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FORM 10/A
AMENDMENT NO. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
CITGO PETROLEUM CORPORATION
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(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 73-1173881
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE WARREN PLACE
6100 SOUTH YALE AVENUE
TULSA, OKLAHOMA 74136
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (918) 495-4000
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
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<S> <C>
% Senior Notes Due 2006 New York Stock Exchange
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</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
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(Title of class)
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(Title of class)
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Item 2, Item 6, Item 13 and Item 15 are hereby amended in their entireties as
follows:
ITEM 2. FINANCIAL INFORMATION.
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 and as of and for each of the
three month periods ended March 31, 1996 and 1995. The following table should be
read in conjunction with the consolidated financial statements of the Company as
of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 included elsewhere in this Registration Statement on
Form 10, the condensed consolidated financial statements of the Company as of
March 31, 1996 and for the three month periods ended March 31, 1996 and 1995
included elsewhere in this Registration Statement on Form 10 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. The condensed consolidated financial statements as of
March 31, 1996 and for the three months ended March 31, 1996 and 1995 are
unaudited. Interim results, in the opinion of management, include all
adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly the financial information for such periods; however, such results
are not necessarily indicative of the results which may be expected for any
other interim period or for a full year.
<TABLE>
<CAPTION>
MARCH 31, YEAR ENDED DECEMBER 31,
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1996 1995 1995 1994 1993(1) 1992 1991
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($ IN MILLIONS, EXCEPT AS OTHERWISE INDICATED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.............................................. $2,607 $2,357 $10,522 $9,247 $9,107 $9,173 $8,922
Equity in earnings (losses) of affiliates.......... 8 10 34 29 30 25 32
Other income (expense), net........................ (1) 3 (7) (10) (4) (7) (3)
------- ------ ------ ------ ------ ------ ------
Total revenue................................ 2,614 2,370 10,549 9,266 9,133 9,191 8,951
Cost of sales and operating expenses............... 2,522 2,238 10,066 8,731 8,654 8,787 8,495
Selling, general and administrative expenses....... 43 34 162 157 138 137 125
------- ------ ------ ------ ------ ------ ------
Operating income................................. 49 98 321 378 341 267 331
Interest income.................................... 1 1 4 3 1 1 3
Interest expense, including capital lease.......... 26 24 107 78 79 77 105
Minority interest.................................. -- -- 2 2 2 2 1
------- ------ ------ ------ ------ ------ ------
Income before income taxes, extraordinary items
and cumulative effect of accounting changes.... 24 75 216 301 261 189 228
Income taxes....................................... 9 28 80 110 99 69 77
------- ------ ------ ------ ------ ------ ------
Income before extraordinary items and cumulative
effect of accounting changes................... 15 47 136 191 162 120 151
Extraordinary items(2)............................. -- 4 4 (2) -- (8)
Cumulative effect of accounting changes(3)......... -- -- -- (4) -- (87) --
------- ------ ------ ------ ------ ------ ------
Net income....................................... $ 15 $ 51 $ 140 $ 185 $ 162 $ 33 $ 143
======= ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES................... 1.79x 3.51x 2.76x 3.85x 3.71x 2.94x 2.92x
OTHER FINANCIAL DATA:
Depreciation and amortization(4)................... $ 44 $ 40 $ 165 $ 157 $ 174 $ 147 $ 112
Capital expenditures............................... 100 67 314 350 345 284 240
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets....................................... $5,132 $4,463 $ 4,924 $4,440 $3,866 $3,488 $3,259
Long-term debt (excluding current portion)......... 1,205 955 1,159 1,008 912 1,057 849
Total debt......................................... 1,300 1,024 1,255 1,068 915 1,057 853
Capital lease obligation (total)................... 152 162 152 162 170 178 184
Shareholder's equity............................... 1,746 1,627 1,732 1,577 1,350 1,004 992
OPERATING DATA:
Rated refining capacity (at end of period)
(MBPD)(5)........................................ 605 601 604 601 599 544 544
Refined product sales (millions of gallons)........ 4,251 4,247 18,344 17,173 16,097 14,788 13,118
Gasoline sales (millions of gallons)............... 2,509 2,590 11,075 9,747 9,380 8,694 7,615
Number of CITGO branded outlets (at end of
period).......................................... 14,159 13,197 14,038 13,117 12,546 11,953 11,319
</TABLE>
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(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 "Item 1 and Item 3. Business and
Properties -- Refining."
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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 of which individual petroleum refining and marketing
companies have little control over. 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
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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 $25 million per year in 1997 through 1999, in each case as
compared to the original modification and without giving effect to any other
factors that may affect the price payable for crude oil under these agreements.
Due to the pricing formula under the supply agreements, the aggregate price
actually paid for crude oil purchased from PDVSA under these agreements in each
of these years will depend primarily upon the then current prices for refined
products and certain actual costs of CITGO. These estimates are also based on
the assumption that CITGO will purchase the base volumes of crude oil under the
agreements.
The following table summarizes the sources of CITGO's sales revenue and
sales volumes for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED DECEMBER 31,
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1995 1994 1993 1995 1994 1993
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($ 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
======= ====== ====== ======= ======= =======
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The following table summarizes the sources of CITGO's sales revenue and
sales volumes for the three months ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
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1996 1995 1996 1995
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(MILLIONS OF
($ IN MILLIONS) GALLONS)
<S> <C> <C> <C> <C>
Gasoline....................................... $ 1,482 $ 1,412 2,509 2,590
Jet fuel....................................... 323 269 530 551
Diesel/#2 fuel................................. 453 332 794 700
Petrochemicals, industrial products and other
products..................................... 189 204 334 312
Asphalt........................................ 13 19 32 45
Lubricants and waxes........................... 101 88 52 49
------ ------ ----- -----
Total refined product sales.......... $ 2,561 $ 2,324 4,251 4,247
Other sales.................................... 46 33
------ ------ ----- -----
Total sales.......................... $ 2,607 $ 2,357 4,251 4,247
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</TABLE>
The following table summarizes CITGO's cost of sales and operating expenses
for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1994 1993
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($ 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>
The following table summarizes CITGO's cost of sales and operating expenses
for the three months ended March 31, 1996 and 1995.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
1996 1995
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($ IN MILLIONS)
<S> <C> <C>
Crude oil........................................................ $ 617 $ 540
Refined products................................................. 1,378 1,185
Intermediate feedstocks.......................................... 197 221
Refining and manufacturing costs................................. 195 174
Other operating costs and expenses and inventory changes......... 134 118
------ ------
Total cost of sales and operating expenses............. $ 2,521 $ 2,238
====== ======
</TABLE>
RESULTS OF OPERATIONS -- THREE MONTHS ENDED MARCH 31,1996 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1995
Sales increased $250 million, or approximately 11%, in the three month
period ended March 31, 1996, as compared to the same period in 1995. Total sales
volumes were relatively constant in the first quarter of 1996 as compared to the
first quarter of 1995. Total sales volumes of light fuels (gasoline, diesel/#2
fuel and jet fuel) declined slightly in the first quarter of 1996 as compared to
the first quarter of 1995 as a result of decreases in bulk sales volumes during
the period (as discussed below) that were mostly offset by increases (discussed
below) in light fuels sales volumes, excluding bulk sales. Although
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total sales volumes remained relatively flat, increases in light fuels sales
prices resulted in an increase in revenues for the first three months of 1996 as
compared to the first three months of 1995.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 10% in the first
quarter of 1996 as compared to the first quarter of 1995. Gasoline and
distillates had increases of 12% and 13%, respectively, but jet fuel volumes
decreased 1% in the first quarter of 1996, compared to the first quarter of
1995. Gasoline sales volumes increased due to successful marketing efforts,
including the net addition of 962 independently-owned CITGO branded retail
outlets since March 31, 1995, bringing the total number of CITGO branded retail
outlets to 14,159 at March 31, 1996 (17 of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, were higher in the first
quarter of 1996 than in 1995. The average increase for the first quarter of 1996
from the first quarter of 1995 was 4 cents per gallon, or a 7% increase. Sales
prices of jet fuel and distillates, excluding bulk sales, increased 9 and 11
cents per gallon, respectively, or 19% and 22%, respectively, in the first
quarter of 1996 as compared to the same period in 1995.
