily upon the then current prices for refined products and certain actual
costs of CITGO. These estimates are also based on the assumption that CITGO will
purchase the base volumes of crude oil under the agreements.
Under certain of these agreements, if supplies from PDVSA are interrupted,
PDVSA is required to compensate CITGO for any additional costs incurred in
securing crude oil or other feedstocks. These crude oil supply agreements may be
terminated (i) by mutual agreement, (ii) by either party in the event of a
material default, bankruptcy or similar financial hardship on the part of the
other party or (iii) in the case of contracts with CITGO, if PDVSA no longer
holds specified ownership interests in CITGO. See "Description of Debt
Securities -- Covenants -- Specified Agreements" in the accompanying Prospectus.
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<PAGE> 26
Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDVSA subsidiaries. In 1995, 71% of the PDVSA
contract crude oil delivered to the Lake Charles and Corpus Christi refineries
was delivered on tankers operated by PDVSA subsidiaries.
CITGO purchases additional crude oil under a 90-day evergreen agreement
with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries are
particularly well suited to refine PEMEX's Maya heavy, sour crude oil, which is
similar in many respect to several types of Venezuelan crude oil. Effective
January 1995, the PEMEX crude agreement provided for the purchase of 23 MBPD for
the first six months of 1995 and 17 MBPD for the last six months of 1995. The
PEMEX agreement provides for the purchase of 37 MBPD of crude for the first six
months of 1996 and 45 MBPD for the last six months of 1996.
CITGO is a party to a contract with an affiliate of Occidental Petroleum
Corporation ("Occidental") for the purchase of crude oil. Purchases under this
contract, which expires on August 31, 1998, averaged 54.5 MBPD in 1995. CITGO
also purchases crude oil under long-standing relationships with numerous other
domestic producers.
MARKETING
CITGO's major products are light fuels (including gasoline, jet fuel, and
diesel fuel), petrochemicals, industrial products, asphalt, and lubricants and
waxes. The following table shows revenue of each of these product categories for
the three years in the period ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1995 1994 1993
---------------- --------------- ---------------
($ IN MILLIONS, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C>
Light Fuels..................... $ 8,886 85.8% $7,845 86.0% $7,841 87.2%
Petrochemicals and industrial
products...................... 831 8.0% 707 7.8% 602 6.7%
Asphalt......................... 238 2.3% 194 2.1% 179 2.0%
Lubricants and Waxes............ 404 3.9% 370 4.1% 370 4.1%
------- ----- ------ ----- ------ -----
Total................. $10,359 100.0% $9,116 100.0% $8,992 100.0%
======= ===== ====== ===== ====== =====
</TABLE>
Refined Product Purchases. Refined product purchases are required to
supplement the production of the Lake Charles and Corpus Christi refineries in
order to meet the demand of CITGO's marketing network. During 1995, CITGO's
shortage in gasoline production approximated 277 MBPD. However, due to
logistical needs, timing differences and product grade imbalances, in 1995 CITGO
purchased approximately 471 MBPD of gasoline, and CITGO sold into the spot
market or to traders or other refiners approximately 194 MBPD of gasoline. The
following table shows CITGO's purchases of refined products for the three years
in the period ended December 31, 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1994 1993
---- ---- ----
(MBPD)
<S> <C> <C> <C>
Gasoline......................................................... 471 380 352
Jet Fuel......................................................... 87 89 74
Diesel/#2 fuel................................................... 90 98 88
--- --- ---
Total.................................................. 648 567 514
=== === ===
</TABLE>
CITGO purchases substantially all of the refined products produced at the
LYONDELL-CITGO refinery under a long-term contract extending through the year
2017. In 1995, CITGO purchased 103 MBPD of gasoline, 46 MBPD of distillate and
27 MBPD of jet fuel from LYONDELL-CITGO. See "-- Refining -- LYONDELL-CITGO".
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<PAGE> 27
Light Fuels Sales. CITGO markets gasoline, jet fuel and other distillates
through an extensive marketing network. The following table provides a breakdown
of the sales made by type of product for the three years ended December 31,
1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------- --------------------------
1995 1994 1993 1995 1994 1993
------ ------ ------ ------ ------ ------
($ IN MILLIONS) (MILLIONS OF GALLONS)
<S> <C> <C> <C> <C> <C> <C>
Gasoline...................... $6,367 $5,252 $5,256 11,075 9,747 9,380
Jet Fuel...................... 1,163 1,102 1,019 2,249 2,131 1,827
Diesel/#2 fuel................ 1,356 1,491 1,566 2,730 3,067 3,005
------ ------ ------ ------ ------ ------
Total............... $8,886 $7,845 $7,841 16,054 14,945 14,212
====== ====== ====== ====== ====== ======
</TABLE>
Gasoline sales accounted for 61%, 57% and 58% of CITGO's total revenues in
the years 1995, 1994 and 1993, respectively. CITGO markets CITGO branded
gasoline through more than 14,000 independently owned and operated CITGO branded
retail outlets (including 12,286 branded retail outlets owned and operated by
approximately 750 independent distributors and 1,752 7-Eleven convenience
stores) located throughout the United States, primarily east of the Rocky
Mountains. In addition, CITGO itself owns, operates or leases 16 retail outlets
that operate under the name "Quik Mart." CITGO purchases gasoline to supply its
marketing network, as the gasoline production from the Lake Charles and Corpus
Christi refineries was equivalent to approximately 53%, 60% and 65% of the
volume of CITGO branded gasoline sold in 1995, 1994 and 1993, respectively. See
"-- Refined Product Purchases."
CITGO's strategy is to enhance the value of the CITGO brand in order to
obtain premium pricing for its products by appealing to consumer preference for
quality petroleum products and services. This is accomplished through a
commitment to quality, dependability and customer service to its independent
distributors, which constitute CITGO's primary distribution channel. CITGO also
promotes the CITGO brand through various cost-sharing arrangements between CITGO
and the distributors to fund local and regional advertising and other
promotional efforts, as well as to fund image enhancement and other improvements
to the retail outlets, such as signage, lighting and card reader pumps. As a
result of the implementation of this strategy, the number of independent
distributor-owned or operated CITGO branded retail outlets has grown
significantly since 1986 when there were approximately 7,000 outlets (including
7-Eleven convenience stores), with such number increasing by approximately 7%,
6% and 13% in 1995, 1994 and 1993, respectively. In 1995, the National Petroleum
News ranked CITGO third in domestic gasoline market share with 8.2%, up from
approximately 4.5% in 1989. In addition, customers have selected CITGO as the
top branded supplier in three successive biannual Supplier's Cup competitions,
held in 1990, 1992 and 1994 and sponsored by the Petroleum Marketers Association
of America, an organization of independent refined products distributors.
In 1994 CITGO began offering to its distributors a program to enhance their
stations with new card reader pumps. These pumps allow customers to pay for
their gasoline at the pumps with their credit cards instead of going into the
stores to pay. As of December 31, 1995, approximately 1,000 retail outlets had
installed the card reader pumps.
CITGO has also engaged in a strategy to aggressively expand its credit card
program since credit card sales generally are higher per transaction than cash
sales. Since 1992, CITGO has experienced growth in the number of new accounts of
8%, 9% and 11% in 1995, 1994 and 1993, respectively. The point-of-sale ("POS")
system that supports the credit card program has expanded to the point that
approximately 94% of CITGO's branded credit card sales in 1995 were processed on
the POS system.
Sales to 7-Eleven 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. Sales to independent branded distributors are typically made under
three-year contracts.
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<PAGE> 28
CITGO markets jet fuel directly to airline customers at 22 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York
and Miami. Jet fuel sales volumes to airline customers increased approximately
2%, 18% and 12% in 1995, 1994 and 1993, respectively. The volume increases were
due both to higher levels of purchases by existing customers and to sales to new
customers. Sales of bonded jet fuel, which are exempt from import duties as well
as certain state and local taxes, have increased from 482 million gallons in
1993 to 555 million gallons in 1995 (accounting for over 30% of total jet fuel
sales volume to airline customers in both years).
CITGO's diesel/#2 fuel marketing strategy aims to obtain the best value for
the products manufactured at the Lake Charles and Corpus Christi refineries, as
well as those received from LYONDELL-CITGO. Growth in wholesale rack sales to
distributors has been the primary focus of marketing efforts. Such efforts have
resulted in increases in wholesale rack sales volume from approximately 896
million gallons in 1993 to approximately 1,283 million gallons in 1995. The
remaining diesel/#2 fuel production is sold either in bulk through contract
sales (primarily as heating oil in the Northeast) or on a spot basis.
CITGO's delivery of light fuels to its customers is accomplished in part
through 52 refined product terminals located throughout CITGO's primary market
territory. Of these terminals, 40 are wholly-owned by CITGO and 12 are jointly
owned. CITGO's refined product terminals provide a total of approximately 22
million barrels of storage capacity. Fifteen of CITGO's product terminals have
waterborne docking facilities, which greatly enhance the flexibility of CITGO's
logistical system. In addition, CITGO has active exchange relationships with
over 370 other refined product terminals, providing flexibility and timely
response to distribution needs. CITGO operates fleets of leased and owned trucks
for delivery of refined products from the product terminals to retail locations.
The following table identifies by state the number and capacity of CITGO's
wholly- and jointly-owned refined products terminals:
<TABLE>
<CAPTION>
NUMBER OF
REFINED STORAGE
STATE PRODUCTS TERMINALS CAPACITY(1)
------------------------------------------------------ ------------------ -----------
(THOUSANDS
OF BARRELS)
<S> <C> <C>
Indiana............................................... 2 4,554
New Jersey............................................ 2 4,341
New York.............................................. 3 1,764
Florida............................................... 5 1,613
Texas................................................. 11 1,359
Massachusetts......................................... 1 1,314
Virginia.............................................. 4 1,079
Wisconsin............................................. 3 946
North Carolina........................................ 3 753
Michigan.............................................. 3 675
All others (9 states)................................. 15 3,430
--
------
Total (19 states)........................... 52 21,828
== ======
</TABLE>
- ---------------
(1) CITGO's joint ownership interest in 12 refined products terminals ranges
from 25% to 50%, and the aggregate storage capacity attributable to
jointly-owned refined products terminals is 4,592 thousand barrels.
Petrochemicals and Industrial Products. CITGO sells petrochemicals and
industrial products in bulk to a variety of U.S. manufacturers as raw materials
for finished goods. Sulfur is sold to the U.S. and international fertilizer
industry; cycle oils are sold for feedstock processing and blending; natural gas
liquids are sold to the U.S. fuel and petrochemical industry; petroleum coke is
sold primarily in international markets for use as kiln and boiler fuel; and
residual fuel blendstocks are sold to a variety of fuel oil blenders and
customers. The majority of CITGO's cumene production is sold to a phenol
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<PAGE> 29
production plant owned by a partnership in which CITGO is a limited partner. The
phenol plant produces phenol and acetone for sale primarily to the principal
partner in the phenol plant for the production of plastics.
Asphalt. CITGO markets asphalt through 10 terminals located along the East
Coast, from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to
independent contractors for use in the construction and resurfacing of roadways.
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.
In April 1995, CITGO acquired Cato for a purchase price of approximately
$46.8 million. CITGO sells its finished lubricant products through three classes
of trade: (i) independent distributors that specialize in lubricant sales
(representing 66% of 1995 sales), (ii) mass merchandisers (representing 8% of
1995 sales) and (iii) directly to large industrial end users (representing 26%
of 1995 sales). CITGO emphasizes sales to independent distributors in its
lubricants marketing because of the higher margins realized from these sales.
Large industrial end users include steel manufacturers for industrial lubricants
and automobile manufacturers for "original equipment" quantities of automotive
oils and fluids.
CITGO markets the largest portion of its wax production as coating
materials for the corrugated container industry. CITGO also provides wax for the
manufacture of candles, drinking cups, waxed papers, and a variety of building
and rubber products.
PIPELINE OPERATIONS
CITGO owns and operates a 959 mile crude oil pipeline system and three
product pipelines located in Texas, Oklahoma and Louisiana with a combined total
of approximately 1,100 miles. The crude oil pipeline provides CITGO with access
to extensive gathering systems throughout major production areas in Louisiana
and Texas that provide the Lake Charles refinery with domestic crude oil to
supplement supplies delivered by ship.
CITGO also has joint equity interests in three crude oil pipeline companies
with a total of nearly 5,800 miles of crude oil pipeline. In addition, CITGO has
joint equity interests in six refined product pipeline companies with a total of
approximately 8,000 miles of refined product pipeline. One of the refined
product pipelines in which CITGO has an interest, the Colonial Pipeline, is the
largest refined product pipeline in the United States. It transports gasoline,
jet fuel and diesel/#2 fuel from the Gulf Coast to the mid-Atlantic states.
These equity interest pipelines provide CITGO with access to substantial
refinery feedstocks and reliable transportation to refined product markets.
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<PAGE> 30
For the year ended December 31, 1995, CITGO's equity interest pipeline
interests provided it with $29 million of dividends. The following table
identifies the pipelines in which CITGO held an ownership interest at December
31, 1995.
<TABLE>
<CAPTION>
CITGO
CITGO 1995
PIPELINE LOCATION SIZE OWNERSHIP DIVIDENDS
- -------------------------- ------------------------------------ ------- --------- ---------------
(MILES) (%) ($ IN MILLIONS)
<S> <C> <C> <C> <C>
Crude Oil Pipelines:
CITGO................... Various locations in TX, LA and AR 959 100.0 $ --
West Texas-Gulf...... Colorado City, TX to Nederland, TX 579 11.4 0.9
Texas-New Mexico..... Aneth, UT to Houston, TX 3,803 10.0 0.9
Kaw.................. Ray, KS to Chase, KS 1,396 33.3 0.1
Products Pipelines:
Colonial................ Houston, TX to Linden, NJ 5,317 13.98 $21.5
Explorer................ Lake Charles, LA to Hammond, IN 1,413 6.8 2.8
Eagle................... Houston, TX to Drumright, OK 722 100.0 --
Casa.................... Victoria, TX to Austin, TX 247 100.0 --
Badger.................. E. Chicago, IN to Rockford, IL 334 32.0 1.2
Wolverine............... Joliet, IL to Detroit, MI 618 9.5 1.0
West Shore.............. Hammond, IN to Green Bay, WI 321 8.0 0.4
Lake Charles............ Lake Charles, LA 13 50.0 0.2
Lakemont................ Lake Charles, LA to Mont Belvieu, TX 108 100.0 --
</TABLE>
These pipelines are all common carriers regulated by the Federal Energy
Regulatory Commission except for the Kaw crude oil pipeline, an intrastate
pipeline, regulated by a Kansas state agency. Historically, these pipelines have
paid out 100% of net earnings as dividends, with depreciation expense and
deferred taxes providing adequate cash flow to fund capital expenditures. CITGO,
along with other joint-interest owners (primarily major oil companies), has
obligations with respect to certain throughput and deficiency agreements in
connection with some of its joint-interest pipeline companies under the terms of
which the owners are obliged to transport sufficient product through the
pipeline in the event of a shortfall in transportation volumes. CITGO has
experienced no product shipment requirements under the throughput and deficiency
agreements, and does not anticipate any transportation volume shortfalls in the
foreseeable future.
COMPETITION
The U.S. petroleum refining and marketing industry is highly fragmented and
the Company's competitors include large integrated major oil companies as well
as independent refiners and marketers. No company accounts for more than 10% of
the total volume of gasoline sold in the U.S. Generally, U.S. refiners compete
for sales on the basis of price and brand image and recognition and, in some
product areas, product quality. Competitive factors also include: (i) the
relative balance between a refiner's crude supply sources, refining capacity,
and volumes of refined products needed to supply its marketing network, (ii)
market penetration, (iii) refining margin volatility, (iv) transportation
differentials, and (v) overall capital strength and financial flexibility.
EMPLOYEES
CITGO and its subsidiaries have a total of approximately 5,000 employees,
approximately 1,800 of whom are covered by 15 union contracts. Approximately
1,700 of the union employees are employed in refining operations. The remaining
union employees are located primarily at a lubricant blending and packaging
plant and at certain refined product terminals. The Company has recently
completed negotiations on labor contracts relating to a majority of its union
employees and the Company anticipates that contracts will be negotiated with
respect to the remainder of its union employees before the expiration of
existing union contracts at the end of 1996. The Company has not experienced any
work
S-30
<PAGE> 31
stoppages or significant labor disputes and the Company believes that its
relationship with its employees is good.
ENVIRONMENT AND SAFETY
CITGO's operations are subject to extensive Federal, state and local
environmental laws and regulations governing air emissions, water discharges,
site remediation and the generation, handling and disposal of wastes. CITGO
believes that its operations are in substantial compliance with these laws and
regulations or are operating under consent decrees or similar arrangements with
governmental authorities to attain compliance. Past and present refining,
marketing and distribution activities have resulted in contamination at certain
CITGO properties which may, in some cases, have migrated to adjacent properties.
Upon the discovery of contamination at its refineries, terminals or other
properties, CITGO investigates and, where required, undertakes remedial measures
in accordance with applicable laws and regulations.
The Company is subject to environmental regulations adopted by the U.S.
Environmental Protection Agency ("EPA") and state environmental agencies to
implement the Clean Air Act Amendments of 1990 (the "CAA Amendments"). Among
other things, the CAA Amendments require all major sources of hazardous air
pollutants, as well as certain other sources of air pollutants, to obtain state
operating permits. The permits must contain applicable federal and state
emission limitations and standards as well as satisfy other statutory
requirements. The CAA Amendments also mandated numerous comprehensive
specifications for reformulated motor vehicle fuel, including reduced Reid vapor
pressure, lower benzene content and increased oxygenate content. In addition,
the CAA Amendments mandated significant reductions in the sulfur content of
diesel fuel. In particular, the CAA Amendments specified standards for the
"simple" model of reformulated gasoline to be used after January 1, 1995 in the
nine cities in the United States with the worst air quality and other cities
that voluntarily impose the stringent reformulated fuel specifications. CITGO
has incurred significant capital expenditures during the last several years in
order to satisfy these requirements of the CAA Amendments, and the Company
believes that it currently satisfies such requirements. The CAA Amendments also
provided that more stringent "complex" model requirements for reformulated fuels
are to be utilized in these cities beginning in May 1997, although these
"complex" model requirements have yet to be developed. The Company has budgeted
approximately $195 million for capital expenditures in the five-year period from
1996 to 2000 to modify refinery operations to satisfy the requirements of the
CAA Amendments relating to reformulated gasoline. These estimates may change due
to a variety of factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
In 1992, CITGO reached an agreement with a state agency to cease usage of
certain surface impoundments at CITGO's Lake Charles, Louisiana refinery by
1994, which has been complied with by CITGO. A mutually acceptable closure plan
was filed with the state in 1993. The Company and a former owner agreed to share
closure costs. Final closure of these impoundments is expected to be completed
no earlier than 1998. Equipment to replace these impoundments required
approximately $146 million of capital expenditures.
CITGO has entered into administrative consent orders with the New Jersey
Department of Environmental Protection to investigate and remediate three New
Jersey properties.
While CITGO is named as a potentially responsible party ("PRP") at a number
of "Superfund" sites, pursuant to a 1992 agreement, a former owner of CITGO has
agreed to indemnify CITGO with respect to Superfund damages where offsite
hazardous waste disposal occurred prior to September 1, 1983. Based on publicly
available information, CITGO believes that such former owner has the financial
capability to fulfill all of its responsibilities under this agreement.
Accordingly, CITGO believes that its offsite liability exposure under the
Federal Superfund and similar state laws is immaterial. In addition, under the
1992 agreement, CITGO assumed any responsibility for certain other environmental
contamination at certain owned terminal properties in return for cash payments
and other agreements.
S-31
<PAGE> 32
During 1994 and 1995, CITGO received two notices of violations and two
compliance orders from the EPA relating to the operation of certain units at the
Paulsboro Refinery. CITGO has disputed the allegations contained therein, and is
currently in confidential settlement negotiations with the EPA to resolve such
allegations. The resolution of this matter is anticipated shortly and is
expected to include a Consent Decree which will contain the assessment of a
penalty and compliance measures requiring certain capital expenditures. CITGO
does not believe the ultimate resolution of these matters will have a material
adverse effect on CITGO's consolidated financial position or results of
operations.
On March 4, 1994, CITGO received a notice of violation from the EPA
alleging violations related to a crude oil discharge in November 1992 into
Claiborne Parish, Louisiana, and a crude oil discharge in March 1993 into Moody
Creek in Gregg County, Texas. CITGO has agreed to pay $62,100 to the EPA to
settle this matter.
Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 1995, CITGO expended approximately $34
million for environmental and regulatory capital improvements in its operations.
CITGO currently anticipates that it will spend approximately $330 million for
environmental and regulatory capital projects over the five-year period
1996-2000.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. At December 31, 1995 and 1994, CITGO had $60 million and $58 million
of environmental accruals included in other noncurrent liabilities. Based on
currently available information, including the continuing participation of
former owners in remediation actions, CITGO believes that these accruals are
sufficient to address its environmental clean-up obligations.
Conditions which require additional expenditures may exist for various
Company sites including, but not limited to, the Company's operating refinery
complexes, closed refinery sites, service stations and crude oil and petroleum
storage terminals. The amount of such future expenditures, if any, is
indeterminable.
CITGO is subject to stringent occupational health and safety laws and
regulations. CITGO maintains comprehensive safety, training and maintenance
programs, and management believes that CITGO is in substantial compliance with
occupational health and safety laws.
LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Among the lawsuits pending, the Company is in
litigation filed in April 1994 in the United States District Court for the
Western District of Louisiana (CITGO Petroleum Corporation v. OHM Remediation
Services Corp.) concerning a contract for sludge removal and treatment at the
Company's Lake Charles, Louisiana refinery, in which the Company is seeking
contractual penalties for non-performance and breach of contract and also a
determination that a portion of any damages awarded would be recoverable from a
former owner. In this lawsuit, the contractor has counterclaimed seeking
monetary damages of $35,000,000 plus interest.
The Company is also in litigation filed in September 1993 in the 14th
Judicial District Court for the Parish of Calcasieu, State of Louisiana (State
of Louisiana and Ben Morrison, Secretary, Department of Revenue and Taxation v.
CITGO Petroleum Corporation) in which the State of Louisiana is seeking an
assessment upon the Company of a use tax on petroleum coke which accumulates on
catalyst during refining operations and a change to the calculation on the
sales/use tax on gas generated by refining operations. Similar lawsuits are
pending between the State of Louisiana and other refiners.
In addition, the Company is in litigation filed in May 1993 in the United
States District Court for the Western District of Louisiana (Celestine, et al v.
CITGO Petroleum Corporation and subsequently filed related cases which have been
consolidated into this proceeding) in which a number of current and former
employees and applicants on behalf of themselves and a class of similarly
situated persons have asserted claims under Federal and state laws of racial
discrimination in connection with the employment
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<PAGE> 33
practices at the Company's Lake Charles, Louisiana refining complex. The
plaintiffs seek injunctive relief and monetary damages. The Court has denied a
motion for certification of similarly situated persons as a class, and the
plaintiffs are appealing the Court's denial of class certification.
The Company is vigorously contesting the lawsuits and claims pending
against it and the Company believes that its positions are sustainable. The
Company has recorded accruals for losses it considers probable and reasonably
estimable. However, due to uncertainties involved in litigation, there are cases
in which the outcome is not reasonably predictable and the losses, if any, are
not reasonably estimable. If such lawsuits and claims were to be determined in a
manner adverse to the Company, and in amounts in excess of the Company's
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Company's results of operations in a given year.
The term "reasonably possible" is used herein to mean that the chance of a
future transaction or event occurring is more than remote but less than likely.
However, based upon current assessments of these lawsuits and claims by the
Company's counsel and the capital resources available to the Company, management
believes that the ultimate resolution of these lawsuits and claims is unlikely
to exceed the aggregate of the amounts accrued in respect of such lawsuits and
the insurance coverages and indemnification available to the Company by a
material amount and should not have a material adverse effect on the Company.
S-33
<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages and titles of the directors
and executive officers of CITGO.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------- --- ------------------------------------
<S> <C> <C>
Luis Urdaneta........................... 54 Chairman of the Board and Director
Ralph S. Cunningham..................... 55 President, Chief Executive Officer
and Director
Roberto V. Mandini...................... 55 Executive Vice President and
Director
William J. Beckert...................... 53 Senior Vice President, Operations
Steven R. Berlin........................ 51 Senior Vice President, Finance and
Administration and Chief Financial
Officer
Lawrence H. Brittain, Jr................ 61 Senior Vice President, Marketing,
Light Oils and Lubricants
Eduardo Lopez Quevedo................... 55 Director
Angel E. Olmeta......................... 58 Director
</TABLE>
The only standing committee of the Company's Board of Directors is the
Audit Committee. The Audit Committee is comprised of Messrs. Mandini, Lopez
Quevedo and Olmeta.
