FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________to _________
Commission File Number 001-12138
---------
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
750 Lexington Avenue
New York, New York 10022
--------------------------------------------------
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (212) 753-5340
--------------
Securities registered pursuant to Section 12(b) of the Securities
Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
- ---------------------------------------- -------------------------------------
7-3/4% Senior Notes, Due 2000 New York Stock Exchange, Inc.
7-7/8% Senior Notes, Due 2003 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
--
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K:
Not Applicable.
Aggregate market value of the voting stock held by non-affiliates
of the registrant: Not Applicable.
Number of shares of Common Stock outstanding as of March 1, 1999: 1,000
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
Table of Contents
Page
----
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................1
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES.......................................1
ITEM 3. LEGAL PROCEEDINGS....................................................17
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS......................................................18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
..............................................................................19
ITEM 6. SELECTED FINANCIAL DATA..............................................19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..............................21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........30
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA............................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.............................................................34
ITEM 11. EXECUTIVE COMPENSATION..............................................34
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................34
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS..........................................................35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND
REPORTS ON FORM 8-K...........................................................38
i
<PAGE>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Specifically, all statements under the captions "Items 1. and 2.
Business and Properties" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" relating to capital expenditures
and investments related to environmental compliance and strategic planning,
purchasing patterns of refined products and capital resources available to the
Companies (as defined herein) are forward looking statements. In addition, when
used in this document, the words "anticipate", "estimate", "prospect" and
similar expressions are used to identify forward looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the Companies' products as a result of competitive actions or economic
factors and changes in the cost of crude oil, feedstocks, blending components or
refined products. Such statements are also subject to the risks of increased
costs in related technologies and such technologies producing anticipated
results. Should one or more of these risks or uncertainties, among others,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although PDV America, Inc. believes that the
expectations reflected by such forward looking statements are reasonable based
on information currently available to the Companies, no assurances can be given
that such expectations will prove to have been correct.
<PAGE>
PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
Overview
PDV America, Inc. ("PDV America" or the "Company" and,
together with its subsidiaries, the "Companies") was incorporated in 1986 in the
State of Delaware and is a wholly owned subsidiary, effective April 2, 1997, of
PDV Holding, Inc. ("PDV Holding"), a Delaware corporation. The Company's
ultimate parent is Petroleos de Venezuela, S.A. (together with one or more of
its subsidiaries, referred to herein as "PDVSA"), the national oil company of
the Republic of Venezuela. Through its wholly owned operating subsidiaries,
CITGO Petroleum Corporation ("CITGO") and PDV Midwest Refining L.L.C. ("PDVMR")
(see below), PDV America refines, markets and transports petroleum products,
including gasoline, diesel fuel, jet fuel, petrochemicals, lubricants, asphalt
and refined waxes, mainly within the continental United States east of the Rocky
Mountains.
Prior to May 1, 1997, the Company had a 50% interest in The
UNO-VEN Company ("UNO-VEN"), an Illinois general partnership. As of May 1, 1997,
pursuant to a Partnership Interest Retirement Agreement, certain UNO-VEN assets
were transferred to PDMVR. Accordingly, the Company's consolidated financial
statements reflect the equity in earnings of UNO-VEN through April 30, 1997
(Consolidated Financial Statements of PDV America - Note 8 of Item 14a), the
results of operations of PDVMR on a consolidated basis since May 1, 1997 and the
financial position of PDVMR at December 31, 1997 and 1998. See "--PDV Midwest
Refining, L.L.C."
<PAGE>
PDV America's aggregate net interest in rated crude oil
refining capacity is 858 thousand barrels per day ("MBPD"). The following table
shows the capacity of each U.S. refinery in which PDV America holds an interest
and PDV America's share of such capacity as of December 31, 1998.
PDV America Refining Capacity
<TABLE>
<CAPTION>
Net PDV
America
Total Interest
Rated in
Crude Rated
PDV America Refining Refining
Owner Interest Capacity Capacity
----------------- ------------- --------------- -------------
(%) (MBPD) (MBPD)
<S> <C> <C> <C> <C>
Refinery Interests Held By PDV America
as of December 31, 1998
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX(1) LYONDELL-CITGO 41 265 109
Lemont, IL PDVMR 100 167 167
---------- ----------
Total Rated Refining Capacity
as of December 31, 1998 1,014 858
========== ==========
- -------------------------
<FN>
(1) The initial interest in LYONDELL-CITGO was acquired on July 1, 1993. CITGO's interest in LYONDELL-CITGO at
December 31, 1998 approximates 41%. CITGO has a one-time option to increase, for an additional investment, its
participation interest to 50%. This option may be exercised after January 1, 2000 but no later than September 30, 2000.
See "--CITGO--Refining--LYONDELL-CITGO". See also "Factors Affecting Forward Looking Statements".
</FN>
</TABLE>
2
<PAGE>
The following table shows sales revenues and volumes of PDV America for
the three years in the period ended December 31, 1998.
PDV America Sales Revenues and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
-------------------------------------------- --------------------------------------------
1998 1997 1996 1998 1997 1996
-------------- -------------- -------------- -------------- -------------- --------------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C>
Gasoline $ 6,252 $ 7,754 $ 7,451 13,241 11,953 11,308
Jet fuel 828 1,183 1,489 1,919 2,000 2,346
Diesel/#2 fuel 1,945 2,439 2,312 4,795 4,288 3,728
Asphalt 300 398 257 774 749 569
Petrochemicals and industrial
products 952 1,178 846 2,658 1,961 1,408
Lubricants and waxes 441 467 426 230 239 220
-------- -------- -------- -------- -------- --------
Total refined product sales 10,718 $ 13,419 $ 12,781 23,617 21,190 19,579
Other sales 242 203 171 -- -- --
-------- -------- -------- -------- -------- --------
Total sales $ 10,960 $ 13,622 $ 12,952 23,617 21,190 19,579
======== ======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
The following table shows PDV America's aggregate interest in
refining capacity, refinery input and product yield for the three years in the
period ended December 31, 1998.
PDV America Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998(6) 1997(2)(3) 1996(1)(4)
------------------------ --------------------------- ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(5) 858 853 683
Refinery Input
Crude oil 763 82.8% 675 80.9% 561 81.2%
Other feedstocks 159 17.2 159 19.1 130 18.8
--- ----- --- ----- --- -----
Total 922 100.0% 834 100.0% 691 100.0%
=== ===== === ===== === =====
Product Yield
Light fuels
Gasoline 413 44.3% 381 45.3% 313 44.9%
Jet Fuel 69 7.4 68 8.1 70 10.0
Diesel/#2 fuel 175 18.8 144 17.1 122 17.5
Asphalt 45 4.8 42 5.0 34 4.9
Petrochemical and Industrial Products 231 24.7 206 24.5 158 22.7
--- ----- --- ----- --- -----
Total 933 100.0% 841 100.0% 697 100.0%
=== ===== === ===== === =====
- -------------------------
<FN>
(1) For 1996, includes all of CITGO and 50% of UNO-VEN refinery production, except as otherwise noted.
(2) For 1997, includes all of CITGO refinery production, 50% of UNO-VEN refinery production through April 30, 1997 and all of
PDVMR refinery production beginning May 1, 1997 through December 31, 1997.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) Includes a weighted average of 12.89% of the Houston refinery for 1996.
(5) At year end.
(6) Includes a weighted average of 41.25% of the Houston refinery for 1998.
</FN>
</TABLE>
Competitive Nature of the Petroleum Refining Business
The petroleum refining industry is cyclical and highly
volatile, reflecting capital intensity with high fixed and low variable costs.
Petroleum industry operations and profitability are influenced by a large number
of factors, over some of which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum industry activities, regulating how companies
conduct their operations and formulate their products. The U.S. petroleum
refining industry has entered a period of consolidation in which a number of
former competitors have combined their operations. Demand for crude oil and its
products is largely driven by the health of local and worldwide economies,
although weather patterns and taxation relative to other energy sources also
play significant parts. Generally, U.S. refiners compete for sales on the basis
of price and brand image and, in some areas, product quality.
4
<PAGE>
CITGO
CITGO refines, markets and transports gasoline, diesel fuel,
jet fuel, petrochemicals, lubricants, refined waxes, asphalt and other refined
products throughout the United States, primarily east of the Rocky Mountains.
CITGO's transportation fuel customers include CITGO branded wholesale marketers,
convenience stores and airlines. Asphalt is generally marketed to independent
paving contractors on the East Coast of the United States. Lubricants are sold
to independent marketers, mass marketers and industrial customers, and
petrochemical feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States.
Petroleum coke is sold primarily in international markets.
Refining
CITGO's aggregate net interest in rated crude oil refining
capacity is 691 thousand barrels per day ("MBPD"). The following table shows the
capacity of each U.S. refinery in which CITGO holds an interest and CITGO's
share of such capacity as of December 31, 1998.
<TABLE>
<CAPTION>
Total Net
Rated CITGO
Crude Ownership
CITGO Refining In Refining
Owner Interest Capacity Capacity
-------------- -------- -------- --------
Location (%) (MBPD) (MBPD)
<S> <C> <C> <C> <C>
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 150 150
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX(1) LYONDELL-CITGO 41 265 109
--- ---
Total Rated Refining Capacity 847 691
as of December 31, 1998 === ===
- ---------------
<FN>
(1) Initial interest acquired on July 1, 1993. CITGO's interest in LYONDELL-CITGO at December 31, 1998 approximates
41%. CITGO has a one-time option, exercisable after January 1, 2000 but not later than September 30, 2000, to increase
for an additional investment, its participation interest up to a maximum of 50%. See "CITGO--Refining--LYONDELL-CITGO".
See also "Factors Affecting Forward Looking Statements".
</FN>
</TABLE>
5
<PAGE>
The following table shows CITGO's aggregate interest in
refining capacity, refinery input and product yield for the three years in the
period ended December 31, 1998.
CITGO Refinery Production (1)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998(2) 1997(3) 1996(4)
------------------------ --------------------------- ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity (5) 691 693 606
Refinery Input
Crude oil 615 81.0% 548 79.3% 488 80.3%
Other Feedstocks 144 19.0% 143 20.7% 120 19.7%
--- ----- --- ----- --- -----
Total 759 100.0% 691 100.0% 608 100.0%
===
Product Yield
Light fuels
Gasoline 334 43.3% 309 44.0% 269 44.0%
Jet Fuel 66 8.5% 66 9.4% 65 10.6%
Diesel/#2 fuel 134 17.4% 112 15.9% 103 16.8%
Asphalt 45 5.8% 42 6.0% 34 5.6%
Petrochemicals and industrial products 193 25.0% 174 24.7% 141 23.0%
--- ----- --- ----- --- -----
Total 772 100.0% 703 100.0% 612 100.0%
=== ===== === ===== === =====
Utilization of Rated Refining Capacity 89% 79% 81%
- ---------------
<FN>
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 41.25% of the Houston refinery for 1998.
(3) Includes a weighted average of 34.44% of the Houston refinery for 1997.
(4) Includes a weighted average of 12.89% of the Houston refinery for 1996.
(5) At year end.
</FN>
</TABLE>
CITGO produces its light fuels and petrochemicals primarily
through its Lake Charles and Corpus Christi refineries. Asphalt refining
operations are carried out through CITGO's Paulsboro and Savannah refineries.
CITGO also owns an interest in and obtains refined products from a refinery in
Houston.
Lake Charles, Louisiana Refinery. This refinery was originally
built in 1944 and since then has been continuously upgraded. Today it is a
modern, complex, high conversion refinery, which is one of the largest in the
United States. It has a rated refining capacity of 320 MBPD and is capable of
processing large volumes of heavy crude oil into a flexible slate of refined
products, including significant quantities of high-octane unleaded gasoline and
reformulated gasoline. The Lake Charles refinery has a Solomon Process
Complexity Factor of 17.0 (as compared to an average of 13.8 for U.S. refineries
in the most recently available Solomon Associates, Inc. survey). The Solomon
Process Complexity Rating is an industry measure of a refinery's ability to
produce higher value-added products. A higher rating indicates a greater
capability to produce such products.
6
<PAGE>
The following table shows the rated refining capacity,
refinery input and product yield at the Lake Charles refinery for the three
years in the period ended December 31, 1998.
Lake Charles Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ --------------------------- ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(1) 320 320 320
Refinery Input
Crude oil 288 84.2% 291 87.9% 274 85.1%
Other feedstocks 54 15.8 40 12.1 48 14.9
---- ------ ---- ------ ---- ------
Total 342 100.0% 331 100.0% 322 100.0%
==== ====== ==== ====== ==== ======
Product Yield
Light fuels
Gasoline 187 53.7% 177 52.4% 164 50.3%
Jet Fuel 59 17.0 60 17.7 62 19.0
Diesel/#2 fuel 47 13.5 45 13.3 38 11.7
Petrochemicals and Industrial Products 55 15.8 56 16.6 62 19.0
--- ----- --- ----- --- -----
Total 348 100.0% 338 100.0% 326 100.0%
=== ===== === ===== === =====
Utilization of Rated Refining Capacity 90% 91% 86%
- -------------------------
<FN>
(1) At year end.
</FN>
</TABLE>
Approximately 66%, 63% and 67% of the total crude runs at the
Lake Charles refinery, in the years 1998, 1997 and 1996, respectively, consisted
of crude oil with an average API gravity of 24 degrees or less. Due to the
complex processing required to refine such crude oil, the Lake Charles
refinery's economic crude oil throughput capacity is approximately 290 MBPD,
which is approximately 90% of its rated capacity of 320 MBPD.
The Lake Charles refinery's Gulf Coast location provides it
with access to crude oil deliveries from multiple sources. Imported crude oil
and feedstocks supplies are delivered by ship directly to the Lake Charles
refinery, and domestic crude oil supplies are delivered by pipeline and barge.
In addition, the refinery is connected by pipelines to the Louisiana Offshore
Oil Port and to terminal facilities in the Houston area through which it can
receive crude oil deliveries if the Lake Charles docks are temporarily
inaccessible. For delivery of refined products, the refinery is connected
through the Lake Charles Pipeline directly to the Colonial and Explorer
Pipelines, which are the major refined product pipelines supplying the northeast
and midwest regions of the United States, respectively. The refinery also uses
adjacent terminals and docks, which provide access for ocean tankers and barges.
The Lake Charles refinery's main petrochemical products are
propylene and benzene. Industrial products include sulphur, residual fuels and
petroleum coke.
Located adjacent to the Lake Charles refinery is a lubricants
refinery operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"),
which is owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily
because of its specific design, the Cit-Con refinery produces extremely high
quality oils and waxes and is one of the few in the industry designed as a
stand-alone lubricants refinery.
7
<PAGE>
Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from
Conoco's nearby refinery. Finished refined products are shared on the same pro
rata basis by CITGO and Conoco.
Corpus Christi, Texas Refinery. This refinery complex consists
of the East and West Plants, located within five miles of each other.
Construction began on the East Plant in 1937, and it was extensively
reconstructed and modernized during the 1970s and 1980s. The West Plant was
completed in 1983. The Corpus Christi refinery is an efficient and highly
complex facility, capable of processing high volumes of heavy crude oil into a
flexible slate of refined products, with a Solomon Process Complexity Factor of
20.5 (as compared to an average of 13.8 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey).
The following table shows rated refining capacity, refinery
input and product yield at the Corpus Christi refinery for the three years in
the period ended December 31, 1998.
Corpus Christi Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ --------------------------- ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity(1) 150 150 140
Refinery Input
Crude oil 152 71.4% 115 59.3% 133 66.8%
Other feedstocks 61 28.6 79 40.7 66 33.2
--- ----- --- ----- --- -----
Total 213 100.0% 194 100.0% 199 100.0%
=== ===== === ===== === =====
Product Yield
Light fuels
Gasoline 97 45.7% 93 47.9% 93 47.0%
Diesel/#2 fuel 58 27.4 45 23.2 59 29.8
Petrochemicals and Industrial Products 57 26.9 56 28.9 46 23.2
--- ----- --- ----- --- -----
Total 212 100.0% 194 100.0% 198 100.0%
=== ===== === ===== === =====
Utilization of Rated Refining Capacity 101% 77% 95%
- -------------------------
<FN>
(1) At year end.
</FN>
</TABLE>
Corpus Christi crude runs during 1998 consisted of 100% heavy
sour Venezuelan crude. The average API gravity of the composite crude slate run
at the Corpus Christi refinery is approximately 24 degrees. Crude oil supplies
are delivered directly to the Corpus Christi refinery through the Port of Corpus
Christi.
CITGO operates the West Plant under a sublease agreement (the
"Sublease") from Union Pacific Corporation ("Union Pacific"). The basic term of
the Sublease ends on January 1, 2004, but CITGO may renew the Sublease for
successive renewal terms through January 31, 2011. CITGO has the right to
purchase the West Plant from Union Pacific at the end of the basic term, the end
of any renewal term, or on January 31, 2011, at a nominal price.
During the last several years, CITGO has increased the
capacity of the Corpus Christi refinery to produce petrochemical products. The
Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, methyl tertiary butyl ether ("MTBE") and aromatics (including
benzene,
8
<PAGE>
toluene and xylene). The Company produces a significant quantity of cumene, an
important petrochemical product used in the engineered plastics market. The
production of xylene, a basic building block used in the manufacture of consumer
plastics, allows the refinery to take advantage of its reforming capacity while
staying within the gasoline specifications of the Clean Air Act Amendments of
1990.
Paulsboro, New Jersey Refinery. This is an asphalt refinery
which consists of Unit I, with a rated capacity of 44 MBPD, and Unit II, with a
rated capacity of 40 MBPD. Unit I was constructed in 1979 primarily to process
low sulphur, light crude oil but has been modified to run heavier crudes. Unit
II, originally constructed in 1980 to produce asphalt from high sulphur, heavy
crude oil high in naphthenic acid, is a combination atmospheric and vacuum
distillation facility.
Savannah, Georgia Refinery. This is an asphalt refinery, which
includes two crude distillation units, with a combined rated capacity of 28
MBPD.
LYONDELL-CITGO REFINING L.P. On July 1, 1993, subsidiaries of
CITGO and Lyondell Chemical Company ("Lyondell") formed LYONDELL-CITGO REFINING
LP ("LYONDELL-CITGO"), which owns and operates a sophisticated 265 MBPD refinery
previously owned by Lyondell and located on the ship channel in Houston, Texas.
At December 31, 1998, CITGO's investment in LYONDELL-CITGO was $597 million. In
addition, at December 31, 1998, CITGO held notes receivable from LYONDELL-CITGO
of $36 million. (See Consolidated Financial Statements of PDV America - Note 2
in Item 14a.) The crude oil processed by this refinery is supplied by PDVSA
under a long-term crude oil supply agreement through the year 2017. CITGO
purchases substantially all of the refined products produced at this refinery
under a long-term contract. (See Consolidated Financial Statements of PDV
America - Note 2 in Item 14a.)
CITGO's participation interest in LYONDELL-CITGO was
approximately 41% at December 31, 1998. CITGO has a one-time option, exercisable
after January 1, 2000 but not later than September 30, 2000, to increase, for an
additional investment, its participation interest to 50%.