To meet demand for its products and to manage logistics, timing differences
and product grade imbalances, CITGO purchases and sells gasoline, diesel/#2 fuel
and jet fuel from and to other refiners and in the spot market. Such bulk sales
decreased by $113 million, or 21%, from $537 million in the three month period
ended March 31, 1995 to $424 million in the same period in 1996. The decrease in
revenue is a result of a 28% decrease in volumes offset by a 9% increase in bulk
sales prices between the quarters.
Petrochemicals and industrial products sales revenues decreased 26% and
increased 10%, respectively, for the three months ended March 31, 1996 as
compared to the three months ended March 31, 1995. Petrochemicals revenue
decreased as the result of a 27% decrease in unit sales price that was partially
offset by a 1% increase in volume, from 97 million gallons at March 31, 1995 to
98 million gallons at March 31, 1996. Industrial products had an 8% growth in
volume and a 2% increase in unit sales price.
Asphalt sales in the first quarter of 1996 were $6 million lower, and sales
volumes were 31% lower, than in the same quarter in 1995. The decrease in sales
volumes was largely associated with the fact that the first quarter sales of
1995 were unusually high due to a mild winter in the Northeast during that
period. Asphalt sales prices increased by 5% in the first quarter of 1996 over
the first quarter of 1995.
Equity in earnings (losses) of affiliates decreased by $2 million for the
three month period ended March 31, 1996 as compared to the same period in 1995.
The decrease was primarily due to the decrease in the equity in earnings of
LYONDELL-CITGO of $1 million, and a decrease in the equity in the earnings of
Nelson Industrial Steam Company ("NISCO") of $1 million.
Other income (expense) was $(0.7) million for the three month period ended
March 31, 1996 as compared to $2.9 million for the same period in 1995. The
difference is primarily due to a $2.4 million gain on the termination of an
interest rate swap agreement recognized in the first three months of 1995.
Cost of sales and operating expenses increased by $283 million, or 13%, in
the three month period ended March 31, 1996 as compared to the same period in
1995. Higher crude oil costs (an increase from $540 million in the first quarter
of 1995 to $617 million in the first quarter of 1996) resulted from a 15%
increase in crude prices including an increase of approximately $11 million due
to the adjustment in the crude and feedstock agreements (described in the
"Overview" above), and a less than 1% decline in crude oil volumes. Refined
product purchases increased approximately 16%, from $1,185 million in the first
quarter of 1995 to $1,378 million in the first quarter of 1996, as the result of
a 4% increase in volumes of refined product purchases to support the increase in
sales volumes discussed above, and an 11% increase in purchase prices between
the two periods. Intermediate feedstocks purchases decreased from 1995 to 1996,
from $221 million to $197 million, an overall decrease of 11%. Intermediate
feedstock volumes are down 16% between the two periods and purchase prices
increased 6% from March 31, 1995 to March 31, 1996. Refinery and manufacturing
expenses increased 12%, from $174 million to
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$195 million for the three month periods ended March 31, 1995 and March 31,
1996, respectively. Purchased fuel costs increased by $7 million, from $9
million in 1995 to $16 million in 1996 as a result of increased prices.
Depreciation and amortization expense increased by $4 million, from $40 million
in 1995 to $44 million in 1996. Increased capital expenditures at the Company's
refineries related to environmental compliance and strategic planning will
continue to result in increases in capital assets with corresponding increases
in depreciation expense. The cost of sales for the three months ended March 31,
1996 includes a $6.4 million credit for settlement of insurance claims related
to the Corpus Christi refinery fire of August 1995.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 55% and 53% of total cost of sales and operating
expenses for the first quarter 1996 and 1995, respectively. CITGO estimates
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 product. 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 that its purchased
refined product requirements will continue to increase 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
would impact the volume of refined products purchased.
The gross margin for the three months ended March 31, 1996 was $86 million
or 3.3% compared to $120 million or 5.1% for the same period in 1995. The 1996
first quarter gross margin was adversely affected by the crude and feedstock
supply agreement changes, the decline in petrochemical profitability, increased
refinery and manufacturing expenses, lower refinery throughput and increased
volumes of refined products purchased as a percentage of sales volume, partially
offset by the settlement of the Corpus Christi refinery insurance claims.
Selling, general and administrative expenses increased by 26%, from $34
million in the first quarter of 1995 to $43 million in the first quarter of
1996. The increase is primarily due to an increase of approximately $5 million
in advertising and marketing programs. Also, during the third quarter of 1995,
CITGO began a multi-year effort to replace its current business information
system. Expenditures relating to this effort were approximately $2 million
during the first quarter of 1996.
Interest expense increased $2 million, or 6% (from $24 million to $26
million) for the first quarter ended March 31, 1996. This increase is primarily
due to an increase in the level of outstanding debt due to capital expenditures
and capital contributions to LYONDELL-CITGO and reduced cash flows from
operations. The average interest rate on all debt held by CITGO was 6.98% for
the three months ended March 31, 1996 as compared to 7.81% for the same period
in 1995.
Income taxes were based on an effective tax rate of 37% for both three
month periods ended March 31, 1996 and 1995.
Net income of $50.5 million for the three month period ended March 31, 1995
includes an extraordinary gain of $3.4 million, net of related income taxes of
$2.2 million, due to the early extinguishment of tax-exempt Louisiana wastewater
facility revenue bonds.
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
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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 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.
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.
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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 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".
8
<PAGE> 10
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.
For the three month period ended March 31, 1996, the Company's consolidated
net cash used in operating activities totaled approximately $18 million,
primarily reflecting net income of approximately $15 million, depreciation and
amortization of $44 million and net changes in other items (including, among
other categories, notes and accounts receivable, prepaid expenses and deferred
taxes) of $(77) million. The net change in other items was attributable
primarily to an increase in accounts receivable of approximately $83 million,
primarily as a result of increases in prices of refined products and crude oil
during the period.
Net cash used in investing activities of $153 million for the three month
period ended March 31, 1996 included capital expenditures of $100 million
(compared to $67 million for the same period in 1995) and additional investments
of $41 million in LYONDELL-CITGO.
Net cash provided by financing activities of $168 million for the three
month period ended March 31, 1996 included proceeds of $122 million from CITGO's
short term borrowing facilities, $30 million from its revolving bank facility,
the issuance of $25 million of tax-exempt revenue bonds, and net repayments
during the period of $9 million on CITGO's term note and other debt.