Set forth below are the biographies of each of the Company's directors and
executive officers.
Luis Urdaneta, Chairman of the Board and Director. Mr. Urdaneta has been a
Vice President of PDVSA since March 1994. Prior to such time, he was a Vice
President of Lagoven, a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from
February 1992 to February 1994; the President of Carbozulia, the coal subsidiary
of PDVSA from 1986 to 1992; a Director of Pequiven, the petrochemical subsidiary
of PDVSA from January 1985 to 1986; a Director of Intevep, the research and
development subsidiary of PDVSA from January 1985 to 1986; a director of
Bariven, a subsidiary of PDVSA engaged in materials purchasing for U.S. and
European operations, from January 1985 to 1986; the General Refining Manager of
Lagoven, a subsidiary of PDVSA engaged in the exploration, production, refining
and retailing of crude, products, gas and LPG, in 1984; and the Manager of Amuay
Refinery, from 1981 to 1983.
Ralph S. Cunningham, President, Chief Executive Officer and Director. Mr.
Cunningham has been President and Chief Executive Officer since May 1, 1995.
Prior to such time, he was Vice Chairman of Huntsman Corporation (a privately
held petrochemical company headquartered in Houston, Texas) from 1994 to 1995,
President of Texaco Chemical Company from 1990 to 1994, Chairman and Chief
Executive Officer of Clark Oil & Refining Corporation from 1989 to 1990,
President of Tenneco Oil Processing & Marketing from 1982 to 1989 and Executive
Vice President of Tenneco Oil Processing & Marketing from 1980 to 1982. Mr.
Cunningham is a Director of Bank of Oklahoma, N.A., Enterprise Products Company
(a natural gas liquids service business), Huntsman Corporation, International
Technology Corporation (an environmental waste management company), and
Sherritt, Inc. (a fertilizer production company).
Roberto V. Mandini, Executive Vice President and Director. Mr. Mandini has
been Executive Vice President since January 1995. Prior to such time, he was
Chief Executive Officer and Chairman of the Board of Directors of Corpoven S.A.,
a subsidiary of PDVSA engaged in the exploration, production, refining and
retailing of crude, products, gas and LPG, from December 1986 to December 1994.
Mr. Mandini was also Executive Vice President of Corpoven S.A. from June 1986 to
December 1986, Executive Vice President of Meneven S.A., a company that was
merged into Corpoven in 1986, from January 1985 to June 1986, a member of the
Board of Directors of Lagoven S.A., a subsidiary of PDVSA engaged in the
exploration, production, refining and retailing of crude, products, gas and LPG,
from 1981 to 1985, and Producing Function Coordinator with PDVSA from 1980 to
1981.
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<PAGE> 35
William J. Beckert, Senior Vice President, Operations. Mr. Beckert has been
Senior Vice President, Operations since December 1994, with responsibility for
the Lake Charles Manufacturing Complex, Corpus Christi Refinery, Petrochemicals,
Supply and Logistics, Asphalt Business Unit, Refinery Coordination, Industrial
Products, Corporate Planning and Economics, and Health, Safety and
Environmental. Prior to such time, he was Vice President, Corporate Planning and
Economics from 1986 to 1995 and General Manager, Operations and Planning from
1985 to 1986. Prior to such time, he was Manager, Product Management with Gulf
Oil Corporation from 1982 to 1985 and Manager, Business Performance and
Coordination from 1980 to 1982 and Manager, International Planning and
Coordination from 1978 to 1980. Mr. Beckert currently serves as Chairman of the
Board of Directors of THYSSEN-CITGO Petcoke Corporation (a joint venture
downstream petroleum coke marketing company) and as a Director of PDV Services,
Inc. and the American Petroleum Institute.
Steven R. Berlin, Senior Vice President, Finance and Administration and
Chief Financial Officer. Mr. Berlin has been Senior Vice President and Chief
Financial Officer since August 1992, with responsibility for Finance and
Administration Organizations including Benefits Planning, Corporate Controller
and Treasurer, Government and Public Affairs, Information Systems, Procurement
and Corporate Services, and Tax. Prior to such time, he was Vice President and
Chief Financial Officer of CITGO from 1986 to 1992, General Manager Industrial
Products of CITGO (which included responsibility for refining by-products such
as sulfur and petroleum coke) from 1985 to 1986 and General Manager, Financial
Services of CITGO from 1983 to 1985. Prior to such time, he was Controller,
Refining, Marketing and Transportation of Cities Service Company from 1982 to
1983 and Natural Gas Liquids from 1979 to 1982 and Manager, Operations Control
from 1976 to 1979. Prior to such time, he was Professor of Accounting,
University of Houston, from 1971 to 1973 and part-time Professor of Accounting,
University of Tulsa, from 1973 to 1980. Mr. Berlin is a director of the American
Petroleum Institute and a director of the American Assembly of Collegiate
Schools of Business.
Lawrence H. Brittain, Jr., Senior Vice President, Marketing, Light Oils and
Lubricants. Mr. Brittain has been Senior Vice President Marketing, Light Oils &
Lubricants since March 1, 1996. Prior to such time, he was Vice President,
Marketing of CITGO from 1986 to 1996 with responsibility for Light Oils
Marketing, Credit Card Operations, Pricing, Aviation and Government Sales,
Advertising, Brand Operations and Program Development, Business Services, and
Terminal Facilities. Prior to such time, he was General Manager Retail
Operations of CITGO from 1985 to 1986. Prior to such time, he was Division
Manager with Chevron in 1985; General Manager of the Houston and Nashville
Districts with Gulf Oil Corporation from 1974 to 1985; District Sales Manager
(Atlanta) from 1971 to 1974; Sales Manager (Jacksonville) from 1968 to 1971;
Regional Merchandising Manager, Southern Region from 1967 to 1968 and All
Markets Sales Representative from 1962 to 1966. Mr. Brittain currently serves on
the Board of Directors for Deltaven, S.A., a subsidiary of PDVSA responsible for
marketing petroleum products in Venezuela.
Eduardo Lopez Quevedo, Director. Mr. Lopez Quevedo has been President of
Interven, S.A., a company engaged in the monitoring of the international
operations of PDVSA, since 1994. Prior to such time, he was the President of
Maraven, S.A., a subsidiary of PDVSA engaged in the exploration, production,
refining and retailing of crude, products, gas and LPG, from 1992 to 1994. Prior
to such time, he was Vice President of Maraven, S.A., from 1990 to 1992; a Vice
President of Interven, S.A. from 1988 to 1990; Vice President of Corpoven, S.A.,
a subsidiary of PDVSA engaged in the exploration, production, refining and
retailing of crude, products, gas and LPG from 1986 to 1988; President of
Cevegas, S.A., an industrial gas company in Venezuela, from 1986 to 1988; a
Director of Lagoven, S.A., a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from January
1985 to December 1986; a Director of Corpoven, S.A. from December 1978 to
January 1985; the Trading and Supply Coordinator of PDVSA from 1977 to 1978; and
a Director of Llanoven, the successor to Mobil Oil in Venezuela, from 1975 to
1977. Mr. Lopez Quevedo currently serves as a Director of Interven, S.A.; Vice
Chairman of the Board of AB Nynas Petroleum of Sweden; Vice Chairman of the
Supply and Marketing Committee of Ruhr Oel Gmbh of the Federal Republic of
Germany; and Chairman of PDV Europa of The Hague and The Netherlands.
S-35
<PAGE> 36
Angel E. Olmeta, Director. Mr. Olmeta has been Presidential Advisor of
PDVSA since January 1, 1996. Prior to such time he was Vice President of PDV
America, the holding company for the U.S. operations of PDVSA, from September
1994 to December 1995; Executive Vice President and Chief Operating Officer of
CITGO from August 1992 to August 1994; Executive Vice President of CITGO from
August 1991 to August 1992; Managing Director of Petroleos de Venezuela (USA)
Corporation, a subsidiary of PDVSA, from 1987 to 1991; a Director of Lagoven, a
subsidiary of PDVSA engaged in the exploration, production, refining and
retailing of crude, products, gas and LPG, from 1985 to 1987; Corporate Planning
Coordinator of PDVSA from 1981 to 1985; and International Marketing Manager of
Maraven, a subsidiary of PDVSA engaged in the exploration, production, refining
and retailing of crude, products, gas and LPG from 1976 to 1981. Mr. Olmeta
currently serves as a Director of PDV America and PDVSA.
S-36
<PAGE> 37
DESCRIPTION OF THE NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Debt Securities set forth
in the accompanying Prospectus, to which description reference is hereby made.
The statements herein concerning the Notes and the Indenture do not purport to
be complete. All such statements are qualified in their entirety by reference to
the accompanying Prospectus and the provisions of the Indenture, the form of
which has been filed with the Securities and Exchange Commission.
The Notes offered hereby constitute a single series of Debt Securities to
be issued under an Indenture dated as of May 1, 1996 (the "Indenture"), between
the Company and The First National Bank of Chicago, as Trustee (the "Trustee").
For purposes of this "Description of the Notes", the term "Company" refers to
CITGO Petroleum Corporation and does not include its subsidiaries. Capitalized
terms that are used but not otherwise defined herein have the meanings assigned
to them in the Indenture.
GENERAL
The Notes will mature on May 15, 2006, and will be limited to an aggregate
principal amount of $200,000,000. The Notes will bear interest at the rate set
forth on the cover page of this Prospectus Supplement from May 15, 1996 (the
"Issue Date"), or from the most recent interest payment date to which interest
has been paid, payable semi-annually on May 15 and November 15 of each year,
beginning on November 15, 1996, to the person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding May 1
or November 1, as the case may be. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Except as otherwise set forth below under "Book-Entry System", the Notes
will be represented by Global Securities deposited with a Depositary (as defined
below). Owners of beneficial interests will not be entitled to receive
certificated Notes and will not be considered the "holders" of the Notes for
purposes of the Indenture. See "-- Book-Entry System."
The Indenture does not contain covenants or other provisions designed to
afford holders of the Notes protection in the event of a highly leveraged
transaction, change in credit rating or other similar occurrence.
RANKING
The Notes will be general unsecured senior obligations of the Company. The
Notes will rank pari passu in right of payment with all existing and future
senior unsecured indebtedness of the Company and senior in right of payment to
all existing and future indebtedness of the Company that is designated as
subordinate or junior in right of payment to the Notes. The Notes will be
effectively subordinated to all obligations (including trade payables) of the
Company's subsidiaries. At December 31, 1995, the Company's subsidiaries had
balance sheet liabilities of approximately $606 million. The subsidiaries also
have other liabilities (including contingent liabilities) which may be
substantial.
OPTIONAL REDEMPTION
The Notes are not redeemable at the option of the Company prior to their
maturity.
BOOK-ENTRY SYSTEM
The Depository Trust Company, New York, New York, will act as securities
depositary (the "Depositary") for the Notes. The Notes will be represented by
one or more global securities (collectively, the "Global Securities") registered
in the name of Cede & Co., the Depositary's nominee. The provisions set forth
under "Description of Debt Securities -- Book-Entry System" in the Prospectus
will be applicable to the Notes. Accordingly, beneficial interests in the Notes
will be shown on, and transfers thereof will be effected only through, records
maintained by the Depositary and its participants. Except as
S-37
<PAGE> 38
described under "Description of Debt Securities -- Book-Entry System" in the
Prospectus, owners of beneficial interests in the Global Securities will not be
entitled to receive Notes in definitive form and will not be considered holders
of Notes.
The following summary is based on information furnished by the Depositary:
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the United States Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
United States Securities Exchange Act of 1934, as amended. The Depositary holds
securities that its participants ("Direct Participants") deposit with the
Depositary. The Depositary also facilitates the settlement among Direct
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Direct Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. Direct Participants include securities
brokers and dealers (including the Underwriters), banks, trust companies,
clearing corporations and certain other organizations. The Depositary is owned
by a number of its Direct Participants and by the New York Stock Exchange, Inc.,
the American Stock Exchange, Inc. and the National Association of Securities
Dealers, Inc. Access to the Depositary's system is also available to others such
as securities brokers and dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Direct Participant, either directly
or indirectly ("Indirect Participants"). The rules applicable to the Depositary
and its Direct and Indirect Participants are on file with the United States
Securities and Exchange Commission.
Purchases of Notes under the Depositary's system must be made by or through
Direct Participants, which will receive a credit for such Notes on the
Depositary's records. The ownership interest of each actual purchaser of each
Note represented by the Global Security ("Beneficial Owner") is in turn to be
recorded on the Direct and Indirect Participants' records. Beneficial Owners
will not receive written confirmation from the Depositary of their purchase, but
Beneficial Owners are expected to receive written confirmations providing
details of the transaction, as well as periodic statements of their holdings,
from the Direct or Indirect Participants through which such Beneficial Owner
entered into the transaction. Transfers of ownership interests in the Global
Securities are to be accomplished by entries made on the books of Direct or
Indirect Participants acting on behalf of Beneficial Owners. The Depositary has
no knowledge of the actual Beneficial Owners of the Global Securities; the
Depositary's records reflect only the identity of the Direct Participants to
whose accounts such Notes are credited, which may or may not be the Beneficial
Owners. The Direct and Indirect Participants will remain responsible for keeping
account of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Global Security. Under its usual procedures, the Depositary mails an omnibus
proxy (an "Omnibus Proxy") to the Company as soon as possible after the
applicable record date. The Omnibus Proxy assigns Cede & Co.'s consenting or
voting rights to those Direct Participants to whose accounts the Notes are
credited on the applicable record date (identified in a listing attached to the
Omnibus Proxy).
Principal and interest payments on the Global Security representing the
Notes will be made in immediately available funds to the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on such date. Payments by Direct or Indirect
Participants to Beneficial Owners will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such Participant and not of the
S-38
<PAGE> 39
Depositary, the Trustee or the Company, subject to any statutory or regulatory
requirements as may be in effect from time to time. Payment of principal,
premium, if any, and interest to the Depositary is the responsibility of the
Company or the Trustee, disbursement of such payments to Direct Participants
shall be the responsibility of the Depositary, and disbursement of such payments
to the Beneficial Owners shall be the responsibility of Direct and Indirect
Participants. Neither the Company nor the Trustee will have any responsibility
or liability for the disbursement of payments in respect of ownership interests
in the Notes by the Depositary or the Direct or Indirect Participants or for
maintaining or reviewing any records of the Depositary or the Direct or Indirect
Participants relating to ownership interests in the Notes or the disbursement of
payments in respect thereof.
The Depositary may discontinue providing its services as securities
depositary with respect to the Notes at any time by giving reasonable notice to
the Company or the Trustee. Under such circumstances, and in the event that a
successor securities depositary is not obtained, Notes in definitive form are
required to be printed and delivered to each holder.
The Company may decide to discontinue use of the system of book-entry
transfers through the Depositary (or a successor securities depositary). In that
event, Notes in definitive form will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's system has been obtained from sources that the Company believes to
be reliable, but the Company takes no responsibility for the accuracy thereof
and such information is subject to any changes to the arrangements between the
Company and the Depositary and any changes to such procedures that may be
instituted unilaterally by the Depositary.
SAME-DAY SETTLEMENT
Settlement for the Notes will be made by the Underwriters in immediately
available funds. So long as the Depositary continues to make its Same-Day Funds
Settlement System available to the Company, all payments of principal and
interest on the Notes will be made by the Company in immediately available
funds.
Secondary trading in long term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. In contrast, the Notes
will trade in the Depositary's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Notes will therefore be required by
the Depositary to settle in immediately available funds. No assurance can be
given as to the effect, if any, of settlement in immediately available funds on
trading activity in the Notes.
NOTICES
Notices to holders of Notes will be given by mail to the registered
addresses of such holders.
CONCERNING THE TRUSTEE
The First National Bank of Chicago will be the Trustee under the Indenture.
The Trustee has lending and other customary banking relationships with the
Company and receives customary fees and compensation in connection therewith.
The Trustee's current address is One First National Plaza, Suite 0126, Chicago,
Illinois 60670-0126.
GOVERNING LAW
The Indenture will provide that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the laws of another jurisdiction would be required thereby.
S-39
<PAGE> 40
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
among the Company, Salomon Brothers Inc and Chase Securities Inc., as
Underwriters (the "Underwriting Agreement"), the Company has agreed to sell to
each of the Underwriters, and each of the Underwriters has severally agreed to
purchase, the principal amount of Notes set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
--------------------------------------------------------------------- ----------------
<S> <C>
Salomon Brothers Inc................................................. $150,000,000
Chase Securities Inc................................................. 50,000,000
------------
Total...................................................... $200,000,000
============
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all the Notes
offered hereby if any Notes are purchased. In the event of default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
the Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose
initially to offer the Notes to the public at the public offering price set
forth on the cover page of this Prospectus Supplement, and to certain dealers at
such price less a concession of not more than .40% of the principal amount of
the Notes. The Underwriters may allow, and such dealers may reallow, a
concession of not more than .25% of the principal amount of the Notes to certain
other dealers. After the initial public offering, the public offering price and
such concession may be changed from time to time.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes, but they are not obligated to do so and may discontinue
making a market at any time without notice. Although the Notes have been
approved for listing on the New York Stock Exchange, subject to official notice
of issuance, there can be no assurance given as to the liquidity of the trading
market for the Notes.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain civil liabilities, including liabilities
under the Securities Act of 1933, as amended, or contribute to payments which
the Underwriters may be required to make in respect thereof.
The Underwriting Agreement also provides that the Underwriters will
reimburse the Company for expenses incurred by the Company in connection with
the offering and sale of the Notes in an amount not to exceed $100,000.
The Underwriters may be customers of, engage in transactions with, or
perform services for the Company in the ordinary course of business and may
receive customary fees and compensation in connection therewith. Chase
Securities Inc. is an affiliate of The Chase Manhattan Bank, N.A. and Texas
Commerce Bank, N.A. which are lenders to the Company under the Company's credit
facilities, and will each receive their proportionate share (6.25%, in the case
of The Chase Manhattan Bank, N.A., and 7.50%, in the case of Texas Commerce
Bank, N.A.) of any repayment by the Company of amounts outstanding under such
facilities from the proceeds of the offering of the Notes. See "Use of
Proceeds."
Phibro Energy, an affiliate of Salomon Brothers Inc, is in the business of
refining and trading crude oil and, in connection therewith, does business with
the Company and its affiliates.
LEGAL MATTERS
The validity of the Notes will be passed upon for the Company by Andrews &
Kurth L.L.P., Houston, Texas, and for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
S-40
<PAGE> 41
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993................................................................................ F-4
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1995,
1994 and 1993....................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993....................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 42
[DELOITTE & TOUCHE LLP LOGO]
----------------------------------------
Suite 2400 Telephone: (918) 586-8800
One Williams Center
Facsimile: (918) 592-3856
Tulsa, Oklahoma 74172-0124
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of CITGO Petroleum
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CITGO Petroleum Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits to conform
with Statement of Financial Accounting Standards No. 112.
Tulsa, Oklahoma
February 12, 1996
[DELOITTE & TOUCHE TOHMATSU INTERNATIONAL LOGO]
F-2
<PAGE> 43
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 19,863 $ 16,271
Accounts receivable............................................. 817,990 752,744
Due from affiliates............................................. 28,991 19,651
Inventories..................................................... 785,275 778,844
Prepaid expenses and other...................................... 30,199 19,302
---------- ----------
Total current assets.................................... 1,682,318 1,586,812
PROPERTY, PLANT AND EQUIPMENT -- Net.............................. 2,491,849 2,277,240
RESTRICTED CASH................................................... 1,258 42,887
INVESTMENTS IN AFFILIATES......................................... 650,360 461,807
OTHER ASSETS...................................................... 97,793 71,282
---------- ----------
$ 4,923,578 $ 4,440,028
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans........................................... $ 25,000 $ 53,500
Accounts payable................................................ 438,172 401,371
Payables to affiliates.......................................... 176,800 149,713
Taxes other than income......................................... 173,915 138,296
Other........................................................... 224,077 196,002
Current portion of long-term debt............................... 95,240 60,454
Current portion of capital lease obligation..................... 10,557 9,462
---------- ----------
Total current liabilities............................... 1,143,761 1,008,798
LONG-TERM DEBT.................................................... 1,159,263 1,007,606
CAPITAL LEASE OBLIGATION.......................................... 141,504 152,061
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS....................... 167,905 175,309
OTHER NONCURRENT LIABILITIES...................................... 186,376 166,075
DEFERRED INCOME TAXES............................................. 367,644 329,771
MINORITY INTEREST................................................. 25,618 23,625
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock -- $1.00 par value, 1,000 shares authorized, issued
and outstanding.............................................. 1 1
Additional capital.............................................. 1,222,345 1,207,345
Retained earnings............................................... 509,161 369,437
---------- ----------
Total shareholder's equity.............................. 1,731,507 1,576,783
---------- ----------
$ 4,923,578 $ 4,440,028
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 44
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
REVENUES
Net sales....................................... $10,279,579 $9,093,562 $8,986,839
Sales to affiliates............................. 242,581 153,143 120,569
----------- ---------- ----------
10,522,160 9,246,705 9,107,408
Equity in earnings (losses) of affiliates......... 33,530 28,585 30,117
Other income (expense) - net...................... (2,985) (6,265) (3,819)
----------- ---------- ----------
10,552,705 9,269,025 9,133,706
----------- ---------- ----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $3,321,128, $2,915,696 and
$3,058,445 from
affiliates).................................. 10,066,012 8,730,971 8,654,315
Selling, general and administrative expenses.... 162,260 156,635 137,530
Interest expense, excluding capital lease....... 88,655 58,899 59,581
Capital lease interest charge................... 17,913 18,893 19,773
Minority interest............................... 1,993 2,394 1,810
----------- ---------- ----------
10,336,833 8,967,792 8,873,009
----------- ---------- ----------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE....................................... 215,872 301,233 260,697
INCOME TAXES...................................... 79,528 110,444 98,562
----------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE...... 136,344 190,789 162,135
EXTRAORDINARY GAIN, early extinguishment of debt,
net of related income taxes of $2,160........... 3,380 -- --
EXTRAORDINARY CHARGE, early extinguishment of
debt, net of related income tax benefit of
$956............................................ -- (1,627) --
CUMULATIVE EFFECT, change in accounting for post-
employment benefits, net of related income tax
benefit of $2,823............................... -- (4,477) --
----------- ---------- ----------
NET INCOME........................................ $ 139,724 $ 184,685 $ 162,135
============ ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 45
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- ADDITIONAL RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993.............. 1 $1 $ 952,804 $ 51,100 $ 1,003,905
Net income.......................... -- -- -- 162,135 162,135
Capital contributions received from
Parent........................... -- -- 212,000 -- 212,000
Dividends to Parent................. -- -- -- (28,483) (28,483)
-- --
---------- -------- ----------
BALANCE, DECEMBER 31, 1993............ 1 1 1,164,804 184,752 1,349,557
Net income.......................... -- -- -- 184,685 184,685
Capital contributions received from
Parent........................... -- -- 42,541 -- 42,541
-- --
---------- -------- ----------
BALANCE, DECEMBER 31, 1994............ 1 1 1,207,345 369,437 1,576,783
Net income.......................... -- -- -- 139,724 139,724
Capital contributions received from
Parent........................... -- -- 15,000 -- 15,000
-- --
---------- -------- ----------
BALANCE, DECEMBER 31, 1995............ 1 $1 $1,222,345 $509,161 $ 1,731,507
== == ========== ======== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 46
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $139,724 $184,685 $162,135
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 164,570 157,071 173,879
Provision for losses on accounts receivable.......... 9,070 6,250 9,387
Deferred income taxes................................ 16,957 29,087 16,520
Equity earnings (losses) of affiliates in excess of
distributions...................................... (4,490) (3,930) (3,808)
(Gain) charge from early extinguishment of debt...... (3,380) 1,627 --
Other adjustments.................................... 3,652 5,483 1,657
Changes in operating assets and liabilities, net of
investment in subsidiary:
Accounts receivable and due from affiliates........ (77,412) (170,874) (38,287)
Inventories........................................ 2,212 (46,878) 14,296
Prepaid expenses and other current assets.......... 4,766 2,653 (7,394)
Accounts payable and other current liabilities..... 133,110 98,187 123,990
Other assets....................................... (68,114) (38,688) (51,362)
Other liabilities.................................. 9,685 55,422 10,101
-------- -------- --------
Total adjustments............................... 190,626 95,410 248,979
-------- -------- --------
Net cash provided by operating activities....... 330,350 280,095 411,114
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................... (314,225) (350,492) (345,430)
Proceeds from sales of property, plant and equipment.... 843 2,734 242
Decrease (increase) in restricted cash.................. 41,629 (42,887) --
Return of partnership capital........................... -- 49,256 --
Investments in LYONDELL-CITGO Refining Company Ltd...... (178,875) (138,416) (118,880)
Investment in subsidiary and advances to other
affiliates........................................... (46,805) (1,531) (18,308)
-------- -------- --------
Net cash used in investing activities........... (497,433) (481,336) (482,376)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank
loans................................................ (28,500) 16,500 28,000
Net borrowings (repayments) of revolving bank loan...... 95,000 55,000 (190,000)
Payments on term bank loan.............................. (7,353) (150,000) --
Payments on senior notes................................ (47,321) -- --
Proceeds from master shelf agreement.................... 100,000 160,000 --
Proceeds from issuance of tax-exempt bonds.............. 90,700 70,000 50,000
Payments on tax-exempt bonds............................ (40,237) -- --
Payments of capital lease obligations................... (9,011) (8,691) (7,841)
Borrowings (repayments) of other debt................... 2,397 18,510 (2,380)
Capital contributions received from Parent.............. 15,000 42,541 212,000
Dividends paid to Parent................................ -- -- (28,483)
-------- -------- --------
Net cash provided by financing activities....... 170,675 203,860 61,296
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... 3,592 2,619 (9,966)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 16,271 13,652 23,618
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 19,863 $ 16,271 $ 13,652
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized................. $ 97,788 $ 75,538 $ 84,255
======== ======== ========
Income taxes, net of refunds of $3,682 in 1995....... $ 64,437 $ 94,551 $ 72,684
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 47
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- CITGO Petroleum Corporation ("CITGO") is a subsidiary
of PDV America, Inc., an indirect wholly owned subsidiary of Petroleos de
Venezuela, S.A. ("PDVSA"), the national oil company of Venezuela.