Crude Oil and Refined Product Purchases
CITGO owns no crude oil reserves or production facilities, and
must therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including
LYONDELL-CITGO, PDV Midwest Refining, L.L.C. ("PDVMR"), Chalmette Refining,
L.L.C. ("Chalmette") and a joint venture that owns and operates a refinery in
St. Croix, U.S. Virgin Islands ("HOVENSA"). See "Item 13. Certain Relationships
and Related Transactions".
9
<PAGE>
Crude Oil Purchases. The following chart shows CITGO's
purchases of crude oil for the three years in the period ended December 31,
1998:
CITGO Crude Oil Purchases
<TABLE>
<CAPTION>
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
---------------------------- -------------------------- -------------------------- ------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Suppliers (MBPD) (MBPD) (MBPD) (MBPD)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PDVSA 134 130 142 153 117 130 52 49 39 17 14 17
PEMEX 51 61 44 0 0 0 0 0 0 0 0 0
Occidental 20 40 43 0 0 0 0 0 0 0 0 0
Other Sources 88 57 45 0 0 3 0 0 0 0 0 0
--- --- --- --- --- --- --- --- --- --- --- ---
Total 293 288 274 153 117 133 52 49 39 17 14 17
=== === === === === === == == == == == ==
</TABLE>
CITGO's largest supplier of crude oil is PDVSA, and CITGO has
entered into long-term crude oil supply agreements with PDVSA with respect to
the crude oil requirements for each of CITGO's refineries. See "Item 13. Certain
Relationships and Related Transactions". The following table shows the base and
incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1998.
The crude supply contracts include force majeure clauses that
have been exercised on certain occasions. Exercise of these clauses requires
that the Company locate alternative sources of supply for its crude oil
requirements, and such action may result in lower operating margins.
CITGO Crude Oil Supply Contracts with PDVSA
<TABLE>
<CAPTION>
Volumes of Crude
Oil Purchased
Contract Crude for the Year Ended Contract
Oil Volume December 31, Expiration
----------------------------- ---------------------------------------
Base Incremental(1) 1998 1997 1996 Date
---------- ------------------ ------------ ------------- ------------ ----------
(MBPD) (MBPD) (year)
Location
<S> <C> <C> <C> <C> <C> <C>
Lake Charles, LA 120 50 121(2) 115(2) 121(2) 2006
Corpus Christi, TX 130 -- 128(2) 125(2) 130 2012
Paulsboro, NJ 30 -- 35(2) 35(2) 34(2) 2010
Savannah, GA 12 -- 12(2) 12(2) 11(2) 2013
Houston, TX(3) 200 -- 223 216 134 2017
- --------------------
<FN>
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right to sell to CITGO incremental volumes
up to the maximum amount specified in the table, subject to certain restrictions relating to the type of crude
oil to be supplied, refining capacity and other operational considerations at the refinery.
(2) Volumes purchased under the supply agreements do not equal purchases from PDVSA shown in the previous table as a result
of spot purchases or transfers between refineries.
(3) CITGO acquired a participation interest in LYONDELL-CITGO, the owner of the Houston refinery, on July 1, 1993. In
connection with such transaction, LYONDELL-CITGO entered into a long-term crude oil supply agreement with PDVSA that
provided for delivery volumes of 135 MBPD until the completion of a refinery enhancement project at which time the
delivery volumes increased to a range that extends from 200 MBPD to 230 MBPD.
</FN>
</TABLE>
Most of the crude oil and feedstocks purchased by CITGO from
PDVSA are delivered on tankers owned by PDV Marina, S.A. ("PDV Marina"), a
wholly owned subsidiary of PDVSA, or by other
10
<PAGE>
PDVSA subsidiaries. In 1998, 82% of the PDVSA contract crude oil delivered to
the Lake Charles and Corpus Christi refineries was delivered on tankers operated
by PDVSA subsidiaries.
CITGO purchases additional crude oil under a 90-day evergreen
agreement with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries
are particularly well suited to refine PEMEX's Maya heavy, sour crude oil, which
is similar in many respects to several types of Venezuelan crude oil.
CITGO was a party to a contract with an affiliate of
Occidental Petroleum Corporation ("Occidental") for the purchase of light, sweet
crude oil to produce lubricants. This contract expired on August 31, 1998. CITGO
also purchases sweet crude oil under long-standing relationships with numerous
other producers.
Refined Product Purchases. CITGO is required to purchase
refined products to supplement the production of the Lake Charles and Corpus
Christi refineries in order to meet the demand of CITGO's marketing network.
During 1998, CITGO's shortage in gasoline production approximated 329 MBPD.
However, due to logistical needs, timing differences and product grade
imbalances, CITGO purchased approximately 581 MBPD of gasoline and sold into the
spot market or to refined product traders or other refiners, approximately 254
MBPD of gasoline. The following table shows CITGO's purchases of refined
products for the three years in the period ended December 31, 1998.
CITGO Refined Product Purchases
Year Ended December 31,
------------------------------------------------
1998 1997 1996
---------------- ---------------- --------------
(MBPD)
Light Fuels
Gasoline 581 518 484
Jet Fuel 69 74 92
Diesel/#2 fuel 208 190 153
--- --- ---
Total 858 782 729
=== === ===
As of December 31, 1998, CITGO purchased substantially all of
the refined products, excluding petrochemicals, produced at the LYONDELL-CITGO
refinery under a long-term contract through the year 2017. LYONDELL-CITGO was a
major supplier in 1998 providing CITGO with 120 MBPD of gasoline, 79 MBPD of
diesel/#2 fuel and 17 MBPD of jet fuel.
See "--Refining--LYONDELL-CITGO".
As of May 1, 1997, CITGO began purchasing, under a contract
with a sixty-month term, substantially all of the refined products produced at
the PDVMR refinery. During the period ended December 31, 1998, the PDVMR
refinery provided CITGO with 78 MBPD of gasoline, 42 MBPD of diesel/#2 fuel and
5 MBPD of jet fuel.
An affiliate of PDVSA acquired a 50% equity interest in a
refinery in Chalmette, Louisiana ("Chalmette") in October 1997 and has assigned
to CITGO its option to purchase up to 50 percent of the refined products
produced at the refinery through December 31, 1999. CITGO exercised this option
on November 1, 1997, and acquired approximately 65 MBPD of refined products from
the refinery during 1998, approximately one-half of which was gasoline.
In October 1998 an affiliate of PDVSA acquired a 50% equity
interest in HOVENSA and has the right under a product sales agreement to assign
periodically to CITGO, or other related parties, its
11
<PAGE>
option to purchase 50% of the refined products produced by HOVENSA (less a
certain portion of such products that HOVENSA will market directly in the local
and Caribbean markets). In addition, under the product sales agreement, the
PDVSA affiliate has appointed CITGO as its agent in designating which of its
affiliates shall from time to time take deliveries of the refined products
available to it. The product sales agreement will be in effect for the life of
the joint venture, subject to termination events based on default or mutual
agreement. Pursuant to the above arrangement, CITGO began acquiring
approximately 120 MBPD of refined products from HOVENSA on November 1, 1998,
approximately one-half of which was gasoline.
Marketing
CITGO's major products are light fuels (including gasoline,
jet fuel and diesel fuel), industrial products, petrochemicals, asphalt, and
lubricants and waxes. The following table shows revenue and volumes of each of
these product categories for the three years in the period ended December 31,
1998.
CITGO Refined Product Sales Revenues and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
------------------------------------------------ ---------------------------------------------
1998 1997 1996 1998 1997 1996
--------------- -------------- --------------- --------------- --------------- -------------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C>
Light Fuels
Gasoline $6,252 $7,754 $7,451 13,241 11,953 11,308
Jet Fuel 828 1,183 1,489 1,919 2,000 2,346
Diesel/#2 fuel 1,945 2,439 2,312 4,795 4,288 3,728
Asphalt 300 398 257 774 749 569
Petrochemicals and
Industrial Products 937 1,172 846 2,440 1,940 1,408
Lubricants and Waxes 441 467 426 230 239 220
------- ------- ------- ------ ------ ------
Total $10,703 $13,413 $12,781 23,399 21,169 19,579
======= ======= ======= ====== ====== ======
</TABLE>
Light Fuels. Gasoline sales accounted for 58% of CITGO's
refined product sales in the years 1998, 1997 and 1996. CITGO markets CITGO
branded gasoline through over 15,000 independently owned and operated CITGO
branded retail outlets (including 13,165 branded retail outlets owned and
operated by approximately 824 independent marketers and 1,888 7-Eleven(TM)
convenience stores) located throughout the United States, primarily east of the
Rocky Mountains. CITGO purchases gasoline to supply its marketing network, as
the gasoline production from the Lake Charles and Corpus Christi refineries was
only equivalent to approximately 48%, 47% and 49% of the volume of CITGO branded
gasoline sold in 1998, 1997 and 1996, respectively. See "--Crude Oil and Refined
Product Purchases--Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand in
order to obtain premium pricing for its products by appealing to consumer
preference for quality petroleum products and services. This is accomplished
through a commitment to quality, dependability and customer service to its
independent marketers, which constitute CITGO's primary distribution channel.
Sales to independent branded marketers typically are made
under contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year 2006.
Under this contract, CITGO arranges all transportation and delivery of motor
fuels and handles all product ordering. CITGO also acts as processing agent for
the purpose of facilitating and implementing orders and purchases from
third-party suppliers. CITGO receives a processing fee for such services.
12
<PAGE>
CITGO markets jet fuel directly to airline customers at 26
airports, including such major hub cities as Atlanta, Chicago, Dallas/Fort
Worth, New York and Miami.
Growth in wholesale rack sales to marketers has been the
primary focus of diesel/#2 marketing efforts. Such marketing efforts have
resulted in increases in wholesale rack sales volume from approximately 1,561
million gallons in 1996 to approximately 1,928 million gallons in 1998. The
remaining diesel/#2 fuel production is sold either in bulk through contract
sales (primarily as heating oil in the Northeast) or on a spot basis.
CITGO's delivery of light fuels to its customers is
accomplished in part through 49 refined product terminals located throughout
CITGO's primary market territory. Of these terminals, 34 are wholly owned by
CITGO and 15 are jointly owned. Fifteen of CITGO's product terminals have
waterborne docking facilities, which greatly enhance the flexibility of CITGO's
logistical system. In addition, CITGO operates eight terminals owned by PDVMR in
the Midwest. Refined product terminals owned or operated by CITGO provide a
total storage capacity of approximately 23 million barrels. Also, CITGO has
active exchange relationships with over 270 other refined product terminals,
providing flexibility and timely response to distribution needs.
Petrochemicals and Industrial Products. CITGO sells
petrochemicals in bulk to a variety of U.S. manufacturers as raw materials for
finished goods. The majority of CITGO's cumene production is sold to Mount
Vernon Phenol Plant Partnership ("MVPPP")(see "Item 13. Certain Relationships
and Related Transactions"), a joint venture phenol production plant in which
CITGO is a limited partner. The phenol plant produces phenol and acetone for
sale primarily to the principal partner in the phenol plant for the production
of plastics. Sulphur is sold to the U.S. and international fertilizer industry;
cycle oils are sold for feedstock processing and blending; natural gas liquids
are sold to the U.S. fuel and petrochemical industry; petroleum coke is sold
primarily in international markets, through a joint venture, for use as kiln and
boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil
blenders and customers.
Asphalt. CITGO markets asphalt through 15 terminals located
along the East Coast, from Savannah, Georgia to Albany, New York. Asphalt is
sold primarily to independent contractors for use in the construction and
resurfacing of roadways. Demand for asphalt in the Northeastern United States
peaks in the summer months.
Lubricants and Waxes. CITGO markets many different types,
grades and container sizes of lubricants and wax products, with the bulk of
sales consisting of automotive oil and lubricants and industrial lubricants.
Other major lubricant products include 2-cycle engine oil and automatic
transmission fluid.
Pipeline Operations
CITGO owns and operates 339 miles of crude oil pipeline
systems and approximately 1,080 miles of products pipeline systems. CITGO also
has equity interests in three crude oil pipeline companies with a total of
nearly 5,400 miles of pipeline plus equity interest in six refined product
pipeline companies with a total of approximately 8,000 miles of pipeline.
CITGO's pipeline interests provide it with access to substantial refinery
feedstocks and reliable transportation to refined product markets, as well as
cash flows from dividends. One of the refined product pipelines in which CITGO
has an interest, Colonial Pipeline, is the largest refined product pipeline in
the United States transporting gasoline, jet fuel and diesel/#2 fuel oil from
the Gulf Coast to the mid-Atlantic and eastern seaboard states.
13
<PAGE>
Employees
CITGO and its subsidiaries have a total of approximately 4,500
employees, approximately 1,900 of whom are covered by 15 union contracts.
Approximately 1,600 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant blending and
packaging plant and at various refined product terminals.
Effective February 28, 1998, the stock of Petro-Chemical
Transport, Inc. ("PCT"), a wholly owned subsidiary of CITGO, was sold. As a
result of this sale, approximately 420 employees were terminated. The operations
of PCT were not material to CITGO.
PDV Midwest Refining, L.L.C.
Refining
PDVMR produces light fuels, petrochemicals and industrial
products at its refinery in Lemont, Illinois. The refinery has a crude
distillation capacity of 167 MBPD and has a Solomon Process Complexity Factor of
11.3 (as compared to an average of 13.8 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey).
The following table shows refining capacity, refinery input
and product yield at the Lemont refinery for the three years in the period ended
December 31, 1998.
Lemont Refinery Production
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
------------------------ --------------------------- ------------------------
(MBPD, except as otherwise indicated)
<S> <C> <C> <C> <C> <C> <C>
Rated Refining Capacity (1) 167 160 153
Refinery Input
Crude oil 148 90.8% 151 89.1% 146 88.4%
Other feedstocks 15 9.2% 17 10.9 19 11.6
--- ----- --- ----- --- -----
Total 163 100.0% 168 100.0% 165 100.0%
=== ===== === ===== === =====
Product Yield
Light fuels
Gasoline 79 49.1% 87 52.4% 87 53.0%
Jet Fuel 3 1.8% 3 1.8% 7 4.3
Diesel/#2 Fuel 41 25.5% 39 23.5% 37 22.6
Industrial Products &
Petrochemicals 38 23.6% 37 22.3% 33 20.1
--- ----- --- ----- --- -----
Total 161 100.0% 166 100.0% 164 100.0%
=== ===== === ===== === =====
Utilization of Rated 89% 94% 95%
Refining Capacity
- -----------------------
<FN>
(1) At year end.
</FN>
</TABLE>
14
<PAGE>
The average API gravity of the composite crude slate run at
the Lemont refinery is approximately 27.2 degrees. Crude oil is supplied to the
refinery by pipeline.
Petrochemical products at the Lemont refinery include benzene,
toluene and xylene, plus a range of ten different aliphatic solvents.
PDVMR owns a 25% interest in a partnership which operates a
needle coke production facility adjacent to the Lemont refinery (the "Needle
Coker"). The remaining 75% interest is held by various subsidiaries of UNOCAL.
Crude Oil Purchases
PDVMR owns no crude oil reserves or production facilities and,
therefore, relies on purchases of crude oil for its refining operations. A
portion of the crude oil refined at the Lemont refinery is supplied by PDVSA
under a crude oil supply agreement, effective as of April 23, 1997, that expires
in the year 2002 and thereafter is renewable annually. The contract calls for
delivery of a guaranteed volume of up to 100 MBPD; however, PDVMR is not
required to purchase a set minimum. In 1998, the crude oil processed at the
Lemont refinery was 23 percent Venezuelan, 67 percent Canadian and 10 percent
from other sources.
Marketing
Subsequent to the transfer of assets on May 1, 1997,
substantially all of PDVMR's products are sold to and marketed by CITGO. (See
"Item 13. Certain Relationships and Related Transactions".)
Employees
PDVMR has no employees. CITGO operates the Lemont refinery and
provides all administrative functions to the Company pursuant to a Refinery
Operating Agreement (as defined below).
Refinery Operating Agreement with CITGO
CITGO operates the Lemont refinery in accordance with a
Refinery Operating Agreement (the "Refinery Operating Agreement") between CITGO
and PDVMR. The Refinery Operating Agreement sets out the duties, obligations and
responsibilities of the operator and the Company with respect to the operation
of the refinery. CITGO provides all administrative functions to the Company,
including cash management, legal and accounting services. The term of the
agreement is 60 months, commencing May 1, 1997, and shall be automatically
renewed for periods of 12 months (subject to early termination as provided in
the Refinery Operating Agreement). (See "Item 13. Certain Relationships and
Related Transactions".)
Environment and Safety
Environment--General
Beginning in 1994, the U.S. refining industry was required to
comply with stringent product specifications under the 1990 Clean Air Act
("CAA") Amendments for reformulated gasoline and low sulphur diesel fuel, which
necessitated additional capital and operating expenditures, and altered
significantly the U.S. refining industry and the return realized on refinery
investments. In addition, numerous other factors affect the Company's plans with
respect to environmental compliance and related expenditures. See "Factors
Affecting Forward Looking Statements".
15
<PAGE>
In addition, the Companies are subject to various federal,
state and local environmental laws and regulations which may require the
Companies to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by the Companies or other
parties. Management believes the Companies are in compliance with these laws and
regulations in all material aspects. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
The Company's accounting policy establishes environmental
reserves as probable site restoration and remediation obligations become
reasonably capable of estimation. Based on currently available information,
including the continuing participation of former owners in remediation actions
and indemnification agreements with third parties, the Company's management
believes that its accruals are sufficient to address the Companies'
environmental clean-up obligations.
Conditions which require additional expenditures may exist for
various of the Companies' sites including, but not limited to, the Companies'
operating refinery complexes, closed refineries, service stations and crude oil
and petroleum product storage terminals. The amount of such future expenditures,
if any, is indeterminable.
Environment--CITGO
Under a 1992 agreement with CITGO, a former owner of certain
of CITGO's operations and assets, including the Lake Charles refinery,
indemnifies CITGO for certain environmental remediation costs, "Superfund"
liabilities and tort liabilities related to those operations and assets
according to relative ownership periods and the terms of the agreement.
A February 1999 order of a Louisiana agency specifies
requirements to complete closure of certain surface impoundments at the Lake
Charles refinery. CITGO and the former owner are participating in this closure
and sharing the related costs based on estimated contributions of waste and
ownership periods. Final closure is expected to begin in 2000.
Based on publicly available information, CITGO believes that
the former owner has the financial capability to fulfill all of its
responsibilities under the 1992 agreement. Accordingly, CITGO believes that its
liability exposure under the Federal Superfund and similar state laws with
respect to those sites for which the former owner provides indemnity is not
material.
In July 1997, the Texas Natural Resources Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Company LP ("CITGO Refining") violated TNRCC rules
relating to operation of a hazardous waste management unit without a permit and
recommended a penalty of $699,200. CITGO Refining disagrees with those
allegations and the proposed penalties. As part of the continuing negotiations,
TNRCC has proposed to settle the alleged violation of hazardous waste management
rules and regulations in addition to alleged unauthorized emissions to the
atmosphere and alleged unauthorized discharge to the waters of the state in
return for payment of a penalty of $786,300.