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.
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
9
<PAGE> 11
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. As of March 31,
1996, capital resources available to CITGO include cash generated by operations,
available borrowing capacity under CITGO's committed bank facilities of $355
million and $38.5 million of 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.
On April 4, 1996, CITGO filed a registration statement with the Securities
and Exchange Commission relating to the shelf registration of $600 million of
debt securities that may be offered and sold from time to time. CITGO
anticipates that it will offer for sale to the public a tranche of debt
securities with an aggregate principal amount of $200 million as soon as
practicable after the effective date of the registration statement. The proceeds
of such $200 million offering will be used by CITGO to reduce borrowings
outstanding under CITGO's revolving credit facility.
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.
10
<PAGE> 12
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
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.
As of December 31, 1995 and 1994, CITGO had entered into the following
interest rate swap agreements to reduce the impact of interest rate changes on
its variable interest rate debt:
<TABLE>
<CAPTION>
FIXED RATE NOTIONAL PRINCIPAL
PAID AMOUNT
EXPIRATION ---------- ---------------------
VARIABLE RATE INDEX DATE 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>
11
<PAGE> 13
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. The fair value of the
interest rate swap agreements in place at March 31, 1996, based on the estimated
amount that CITGO would receive or pay to terminate the agreements as of that
date and taking into account current interest rates, was an unrealized loss of
$1 million. In connection with the determination of such fair market value, the
Company considered the creditworthiness 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 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. Effective January 1, 1996, the Company adopted
SFAS 121. The adoption of SFAS 121 did not have a material effect on the
consolidated financial position or results of operations of the Company.
12
<PAGE> 14
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth the annual salary, bonuses and other
compensation and long-term incentive award payouts earned during 1995 by CITGO's
President and Chief Executive Officer, former President and Chief Executive
Officer and each of its four other most highly compensated executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
NAME AND -------------------------------- INCENTIVE ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER PAYOUT(L) COMPENSATION
- --------------------------------- ---- -------- -------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ralph S. Cunningham(a)
President and Chief
Executive Officer.............. 1995 $366,667 $250,000 $193,642(b) $ -- $ 13,752(g)
Ron E. Hall(a)
Former President and
Chief Executive Officer........ 1995 $276,500 $ -- $ 93,457(c) $617,250 $457,942(h)
Roberto V. Mandini
Executive Vice President....... 1995 $400,000 $240,000 $ 98,821(d) $ -- $ 13,500(i)
Steven R. Berlin
Sr. Vice President, Finance &
Administration and Chief
Financial Officer.............. 1995 $357,500 $146,000 $ 51,647(e) $201,635 $ 23,582(j)
William J. Beckert
Sr. Vice President,
Operations..................... 1995 $283,500 $130,000 $ --(f) $142,214 $ 13,500(i)
Peter E. Luitwieler
Vice President, Systems
Modernization.................. 1995 $244,000 $ 90,000 $ --(f) $148,140 $ 19,521(k)
</TABLE>
- ---------------
(a) Mr. Cunningham was elected President and Chief Executive Officer of the
Company upon Mr. Hall's retirement effective May 1, 1995. The amount shown
as "Salary" for Mr. Cunningham is reflective of the fact that he was
employed by the Company for only eight months in 1995, and the amount shown
as "Salary" for Mr. Hall is reflective of the fact that he was employed by
the Company for only four months in 1995.
(b) Includes $81,448 of interest paid by the Company on Mr. Cunningham's home
mortgage and the related federal and state income tax and FICA remitted as
additional withholding by the Company on Mr. Cunningham's behalf. The
balance represents the value of perquisites that, individually, do not
constitute more than 25% of the total perquisites for Mr. Cunningham.
(c) Includes $26,981 for Company-paid financial planning services provided to
Mr. Hall and the related federal and state income tax and FICA remitted as
additional withholding by the Company on Mr. Hall's behalf. The balance
represents the value of perquisites that, individually, do not constitute
more than 25% of the total perquisites for Mr. Hall.
(d) Includes a $40,456 housing allowance paid to Mr. Mandini and the related
federal and state income tax and FICA remitted as additional withholding by
the Company on Mr. Mandini's behalf. The balance represents the value of
perquisites that, individually, do not constitute more than 25% of the
total perquisites for Mr. Mandini.
(e) Includes $16,760 related to Mr. Berlin's use of a Company car and the
related federal and state income tax and FICA remitted as additional
withholding by the Company on Mr. Berlin's behalf. The balance represents
the value of perquisites that, individually, do not constitute more than
25% of the total perquisites for Mr. Berlin.
(f) Perquisites and other personal benefits are less than the lesser of $50,000
or 10% of the total of annual salary and bonus for the named executive
officer.
13
<PAGE> 15
(g) Represents moving expenses of $13,752 paid in connection with Mr.
Cunningham's relocation to Tulsa, Oklahoma to commence employment with the
Company.
(h) In connection with his retirement on May 1, 1995, Mr. Hall received a cash
payment of $120,000, a cash payment of $31,904 in lieu of vacation for 1995
and other property and related tax payment adjustments of $149,484. All
Other Compensation also includes Company contributions of $13,500 to Mr.
Hall's account in the Company's Section 401(k) plan for 1995 and $143,054
earned during 1995 on long-term incentive plan compensation.
(i) Represents Company contributions to the named executive officer's account in
the Company's Section 401(k) plan for 1995.
(j) Includes Company contributions of $13,500 to Mr. Berlin's account in the
Company's Section 401(k) plan for 1995 and $10,082 earned during 1995 on
long-term incentive compensation.
(k) Includes Company contributions of $13,500 to Mr. Luitwieler's account in the
Company's Section 401(k) plan for 1995 and $6,021 earned during 1995 on
long-term incentive compensation.
(l) Represents long-term incentive plan awards granted in 1992 and earned over
the three-year performance period from 1992 through 1994. Messrs. Hall,
Beckert and Luitwieler received their payouts during 1995; pursuant to an
irrevocable election made during 1992 by Mr. Berlin, his payout has been
deferred. Payout was based on the achievement of the three years' earnings
goals as modified. The LTIP provides that generally performance goals
established for any period will not change. However, the plan provides that
certain extraordinary circumstances may warrant, at the discretion of the
Board of Directors, a modification to the performance goals. Certain of the
performance goals were modified in accordance with the terms of the plan in
order to take into account certain extraordinary circumstances.
LONG-TERM INCENTIVE PLAN
The Company has established the CITGO Petroleum Corporation Long-Term
Incentive Plan (the "LTIP") pursuant to which the Company may award cash to plan
participants in order to attract and retain key management employees. Grants are
made on an annual basis to participants pursuant to the recommendation of the
President and Chief Executive Officer and the approval of the Board of
Directors. In making grants and selecting participants, the nature of the
services rendered by the participant and his or her present and potential
contributions to the long-term financial success of the Company are considered.
The following table provides information concerning awards granted under the
Company's LTIP during the last fiscal year to the executive officers named in
the Summary Compensation Table.