CITGO manufactures or refines and markets quality transportation fuels as well
as lubricants, refined waxes, petrochemicals, asphalt and other industrial
products. Transportation fuel customers include primarily CITGO branded
wholesale distributors, convenience stores and airlines located primarily east
of the Rocky Mountains. Crude oil and refined products are also sold for
refinery supply, logistical and marketing purposes. Such sales are primarily to
major and independent oil companies and traders. Lubricants are sold to
independent distributors, mass marketers and industrial customers and
petrochemical feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States. Sales are
made primarily on account, based on pre-approved unsecured credit terms
established by CITGO management, except sales to airlines, which are made
primarily on a prepaid basis. The Company also has a proprietary credit card
program which allows retail consumers to purchase fuel and convenience items at
CITGO branded outlets. Allowances for uncollectible accounts are established
based on several factors which include, but are not limited to, analysis of
specific customers, historical trends, current economic conditions and other
information.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CITGO and its subsidiaries (collectively referred to as the
"Company"). All subsidiaries are wholly owned except for Cit-Con Oil Corporation
("Cit-Con"), which is 65 percent owned. All material intercompany transactions
and accounts have been eliminated.
The Company's investments in affiliates are accounted for by the equity method.
The excess of the investments over the equity in the underlying net assets of
the affiliates is amortized on a straight-line basis over 40 years, which is
based upon the estimated useful lives of the affiliates' assets.
Pervasiveness of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Revenue Recognition -- Revenue is recognized upon transfer of title to products
sold, based upon the terms of delivery.
Supply and Marketing Activities -- The Company engages in the buying and selling
of crude oil to supply its refineries. The net results of this activity are
recorded in cost of sales. The Company also engages in the buying and selling of
refined products to facilitate the marketing of its refined products. The
results of this activity are recorded in cost of sales and sales.
Refined product exchange transactions that do not involve the payment or receipt
of cash are not accounted for as purchases or sales. Any resulting volumetric
exchange balances are accounted for as inventory in accordance with the
Company's LIFO inventory method. Exchanges that are settled through payment or
receipt of cash are accounted for as purchases or sales.
Excise Taxes -- The Company collects excise taxes on sales of gasoline and other
motor fuels. Excise taxes of approximately $2.2 billion, $2.1 billion and $1.4
billion were collected from customers and paid to various governmental entities
in 1995, 1994 and 1993, respectively. Excise taxes are not included in sales.
F-7
<PAGE> 48
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories -- Crude oil and refined product inventories are stated at the lower
of cost or market and cost is primarily determined using the last-in, first-out
("LIFO") method. The average cost method is used for materials and supplies.
Property, Plant and Equipment -- Property, plant and equipment is reported at
cost, less accumulated depreciation. Depreciation is based upon the estimated
useful lives of the related assets using the straight-line method. Depreciable
lives are generally as follows: buildings and leaseholds -- 10 to 24 years;
machinery and equipment -- 5 to 24 years; and vehicles -- 3 to 10 years.
The Company capitalizes interest on projects when construction takes
considerable time and entails major expenditures. Such interest is allocated to
property, plant and equipment and amortized over the estimated useful lives of
the related assets. Capitalized interest totaled $5 million, $12 million and $4
million in 1995, 1994 and 1993, respectively.
Futures Contracts and Commodity Options Activity and Other Derivatives -- The
Company enters into petroleum futures contracts to hedge a portion of the price
risk associated with crude oil and refined products. The Company also buys and
sells commodity options for delivery and receipt of crude oil and refined
products. In order for a transaction to qualify as a hedge, the Company requires
that the item to be hedged exposes the Company to price risk and that the
commodity contract reduce that risk and be designated as a hedge. The high
correlation between price movements of a product and the commodity contract in
that product is well demonstrated in the petroleum industry and generally the
Company relies on those historical relationships and on periodic comparisons of
market price changes to price changes of futures and options contracts accounted
for as hedges. Gains or losses on contracts which qualify as hedges are
recognized when the related inventory is sold or the hedged transaction is
consummated. Changes in the market value of futures and option positions which
are not hedges are recorded as gains or losses in the period in which they
occur.
The Company has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to manage
well defined interest rate and commodity price risks arising out of the
Company's core activities.
The Company has entered into various interest rate swap and cap agreements to
manage its risk related to interest rate changes on its debt. Premiums paid for
purchased interest rate swap and cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are included in
other assets. The interest rate differentials received or paid by the Company
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place or are recognized immediately if the hedged
borrowings are no longer held.
The Company from time to time enters into refined product price collars and
crackspread hydrocarbon swaps. No premiums are required for these agreements.
Gains and losses under these agreements, which primarily fix margins on
anticipated sales, are accrued as receivables or payables and as adjustments of
the carrying amount of inventories. The amounts are recognized in income through
cost of sales when the related refined products are sold, unless an earlier
writedown is required to recognize anticipated nonrecovery of deferred amounts.
The market risk associated with these agreements is not significant.
Refinery Maintenance -- Costs of refinery turnaround maintenance are charged to
operations over the average period between turnarounds. Turnaround periods range
approximately from one to seven years. Unamortized costs are included in other
assets. Amortization of refinery turnaround costs is included in depreciation
and amortization expense. Amortization was $43 million, $54 million and $86
million for 1995, 1994 and 1993, respectively. Ordinary maintenance is expensed
as incurred.
F-8
<PAGE> 49
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Expenditures -- Environmental expenditures that relate to current
or future revenues are expensed or capitalized as appropriate. Expenditures that
relate to an existing condition caused by past operations and do not contribute
to current or future revenue generation are expensed. Liabilities are recorded
when environmental assessments and/or cleanups are probable and the costs can be
reasonably estimated. Subsequent adjustments to estimates, to the extent
required, may be made as more refined information becomes available.
Income Taxes -- In 1992, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes," effective at the
beginning of fiscal 1990. This statement requires an asset and liability
approach for financial accounting and reporting of income taxes.
The Company is included in the consolidated U.S. Federal income tax return filed
by PDV America, Inc. The Company's current and deferred income tax has been
computed on a stand alone basis.
Postretirement Benefits -- In addition to pension benefits, the Company, at
present, provides certain health care and life insurance benefits to eligible
employees at retirement. The Company accounts for these benefits in accordance
with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." This statement requires costs related to postretirement benefits to
be accrued during the period an employee provides service.
Postemployment Benefits -- The Company provides various postemployment benefits
for eligible former or inactive employees, including disability, severance, and
salary continuation benefits. Effective January 1, 1994, the Company adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits." The principal
effect of adopting this standard is the accrual of postemployment benefits
during the period the employees provide service rather than expensing costs as
paid. The cumulative effect of adopting this standard was $4.5 million, which is
net of the income tax benefit of $2.8 million. The effect on 1994 net income,
excluding the cumulative effect, was not material.
Restricted Cash -- Restricted cash represents short-term, highly liquid
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing environmental facilities as
defined in the bond agreements.
Consolidated Statement of Cash Flows -- For purposes of the consolidated
statement of cash flows, the Company considers highly liquid short-term
investments with original maturities of three months or less to be cash
equivalents. In addition, borrowings with original maturities of three months or
less are presented net of repayments.
Reclassifications -- Certain minor reclassifications have been made to the 1993
and 1994 financial statements to conform with the classifications used in 1995.
2. INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD.
On July 1, 1993, subsidiaries of CITGO and Lyondell Petrochemical Company
("Lyondell") executed definitive agreements with respect to LYONDELL-CITGO
Refining Company Ltd. ("LYONDELL-CITGO"), a Texas limited liability company
which owns and operates a 265 MBPD refinery previously owned by Lyondell and
located in Houston, Texas. As of December 31, 1995, CITGO has invested
approximately $436 million in cash for a minority participation interest in
LYONDELL-CITGO and to fund the initial portion of CITGO's commitment to the
refinery enhancement project described below, while Lyondell contributed the
refinery and related assets in exchange for the remaining participation interest
in the new company. As of December 31, 1995, LYONDELL-CITGO has spent
approximately $600 million on a refinery enhancement project to increase the
refinery's heavy crude oil high conversion capacity. This heavy crude oil will
be entirely supplied by a subsidiary of PDVSA under a long-term crude oil supply
contract. CITGO purchases substantially all of the refined products produced at
the Houston
F-9
<PAGE> 50
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
refinery under a long-term contract through the year 2017, thereby significantly
reducing CITGO's need to purchase refined products from third party sources to
supply its distribution network. LYONDELL-CITGO estimates expenditures to
complete this project will total approximately $400 million to $500 million.
As of December 31, 1995, CITGO is committed to invest an additional (i) $30
million at the in-service date of the refinery enhancement project, which is
currently scheduled for 1997, and (ii) up to an additional approximately $150
million through the in-service date provided that the project costs do not
exceed 110 percent of current estimates. In addition, CITGO is required to fund
certain fees, expenses and interest on LYONDELL-CITGO's initial $200 million
construction loan, and is committed to fund up to $22 million for certain
maintenance and environmental costs, to the extent that maintenance and
environmental costs exceed expectations. Although CITGO is committed to fund the
investments described above, CITGO does not currently expect that its aggregate
investments will exceed $630 million (including the initial investment, but
exclusive of reinvested earnings) through the in-service date. CITGO's expected
aggregate investment in LYONDELL-CITGO, plus its share of LYONDELL-CITGO's
earnings, which must be reinvested through the in-service date, will give CITGO
approximately a 40 percent participation interest in LYONDELL-CITGO; CITGO also
has the option to make an additional investment which, if made, would increase
CITGO's participation interest to 50 percent. As of December 31, 1995, CITGO has
received $258 million of equity contributions to fund the investments in
LYONDELL-CITGO. CITGO expects to fund the Company's remaining commitment through
cash generated from operations and available credit facilities.
The Company accounts for its investment in LYONDELL-CITGO using the equity
method. At December 31, 1995 and 1994, the Company's investment, including
reinvested earnings, was $461 million and $268 million, which represented an
approximate 12 percent and 11 percent participation interest, respectively. The
Company's equity in the earnings of LYONDELL-CITGO was $14 million, $6 million
and $5 million for 1995, 1994 and 1993, respectively.
3. ACQUISITION OF BUSINESS
On May 1, 1995, the Company purchased Cato Oil & Grease ("Cato"). Cato is
primarily engaged in the manufacture and distribution of lubricants. The results
of operations of Cato are included in the accompanying financial statements
since the date of acquisition. Proforma results of operations for this business
are not material to the Company's consolidated statement of income. The total
cost of this acquisition was $46,805,500 which was allocated as follows:
<TABLE>
<S> <C>
Property, plant and equipment......................................... $27,000,000
Inventory............................................................. 8,643,000
Accounts receivable................................................... 6,144,000
Other assets (net).................................................... 5,018,500
-----------
$46,805,500
============
</TABLE>
4. RELATED PARTY TRANSACTIONS
Under long-term crude oil supply agreements, which extend through the years 2012
and 2006, and other agreements, including vessel transportation contracts, the
Company purchased $1.9 billion, $1.8 billion and $2.0 billion of crude oil,
feedstocks and other products from wholly owned subsidiaries of PDVSA in 1995,
1994 and 1993, respectively. These crude oil, feedstock, and other product
purchases comprised 31 percent, 34 percent and 37 percent of the Company's total
acquisitions in 1995, 1994 and 1993, respectively. The crude oil supply
contracts incorporate formula prices based on the market value of a number of
refined products deemed to be produced from each particular crude oil, less (i)
certain
F-10
<PAGE> 51
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deemed refining costs adjustable for inflation; (ii) certain actual costs,
including transportation charges, import duties and taxes and (iii) a deemed
margin, which varies according to the grade of crude oil. Prior to 1995, certain
costs were used in the formula aggregating approximately $70 million per year
which were to cease being deductible after 1996. Commencing in the third quarter
of 1995, a portion of such deductions were and will be deferred from 1995 and
1996 to the years 1997 through 1999. As a result of the deferrals, crude oil
costs for 1995 increased by approximately $22 million and crude oil costs for
1996 are estimated to increase by approximately $45 million. However, from 1997
through 1999, crude oil costs are estimated to decrease by approximately $25
million per year as a result of the deferral. At December 31, 1995 and 1994,
$146 million and $128 million, respectively, were included in payables to
affiliates as a result of these transactions.
During 1995, 1994 and 1993, the Company also purchased $1.4 billion, $1.1
billion and $1.0 billion of crude oil, feedstocks and refined products from
LYONDELL-CITGO primarily under a product sales agreement. The product sales
agreement incorporates formula prices based on published market prices and
defined marketing discounts and variable factors. At December 31, 1995 and 1994,
$31 million and $22 million were included in payables to affiliates as a result
of these transactions.
The Company had refined product, feedstock, crude oil and other product sales of
$243 million, $153 million and $121 million to affiliates in 1995, 1994 and
1993, respectively. At December 31, 1995 and 1994, $29 million and $20 million
were included in due from affiliates as a result of these transactions.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment of
rent, stipulated loss value and terminating value due under the lease of the
Corpus Christi refinery facilities described in Note 14.
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1995 1994
-------- --------
(000'S OMITTED)
<S> <C> <C>
Trade........................................................ $620,690 $566,208
Credit card.................................................. 166,492 154,300
Other........................................................ 49,105 47,320
-------- --------
836,287 767,828
Allowance for uncollectible accounts......................... (18,297) (15,084)
-------- --------
$817,990 $752,744
======== ========
</TABLE>
6. INVENTORIES
<TABLE>
<CAPTION>
1995 1994
-------- --------
(000'S OMITTED)
<S> <C> <C>
Refined product.............................................. $588,696 $601,146
Crude oil.................................................... 149,414.. 136,086
Materials and supplies....................................... 47,165 41,612
-------- --------
$785,275 $778,844
======== ========
</TABLE>
As of December 31, 1995 and 1994, replacement costs exceeded LIFO carrying
values by approximately $112 million and $40 million.
F-11
<PAGE> 52
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Land...................................................... $ 112,542 $ 112,061
Buildings and leaseholds.................................. 410,903 378,367
Machinery and equipment................................... 2,184,920 1,982,970
Vehicles.................................................. 44,211 39,231
Construction in process................................... 218,146 127,981
---------- ----------
2,970,722 2,640,610
Accumulated depreciation and amortization................. (478,873) (363,370)
---------- ----------
$2,491,849 $2,277,240
========== ==========
</TABLE>
Depreciation expense for 1995, 1994 and 1993 was $122 million, $103 million and
$88 million, respectively.
Other income includes gains and losses on disposals and retirements of property,
plant and equipment. Such net losses were approximately $4 million, $7 million
and $5 million in 1995, 1994 and 1993, respectively.
8. INVESTMENTS IN AFFILIATES
In addition to LYONDELL-CITGO, the Company's investments in affiliates consist
of equity interests of 6.8 to 50 percent in joint interest pipelines and
terminals, including a 13.98 percent interest in Colonial Pipeline Company, a
49.5 percent partnership interest in Nelson Industrial Steam Company ("NISCO"),
which is a qualified cogeneration facility; and a 49 percent partnership
interest in Mount Vernon Phenol Plant. The carrying value of these investments
exceeded the Company's equity in the underlying net assets by approximately $164
million and $168 million at December 31, 1995 and 1994, respectively.
In September 1994, NISCO refinanced its long-term debt. In connection with this
transaction CITGO received a $75 million cash distribution from NISCO and NISCO
wrote off deferred loan fees and other costs associated with the extinguished
debt. CITGO's share of NISCO's write-off, $1.6 million, was reported as an
extraordinary after tax charge in 1994. The distribution received exceeded
CITGO's investment and capital account in NISCO by approximately $26 million.
This amount was recorded in other noncurrent liabilities based on the terms of
the NISCO partnership agreement and has subsequently been adjusted to reflect
capital transactions and CITGO's share of NISCO's earnings and losses. At
December 31, 1995 and 1994, other noncurrent liabilities include approximately
$40 million and $35 million related to the Company's partnership interest in
NISCO.
Information on the Company's investments, including LYONDELL-CITGO, follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Company's investments in affiliates............... $650,360 $461,807 $370,400
Company's equity in net income (losses) of
affiliates...................................... 33,530 28,585 30,117
Dividends received from affiliates................ 29,040 26,282 26,309
</TABLE>
F-12
<PAGE> 53
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected financial information provided by the affiliates is summarized as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(000'S OMITTED)
<S> <C> <C> <C>
Summary of financial position:
Current assets..................................... $ 547,479 $ 529,206 $ 489,303
Noncurrent assets.................................. 2,345,695 1,876,688 1,669,291
Current liabilities................................ 596,723 510,613 381,014
Noncurrent liabilities............................. 1,659,729 1,400,805 1,267,436
Summary of operating results:
Revenues........................................... $3,900,653 $3,474,306 $2,319,239
Gross profit....................................... 574,103 522,059 511,150
Net income......................................... 344,817 276,633 279,155
</TABLE>
9. SHORT-TERM BANK LOANS
As of December 31, 1995, the Company has established $179.5 million of
uncommitted, unsecured, short-term borrowing facilities with various banks.
Interest rates on these facilities are determined daily based upon the Federal
funds interest rates, and maturity options vary up to 30 days. The weighted
average interest rates actually incurred in 1995, 1994 and 1993 were 6.2
percent, 6.4 percent and 3.5 percent, respectively. The Company had $25.0
million and $53.5 million of borrowings outstanding under these facilities at
December 31, 1995 and 1994.
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
1995 1994
---------- ----------
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan....................................... $ 290,000 $ 195,000
Term bank loan............................................ 117,647 125,000
Senior Notes:
8.75% Series A due 1998................................. 56,250 75,000
9.03% Series B due 2001................................. 171,429 200,000
9.30% Series C due 2006................................. 125,000 125,000
Master Shelf Agreement:
8.55% Senior Notes due 2002............................. 25,000 --
8.68% Senior Notes due 2003............................. 50,000 50,000
7.29% Senior Notes due 2004............................. 20,000 20,000
8.59% Senior Notes due 2006............................. 40,000 40,000
8.94% Senior Notes due 2007............................. 50,000 50,000
7.17% Senior Notes due 2008............................. 25,000 --
7.22% Senior Notes due 2009............................. 50,000 --
Tax-Exempt Bonds:
Pollution control revenue bonds due 2004................ 15,800 15,800
Port facilities revenue bonds due 2007.................. 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023.... 3,020 50,000
Louisiana wastewater facility revenue bonds due 2024.... 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025.... 40,700 --
Gulf Coast solid waste facility revenue bonds due
2025................................................. 50,000 --
Gulf Coast solid waste facility revenue bonds due
2026................................................. 50,000 50,000
Cit-Con bank credit agreement............................. 42,857 40,460
---------- ----------
1,254,503 1,068,060
Current portion of long-term debt......................... (95,240) (60,454)
---------- ----------
$1,159,263 $1,007,606
========== ==========
</TABLE>
F-13
<PAGE> 54
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving and Term Bank Loans -- The Company's credit agreement with various
banks was amended during 1994. The primary result of the amendments was a
reduction in borrowings under the term bank loan of $150 million. At December
31, 1995, this agreement consists of a $125 million term loan and a $675 million
revolving loan. The term loan is unsecured, has various interest rate options
(year-end rate of 6.3 percent, 6.6 percent and 4.0 percent at December 31, 1995,
1994 and 1993) and principal amounts are payable in quarterly installments
commencing in December 1995. The revolving loan is unsecured, has various
borrowing maturities and interest rate options (year-end rate of 6.4 percent,
6.7 percent and 3.9 percent at December 31, 1995, 1994 and 1993), and is
committed through December 31, 1999. Both the term and revolving loans contain
certain covenants that, depending upon the level of the Company's capitalization
and earnings, could impose limitations on the Company for paying dividends,
incurring additional debt, placing liens on property, and selling fixed assets.
The Company was in compliance with the debt covenants at December 31, 1995.
Senior Notes -- At December 31, 1995, the Company has outstanding approximately
$352.7 million of Senior Notes (the "Notes"). Guarantees of these Notes by
significant subsidiaries of CITGO were released during 1995. Principal amounts
are payable in annual installments commencing in November, 1995 for the Series A
and Series B Notes and November, 1996 for the Series C Notes. Interest is
payable semi-annually in May and November. The Notes contain certain covenants
that, depending upon the level of the Company's capitalization and earnings,
could impose limitations on the Company for paying dividends, incurring
additional debt, placing liens on property, and selling fixed assets. The
Company was in compliance with the debt covenants at December 31, 1995.
Master Shelf Agreement -- During 1994, CITGO entered into an unsecured Master
Shelf Agreement with an insurance company to place up to $260 million of senior
notes in private markets. A total of $260 million has been drawn under this
facility as of December 31, 1995, with various fixed interest rates and
maturities. The agreement contains certain covenants that, depending upon the
level of the Company's capitalization and earnings, could impose limitations on
the Company for paying dividends, incurring additional debt, placing liens on
property, and selling fixed assets. The Company was in compliance with the debt
covenants at December 31, 1995.
Tax-Exempt Bonds -- Through state entities, the Company has issued $27.6 million
of industrial development bonds for certain Lake Charles, Louisiana port
facilities and pollution control equipment and $163.7 million of environmental
revenue bonds to finance a portion of the Company's environmental facilities at
its Lake Charles, Louisiana refinery and at the LYONDELL-CITGO refinery.
The pollution control and port facilities revenue bonds are secured by letters
of credit. Interest rates vary weekly and the interest rates at December 31,
1995, 1994 and 1993 were 5.1 percent, 5.5 percent and 3.2 percent, respectively.
The Louisiana Revenue Bonds due in the year 2023 have a fixed interest rate of 6
percent. Guarantees of these bonds by certain CITGO subsidiaries were released
during 1995. During 1995 the Company repurchased approximately $47 million of
these bonds at a discount, resulting in an extraordinary gain of approximately
$3.4 million net of related income taxes of approximately $2.2 million. The
Louisiana Revenue Bonds due in the year 2024 are secured by a letter of credit
and have a floating interest rate which was 6.2 percent and 5.7 percent at
December 31, 1995 and 1994, respectively. The Louisiana Revenue Bonds due in the
year 2025 are secured by a letter of credit and have a floating interest rate
which was 6.2 percent at December 31, 1995. The Gulf Coast Revenue Bonds due in
the year 2025 are secured by a letter of credit and have a floating interest
rate which was 6.2 percent at December 31, 1995. The Gulf Coast Revenue Bonds
due in the year 2026 are secured by a letter of credit and have a floating
interest rate which was 6.2 percent and 5.7 percent at December 31, 1995 and
1994, respectively.