Increasingly stringent regulatory provisions periodically
require additional capital expenditures. During 1998, CITGO expended
approximately $65 million for environmental and regulatory capital improvements
in its operations. Management currently estimates that CITGO will spend
approximately $303 million for environmental and regulatory capital projects
over the five-year period 1999-2003. These estimates may vary due to a variety
of factors. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources". See also
"Factors Affecting Forward Looking Statements".
16
<PAGE>
Environment--PDVMR
In accordance with the Partnership Interest Retirement
Agreement, the Company, VPHI Midwest, Inc., a subsidiary of the Company, and
PDVMR assumed joint and several liability for all environmental matters relating
to past operations of UNO-VEN.
During 1998, PDVMR expended approximately $4 million for
environmental and regulatory capital improvements in its operations and
currently anticipates spending approximately $29 million for environmental and
regulatory capital projects over the five-year period 1999-2003. These estimates
may vary due to a variety of factors. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources".
Safety
Due to the nature of petroleum refining and distribution, both
CITGO and PDVMR are subject to stringent occupational health and safety laws and
regulations. CITGO and PDVMR maintain comprehensive safety, training and
maintenance programs, and PDV America believes that both companies are in
substantial compliance with occupational health and safety laws.
ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of
business are pending against the Companies. The Companies record accruals for
potential losses when, in management's opinion, such losses are probable and
reasonably estimable. If known lawsuits and claims were to be determined in a
manner adverse to the Companies, and in amounts greater than the Companies'
accruals, then such determinations could have a material adverse effect on the
Companies' results of operations in a given reporting period. However, in
management's opinion the ultimate resolution of these lawsuits and claims will
not exceed, by a material amount, the amount of the accruals and the insurance
coverage available to the Companies. This opinion is based upon management's and
counsel's current assessment of these lawsuits and claims. The most significant
lawsuits and claims are discussed below.
In a pending case in federal court, Oil Chemical and Atomic
Workers, Local 7-517 (the "Union") has asserted claims against CITGO, PDVSA, PDV
America, PDVMR, UNO-VEN and Unocal pursuant to the Labor Management Relations
Act. The Union alleges that CITGO and the other defendants are bound by the
terms of a collective bargaining agreement between UNO-VEN and the Union
covering certain employees at a refinery in Lemont, Illinois. This refinery was
acquired by PDVMR on May 1, 1997 in a transaction involving the former partners
of UNO-VEN. Pursuant to an operating agreement with PDVMR, CITGO became the
operator of this refinery and employed the substantial majority of the employees
previously employed by UNO-VEN pursuant to its initial terms and conditions of
employment, but CITGO did not assume the existing labor agreement. The Union
seeks monetary compensation for certain differences in employee benefits and
reinstatement of all of the UNO-VEN benefit plans. The Union also seeks to
require CITGO to abide by the terms of the collective bargaining agreement
between the Union and UNO-VEN. As an alternative claim against all defendants
but CITGO, the Union alleges that if the labor agreement is not binding on
CITGO, there was a violation of the Federal Workers Adjustment Retraining and
Notification Act by failure to give 60 days' written notice of termination to
approximately 400 UNO-VEN employees; this would allegedly entitle such workers
to 60 days' pay and benefits, which is estimated to be approximately $6 million.
In March 1999, the federal appeals court affirmed the trial court's grant of the
motions for summary judgment filed by CITGO and the other defendants.
PDVMR and PDV America, jointly and severally, have agreed to
indemnify UNO-VEN and certain other related entities against certain liabilities
and claims, including the preceding matter.
17
<PAGE>
In May 1997, an explosion and fire occurred at CITGO's Corpus
Christi refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property damage
related to the above noted incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively are not material.
There are presently six lawsuits pending against CITGO in federal and state
courts alleging property damages, personal injury and punitive damages. A trial
in one of the federal court lawsuits in October 1998 involving ten bellwether
plaintiffs, out of approximately 400 plaintiffs, resulted in a verdict for
CITGO. The remaining cases are not currently scheduled for trial. CITGO
anticipates that the claims of the remaining plaintiffs in this lawsuit will be
resolved for an immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas
state court against CITGO and other operators and owners of nearby industrial
facilities which claims damages for reduced value of residential properties
located in the vicinity of the industrial facilities as a result of air, soil
and groundwater contamination. In 1997, CITGO offered to purchase about 275
properties in a neighborhood adjacent to CITGO's Corpus Christi refinery, which
were included in the lawsuit. Related to this offer, $15.7 million was expensed
in 1997. To date, CITGO has reached agreements to buy all but 18 of such
properties, which include settlements of property damage claims, and has offers
open to purchase the remaining properties. Two related personal injury and
wrongful death lawsuits were filed against the same defendants in 1996 and are
scheduled for trial in 1999.
Litigation is pending in federal court in Lake Charles,
Louisiana, against CITGO by a number of current and former Lake Charles refinery
employees and applicants asserting claims of racial discrimination in connection
with CITGO's employment practices. Trials in this case are set to begin in the
fall of 1999.
CITGO is among defendants to lawsuits in California and North
Carolina alleging contamination of water supplies by methyl tertiary butyl ether
("MTBE"), a component of gasoline. The action in California was filed in
November 1998 by the South Tahoe Public Utility District and CITGO was added as
a defendant in February 1999. The North Carolina case, filed in January 1999, is
a putative class action on behalf of owners of water wells and other drinking
water supplies in the state. Both actions allege that MTBE poses public health
risks. Both actions seek damages as well as remediation of the alleged
contamination. These matters are in early states and there has been no discovery
conducted against CITGO. CITGO intends to deny all of the allegations and is
pursuing its defenses.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
Not Applicable.
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded. All of the
Company's common stock is held by PDV Holding, Inc. ("PDV Holding"), a Delaware
corporation, whose ultimate parent is PDVSA. In 1998 PDV America declared and
paid a dividend of $268.5 million to PDV Holding. PDV America did not declare or
pay any dividends in 1997.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical
consolidated financial and operating data of PDV America as of the end of and
for each of the five years in the period ended December 31, 1998. The following
table should be read in conjunction with the consolidated financial statements
of PDV America as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, included in Item 8. The audited
consolidated financial statements of PDV America for each of the five years in
the period ended December 31, 1998 have been prepared on the basis of United
States generally accepted accounting principles.
19
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997(8) 1996 1995(7) 1994
------------- -------------- -------------- -------------- ------------
($ in millions)
Income Statement Data
<S> <C> <C> <C> <C> <C>
Sales $10,960 $13,622 $12,952 $10,522 $9,247
Equity in earnings (losses) of affiliates(1) 82 69 45 48 55
Net revenues 11,107 13,754 13,071 10,647 9,374
Income before extraordinary items
and cumulative effect of accounting
changes 231 228 138 143 205
Extraordinary gain (charges)(2) -- -- -- 3 (2)
Cumulative effect of accounting
changes(3) -- -- -- -- (4)
Net income 231 228 138 146 199
Ratio of Earnings to Fixed Charges(4) 3.06x 2.58x 1.91x 2.02x 2.65x
Balance Sheet Data
Total assets $7,075 $7,244 $6,938 $6,220 $5,770
Long-term debt (excluding current
portion)(5) 2,174 2,164 2,595 2,297 2,155
Total debt(6) 2,273 2,526 2,755 2,428 2,279
Shareholder's equity 2,601 2,589 2,111 1,973 1,812
- -------------------------
<FN>
(1) Includes the equity in the earnings of UNO-VEN of $0.4 million, $23 million, $15 million and $27 million for the four months
ended April 30, 1997 and the years ended December 31, 1996, 1995 and 1994, respectively.
(2) Represents extraordinary gain or (charges) for the early extinguishment of debt (net of related income tax provision of
$2 million and income tax benefits of $1 million in 1995 and 1994, respectively).
(3) Represents the cumulative effect of the accounting change to Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits" in 1994 (net of related income tax benefits of $3 million).
(4) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" consist of income before income taxes
and cumulative effect of accounting changes plus fixed charges (excluding capitalized interest), amortization of previously
capitalized interest and certain adjustments to equity in income of affiliates. "Fixed charges" include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of operating lease rent expense deemed to be
representative of interest.
(5) Includes long-term debt to third parties, note payable to affiliate and capital lease obligations.
(6) Includes short-term bank loans, current portion of capital lease obligations and long-term debt, long-term debt, capital
lease obligations and note payable to affiliate.
(7) Includes operations of Cato Oil and Grease Company since May 1, 1995.
(8) Includes operations of PDVMR since May 1, 1997.
</FN>
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The following discussion of the financial condition and
results of operations of PDV America should be read in conjunction with the
consolidated financial statements of PDV America included elsewhere herein.
Petroleum industry operations and profitability are influenced
by a large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases
limiting their profits directly. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. PDV America's consolidated operating results are affected by
these industry-specific factors and by company-specific factors, such as the
success of marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the
refining and marketing business in the United States are primarily dependent
upon producing and selling quantities of refined products at margins sufficient
to cover fixed and variable costs. The refining and marketing business is
characterized by high fixed costs resulting from the significant capital outlays
associated with refineries, terminals and related facilities. This business is
also characterized by substantial fluctuations in variable costs, particularly
costs of crude oil, feedstocks and blending components, and in the prices
realized for refined products. Crude oil and refined products are commodities
whose price levels are determined by market forces beyond the control of the
Companies.
In general, prices for refined products are significantly
influenced by the price of crude oil, feedstocks and blending components.
Although an increase or decrease in the price for crude oil, feedstocks and
blending components generally results in a corresponding change in prices for
refined products, there is usually a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on PDV America's consolidated operating results therefore
depends in part on how quickly refined product prices adjust to reflect these
changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, 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. CITGO purchases a significant amount of its crude oil requirements from
PDVSA under long-term crude oil supply agreements (expiring in the years 2006
through 2013). CITGO's supply agreements were 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 58% of the crude oil processed in refineries
owned by CITGO in the year ended December 31, 1998. The crude supply contracts
include force majeure clauses that have been exercised on certain occasions.
Exercise of these clauses requires that CITGO locate alternative sources of
supply for its crude oil requirements, and such action may result in lower
operating margins. CITGO also purchases significant volumes of refined products
to supplement the production from its refineries to meet marketing demands and
to resolve logistical issues. PDV America's earnings and cash flows are also
affected by the cyclical nature of petrochemical prices. As a result of these
factors, the earnings and cash flows of PDV America may experience substantial
fluctuations. Inflation was not a significant factor in the operations of PDV
America for the three years ended 1998.
21
<PAGE>
CITGO's revenues accounted for approximately 99% of PDV
America's consolidated revenues in 1998, 1997 and 1996. PDVMR's sales of $1,034
million for the period ended December 31, 1998 were primarily to CITGO and,
accordingly, these were eliminated in consolidation. However, the operations of
PDVMR contributed approximately $77 million to the Companies' consolidated gross
margin.
In July 1997 the Company's senior management implemented a
Transformation Program designed to ensure that numerous expense controls,
business information systems and business efficiency initiatives underway were
effectively coordinated to achieve desired results. Included in this program
were reviews of CITGO's business units, assets, strategies, and business
processes. These combined actions include personnel reductions (the "Separation
Programs"). The cost of the Separation Programs was approximately $8 million and
$22 million for the years ended December 31, 1998 and 1997, respectively. In
addition, as part of the Transformation Program, the first phase of Systems,
Applications and Products in Data Processing ("SAP") implementation, which
included the financial reporting and materials management systems, was brought
into production on January 1, 1998. Additional SAP modules, including plant
maintenance work order and cost tracking, were implemented throughout 1998. The
implementation will continue in 1999.
The following table summarizes the sources of PDV America's sales
revenues and volumes.
PDV America Sales Revenues and Volumes
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
------------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996
-------------- ------------- -------------- ------------- ------------ ------------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C>
Gasoline $ 6,252 $ 7,754 $ 7,451 13,241 11,953 11,308
Jet fuel 828 1,183 1,489 1,919 2,000 2,346
Diesel/#2 fuel 1,945 2,439 2,312 4,795 4,288 3,728
Asphalt 300 398 257 774 749 569
Petrochemicals and industrial
products 952 1,178 846 2,658 1,961 1,408
Lubricants and waxes 441 467 426 230 239 220
--------- --------- --------- ------- ------- -------
Total refined product sales 10,718 $ 13,419 $ 12,781 23,617 21,190 19,579
Other sales 242 203 171 -- -- --
--------- --------- --------- ------- ------- -------
Total sales $ 10,960 $ 13,622 $ 12,952 23,617 21,190 19,579
========= ========= ========= ======= ======= =======
</TABLE>
The following table summarizes PDV America's cost of sales and
operating expenses.
PDV America Cost of Sales and Operating Expense
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
($ in millions)
<S> <C> <C> <C>
Crude oil $ 2,571 $ 3,552 $ 3,053
Refined products 5,102 6,739 7,139
Intermediate feedstocks 900 1,240 1,000
Refining and manufacturing costs 949 940 801
Other operating costs and expenses and inventory changes 784 527 498
--------- --------- ---------
Total cost of sales and operating expenses $ 10,306 $ 12,998 $ 12,491
========= ========= =========
</TABLE>
22
<PAGE>
Results of Operations--1998 Compared to 1997
Sales revenues and volumes. Sales decreased by $2,662 million,
representing a 20% decrease from 1997 to 1998. This was due to a decrease in
average sales price of 28% partially offset by an increase in sales volumes of
12%. (See PDV America Sales Revenues and Volumes table above.)
Equity in earnings (losses) of affiliates. Equity in earnings
of affiliates increased by approximately $13 million, or 18.8% from $69 million
in 1997 to $82 million in 1998. This increase was due primarily to a $14 million
increase in CITGO's equity in earnings of LYONDELL-CITGO as a result of the
change in CITGO's interest in LYONDELL-CITGO which increased from approximately
13% at December 31, 1996 to approximately 42% on April 1, 1997 and the
improvement in LYONDELL-CITGO's operations since completion of its refinery
enhancement project during the first quarter of 1997 (See Consolidated Financial
Statements of PDV America - Note 2 in Item 14a.)
Cost of sales and operating expenses. Cost of sales and
operating expenses decreased by $2,692 million, or 21% from 1997 to 1998. (See
PDV America Cost of Sales and Operating Expense table above.)
The Companies purchase refined products to supplement the
production from their refineries to meet marketing demands and resolve
logistical issues. The refined product purchases represented 50% and 52% of cost
of sales for the years 1998 and 1997, respectively. These refined product
purchases included purchases from LYONDELL-CITGO, Chalmette and HOVENSA. The
Companies estimate that margins on purchased products, on average, are lower
than margins on produced products due to the fact that the Companies can only
receive the marketing portion of the total margin received on the produced
refined products. However, purchased products are not segregated from the
Companies produced products and margins may vary due to market conditions and
other factors beyond the Companies' control. As such, it is difficult to measure
the effects on profitability of changes in volumes of purchased products. The
Companies anticipate their purchased product requirements will 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, the Companies do not anticipate operational actions or market
conditions which might cause a material change in anticipated purchased product
requirements; however, there could be events beyond the control of the Companies
which impact the volume of refined products purchased. See also "Factors
Affecting Forward Looking Statements".
Gross margin. The gross margin for 1998 was $655 million
compared to $625 million for 1997. Gross margins in 1998 were positively
affected by a 12% increase in sales volume partially offset by an erosion of
gross margin on a per gallon basis which includes a lower of cost or market
adjustment of $172 million.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased $47 million, or 22% in 1998. The increase
is due primarily to salary and related burden allocations as well as increases
in advertising expense and depreciation.
Interest expense. Interest expense decreased $29 million from
1997 to 1998. The decrease was primarily due to the decrease in average debt
outstanding related to a decrease in working capital requirements and the
deferral of a significant 1998 excise tax payment, as well as the repayment of
$250
23
<PAGE>
million of the Company's Senior Notes on August 1, 1998. Also the average
interest rate decreased due to a decrease in key rates and replacement of higher
rate debt with lower rate debt.
Income taxes. PDV America's provision for income taxes in 1998
was $131 million, representing an effective tax rate of 36%. In 1997, PDV
America's provision for income taxes was $106 million, representing an effective
tax rate of 32%. The relatively low rate in 1997 was due primarily to the
favorable resolution of a significant tax issue with the Internal Revenue
Service in the second quarter of 1997. The resolution resulted in the reduction
of a contingency reserve previously established related to this matter. The
decrease was partially offset by the recording of a valuation allowance related
to a capital loss carryforward. In 1998 the effective tax rate decreased
slightly compared to the 1996 rate due to a decrease in state taxes.
Results of Operations--1997 Compared to 1996
Sales revenues and volumes. Sales increased by $670 million,
representing a 5% increase from 1996 to 1997. The increase was due to an
increase in sales volumes of 8% partially offset by a decrease in average sales
prices of 3%. (See PDV America Sales Revenue and Volumes table above.)
Equity in earnings (losses) of affiliates. Equity in earnings
of affiliates increased by approximately $24 million, or 53% from $45 million in
1996 to $69 million in 1997. This increase was due primarily to a $43 million
increase in CITGO's equity earnings of LYONDELL-CITGO, which was due primarily
to the change in CITGO's interest in LYONDELL-CITGO, which increased from
approximately 13% at December 31, 1996 to approximately 42% on April 1,
1997, and the improvement in LYONDELL-CITGO's operations since completion of its
refinery enhancement project during the first quarter of 1997. Also, subsequent
to the transfer of UNO-VEN assets, the Companies have recorded $4 million of
equity in the earnings of Needle-Coker from the period from May 1, 1997 to
December 31, 1997. These were offset by a $23 million decrease in the equity in
earnings of UNO-VEN from $23 million in 1996 to $.5 million for the first four
months of 1997. See "--PDV Midwest Refining, LLC" under "Business and
Properties" and Consolidated Financial Statements of PDV America - Note 8 in
Item 14a).
Other income (expense). Other income (expense) was $(14.5)
million for the year ended December 31, 1997 as compared to $(3.4) million for
the same period in 1996. The 1997 amount includes $8.7 million in loss reserves
on a lubricants plant and retail properties, a $5.8 write-off of a capital
project, $5.8 million in fees related to the sale of trade accounts, notes and
credit card receivables in June and November 1997 and a $2.6 million write-off
of miscellaneous assets. These items were offset by a net $8.3 million property
insurance recovery relating to the Corpus Christi alkylation unit fire during
the third quarter and a $1.3 million gain on the sale of pipeline assets in the
first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $507 million, or 4% from 1996 to 1997. (See PDV
America Cost of Sales and Operating Expense table above.)
The Companies purchase refined products to supplement the
production from their refineries to meet marketing demands and resolve
logistical issues. The refined product purchases represented 52% and 57% of cost
of sales for the years 1997 and 1996, respectively. These refined product
purchases included purchases from LYONDELL-CITGO, and Chalmette.