LONG-TERM INCENTIVE PLAN -- GRANTS IN 1995
<TABLE>
<CAPTION>
PERFORMANCE
OR OTHER
PERIOD ESTIMATED FUTURE PAYOUTS UNDER
UNTIL NON-STOCK PRICE-BASED PLANS
MATURATION --------------------------------------------
NAME OR PAYOUT THRESHOLD ($) TARGET ($) MAXIMUM ($)
- -------------------------------------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C>
Ralph S. Cunningham................... 3 years $ 317,777 $ 635,554 $1,271,108
Ron E. Hall........................... 3 years $ 359,450 $ 718,900 $1,437,800
Roberto V. Mandini.................... 3 years $ 240,000 $ 480,000 $ 960,000
Steven R. Berlin...................... 3 years $ 210,000 $ 420,000 $ 840,000
William J. Beckert.................... 3 years $ 168,000 $ 336,000 $ 672,000
Peter E. Luitwieler................... 3 years $ 119,000 $ 238,000 $ 476,000
</TABLE>
Under the LTIP, payouts are based upon the Company's achievement of
specified operating and financial goals over a maximum of a three-year period
ending on the maturity date. The performance goals are established by the Board
of Directors pursuant to the recommendation of the President and Chief Executive
Officer. The performance goals may not be modified except in certain
extraordinary circumstances at the discretion of the Board of Directors. Whether
a payout is at the threshold, target or
14
<PAGE> 16
maximum amount depends upon the degree to which performance goals are achieved.
If actual performance is 120% or more of the goal, participants earn the maximum
award. If actual performance is 100% of the goal, the target award is earned. If
actual performance is 80% of the goal, the threshold award is earned.
Straight-line interpolation is used for percentages between the 120% level and
the 100% level and between the 100% level and the 80% level. No payouts are
earned if the actual performance is less than 80% of the goal.
Within 30 days of the grant of any annual LTIP award, participants may
irrevocably elect to defer all of their award past maturity date. However, if a
participant terminates employment, other than by retirement, all deferred
amounts are immediately payable. Awards under the 1995 program were granted in
March 1995, will mature on December 31, 1997 and are payable in March 1998
unless an election to defer was made.
Target awards for each of the named executive officers are based upon their
annual salary in effect as of the beginning of the first year in the three-year
performance period multiplied by the applicable percentages as specified in the
LTIP. Awards for Mr. Cunningham and Mr. Hall were pro-rated to reflect their
partial years of participation in 1995.
In the event of a participant's termination of employment prior to the end
of a performance period or upon a change in control (as defined in the plan),
awards may be modified, payouts may be accelerated, and in certain circumstances
(e.g., termination for reasons other than death, disability, retirement) awards
may be forfeited.
RETIREMENT PLANS
Certain employees of the Company, including each of the named executive
officers reflected in the Summary Compensation Table, are participants in
CITGO's Pension Plan for Salaried Employees (the "Pension Plan"). The Pension
Plan is a qualified, noncontributory, defined benefit retirement plan governed
by the Employee Retirement Income Security Act of 1974. The Pension Plan was
established January 1, 1991 and is administered by a committee appointed by the
President and Chief Executive Officer. All salaried employees of CITGO and its
participating subsidiaries (including officers) are eligible to participate in
the Pension Plan provided they meet certain service requirements.
The following table illustrates the estimated annual retirement benefits
payable as a straight-life annuity beginning at age 65 under the Pension Plan to
participants in the following classifications of final average base earnings and
years of service. Benefits under the Pension Plan are not reduced by Social
Security benefits or other offset amounts.
PENSION PLAN TABLE
FOR THE
PENSION PLAN FOR SALARIED EMPLOYEES
<TABLE>
<CAPTION>
FINAL AVERAGE YEARS OF BENEFIT CREDIT SERVICE
BASE ---------------------------------------------------
EARNINGS: 15 20 25 30 35
- ------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000................................... $ 7,500 $10,000 $12,500 $15,000 $17,500
$ 75,000................................... $12,750 $17,000 $21,250 $25,500 $29,750
$100,000................................... $18,000 $24,000 $30,000 $36,000 $42,000
$125,000................................... $23,250 $31,000 $38,750 $46,500 $54,250
$150,000................................... $28,500 $38,000 $47,500 $57,000 $66,500
$175,000................................... $28,500 $38,000 $47,500 $57,000 $66,500
$200,000................................... $28,500 $38,000 $47,500 $57,000 $66,500
</TABLE>
Benefits are paid to or on behalf of each participant upon retirement,
normally at age 65, and under certain circumstances upon death or disability.
The amount of annual pension payable at normal retirement age under the Pension
Plan is calculated by [A + B] x C, where A equals 1% of final average base
earnings (up to the breakpoint), B equals 1.4% of final average base earnings
(above the breakpoint), and C equals the years of benefit credit service after
January 1, 1991 (up to 40 years).
15
<PAGE> 17
"Final average base earnings" is the annual average of the highest 36
consecutive months of base salary during the final ten years of the
participant's employment, limited in accordance with federal law to the amount
that may be considered in determining qualified plan benefits. For purposes of
the table above, it has been assumed that the current federal limit of $150,000
remains unchanged. The breakpoint is 125% of the 35-year rolling average of the
individual's covered compensation for Social Security purposes ending with the
year the individual participant reaches Social Security retirement age. For
purposes of the table above, the breakpoint is assumed to be $50,000. The
benefits payable under the Pension Plan are actuarially adjusted to reflect the
form of payment elected by the participant and are subject to the limitations on
maximum benefits imposed by applicable federal law. At December 31, 1995, the
executive officers named in the Summary Compensation Table had the following
years of benefit credit service under the Pension Plan:
<TABLE>
<CAPTION>
NAMED
EXECUTIVE YEARS OF BENEFIT
OFFICERS CREDIT SERVICE
---------------------------------------------- ----------------
<S> <C>
Mr. Cunningham................................ 0
Mr. Hall...................................... 4.3334
Mr. Mandini................................... 1
Mr. Berlin.................................... 5
Mr. Beckert................................... 5
Mr. Luitwieler................................ 5
</TABLE>
The Company also provides pension benefits to certain executives under
CITGO's non-qualified supplemental defined benefit plan for selected key
executives (the CITGO Petroleum Corporation Executive Protection Plan, referred
to herein as the "Supplemental Pension Plan"). The following table illustrates
the estimated annual straight-life annuity benefits payable at age 65 to a
participant (at the level of Vice President or higher) under the Supplemental
Pension Plan in the following classifications of compensation and years of
participation.