Cit-Con Bank Credit Agreement -- The Cit-Con bank credit agreement provided for
borrowings of up to $50 million and was converted to a term loan during 1995.
The agreement is collateralized by throughput
F-14
<PAGE> 55
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreements of the owner companies, has various interest rate options (weighted
average effective rates of 6.8 percent, 6.7 percent and 3.8 percent at December
31, 1995, 1994 and 1993, and requires quarterly principal payments through
December 2001.
Debt Maturities -- Future maturities of long-term debt as of December 31, 1995
are: 1996 -- $95.2 million; 1997 -- $95.2 million; 1998 -- $95.2 million;
1999 -- $366.6 million; 2000 -- $47.1 million and $555.2 million thereafter.
Interest Rate Swap and Cap Agreements -- The Company has entered into the
following interest rate swap agreements to reduce the impact of interest rate
changes on its variable interest rate debt:
<TABLE>
<CAPTION>
NOTIONAL PRINCIPAL
AMOUNT
EXPIRATION FIXED RATE --------------------
VARIABLE RATE INDEX DATE PAID 1995 1994
---------------------------------- -------------- ---------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
One-month LIBOR................... September 1998 4.85% $ 25,000 $25,000
One-month LIBOR................... September 1998 4.77% -- 25,000
One-month LIBOR................... November 1998 5.09% 25,000 25,000
One-month LIBOR................... May 2000 6.28% 25,000 --
J. J. Kenny....................... May 2000 4.72% 25,000 --
J. J. Kenny....................... February 2005 5.30% 12,000 --
J. J. Kenny....................... February 2005 5.27% 15,000 --
J. J. Kenny....................... February 2005 5.49% 15,000 --
-------- -------
$142,000 $75,000
========= ========
</TABLE>
Interest expense includes $0.1 million, $0.4 million and $0.3 million in 1995,
1994 and 1993 related to interest paid on these agreements. During 1995, the
Company converted $25 million of variable rate debt to fixed rate borrowings and
terminated the interest rate swap agreement matched to the variable rate debt.
Other income in 1995 includes a $2.4 million gain related to the termination of
this interest rate swap agreement.
During 1995, the Company entered into a 9 percent interest rate cap agreement
with a notional amount of $25 million, a reference rate of three-month LIBOR and
an expiration date of February, 1997. Other interest rate cap agreements to
which the Company was a party expired in November, 1994. The effect of these
agreements was not material in 1995, 1994 or 1993.
11. EMPLOYEE BENEFIT PLANS
Employee Savings -- The Company sponsors three qualified defined contribution
retirement and savings plans covering substantially all eligible salaried and
hourly employees. Participants make voluntary contributions to the plans and the
Company makes contributions, including matching of employee contributions, based
on plan provisions. The Company charged $16 million, $15 million and $15 million
to operations related to its contributions to these plans for the years 1995,
1994 and 1993, respectively.
Pension Benefits -- The Company sponsors three qualified noncontributory defined
benefit pension plans, two of which cover eligible hourly employees and one of
which covers eligible salaried employees. The Company also sponsors two
nonqualified defined benefit plans for certain eligible employees. The qualified
plans' assets include corporate securities, a fixed income mutual fund, and a
short-term investment fund. The nonqualified plans are not funded.
The Company's policy is to fund the qualified pension plans in accordance with
applicable laws and regulations and not to exceed the tax deductible limits. The
nonqualified plans are funded as necessary
F-15
<PAGE> 56
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to pay retiree benefits. The plan benefits for each of the qualified pension
plans are primarily based on an employee's years of plan service and
compensation as defined by each plan.
The Company's net periodic pension costs for these plans included the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Service cost-benefits earned during the year................ $ 11,498 $ 11,757 $10,684
Interest cost on projected benefit obligation............... 11,496 10,164 9,585
Actual loss (return) on plan assets......................... (34,784) 3,166 (7,421)
Net amortization and deferral............................... 23,777 (14,529) (3,348)
-------- -------- -------
Net periodic pension cost................................... $ 11,987 $ 10,558 $ 9,500
======== ======== =======
</TABLE>
The following table summarizes the funded status of these plans and the related
amounts recognized in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
1995 1994
------------------------- ------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
PLANS PLANS PLANS PLANS
---------- ----------- ---------- -----------
(000'S OMITTED) (000'S OMITTED)
<S> <C> <C> <C> <C>
Plan assets at fair value................... $ 155,997 -- $ 90,497 $ 28,048
Actuarial present value of benefit
obligation:
Vested benefits........................... (103,046) (10,292) (64,429) (34,033)
Nonvested benefits........................ (16,661) -- (8,912) (4,861)
--------- -------- -------- --------
Accumulated benefit obligation.............. (119,707) (10,292) (73,341) (38,894)
Effect of projected long-term compensation
increases................................. (41,012) (1,729) (24,036) (9,599)
--------- -------- -------- --------
Total projected benefit obligation
("PBO")................................... (160,719) (12,021) (97,377) (48,493)
--------- -------- -------- --------
PBO in excess of plan assets.............. $ (4,722) $ (12,021) $ (6,880) $ (20,445)
========= ======== ======== ========
Pension liability recognized in the
consolidated balance sheets............... $ (27,467) $ (10,292) $(16,010) $ (17,301)
Amounts not recognized:
Prior service costs....................... 1,928 (1,786) (407) 549
Net gain at date of adoption.............. 2,085 -- 1,078 1,275
Net amount resulting from plan experience
and changes in actuarial assumptions... 18,732 (862) 8,459 (5,894)
Additional minimum liability.............. -- 919 -- 926
--------- -------- -------- --------
Funded status as of year end........... $ (4,722) $ (12,021) $ (6,880) $ (20,445)
========= ======== ======== ========
</TABLE>
The underfunded plans relate to the plans in which plan assets at fair value are
exceeded by the accumulated benefit obligation.
F-16
<PAGE> 57
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are the significant assumptions used in determining the costs and
funded status of these plans:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Discount rate:
Pension costs................................................ 8.0 % 7.5 % 8.0 %
Benefit obligations.......................................... 7.5 % 8.0 % 7.5 %
Rate of long-term compensation increase:
Pension costs................................................ 5.0 % 5.0 % 6.0 %
Benefit obligations.......................................... 5.0 % 5.0 % 5.0 %
Expected long-term rate of return on assets.................... 8.5 % 9.0 % 9.0 %
</TABLE>
Postretirement Benefits Other Than Pensions -- In addition to pension benefits,
the Company also provides certain health care and life insurance benefits for
eligible salaried and hourly employees at retirement. These benefits are subject
to deductibles, copayment provisions and other limitations and are primarily
funded on a pay as you go basis. The Company reserves the right to change or to
terminate the benefits at any time.
The following sets forth the funded status of the accumulated postretirement
benefit obligation reconciled with amounts reported in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(000'S OMITTED)
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees................................................... $ 49,853 $ 47,526
Fully eligible active employees............................ 38,393 39,477
Other active employees..................................... 73,295 60,106
-------- --------
Total APBO......................................... 161,541 147,109
Trust assets at fair value................................... 799 756
-------- --------
APBO in excess of trust assets............................... 160,742 146,353
Plus unrecognized net gain................................... 10,863 32,632
-------- --------
Postretirement benefit liability recognized in the
consolidated balance sheets including $3.7 million in
other current liabilities in 1995 and 1994.............. $171,605 $178,985
========= =========
</TABLE>
The Company's net periodic postretirement benefit cost (credit) included the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Service cost -- benefits earned during the year.... $ 5,819 $ 7,421 $ 7,770
Interest cost on APBO.............................. 12,089 11,833 12,120
Actual return on trust assets...................... (43) (41) --
Other -- amortization of unrecognized net gain..... (21,603) (5,333) --
-------- ------- -------
Net periodic postretirement benefit cost
(credit)......................................... $ (3,738) $13,880 $19,890
========= ======== ========
</TABLE>
The amortization of unrecognized net gain (or loss) is due to changes in the
APBO resulting from experience different from that assumed and from changes in
assumptions. Gains (or losses) are recognized as a component of net
postretirement benefit cost by the amount the beginning of year unrecognized net
gain (or loss) exceeds 7.5 percent of the APBO. Increases in the per capita
costs of covered health care benefits of 11 percent, 12 percent and 15 percent
were assumed for 1995, 1994 and
F-17
<PAGE> 58
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1993, respectively, gradually decreasing to a 6 percent ultimate rate by the
year 2004. Increasing the assumed health care cost trend rates by one percentage
point in each future year would increase the accumulated postretirement benefit
obligation as of December 31, 1995 by $30.4 million and increase the aggregate
of the service cost and interest cost components of net periodic postretirement
benefit cost for 1995 by $3.8 million. Discount rates of 8 percent, 7.5 percent
and 8 percent for 1995, 1994 and 1993, respectively, were used to determine the
net periodic postretirement cost. Discount rates of 7.5 percent and 8 percent
for 1995 and 1994, respectively, were used to determine the accumulated
postretirement benefit obligation.
12. INCOME TAXES
The provisions for income taxes are comprised of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Current:
Federal............................................ $57,435 $ 70,665 $72,117
State.............................................. 5,136 6,913 9,925
------- -------- -------
62,571 77,578 82,042
Deferred............................................. 16,957 32,866 16,520
------- -------- -------
$79,528 $110,444 $98,562
======= ======== =======
</TABLE>
The Federal statutory tax rate differs from the effective tax rate due to the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate................................ 35.0% 35.0% 35.0%
State taxes, net of Federal benefit....................... 3.2% 2.5% 2.9%
Dividend exclusions....................................... (3.3)% (2.2)% (2.3)%
New tax legislation....................................... -- -- 2.9%
Other..................................................... 1.9% 1.4% (0.7)%
---- ---- ----
Effective tax rate........................................ 36.8% 36.7% 37.8%
==== ==== ====
</TABLE>
Effective August 10, 1993, Federal tax legislation was enacted which, among
other changes, increased the Federal statutory tax rate from 34 percent to 35
percent retroactive to January 1, 1993. The effect, which decreased net income
for 1993 by $8.5 million, was recognized as a component of the provision for
income taxes for 1993. Net deferred tax liabilities were increased by $7.9
million as a result of this rate increase.
In 1995, the Company generated alternative minimum tax of approximately $18
million which is available to offset regular federal income taxes in future
years, subject to certain alternative minimum tax limitations.
The Company and PDV America, Inc. are parties to a tax allocation agreement
which is designed to provide PDV America, Inc. with sufficient cash to pay its
consolidated income tax liabilities. Current amounts payable to PDV America,
Inc. under this agreement of $12.2 million and $7.5 million are included in
other current liabilities at December 31, 1995 and 1994, respectively.
In 1993, the Company incurred a net capital loss of $19.8 million which, for
Federal income tax purposes, may only offset capital gains to decrease the
Company's tax liability. The Federal income tax benefit was fully recognized in
the 1993 provision for income taxes based on losses utilized during the
carryback
F-18
<PAGE> 59
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
period and anticipated future capital gains. The Company has utilized
approximately $10.4 million of the capital loss to offset capital gains, and at
December 31, 1995, the remaining capital loss carryforward was $9.4 million
which expires in 1998.
Deferred income taxes reflect the net tax effects of (i) temporary differences
between the financial and tax bases of assets and liabilities and (ii) loss and
tax credit carryforwards. The tax effects of significant items comprising the
Company's net deferred tax liability as of December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
(000'S OMITTED)
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment.............................. $387,298 $351,715
Inventories................................................ 72,452 71,033
Investments in affiliates.................................. 68,038 61,016
Environmental charges...................................... 6,739 7,054
Other...................................................... 1,218 2,054
-------- --------
535,745 492,872
-------- --------
Deferred tax assets:
Postretirement benefit obligations......................... 70,284 72,527
Marketing and promotional accruals......................... 23,603 20,033
Employee benefit accruals.................................. 25,487 22,542
Alternative minimum tax credit carryforward................ 18,166 --
Other...................................................... 43,384 39,906
-------- --------
180,924 155,008
-------- --------
Net deferred tax liability (of which $12,823 is a current
asset at December 31, 1995 and $8,093 is a current
liability at December 31, 1994)............................ $354,821 $337,864
======== ========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. Included among
these are (i) litigation with a contractor who is claiming additional
compensation for sludge removal and treatment at the Company's Lake Charles,
Louisiana refinery; the Company is seeking contractual penalties for
non-conformance and breach of contract and also a determination that a portion
of any damages awarded would be recoverable from a former owner; (ii) litigation
against the State of Louisiana concerning a potential assessment to the Company
and other refiners of a use tax on petroleum coke which accumulates on catalyst
during refining operations and a change to the calculation of the sales/use tax
on fuel gas generated by refinery operations; and (iii) litigation against the
Company by a number of current and former employees and applicants on behalf of
themselves and a class of similarly situated persons asserting claims under
Federal and state laws of racial discrimination in connection with the
employment practices at the Company's Lake Charles, Louisiana refining complex;
the plaintiffs have appealed the Court's denial of class certification. The
Company is vigorously contesting such lawsuits and claims and believes that its
positions are sustainable. The Company has recorded accruals for losses it
considers probable and reasonably estimable. However, due to uncertainties
involved in litigation, there are cases in which the outcome is not reasonably
predictable and the losses, if any, are not reasonably estimable. If such
lawsuits and claims were to be determined in a manner adverse to the Company,
and in amounts in excess of the Company's accruals, it is reasonably possible
that such determinations could have a material adverse effect on the
F-19
<PAGE> 60
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's results of operations in a given year. The term "reasonably possible"
is used herein to mean that the chance of a future transaction or event
occurring is more than remote but less than likely. However, based upon
management's current assessments of these lawsuits and claims and that provided
by counsel in such matters, and the capital resources available to the Company,
management of the Company believes that the ultimate resolution of these
lawsuits and claims would not exceed the aggregate of the amounts accrued in
respect of such lawsuits and claims and the insurance coverages available to the
Company by a material amount and, therefore, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
Environmental Compliance and Remediation -- The Company is subject to various
Federal, state and local environmental laws and regulations which may require
the Company to take action to correct or improve the effects on the environment
of prior disposal or release of petroleum substances by the Company or other
parties. Management believes the Company is in compliance with these laws and
regulations in all material respects. Maintaining compliance with environmental
laws and regulations could require significant capital expenditures and
additional operating costs.
In 1992, the Company reached an agreement with a state agency to cease usage of
certain surface impoundments at the Company's Lake Charles, Louisiana refinery
by 1994. A mutually acceptable closure plan was filed with the state in 1993.
The Company and a former owner are sharing the closure costs. The remediation
commenced in December 1993 and is expected to be completed no earlier than 1998.
Equipment to replace these impoundments required approximately $146 million of
capital expenditures.
In 1992, an agreement was reached between the Company and a former owner
concerning a number of environmental issues. The agreement consisted, in part,
of payments to the Company totaling $46 million, of which $31 million was
received in 1992 and $5 million in each of the years 1993, 1994, and 1995. The
former owner will continue to share the costs of certain specific environmental
remediation and certain tort liability actions based on ownership periods and
specific terms of the agreement.
At December 31, 1995 and 1994, the Company had $60 million and $58 million of
environmental accruals included in other noncurrent liabilities. Based on
currently available information, including the continuing participation of
former owners in remediation actions, management believes these accruals are
adequate. Conditions which require additional expenditures may exist for various
Company sites including, but not limited to, the Company's operating refinery
complexes, closed refineries, service stations and crude oil and petroleum
product storage terminals. The amount of such future expenditures, if any, is
indeterminable.
Capital Expenditures -- The Company's anticipated capital expenditures,
excluding the investments in LYONDELL-CITGO, for the five-year period 1996 to
the year 2000 total approximately $1.6 billion. The expenditures include
environmental and regulatory capital projects as well as strategic capital
expenditures. At December 31, 1995, authorized expenditures on incomplete
capital projects totaled approximately $258 million.
Supply Agreements -- The Company has a long-term contract through August 31,
1998 which provides CITGO the option to purchase domestic crude oil at contract
reference prices from an independent supplier. Purchases under this contract
totaled $261 million, $239 million and $214 million in 1995, 1994 and 1993,
respectively.
The Company has various other crude oil, refined product and feedstock purchase
agreements with unaffiliated entities with terms ranging from monthly to annual
renewal. The Company believes numerous sources of supply are readily available
on comparable terms.
F-20
<PAGE> 61
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Throughput Agreements -- The Company has throughput agreements with certain
pipeline affiliates (Note 8). These throughput agreements may be used to secure
obligations of the pipeline affiliates. Under these agreements, the Company may
be required to provide its pipeline affiliates with additional funds through
advances against future charges for the shipping of petroleum products. The
Company currently ships on these pipelines and has not been required to advance
funds in the past. At December 31, 1995, the Company has no fixed and
determinable, unconditional purchase obligations under these agreements.
Marine Spill Response Arrangements -- During the third quarter of 1995, the
Company entered into a contract with National Response Corporation for marine
oil removal services capability and terminated its relationship with the
previous provider of that service. The Company paid a cancellation fee of
approximately $16 million, which is included in cost of sales and operating
expenses in 1995.
Futures Contracts and Commodity Option Agreements -- The Company enters into
petroleum futures contracts primarily to reduce the Company's inventory exposure
to market risk. Such contracts are entered into through major brokerage houses
and traded on national exchanges and can be settled in cash or through delivery
of the commodity. Since the contracts described above generally qualify as
hedges and correlate to price movements of crude oil and refined products, gains
or losses resulting from market changes in these contracts will be offset by
losses or gains on the Company's hedged inventory or future purchases and sales.
Unrealized and deferred gains and losses on these contracts at December 31,
1995, 1994 and 1993 and the effects on cost of sales and pretax earnings for
1995, 1994 and 1993 were not material. At times, the Company enters into
commodity futures and option agreements that are not related to the hedging
program discussed above. This activity and its results were not material in 1995
or 1994; 1993 cost of sales includes an approximate $20 million loss from this
activity.
Refined Product Price Collars and Crackspread Hydrocarbon Swaps -- From time to
time, the Company uses these agreements to hedge exposure to changes in prices
of refined products. At December 31, 1995 and 1994, the Company had no such
agreements in place. At December 31, 1993, the Company had one turbine fuel
price collar in effect which effectively established a ceiling and floor price
for 52 thousand barrels of turbine fuel sales per month. The agreement expired
in August 1994.
Other Credit and Off-Balance Sheet Risk Information as of December 31,
1995 -- The Company has guaranteed approximately $12 million of debt of certain
CITGO distributors and an affiliate. Such debt is substantially collateralized
by assets of these entities. The Company has outstanding letters of credit
totaling approximately $198 million, which includes $193 million related to the
Company's tax-exempt bonds. The Company has also acquired surety bonds totaling
$30 million primarily due to requirements of various government entities. The
Company does not expect liabilities to be incurred related to such guarantees,
letters of credit or surety bonds.
Neither the Company nor the counterparties are required to collateralize their
obligations under interest rate swaps or caps, refined product price collar or
crackspread hydrocarbon swap agreements. The Company is exposed to credit loss
in the event of nonperformance by the counterparties to these agreements, but
has no off-balance sheet risk of accounting loss for the notional amounts. The
Company does not anticipate nonperformance by the counterparties, which consist
primarily of major financial institutions as of December 31, 1995.
F-21
<PAGE> 62
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. LEASES
The Company leases certain of its Corpus Christi refinery facilities under a
long-term lease. The basic term of the lease expires on January 1, 2004;
however, the Company may renew the lease until January 31, 2011, the date of its
purchase option. Capitalized costs included in property, plant and equipment
related to the leased assets were approximately $209 million at December 31,
1995 and 1994. Accumulated amortization related to the leased assets was
approximately $78 million and $70 million at December 31, 1995 and 1994,
respectively. Amortization is included in depreciation expense.
The Company also has various noncancelable operating leases, primarily for
office space, computer equipment and vehicles. Rent expense on all operating
leases totaled $33 million in 1995 and $34 million in 1994 and 1993. Future
minimum lease payments for the capital lease and noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASE LEASES TOTAL
------------------------------------------------ --------- --------- --------
(000'S OMITTED)
<S> <C> <C> <C>
1996............................................ $ 27,375 $11,828 $ 39,203
1997............................................ 27,375 9,665 37,040
1998............................................ 27,375 8,023 35,398
1999............................................ 27,375 6,950 34,325
2000............................................ 27,375 6,559 33,934
Thereafter...................................... 118,125 23,701 141,826
--------- ------- --------
Total minimum lease payments.................... 255,000 $66,726 $321,726
======= ========
Amount representing interest.................... (102,939)
---------
Present value of minimum lease payments......... 152,061
Current portion................................. 10,557
---------
$ 141,504
=========
</TABLE>
15. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures about
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
in interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
F-22
<PAGE> 63
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair values because of the short maturity of these instruments. The
carrying amounts and estimated fair values of the Company's other financial
instruments are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
(000'S OMITTED)
<S> <C> <C> <C> <C>
LIABILITIES:
Short-term bank loans........ $ 25,000 $ 25,000 $ 53,500 $ 53,500
Long-Term debt............... 1,254,503 1,327,684 1,068,060 1,076,112
DERIVATIVE AND OFF-BALANCE
SHEET FINANCIAL
INSTRUMENTS -- UNREALIZED
GAINS (LOSSES):
Interest rate swap
agreements................ -- (3,030) -- 7,598
Interest rate cap
agreements................ -- -- -- --
Guarantees of debt........... -- (48) -- (105)
Letters of credit............ -- (842) -- (626)
Surety bonds................. -- (90) -- (93)
</TABLE>
Short-term bank loans and long-term debt -- The fair value of short-term bank
loans and long-term debt is based on interest rates that are currently available
to the Company for issuance of debt with similar terms and remaining maturities.
Interest rate swap and cap agreements -- The fair value of these agreements is
based on the estimated amount that the Company would receive or pay to terminate
the agreements at the reporting dates, taking into account current interest
rates and the current creditworthiness of the counterparties.
Guarantees, letters of credit and surety bonds -- The estimated fair value of
contingent guarantees of third-party debt, letters of credit and surety bonds is
based on fees currently charged for similar one-year agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent information
available to management as of the reporting dates. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date, and current estimates of fair value
may differ significantly from the amounts presented herein.
F-23
<PAGE> 64
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
The following is a summary of the quarterly results of operations for the years
ended December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ---------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales................................... $ 2,357,482 $ 2,952,144 $ 2,707,483 $ 2,505,051
Cost of sales and operating expenses.... 2,237,897 2,850,103 2,596,968 2,381,044
Income before extraordinary gain........ 47,161 25,743 31,087 32,353
Extraordinary gain...................... 3,380 -- -- --
---------- ---------- ---------- ----------
Net income.................... $ 50,541 $ 25,743 $ 31,087 $ 32,353
========== ========== ========== ==========
1994
Sales................................... $ 2,035,550 $ 2,313,359 $ 2,519,267 $ 2,378,529
Cost of sales and operating expenses.... 1,913,004 2,211,222 2,381,518 2,225,227
Income before extraordinary charge and
cumulative effect of a change in
accounting principle.................. 44,092 37,189 54,512 54,996
Extraordinary charge.................... -- -- (1,627) --
Cumulative effect of a change in
accounting principle -- SFAS 112(1)... (4,477) -- -- --
---------- ---------- ---------- ----------
Net income.................... $ 39,615 $ 37,189 $ 52,885 $ 54,996
========== ========== ========== ==========
</TABLE>
- ---------------
(1) The Company's original estimate of the cumulative effect of accounting
change for the adoption of SFAS No. 112 has been revised to the amount
reflected.
17. SUBSEQUENT EVENTS -- UNAUDITED
During March, 1996, the Company's Board of Directors approved a resolution to
proceed with a public offering of up to $600 million of senior unsecured notes.
* * * * * *
F-24
<PAGE> 65
PROSPECTUS
CITGO PETROLEUM CORPORATION
DEBT SECURITIES
---------------------
CITGO Petroleum Corporation ("CITGO" or the "Company") may offer and issue
from time to time debt securities (the "Debt Securities") with an aggregate
initial offering price of $600,000,000 (or the equivalent thereof in one or more
foreign currencies or composite currencies). The Debt Securities may be sold for
U.S. dollars or one or more foreign or composite currencies, and the principal
of and any interest on the Debt Securities may likewise be payable in U.S.
dollars or one or more foreign or composite currencies.