24
<PAGE>
Gross margin. The gross margin for 1997 was $625 million, or
4.6%, compared to $461 million, or 3.6%, for 1996. Gross margins in 1997 were
positively affected by high crude runs during periods of strong refining margins
as well as asphalt and petrochemical activities and the positive contribution
from PDVMR's refining operations.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased $42 million, or 25%, due primarily to
increased selling expenses in 1997, including the effect of the change in focus
of the Companies' marketing programs initiated in April 1996 and increases in
several other areas including purchasing, administrative services, information
systems, corporate executive, credit card and other charges, none of which
increased more than $6 million individually, but in the aggregate increased
approximately $30 million for the year. Additionally, the effect of including
PDVMR's expenses from May 1, 1997 to December 31, 1997 contributed to the
increase.
Interest expense. Interest expense increased $15 million from
1996 to 1997. The increase was primarily due to the public debt and certain
industrial revenue bonds which were outstanding for the entire year in 1997
compared to only a partial year during 1996 and CITGO's revolving bank loan,
which had a higher outstanding balance during most of 1997 as compared to 1996.
The increase was also due to debt related to PDVMR.
Income taxes. PDV America's provision for income taxes in 1997
was $106 million, representing an effective tax rate of 32%. In 1996, PDV
America's provision for income taxes was $78 million, representing an effective
tax rate of 36%. The decrease is due primarily to the favorable resolution with
the Internal Revenue Service of a significant tax issue, related to
environmental expenditures, in the second quarter of 1997. The decrease was
partially offset by the recording of a valuation allowance related to a capital
loss carryforward.
Liquidity and Capital Resources
For the year ended December 31, 1998, PDV America's net cash
provided by operating activities totaled approximately $711 million, primarily
reflecting $231 million of net income and $265 million of depreciation and
amortization, a lower of cost or market adjustment to inventory of $172 million
and the net effect of other items of $43 million. The more significant changes
in other items included the decrease in accounts receivable, including
receivables from affiliates, of approximately $86 million, a decrease in
accounts payable and other liabilities, including payables to affiliates, of
approximately $78 million and the increase of other assets of approximately $79
million.
Net cash used in investing activities in 1998 totaled $232
million, consisting primarily of capital expenditures of $230 million, loans to
PDVSA Finance Ltd. in the aggregate amount of $260 million, and a loan to
LYONDELL-CITGO of $20 million offset by $250 million of proceeds from notes
receivable from PDVSA and $27 million of proceeds from sales of property, plant
and equipment.
During the same period, consolidated net cash used in
financing activities totaled approximately $479 million, consisting primarily of
$309 million of payments on private placement notes, $269 million of dividends
paid to PDV Holding, $59 million of repayment on term bank loan offset by $50
million of capital contribution from PDV Holding and the net additional
borrowings of $108 million.
25
<PAGE>
PDV America currently estimates capital expenditures for the
years 1999-2003 will total approximately $2.2 billion, exclusive of investments
in LYONDELL-CITGO, as shown in the following table.
Estimated Capital Expenditures--1999 through 2003(1)
Strategic $1,320 million
Maintenance 503 million
Regulatory/Environmental 332 million
-----------
Total $2,155 million
------------- ==============
(1) These estimates may change as future regulatory events unfold.
PDV America's $750 million senior notes issued in 1993 are
comprised of (i) $250 million of 7 3/4% Senior Notes due August 1, 2000 and (ii)
$500 million 7 7/8% Senior Notes due August 1, 2003 (collectively, the "Senior
Notes"). Interest on these notes is payable in semiannual installments. PDV
America repaid on August 1, 1998 the $250 million 7 1/4% Senior Notes due August
1, 1998, with the proceeds received from the maturity of $250 million of Mirror
Notes due from PDVSA on July 31, 1998.
PDV America's $260 million loan to PDVSA Finance Ltd., a
wholly owned subsidiary of Petroleos de Venezuela, S.A., was issued on November
10, 1998 and is comprised of two promissory notes of $130 million. PDVSA Finance
shall repay the outstanding principal amount of the loan commencing on February
10, 2009, in 20 equal quarterly installments of principal. Interest shall be
payable in arrears quarterly commencing on February 10, 1999, at a rate per
annum equal to 8.558%.
As of December 31, 1998, CITGO had an aggregate of $1,343
million of indebtedness outstanding that matures on various dates through the
year 2028. As of December 31, 1998, the contractual commitments to make
principal payments on this indebtedness were $84 million, $47 million and $47
million for 1999, 2000 and 2001, respectively. CITGO's bank credit facility
consists of a $400 million, five-year revolving bank loan and a $150 million,
364-day revolving bank loan, both of which are unsecured and have various
borrowing maturities, of which $165 million was outstanding at December 31,
1998. Cit-Con has a separate credit agreement under which $21 million was
outstanding at December 31, 1998. Other principal indebtedness consists of (i)
$200 million in senior notes issued in 1996, (ii) $260 million in senior notes
issued pursuant to a master shelf agreement with an insurance company, (iii)
$177 million in senior notes issued in 1991, (iv) $276 million in obligations
related to tax exempt bonds issued by various governmental units, and (v) $208
million in obligations related to taxable bonds issued by a governmental unit.
(See Consolidated Financial Statements of PDV America - Notes 9 and 10 in Item
14a.)
As of December 31, 1998, PDVMR had an aggregate of $65 million
of indebtedness that matures on various dates through the year 2008. PDVMR's
bank credit facility consists of a $125 million revolving credit facility,
committed through April 2002, of which $45 million was outstanding at December
31, 1998. Other indebtedness consists of $20 million in pollution control bonds.
(See Consolidated Financial Statements of PDV America - Note 10 in Item 14a.)
26
<PAGE>
The debt instruments of PDV America, PDVMR and CITGO impose
restrictions on PDV America's, PDVMR's and CITGO's ability to incur additional
debt, grant liens, make investments, sell or acquire fixed assets, make
restricted payments and engage in other transactions. In addition, restrictions
exist over the payment of dividends and other distributions to PDV America from
CITGO. PDV America, PDVMR and CITGO were in compliance with all their respective
covenants under such debt instruments at December 31, 1998.
As of December 31, 1998, capital resources available to the
Companies included cash on hand, available borrowing capacity under CITGO's
revolving credit facility of $385 million, $138 million in unused availability
under CITGO's uncommitted short-term borrowing facilities with various banks and
$80 million in unused availability under PDVMR's revolving credit facility with
various banks. Additionally, the remaining $400 million from CITGO's shelf
registration with the Securities and Exchange Commission for $600 million of
debt securities may be offered and sold from time to time. The Companies'
management believes that they have sufficient capital resources to carry out
planned capital spending programs, including regulatory and environmental
projects in the near term, and to meet anticipated operating needs, debt service
and currently anticipated future obligations as they arise. In addition, PDV
America intends that payments received from PDVSA under the Mirror Notes will
provide funds to service PDV America's Senior Notes. The Companies periodically
evaluate other sources of capital in the marketplace and anticipate that
long-term capital requirements will be satisfied with current capital resources
and future financing arrangements. The Companies' ability to obtain such
financing will depend on numerous factors, including market conditions and the
perceived creditworthiness of the Companies at that time. See "Factors Affecting
Forward Looking Statements".
PDV America and its direct subsidiaries are also party to a
tax allocation agreement, which is designed to provide PDV America with
sufficient cash to pay its consolidated income tax liabilities.
New Accounting Standards
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
Company had no items of other comprehensive income during the three years ended
December 31, 1998.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which is effective for the fiscal year
ending December 31, 1998. SFAS No. 131 modifies current segment reporting
requirements and establishes, for public companies, criteria for reporting
disclosures about a company's products and services, geographic areas and major
customers in annual and interim financial statements. The Company has determined
that its operations comprise a single reportable segment.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") which is effective for the Company's
fiscal year ending December 31, 1998. The statement revises current employers'
disclosure requirements for pensions and other postretirement benefits. It does
not change the measurement or recognition of costs or liabilities associated
with those plans.
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement
27
<PAGE>
establishes accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all derivatives, at
fair value, as either assets or liabilities in the statement of financial
position with an offset either to shareholder's equity and comprehensive income
or income depending upon the classification of the derivative. The Company has
not determined the impact on its financial statements that may result from
adoption of SFAS No. 133, which is required no later than January 1, 2000.
Year 2000 Readiness
General. The inability of computers, software and other
equipment using microprocessors to recognize and properly process data fields
containing a two-digit year is commonly referred to as the Year 2000 issue. As
the Year 2000 approaches, such systems may be unable to accurately process
certain date-based information.
To mitigate any adverse impact this may cause, the Companies
have established a company-wide Year 2000 Project ("Project") to address the
issue of computer programs and embedded computer chips which may be unable to
correctly function with the Year 2000. The Project is proceeding on schedule. In
addition, CITGO is updating major elements of their information systems by
implementing programs purchased from SAP. The first phase of SAP implementation,
which included the financial reporting and materials management systems, was
brought into production on January 1, 1998. Additional SAP modules including
plant maintenance work order and cost tracking were implemented throughout 1998.
The implementation will continue in 1999. The total cost of the SAP
implementation is estimated to be approximately $110 million, which includes
software, hardware, reengineering and change management. Management has
determined that SAP is an appropriate solution to the Year 2000 issue related to
the systems for which SAP is implemented. Such systems comprise approximately
80% of the Companies' total information systems. The implementation of SAP is 70
to 75% complete, and is on schedule and on budget as of December 31, 1998.
Remaining business software systems are expected to be made Year 2000 ready
through the Year 2000 Project or they will be replaced.
The Project. The Companies' Year 2000 Project Team is divided
into two groups. One group is working with Information Systems ("I.S.") and
Information Technology ("I.T.") related matters, while the other is analyzing
non-I.S. and non-I.T. business and asset integrity matters. A risk-based
approach toward Year 2000 readiness was applied to non-SAP systems and
processes, with most fix-or-replace decisions made by year-end 1998. The
strategy for achieving Year 2000 business and asset integrity is focused on
equipment, software and relationships that are critical to the Companies'
primary business operations, including refinery operations, terminal operations,
crude oil purchase and shipment operations, and refined product distribution
operations. The Companies engaged third party consultants to review and validate
the methodology and organization of the Project. The Project strategy involves a
number of phases: Inventory and Assessment of Critical Equipment, Software and
Relationships, Contingency Planning, Remediation, Testing and Readiness.
The Inventory and Assessment of Critical Equipment and
Software phase of the Project has been completed. The Inventory and Assessment
of business relationships with customers and suppliers to assure continuity of
purchases, sales and intercompany communications began in June 1998. The
Companies now require that all new contracts with vendors, suppliers or business
partners include a clause covering Year 2000 readiness. The Companies also seek
evidence of Year 2000 readiness from service providers prior to procuring new
services.
28
<PAGE>
While the Project is systematically assessing the Year 2000
readiness of third party suppliers and customers, there can be no guarantee that
third parties of business importance to the Companies will successfully and
timely reprogram, replace or test all of their own computer hardware, software
and process control systems. The Companies have therefore chosen to continue
assessment and reevaluation of third party relationships beyond the deadline for
completion of other aspects of Inventory and Assessment phases of the Project.
Reviews of third party Year 2000 readiness will continue through 1999.
The Companies have also established a Year 2000 Contingency
Planning Team. The strategy for Contingency Planning includes a review and
analysis of existing contingency plans for the Companies' refineries, terminals,
pipelines and other operations, in light of potential Year 2000 issues
discovered in the Inventory and Assessment phases of the Project. The
Contingency Planning phase will also evaluate and implement changes to the
existing contingency plans. Contingency plans based on this process are
scheduled to be enacted in phases, with completion scheduled for June 30, 1999.
Additional planning is under way for the Remediation phase of the Project.
Remediation has begun and includes technical analysis, testing and, if
necessary, retrofitting or replacement of systems and equipment determined to be
incapable of reliable operations in the Year 2000. Target for completion of the
Remediation phase is August 1, 1999. The final phase of the Project, Readiness,
is being conducted concurrently with other Project phases. As systems,
equipment, processes and business relationships are determined and documented as
Year 2000 ready, Project resources are being shifted to pursue Readiness in
remaining areas of the enterprise.
The following is the Companies' definition of Year 2000
Readiness:
o Correctly and accurately handle date information before, during
and after midnight, December 31, 1999.
o Function correctly and accurately, and without disruption,
before, during and after January 1, 2000.
o Respond to two-digit year date input in a way that resolves
ambiguity as to the century in a disclosed, defined and
predetermined manner.
o Process all date data to reflect the year 2000 as a leap year.
o Correctly and accurately recognize and process any date with a
year specified as "99" and "00".
Costs. The estimated total cost of the Project is not more
than $28 million, down from an original estimate of $35 million. The reduction
is due to less than expected need for remediation of embedded systems and
refinements in expense estimates. This estimate does not include the Companies'
potential share of Year 2000 costs that may be incurred by partnerships and
joint ventures in which the Companies participate but are not the managing
partner or operator. The total amount expended through December 31, 1998 was
approximately $7.1 million. Approximately 65% of these expenditures were for
internal costs to conduct the company-wide Inventory and Assessment phases of
the Project. The remaining 35% of the cost was for consultants in the
specialized areas of Project Management,
29
<PAGE>
Contingency Planning, Information Technology, Database Administration and
Operations Analysis, as well as fees paid to third parties for Quality
Assessment analysis of Project organization and methodology.
The costs of the Project are being funded with cash from
operations. No existing or planned I.T. projects have been deferred or delayed
due to Year 2000 readiness initiatives. The cost of implementing SAP replacement
systems is not included in these estimates.
The majority of estimated future costs for completing the
Project are anticipated to be directed toward the replacement and repair of
systems and equipment found to be incapable of reliable operation in the Year
2000. Estimates for replacement and repair costs will be refined over time as
the Remediation phase progresses.
Risks. The failure to correct a material Year 2000 problem
could result in an interruption, or failure of, certain normal business
activities or operations. Because the Companies are dependent, to a very
substantial degree, upon the proper functioning of their computer systems and
their interaction with third parties, including vendors and customers and their
computer systems, a failure of any of these systems to be Year 2000 compliant
could have a material adverse effect on the Companies. Failure of this kind
could, for example, cause disruption in the supply of crude oil, cause
disruption in refinery operations, cause disruption in the distribution of
refined products, lead to incomplete or inaccurate accounting, recording, or
processing of purchases of supplies or sales of refined products, or result in
generation of erroneous results. If not remedied, potential risks include
business interruption, financial loss, regulatory actions, reputational harm,
and legal liability. Such failures could adversely affect the Companies' results
of operations, liquidity and financial condition. Unlike other business
interruption scenarios, Year 2000 implications could include multiple,
simultaneous events which could result in unpredictable outcomes.
Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third party suppliers and customers, PDV America's management is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material impact on the Companies' operations, liquidity or financial position.
The Project is expected to significantly reduce the Companies' level of
uncertainty about the Year 2000 impact. PDV America's management believes that,
with the implementation of new SAP business systems and completion of the
Project as scheduled, the possibility of significant interruptions of normal
operations should be minimized. See also "Factors Affecting Forward Looking
Statements".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. The Companies have exposure to price
fluctuations of crude oil and refined products as well as fluctuations in
interest rates. To manage these exposures, the Companies have defined certain
benchmarks consistent with their preferred risk profile for the environment in
which the Companies operate and finance their assets. The Companies do not
attempt to manage the price risk related to all of their inventories of crude
oil and refined products. As a result, at December 31, 1998, the Companies were
exposed to the risk of broad market price declines with respect to a substantial
portion of their crude oil and refined product inventories. The following
disclosures do not attempt to quantify the price risk associated with such
commodity inventories.
30
<PAGE>
Commodity Instruments. CITGO balances its crude oil and
petroleum product supply/demand and manages a portion of its price risk by
entering into petroleum futures contracts, options and other over-the-counter
commodity derivatives. Generally, CITGO's management strategies qualify as
hedges. However, certain strategies do not qualify as hedges. CITGO may take
commodity positions based on its views or expectations of specific commodity
prices or price differentials between commodity types.
Non-Trading Commodity Derivatives
Open Positions at December 31, 1998
<TABLE>
<CAPTION>
Maturity Volumes of Contract Market
Commodity Derivative Date Contracts(1) Value(2) Value
- --------- ---------- ---- ------------ -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C>
No Lead Gasoline Futures Purchased 1999 500 $ 8 $ 8
Heating Oil Futures Purchased 1999 371 $ 7 $ 6
Futures Sold 1999 110 $ 2 $ 2
- ------------------------
<FN>
(1) 1000 barrels per contract
(2) Weighted average price
</FN>
</TABLE>
Debt Related Instruments. CITGO has fixed and floating U.S.
currency denominated debt. CITGO uses interest rate swaps to manage its debt
portfolio toward a benchmark of 40 to 60 percent fixed rate debt to total fixed
and floating rate debt. These instruments have the effect of changing the
interest rate with the objective of minimizing CITGO's long-term costs. At
December 31, 1998, CITGO's primary exposures were to U.S. dollar LIBOR and U.S.
Treasury rates.
For interest rate swaps, the table below presents notional
amounts and weighted average interest rates by expected (contractual) maturity
dates. Notional amounts are used to calculate the contractual payments to be
exchanged under the contract.
Non-Trading Interest Rate Derivatives
Open Positions at December 31, 1998
Notional
Expiration Fixed Rate Principal
Variable Rate Index Date Paid Amount
- ------------------- ------ ------ -----------
($ in millions)
One-month LIBOR May 2000 6.28% $ 25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
-----
$ 92
=====
For debt obligations, the table below presents principal cash
flows and related weighted average interest rates by expected maturity dates.
Weighted average variable rates are based on implied forward rates in the yield
curve at the reporting date.
31
<PAGE>
Long-Term Debt
At December 31, 1998
Average
Fixed Average Fixed Variable Variable
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
- ------------------- --------- ------------- --------- -------------
1999 $ 40 9.11% $ 44 5.01%
2000 290 7.94% 7 5.09%
2001 40 9.11% 7 5.23%
2002 36 8.78% 45 5.31%
2003 559 7.98% 165 5.44%
Thereafter 422 8.02% 501 6.00%
------ ----- ---- -----
Total $1,387 8.07% $769 5.77%
====== ===== ==== =====
Fair Value $1,356 $769
====== ====
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The Consolidated Financial Statements, the Notes to
Consolidated Financial Statements and the Independent Auditors' Report are
included in Item 14a of this report. The Quarterly Results of Operations are
reported in Note 16 of Notes to Consolidated Financial Statements included in
Item 14a.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
The directors and executive officers of PDV America are as
follows:
Name Age Position
- ---- --- --------
Luis Urdaneta 57 Chairman of the Board and Director,
President, Chief Executive and Financial
Officer
Jose I. Moreno 40 Secretary and Director
Theodore Helmes 43 Treasurer and Chief Accounting Officer
Directors are elected to serve until their successors are duly
elected and qualified. Executive officers are appointed by and serve at the
discretion of the Board of Directors.
Luis Urdaneta has been a director of PDV America and Chairman
of the Board, President, Chief Executive and Financial Officer, since July 1998.
From March 1994 to May 1998 he was designated member of the Board of Directors
and Executive Vice-President of PDVSA. He has been Chairman of the Board of
Directors of CITGO since 1994.
Jose I. Moreno has been a director of PDV America and
Secretary since August 1998. He has served as legal counsel to various
subsidiaries of PDVSA in Venezuela and as member of the Board of Directors in
subsidiaries of PVDSA located outside Venezuela, since 1991.