PENSION PLAN TABLE
FOR THE
SUPPLEMENTAL PENSION PLAN FOR SELECTED KEY EXECUTIVES
<TABLE>
<CAPTION>
YEARS OF PLAN PARTICIPATION
------------------------------------------------------------
COMPENSATION: 15 20 25 30 35
- ------------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 200,000....................... $ 46,500 $ 62,000 $ 77,500 $ 93,000 $ 108,500
$ 250,000....................... $ 65,250 $ 87,000 $108,750 $ 130,500 $ 152,250
$ 300,000....................... $ 84,000 $112,000 $140,000 $ 168,000 $ 196,000
$ 350,000....................... $102,750 $137,000 $171,250 $ 205,500 $ 239,750
$ 400,000....................... $121,500 $162,000 $202,500 $ 243,000 $ 283,500
$ 500,000....................... $159,000 $212,000 $265,000 $ 318,000 $ 371,000
$ 600,000....................... $196,500 $262,000 $327,500 $ 393,000 $ 458,500
$ 700,000....................... $234,000 $312,000 $390,000 $ 468,000 $ 546,000
$ 800,000....................... $271,500 $362,000 $452,500 $ 543,000 $ 633,500
$ 900,000....................... $309,000 $412,000 $515,000 $ 618,000 $ 721,000
$1,000,000....................... $346,500 $462,000 $577,500 $ 693,000 $ 808,500
$1,250,000....................... $440,250 $587,000 $733,750 $ 880,500 $1,027,250
$1,500,000....................... $534,000 $712,000 $890,000 $1,068,000 $1,246,000
</TABLE>
The Supplemental Pension Plan is unfunded and is designed to supplement the
benefits paid to certain executives of the Company pursuant to the qualified
Pension Plan. Eligibility to participate is limited to the senior executive
staff and a group of key management employees as selected by the President and
Chief Executive Officer on an annual basis. The plan is noncontributory and
provides that the normal retirement age is 65. The benefits shown above are not
subject to reduction for Social Security benefits but may be reduced, as
described in the following sentence, for benefits payable under the
16
<PAGE> 18
Pension Plan. The annual pension benefit under the Supplemental Pension Plan of
a participant at the level of Vice President or higher is the greater of (i) the
product of 2.5%, the number of years of plan participation and compensation,
reduced by benefits payable under the Pension Plan, or (ii) 20% of compensation.
For any participant that is below the level of Vice President, the annual
pension benefit is calculated as 15% of compensation. Compensation for purposes
of the Supplemental Pension Plan is the participant's annual base salary, as in
effect generally at the date of retirement, plus the greater of (a) the most
recently awarded annual bonus and (b) the average of the last three awarded
annual bonuses. Compensation for purposes of the Supplemental Pension Plan of
each named executive officer, except Mr. Hall, is substantially equivalent to
the respective amounts set forth in the Summary Compensation Table under the
headings Salary and Bonus. For Mr. Hall, who retired effective May 1, 1995,
compensation for purposes of the Supplemental Pension Plan is $1,462,000. At
December 31, 1995, the executive officers named in the Summary Compensation
Table had the following years of plan participation:
<TABLE>
<CAPTION>
YEARS OF PLAN
NAMED EXECUTIVE OFFICERS PARTICIPATION
--------------------------------------------------------------
<S> <C>
Mr. Cunningham................................... 0.6667
Mr. Hall......................................... 9.8333
Mr. Mandini...................................... 1
Mr. Berlin....................................... 11.55
Mr. Beckert...................................... 9.5
Mr. Luitwieler................................... 10.5
</TABLE>
Benefits generally commence under the Supplemental Pension Plan upon the
participant's retirement and are paid on a joint and survivor basis, which
provides for a lesser annual benefit to be paid to the participant's designated
beneficiary upon the death of the retired participant. The plan also provides
for certain disability benefits, pre- and post-retirement death benefits and a
pre-retirement spouse's benefit. A participant generally vests in his plan
benefit upon completion of sixty consecutive months of plan participation.
However, as allowed under the plan, the Board of Directors granted Mr.
Cunningham an accelerated phase-in of his vested right to a Supplemental Pension
Plan benefit.
In 1996, the Company approved the adoption of the Retirement Restoration
Plan, an unfunded, nonqualified, defined benefit plan available to selected
participants in the Pension Plan, providing benefits not otherwise payable by
the Pension Plan due to limitations imposed by federal law. The tables and
disclosures above do not take into account any excess benefits that may be
payable under the Retirement Restoration Plan; however, any benefits payable
under the Retirement Restoration Plan will reduce the benefits payable under the
Supplemental Pension Plan in the same manner as for benefits payable under the
Pension Plan.
COMPENSATION OF DIRECTORS
The members of the Board of Directors of CITGO receive no compensation in
their capacity as directors on the Board. There are no standard agreements or
any other arrangements, including consulting contracts, with any director.
EMPLOYMENT CONTRACTS/TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In connection with Mr. Cunningham's appointment in May 1995 as President
and Chief Executive Officer following Mr. Hall's retirement, the Company and Mr.
Cunningham entered into an agreement that provides that if Mr. Cunningham is
terminated by the Company without cause during his first twelve months of
employment, he will receive a lump sum payment equal to his annual salary, he
will be moved at Company expense to Houston and the Company will buy his home in
Tulsa. Additionally, if Mr. Cunningham is terminated by the Company without
cause after he completes twelve months of employment, he will receive a lump sum
payment equal to one-half his annual salary and he will be moved at Company
expense to Houston. The agreement also provides for preferential vesting in the
Supplemental Pension Plan.
17
<PAGE> 19
Mr. Berlin also has an employment agreement with the Company to provide
services until July 1, 1998 on substantially the same economic terms as were in
effect during 1995. The agreement also provides that if he elects to terminate
his employment with the Company on July 1, 1998, the Company will (i) make a
one-time lump-sum payment of his accrued annual retirement benefits under the
Supplemental Pension Plan and (ii) administer outstanding grants under the
Company's LTIP according to the LTIP's provisions applicable to retirees.
In connection with Mr. Hall's retirement as President and Chief Executive
Officer, the Company and Mr. Hall entered into a retirement agreement that
provided that Mr. Hall would receive the property and cash detailed in the
Summary Compensation Table and related footnotes.
There are no other employment contracts or arrangements in place.
ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
CITGO has no formal compensation committee (or other board committee
performing equivalent functions). The following officers and employees of CITGO
and former CITGO officer participated in deliberations of CITGO's Board of
Directors concerning executive officer compensation during 1995:
<TABLE>
<CAPTION>
NAME OF OFFICER, PRINCIPAL POSITION
EMPLOYEE WITH REGISTRANT AT THE PARTICIPATED IN BOARD DISCUSSION
OR FORMER EMPLOYEE TIME OF DELIBERATIONS AS A RESULT OF POSITION AS:
- -------------------- --------------------------------- --------------------------------
<S> <C> <C>
Ralph S. Cunningham President and CEO Member of Board of Directors
Ron E. Hall President and CEO Member of Board of Directors
Angel E. Olmeta Former Executive Vice President Member of Board of Directors
Roberto V. Mandini Executive Vice President Member of Board of Directors
Tom G. Richardson Vice President, Human Resources Vice President, Human Resources
</TABLE>
During 1995, no executive officer of CITGO served on the compensation
committee (or other board committee performing equivalent functions) or as a
director of another entity as to which any executive officer served on CITGO's
Board of Directors.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
a. Financial Statements:
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-1
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-2
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993................................................................................ F-3
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1995,
1994 and 1993....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-5
Notes to Consolidated Financial Statements............................................ F-6
Condensed Consolidated Balance Sheets at March 31, 1996 (unaudited) and December 31,
1995................................................................................ F-24
Condensed Consolidated Statements of Income for the three month periods ended March
31, 1996 and 1995 (unaudited)....................................................... F-25
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1996 and 1995 (unaudited)................................................. F-26
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-27
</TABLE>
b. Supplementary Data
Not Applicable.