The Debt Securities will be offered to the public on terms determined by
market conditions at the time of sale. The Debt Securities may be issued in one
or more series with the same or various maturities at par or a premium or with
an original issue discount. The specific designation, aggregate principal
amount, currency, purchase price, maturity, rate or method of calculation of
interest and time of payment thereof, whether such Debt Securities are to be
issued in book-entry form, redemption, pre-payment or sinking fund provisions,
any other specific terms, and any listing on a securities exchange of Debt
Securities in respect of which this Prospectus is being delivered (the "Offered
Debt Securities") will be set forth in an accompanying prospectus supplement
(the "Prospectus Supplement") together with the terms of offering of the Offered
Debt Securities.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE DEBT SECURITIES.
---------------------
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The Debt Securities may be sold directly by the Company, through agents
designated from time to time, through underwriting syndicates represented by
managing underwriters, by underwriters without a syndicate, or by dealers. See
"Plan of Distribution." If any agents of the Company or any underwriters are
involved in the sale of the Offered Debt Securities, the names of such agents or
underwriters and any applicable commissions or discounts will be set forth in
the Prospectus Supplement. The net proceeds to the Company from such sale also
will be set forth in the Prospectus Supplement.
---------------------
The date of this Prospectus is May 17, 1996.
<PAGE> 66
AVAILABLE INFORMATION
The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, will file reports and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company with the Commission may be
inspected and copied at the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, at prescribed rates.
This Prospectus, which constitutes a part of a registration statement on
Form S-3 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act of 1933, as amended (the "Securities Act"), omits
certain of the information set forth in the Registration Statement. Reference is
hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Company and the securities offered
hereby. Statements contained herein concerning the provisions of such documents
are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission.
The Company is incorporated in Delaware, and its principal executive
offices are located at One Warren Place, 6100 South Yale Avenue, Tulsa, Oklahoma
74136 (telephone: (918) 495-4000).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by this reference the Registration
Statement on Form 10 filed with the Commission by the Company pursuant to the
Exchange Act (File No. 1-14380).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement contained herein or in a document incorporated or
deemed to be incorporated herein by reference shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
incorporated document or in any accompanying prospectus supplement modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
Copies of all documents incorporated herein by reference other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference) will be provided without charge to each person who receives a copy
of this Prospectus upon request to the Company, One Warren Place, 6100 South
Yale Avenue, Tulsa, Oklahoma 74136, Attention: Corporate Secretary (telephone:
(918) 495-5540).
ENFORCEABILITY OF CIVIL LIABILITIES
AGAINST FOREIGN PERSONS
CITGO is an indirect wholly-owned subsidiary of Petroleos de Venezuela,
S.A., the national oil company of Venezuela ("PDVSA"). Certain members of
CITGO's Board of Directors are residents of Venezuela, and all or a substantial
portion of the assets of such directors are located outside the United States.
As a result, it may be difficult for investors to effect service of process
within the United States upon such persons or to enforce, in United States
courts, judgments obtained in such courts and predicated upon the civil
liability provisions of the United States Federal securities laws. CITGO has
been advised by Carlos E. Padrone Amare, PDVSA's General Counsel, that
liabilities predicated solely upon
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the civil liability provisions of the United States Federal securities laws in
actions brought in Venezuela, in original actions or in actions for enforcement
of judgments of United States courts, may not be enforceable in Venezuela.
THIS PROSPECTUS INCLUDES "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. ALL STATEMENTS, OTHER THAN
STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY REFERENCE INTO
THIS PROSPECTUS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION, WHEN USED IN THIS
DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND SIMILAR EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING
ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE
ANTICIPATED, ESTIMATED OR PROJECTED. ALTHOUGH CITGO BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, NO
ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS PROSPECTUS,
INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO CITGO OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
THE REPUBLIC OF VENEZUELA MAINTAINS DIPLOMATIC RELATIONS WITH THE
GOVERNMENT OF CUBA AND, AS A SOVEREIGN NATION, MAY HAVE DEALINGS WITH THE
GOVERNMENT OF CUBA OR WITH PERSONS OR COMPANIES IN CUBA. IN ADDITION, CERTAIN
COMPANIES THAT ARE CONTROLLED BY THE REPUBLIC OF VENEZUELA MAY HAVE HAD AND MAY
CONTINUE TO HAVE DEALINGS WITH THE GOVERNMENT OF CUBA OR WITH PERSONS OR
COMPANIES IN CUBA. MARAVEN AND PEQUIVEN, WHOLLY-OWNED SUBSIDIARIES OF PDVSA,
FROM TIME TO TIME SELL PRODUCTS TO PERSONS IN CUBA. IN 1995, MARAVEN SOLD
LUBRICANTS TO CUBA METALES AND PEQUIVEN SOLD UREA AND SULPHUR PRODUCTS TO
QUIMIMPORT. THE INFORMATION INCLUDED IN THIS PARAGRAPH IS ACCURATE AS OF THE
DATE OF THIS PROSPECTUS. CURRENT INFORMATION CONCERNING BUSINESS DEALINGS OF
PDVSA SUBSIDIARIES WITH THE GOVERNMENT OF CUBA OR WITH PERSONS LOCATED IN CUBA
MAY BE OBTAINED FROM THE STATE OF FLORIDA DEPARTMENT OF BANKING AND FINANCE AT
THE CAPITOL BUILDING, PLAZA LEVEL, TALLAHASSEE, FLORIDA 32399-0350 (TEL. NO.
(940) 488-9805).
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes appearing elsewhere in this
Prospectus or incorporated by reference herein. Unless the context otherwise
requires, all references in this Prospectus to "CITGO" or the "Company" are to
CITGO Petroleum Corporation and its subsidiaries, together with their respective
interests in affiliates that are accounted for under the equity method.
THE COMPANY
CITGO Petroleum Corporation is a privately-held company engaged in the
refining, marketing and transportation of petroleum products including gasoline,
diesel fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes.
CITGO is a direct wholly-owned subsidiary of PDV America, Inc., a Delaware
corporation ("PDV America"), and an indirect wholly-owned subsidiary of PDVSA.
PDVSA, the national oil company of the Republic of Venezuela, is the
world's second largest oil company, behind only Saudi Aramco, according to
rankings published by Petroleum Intelligence Weekly, based on a combination of
factors, including reserves, production capacity and refined product sales. At
December 31, 1995, PDVSA's proved crude oil reserves of approximately 64.8
billion barrels were the largest of any company or country in the Western
hemisphere (larger, for example, than the 22.4 billion barrels of proved crude
oil reserves located in the United States). PDVSA does not and will not
guarantee or otherwise be responsible for the payment of any obligations of
CITGO, including CITGO's obligations with respect to any Debt Securities.
CITGO owns and operates two modern, highly complex crude oil refineries
(Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt refineries
(Paulsboro, New Jersey, and Savannah, Georgia) with a combined aggregate rated
crude oil refining capacity of 572 thousand barrels per day ("MBPD"). The Lake
Charles refinery is the sixth largest in the United States. The Lake Charles
refinery and the Corpus Christi refinery have Solomon Process Complexity Ratings
of 15.2 and 15.8, respectively (as compared to an average of 12.6 for U.S.
refineries in the most recently available Solomon Associates, Inc. survey). The
Solomon Process Complexity Rating is an industry measure of a refinery's ability
to produce higher value-added products. CITGO also owns a minority interest in
LYONDELL-CITGO, a limited liability company that owns and operates a refinery in
Houston, Texas, with a rated crude oil refining capacity of 265 MBPD.
CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into
long-term crude oil supply agreements with PDVSA, expiring between 2006 and
2013, which allow CITGO to purchase crude oil and other feedstocks at each of
its refineries. The long-term crude oil supply agreements 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) certain
deemed refining costs adjustable for inflation, (ii) certain actual costs,
including transportation charges, import duties and taxes and (iii) a deemed
margin which varies according to the grade of crude oil or feedstock delivered.
Deemed margins under certain of the supply agreements are adjusted periodically
by a formula based in part on the rate of inflation. These crude oil supply
agreements are designed to provide a relatively stable level of gross margin on
crude oil supplied by PDVSA in order to reduce the volatility of earnings and
cash flows from the refining and marketing operations of CITGO. This supply
represented approximately two-thirds of the crude oil processed in refineries
operated by CITGO in 1995.
CITGO markets branded gasoline through over 14,000 independently owned and
operated CITGO branded retail outlets (including 12,286 retail outlets owned or
operated by approximately 750 independent branded distributors and 1,752
7-Eleven convenience stores) located throughout the United States, primarily
east of the Rocky Mountains. In 1995, the National Petroleum News ranked CITGO
second in the number of branded outlets and third in domestic gasoline market
share with 8.2%, up from approximately 4.5% in 1989. The number of independent
distributor-owned or operated CITGO branded retail outlets increased
approximately 7%, 6% and 13% in 1995, 1994, and 1993, respectively.
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Gasoline sales accounted for 61%, 57% and 58% of CITGO's total sales revenues in
1995, 1994, and 1993, respectively. To supply its market network, CITGO not only
uses the gasoline production from its refineries but also purchases gasoline
from others. In 1995, CITGO sold approximately 11.1 billion gallons of gasoline.
CITGO sells jet fuel directly to airline customers at 22 airports,
including such major hub cities as Chicago, Dallas/Fort Worth, New York and
Miami. CITGO also sells diesel/#2 fuel through wholesale rack sales to
distributors as well as in bulk through contract sales or on a spot basis.
CITGO's delivery of light products is accomplished in part through 52
refined product terminals located throughout CITGO's primary market territory.
Of these terminals, 40 were wholly owned by CITGO and 12 were jointly owned as
of December 31, 1995. Active exchange relationships give CITGO access to over
370 other refined product terminals.
CITGO sells petrochemicals and industrial products in bulk to a variety of
U.S. manufacturers as raw materials for finished goods. Sulfur is sold to the
U.S. and international fertilizer industry; cycle oils are sold for feedstocks
processing and blending; natural gas liquids are sold to the U.S. fuel and
petrochemical industry; petroleum coke is sold primarily in international
markets for use as kiln and boiler fuel; and residual fuel blendstocks are sold
to a variety of fuel oil blenders and customers.
CITGO sells a variety of lubricants, including automotive lubricants and
industrial lubricants and waxes, to independent distributors, mass marketers and
industrial customers. CITGO markets many different types, grades and container
sizes of lubricant and wax products, with the bulk of these sales consisting of
automotive oil and lubricants and industrial lubricants. CITGO markets the
largest portion of its wax production as coating material for the corrugated
container industry. In 1995 CITGO acquired Cato Oil & Grease ("Cato"), a lubes
blending, manufacturing and packaging operation. Cato's extensive lines of
lubricating fluids and grease will continue to be marketed under the Mystik and
Cato brands.
CITGO markets asphalt through 10 terminals located along the East Coast,
from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to
independent contractors for use in the construction and resurfacing of roadways.
CITGO owns and operates a 959 mile crude oil pipeline system and three
product pipelines with a combined total of approximately 1,100 miles. CITGO also
owns minority 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
products markets, as well as dividend income. One of these pipelines, Colonial
Pipeline, is owned 13.98% by CITGO and is the largest refined product pipeline
in the United States. It transports gasoline, jet fuel and diesel/#2 fuel from
the Gulf Coast to the mid-Atlantic states, a major market area for CITGO.
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RISK FACTORS
VOLATILITY OF EARNINGS AND CASH FLOWS
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 the
costs of crude oil, feedstocks and blending components, and in the prices
realized for refined products. In general, prices for refined products are
significantly influenced by the price of crude oil and, to a lesser extent, by
the prices of feedstocks and blending components. Although an increase or
decrease in prices for crude oil, feedstocks and blending components generally
will result in a corresponding increase or decrease in prices for refined
products, there is generally a lag in the realization of the corresponding
increase or decrease in prices for refined products. A substantial or prolonged
increase in crude oil prices without a corresponding increase in refined product
prices, a substantial or prolonged increase in refined product prices without a
corresponding decrease in crude oil prices, or a substantial or prolonged
decrease in demand for refined products could have a significant negative effect
on the Company's earnings and cash flows.
The markets and prices for crude oil, feedstocks, blending components and
refined products depend on many factors beyond the control of CITGO, including
(i) the aggregate demand for crude oil, refined products and petrochemicals,
which fluctuates with changes in the economy, price levels, seasons and weather
patterns, (ii) the level of foreign and domestic crude oil production, (iii)
refinery utilization rates, (iv) the price and availability of alternative
products, (v) the impact of energy conservation efforts, (vi) domestic and
international political and economic events and (vii) the extent of governmental
regulation and taxation. In addition, refinery throughput and operating costs
may vary due to scheduled and unscheduled maintenance shutdown requirements. In
addition, although the Company realized relatively high prices from the sale of
petrochemical products during 1995, petrochemical prices are generally cyclical
and CITGO anticipates that prices for such products will decline from their
recent high levels. A significant and prolonged decline in petrochemical prices
could also have an adverse effect on CITGO's earnings and cash flows. As a
result of these factors, the earnings and cash flows of CITGO may be subject to
substantial fluctuations.
DEPENDENCE ON CRUDE OIL SUPPLIED BY PDVSA
CITGO purchases a significant portion of its crude oil requirements from
PDVSA, the national oil company of the Republic of Venezuela, under long-term
supply agreements (expiring in 2006 through 2013). In 1995, approximately
two-thirds of the crude oil refined by CITGO was supplied by PDVSA under
contracts of this type. These arrangements are designed to reduce the volatility
of earnings and cash flows from the refining and marketing operations of CITGO
by providing a relatively stable level of gross margin on crude oil supplied by
PDVSA. The supply agreements 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) certain deemed refining costs
adjustable for inflation, (ii) certain actual costs, including transportation
charges, import duties and taxes and (iii) a deemed margin, which varies
according to the grade of crude oil or feedstock delivered. 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. Although CITGO believes that these supply agreements reduce the
volatility of its earnings and cash flows, these agreements also limit CITGO's
ability to enjoy higher margins during periods when the market price of crude
oil is low relative to the then current market prices for refined products.
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By reason of its indirect ownership of CITGO, PDVSA could cause the
termination of such supply agreements or a modification of the terms of such
supply agreements. Although the Indenture relating to the Debt Securities
restricts the ability of CITGO to terminate or modify such supply agreements,
the Indenture would not prevent PDVSA from taking actions, or causing CITGO to
take actions, to cause a termination or modification of such agreements. By
their terms, the agreements terminate if PDVSA no longer owns 50% or more of the
ownership interest in CITGO. In addition, all of the crude oil supplied by PDVSA
under these agreements is produced in Venezuela, a country that has experienced
social tensions, domestic unrest and attempted military coups from time to time
during the last several years as a result of difficult economic conditions. If
the supply agreements are modified or terminated or this source of crude oil is
otherwise interrupted due to production difficulties, political or economic
events in Venezuela or other factors, CITGO could experience significantly
greater volatility in its earnings and cash flows. See "Description of Debt
Securities -- Certain Covenants -- Specified Agreements."
Since January 1, 1992, the supply agreements between PDVSA and CITGO with
respect to the Lake Charles, Corpus Christi and Paulsboro refineries have been
modified at various times to adjust the price levels to be paid by CITGO for
crude oil purchased from PDVSA. These modifications resulted in an approximate
$70 million decrease in CITGO's crude oil costs for each of the years 1992
through 1994, and an approximate $48 million decrease in CITGO's crude oil costs
in 1995, as compared to the amounts that would otherwise have been payable
thereunder. The Company anticipates that such modifications will decrease the
price of crude oil purchased from PDVSA under these agreements by approximately
$25 million per year in 1996 through 1999, in each case (i) as compared with the
price that would otherwise be payable thereunder and (ii) without giving effect
to any other factors that may affect the price paid by CITGO for crude oil under
these agreements. These estimates are based on the assumption that, among other
things, CITGO will purchase the base volumes of crude oil under the agreements.
Such net cost reductions, which were intended to defray CITGO's costs for
certain environmental compliance expenditures, will be eliminated after 1999.
GOVERNMENT REGULATION; ENVIRONMENTAL LIABILITIES
The operations of CITGO are subject to extensive environmental, health,
safety and consumer protection laws and regulations. The nature of the oil and
gas business exposes CITGO to risks of liability due to the production,
refining, storage, transportation and sale of materials that can cause
contamination or personal injury if released into the environment. In addition,
environmental laws, such as the 1990 Clean Air Act Amendments and the Oil
Pollution Act of 1990, may have a significant effect on the methods of product
formulation, the nature and scope of cleanup of contamination at operating
facilities, and the costs of transportation of crude oil and refined products.
Under the 1990 Clean Air Act Amendments, the U.S. refining industry is being
required to comply with stringent product specifications which will require
CITGO to continue to make substantial capital expenditures. CITGO expects that
the nature of its business will continue to make it subject to increasingly
stringent environmental and other regulatory standards. It is difficult to
predict the effect of future developments in such laws and regulations on
CITGO's future earnings and operations, but CITGO anticipates that these
standards will cause an increase in its capital expenditures and operating
costs, both as to existing operations and to effect product specification
changes necessary to conduct operations in the future.
FUNDING OF CAPITAL EXPENDITURES
The Company has historically financed its capital expenditure requirements
through cash from operations, borrowings and, to a lesser extent, capital
contributions from PDV America, its parent company. The Company anticipates that
it will make significant capital expenditures during the next several years in
connection with strategic investments (including additional investments in
LYONDELL-CITGO related to a refinery enhancement project), to satisfy
environmental and other regulatory requirements and to upgrade and maintain its
refineries. The Company intends to fund its capital expenditures in the future
from cash from operations, borrowings under its existing bank credit facilities
and the issuance of Debt Securities. As a result, the Company's level of
indebtedness may increase in
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the future. The Company has significant credit availability under its existing
committed bank credit facility ($385 million as of December 31, 1995). This
credit facility expires in 1999, and there can be no assurance that the Company
will be able to renew it on satisfactory terms. In addition, there can be no
assurances that the Company will be able to borrow money from other sources on
terms acceptable to it or that the Company will be able to sell Debt Securities
having terms acceptable to it.
STRUCTURAL SUBORDINATION
CITGO conducts a portion of its operations through subsidiaries and joint
ventures with other companies. Accordingly, CITGO relies in part on dividends
from its subsidiaries and joint ventures, as well as payment of principal and
interest on advances made to its affiliates, to provide funds necessary to meet
its obligations, including the payment of principal and interest on any Debt
Securities. The ability of any such subsidiary or joint venture to pay dividends
or make cash distributions is subject to applicable laws, contractual
restrictions and applicable joint venture rights and obligations. None of the
subsidiaries of CITGO is an obligor or guarantor in respect of any Debt
Securities. The rights of CITGO and its creditors (including the holders of Debt
Securities) to realize upon the assets of any of their respective subsidiaries
would rank behind the claims of creditors (including trade creditors and tort
claimants) of such subsidiaries, except to the extent that CITGO may itself be a
creditor with recognized claims against any such subsidiary (in which case such
rights, if unsecured, would rank behind the secured claims of such creditors).
RECENT INCREASES IN RETAIL GASOLINE PRICES; POSSIBILITY OF FUTURE LEGISLATION OR
OTHER GOVERNMENTAL ACTION
Retail prices for gasoline have increased significantly during the first
several months of 1996 and, in response to such increases, there have been
newspaper reports that certain members of Congress are considering introducing
legislative proposals to reduce the federal gasoline tax from 18.1 cents a
gallon, to possibly 13.8 cents a gallon. The Company is unable to make any
prediction as to whether any such proposal will be introduced in Congress or
whether any such proposal, if introduced, would ultimately be adopted as
legislation. In addition, it is possible that other governmental action, either
by the federal government or one or more state governments, could be taken in
response to such recent gasoline price increases. On May 10, 1996, the Company
received a letter from the Antitrust Division of the United States Department of
Justice indicating that the department has opened an investigation into the
recent increases in gasoline prices to determine whether those increases were
caused by conduct in violation of the antitrust laws, and indicating that the
Company will soon be receiving a civil investigative demand seeking documents
and responses to interrogatories in connection with such investigation. There
can be no assurance that such investigation, any legislation, if adopted, or
other governmental action, if taken, would not have an adverse effect on the
Company.
ABSENCE OF PUBLIC MARKET FOR THE DEBT SECURITIES
There has been no prior public market for any of the Debt Securities, and
the Company is not obligated to apply for listing of any of the Debt Securities
on any national securities exchange or for quotation on any automated quotation
system. The Underwriters of any offerings of Offered Debt Securities, if any,
will not be obligated to make a market for Offered Debt Securities, and any
market-making which does commence may be discontinued at any time without
notice. Accordingly, there can be no assurance that any market will develop upon
completion of the offering of any Offered Debt Security or, if developed, that
any trading market will be sustained. Factors such as the Company's financial
results, variations in interest rates, future announcements concerning the
Company or its competitors, government regulation, and general economic and
other conditions and developments affecting the refining and marketing industry
could cause the market price of any Offered Debt Securities to fluctuate
substantially following the issuance thereof. Depending on such factors, the
Offered Debt Securities may trade, if at all, at a discount from their face
amount.
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USE OF PROCEEDS
Except as otherwise set forth in the Prospectus Supplement relating to the
Offered Debt Securities, the net proceeds to be received by the Company from the
sale of the Debt Securities will be used for general corporate purposes,
including capital expenditures and repayment of indebtedness. Any specific
allocation of the proceeds to a particular purpose that has been made as of the
date of any Prospectus Supplement will be described therein. Pending ultimate
application, the net proceeds from the sale of the Debt Securities may be used
to reduce short-term indebtedness or may be temporarily invested in marketable
securities.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of earnings to fixed charges for
the Company for the five years ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ---------------------------------------------
1995 1994 1993 1992 1991
- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C>
2.76x 3.85x 3.71x 2.94x 2.92x
</TABLE>
For the purposes 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.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities are to be issued under an Indenture (the "Indenture")
between the Company and The First National Bank of Chicago, as Trustee (the
"Trustee"), a copy of which is filed as an exhibit to the Registration
Statement. The following summaries of certain provisions of the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Indenture, including the definitions
therein of certain terms. Wherever particular provisions of the Indenture or
terms defined therein are referred to herein, such provisions or defined terms
are incorporated herein by reference, and the statements are qualified in their
entirety by such reference. Capitalized terms not otherwise defined herein shall
have the meanings given to them in the Indenture.
The following sets forth certain general terms and provisions of the Debt
Securities offered hereby. The particular terms of the Debt Securities of any
series offered by any Prospectus Supplement (the "Offered Securities") will be
described in the Prospectus Supplement relating to such Offered Securities (the
"Applicable Prospectus Supplement").
GENERAL
The Indenture does not limit the amount of Debt Securities that may be
issued thereunder, and Debt Securities may be issued thereunder from time to
time in one or more series. The Debt Securities will be general unsecured senior
obligations of the Company. The Debt Securities will rank pari passu in right of
payment with all existing and future senior unsecured indebtedness of the
Company and senior in right of payment to all existing and future indebtedness
of the Company that is designated as subordinate or junior in right of payment
to the Debt Securities. The Debt Securities will be effectively subordinated to
all obligations (including trade payables) of the Company's Subsidiaries. At
December 31, 1995, the Company's Subsidiaries had balance sheet liabilities of
approximately $606 million. The Subsidiaries also have other liabilities
(including contingent liabilities) which may be substantial.