Theodore Helmes has been Treasurer and Chief Accounting
Officer of PDV America since March 1999. He has been the International Finance
Manager of PDV America since June 1991.
PDV America's Board of Directors currently has no committees.
ITEM 11. EXECUTIVE COMPENSATION
For the year ended December 31, 1998, the directors and
executive officers of PDV America received compensation in the aggregate of
approximately $1,300,000.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
PDV America is a wholly owned indirect subsidiary of PDVSA. As
a result, PDVSA, either directly or indirectly, nominates and selects the
members of the Board of Directors of PDV America and its subsidiaries. Certain
members of the Board of Directors of PDV America are also directors or executive
officers of PDVSA.
CITGO has entered into several transactions with PDVSA or
other affiliates of PDVSA, including crude oil and feedstock supply agreements,
agreements for the purchase of refined products and transportation agreements.
These crude oil supply agreements require PDVSA to supply minimum quantities of
crude oil and other feedstocks to CITGO for a fixed period, usually 20 to 25
years. The supply agreements differ somewhat for each entity and each refinery
but generally incorporate formula prices based on the market value of a slate of
refined products deemed to be produced for each particular grade of crude oil or
feedstock, less (i) certain deemed refining costs; (ii) certain actual costs,
including transportation charges, import duties and taxes; and (iii) a deemed
margin, which varies according to the grade of crude oil or feedstock delivered.
Under each supply agreement, deemed margins and deemed costs are adjusted
periodically by a formula primarily based on the rate of inflation. Because
deemed operating costs and the slate of refined products deemed to be produced
for a given barrel of crude oil or other feedstock do not necessarily reflect
the actual costs and yields in any period, the actual refining margin earned by
a purchaser under the various supply agreements will vary depending on, among
other things the efficiency with which such purchaser conducts its operations
during such period. These supply agreements are designed to reduce the inherent
earnings volatility of the refining operations of CITGO. Prior to 1995, certain
costs were used in the CITGO supply agreement formulas, aggregating
approximately $70 million per year, which were to cease being deductible after
1996. Commencing in the third quarter of 1995, a portion of such deductions were
deferred from 1995 and 1996 to the years 1997 through 1999. In 1998, the effect
of the adjustments to the original modifications was to reduce the price of
crude oil purchased from PDVSA by approximately $25 million. 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 approximately $25 million in 1999, 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 depends primarily upon the current
prices for refined products and certain actual costs of CITGO. This estimate is
based on the assumption that CITGO will purchase the base volumes of crude oil
under the agreements. See also "Factors Affecting Forward Looking Statements".
PDVMR is party to a Contract For Purchase and Sale Of Crude Oil dated
April 23, 1997, with CITGO and Maraven S.A. ("Maraven"), a corporation organized
and existing, at the date of the contract, under the laws of the Republic of
Venezuela. In accordance with the contract, Maraven (or its successor) is
obligated to provide a base volume of up to 100,000 barrels per day of
Venezuelan crude, and CITGO as operator is responsible for administering the
purchase of additional volumes of crude for the refinery. The Venezuelan crude
is priced in accordance with a formula based upon posted crude prices less a
quality differential. Maraven (or its successor), CITGO and PDVMR can change the
amount and type of crude supplied in order to capture additional economic
opportunities. The term of the agreement is sixty months with renewal periods of
twelve months.
35
<PAGE>
LYONDELL-CITGO owns and operates a 265 MBPD refinery in
Houston, Texas. LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and
Lyondell, referred to as the owners. CITGO contributed cash during the years
1993 through 1997 for a participation interest and other commitments related to
LYONDELL-CITGO's refinery enhancement project, and Lyondell contributed the
Houston refinery and related assets for the remaining participation interest.
The refinery enhancement project to increase the refinery's heavy crude oil high
conversion capacity was substantially completed at the end of 1996 with an
in-service date of March 1, 1997. The heavy crude oil processed by the Houston
refinery is supplied by PDVSA under a long-term crude oil supply agreement
through the year 2017, and CITGO purchases substantially all of the refined
products produced at the Houston refinery under a long-term contract (See
Consolidated Financial Statements of PDV America -- Notes 2 and 3 in Item 14a).
Under long-term supply agreements and refined product purchase
agreements, CITGO, PDVMR and LYONDELL-CITGO purchased approximately $1.4
billion, $0.2 billion and $0.5 billion, respectively, of crude oil, feedstocks
and refined products at market related prices from PDVSA in 1998. At December
31, 1998, $91 million was included in due to affiliates as a result of the
Companies transactions with PDVSA.
CITGO's participation interest in LYONDELL-CITGO was
approximately 41% at December 31, 1998, in accordance with agreements between
the owners concerning such interest. CITGO has a one-time option exercisable
after January 1, 2000 but before September 30, 2000, to increase, for an
additional investment, its participation interest to 50%.
CITGO loaned $19.8 million and $16.5 million to LYONDELL-CITGO
during 1998 and 1997, respectively. The notes bear interest at market rates
which were approximately 5.9% at December 31, 1998 and 1997, and are due July 1,
2003. These notes are included in other assets at December 31, 1998 and 1997.
CITGO accounts for its investment in LYONDELL-CITGO using the
equity method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the owners.
An affiliate of PDVSA acquired a 50 percent equity interest in
Chalmette in October 1997 and has assigned to CITGO its option to purchase up to
50 percent of the refined products produced at the refinery through December 31,
1999. (See Consolidated Financial Statements of PDV America -- Note 3 in Item
14a.) CITGO exercised this option on November 1, 1997, and acquired
approximately 65 MBPD of refined products from the refinery during 1998,
approximately one-half of which was gasoline.
In October 1998, an affiliate of PDVSA acquired a 50 percent
equity interest in HOVENSA and has the right under a product sales agreement to
assign periodically to CITGO, or other related parties, its option to purchase
50% of the refined products produced by HOVENSA (less a certain portion of such
products that HOVENSA will market directly in the local and Caribbean markets).
In addition, under the product sales agreement, the PDVSA affiliate has
appointed CITGO as its agent in designating which of its affiliates shall from
time to time take deliveries of the refined products available to it. The
product sales agreement will be in effect for the life of the joint venture,
subject to termination events based on default or mutual agreement. (See
Consolidated Financial Statements of PDV America -- Note 3 in Item 14a.)
Pursuant to the above arrangement, CITGO began acquiring approximately 120
36
<PAGE>
MBPD of refined products from HOVENSA on November 1, 1998, approximately
one-half of which was gasoline.
The purchase agreements with LYONDELL-CITGO, Chalmette and
HOVENSA incorporate various formula prices based on published market prices and
other factors. Such purchases totaled $2.1 billion for 1998. At December 31,
1998, $44 million was included in payables to affiliates as a result of these
transactions.
The notes receivable from PDVSA are unsecured and consist of
(i) $250 million 7.75% Notes due August 1, 2000 and (ii) $500 million 7.995%
Notes due August 1, 2003. Interest on these notes is payable semiannually by
PDVSA to PDV America on February 1 and August 1 of each year, less one business
day. For the year ended December 31, 1998, approximately $70 million of interest
income is attributable to such notes with $25 million included in "Due from
affiliates" at December 31, 1998.
The notes receivable from PDVSA Finance Ltd. are unsecured and
are comprised of two $130 million 8.558% Notes maturing on November 10, 2013.
Interest on these notes is payable quarterly, starting February 10, 1999.
Interest income attributable to such notes was approximately $3 million at
December 31, 1998, with the entire amount included in "Due from affiliates" at
December 31, 1998.
CITGO had refined product, feedstock and crude oil and other
product sales of $164 million to affiliates, including LYONDELL-CITGO and MVPPP,
in 1998. At December 31, 1998, $34 million was included in "Due from affiliates"
as a result of these transactions.
The Company has entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these services was
$1.7 million in 1998.
CITGO has guaranteed approximately $99 million of debt of
certain affiliates, including $50 million related to HOVENSA and $11 million
related to Nelson Industrial Steam Company. (See Consolidated Financial
Statements of PDV America -- Note 13 in Item 14a.)
Under a separate guarantee of rent agreement, PDVSA has
guaranteed payment of rent, stipulated loss value and termination value due
under the lease of the Corpus Christi Refinery West Plant facilities. (See
Consolidated Financial Statements of PDV America -- Note 14 in Item 14a.)
The Company and PDV America are parties to a tax allocation
agreement that is designed to provide PDV America with sufficient cash to pay
its consolidated income tax liabilities.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND
REPORTS ON FORM 8-K
a. Certain Documents Filed as Part of this Report
(1) Financial Statements:
Page
----
Independent Auditors' Report...................................F-1
Consolidated Balance Sheets at December 31, 1998
and 1997..............................................F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996......................F-4
Consolidated Statements of Shareholder's Equity for the
years ended December 31, 1998, 1997 and 1996..........F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997
and 1996..............................................F-6
Notes to Consolidated Financial Statements.....................F-9
(2) None
(3) Exhibits:
The Exhibit Index in part c., below, lists the exhibits that
are filed as part of, or incorporated by reference into, this
report.
b. Reports on Form 8-K
None.
c. Exhibits
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of PDV America
- -------------------
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
38
<PAGE>
*4.1 Indenture, dated as of August 1, 1993, among PDV America,
Propernyn, PDVSA and Citibank, N.A., as trustee, relating to
PDV America's 7-1/4% Senior Notes Due 1998, 7-3/4% Senior
Notes Due 2000 and 7-7/8% Senior Notes Due 2003
*4.2 Form of Senior Note (included in Exhibit 4.1)
*10.1 Crude Supply Agreement, dated as of September 30, 1986,
between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
*10.2 Supplemental Crude Supply Agreement, dated as of September 30,
1986, between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
*10.3 Crude Oil and Feedstock Supply Agreement, dated as of March
31, 1987, between Champlin Refining Company and Petroleos de
Venezuela, S.A.
*10.4 Supplemental Crude Oil and Feedstock Supply Agreement, dated
as of March 31, 1987, between Champlin Refining Company and
Petroleos de Venezuela, S.A.
*10.5 Contract for the Purchase/Sale of Boscan Crude Oil, dated as
of June 2, 1994, between Tradecal, S.A., and CITGO Asphalt
Refining Company
*10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil, dated December 28, 1990, among Maraven, S.A.,
Lagoven, S.A., and Seaview Oil Company
*10.7 Sublease Agreement, dated as of March 31, 1987, between
Champlin Petroleum Company, as Sublessor, and Champlin
Refining Company, as Sublessee
*10.8 Operating Agreement, dated as of May 1, 1984, among Cit-Con
Oil Corporation, CITGO Petroleum Corporation and Conoco, Inc.
*10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd. dated July 1, 1993
*10.10 Contribution Agreement among Lyondell Petrochemical Company,
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
- -------------------
* Previously filed in connection with the Registrant's Registration
Statement on Form F-1, Registration No. 33-63742, originally filed
with the Commission on June 2, 1993.
39
<PAGE>
*10.11 Crude Oil Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Lagoven, S.A.
*10.12 Supplemental Supply Agreement, dated as of May 5, 1993,
between LYONDELL-CITGO Refining Company, Ltd. and
Petroleos de Venezuela, S.A.
*10.13 The UNO-VEN Company Partnership Agreement, dated as of
December 4, 1989, between Midwest 76, Inc. and VPHI Midwest,
Inc.
*10.14 Supply Agreement, dated as of December 1, 1989, between The
UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.15 Supplemental Supply Agreement, dated as of December 1, 1989,
between The UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.16 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
**10.17 Amendment and Supplement to Supply Agreement, dated as of May
11, 1994, between The UNO-VEN Company and Tradecal, S.A., as
assignee of Petroleos de Venezuela, S.A.
***10.18 $150,000,000 Credit Agreement, dated May 13, 1998 between
CITGO Petroleum Corporation and the Bank of America National
Trust and Savings Association, The Bank of New York, the Royal
Bank of Canada and Other Financial Institutions
***10.19 $400,000,000 Credit Agreement, dated May 13, 1998 between
CITGO Petroleum Corporation and the Bank of America National
Trust and Savings Association, The Bank of New York, the Royal
Bank of Canada and Other Financial Institutions
***10.20 Limited Partnership Agreement of LYONDELL-CITGO Refining LP,
dated December 31, 1998
- -------------------
* Previously filed in connection with the Registrant's Registration
Statement on Form F-1, Registration No. 33-63742, originally filed with
the Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's
("CITGO") Form 10-K (File No. 1-14380) and incorporated herein by this
reference.
40
<PAGE>
10.21 Loan agreement with PDVSA Finance Ltd. consisting of a
Promissory Note in the amount of $130,000,000, dated November
10, 1998
10.22 Loan agreement with PDVSA Finance Ltd. consisting of
Promissory Note in the amount of $130,000,000, dated November
10, 1998
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- -------------------
* Previously filed in connection with the Registrant's Registration
Statement on Form F-1, Registration No. 33-63742, originally filed with
the Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's
("CITGO") Form 10-K (File No. 1-14380) and incorporated herein by this
reference.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on March 30,
1999.
PDV AMERICA, INC.
By /s/ Luis Urdaneta
----------------------------
Luis Urdaneta
President, Chief Executive and
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
By /s/ Luis Urdaneta President, Chief Executive March 30, 1999
-------------------------- and Financial Officer,
Luis Urdaneta Director
By /s/ Jose I. Moreno Secretary, Director March 30, 1999
--------------------------
Jose I. Moreno
By /s/ Theodore Helmes Treasurer, Chief Accounting March 30, 1999
-------------------------- Officer
Theodore Helmes
42
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
PDV America, Inc.
We have audited the accompanying consolidated balance sheets of PDV America,
Inc. and subsidiaries (the "Company") as of December 31, 1998 and 1997, 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, 1998. 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 PDV America, Inc. and subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
February 5, 1999
F-1
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 34,822 $ 35,268
Accounts receivable - net 592,315 666,264
Due from affiliates 52,666 55,883
Inventories 835,128 1,000,498
Current portion of notes receivable
from PDVSA -- 250,000
Prepaid expenses and other 85,571 20,872
---------- ----------
Total current assets 1,600,502 2,028,785
NOTES RECEIVABLE FROM PDVSA AND AFFILIATE 1,010,000 750,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,420,053 3,427,983
RESTRICTED CASH 9,436 6,920
INVESTMENTS IN AFFILIATES 807,659 841,323
OTHER ASSETS 227,760 188,511
---------- ----------
TOTAL $7,075,410 $7,243,522
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 37,000 $ 3,000
Accounts payable 492,090 491,977
Due to affiliates 158,956 231,152
Taxes other than income 219,642 180,143
Other current liabilities 247,966 275,086
Income taxes payable 1,607 --
Current portion of long-term debt 47,078 345,099
Current portion of capital lease
obligation 14,660 13,140
---------- ----------
Total current liabilities 1,218,999 1,539,597
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in Thousands) (continued)
- --------------------------------------------------------------------------------
1998 1997
LONG-TERM DEBT 2,071,843 2,047,708
CAPITAL LEASE OBLIGATION 101,926 116,586
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 200,281 199,765
OTHER NONCURRENT LIABILITIES 230,007 234,710
DEFERRED INCOME TAXES 621,463 487,727
MINORITY INTEREST 29,559 28,337
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDER'S EQUITY:
Common stock, $1.00 par value-authorized,
issued and outstanding, 1,000 shares 1 1
Additional capital 1,532,435 1,482,435
Retained earnings 1,068,896 1,106,656
---------- ----------
Total shareholder's equity 2,601,332 2,589,092
---------- ----------
TOTAL $7,075,410 $7,243,522
========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE YEARS ENDED DECEMBER 31, 1998
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
REVENUES:
<S> <C> <C> <C>
Net Sales $ 10,780,691 $ 13,394,608 $ 12,698,366
Sales to affiliates 179,556 227,595 253,694
------------ ------------ ------------
10,960,247 13,622,203 12,952,060
Equity in earnings (losses) of affiliates - net 82,338 68,930 44,906
Interest income from PDVSA 73,152 77,725 77,725
Other income (expense) - net (8,669) (14,487) (3,373)
------------ ------------ ------------
11,107,068 13,754,371 13,071,318
------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $3,576,056, $4,275,607 and
$4,001,471 from affiliates) 10,305,535 12,997,592 12,491,003
Selling, general and administrative expenses 258,366 211,423 169,159
Interest expense:
Capital leases 14,235 15,597 16,818
Other 166,006 193,868 177,544
Minority interest 1,223 1,706 1,013
------------ ------------ ------------
10,745,365 13,420,186 12,855,537
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 361,703 334,185 215,781
INCOME TAXES 130,985 106,168 77,758
------------ ------------ ------------
NET INCOME $ 230,718 $ 228,017 $ 138,023
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Common Stock Additional Retained Shareholder's
Shares Amount Capital Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1 $ 1 $ 1,232,435 $ 740,616 $ 1,973,052
Net income -- -- -- 138,023 138,023
---- ----- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 1 1 1,232,435 878,639 2,111,075
Capital contributions received from
parent -- -- 250,000 -- 250,000
Net income -- -- -- 228,017 228,017
---- ----- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 1 1 1,482,435 1,106,656 2,589,092
Capital contributions received from
Parent -- -- 50,000 -- 50,000
Dividend distribution -- -- -- (268,500) (268,500)
Other -- -- -- 22 22
Net income -- -- -- 230,718 230,718
---- ----- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 1 $ 1 $ 1,532,435 $ 1,068,896 $ 2,601,332
==== ===== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
(Dollars in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 230,718 $ 228,017 $ 138,023
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 265,125 240,523 192,585
Provision for losses on accounts receivable 13,826 17,827 13,275
Gain on sale of Petro-Chemical Transport (2,590) -- --
Deferred income taxes 72,593 82,145 5,159
Distributions in excess of (less than) equity in
earnings (losses) of affiliates 46,180 33,506 (8,672)
Inventory adjustment to market 171,600 -- --
Postretirement benefits 516 (10,605) 15,465
Other adjustments (259) 7,397 2,549
Change in operating assets and liabilities,
exclusive of acquisitions of businesses:
Accounts receivable 103,893 328,000 (199,333)
Due from affiliates (17,963) (2,642) 1,253
Inventories (6,456) (95,107) (47,916)
Prepaid expenses and other current assets (9,687) 6,380 6,525
Accounts payable and other current liabilities (25,383) (246,846) 92,265
Income taxes payable (9,867) (15,934) 3,725
Due to affiliates (87,705) (73,417) 98,580
Other assets (79,118) (86,934) (83,874)
Other liabilities 45,236 34,417 35,833
--------- --------- ---------
Net cash provided by operating activities 710,659 446,727 265,442
--------- --------- ---------
</TABLE>
F-6
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
(Dollars in Thousands) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (230,195) (264,377) (437,763)
Proceeds from sales of property, plant and equipment 26,722 28,194 3,929
Loan to affiliate (260,000) -- --
Proceeds from notes receivable from PDVSA 250,000 -- --
(Increase) decrease in restricted cash (2,516) 2,449 (8,111)
Investments in LYONDELL-CITGO Refining LP -- (45,635) (142,638)
Loans to LYONDELL-CITGO Refining LP (19,800) (16,509) --
Proceeds from sale of Petro-Chemical Transport 7,160 -- --
Investments in subsidiary and advances to other
affiliates (3,247) (2,442) (10)
--------- --------- ---------
Net cash used in investing activities (231,876) (298,320) (584,593)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) borrowings from revolving bank loans $ (47,000) $(106,000) $ 60,000
Net proceeds from (repayments of) short-term bank loans 34,000 (50,000) 28,000
Payments on term bank loan (58,823) (29,412) (29,412)
Payments on private placement senior notes (308,686) (58,685) (58,685)
Payments on UHS business purchase liability (7,169) -- --
Proceeds from issuance of senior notes -- -- 199,694
Proceeds from issuance of taxable bonds 100,000 -- 120,000
Proceeds from issuance of tax-exempt bonds 47,200 -- 25,000
Dividends paid to parent (268,500) -- --
Payments of capital lease obligations (13,140) (11,778) (11,252)
Repayments of other debt (7,111) (5,109) (7,143)
Capital contributions received from parent 50,000 250,000 --
Payment of UNO-VEN notes -- (135,000) --
--------- --------- ---------
Net cash (used in) provided by financing
activities (479,229) (145,984) 326,202
--------- --------- ---------
</TABLE>
F-7
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
(Dollars in Thousands) (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (446) 2,423 7,051
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
35,268 32,845 25,794
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,822 $ 35,268 $ 32,845
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 184,376 $ 212,355 $ 197,798
========= ========= =========
Income taxes (net of refunds) $ 60,392 $ 48,639 $ 58,492
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - PDV America, Inc. (the "Company") was
incorporated on November 14, 1986 and is a wholly-owned subsidiary,
effective April 21, 1997, of PDV Holding, Inc. ("PDV Holding"), a
Delaware corporation (see below). The Company's ultimate parent is
Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company of the
Republic of Venezuela.