18
<PAGE> 20
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
a. Financial Statements:
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-1
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-2
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and
1993................................................................................ F-3
Consolidated Statements of Shareholder's Equity for the years ended December 31, 1995,
1994 and 1993....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
1993................................................................................ F-5
Notes to Consolidated Financial Statements............................................ F-6
Condensed Consolidated Balance Sheets at March 31, 1996 (unaudited) and December 31,
1995................................................................................ F-24
Condensed Consolidated Statements of Income for the three month periods ended March
31, 1996 and 1995 (unaudited)....................................................... F-25
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1996 and 1995 (unaudited)................................................. F-26
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-27
</TABLE>
b. Exhibits
<TABLE>
<S> <C>
**3.1 -- Restated Certificate of Incorporation of CITGO Petroleum
Corporation
**3.2 -- Bylaws of CITGO Petroleum Corporation
**4.1 -- Indenture, dated as of May , 1996, between CITGO Petroleum
Corporation and The First National Bank of Chicago, as Trustee,
relating to the securities being registered
*10.1 -- CITGO Credit Facility (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form F-1 of PDV America, Inc. (No.
33-63742))
**10.2(i) -- First Amendment to the Second Amended and Restated Senior Term Loan
Agreement, by and between CITGO Petroleum Corporation and Bank of
America National Trust and Savings Association et al, dated as of
February 15, 1994
**10.2(ii) -- Second Amendment to Second Amended and Restated Senior Term Loan
Agreement by and among CITGO Petroleum Corporation and Bank of
America Illinois et al, dated as of October 21, 1994
**10.2(iii) -- First Amendment to the Second Amended and Restated Senior Revolving
Credit Facility Agreement by and among CITGO Petroleum Corporation
and Bank of America National Trust and Savings Association et al,
dated as of February 15, 1994
**10.2(iv) -- Second Amendment to Second Amended and Restated Senior Revolving
Credit Facility Agreement by and among CITGO Petroleum Corporation
and Bank of America Illinois et al, dated as of October 21, 1994
**10.3 -- Master Shelf Agreement (1994) by and between Prudential Insurance
Company of America and CITGO Petroleum Corporation ($100,000,000),
dated March 4, 1994
**10.4(i) -- Letter Agreement by and between the Company and Prudential
Insurance Company of America, dated March 4, 1994
**10.4(ii) -- Letter Amendment No. 1 to Master Shelf Agreement with Prudential
Insurance Company of America, dated November 14, 1994
*10.5 -- CITGO Senior Debt Securities (1991) Agreement (incorporated by
reference to Exhibit 4.4 to the Registration Statement on Form F-1
of PDV America, Inc. (No. 33-63742))
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
**10.6 -- CITCON Credit Agreement between CITCON Oil Corporation and The
Chase Manhattan Bank N.A., as Agent, dated as of April 30, 1992.
**10.7(i) -- First Amendment to the CITCON Credit Agreement, between CITCON Oil
Corporation and The Chase Manhattan Bank (National Association),
dated as of June 30, 1992
**10.7(ii) -- Second Amendment to the CITCON Credit Agreement, between CITCON Oil
Corporation and The Chase Manhattan Bank (National Association),
dated as of March 31, 1994
**10.7(iii) -- Third Amendment to the CITCON Credit Agreement, between CITCON Oil
Corporation and The Chase Manhattan Bank (National Association),
dated as of June 10, 1994
*10.8 -- Crude Supply Agreement between CITGO Petroleum Corporation and
Petroleos de Venezuela, S.A., dated as of September 30, 1986
(incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
*10.9(i) -- Supplemental Crude Supply Agreement between CITGO Petroleum
Corporation and Petroleos de Venezuela S.A., dated September 30,
1986 (incorporated by reference to Exhibit 10.2 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
**10.9(ii) -- Amendment, Guideline Interpretation No. 8B Crude Supply Agreement
between Commercit, S.A. and CITGO, dated August 31, 1995
*10.10 -- Crude Oil and Feedstock Supply Agreement between Champlin Refining
Company and Petroleos de Venezuela, S.A., dated March 31, 1987
(incorporated by reference to Exhibit 10.3 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
*10.11(i) -- Supplemental Crude Oil and Feedstock Supply Agreement between
Champlin Refining Company and Petroleos de Venezuela, S.A., dated
as of March 31, 1987 (incorporated by reference to Exhibit 10.4 to
the Registration Statement on Form F-1 of PDV America, Inc. (No.
33-63742))
**10.11(ii) -- Supplement 8C, Crude Oil and Feedstock Supply Agreement between
Commerchamp, S.A. and CITGO Refining and Chemicals, Inc., dated
August 31, 1995
*10.12 -- Contract for the Purchase/Sale of Boscan Crude Oil between Tradecal
S.A. and CITGO Asphalt Refining Company, dated June 2, 1993
(incorporated by reference to Exhibit 10.5 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
*10.13 -- Restated Contract for the Purchase/Sale of Heavy/Extra Heavy Crude
Oil by and between Maraven, S.A. and Lagoven, S.A., and Seaview Oil
Company, dated December 28, 1990 (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form F-1 of PDV
America, Inc. (No. 33-63742))
*10.14 -- Sublease Agreement between Champlin Petroleum Company, Sublessor,
and Champlin Refining Company, Sublessee dated as of March 31, 1987
(incorporated by reference to Exhibit 10.7 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
*10.15 -- Operating Agreement among Cit-Con Oil Corporation, CITGO Petroleum
Corporation and Conoco, Inc. dated as of May 1, 1984 (incorporated
by reference to Exhibit 10.9 to the Registration Statement on Form
F-1 of PDV America, Inc. (No. 33-63742))
</TABLE>
20
<PAGE> 22
<TABLE>
<S> <C>
*10.16 -- Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd., dated July 1, 1993
(incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
**10.17(i) -- Amendment No. 1 to Amended and Restated Limited Liability Company
Regulations of LYONDELL-CITGO Refining Company Ltd., dated as of
April 28, 1995
**10.17(ii) -- Amendment No. 2 to Amended and Restated Limited Liability Company
Regulations of LYONDELL-CITGO Refining Company Ltd., dated August
28, 1995
*10.18 -- Contribution Agreement between Lyondell Petrochemical Company and
LYONDELL-CITGO Refining Company Ltd., dated July 1, 1993
(incorporated by reference to Exhibit 10.10 to the Registration
Statement on Form F-1 of PDV America, Inc. (No. 33-63742))
*10.19 -- Crude Oil Supply Agreement between LYONDELL-CITGO Refining Company,
Ltd. and Lagoven, S.A., dated as of May 5, 1993 (incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form
F-1 of PDV America, Inc. (No. 33-63742))
*10.20 -- Supplemental Supply Agreement between LYONDELL-CITGO Refining
Company, Ltd. and Petroleos de Venezuela, S.A., dated as of May 5,
1993 (incorporated by reference to Exhibit 10.12 to the
Registration Statement on Form F-1 of PDV America, Inc. (No.