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The Applicable Prospectus Supplement will describe the following terms of
the Offered Securities:
(1) the title of the Offered Securities;
(2) the aggregate principal amount of the Offered Securities and any
limit on such aggregate principal amount;
(3) the Person to whom any interest on the Offered Securities shall be
payable, if other than the person in whose name that Offered Security (or
one or more Predecessor Securities) is registered at the close of business
on the Regular Record Date for such interest, the manner in which, or the
Person to whom, any interest on any Offered Security in bearer form shall
be payable, if otherwise than upon presentation and surrender of the
coupons appertaining thereto as they severally mature, and the extent to
which, or the manner in which, any interest payable on a temporary global
Offered Security on an Interest Payment Date will be paid;
(4) the percentage of the principal amount at which the Offered
Securities will be issued and, if other than the principal amount thereof,
the portion of the principal amount thereof payable upon declaration of
acceleration of the maturity thereof, or the method by which any such
portion shall be determined;
(5) the date or dates, or the method for determining such date or
dates, on which the principal of the Offered Securities will be payable;
(6) the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which the Offered
Securities will bear interest, if any;
(7) the date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the Interest Payment Dates
and the record date, if any, for the interest payable on any Offered
Security in registered form on any Interest Payment Date, or the method by
which such dates shall be determined, the Persons to whom such interest
shall be payable, and the basis upon which interest shall be calculated if
other than that of a 360-day year of twelve 30-day months;
(8) the place or places where the principal of (and premium, if any)
and interest, if any, on the Offered Securities and Additional Amounts, if
any, payable in respect of, Offered Securities will be payable, where the
Offered Securities in registered form may be surrendered for registration
of transfer or exchange and where notices or demands to or upon the Company
in respect of the Offered Securities and the Indenture may be served;
(9) the period or periods within which, the price or prices at which,
the currency or currencies, currency unit or units or composite currency or
currencies in which, and the other terms and conditions upon which the
Offered Securities may be redeemed, as a whole or in part, at the option of
the Company, if the Company is to have such an option;
(10) the obligation, if any, of the Company to redeem, repay or
purchase the Offered Securities pursuant to any sinking fund or analogous
provision or at the option of a Holder thereof, and the period or periods
within which or the date or dates on which, the price or prices at which,
the currency or currencies, currency unit or units or composite currency or
currencies in which, and the other terms and conditions upon which such
Offered Securities will be redeemed, repaid or purchased, as a whole or in
part, pursuant to such obligation;
(11) if other than the Trustee, the identity of each Security
Registrar and/or Paying Agent;
(12) if other than U.S. dollars, the currency or currencies in which
the Offered Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
(13) whether the amount of payments of principal of (and premium, if
any) or interest, if any, on the Offered Securities may be determined with
reference to an index, formula or other method (which index, formula or
method may, but need not be, based on a currency, currencies, currency
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unit or units, composite currency or currencies, commodities, equity
indices and other indices) and the manner in which such amounts shall be
determined;
(14) provisions, if any, granting special rights to the Holders of
Offered Securities upon the occurrence of such events as may be specified;
(15) any additions to, modifications of or deletions from the terms of
the Offered Securities with respect to the Events of Default or covenants
set forth in the Indenture;
(16) whether the Offered Securities will be in registered or bearer
form (with or without coupons), any restrictions applicable to the offer,
sale or delivery of Offered Securities in bearer form and the terms upon
which Offered Securities in bearer form may be exchanged for Offered
Securities in registered form and vice versa (if permitted by applicable
laws and regulations), and, if in registered form, the denominations
thereof if other than $1,000 and any integral multiple thereof and, if in
bearer form, the denominations thereof and terms and conditions relating
thereto;
(17) the date as of which any Offered Securities in bearer form and
any temporary global Offered Security representing Outstanding Offered
Securities shall be dated if other than the date of original issuance of
the first Offered Security to be issued;
(18) the applicability, if any, of the defeasance and covenant
defeasance provisions described under the caption "Defeasance and Covenant
Defeasance" and any provisions in modification of, in addition to or in
lieu of any of such provisions;
(19) if the principal of or any premium or interest or Additional
Amounts, if any, on any Offered Securities is to be payable, at the
election of the Company or a Holder thereof, in one or more currencies,
currency units or composite currencies other than that or those in which
the Offered Securities are stated to be payable, the currency, currencies,
currency units or composite currencies in which payment of the principal of
and any premium and interest on the Offered Securities as to which such
election is made shall be payable, and the periods within which and the
terms and conditions upon which such election is to be made, and the time
and manner of, and identity of the exchange rate agent with responsibility
for, determining the exchange rate between the currency or currencies,
currency unit or units or composite currency or currencies in which such
Offered Securities are denominated or stated to be payable;
(20) whether the Offered Securities will be issuable, in whole or in
part, in the form of one or more Global Securities (with or without
coupons) as described under "Book-Entry System," and, if so, whether
beneficial owners of interests in any such permanent global Security may
exchange such interests for Securities of such series and of like tenor of
any authorized form and denomination and the circumstances under which any
such exchanges may occur and, if Offered Securities in registered form are
to be issuable as a global Security, the identity of the depositary for
such series;
(21) if the Offered Securities are to be issuable in definitive form
(whether upon original issue or upon exchange of a temporary Offered
Security) only upon receipt of certain certificates or other documents or
satisfaction of other conditions, then the form and/or terms of such
certificates, documents or conditions;
(22) whether and under what circumstances the Company will pay
Additional Amounts on the Offered Securities to any Holder who is not a
United States person (including any modification to the definition of such
term) in respect of any tax, assessment or governmental charge and, if so,
whether the Company will have the option to redeem such Offered Securities
rather than pay such Additional Amounts (and the terms of any such option);
and
(23) any other terms of such Offered Securities not inconsistent with
the provisions of the Indenture (Section 301 of the Indenture).
The Debt Securities of any series may be issued as Original Issue Discount
Securities to be offered and sold at a substantial discount below their stated
principal amount. Federal income tax consequences
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and other special considerations applicable to Original Issue Discount
Securities and any Debt Securities treated as having been issued with original
issue discount for federal income tax purposes will be described in the
Applicable Prospectus Supplement. "Original Issue Discount Securities" means any
Offered Security which provides for an amount less than the principal amount
thereof to be due and payable upon the declaration of acceleration of the
Maturity thereof upon the occurrence of an Event of Default and the continuation
thereof.
The Indenture does not contain covenants or other provisions designed to
afford Holders of Debt Securities protection in the event of a highly leveraged
transaction, change in credit rating or other similar occurrence.
DENOMINATIONS, INTEREST, REGISTRATION AND TRANSFER
Unless otherwise described in the Applicable Prospectus Supplement, the
Debt Securities of any series will be issuable in denominations of $1,000 and
integral multiples thereof (Section 302 of the Indenture) and will be issued
only in fully registered form without coupons.
Unless otherwise specified in the Applicable Prospectus Supplement, the
principal of (and applicable premium, if any) and interest, if any, on any
series of Debt Securities will be payable at the corporate trust office of the
Trustee, provided that, at the option of the Company, payment of interest may be
made by check mailed to the address of the person entitled thereto as it appears
in the Security Register or by wire transfer of funds to such Person at an
account maintained within the United States (Sections 301, 305, 306, 307 and
1002 of the Indenture).
BOOK-ENTRY SYSTEM
The provisions set forth below in this section headed "Book-Entry System"
will apply to the Debt Securities of any series if the Applicable Prospectus
Supplement relating to such series so indicates.
The Debt Securities of such series will be represented by one or more
global securities (collectively, a "Global Security") registered in the name of
a depositary (the "Depositary") or a nominee of the Depositary identified in the
Applicable Prospectus Supplement relating to such series. Except as set forth
below, a Global Security may be transferred, in whole and not in part, only to
the Depositary or another nominee of the Depositary.
Upon the issuance of a Global Security, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Debt Securities represented by such Global Security to the accounts of
institutions that have accounts with the Depositary or its nominee
("participants"). The accounts to be credited will be designated by the
underwriters, dealers or agents. Ownership of beneficial interests in a Global
Security will be limited to participants or persons that may hold interests
through participants. Ownership of interests in such Global Security will be
shown on, and the transfer of those ownership interests will be effected only
through, records maintained by the Depositary (with respect to participants'
interests) and such participants (with respect to the owners of beneficial
interests in such Global Security). The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such limits and laws may impair the ability to transfer
beneficial interests in a Global Security.
So long as the Depositary, or its nominee, is the registered holder and
owner of such Global Security, the Depositary or such nominee, as the case may
be, will be considered the sole owner and holder of the related Debt Securities
for all purposes of such Debt Securities and for all purposes under the
Indenture. Except as set forth below, owners of beneficial interests in a Global
Security will not be entitled to have the Debt Securities represented by such
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of Debt Securities in definitive form and will not be
considered to be the owners or holders of any Debt Securities under the
Indenture or such Global Security.
Accordingly, each person owning a beneficial interest in a Global Security
must rely on the procedures of the Depositary and, if such person is not a
participant, on the procedures of the participant
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through which such person owns its interest, to exercise any rights of a holder
of Debt Securities under the Indenture or such Global Security. The Indenture
permits the Depositary to authorize participants, as its agents, to take any
action which the Depositary, as the holder of a Global Security, is entitled to
take under the Indenture or such Global Security. The Company understands that
under existing industry practice, in the event the Company requests any action
of holders of Debt Securities or an owner of a beneficial interest in a Global
Security desires to take any action that the Depositary, as the holder of such
Global Security is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Payment of principal of and premium, if any, and interest, if any, on Debt
Securities represented by a Global Security will be made to the Depositary or
its nominee, as the case may be, as the registered owner and holder of such
Global Security.
Upon receipt of any payment of principal, premium, if any, or interest, if
any, in respect of a Global Security, the Depositary will credit immediately
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Security
as shown on the records of the Depositary. Payments by participants to owners of
beneficial interests in a Global Security held through such participants will be
governed by standing instructions and customary practices, as is the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants. The Company
will not have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial ownership interests in a
Global Security for any Debt Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depositary and its participants or
the relationship between such participants and the owners of beneficial
interests in such Global Security owning through such participants.
Unless and until it is exchanged in whole or in part for Debt Securities in
definitive form, a Global Security may not be transferred except as a whole by
the Depositary to a nominee of such Depositary or by a nominee of such
Depositary to such Depositary or another nominee of such Depositary.
Securities represented by a Global Security are exchangeable for Debt
Securities in definitive form of like tenor as such Global Security in
denominations of $1,000 and in any greater amount that is an integral multiple
thereof if (i) the Depositary notifies the Company that it is unwilling or
unable to continue as Depositary for such Global Security or if at any time the
Depositary ceases to be a clearing agency registered under the Securities
Exchange Act of 1934, as amended, (ii) the Company in its discretion at any time
determines not to have all of the Debt Securities represented by a Global
Security and notifies the Trustee thereof, or (iii) an Event of Default has
occurred and is continuing with respect to the Debt Securities. Any Debt
Security that is exchangeable pursuant to the preceding sentence is exchangeable
for Debt Securities issuable in authorized denominations and registered in such
names as the Depositary shall direct. Subject to the foregoing, a Global
Security is not exchangeable, except for a Global Security or Global Securities
of the same aggregate denominations to be registered in the name of the
Depositary or its nominee.
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CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Restricted Payments. The Company will not (and will not
permit any Restricted Subsidiary to), directly or indirectly, make any
Restricted Payment, unless:
(a) after giving effect thereto, the aggregate amount of all
Restricted Payments during the period commencing on April 1, 1996, and
ending on the date of the payment of such Restricted Payment (the
"Computation Period") shall not exceed an amount equal to the sum of:
(1) $450,000,000, plus
(2) 100% of the aggregate amount received by the Company as (i) the
net cash proceeds or (ii) the Fair Market Value of Marketable Assets
from the sale (other than to a Subsidiary of the Company) of shares of
Capital Stock of the Company or otherwise received as a capital
contribution during the Computation Period, minus
(3) 100% of the aggregate amount of all PDVSA Investments made
during the Computation Period, plus
(4) 100% of the aggregate amount received during the Computation
Period by the Company and its Restricted Subsidiaries (except, in the
case of any such amount received and held by a Restricted Subsidiary, to
the extent that such Restricted Subsidiary is prohibited, whether by
contract, applicable law or otherwise, from paying such amount as
dividends to the Company or any other Restricted Subsidiary) (i) as
earnings (whether in the form of dividends or otherwise) on PDVSA
Investments and (ii) as net cash proceeds in connection with the sale,
redemption or other disposition of one or more PDVSA Investments or any
part thereof or any interest therein, plus
(5) 75% (or minus 100% if negative) of the aggregate Consolidated
Net Income for the period commencing on April 1, 1996, and ending on and
including the last day of the fiscal quarter ended immediately prior to
the date of payment of such Restricted Payment, plus
(6) 100% of the aggregate principal amount of any Senior
Indebtedness of the Company converted into or exchanged for Capital
Stock of the Company during the Computation Period;
(b) immediately after giving effect to such Restricted Payment, no
Default or Event of Default shall have occurred and be continuing; and
(c) immediately after giving effect to any such Restricted Payment,
Consolidated Net Worth shall be at least equal to the sum of:
(1) $1,400,000,000, plus
(2) an amount equal to $10,000,000 multiplied by the number of
completed fiscal quarters of the Company since April 1, 1996.
Notwithstanding the foregoing, the foregoing provisions do not prohibit the
payment of any dividend or making of any distribution within 90 days after the
date of its declaration if the dividend or distribution would have been
permitted on the date of declaration; provided, however, that such dividend
shall be deemed to have been made as of its date of declaration for purposes of
this covenant.
Specified Agreements. The Company will not, and will not permit any of its
Restricted Subsidiaries to, amend, modify or waive:
(a) any Pricing Term of any Specified Agreement, unless the Trustee
shall have first received (i) a certified resolution of the Board of
Directors of the Company to the effect that such amendment, modification or
waiver would not have a Materially Adverse Effect and (ii) the written
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opinion of a nationally recognized firm of investment bankers that such
amendment, modification or waiver is fair, from a financial point of view,
to the Company and its Restricted Subsidiaries;
(b) any Material Non-Pricing Term of any Specified Agreement; or
(c) any provision of the CITGO Supplemental Supply Agreement (unless
an amendment thereto shall be required to conform the CITGO Supplemental
Supply Agreement to the CITGO Supply Agreement following an amendment of
the CITGO Supply Agreement effected in compliance with the provisions of
this covenant or otherwise not in violation of the Indenture).
Transactions with Affiliates. The Company will not, and will not permit any
of its Restricted Subsidiaries to, engage in any transaction with an Affiliate
of the Company (other than the Company or a Restricted Subsidiary of the
Company) on terms less favorable to the Company or such Restricted Subsidiary
(as the case may be) than would have been obtainable in arms' length dealing
with a Person other than an Affiliate; provided that nothing in this covenant
shall prohibit any transaction where the amount involved is less than
$1,000,000; provided further that the aggregate amount involved in all
transactions consummated in reliance on the preceding proviso in any
twelve-month period shall not exceed $10,000,000. In determining whether, for
purposes of this covenant, any transaction between or among parties is arms'
length, all other contemporaneous transactions between or among such parties
shall be taken into account so that such transaction and such other transactions
shall be considered as a single transaction.
The limitations of the preceding paragraph do not apply to transactions
with Affiliates contemplated by agreements in effect on the date of the
Indenture in accordance with the terms of such agreements as in effect on the
date of the Indenture or any renewals or extensions thereof on substantially the
same terms (and, with respect to Specified Agreements, as amended in compliance
with the "Specified Agreements" covenant or otherwise not in violation of the
Indenture).
Limitation on Liens. The Indenture provides that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
Incur any Lien on or with respect to any Significant Property of the Company or
such Restricted Subsidiary, or any interest therein or any income or profits
therefrom, unless the Debt Securities are secured equally and ratably with (or
prior to) any and all other Indebtedness secured by such Lien, except for: (a)
Liens existing on the Issue Date; (b) Liens on Property existing at the time of
acquisition thereof or Liens affecting Property of a Person existing at the time
it becomes a Subsidiary of the Company or at the time it is merged into or
consolidated with the Company or a Subsidiary of the Company; provided that, in
either case, such Liens do not extend to or cover any Property of the Company or
of any of its Restricted Subsidiaries other than the Property that secured the
Acquired Indebtedness prior to the time such Indebtedness became Acquired
Indebtedness of the Company or a Subsidiary; (c) Liens on Property Incurred to
secure payment of all or a part of the purchase price thereof or to secure
Indebtedness Incurred prior to, at the time of, or within 12 months after the
acquisition thereof for the purpose of financing all or part of the purchase
price thereof; (d) Liens on any Property to secure all or part of the cost of
improvements or construction thereon or Indebtedness Incurred to provide funds
for such purpose in a principal amount not exceeding the cost of such
improvements or construction and Incurred within 12 months after completion of
such improvements or construction; (e) Liens to government entities granted to
secure pollution control or industrial revenue bond financings; (f) Liens which
secure Indebtedness owing by a Restricted Subsidiary of the Company to the
Company, by the Company to a Restricted Subsidiary or by one Restricted
Subsidiary to another Restricted Subsidiary; (g) Liens imposed by law, including
mechanics', materialmens', carriers' or other like Liens, arising in the
ordinary course of business; (h) any Lien Incurred to secure the performance of
surety or appeal bonds Incurred in the ordinary course of business consistent
with past practice; (i) any Lien incidental to the normal conduct of the
business of the Company or any Restricted Subsidiary or the ownership of its
property or the conduct of the ordinary course of its business (including,
without limitation, (A) zoning restrictions, easements, rights of way, licenses,
covenants, reservations, restrictions on the use of real property and other
minor irregularities of title, (B) rights of lessees under leases, (C) rights of
collecting banks having rights of setoff, revocation, refund or
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chargeback with respect to money or instruments of the Company or any Restricted
Subsidiary on deposit with or in the possession of such banks, (D) Liens to
secure the performance of statutory obligations, tenders, bids, leases, progress
payments, performance or return-of-money bonds, performance or other similar
bonds or other obligations of a similar nature incurred in the ordinary course
of business, (E) Liens required by any contract or statute in order to permit
the Company or a Subsidiary of the Company to perform any contract or
subcontract made by it with or pursuant to the requirements of a governmental
entity and (F) "first purchaser" Liens on crude oil), in each case which are not
Incurred in connection with the borrowing of money, the obtaining of advances or
credit or the payment of the deferred purchase price of Property and which do
not in the aggregate impair the use of Property in the operation of the business
of the Company and its Restricted Subsidiaries taken as a whole; (j) Liens for
taxes not yet due or which are being contested in good faith by appropriate
proceedings, so long as reserves have been established to the extent required by
GAAP; (k) Liens securing obligations in respect of Interest Rate Protection
Agreements or Exchange Rate Contracts; (l) Liens on the assets of the Company or
any Restricted Subsidiary created or existing to secure stay or appeal bonds or
otherwise resulting from any litigation or legal proceeding which are currently
being contested in good faith by appropriate action promptly initiated and
diligently conducted, including the Lien of any judgment, provided that the
aggregate amount secured by all such Liens does not exceed $25 million; and (m)
any extension, renewal, replacement or refinancing of any Lien referred to in
the foregoing clauses (a) through (e); provided, however, that (X) such new Lien
shall be limited to all or part of the same property that secured the original
Lien (plus improvements on such property) and (Y) the Indebtedness secured by
such Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (a) through (e) at the time the original
Lien became a Lien permitted under this "Limitation on Liens" covenant and (B)
an amount necessary to pay any fees and expenses, including premiums, related to
such refinancing, refunding, extension, renewal or replacement. Notwithstanding
the foregoing, the Company and any one or more of its Restricted Subsidiaries
may, without securing the Debt Securities, Incur Liens which would otherwise be
subject to the foregoing restrictions securing (x) Current Indebtedness and (y)
Funded Indebtedness in an aggregate principal amount which, together with all
other such Funded Indebtedness of the Company and its Restricted Subsidiaries
which would otherwise be subject to the foregoing restrictions (not including
Indebtedness permitted to be secured under clauses (f) through (k), inclusive,
above) and the aggregate Attributable Indebtedness of Sale and Leaseback
Transactions does not at the time such Lien is Incurred exceed 15% of
Consolidated Net Tangible Assets of the Company and its consolidated Restricted
Subsidiaries.
Limitation on Sale and Leaseback Transactions. The Indenture provides that
the Company will not, and will not cause or permit any Restricted Subsidiary to,
enter into, assume, Guarantee or otherwise become liable with respect to any
Sale and Leaseback Transaction, unless (a) the obligation of the Company or such
Restricted Subsidiary with respect thereto would be permitted under the
"Limitation on Liens" covenant; (b) after the Issue Date and within a period
commencing six months prior to the effective date of such Sale and Leaseback
Transaction (or, if later, commencing on the Issue Date) and ending six months
after such effective date, the Company or any Restricted Subsidiary shall have
expended (or entered into a binding commitment to expend) for any Property
(including amounts expended or committed for the acquisition of such Property,
and for additions, alterations, improvements and repairs thereto; provided that
such expenditures constitute additions to property, plant and equipment under
GAAP; and provided further that any expenditure which shall have been financed
by Indebtedness secured by a Lien permitted under clause (c) or (d) of the
"Limitation on Liens" covenant shall be disregarded for purposes of determining
whether the Company or such Restricted Subsidiary shall have satisfied the
requirements of this clause (b)) an amount equal to all or a portion of the net
proceeds received from such transaction (but excluding any portion of such
proceeds which are applied as set forth in (c) below); or (c) the Company,
within six months after the effective date of any such Sale and Leaseback
Transaction, applies to the defeasance or retirement of the Debt Securities or
other Senior Indebtedness an amount equal to the net proceeds of the sale or
transfer of the Property leased in
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such transaction (with any such amount required to be applied under this clause
(c) to be reduced to reflect any amount utilized by the Company or a Restricted
Subsidiary as set forth in (b) above).
Restricted and Unrestricted Subsidiaries. Subject to the following
paragraph, the Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of itself or of any of its Restricted Subsidiaries as
an Unrestricted Subsidiary if (i) such Subsidiary does not have any obligations
which, if in default, would result in a cross default on Indebtedness of the
Company and (ii) either (a) such Subsidiary has total assets of $1,000 or less,
or (b) such designation is effective immediately upon such Person becoming a
Subsidiary of the Company or any of its Restricted Subsidiaries. Unless so
designated an Unrestricted Subsidiary, any Person that becomes a wholly-owned
Subsidiary of the Company or its Restricted Subsidiaries shall be classified as
a Restricted Subsidiary thereof. Except as provided in the first sentence of
this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted
Subsidiary. Subject to the following paragraph, an Unrestricted Subsidiary may
be redesignated as a Restricted Subsidiary. No Restricted Subsidiary may be a
Subsidiary of an Unrestricted Subsidiary. The designation of an Unrestricted
Subsidiary or the removal of such designation in compliance with the following
paragraph shall be made by the delivery to the Trustee of a certificate of
designation executed by the President, the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer, any Executive Vice President,
any Senior Vice President or the Treasurer of the Company.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless after giving effect to such action, transaction or series
of transactions, on a pro forma basis, (i) no Default or Event of Default would
occur or be continuing, and (ii) there exist no Liens with respect to the
Property of such Person other than Liens permitted under the "Limitation on
Liens" covenant.
Reports to Holders. Whether or not the Company is then required to do so
under the Exchange Act, the Company will file with the Securities and Exchange
Commission (the "Commission") the documents, reports and other information
required by the Exchange Act to be filed by domestic issuers of debt securities
registered under the Exchange Act and, upon such filing, will promptly furnish
such reports, documents and information to the Trustee and, within 15 days after
such filing with the Commission, the holders of the Debt Securities.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company shall not, and shall not permit any Restricted Subsidiary to,
consolidate or merge with or into any other Person, or convey, transfer or lease
all or substantially all its assets to any Person, unless: (1) either (a) the
Company shall be the continuing Person in the case of a merger or consolidation
or (b) the resulting, surviving or transferee Person if other than the Company
(the "Successor Company") shall be a solvent corporation, limited partnership or
limited liability company organized and validly existing under the laws of the
United States of America, any State thereof or the District of Columbia, and the
Successor Company shall expressly assume, by a supplement to the Indenture,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Debt Securities and the Indenture; (2)
immediately before and after giving effect to such transaction on a pro forma
basis (and treating any Indebtedness which becomes an obligation of the
Successor Company or any Restricted Subsidiary as a result of such transaction
as having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default or Event of Default shall have
occurred and be continuing; and (3) the Company shall have delivered to the
Trustee an Officer's Certificate and an Opinion of Counsel, each stating that
such transaction and such supplemental indenture (if any) comply with the
Indenture.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of the Company under the Indenture, and the
predecessor Company (except in the case of a lease and except in the case of any
conveyance or transfer of assets in which the transferee does not acquire
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the assets of the Company as an entirety or virtually as an entirety) will be
released from its obligations in respect of the Debt Securities.
MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS
Subject to certain exceptions, the provisions of the Indenture applicable
to the Debt Securities of any series may be amended or supplemented with the
written consent of the Holders of at least a majority in principal amount of the
Debt Securities of each affected series then outstanding and compliance with any
provisions may be waived with the consent of the Holders of at least a majority
in principal amount of the Debt Securities of each affected series then
outstanding. However, without the consent of each Holder of each Debt Security
so affected, no amendment or waiver may, among other things, (i) reduce the
amount of Debt Securities of each affected series whose Holders must consent to
an amendment, (ii) reduce the rate of or extend the time for payment of interest
on any Debt Securities, (iii) reduce the principal of or change the Stated
Maturity of any Debt Securities, (iv) reduce the premium payable upon the
redemption of any Debt Security or change the time or times at which any Debt
Securities may be redeemed, (v) make any Debt Security payable in money other
than that stated in the Debt Security, or (vi) impair the right of any Holder to
institute suit for the enforcement of any payment due on or with respect to any
Debt Securities.