On April 21, 1997, Propermyn B.V. ("Propermyn"), a Dutch limited
liability company whose ultimate parent is PDVSA and which held all of
the Company's common stock, contributed its shares of the Company to
PDV Holding.
Description of Business - The Companies (as defined below) manufacture
or refine and market quality transportation fuels as well as
lubricants, refined waxes, petrochemicals, asphalt and other industrial
products. CITGO (as defined below) owns and operates two modern, highly
complex crude oil refineries (Lake Charles, Louisiana, and Corpus
Christi, Texas) and two asphalt refineries (Paulsboro, New Jersey, and
Savannah, Georgia) with a combined aggregate rated crude oil refining
capacity of 582 thousand barrels per day ("MBPD"). CITGO also owns a
minority interest in LYONDELL-CITGO Refining L.P., a limited
partnership that owns and operates a refinery in Houston, Texas, with a
rated crude oil refining capacity of 265 MBPD. CITGO also operates a
167 MBPD refinery in Lemont, Illinois, owned by PDVMR (as defined
below). CITGO's assets also include a 65 percent owned lubricant and
wax plant, pipelines, and equity interests in pipelines, pipeline
companies and petroleum storage terminals. Transportation fuel
customers include primarily CITGO branded wholesale marketers,
convenience stores and airlines located primarily east of the Rocky
Mountains. Asphalt is generally marketed to independent paving
contractors on the east coast of the United States. Lubricants are sold
to independent marketers, mass marketers and industrial customers and
petrochemical feedstocks and industrial products are sold to various
manufacturers and industrial companies throughout the United States.
Petroleum coke is sold primarily in international markets.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries
(including CITGO Petroleum Corporation ("CITGO") and its wholly-owned
subsidiaries, Cit-Con Oil Corporation, which is 65% owned by CITGO and
VPHI Midwest, Inc. ("Midwest") and its wholly-owned subsidiary, PDV
Midwest Refining, L.L.C. ("PDVMR") (collectively, the "Companies"). All
material intercompany transactions and accounts have been eliminated.
Prior to May 1, 1997, Midwest had a 50% interest in the UNO-VEN Company
("UNO-VEN"), an Illinois general partnership. Beginning May 1, 1997,
pursuant to the Partnership Interest Retirement Agreement (Note 8),
PDVMR now owns certain UNO-VEN assets, as defined. Accordingly, the
consolidated financial statements reflect the equity in earnings of
UNO-VEN
F-9
<PAGE>
through April 30, 1997 (see Note 8) and the results of operations of
PDVMR on a consolidated basis since May 1, 1997.
The Companies' investments in less than majority owned affiliates are
accounted for by the equity method. In addition, the excess of the
carrying value 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.
Estimates, Risks and Uncertainties - 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.
The Companies' operations are sensitive to domestic and international
political, legislative, regulatory and legal environments. In addition,
significant changes in the prices or availability of crude oil and
refined products could have a significant impact on the results of
operations for any particular year.
Impairment of Long-Lived Assets - The Company periodically evaluates
the carrying value of long-lived assets to be held and used when events
and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and
is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair market
value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except the fair market
values are reduced for the cost to dispose.
Revenue Recognition - Revenue is recognized upon transfer of title to
products sold, based upon the terms of delivery.
Supply and Marketing Activities - The Companies engage in the buying
and selling of crude oil to supply their refineries. The net results of
this activity are recorded in cost of sales. The Companies also engage
in the buying and selling of refined products to facilitate the
marketing of their 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 Companies' last-in, first-out ("LIFO") method.
Exchanges that are settled through payment or receipt of cash are
accounted for as purchases or sales.
Excise Taxes - The Companies collect excise taxes on sales of gasoline
and other motor fuels. Excise taxes of approximately $3 billion, $3.2
billion and $2.7 billion were collected from customers and paid to
various governmental entities in 1998, 1997 and 1996, respectively.
Excise taxes are not included in sales.
F-10
<PAGE>
Cash and Cash Equivalents - Cash and cash equivalents consist of highly
liquid short-term investments and bank deposits with initial maturities
of three months or less.
Restricted Cash - Restricted cash represents highly liquid short-term
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing construction of
environmental facilities as defined in the bond agreements.
Inventories - Crude oil and refined product inventories are stated at
the lower of cost or market and cost is primarily determined using the
LIFO inventory method. Materials and supplies are valued primarily
using the average cost method.
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 25 years; machinery and equipment - 3
to 25 years; and vehicles - 3 to 10 years.
Upon disposal or retirement of property, plant and equipment, the cost
and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income.
The Companies capitalize 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
approximated $5 million, $8 million and $12 million in 1998, 1997 and
1996, respectively.
Commodity and Interest Rate Derivatives - The Companies use commodity
and financial instrument derivatives to manage defined interest rate
and commodity price risks arising out of the Companies' core
activities. The Companies have only limited involvement with other
derivative financial instruments, and do not use them for trading
purposes.
The Companies enter into petroleum futures contracts, options and other
over the counter commodity derivatives, primarily to hedge a portion of
the price risk associated with crude oil and refined products. In order
for a transaction to qualify for hedge accounting, the Companies
require that the item to be hedged exposes the Companies to price risk
and that the commodity contract reduces that risk and is 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 Companies rely 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 commodity derivatives
which are not hedges are recorded as gains or losses in the period in
which they occur.
The Companies also enter into various interest rate swap and cap
agreements to manage their risk related to interest rate changes on
their 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 Companies related
to these agreements are recognized as adjustments to interest expense
over the
F-11
<PAGE>
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.
In June 1998, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). The statement
establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives, at fair value, as either assets or
liabilities in the statement of financial position with an offset
either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. The Company has
not determined the impact on its financial statements that may result
from adoption of SFAS No. 133, which is required no later than January
1, 2000.
Refinery Maintenance - Costs of major refinery turnaround maintenance
are charged to operations over the estimated period between
turnarounds. Turnaround periods range approximately from one to eight
years. Unamortized costs are included in other assets. Amortization of
refinery turnaround costs is included in depreciation and amortization
expense. Amortization was $58 million, $57 million and $53 million for
1998, 1997 and 1996, respectively. Ordinary maintenance is expensed as
incurred.
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. Environmental liabilities are not discounted to
their present value. Subsequent adjustments to estimates, to the extent
required, may be made as more refined information becomes available.
Income Taxes - The Companies account for income taxes using an asset
and liability approach, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
Comprehensive Income - Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). The Company had no items of other
comprehensive income during the three years ended December 31, 1998.
Reclassifications - Certain reclassifications have been made to the
1997 financial statements to conform with the classifications used in
1998.
2. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265
thousand barrel per day refinery in Houston, Texas. LYONDELL-CITGO was
formed in 1993 by subsidiaries of CITGO and Lyondell Company
("Lyondell"), referred to as the owners. CITGO has contributed cash for
a participation interest and other commitments related to
LYONDELL-CITGO's refinery enhancement project, and Lyondell contributed
the Houston
F-12
<PAGE>
refinery and related assets for the remaining participation interest.
The refinery enhancement project to increase the refinery's heavy crude
oil high conversion capacity was substantially completed at the end of
1996 with an in-service date of March 1, 1997. The heavy crude oil
processed by the Houston refinery is supplied by a subsidiary of PDVSA
under a long-term crude oil supply contract through 2017, and CITGO
purchases substantially all of the refined products produced at the
Houston refinery under a long-term contract (Note 3).
CITGO's participation interest in LYONDELL-CITGO increased from 13% at
December 31, 1996, to approximately 42% on April 1, 1997, in accordance
with agreements between the owners concerning such interest. CITGO has
a one time option to increase, for an additional investment, its
participation interest to 50%. This option may be exercised after
January 1, 2000 but no later than September 30, 2000.
CITGO loaned $19.8 million and $16.5 million to LYONDELL-CITGO during
1998 and 1997, respectively. The notes bear interest at market rates
which were approximately 5.9% at December 31, 1998 and 1997, and are
due July 1, 2003. These notes are included in other assets in the
accompanying consolidated balance sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
1998 1997 1996
(000s Omitted)
Carrying value of investment
at December 31 $ 597,373 $ 630,060 $ 604,729
Notes receivable at December 31 36,309 16,509 --
Participation interest at December 31 41% 42% 13%
Equity in net income $ 58,827 $ 44,429 $ 1,254
Cash distributions received 91,763 64,734 --
Summary of financial position:
Current assets $ 197,000 $ 243,000 $ 273,000
Noncurrent assets 1,440,000 1,438,000 1,434,000
Current liabilities 203,000 293,000 373,000
Noncurrent liabilities 785,000 715,000 671,000
Member's equity 649,000 673,000 663,000
Summary of operating results:
Revenue $2,055,000 $2,697,000 $2,823,000
Gross profit 291,000 255,000 70,000
Net income 169,000 147,000 11,000
F-13
<PAGE>
3. RELATED PARTY TRANSACTIONS
CITGO purchases approximately two-thirds of the crude oil processed in
its refineries from subsidiaries of PDVSA under long-term supply
agreements. These supply agreements extend through the year 2006 for
the Lake Charles refinery, 2010 for the Paulsboro refinery, 2012 for
the Corpus Christi refinery and 2013 for the Savannah refinery. CITGO
purchased $1.4 billion, $2 billion and $2.4 billion of crude oil,
feedstocks and other products from wholly-owned subsidiaries of PDVSA
in 1998, 1997 and 1996, respectively, under these and other purchase
agreements. The crude supply contracts include force majeure clauses
that have been exercised on various occasions. Exercise of these
clauses requires that CITGO locate alternatives sources of supply for
its crude oil requirements, and such action may result in lower
operating margins.
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 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. At December
31, 1998 and 1997, $74 million and $138 million, respectively, were
included in payables to affiliates as a result of these transactions.
An affiliate of PDVSA acquired a 50% equity interest in a refinery in
Chalmette, Louisiana ("Chalmette"), in October 1997 and has assigned to
CITGO its option to purchase up to 50% of the refined products produced
at the refinery, through December 31, 1999. CITGO exercised this option
on November 1, 1997, and is acquiring approximately 65 thousand barrels
per day of refined products from the refinery, approximately one-half
of which is gasoline.
Other affiliates of PDVSA entered into an agreement to acquire a
combined 50% equity interest in an integrated vacuum/cover facility at
Phillips' oil refinery under construction in Sweeny, Texas ("Sweeny"),
on October 30, 1998.
In October 1998, an affiliate of PDVSA acquired a 50% equity interest
in a joint venture that owns and operates a refinery in St. Croix, U.S.
Virgin Islands ("HOVENSA") and has the right under a product sales
agreement to assign periodically to CITGO, or other related parties,
its option to purchase 50% of the refined products produced by HOVENSA
(less a certain portion of such products that HOVENSA will market
directly in the local and Caribbean markets). In addition, under the
product sales agreement, the PDVSA affiliate has appointed CITGO as its
agent in designating which of its affiliates shall from time to time
take deliveries of the refined products available to it. The product
sales agreement will be in effect for the life of the joint venture,
subject to termination events based on default or mutual agreement
(Note 3). Pursuant to the above arrangement, CITGO began acquiring
approximately 120 MBPD of refined products from HOVENSA on November 1,
1998, approximately one-half of which was gasoline.
CITGO also purchases refined products from various other affiliates
including LYONDELL-CITGO, HOVENSA and Chalmette under long-term
contracts. These agreements incorporate various formula prices based on
published market prices and other factors. Such purchases totaled $2.1
billion, $2.0 billion and $1.6 billion for 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, $44 million and $39
million, respectively, were included in payables to affiliates as a
result of these transactions.
F-14
<PAGE>
CITGO had refined product, feedstock, and other product sales to
affiliates of $164 million, $221 million, and $190 million, in 1998,
1997 and 1996, respectively. CITGO's sales of crude oil to affiliates
were $18 million, $3 million, and $64 million in 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, $34 million and $23
million, respectively, were included in due from affiliates as a result
of these and related transactions.
Pursuant to the Refinery Agreement with PDVMR (Note 8), on May 1, 1997,
CITGO has been appointed operator of the PDVMR refinery. The term of
the agreement is 60 months and shall be automatically renewed for
periods of 12 months (subject to early termination as provided in the
agreement). CITGO employed the substantial majority of employees
previously employed by UNO-VEN and, as a result, CITGO assumed a
liability for post retirement benefits other than pensions of $27
million related to those employees. CITGO also purchases the products
produced at the refinery.
PDVMR is party to a Contract For Purchase and Sale Of Crude Oil dated
April 23, 1997, with Maraven S.A. ("Maraven"), a corporation organized
and existing, at the date of the contract, under the laws of the
Republic of Venezuela, and CITGO. In accordance with the contract,
Maraven (or its successor) is obligated to provide a base volume of up
to 100,000 barrels per day of Venezuelan crude, and CITGO as operator
is responsible for administering the purchase of additional volumes of
crude for the refinery. The Venezuelan crude is priced in accordance
with a formula based upon posted crude prices less a quality
differential. Maraven (or its successor), CITGO and PDVMR can change
the amount and type of crude supplied in order to capture additional
economic opportunities. The term of the agreement is 60 months with
renewal periods of 12 months.
During 1995, the Company entered into a service agreement with PDVSA to
provide financial and foreign agency services. Income from these
services was $1.7 million, $0.9 million and $0.3 million in 1998, 1997
and 1996, respectively.
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. The Company has also guaranteed debt of certain affiliates (Note
13).
The notes receivable from PDVSA are unsecured and are comprised of $250
million of 7.75% notes maturing on August 1, 2000 and $500 million of
7.995% notes maturing on August 1, 2003. Interest on these notes is
payable semiannually by PDVSA to the Company on February 1 and August 1
of each year, less one business day. Interest income attributable to
such notes was approximately $70 million, $78 million and $78 million
for the years ended December 31, 1998, 1997 and 1996, respectively,
with approximately $25 million and $32 million included in due from
affiliates at December 31, 1998 and 1997, respectively. The notes
receivable from affiliate are unsecured and are comprised of two $130
million of 8.558% notes maturing on November 10, 2013. Interest on
these notes is payable quarterly starting February 10, 1999. Interest
income attributable to such notes was approximately $3 million at
December 31, 1998, with the entire amount included in due from
affiliates at December 31, 1998. Due to the related party nature of
these notes receivable, it is not practicable to estimate their fair
value.
F-15
<PAGE>
4. ACCOUNTS RECEIVABLE
1998 1997
(000s Omitted)
Trade $ 541,613 $ 580,247
Credit card 47,096 45,896
Other 23,051 65,374
--------- ---------
611,760 691,517
Less allowance for uncollectible accounts (19,445) (25,253)
--------- ---------
$ 592,315 $ 666,264
========= =========
Sales are made primarily on account, based on pre-approved unsecured
credit terms established by management, except sales to airlines, which
are made primarily on a prepaid basis. CITGO also has a proprietary
credit card program and a Companion VISA bank card program, which allow
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.
Effective June 27, 1997 and November 19, 1997, CITGO established two
new limited purpose subsidiaries, CITGO Funding Corporation and CITGO
Funding Corporation II, which entered into nonrecourse agreements to
sell trade accounts and credit card receivables. Under the terms of the
agreements, new receivables are added to the pool as collections reduce
previously sold receivables. The amounts sold at any one time are
limited to a maximum of $125 million of trade accounts receivable and
$150 million of credit card receivables. These agreements are renewable
for successive one-year terms by mutual agreement. Both agreements were
renewed during 1998. Fees and expenses of $16.1 million and $5.8
million related to the agreements were recorded as other expense during
the years ended December 31, 1998 and 1997, respectively. Proceeds of
approximately $275 million from the initial sales in 1997 were used
primarily to make payments on CITGO's revolving bank loan.
5. INVENTORIES
1998 1997
(000s Omitted)
Refined product $ 580,666 $ 734,261
Crude Oil 186,503 196,349
Materials and supplies 67,959 69,888
---------- ----------
$ 835,128 $1,000,498
========== ==========
F-16
<PAGE>
Inventories at December 31, 1998 are carried at estimated net
realizable value and results of operations for 1998 include a charge of
$171.6 million representing the excess of cost over net market value.
At December 31, 1997, replacement costs approximated LIFO carrying
values.
6. PROPERTY, PLANT AND EQUIPMENT
1998 1997
(000s Omitted)
Land $ 140,047 $ 153,448
Building 520,698 512,012
Machinery and equipment 3,486,873 3,350,957
Vehicles 34,434 47,952
Constitution in progress 186,436 135,406
----------- -----------
4,368,488 4,199,775
Accumulation depreciation and amortization (948,435) (771,792)
----------- -----------
$ 3,420,053 $ 3,427,983
=========== ===========
Depreciation expense for 1998, 1997 and 1996 was $203 million, $178
million and $136 million, respectively.
In 1997, CITGO incurred property damages from a fire at the Company's
Corpus Christi, Texas refinery (Note 13). As a result, CITGO
capitalized $14.5 million of replacement machinery and equipment in
1997. Other income (expense) included in 1997, $9.4 million of
insurance recoveries related to this event.
Other income (expense) includes gains and losses on disposals and
retirements of property, plant and equipment. Such net losses were
approximately $2 million, $14 million and $2 million in 1998, 1997, and
1996, respectively.