33-63742))
*10.21 -- Tax Allocation Agreement dated as of June 24, 1993 among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation and
PDV USA, Inc., as amended (incorporated by reference to Exhibit
10.17 to the Registration Statement on Form F-1 of PDV America,
Inc. (No. 33-63742))
**10.22 -- Agreement for the Purchase and Sale of Domestic Crude Oil dated as
of August 31, 1983, among Occidental Petroleum Corporation, OXY
Petroleum, Inc., Cities Service Oil and Gas Corporation, CITGO
Petroleum Corporation and The Southland Corporation
**10.23 -- CITGO Petroleum Corporation Executive Protection Plan, amended and
restated effective November 21, 1994
**10.24 -- CITGO Petroleum Corporation Long Term Incentive Plan -- 1994
**10.25 -- Employment letter agreement dated March 27, 1995 between CITGO
Petroleum Corporation and Ralph S. Cunningham
**10.26 -- Employment letter agreement dated August 30, 1995 between CITGO
Petroleum Corporation and Steven R. Berlin
***12 -- Statement of computation of ratio of earnings to fixed charges
**21 -- Subsidiaries of the registrant
***23.1 -- Consent of Deloitte & Touche LLP
**24 -- Power of Attorney (included in Part II of this Registration
Statement)
***27 -- Financial Data Schedule
</TABLE>
- ---------------
* Incorporated by reference to the Registration Statement on Form F-1 of PDV
America, Inc. (No. 33-63742)
** Previously filed.
*** Filed herewith.
21
<PAGE> 23
[DELOITTE TOUCHE 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.
Deloitte & Touche LLP
Tulsa, Oklahoma
February 12, 1996
[DELOITTE TOUCHE TOHMATSU INTERNATIONAL LOGO]
F-1
<PAGE> 24
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-2
<PAGE> 25
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-3
<PAGE> 26
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-4
<PAGE> 27
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-5
<PAGE> 28
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-6
<PAGE> 29
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-7
<PAGE> 30
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-8
<PAGE> 31
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-9
<PAGE> 32
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-10
<PAGE> 33
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-11
<PAGE> 34
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-12
<PAGE> 35
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-13
<PAGE> 36
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-14
<PAGE> 37
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-15
<PAGE> 38
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-16
<PAGE> 39
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-17
<PAGE> 40
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-18
<PAGE> 41
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-19
<PAGE> 42
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-20
<PAGE> 43
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-21
<PAGE> 44
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
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(000'S OMITTED)
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-22
<PAGE> 45
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-23
<PAGE> 46
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 16,791 $ 19,863
Accounts receivable............................................. 902,497 817,990
Due from affiliates............................................. 27,748 28,991
Inventories..................................................... 784,282 785,275
Prepaid expenses and other...................................... 34,087 30,199
---------- ----------
Total current assets.................................... 1,765,405 1,682,318
PROPERTY, PLANT AND EQUIPMENT -- Net.............................. 2,557,292 2,491,849
RESTRICTED CASH................................................... 15,641 1,258
INVESTMENTS IN AFFILIATES......................................... 693,601 650,360
OTHER ASSETS...................................................... 100,013 97,793
---------- ----------
$ 5,131,952 $ 4,923,578
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans........................................... $ 147,000 $ 25,000
Accounts payable................................................ 416,921 438,172
Payables to affiliates.......................................... 200,679 176,800
Taxes other than income......................................... 160,510 173,915
Other........................................................... 246,938 224,077
Current portion of long-term debt............................... 95,240 95,240
Current portion of capital lease obligation..................... 10,557 10,557
---------- ----------
Total current liabilities............................... 1,277,845 1,143,761
LONG-TERM DEBT.................................................... 1,205,124 1,159,263
CAPITAL LEASE OBLIGATION.......................................... 141,504 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS....................... 171,794 167,905
OTHER NONCURRENT LIABILITIES...................................... 184,936 186,376
DEFERRED INCOME TAXES............................................. 378,074 367,644
MINORITY INTEREST................................................. 26,368 25,618
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 1,222,345
Retained earnings............................................... 523,961 509,161
---------- ----------
Total shareholder's equity.............................. 1,746,307 1,731,507
---------- ----------
$ 5,131,952 $ 4,923,578
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
F-24
<PAGE> 47
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------------
1996 1995
----------- -----------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Net sales..................................................... $ 2,566,742 $ 2,308,994
Sales to affiliates........................................... 40,453 48,488
----------- -----------
2,607,195 2,357,482
Equity in earnings (losses) of affiliates....................... 8,380 10,445
Other income (expense) -- net................................... (685) 2,904
----------- -----------
2,614,890 2,370,831
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases of
$875,829 and $744,228 from affiliates)..................... 2,521,851 2,237,491
Selling, general and administrative expenses.................. 43,128 34,096
Interest expense, excluding capital lease..................... 21,392 19,612
Capital lease interest charge................................. 4,277 4,543
Minority interest............................................. 750 406
----------- -----------
2,591,398 2,296,148
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............... 23,492 74,683
INCOME TAXES.................................................... 8,692 27,522
----------- -----------
INCOME BEFORE EXTRAORDINARY ITEM................................ 14,800 47,161
EXTRAORDINARY GAIN, early extinguishment of debt, net of related
income taxes of $2,160........................................ -- 3,380
----------- -----------
NET INCOME...................................................... $ 14,800 $ 50,541
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-25
<PAGE> 48
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES............................. $ (17,900) $ 147,547
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................... (100,400) (66,775)
Proceeds from sales of property, plant and equipment........... 2,211 424
Decrease (increase) in restricted cash......................... (14,384) 5,622
Investments in LYONDELL-CITGO Refining Company Ltd............. (40,547) (73,037)
--------- ---------
Net cash used in investing activities..................... (153,120) (133,766)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans........................ 122,000 29,000
Net borrowings (repayments) of revolving bank loans............ 30,000 (30,000)
Payments on term bank loan..................................... (7,353) --
Proceeds from master shelf agreement........................... -- 25,000
Proceeds from issuance of tax-exempt bonds..................... 25,000 --
Payments on tax-exempt bonds................................... -- (40,237)
Payments of capital lease obligations.......................... 87 (74)
Borrowings (repayments) of other debt.......................... (1,786) 7,754
--------- ---------
Net cash provided by (used in) financing activities....... 167,948 (8,557)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. $ (3,072) $ 5,224
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 19,863 16,271
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 16,791 $ 21,495
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized........................ $ 23,036 $ 10,872
========= =========
Income taxes, net of refunds of $3,682 in 1995.............. $ 4,990 $ 4,517
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-26
<PAGE> 49
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO")
subsequent to December 31, 1995 and with respect to the interim three month
periods ended March 31, 1996 and 1995 is unaudited. In the opinion of
management, such interim information contains all adjustments consisting only of
normal recurring adjustments necessary for a fair presentation of the results of
such periods. The results of operations for the three month periods ended March
31, 1996 and 1995 are not necessarily indicative of the results to be expected
for the full year.
Effective January 1, 1996, CITGO adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of" (SFAS No. 121"). SFAS No. 121 establishes
the accounting for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and the
accounting for long-lived assets and certain identifiable intangibles to be
disposed of. The adoption of SFAS No. 121 did not have a material effect on the
consolidated financial position or results of operations of CITGO.
The condensed consolidated financial statements include the accounts of
CITGO, its wholly owned subsidiaries and Cit-Con Oil Corporation, which is 65
percent owned by CITGO (collectively, the "Company").