Without the consent of any Holder of the Debt Securities of each affected
series, the Company and the Trustee may, among other things, amend or supplement
the Indenture to cure any ambiguity, omission, defect or inconsistency provided
that such change does not adversely affect the rights of any Holder, to provide
for the assumption by a Successor Company of the obligations of the Company
under the Indenture, to add Guarantees with respect to the Debt Securities or to
secure the Debt Securities, to add to the covenants of the Company for the
benefit of the Holders or to surrender any right or power conferred upon the
Company, to make any change that does not adversely affect the rights of any
Holder or to comply with any requirement of the Commission in connection with
the qualification of the Indenture under the Trust Indenture Act of 1939.
EVENTS OF DEFAULT
An "Event of Default" will occur under the Debt Securities of any series
if:
(i) the Company defaults in the payment of interest on any Debt
Security of such series when it becomes due and payable and such default
continues for a period of 30 days; or
(ii) the Company defaults in the payment of the principal of or
premium, if any, on any Debt Security of such series when the same becomes
due and payable at maturity, upon acceleration, required repurchase or
otherwise; or
(iii) the Company fails to comply with any of its agreements or
covenants in, or provisions of, the Debt Securities of such series or the
Indenture (other than clause (i) or (ii) above) and the default continues
for the period and after the notice specified below; or
(iv) any Indebtedness of the Company or any Restricted Subsidiary
having an outstanding principal amount of $25 million or more in the
aggregate, whether such Indebtedness now exists or shall hereafter be
created, is (A) declared to be due and payable prior to its Stated Maturity
or (B) not paid when due by the Company or any Restricted Subsidiary (after
giving effect to any extension of such due date by the holder of such
Indebtedness and after the expiration of any grace period in respect of
such due date contained in the instrument under which such Indebtedness is
outstanding), or any combination of (A) and (B); or
(v) one or more judgments or orders for the payment of money are
entered by a court of competent jurisdiction against the Company or any
Restricted Subsidiary in an aggregate amount in excess of $50 million and
such judgments or orders are not discharged, waived, stayed or satisfied
for a period of 60 consecutive days after judgment is entered; or
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(vi) certain events involving bankruptcy, insolvency or reorganization
of the Company or any Restricted Subsidiary occur.
A default under clause (iii) above is not an Event of Default with respect
to the Debt Securities of any series until the Trustee notifies the Company in
writing, or the Holders of at least 25% in principal amount of the Debt
Securities of such series then Outstanding notify the Company and the Trustee,
in writing, of the default, and the Company does not cure the default within 60
days after receipt of the notice. The notice must specify the default, demand
that it be remedied and state that the notice is a "Notice of Default". Such
notice to the Company shall be given by the Trustee if so requested in writing
by the Holders of at least 25% of the principal amount of the Debt Securities of
such series then Outstanding.
If an Event of Default with respect to Debt Securities of any series (other
than an Event of Default specified in clause (vi) occurs and is continuing, the
Trustee, by written notice to the Company, or the Holders of at least 25% in
principal amount of the Debt Securities of that series by written notice to the
Company and the Trustee, may declare the principal (or, if any Offered
Securities are Original Issue Discount Securities or Indexed Securities, such
portion of the principal as may be specified in the terms thereof) of all Debt
Securities of such series to be due and payable immediately. Upon such
declaration, such principal will be due and payable immediately. If an Event of
Default specified in clause (vi) occurs, the principal of all such Debt
Securities will become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holders. The Holders
of a majority in principal amount of the Debt Securities of such series by
written notice to the Company and the Trustee may rescind an acceleration and
its consequences if the rescission is made before any judgment or decree for
payment of the money due has been obtained by the Trustee and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration and the Company has
paid or deposited with the Trustee a sum sufficient to pay in the currency or
currency unit or composite currency in which the Debt Securities of such series
are payable (except as otherwise specified):
(A) all overdue installments of interest on and any Additional Amounts
payable in respect of all Outstanding Debt Securities of such series
and any related coupons,
(B) the principal of (and premium, if any, on) any Outstanding Debt
Securities of such series which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate or rates
borne by or provided for in such Debt Securities,
(C) to the extent that payment of such interest is lawful, interest upon
overdue installments of interest and any Additional Amounts at the rate
or rates borne by or provided for in the Debt Securities of such
series, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel.
No such rescission will affect any subsequent default or impair any right
consequent thereto.
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series by notice to the Trustee may on behalf of all Holders
of Debt Securities of such series and any related coupons waive an existing or
past default and its consequences except (i) a default in the payment of the
principal of or interest on or Additional Amounts payable in respect of any Debt
Security of such series or any related coupons or (ii) a default in respect of a
provision that cannot be amended without the consent of each Holder of each
Outstanding Debt Security of such series affected. When a default is waived such
default shall cease to exist and any Event of Default arising therefrom shall be
deemed to have been cured, but no such waiver will extend to any subsequent or
other default or Event of Default or impair any consequent right thereon.
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The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee with respect to the Debt Securities of such
series. However, such direction may not be in conflict with any rule of law or
with the Indenture and the Trustee may refuse to follow any direction that the
Trustee determines is unduly prejudicial to the rights of other Holders of each
Outstanding Debt Security of such series or would involve the Trustee in
personal liability; provided, however, that the Trustee may take any other
action deemed proper by the Trustee that is not inconsistent with such
direction.
A Holder of Debt Securities of any series or any related coupons may not
pursue any remedy with respect to the Indenture or any such Debt Securities of
any series unless: (i) such Holder has previously given to the Trustee written
notice stating that an Event of Default with respect to the Debt Securities of
such series is continuing; (ii) Holders of at least 25% in principal amount of
the Outstanding Debt Securities of such series shall have made a written request
to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the
Trustee reasonable security or indemnity against any loss, liability or expense
to be incurred in compliance with such request; (iv) the Trustee does not comply
with the request within 60 days after receipt of the request and the offer of
security or indemnity; and (v) the Holders of a majority in principal amount of
the Debt Securities of such series do not give the Trustee a written direction
inconsistent with the request during such 60-day period; it being understood and
intended that no one or more of such Holders shall have any right in any manner
whatever by virtue of, or by availing of, any provision of the Indenture to
affect, disturb or prejudice the rights of any other of such Holders, or to
obtain or to seek to obtain priority or preference over any other of such
Holders or to enforce any right under the Indenture, except in the manner
provided in the Indenture and for the equal and ratable benefit of all such
Holders.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" of any Person means Indebtedness of another Person
and any of its Subsidiaries existing at the time such other Person becomes a
Subsidiary (or a Restricted Subsidiary, in the case of the Company) of the
referent Person or at the time it merges or consolidates with the referent
Person or any of the referent Person's Subsidiaries (or Restricted Subsidiaries,
in the case of the Company) or assumed by the referent Person or any Subsidiary
(or any Restricted Subsidiary, in the case of the Company) of the referent
Person in connection with the acquisition of assets from such other Person.
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (and, with correlative meanings,
"controlled by" and "under common control with") shall mean possession, directly
or indirectly, of power to direct or cause the direction of management or
policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise), provided that (a) each
Unrestricted Subsidiary shall be deemed to be an Affiliate of the Company and of
each Restricted Subsidiary of the Company, (b) no individual shall be deemed to
be an Affiliate of a Person solely by reason of his or her being an officer or
director (or equivalent) of such Person and (c) none of the Company or any of
its Restricted Subsidiaries shall be deemed to be Affiliates of each other.
"Attributable Indebtedness" means, in respect of a Sale and Leaseback
Transaction at the time of determination thereof, the capitalized amount in
respect of such transaction that would appear on the face of a balance sheet of
the lessee thereunder in accordance with GAAP.
"Bankruptcy Law" means Title 11, United States Code, or any similar Federal
or state law for the relief of debtors.
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"Board of Directors" means either the board of directors of the Company or
any duly authorized committee thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other arrangement conveying the
right to use) real or personal property of such Person which is required to be
classified and accounted for as a capital lease or a liability on the face of a
balance sheet of such Person in accordance with GAAP. For purposes of the
"Limitation on Liens" covenant, a Capital Lease Obligation shall be deemed to be
secured by a Lien on the property being leased.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than debt securities convertible into an
equity interest), warrants or options to subscribe for or to acquire an equity
interest in such Person; provided, however, that "Capital Stock" shall not
include Redeemable Stock.
"Cit-Con" means Cit-Con Oil Corporation, a Delaware corporation.
"CITGO Supplemental Supply Agreement" means that certain Supplemental Crude
Supply Agreement, dated as of September 30, 1986, by and between the Company and
PDVSA, and as amended, supplemented, restated or otherwise modified from time to
time in compliance with the provisions of the "Specified Agreements" covenant or
otherwise not in violation of the Indenture.
"CITGO Supply Agreement" means that certain Crude Supply Agreement dated as
of September 30, 1986, by and between the Company and PDVSA, and as amended,
supplemented, restated or otherwise modified from time to time in compliance
with the provisions of the "Specified Agreements" covenant or otherwise not in
violation of the Indenture, which Agreement has been heretofore assigned by the
Company to CIVESCO, and by PDVSA to Commercit, S.A., a Venezuelan corporation
and a Subsidiary of PDVSA, and by Commercit, S.A. partially to PMI.
"CIVESCO" means CITGO Venezuela Supply Company, a Delaware corporation and
a Restricted Subsidiary of the Company.
"Common Stock" of any Person means any and all shares, interests or other
participations or other equivalents in the equity interest (however designated
and whether voting or non-voting) of such Person, which have no preference as to
dividends or liquidation over any other equity interest, whether outstanding on
the Issue Date or issued after the Issue Date, and includes, without limitation,
all series and classes of such common stock.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP (as in effect and applied by the
Company on the Issue Date), after eliminating (without duplication) all (a)
gains (net of expenses and taxes applicable thereto) or losses arising from the
sale or other disposition of assets other than current assets, (b) gains arising
from any write-up of assets (other than write-ups of inventories as a result of
the lower of cost or market adjustments), (c) gains arising from the acquisition
by any such Person of its outstanding Indebtedness, (d) that portion (if any) of
the net income of any Restricted Subsidiary which such Restricted Subsidiary is
prohibited (whether by contract, applicable law or otherwise) from paying as
dividends to the Company or any other Restricted Subsidiary, (e) amounts
representing the equity of the Company or any Restricted Subsidiary in the
undistributed earnings of any other Person (other than a Restricted Subsidiary),
(f) in the case of a successor to the Company by consolidation or merger or a
transferee of its assets after the Issue Date, any earnings of the successor or
transferee corporation prior to the consolidation, merger or transfer of assets,
(g) any earnings of any Restricted Subsidiary prior to becoming a Restricted
Subsidiary, (h) any deferred credit (or amortization of a deferred credit)
arising from the acquisition after the date hereof of any Restricted Subsidiary
representing the excess of equity in such Restricted Subsidiary at the date of
acquisition thereof over the cost of investment in such Restricted Subsidiary,
(i) any reversal of any contingency reserve, except to the extent that provision
for such contingency reserve shall have been made from income arising after the
Issue Date and (j) the aggregate amount received during such period
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by the Company and all Restricted Subsidiaries as earnings (whether in the form
of dividends or otherwise) on PDVSA Investments or as net cash proceeds in
connection with the sale, redemption or other disposition of one or more PDVSA
Investments or any part thereto or interest therein.
"Consolidated Net Tangible Assets" means, as of any date of determination,
the sum of the amounts that would appear on a consolidated balance sheet of the
Company and its Restricted Subsidiaries for the total assets (less accumulated
depletion, depreciation or amortization, allowances for doubtful receivables,
other applicable reserves and other properly deductible items) of the Company
and its Restricted Subsidiaries, determined on a consolidated basis in
accordance with GAAP, after giving effect to purchase accounting and after
deducting therefrom, to the extent included in total assets, in each case as
determined on a consolidated basis in accordance with GAAP (without
duplication): (a) the aggregate amount of liabilities of the Company and its
Restricted Subsidiaries which may properly be classified as current liabilities
(including taxes accrued as estimated); (b) current Indebtedness and current
maturities of long-term Indebtedness; (c) minority interests in the Company's
Restricted Subsidiaries held by Persons other than the Company or a wholly owned
Restricted Subsidiary of the Company; and (d) unamortized debt discount and
expenses and other unamortized deferred charges, goodwill, patents, trademarks,
service marks, trade names, copyrights, licenses, organization or developmental
expenses and other intangible items.
"Consolidated Net Worth" means, at any date, all assets of the Company and
its Restricted Subsidiaries at such date determined on a consolidated basis in
accordance with GAAP minus all liabilities of the Company and its Restricted
Subsidiaries (including minority interests in consolidated Subsidiaries of the
Company) at such date determined on a consolidated basis in accordance with
GAAP.
"CRCCLP" means CITGO Refining and Chemicals Company L.P., a Delaware
limited partnership and successor by merger to CRCI, and a Restricted
Subsidiary.
"CRCCLP Supply Agreement" means that certain Crude Oil and Feedstock Supply
Agreement dated as of March 31, 1987, originally by and between CRCI and PDVSA,
and currently between CRCCLP and PDVSA, and as amended, supplemented, restated
or otherwise modified from time to time in compliance with the provisions of the
" Specified Agreements" covenant or otherwise not in violation of the Indenture.
"CRCI" means CITGO Refining and Chemicals, Inc., a Delaware corporation
formerly known as Champlin Refining & Chemicals, Inc., and a Restricted
Subsidiary.
"Current Indebtedness" means any Indebtedness for borrowed money which is
not Funded Indebtedness.
"Custodian" will mean any receiver, trustee, assignee, liquidator,
custodian or similar official under any Bankruptcy Law.
"Default" will mean any event which is, or after notice or passage of time
or both would be, an Event of Default.
"Exchange Rate Contract" means, with respect to any Person, any currency
swap agreements, forward exchange rate agreements, foreign currency futures or
options, exchange rate collar agreements, exchange rate insurance and other
agreements or arrangements, or combination thereof, designed to provide
protection against fluctuations in currency exchange rates.
"Fair Market Value" means, with respect to any assets to be transferred or
any noncash consideration or Property received by any Person, the fair market
value of such consideration or Property (a) in the case of a contribution to
capital in the form of Marketable Assets, as determined by the applicable
readily ascertainable market price and (b) in all other cases, as determined in
good faith by the Board of Directors of the Company, as evidenced by a certified
resolution delivered to the Trustee, provided that, in the case of clause (b)
above, if such resolution indicates that such fair market value exceeds $25
million, such resolution shall be accompanied by the written opinion of a
nationally recognized firm of
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investment bankers to the effect that such consideration or Property is fair,
from a financial point of view, to such Person.
"Funded Indebtedness" means Indebtedness having a Stated Maturity, as of
the time such Indebtedness was Incurred, in excess of one year (or outstanding
under a revolving credit agreement with a scheduled expiration date in excess of
one year after the date such facility originally became available to the obligor
thereunder).
"GAAP" means generally accepted accounting principles in the United States
as in effect as of the date of the Indenture, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP consistently applied.
"Guarantee" by any person means any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any Lien on the
assets of such Person securing obligations of the primary obligor and any
obligation of such Person (a) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Indebtedness or to purchase (or to advance or
supply funds for the purchase or payment of) any security for the payment of
such Indebtedness, (b) to purchase Property, securities or services for the
purpose of assuring the holder of such Indebtedness of the payment of such
Indebtedness, or (c) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Indebtedness (and "Guaranteed" and
"Guarantor" shall have meanings correlative to the foregoing); provided,
however, that a Guarantee by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an Incurrence of such Indebtedness.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (a) any obligation of such Person for borrowed
money, (b) any obligation of such Person evidenced by bonds, debentures, notes,
Guarantees or other similar instruments, including, without limitation, any such
obligations Incurred in connection with the acquisition of Property, assets or
businesses, (c) any reimbursement obligation of such Person with respect to
letters of credit, bankers' acceptances or similar facilities issued for the
account of such Person, (d) any obligation of such Person issued or assumed as
the deferred purchase price of Property or services (but excluding trade
accounts payable or accrued liabilities arising in the ordinary course of
business), (e) any Capital Lease Obligation of such Person, (f) the maximum
fixed redemption or repurchase price of Redeemable Stock of such Person at the
time of determination, (g) any obligation to pay rent or other payment amounts
of such person with respect to any Sale and Leaseback Transaction to which such
Person is a party and (h) any obligation of the type referred to in clauses (a)
through (g) of this paragraph of another Person and all dividends of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of this definition, the maximum fixed repurchase price
of any Redeemable Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were
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repurchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture; provided, however, that if such Redeemable Stock is
not then permitted to be repurchased, the repurchase price shall be the book
value of such Redeemable Stock. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability of any contingent
obligations in respect thereof at such date.
"Interest Rate Protection Agreement" means, with respect to any Person, any
interest rate swap agreement, interest rate cap or collar agreement or other
financial agreement or arrangement designed to protect such Person or its
Restricted Subsidiaries against fluctuations in interest rates, as in effect
from time to time.
"Investment" means, as applied to the Company or any Restricted Subsidiary,
(a) any direct or indirect purchase or other acquisition by the Company or such
Restricted Subsidiary (as the case may be) of stock or other securities of any
Person or (b) any direct or indirect loan, advance or capital contribution by
the Company or such Restricted Subsidiary (as the case may be) to any other
Person.
"Issue Date" means, with respect to the Debt Securities, the date of
original issue of the Debt Securities by the Company.
"Lien" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest, lien
(statutory or other), charge, easement, encumbrance, preference, priority or
other security or similar agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such Property (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing). For purposes of
the "Limitation on Liens" covenant, a Capital Lease Obligation shall be deemed
to be secured by a Lien on the property being leased.
"Marketable Assets" means crude oil or petroleum products which are readily
marketable and have a readily ascertainable market price.
"Material Non-Pricing Term" means (a) any provision of Section 2.10 (force
majeure; liability exemptions), 2.11 (limitation of liabilities; remedies), 3.1
(grounds for termination), 3.2 (other rights and remedies) or 4.3 (commercial
acts and obligations; waiver of immunities; consent to jurisdiction) of the
CITGO Supply Agreement; and (b) any provision of Section 2.10 (force majeure;
liabilities exemptions), 2.11 (limitation of liabilities; and remedies), 3.1
(grounds for termination), 3.2 (other rights and remedies) or 5.3 (commercial
acts and obligations; waiver of immunities) of the CRCCLP Supply Agreement.
"Materially Adverse Effect" means, relative to any occurrence of whatever
nature (including any adverse determination in any litigation, arbitration or
governmental investigation or proceeding) and after taking into account
insurance coverage and effective indemnification with respect to such
occurrence, a materially adverse effect on a consolidated basis for the Company
and its Restricted Subsidiaries on (a) the consolidated financial condition,
business, operations or properties of the Company and its Restricted
Subsidiaries or (b) the ability of the Company to perform any of its payment
obligations or other obligations under the Indenture.
"Officers' Certificate" will mean a certificate signed by two officers of
the Company at least one of whom shall be the principal executive officer,
principal accounting officer or principal financial officer of the Company.
"Opinion of Counsel" will mean a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"PDVSA" means Petroleos de Venezuela, S.A., a Venezuelan corporation.
"PDVSA Investment" means any Investments made by the Company or any
Restricted Subsidiary (other than Investments in the Company or a Restricted
Subsidiary) using funds or other Property contributed after March 31, 1996, to
the Company or any Restricted Subsidiary by PDVSA or its Affiliates
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(but excluding the Company and its Restricted Subsidiaries) in exchange for
Capital Stock or as an equity contribution.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"PMI" means PDVSA Marketing International, S.A., a Panamanian corporation
and a Subsidiary of PDVSA.
"Pricing Term" means (a) any provision of a Supply Agreement or the CITGO
Supplemental Supply Agreement, the proposed amendment, modification or waiver of
which, directly or indirectly, would (i) materially increase the price the
purchaser under such agreement (the "Purchaser") would pay for oil or feedstocks
or (ii) materially reduce the volumes of oil or feedstocks (whether base,
supplemental or incremental) the seller thereunder would be required to sell and
the Purchaser would be required or entitled to purchase; or (b) any provision of
the Tax Allocation Agreement, the proposed amendment, modification or waiver of
which, directly or indirectly, would materially increase the amount or
materially accelerate the payment of amounts otherwise payable thereunder by the
Company or its Restricted Subsidiaries.
"Property" means, with respect to any Person, any interest of such Person
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, including, without limitation, Capital Stock in any other Person.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable), or otherwise (including on the happening of an
event), is or could be required to be redeemed or is or could be redeemable at
the option of the holder thereof, in whole or in part, on or prior to the Stated
Maturity of the Debt Securities, or is or could be exchangeable for Indebtedness
at any time, in whole or in part, on or prior to the Stated Maturity of the Debt
Securities.
"Restricted Payment" means:
(a) the payment of dividends by the Company on, or
(b) other payments or distributions (whether made by the Company or
any of its Restricted Subsidiaries) on account, or to the holders, of, or
(c) the purchase, redemption, retirement or other acquisition (whether
by the Company or any of its Restricted Subsidiaries) of, any shares of any
class of Capital Stock or Redeemable Stock of the Company or any warrant,
option or other right to acquire such Capital Stock or Redeemable Stock
(whether in cash, Property, obligations or other securities), but excluding
dividends or other distributions payable solely in Common Stock of the
Company. Notwithstanding the foregoing, Restricted Payments shall not
include (i) the acquisition of Capital Stock of the Company either (A)
solely in exchange for shares of Capital Stock of the Company, or (B)
through application of net proceeds of a substantially concurrent sale for
cash (other than to a Subsidiary of the Company) of shares of Capital Stock
of the Company; or (ii) payments by the Company under the Tax Allocation
Agreement.
"Restricted Subsidiary" means any direct or indirect wholly-owned
Subsidiary of the Company that, as of the date of determination, is not an
Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement (excluding, however, any such arrangement between
such Person and a Restricted Subsidiary of such Person or between one or more
Restricted Subsidiaries of such Person) pursuant to which a Significant Property
is sold or transferred by such Person or a Restricted Subsidiary of such Person
and is thereafter leased back from the purchaser or transferee thereof by such
Person or one of its Restricted Subsidiaries for a term of more than one year.
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"Senior Indebtedness" means, at any date, any outstanding Indebtedness of
the Company that is pari passu in right of payment with the Debt Securities.
"Significant Property" means (a) the Company's refinery located at Lake
Charles, Louisiana, (b) the Company's lubricants blending plant located at
Cicero, Illinois and (c) CRCCLP's refinery located at Corpus Christi, Texas, in
each case including all associated interests in real property, fixtures,
equipment and other tangible and intangible assets used in connection with such
facilities.
"Specified Agreements" means (a) the Supply Agreements, (b) the CITGO
Supplemental Supply Agreement and (c) the Tax Allocation Agreement.
"Stated Maturity" means, when used with respect to any security or debt
obligation, the date specified in such security or obligation as the fixed date
on which the principal or redemption price of such security or obligation is due
and payable and, when used with respect to any installment of interest on a
security or debt obligation, the fixed date on which such installment of
interest is due and payable. The Stated Maturity of the deemed principal amount
of a Capital Lease Obligation shall be the date of the last payment of rent or
any other amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty.
"Subsidiary" of a Person means (a) a corporation a majority of whose Voting
Stock is at the time, directly or indirectly, owned by such Person, by one or
more subsidiaries of such Person or by such Person and one or more subsidiaries
of such Person, (b) a partnership in which such Person or a subsidiary of such
Person is, at the date of determination, a general or limited partner of such
partnership, but only if such Person or its subsidiary is entitled to receive
more than 50% of the assets of such partnership upon its dissolution, or (c) any
other Person (other than a corporation or partnership) in which such Person,
directly or indirectly, at the date of determination thereof, has (i) at least a
majority ownership interest or (ii) the power to elect or direct the election of
a majority of the directors or other governing body of such Person.
"Supply Agreements" means (a) the CRCCLP Supply Agreement and (b) the CITGO
Supply Agreement.
"Tax Allocation Agreement" means the Tax Allocation Agreement dated as of
June 24, 1993, among PDV America, VPHI Midwest, Inc., the Company, and PDV USA,
Inc., as in effect on the date of the Indenture and as amended, supplemented,
restated or otherwise modified from time to time in compliance with the
"Specified Agreements" covenant or otherwise not in violation of the Indenture.