7. INVESTMENT IN AFFILIATES
CITGO - In addition to LYONDELL-CITGO (Note 2), CITGO's investments in
affiliates consist of equity interests of 6.8 to 50% in joint interest
pipelines and terminals, including a 13.98% interest in Colonial
Pipeline Company; a 49.5% partnership interest in Nelson Industrial
Steam Company ("NISCO"), which is a qualified cogeneration facility;
and a 49% partnership interest in Mount Vernon Phenol Plant. The
carrying value of these investments exceeded CITGO's equity in the
underlying net assets by approximately $151 million and $155 million at
December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, NISCO had a partnership deficit. CITGO's
share of this deficit, as a general partner, was $56.5 million and
$49.6 million at December 31, 1998 and 1997,
F-17
<PAGE>
respectively, which is included in other noncurrent liabilities in the
accompanying consolidated balance sheets.
Information on CITGO's investments, including LYONDELL-CITGO, follows:
<TABLE>
<CAPTION>
1998 1997 1996
(000s Omitted)
<S> <C> <C> <C>
Investments in affiliates (excluding NISCO) $ 781,481 $ 813,923 $ 790,576
Equity in net income of affiliates 77,105 64,460 21,481
Dividends and distributions received from affiliates 122,044 91,742 31,157
</TABLE>
Selected financial information provided by the affiliates is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
(000s Omitted)
<S> <C> <C> <C>
Summary of financial position:
Current assets $ 464,047 $ 511,848 $ 543,692
Noncurrent assets 2,817,165 2,830,568 2,859,091
Current liabilities 670,045 627,296 697,046
Noncurrent liabilities 1,934,378 2,025,709 1,999,276
Summary of operating results:
Revenues $3,337,449 $4,076,429 $4,158,684
Gross profit 757,678 628,559 475,227
Net income 384,810 371,006 242,434
</TABLE>
PDVMR - PDVMR has a 25% interest in The Needle Coker Company
("Needle"), which is accounted for using the equity method. The Company
received cash distributions of approximately $6.5 and $5.5 million in
1998 and 1997, respectively, from Needle.
F-18
<PAGE>
Selected financial information for 1998 and 1997 provided by Needle is shown
below:
1998 1997
(Dollars in Thousands)
Summary of financial position:
Current assets $17,162 $17,099
Noncurrent assets 66,149 70,219
Current liabilities 5,086 4,127
Noncurrent liabilities -- --
Summary of operating results (full year):
Revenues 74,150 85,441
Gross profit 23,292 28,450
Net earnings 20,933 25,510
8. DISTRIBUTION OF UNO-VEN ASSETS
Since 1989, the Company through various subsidiaries had a 50% interest
in UNO-VEN. On May 1, 1997 pursuant to a Partnership Interest
Retirement Agreement, PDV America and Union Oil Company of California
("UNOCAL") transferred certain assets and liabilities of UNO-VEN to
PDVMR, a subsidiary of the Company, as a result of the liquidation of
the Company's 50% ownership interest in UNO-VEN. The assets included a
153 thousand barrel per day refinery in Lemont, Illinois, as well as
eleven product distribution terminals and 89 retail sites located in
the Midwest. CITGO operates these facilities and purchases the products
produced at the refinery (Note 3).
In connection with the transaction, the Company received a capital
contribution of $250,000,000 from PDV Holding, the Company's parent.
This contribution was used, in part, to pay off UNO-VEN's senior notes
and to provide working capital.
The transaction, for accounting purposes, has been treated as a
purchase and, accordingly, the allocation of fair values to the
underlying assets and liabilities acquired is based upon management's
estimates and appraisals. Pro forma results of operations for this
acquisition were not material.
F-19
<PAGE>
The allocation of the Company's basis in the partnership and the
acquisition cost was as follows:
(000s Omitted)
Accounts receivable $ 26,300
Inventory 72,200
Property, plant and equipment 576,800
Investment in The Needle Coker Company 28,800
Other assets 35,300
Working capital facility with bank (13,000)
Other current liabilities (257,600)
Long-term debt (154,900)
Other noncurrent liabilities (68,700)
-----------
PDVMR's equity $ 245,200
==========
Information with respect to UNO-VEN for the four months ended April 30,
1997 and as of and for the year ended December 31, 1996 is as follows:
1997 1996
Investment in UNO-VEN N/A $ 249,949
Equity in net income $ 450 23,425
Distributions received from UNO-VEN 5,194 5,076
Financial information of UNO-VEN is as follows:
1997 1996
(000s Omitted)
Summary of financial position:
Current assets N/A $ 360,900
Noncurrent assets N/A 562,700
Current liabilities N/A 265,800
Noncurrent liabilities N/A 158,000
Summary of operating results:
Revenues $ 567,500 $1,663,277
Gross profit 37,400 150,000
Net income 900 46,890
F-20
<PAGE>
Under a long-term crude oil supply agreement, terminated by UNO-VEN's
liquidation, and vessel transportation contracts, UNO-VEN purchased
$964 million of crude oil from a wholly-owned subsidiary of PDVSA in
1996. The terms and pricing formulas were similar to the Company's
subsidiaries' crude oil supply agreements (see Note 3).
UNO-VEN bought and sold refined products from/to Unocal. Agreements
underlying these transactions defined the obligations and
responsibilities of the parties. Pricing was in accordance with
formulas based, in part, upon market-related prices of finished
products. UNO-VEN also had a number of agreements with Unocal covering
certain marketing, administrative, and technical functions.
9. SHORT-TERM BANK LOANS
As of December 31, 1998, CITGO has established $175 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 1998,
1997 and 1996 were 5.8%, 5.9% and 5.7%, respectively. CITGO had $37
million and $3 million of borrowings outstanding under these facilities
at December 31, 1998 and 1997, respectively.
F-21
<PAGE>
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
(000s Omitted)
<S> <C> <C>
Senior Notes:
7.25% Senior Notes $250 million face amount paid 1998 $ -- $ 249,859
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 497,723 497,330
Shelf registration:
7.875% Senior Notes $200 million face amount due 2006 199,776 199,745
Revolving bank loans:
Bank of America 165,000 135,000
Various banks 45,000 122,000
Term bank loan -- 58,823
Private Placement:
8.75% Series A Senior Notes due 1998 -- 18,750
9.03% Series B Senior Notes due 1998-2001 85,714 114,286
9.30% Series C Senior Notes due 1998-2006 90,909 102,273
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 25,000
Louisiana wastewater facility revenue bonds due 2026 12,000 2,000
Gulf Coast Solid Waste Facility revenue bonds due 2028 25,000 --
Industrial Development Facilities revenue bonds due 2028 22,200 --
Taxable Louisiana wastewater facility revenue bonds due 2026 108,000 118,000
Taxable Gulf Coast environmental facility bonds due 2028 100,000 --
PDVMR - Pollution control bonds due 2008 19,850 19,850
Cit-Con bank credit agreement 21,429 28,571
----------- -----------
2,118,921 2,392,807
Less current portion of long-term debt (47,078) (345,099)
----------- -----------
$ 2,071,843 $ 2,047,708
=========== ===========
</TABLE>
F-22
<PAGE>
In August 1993, the Company issued $1 billion principal amount of
Senior Notes (the "Senior Notes") with interest rates ranging from 7.25
to 7.875% with due dates ranging from 1998 to 2003. Interest on the
Senior Notes is payable semiannually, commencing February 1, 1994. The
Senior Notes represent senior unsecured indebtedness of the Company,
and are structurally subordinated to the liabilities of the Company's
subsidiaries. The Senior Notes are guaranteed by Propernyn and PDVSA.
The Senior Notes contain certain covenants that restrict, among other
things, the ability of the Company and its subsidiaries to incur
additional debt, to pay dividends, place liens on property, and sell
certain assets. The Company was in compliance with the debt covenants
at December 31, 1998.
In April 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. In May 1996, the registration became effective and CITGO sold a
tranche of debt securities with an aggregate offering price of $200
million. On October 28, 1997, CITGO entered into a Selling Agency
Agreement with Salomon Brothers Inc. and Chase Securities Inc.
providing for the sale of up to an additional $235 million in aggregate
principal amount of notes in tranches from time to time by CITGO under
the shelf registration. No amounts were sold under this agreement as of
December 31, 1998.
On May 13, 1998 CITGO terminated its $675 million revolving bank loan
and replaced it with a credit agreement with various banks consisting
of (i) a $400 million, five-year, revolving bank loan and (ii) a $150
million, 364-day, revolving bank loan, both of which are unsecured and
have various borrowing maturities and interest rate options. Interest
rates on the revolving bank loans were 7.5% and 6.9% at December 31,
1998 and 1997, respectively.
On September 3, 1998 CITGO terminated its term bank loan.
PDVMR has a revolving credit facility with a consortium of banks which
is committed through April 28, 2002 and allows for borrowings up to
$125 million at various interest rates. Inventories and accounts
receivable of PDVMR are pledged as collateral. The facility contains
certain covenants that impose limitations on the PDVMR for paying
distributions, incurring additional debt, placing liens on property,
making investments and loans, and modifying or terminating certain
supply, sales and operating agreements (Note 3). PDVMR was in
compliance with these covenants at December 31, 1998. The weighted
average interest rates at December 31, 1998 and 1997 were 6.60% and
6.72%, respectively.
At December 31, 1998, CITGO has outstanding approximately $177 million
of privately placed, unsecured Senior Notes. Principal amounts are
payable in annual installments in November and interest is payable
semiannually in May and November.
At December 31, 1998, CITGO has outstanding $260 million of privately
placed senior notes under an unsecured Master Shelf Agreement with an
insurance company. The notes have various fixed interest rates and
maturities.
The various agreements above contain certain covenants that, depending
upon the level of the Companies' capitalization and earnings, could
impose limitations on the Companies for paying
F-23
<PAGE>
dividends, incurring additional debt, placing liens on property, and
selling fixed assets. The Companies were in compliance with the debt
covenants at December 31, 1998.
Through state entities, CITGO has issued $49.8 million of industrial
development bonds for certain Lake Charles, Louisiana port facilities
and pollution control equipment and $226 million of environmental
revenue bonds to finance a portion of the Company's environmental
facilities at its Lake Charles, Louisiana and Corpus Christi, Texas
refineries and at the LYONDELL-CITGO refinery. Additional credit
support for these bonds is provided through letters of credit. The
bonds bear interest at various floating rates which ranged from 4.1% to
6% at December 31, 1998, and 3.7% to 5.2% at December 31, 1997.
Through state entities, CITGO has issued and currently outstanding $208
million of taxable environmental revenue bonds to finance a portion of
CITGO's environmental facilities at its Lake Charles, Louisiana
refinery and at the LYONDELL-CITGO refinery. Such bonds are secured by
letters of credit and have floating interest rates (5.3% at December
31, 1998 and 5.8% at December 31, 1997). At the option of CITGO and
upon the occurrence of certain specified conditions, all or any portion
of such taxable bonds may be converted to tax-exempt bonds. At December
31, 1998, $12 million of the original $120 million in taxable Louisiana
revenue bonds had been converted to tax-exempt bonds.
PDVMR has nontaxable variable rate pollution control bonds, with
interest, currently paid monthly. The bonds have one payment at
maturity in the year 2008 to retire the principal, and principal and
interest payments are guaranteed by a $20.3 million letter of credit.
An interest rate swap agreement, based upon a notional amount of $19.9
million fixed the variable rate at 5.36% until October 26, 1998.
The Cit-Con bank credit agreement consists of a term loan
collateralized by throughput agreements of the owner companies. The
loan contains various interest rate options (weighted average effective
rates of 6.7% and 6.5% at December 31, 1998 and 1997, respectively),
and requires quarterly principal payments through December 2001.
Future maturities of long-term debt as of December 31, 1998 are:
1999-$47.1 million; 2000-$297.1 million; 2001-$47.1 million; 2002-$81.4
million; 2003 - $724.1 million; and $922.1 million thereafter.
F-24
<PAGE>
CITGO has entered into the following interest rate swap agreements to reduce the
impact of interest rate changes on its variable interest rate debt:
CITGO'S interest rateswap agreements:
<TABLE>
<CAPTION>
Notional Principal
Amount
Expiration Fixed Rate 1998 1997
Variable Rate Index Date Paid (000s Omitted)
<S> <C> <C> <C> <C>
One-month LIBOR September 1998 4.85% $ -- $ 25,000
One-month LIBOR November 1998 5.09 -- 25,000
One-month LIBOR May 2000 6.28 25,000 25,000
J.J. Kenny May 2000 4.72 25,000 25,000
J.J. Kenny February 2005 5.30 12,000 12,000
J.J. Kenny February 2005 5.27 15,000 15,000
J.J. Kenny February 2005 5.49 15,000 15,000
-------- ---------
$ 92,000 $ 142,000
======== =========
</TABLE>
PDVMR'S interest rate swap
agreements:
<TABLE>
<CAPTION>
Notional Principal
Amount
Expiration Fixed Rate 1998 1997
Variable Rate Index Date Paid (000s Omitted)
<S> <C> <C> <C> <C>
J.J. Kenny October 26, 1998 5.36% $ -- $ 19,850
======== =========
</TABLE>
Interest expense includes $1.0 million, $0.8 million and $1.1 million in 1998,
1997 and 1996, respectively, related to interest paid on these agreements.
11. EMPLOYEE BENEFIT PLANS
Employee Savings - CITGO 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 CITGO makes contributions, including
matching of employee contributions, based on plan provisions. CITGO
charged $19 million, $19 million and $16 million to operations related
to its contributions to these plans in 1998, 1997 and 1996,
respectively.
Pension Benefits - CITGO sponsors three qualified noncontributory
defined benefit pension plans, two of which cover eligible hourly
employees and one of which covers eligible salaried employees. CITGO
also sponsors three nonqualified defined benefit plans for certain
eligible employees. The qualified plans' assets include corporate
securities, a fixed income mutual fund, two collective funds and a
short-term investment fund. The nonqualified plans are not funded.
CITGO'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 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.
F-25
<PAGE>
Postretirement Benefits Other Than Pensions - In addition to pension
benefits, the Companies also provide 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 changes in benefit obligations and plan
assets for the pension and postretirement plans for the years ended
December 31, 1998 and 1997 and the funded status of such plans
reconciled with amounts reported in the Company's consolidated balance
sheets:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year $ 233,486 $ 193,074 $ 180,406 $ 149,150
Service cost 17,742 15,759 6,610 6,786
Interest cost 16,058 14,246 12,770 12,359
Actuarial gain (loss) 11,958 17,911 1,631 (12,218)
Assumption of affiliate's postretirement
liability (Note 3) -- -- -- 26,975
Benefits paid (8,862) (7,504) (5,489) (2,646)
--------- --------- --------- ---------
Benefit obligation, end of year 270,382 233,486 195,928 180,406
--------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets, beginning
of year 221,261 184,236 889 843
Acutal return on plan assets 38,139 42,727 50 46
Employer contribution 4,110 1,802 5,489 2,646
Benefits paid (8,862) (7,504) (5,489) (2,646)
--------- --------- --------- ---------
Fair value of plan assets, end of year 254,648 221,261 939 889
--------- --------- --------- ---------
Funded status (15,734) (12,225) (194,989) (179,517)
Unrecognized net acturial gain (41,146) (36,249) (11,896) (23,948)
Unrecognized prior service cost 147 186 -- --
Net gain at date of adoption (1,280) (1,548) -- --
--------- --------- --------- ---------
Net amount recognized $ (58,013) $ (49,836) $(206,885) $(203,465)
========= ========= ========= =========
Amounts recognized in the Company's
consolidated balance sheets consist of:
Accrued benefit liability $ (61,991) $ (53,953) $(206,885) $(203,465)
Intangible asset 3,978 4,117 -- --
--------- --------- --------- ---------
Net amount recognized $ (58,013) $ (49,836) $(206,885) $(203,465)
========= ========= ========= =========
</TABLE>
F-26
<PAGE>
Pension Benefits Other Benefits
---------------- --------------
1998 1997 1998 1997
Weighted-average assumptions as of
December 31:
Discount rate 6.75% 7.0% 6.75% 7.0%
Expected return on plan assets 9.0% 9.0% 6.0% 6.0%
Rate of compensation increase 5.0% 5.0% -- --
For measurement purposes, a 7.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998. The
rate was assumed to decrease gradually to 5.5% for 2002 and remain at
that level thereafter.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------ ------------------------------------
1998 1997 1996 1998 1997 1996
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service Cost $ 17,742 $ 15,759 $ 13,356 $ 6,610 $ 6,786 $ 7,047
Interest cost 16,058 14,246 12,787 12,770 12,359 11,982
Expected return on plan assets (19,660) (15,453) (13,520) (53) (47) (50)
Amortization of prior service
cost 40 40 39 -- -- --
Amortization of net gain at date
of adoption (268) (268) (268) -- -- --
Recognized net actuarial (gain)
loss (1,625) (1,228) (828) (8,823) (27,581) --
-------- -------- -------- -------- -------- --------
Net periodic benefit cost (credit) $ 12,287 $ 13,096 $ 11,566 $ 10,504 $ (8,483) $ 18,979
======== ======== ======== ======== ======== ========
</TABLE>
Actuarial gains (or losses) related to the postretirement benefit
obligation 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% of the accumulated postretirement benefit
obligation.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $18.2 million, $17.5 million
and $0, respectively, as of December 31, 1998 and $16.2 million, $16
million and $0, respectively, as of December 31, 1997.
Assumed health care cost trend rate have a significant effect on the
amounts reported for the health care plans. A one-percentage point
change in assumed health care cost trend rates would have the following
effects:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Increase (decrease) in total of service
and interest cost components $ 3,930,100 $ (3,268,000)
Increase (decrease) in postretirement
benefit obligation 35,267,000 (29,887,000)
Employee Separation Programs - During 1997, CITGO's senior management
implemented a Transformation Program which resulted in certain
personnel reductions (the "Separation
F-27
<PAGE>
Programs"). CITGO expensed approximately $8 million and $22 million for
the years ended December 31, 1998 and 1997, respectively, relating to
the Separation Programs.
In accordance with the transfer of UNO-VEN's assets to PDVMR (Note 8),
PDVMR assumed the responsibility for UNO-VEN's pension plans, which
include both a qualified and a nonqualified plan which were frozen at
their current levels on April 30, 1997. The plans cover former UNO-VEN
employees who were eligible for participation in the plans as of April
30, 1997. At December 31, 1998 and 1997, plan assets consisted of
equity securities, bonds and cash.
The following sets forth the changes in benefit obligations and plan
assets for the years ended December 31, 1998 and 1997 and the funded
status of the plans reconciled with amounts reported in the company's
balance sheets:
Dollars in Thousands
1998 1997
Change in benefit obligation:
Benefit obligation, beginning of year $ 61,018 $ 64,639
Interest cost 4,348 2,853
Actuarial loss 5,735 4,649
Benefits paid (6,330) (11,123)
-------- --------
Benefit obligation, end of year 64,771 61,018
-------- --------
Change in plan assets:
Fair value of plan assets, beginning of year 65,792 68,374
Actual return on plan assets 8,148 8,383
Employer contribution 447 158
Benefits paid (6,330) (11,123)
-------- --------
Fair value of plan assets, end of year 68,057 65,792
-------- --------
Funded status 3,286 4,774
Unrecognized net actuarial loss 2,997 92
-------- --------
Prepaid benefit cost $ 6,283 $ 4,866
======== ========
F-28
<PAGE>
1998 1997
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.00%
Expected return on plan assets 9.50% 9.50%
1998 1997
Components of net periodic benefit cost:
Interest cost $ 4,348 $ 2,853
Expected return on plan assets (5,482) (3,657)
Recognized net actuarial loss 215 --
------- -------
Net periodic benefit cost (credit) $ (919) $ (804)
======= =======
The accumulated benefit obligation of the nonqualified plan exceeds the
related plan assets. The projected benefit obligation (which equals the
accumulated benefit obligation for this plan) and fair value of plan
assets for such plan were $423,802 and $0, respectively, as of December
31, 1998 and $775,208 and $0, respectively, as of December 31, 1997.