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<TABLE>
<CAPTION>
DECEMBER
MARCH 31, 31,
1996 1995
--------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Refined products.................................. $ 579,045 $ 588,696
Crude oil......................................... 158,553 149,414
Materials and supplies............................ 46,684 47,165
--------- ---------
$ 784,282 $ 785,275
========= =========
</TABLE>
F-27
<PAGE> 50
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan............................................ $ 320,000 $ 290,000
Term bank loan................................................. 110,294 117,647
8.75% Series A Senior Notes due 1998........................... 56,250 56,250
9.03% Series B Senior Notes due 2001........................... 171,429 171,429
9.30% Series C Senior Notes due 2006........................... 125,000 125,000
Master Shelf Agreement:
8.55% Senior Notes due 2002.................................. 25,000 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 25,000
7.22% Senior Notes due 2009.................................. 50,000 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 3,020
Louisiana wastewater facility revenue bonds due 2024......... 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025......... 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025....... 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026....... 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026.................................... 25,000 --
Cit-Con bank credit agreement................................ 41,071 42,857
----------- -----------
1,300,364 1,254,503
----------- -----------
Less current portion of long-term debt......................... (95,240) (95,240)
----------- -----------
$ 1,205,124 $ 1,159,263
========== ==========
</TABLE>
In March 1996, CITGO issued $25 million of Port of Corpus Christi Sewage &
Solid Waste Disposal Revenue Bonds due 2026.
4. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims. Various lawsuits and claims 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 CITGO's Lake Charles, Louisiana refinery; CITGO is
seeking contractual penalties for nonperformance 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 CITGO 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 CITGO by a number of current and former employees
and applicants on behalf of themselves and a class
F-28
<PAGE> 51
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
of similarly situated persons asserting claims under Federal and State laws of
racial discrimination in connection with the employment practices at CITGO's
Lake Charles, Louisiana refining complex; the plaintiffs 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 to be 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 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 aspects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
At March 31, 1996, the Company had $60 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 sites of the Company
including, but not limited to, operating refinery complexes, former refinery
sites, service stations and crude oil and petroleum product storage terminals.
The amount of such future expenditures, if any, is indeterminable.
Derivative Commodity and Financial Instruments. CITGO enters into petroleum
futures contracts primarily to reduce its inventory exposure to market risk.
CITGO 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 contracts generally qualify for hedge
accounting and correlate to market price movements of crude oil and refined
products. Resulting gains and losses, therefore, will generally be offset by
gains and losses on CITGO's hedged inventory or future purchases and sales.
CITGO 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 CITGO's core
activities. CITGO has entered into various interest rate swap and cap agreements
to manage its risk related to interest rate changes on its debt. The fair value
of the interest rate swap agreements in place at March 31, 1996, based on the
estimated amount that CITGO would receive or pay to terminate the agreement as
of that date and taking into account current interest rates, was an unrealized
loss of $1 million. In connection with the determination of said fair market
value, the Company considers the creditworthiness of the counterparties, but no
adjustment was determined to be necessary as a result.
F-29
<PAGE> 52
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
The impact of these instruments on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented. The market risk to the
Company related to these instruments was not significant during any of the
periods presented.
5. RELATED PARTY TRANSACTIONS
Effective January 1, 1992, the supply agreements between Petroleos de
Venezuela, S.A. ("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 the third quarter of 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. As a result
of the adjustments to the original modification, crude costs for the first
quarter of 1996 increased approximately $11 million over such costs in the first
quarter of 1995, which is included in cost of sales and operating expenses, and
it is estimated that crude costs will be approximately $11 million higher for
the second quarter 1996 and approximately $45 million higher for the year 1996
than what would otherwise have been payable. The Company anticipates that the
effect of the adjustments to the original modifications will be to reduce the
price of crude oil purchased from PDVSA under these agreements by $25 million
per year in 1997 through 1999, in each case 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 PDSVA 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.
F-30
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
CITGO Petroleum Corporation
By: /s/ Eddie R. Humphrey
----------------------------------
Name: Eddie R. Humphrey
Title: Treasurer
Date: May 15, 1996
<PAGE> 54
INDEX TO EXHIBITS
<TABLE>
<S> <C>
12 -- Statement of computation of ratio of earnings to fixed charges
23.1 -- Consent of Deloitte & Touche LLP.
27 -- Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 12
CITGO PETROLEUM CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Before Provision
For Income Taxes..... 23,492 74,683 215,872 301,233 260,697 189,032 227,900
Distribution in
Excess of Equity
Earnings (Losses)
of
Affiliates........ -- -- -- -- -- 962 4,783
Equity Earnings
(Losses) of
Affiliates in
Excess of
Distributions..... (521) (3,113) (4,490) (3,930) (3,808) -- --
Equity in Loss of
Less than 50%
Owned
Subsidiary........ 2,174 689 5,187 68 183 98 491
Interest Expense..... 25,669 24,155 106,568 77,792 79,354 77,252 104,889
Previously
Capitalized
Interest Amortized
During the
Period............ 877 814 3,440 3,039 2,833 2,849 2,307
Portion of Rent
Representative of
Interest Factor... 2,402 2,572 10,928 11,305 11,173 11,522 8,526
------ ------ ------- ------- ------- ------- -------
Income as
Adjusted........ 54,093 99,800 337,505 389,507 350,432 281,715 348,896
====== ====== ======= ======= ======= ======= =======
Fixed Charges
Interest Expense..... 25,669 24,155 106,568 77,792 79,354 77,252 104,889
Capitalized
Interest.......... 2,109 1,674 5,000 12,000 4,000 7,000 6,000
Portion of Rent
Representative of
Interest Factor... 2,402 2,572 10,928 11,305 11,173 11,522 8,526
------ ------ ------- ------- ------- ------- -------
Total Fixed
Charges......... 30,180 28,401 122,496 101,097 94,527 95,774 119,415
====== ====== ======= ======= ======= ======= =======
Ratio of Earnings to
Fixed Charges........ 1.79x 3.51x 2.76x 3.85x 3.71x 2.94x 2.92x
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
File No. 001-12138 of CITGO Petroleum Corporation on Form 10/A of our report
dated February 12, 1996 (which expresses an unqualified opinion and includes an
explanatory paragraph relating to a 1994 change in method of accounting for
postemployment benefits to conform with Statement of Financial Accounting
Standards No. 112). We also consent to the reference to us under the heading
'Selected Financial Data' in such Form 10/A.
Deloitte & Touche LLP
Tulsa, Oklahoma
May 15, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1995
<CASH> 19,863 16,791
<SECURITIES> 0 0
<RECEIVABLES> 865,278 949,233
<ALLOWANCES> 18,297 18,988
<INVENTORY> 785,275 784,282
<CURRENT-ASSETS> 1,682,318 1,765,405
<PP&E> 2,970,722 3,066,838
<DEPRECIATION> 478,873 509,546
<TOTAL-ASSETS> 4,923,578 5,131,952
<CURRENT-LIABILITIES> 1,143,761 1,277,845
<BONDS> 1,159,263 1,205,124
<COMMON> 1 1
0 0
0 0
<OTHER-SE> 1,731,506 1,746,306
<TOTAL-LIABILITY-AND-EQUITY> 4,923,578 5,131,952
<SALES> 10,522,160 2,607,195
<TOTAL-REVENUES> 10,552,705 2,614,890
<CGS> 10,066,012 2,521,851
<TOTAL-COSTS> 10,228,272 2,564,979
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 9,070 3,030
<INTEREST-EXPENSE> 106,568 25,669
<INCOME-PRETAX> 215,872 23,492
<INCOME-TAX> 79,528 8,692
<INCOME-CONTINUING> 136,344 14,800
<DISCONTINUED> 0 0
<EXTRAORDINARY> 3,380 0
<CHANGES> 0 0
<NET-INCOME> 139,724 14,800
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