"Unrestricted Subsidiary" means Cit-Con and any other Subsidiary of the
Company that the Company has classified, in accordance with the terms of the
Indenture, as an Unrestricted Subsidiary and that has not been reclassified as a
Restricted Subsidiary.
"Voting Stock" means all classes of Capital Stock of a Person then
outstanding normally entitled to vote in elections of directors or Persons
performing similar functions.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
If provision is made with respect to the Debt Securities of any series for
either or both of (a) defeasance of all of the Company's obligations with
respect to the Debt Securities of or within a series ("legal defeasance option")
or (ii) defeasance of the Company's obligations to comply with certain
restrictive covenants, including the covenants described under "Certain
Covenants" ("covenant defeasance option") with respect to the Debt Securities of
or within a series, then the Company may at its option by Board Resolution, at
any time, with respect to the Debt Securities of such series and any coupons
appertaining thereto, elect to have the legal defeasance option or the covenant
defeasance option, as applicable, be applied to the Outstanding Debt Securities
of such series and any coupons appertaining thereto. The Company may exercise
its legal defeasance option with respect to the Debt Securities of any such
series notwithstanding its prior exercise of its covenant defeasance option with
respect thereto.
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If the Company exercises its legal defeasance option with respect to the
Debt Securities of any series, payment of the Debt Securities of such series may
not be accelerated because of an Event of Default. If the Company exercises its
covenant defeasance option with respect to the Debt Securities of any series,
payment of the Debt Securities of such series may not be accelerated because of
certain Events of Default described under "Events of Default" (not including,
among others, Events of Default relating to nonpayment, bankruptcy and
insolvency events) or because of the failure of the Company to comply with
certain covenants specified in the Indenture.
The Company may exercise its legal defeasance option or its covenant
defeasance option with respect to any series of Debt Securities only if (a) the
Company irrevocably deposits with the Trustee in trust for the purpose of making
the following payments, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders of the Debt Securities of such series and
any coupons appertaining thereto, (i) an amount in such currency, currencies or
currency unit in which the Debt Securities of such series and any coupons
appertaining thereto are then specified as payable at Stated Maturity, (ii) U.S.
Government Obligations applicable to the Debt Securities of such series and
coupons appertaining thereto (determined on the basis of the currency,
currencies or currency unit in which such Debt Securities of such series and
coupons appertaining thereto are then specified as payable at Stated Maturity)
which through the scheduled payment of principal and interest in respect thereof
in accordance with their terms will provide money, or (iii) a combination
thereof, in any case, in an amount, sufficient, without consideration of any
reinvestment of such principal and interest, to pay (A) the principal of (and
premium, if any) and interest, if any, on the Outstanding Debt Securities of
such series and any coupons appertaining thereto on the Stated Maturity of such
principal or installment of principal or interest and (B) any mandatory sinking
fund payments or analogous payments applicable to the Outstanding Debt
Securities of such series and any coupons appertaining thereto on the day on
which such payments are due and payable in accordance with the terms of the
Indenture and of the Debt Securities of such series and any coupons appertaining
thereto, (b) the Company delivers to the Trustee a certificate from a nationally
recognized firm of independent certified public accountants expressing their
opinion that such deposit without reinvestment will provide cash at such times
and in such amounts as will be sufficient to pay (i) the principal of (and
premium, if any) and interest, if any, on the Outstanding Debt Securities of
such series and any coupons appertaining thereto on the Stated Maturity of such
principal or installment of principal or interest and (ii) any mandatory sinking
fund payments or analogous payments applicable to the Outstanding Debt
Securities of such series and any coupons appertaining thereto on the day on
which such payments are due and payable in accordance with the terms of the
Indenture and of the Debt Securities of such series and any coupons appertaining
thereto; (c) the deposit does not constitute a default under any other material
agreement or instrument binding on the Company; (d) no Default or Event of
Default has occurred and is continuing on the date of such deposit and after
giving effect thereto; (e) the Company delivers to the Trustee an Opinion of
Counsel to the effect that the trust resulting from the deposit does not
constitute, or is not qualified as, a regulated investment company under the
Investment Company Act of 1940; (f) in the case of the legal defeasance option,
the Company delivers to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal Revenue
Service a ruling, or (ii) since the date of the Indenture there has been a
change in the applicable Federal income tax law, to the effect, in either case,
that, and based thereon such Opinion of Counsel shall confirm that, the Holders
of the Debt Securities of such series and any coupons relating thereto will not
recognize income, gain or loss for Federal income tax purposes as a result of
such defeasance and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred; (g) in the case of the covenant defeasance option,
the Company delivers to the Trustee an Opinion of Counsel to the effect that the
Holders of the Debt Securities of such series and any coupons relating thereto
will not recognize income, gain or loss for Federal income tax purposes as a
result of such covenant defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred; and (h) the Company
delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that all conditions precedent to the defeasance have been complied with
as required by the Indenture.
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SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will, upon the Company's request, cease to be of further
effect with regard to the Debt Securities of any series (except as otherwise
expressly provided for in the Indenture) when (a) either (i) all Outstanding
Debt Securities of such series and all coupons relating thereto have been
delivered (other than (A) coupons appertaining to Debt Securities of such series
in bearer form surrendered for exchange for Debt Securities in registered form
and maturing after such exchange, whose surrender is not required or has been
waived, (B) Debt Securities and coupons of such series which have been
destroyed, lost or stolen and which have been replaced or paid, (C) coupons
appertaining to Debt Securities of such series called for redemption and
maturing after the relevant Redemption Date, whose surrender has been waived and
(D) Debt Securities and coupons of such series for whose payment money has
theretofore been deposited in trust or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such trust, as
provided in Section 1003 of the Indenture) to the Trustee for cancellation or
(ii) all outstanding Debt Securities of such series and all coupons relating
thereto (A) have become due and payable, (B) will become due and payable at
their Stated Maturity within one year or (C) if redeemable at the option of the
Company, are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and the Company has
irrevocably deposited with the Trustee funds in the currency or currencies,
currency unit or units or composite currency or currencies in which the Debt
Securities of such series are payable, sufficient to pay at maturity or upon
redemption all outstanding Debt Securities of such series and such coupons,
including interest thereon and any Additional Amounts with respect thereto, to
the date of such deposit (in the case of Debt Securities of such series which
have become due and payable) or to the Stated Maturity or Redemption Date, as
the case may be, (b) the Company has paid all sums payable by it under the
Indenture and (c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of the
Indenture as to such series have been complied with. The Trustee will be
required to acknowledge satisfaction and discharge of the Indenture on demand of
the Company accompanied by such Officer's Certificate and Opinion of Counsel at
the cost and expense of the Company.
CONCERNING THE TRUSTEE
The First National Bank of Chicago is the Trustee under the Indenture and
also extends credit to the Company and its Subsidiaries in the ordinary course
of business for which it receives customary fees and compensation.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the principal U.S. Federal tax consequences
resulting from the beneficial ownership of the Debt Securities by certain U.S.
holders (as defined below). This summary does not purport to consider all the
possible U.S. Federal tax consequences of the purchase, ownership or disposition
of the Debt Securities and is not intended to reflect the individual tax
position of any beneficial owner. It deals only with Debt Securities held as
capital assets. Moreover, except as expressly indicated, it addresses initial
purchasers and does not address beneficial owners with a special tax status or
special tax situations, such as dealers in securities or currencies. Debt
Securities held as a hedge against currency risks or as part of a straddle with
other investments or as part of a "synthetic security" or other integrated
investment (including a "conversion transaction") comprised of a Debt Security
and one or more other investments, or situations in which the functional
currency of the beneficial owner is not the U.S. dollar. This summary is based
upon the U.S. Federal tax laws and regulations as now in effect and as currently
interpreted and does not take into account possible changes in such tax laws or
such interpretations, any of which may be applied retroactively. It does not
include any description of the tax laws of any state, local or foreign
governments that may be applicable to the Debt Securities or holders thereof.
Persons considering the purchase of Debt Securities should consult their own tax
advisors concerning the application of the U.S. Federal tax laws to their
particular situations as well as any consequences to them under the laws of any
other taxing jurisdiction.
U.S. HOLDERS
Payments of Interest
In general, interest on a Debt Security (other than certain payments on a
Discount Security, as defined and described below under "Original Issue
Discount"), will be taxable to a beneficial owner who or which is (i) a citizen
or resident of the United States, (ii) a corporation created or organized under
the laws of the United States or any State thereof (including the District of
Columbia) or (iii) a person otherwise subject to United States Federal income
taxation on its worldwide income (a "U.S. Holder") as ordinary income at the
time it is received or accrued, depending on the holder's method of accounting
for tax purposes.
Original Issue Discount
The following discussion summarizes the United States Federal income tax
consequences to holders of Debt Securities issued with original issue discount
("OID").
General. A Debt Security will be treated as issued with OID (a "Discount
Security") if the excess of such Security's "stated redemption price at
maturity" over its issue price is greater than a de minimis amount (set forth in
the Internal Revenue Code of 1986, as amended (the "Code") and Treasury
Regulations promulgated under Sections 1271-1275 of the Code (the "OID
Regulations"). Generally, the issue price of a Debt Security (or any Debt
Security that is part of an issue of Debt Securities) will be the first price at
which a substantial amount of Debt Securities that are part of such issue of
Debt Securities are sold. It is expected that the issue price of the Debt
Securities will be the price shown on the cover page of the applicable
Prospectus Supplement. Under the OID Regulations, the "stated redemption price
at maturity" of a Debt Security is the sum of all payments provided by such Debt
Security that are not payments of "qualified stated interest." A "qualified
stated interest" payment includes any stated interest payment on a Debt Security
that is unconditionally payable at least annually at a single fixed rate (or at
certain floating rates) that appropriately takes into account the length of the
interval between stated interest payments. The Company will report annually to
the Internal Revenue Service and to record holders of the Debt Securities
information with respect to OID accruing during the calendar year.
In general, if the excess of a Debt Security's stated redemption price at
maturity over its issue price is de minimis, then such excess constitutes "de
minimis OID." In general, such a Debt Security will not be treated as issued
with OID (in which case the following paragraphs under "Original Issue Discount"
will not apply), and a U.S. Holder of such a Debt Security will recognize
capital gain with respect to such de
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minimis OID as stated principal payments on the Debt Security are made. The
amount of such gain with respect to each such payment will equal the product of
(i) the total amount of the Debt Security's de minimis OID and (ii) a fraction,
the numerator of which is the amount of the principal payment made and the
denominator of which is the stated principal amount of the Debt Security.
The Code and the OID Regulations provide rules that require a U.S. Holder
of a Discount Security having a maturity of more than one year from its date of
issue to include OID in gross income before the receipt of cash attributable to
such income, without regard to the holder's method of accounting for tax
purposes. The amount of OID includible in gross income by a U.S. Holder of a
Discount Security is the sum of the "daily portions" of OID with respect to the
Discount Security for each day during the taxable year or portion of the taxable
year in which the U.S. Holder holds such Discount Security ("accrued OID"). The
daily portion is determined by allocating to each day in any "accrual period" a
pro rata portion of the OID allocable to that accrual period. Under the OID
Regulations, accrual periods with respect to a Debt Security may be any set of
periods (which may be of varying lengths) selected by the U.S. Holder as long as
(i) no accrual period is longer than one year and (ii) each scheduled payment of
interest or principal on such Debt Security occurs on the first day or final day
of an accrual period.
The amount of OID allocable to an accrual period equals the excess of (a)
the product of the Discount Security's adjusted issue price at the beginning of
the accrual period and the Discount Security's yield to maturity (determined on
the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period) over (b) the sum of any payments
of qualified stated interest on the Discount Security allocable to the accrual
period. The "adjusted issue price" of a Discount Security at the beginning of
the first accrual period is the issue price and at the beginning of any accrual
period thereafter is (x) the sum of the issue price of such Discount Security,
the accrued OID for each prior accrual period (determined without regard to the
amortization of any acquisition premium or bond premium), and the amount of any
qualified stated interest on such Debt Security that has accrued prior to the
beginning of the accrual period but is not payable until a later date, less (y)
any prior payments on the Discount Security that were not qualified stated
interest payments. If a payment (other than a payment of qualified stated
interest) is made on the first day of an accrual period, then the adjusted issue
price at the beginning of such accrual period is reduced by the amount of the
payment. If a portion of the initial purchase price of a Debt Security is
attributable to interest that accrued prior to such Debt Security's issue date,
the first stated interest payment on such Debt Security is to be made within one
year of the Debt Security's issue date and such payment will equal or exceed the
amount of pre-issuance accrued interest, then the U.S. Holder may elect to
decrease the issue price of such Debt Security by the amount of preissuance
accrued interest, in which case a portion of the first stated interest payment
will be treated as a return of the excluded pre-issuance accrued interest and
not as an amount payable on such Debt Security.
The OID Regulations contain certain special rules that generally allow any
reasonable method to be used in determining the amount of OID allocable to a
short initial accrual period (if all other accrual periods are of equal length),
and require that the amount of OID allocable to the final accrual period equal
the excess of the amount payable at the maturity of the Debt Security (other
than any payment of qualified stated interest) over such Debt Security's
adjusted issue price as of the beginning of such final accrual period. In
addition, if an interval between payments of qualified stated interest on a Debt
Security contains more than one accrual period. then the amount of qualified
stated interest payable at the end of such interval is allocated pro rata (on
the basis of their relative lengths) between the accrual periods contained in
the interval.
U.S. Holders of Discount Securities generally will have to include in
income increasingly greater amounts of OID over the life of such Discount
Securities.
Acquisition Premium
A U.S. Holder that purchases a Debt Security at its original issuance for
an amount in excess of its issue price but less than its stated redemption price
at maturity (any such excess being "acquisition
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premium") is permitted to reduce the daily portions of OID by a fraction, the
numerator of which is the excess of the U.S. Holder's purchase price for such
Debt Security over the issue price, and the denominator of which is the excess
of the sum of all amounts payable on such Debt Security after the purchase date,
other than payments of qualified stated interest, over such Debt Security's
issue price. Alternatively, a U.S. Holder way elect to compute OID accruals as
described under "Original Issue Discount -- General" above, treating the U.S.
Holder's purchase price as the issue price.
Securities Purchased at a Market Discount
A Debt Security will be treated as issued at a market discount (a "Market
Discount Security") if the amount for which a U.S. Holder purchased such Market
Discount Security is less than such Market Discount Security's issue price,
subject to a de minimis rule similar to the rule relating to de minimis OID
described under "Original Issue Discount -- General."
In general, any partial payment of principal on, or gain recognized on the
maturity or disposition of, a Market Discount Security will be treated as
ordinary income to the extent that such gain does not exceed the accrued market
discount on such Market Discount Security. Alternatively, a U.S. Holder of a
Market Discount Security may elect to include market discount in income
currently over the life of the Market Discount Security. Such an election
applies to all debt instruments with market discount acquired by the electing
U.S. Holder on or after the first day of the first taxable year to which the
election applies and may not be revoked without the consent of the IRS.
Market discount accrues on a straight-line basis, unless the U.S. Holder
elects to accrue such discount on a constant yield to maturity basis. Such an
election is applicable only to the Market Discount Security with respect to
which it is made and is irrevocable. A U.S. Holder of a Market Discount Security
that does not elect to include market discount in income currently generally
will be required to defer deductions for interest on borrowings allocable to
such Market Discount Security in an amount not exceeding the accrued market
discount on such Market Discount Security, until the maturity or disposition of
such Market Discount Security.
Purchase, Sale and Retirement of the Securities
A U.S. Holder's tax basis in a Debt Security will generally be its U.S.
dollar cost increased by the amount of any OID or market discount (or
acquisition discount, in the case of a Short-Term Security) included in the U.S.
Holder's income with respect to the Debt Security and the amount, if any, of
income attributable to de minimis OID included in the U.S. Holder's income with
respect to such Debt Security, and reduced by the sum of (i) the amount of any
payments that are not qualified stated interest payments and (ii) the amount of
any amortizable bond premium applied to reduce interest on the Debt Security. A
U.S. Holder generally will recognize gain or loss on the sale or retirement of a
Debt Security equal to the difference between the amount realized on the sale or
retirement and the tax basis of the Debt Security. The amount realized on a sale
or retirement for an amount in foreign currency will be the U.S. dollar value of
such amount on the date of sale or retirement. Except to the extent described
above under "Market Discount" and except to the extent attributable to accrued
but unpaid interest, gain or loss recognized on the sale or retirement of a Debt
Security will be capital gain or loss and will be long-term capital gain or loss
if the Debt Security was held for more than one year.
NON-U.S. HOLDERS
Subject to the discussion of backup withholding below, payments of
principal (and premium, if any) and interest (including OID) by the Company or
any agent of the Company (acting in its capacity as such) to any holder of a
Debt Security that is not a U.S. Holder (a "Non-U.S. Holder") will not be
subject to U.S. Federal withholding tax, provided, in the case of interest
(including OID), that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of the Company entitled to vote, (ii) the Non-U.S. Holder is not a
controlled foreign corporation for U.S. tax purposes that is related to the
Company (directly or indirectly) through stock
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ownership, and (iii) either (A) the Non-U.S. Holder certifies to the Company or
its agent under penalties of perjury that it is not a United States person and
provides its name and address or (B) a securities clearing organization, bank or
other financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and holds the Debt
Security certifies to the Company or its agent under penalties of perjury that
such statement has been received from the Non-U.S. Holder by it or by another
financial institution and furnishes the payor with a copy thereof.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest (including OID) on the Debt Security is effectively connected with
the conduct of such trade or business, the Non-U.S. Holder, although exempt from
the withholding tax discussed in the preceding paragraph, may be subject to U.S.
Federal income tax on such interest (or OID) in the same manner as if it were a
U.S. Holder. In addition, if the Non-U.S. Holder is a foreign corporation, it
may be subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. For
purposes of the branch profits tax, interest (including OID) on a Debt Security
will be included in the earnings and profits of such holder if such interest (or
OID) is effectively connected with the conduct by such holder of a trade or
business in the United States. In lieu of the certificate described in the
preceding paragraph, such a holder must provide the payor with a properly
executed IRS Form 4224 to claim an exemption from U.S. Federal withholding tax.
Any capital gain, market discount or exchange gain realized on the sale,
exchange, retirement or other disposition of a Debt Security by a Non-U.S.
Holder will not be subject to U.S. Federal income or withholding taxes if (i)
such gain is not effectively connected with a U.S. trade or business of the Non-
U.S. Holder, and (ii) in the case of an individual, such Non-U.S. Holder (A) is
not present in the United States for 183 days or more in the taxable year of the
sale, exchange, retirement or other disposition, or (B) does not have a tax home
(as defined in Section 911(d)(3) of the Code) in the United States in the
taxable year of the sale, exchange, retirement or other disposition, and the
gain is not attributable to an office or other fixed place of business
maintained by such individual in the United States.
PURCHASERS OF SECURITIES WHO ARE NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICABILITY OF UNITED STATES
WITHHOLDING AND OTHER TAXES UPON INCOME REALIZED IN RESPECT OF THE SECURITIES.
INFORMATION REPORTING AND BACKUP WITHHOLDING
A U.S. Holder of Debt Securities may be subject to backup withholding at
the rate of 31% with respect to interest paid on such Debt Securities and to
proceeds from the sale, exchange, redemption or retirement of such Debt
Securities, unless such holder (a) is a corporation or comes within certain
other exempt categories and, when required, demonstrates that fact or (b)
provides a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A holder of a Debt Security who
does not provide the Company with his correct taxpayer identification number may
be subject to penalties imposed by the IRS.
Any amount paid as backup withholding will be creditable against the U.S.
Holder's U.S. Federal income tax liability, provided that all required
information is timely supplied to the Internal Revenue Service.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Debt Security if such holder
has provided the required certification that it is not a United States person as
set forth in clause (iii) in the first paragraph under "Non-U.S. Holders" above,
or has otherwise established an exemption (provided that neither the Company nor
its agent has actual knowledge that the holder is a United States person or that
the conditions of any exemption are not in fact satisfied).
Payment of the proceeds from the sale of a Debt Security to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States
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person, a controlled foreign corporation for United States tax purposes or a
foreign person 50 percent or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment was effectively connected with a U.S. trade or business, information
reporting may apply to such payments. Payment of the proceeds from a sale of a
Debt Security to or through the U.S. office of a broker is subject to
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its taxpayer identification number or otherwise
establishes an exemption from information reporting and backup withholding.
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities (i) through underwriters or
dealers, (ii) directly to a limited number of institutional purchasers or to a
single purchaser, or (iii) through agents. The Applicable Prospectus Supplement
with respect to the Offered Debt Securities will set forth the terms of the
offering of the Offered Debt Securities, including the name or names of any
underwriters, the purchase price of the Offered Debt Securities and the proceeds
to the Company from such sale, any underwriting discounts and other items
constituting underwriters' compensation, any initial public offering price and
any discounts or concessions allowed or reallowed or paid to dealers and any
securities exchanges on which the Offered Debt Securities may be listed.
If underwriters or dealers are used in the sale, the Debt Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. Unless otherwise set forth in the Applicable Prospectus Supplement, the
obligations of the underwriters to purchase the Offered Debt Securities will be
subject to certain conditions precedent and the underwriters will be obligated
to purchase all the Offered Debt Securities if any are purchased. Any initial
public offering price and any discounts or concessions allowed or reallowed or
paid to dealers may be changed from time to time.
Offered Debt Securities may be sold directly by the Company or through
agents designated by the Company from time to time. Any agent involved in the
offer or sale of the Offered Debt Securities in respect of which this Prospectus
is delivered will be named, and any commissions payable by the Company to such
agent will be set forth, in the Applicable Prospectus Supplement. Unless
otherwise indicated in the Applicable Prospectus Supplement, any such agent will
be acting on a best efforts basis for the period of its appointment.
If so indicated in an Applicable Prospectus Supplement, the Company will
authorize agents, underwriters or dealers to solicit offers from certain types
of institutions to purchase Offered Debt Securities from the Company at the
public offering price set forth in the Applicable Prospectus Supplement pursuant
to delayed delivery contracts providing for payment and delivery on a specified
date in the future. Such contracts will be subject only to those conditions set
forth in the Applicable Prospectus Supplement, and the Applicable Prospectus
Supplement will set forth the commission payable for solicitation of such
contracts.
Underwriters and agents may be entitled under agreements entered into with
the Company to indemnification by the Company against certain civil liabilities,
including liabilities under the Securities Act, or to contribution with respect
to payments which the agents or underwriters may be required to make in respect
thereof. Agents and underwriters may be customers of, engage in transactions
with, or perform services for the Company in the ordinary course of business.
The Debt Securities are not proposed to be listed on a securities exchange, and
each series of Debt Securities will be a new issue of securities with no
established trading market. Any underwriters to whom Debt Securities are sold by
the Company for public offering and sale may make a market in such Debt
Securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given that any underwriter will make a market in the Debt Securities or as to
the liquidity of the trading market for any Debt Securities.
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CERTAIN LEGAL MATTERS
Certain legal matters in connection with the Debt Securities will be passed
upon for the Company by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company appearing in the
Registration Statement on Form 10 of the Company have been audited by Deloitte &
Touche LLP, independent auditors, as set forth in their report included therein,
and are incorporated by reference herein in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
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NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES DESCRIBED IN
THIS PROSPECTUS SUPPLEMENT. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH NOTES IN
ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVER OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
-----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference.................................... S-2
The Company.................................... S-3
Use of Proceeds................................ S-5
Capitalization................................. S-5
Selected Consolidated Financial Data........... S-6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... S-7
Business....................................... S-15
Management..................................... S-34
Description of the Notes....................... S-37
Underwriting................................... S-40
Legal Matters.................................. S-40
Index to Financial Statements.................. F-1
PROSPECTUS
Available Information.......................... 2
Incorporation of Certain Documents by
Reference.................................... 2
Enforceability of Civil Liabilities Against
Foreign Persons.............................. 2
Prospectus Summary............................. 4
Risk Factors................................... 6
Use of Proceeds................................ 9
Ratio of Earnings to Fixed Charges............. 9
Description of Debt Securities................. 9
Certain U.S. Federal Income Tax
Considerations............................... 29
Plan of Distribution........................... 33
Certain Legal Matters.......................... 34
Experts........................................ 34
</TABLE>
-----------------------------
UNTIL JUNE 14, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$200,000,000
CITGO PETROLEUM
CORPORATION
7 7/8% SENIOR NOTES DUE 2006
[CITGO LOGO]
SALOMON BROTHERS INC
CHASE SECURITIES INC.
PROSPECTUS SUPPLEMENT
DATED MAY 20, 1996