12. INCOME TAXES
The provisions for income taxes are comprised of the following:
1998 1997 1996
(000s Omitted)
Current:
Federal $ 41,085 $ 24,369 $ 69,698
State 5,896 (346) 2,901
--------- --------- ---------
46,981 24,023 72,599
Deferred 84,004 82,145 5,159
--------- --------- ---------
$ 130,985 $ 106,168 $ 77,758
========= ========= =========
The Federal statutory tax rate differs from the effective rate due to
the following:
1998 1997 1996
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 1.7 2.7 3.2
Dividend exclusions (2.0) (2.3) (3.5)
Tax settlement -- (4.9) --
Other 1.5 1.2 1.3
---- ---- ----
Effective tax rate 36.2% 31.7% 36.0%
==== ==== ====
The effective tax rate during 1997 was lower than during 1996 and 1998
due primarily to the favorable resolution of a significant tax issue,
related to environmental expenditures, with the IRS in 1997.
F -29
<PAGE>
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes, and (b) loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax liability
as of December 31, 1998 and 1997 are as follows:
December 31,
1998 1997
(000s Omitted)
Deferred tax liabilities:
Property, plant and equipment $625,204 $546,726
Inventories (including effect of adjustment
to market) 21,091 88,079
Investments in affiliates 120,480 93,201
Other 63,641 47,082
-------- --------
830,416 775,088
-------- --------
Deferred tax assets:
Postretirement benefit obligations 74,331 72,412
Marketing and promotional accruals 12,773 19,139
Employee benefit accruals 34,029 34,229
Alternative minimum tax credit carryforward 45,678 74,117
Other 97,589 91,940
-------- --------
264,400 291,837
-------- --------
Net deferred tax liability (of which $55,447
and $4,476 is included in prepaid expenses and
other at December 31, 1998 and 1997, respectively) $566,016 $483,251
======== ========
At December 31, 1998, the Company has capital loss carryforwards of
$6.7 million, $2.5 million of which expire in 1999, $0.4 million of
which expire in 2000, $2.3 million of which expire in 2001, and $1.5
million of which expire in 2002. At December 31, 1998 and 1997, a
valuation allowance of $1.0 million and $1.4 million, respectively, was
established related to that portion of the carryforwards for which it
was considered more likely than not that the related tax benefits would
not be realized before expiration.
The Company's alternative minimum tax credit carryforwards are
available to offset regular Federal income taxes in future years
without expiration, subject to certain alternative minimum tax
limitations.
13. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims - Various lawsuits and claims are pending
against the Company. The Company records accruals for potential losses
when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a
manner adverse to the Company, and in amounts greater than the
Company's accruals, then such determinations could have a material
adverse effect on the Company's results of operations in a
F-30
<PAGE>
given reporting period. However, in management's opinion, the ultimate
resolution of these lawsuits and claims will not exceed, by a material
amount, the amount of the accruals and the insurance coverages
available to the Company. This opinion is based upon management's and
counsel's current assessment of these lawsuits and claims. The most
significant lawsuits and claims are discussed below.
Litigation is pending in federal court in Lake Charles, Louisiana,
against CITGO by a number of current and former Lake Charles refinery
employees and applicants on behalf of themselves and others asserting
claims of racial discrimination in connection with the Company's
employment practices. The trial court's denial of class certification
has been upheld on appeal; the plaintiffs are seeking review by the
U.S. Supreme Court. Trials in this case are set for fall, 1999.
In a pending case in the United States District Court for the Northern
District of Illinois, Oil Chemical and Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against UNO-VEN to assert claims
against CITGO, PDVSA, the Company, PDVMR and UNOCAL pursuant to Section
301 of the Labor Management Relations Act ("LMRA"). This complaint
alleges that the Company and the other defendants constitute a single
employer, joint employers or alter-egos for purposes of the LMRA, and
are therefore bound by the terms of a collective bargaining agreement
between UNO-VEN and Local 7-517 covering certain production and
maintenance employees at a Lemont, Illinois, petroleum refinery. On May
1, 1997, in a transaction involving the former partners of UNO-VEN, the
Lemont refinery was acquired by PDVMR. Pursuant to an operating
agreement with PDVMR, CITGO became the operator of the Lemont refinery,
and employed the substantial majority of employees previously employed
by UNO-VEN pursuant to its initial terms and conditions of employment,
but did not assume the existing labor agreement. The union seeks
compensation for monetary differences in medical, pension and other
benefits between the CITGO and UNO-VEN plans and reinstatement of all
of the UNO-VEN benefit plans. The union also seeks to require CITGO to
abide by the terms of the collective bargaining agreement between the
union and UNO-VEN. As an alternative claim against all defendants but
CITGO, the union alleges that if the labor agreement is not binding on
CITGO, there was a violation of the Federal Workers Adjustment
Retraining and Notification Act by failure to give 60 days' written
notice of termination to approximately 400 UNO-VEN employees; this
would allegedly entitle such workers to 60 days' pay and benefits,
which is estimated to be approximately $6 million. On June 18, 1998 the
trial court granted the motions for summary judgment filed by CITGO and
the other defendants; the union has appealed this ruling.
PDVMR and PDV America, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities
and claims, including the preceding two matters.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. CITGO has
received approximately 7,500 individual claims for personal injury and
property damage, allegedly arising from the incident. Approximately
1,300 of these claims have been resolved for amounts which individually
and collectively are not material. There are presently six lawsuits
pending against CITGO in federal and state courts alleging property
damage, personal injury and punitive damages. A trial in October 1998
involving 10 bellwether plaintiffs out of approximately 400 plaintiffs
in one of the
F-31
<PAGE>
federal court lawsuits resulted in a verdict for the Company. The trial
of another 10 plaintiffs is scheduled for February 1999; the remaining
cases are not currently scheduled for trial.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO and other operators and owners of nearby industrial
facilities which claims damages for reduced value of residential
properties located in the vicinity of the industrial facilities as a
result of air, soil and groundwater contamination. In 1997, CITGO
offered to purchase about 275 properties in a neighborhood adjacent to
CITGO's Corpus Christi refinery, which were included in the lawsuit.
Related to this offer, $15.7 million was expensed in 1997. To date,
CITGO has reached agreements to buy all but 18 of such properties,
which include settlements of property damage claims, and has offers
open to purchase the remaining properties. Two related personal injury
and wrongful death lawsuits were filed against the same defendants in
1996 and are in preliminary stages of discovery.
Environmental Compliance and Remediation - The Companies are subject to
various Federal, state and local environmental laws and regulations
which may require the Companies to take action to correct or improve
the effects on the environment of prior disposal or release of
petroleum substances by the Companies or other parties. Management
believes the Companies are in compliance with these laws and
regulations in all material respects. Maintaining compliance with
environmental laws and regulations in the future could require
significant capital expenditures and additional operating costs.
In 1992, CITGO reached an agreement with a state agency to cease usage
of certain surface impoundments at CITGO's Lake Charles refinery by
1994. A mutually acceptable closure plan was filed with the state in
1993. CITGO and a former owner are participating in the closure and
sharing the related costs based on estimated contributions of waste and
ownership periods. The remediation commenced in December 1993. In 1997,
CITGO presented a proposal to a state agency revising the 1993 closure
plan. In 1998, the Company amended its 1997 proposal as requested by
the state agency. A ruling on the proposal, as amended, is expected in
1999 with final closure to begin in 2000.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues. The agreement consisted,
in part, of payments to CITGO totaling $46 million. The former owner
will continue to share the costs of certain specific environmental
remediation and certain tort liability actions based on ownership
periods and specific terms of the agreement.
Based on currently available information, including the continuing
participation of the former owner in remediation actions, management
believes its accruals for potential environmental liabilities are
adequate. Conditions which would require additional expenditures may
exist for various Company sites including, but not limited to, the
Company's 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.
IRS Examination - On January 25, 1999, the IRS completed its
examination of the consolidated income tax returns of PDV America, Inc.
and subsidiaries for tax years 1993 through 1995 and issued to the
Company an Income Tax Examination Changes Report.
F-32
<PAGE>
The IRS claim amounts to approximately $18 million, consisting
primarily of temporary differences, over the three-year period
examined. The Company believes that it has meritorious defenses against
certain of the issues comprising the majority of the IRS claim amount;
however, the likelihood of a favorable outcome is not reasonably
predictable, and the amount of additional tax liability, if any, that
may ultimately result is not reasonably estimable. Management of the
Companies believes that the ultimate resolution of these tax issues
will not be material.
Capital Expenditures - The Company's anticipated capital expenditures,
excluding CITGO's investments in LYONDELL-CITGO, for the five-year
period 1999 to the year 2003 total approximately $2.1 billion
(unaudited). The expenditures include environmental and regulatory
capital projects as well as strategic capital expenditures. At December
31, 1998, authorized expenditures on incomplete capital projects
totaled approximately $304 million.
Supply Agreements - CITGO purchases the crude oil processed at its
refineries and also purchases refined products to supplement the
production from its refineries to meet market demands and resolve
logistical issues. In addition to supply agreements with various
affiliates (Note 3), CITGO has various other crude oil, refined product
and feedstock purchase agreements with unaffiliated entities with terms
ranging from monthly to annual renewal. CITGO believes these sources of
supply are reliable and adequate for its current requirements.
Throughput Agreements - CITGO has throughput agreements with certain
pipeline affiliates (Note 7). These throughput agreements may be used
to secure obligations of the pipeline affiliates. Under these
agreements, CITGO may be required to provide its pipeline affiliates
with additional funds through advances against future charges for the
shipping of petroleum products. CITGO currently ships on these
pipelines and has not been required to advance funds in the past. At
December 31, 1998, CITGO has no fixed and determinable, unconditional
purchase obligations under these agreements.
Commodity Derivative Activity - The Companies' commodity derivatives
are generally entered into through major brokerage houses and traded on
national exchanges and although usually settled in cash, can be settled
through delivery of the commodity. Such contracts generally qualify for
hedge accounting and correlate to price movements of crude oil and
refined products. Resulting gains or losses, therefore, will generally
be offset by gains and losses on the Companies' hedged inventory or
future purchases and sales. The Companies' derivative commodity
activity is closely monitored by management and contract periods are
generally less than 30 days. Unrealized and deferred gains and losses
on these contracts at December 31, 1998 and 1997 and the effects on
cost of sales and pretax earnings for 1998, 1997 and 1996 were not
material. At times during 1998 and 1996, the Companies entered into
commodity derivatives activities that were not related to the hedging
program discussed above. This activity and its results were not
material in 1998 or 1996. There was no nonhedging activity in 1997.
Other Credit and Off-Balance-Sheet Risk Information as of December 31,
1998 - CITGO has guaranteed approximately $8 million of debt of certain
of its marketers and an affiliate. Such debt is substantially
collateralized by assets of these entities. CITGO and PDVMR have
outstanding letters of credit totaling approximately $541.3 million
which includes $520.3 million related to their tax-exempt and taxable
revenue bonds and pollution control bonds (Note 10). CITGO has also
guaranteed approximately $99 million of debt of certain affiliates,
including $50 million
F-33
<PAGE>
related to HOVENSA and $11 million related to NISCO (Note 7). CITGO has
also acquired surety bonds totaling $42 million primarily due to
requirements of various government entities. CITGO does not expect
liabilities to be incurred related to such guarantees, letters of
credit or surety bonds.
Neither CITGO nor the counterparties are required to collateralize
their obligations under interest rate swaps or caps or over-the-counter
derivative commodity agreements. CITGO 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. CITGO does not anticipate nonperformance by the
counterparties, which consist primarily of major financial
institutions.
Management considers the market risk to the Companies related to its
commodity and interest rate derivatives to be insignificant during the
periods presented.
14. LEASES
CITGO leases certain of its Corpus Christi refinery facilities under a
capital lease. The basic term of the lease expires on January 1, 2004;
however, CITGO 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, 1998 and 1997. Accumulated amortization related to the
leased assets was approximately $102 million and $94 million at
December 31, 1998 and 1997, respectively. Amortization is included in
depreciation expense.
The Companies also have various noncancelable operating leases,
primarily for product storage facilities, office space, computer
equipment and vehicles. Rent expense on all operating leases totaled
$34 million, $39 million and $33 million in 1998, 1997 and 1996,
respectively. Future minimum lease payments for the capital lease and
noncancelable operating leases are as follows:
Capital Operating Total
Lease Leases Year
Year (000s Omitted)
1999 $ 27,375 $ 27,020 $ 54,395
2000 27,375 22,811 50,186
2001 27,375 20,393 47,768
2002 27,375 18,020 45,395
2003 27,375 13,618 40,993
Thereafter 36,000 24,018 60,018
--------- --------- ---------
Total minimum lease payments 172,875 $ 125,880 $ 298,755
========= =========
Amount representing interest (56,289)
---------
Present value of minimum lease payments 116,586
Current portion 14,660
---------
$ 101,926
=========
F-34
<PAGE>
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 Companies,
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 Companies 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.
The carrying amounts of cash and cash equivalents, restricted cash and
variable-rate debt approximate fair values because of the short
maturity of these instruments. The carrying amounts and estimated fair
values of the Companies' other financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -----------------------
Carrying Fair Value Carrying Fair Value
Amount Amount
(000s Omitted) (000s Omitted)
<S> <C> <C> <C> <C>
Liabilities:
Short-term bank loans $ 37,000 $ 37,000 $ 3,000 $ 3,000
Long-term debt 2,118,921 2,087,675 2,392,807 2,454,728
Derivative and off-balance sheet
financial instruments -
unrealized gains (losses):
Interest rate swap agreements -- (2,983) -- (3,225)
Guarantees of debt -- (601) -- (59)
Letters of credit -- (3,015) -- (1,848)
Surety bonds -- (147) -- (119)
</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 Companies for issuance of debt with similar
terms and remaining maturities, except for the Company's $750 million
principle amount senior notes which were based upon quoted market
prices.
Interest Rate Swap and Cap Agreements - The fair value of these
agreements is based on the estimated amount that CITGO and PDVMR would
receive or pay to terminate the agreements at the reporting date,
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.
F-35
<PAGE>
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.
16. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
<S> <C> <C> <C> <C>
Sales $ 2,748,946 $ 2,944,287 $ 2,731,898 $ 2,541,898
Cost of sales and operating
expenses $ 2,536,189 $ 2,752,531 $ 2,523,825 $ 2,495,404
Net income $ 95,338 $ 70,620 $ 85,369 $ (20,609)
1997 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
Sales $ 3,262,726 $ 3,440,392 $ 3,564,105 $ 3,354,980
Cost of sales and operating
expenses $ 3,177,759 $ 3,255,776 $ 3,313,878 $ 3,250,179
Net income $ 15,048 $ 77,993 $ 104,331 $ 30,645
</TABLE>
******
F-36
<PAGE>
Commission File Number 001-12138
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
EXHIBITS
FILED WITH
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
------------------
PDV America, Inc.
(Exact name of registrant as specified in its charter)
<PAGE>
INDEX TO EXHIBITS
Sequential Page
Exhibits Number
- -------- ------
(1) Financial Statements:
Independent Auditors' Report.......................................F-1
Consolidated Balance Sheets at December 31, 1998
and 1997..................................................F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996..........................F-4
Consolidated Statements of Shareholder's Equity
for the years ended December 31, 1998, 1997
and 1996..................................................F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997
and 1996..................................................F-6
Notes to the Consolidated Financial Statements.....................F-9
(2) None
(3) Exhibits:
The Exhibit Index in part c., below, lists the exhibits that are filed
as part of, or incorporated by reference into, this report.
b. Reports on Form 8-K
None
(i)
<PAGE>
<TABLE>
<CAPTION>
c. Exhibits
<S> <C>
*3.1 Certificate of Incorporation, Certificate of Amendment of Certificate of
Incorporation and By-laws of PDV America.......................................
*4.1 Indenture, dated as of August 1, 1993, among PDV America,
Propernyn, PDVSA and Citibank, N.A., as trustee, relating to
PDV America's 7-1/4% Senior Notes Due 1998, 7-3/4% Senior Notes Due 2000 and
7-7/8% Senior Notes Due 2003...................................................
*4.2 Form of Senior Note (included in Exhibit 4.1)..................................
*10.1 Crude Supply Agreement, dated as of
September 30, 1986, between CITGO Petroleum
Corporation and Petroleos de Venezuela, S.A....................................
*10.2 Supplemental Crude Supply Agreement, dated as of September 30,
1986, between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A. .............................................................
*10.3 Crude Oil and Feedstock Supply Agreement, dated as of
March 31, 1987, between Champlin Refining Company and
Petroleos de Venezuela, S.A....................................................
*10.4 Supplemental Crude Oil and Feedstock Supply Agreement, dated
as of March 31, 1987, between Champlin Refining Company and
Petroleos de Venezuela, S.A....................................................
*10.5 Contract for the Purchase/Sale of Boscan Crude Oil, dated as of
June 2, 1994, between Tradecal, S.A., and CITGO Asphalt
Refining Company...............................................................
*10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil, dated December 28, 1990, among Maraven, S.A.,
Lagoven, S.A., and Seaview Oil Company.........................................
*10.7 Sublease Agreement, dated as of March 31, 1987, between
Champlin Petroleum Company, as Sublessor, and Champlin Refining
Company, as Sublessee..........................................................
*10.8 Operating Agreement, dated as of May 1, 1984, among Cit-Con Oil
Corporation, CITGO Petroleum Corporation and Conoco, Inc.......................
- ------------------
<FN>
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
</FN>
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
*10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd. dated July 1, 1993.......................
*10.10 Contribution Agreement among Lyondell Petrochemical Company,
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A. .............................................................
*10.11 Crude Oil Supply Agreement, dated as of May 5, 1993, between
LYONDELL-CITGO Refining Company, Ltd. and Lagoven, S.A.
*10.12 Supplemental Supply Agreement, dated as of May 5, 1993,
between LYONDELL-CITGO Refining Company, Ltd. and
Petroleos de Venezuela, S.A....................................................
*10.13 The UNO-VEN Company Partnership Agreement, dated as of
December 4, 1989, between Midwest 76, Inc. and VPHI Midwest, Inc.
*10.14 Supply Agreement, dated as of December 1, 1989, between
The UNO-VEN Company and Petroleos de Venezuela, S.A............................
*10.15 Supplemental Supply Agreement, dated as of December 1, 1989,
between The UNO-VEN Company and Petroleos de Venezuela, S.A.
*10.16 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.................................................
**10.17 Amendment and Supplement to Supply Agreement, dated as of
May 11, 1994, between The UNO-VEN Company and .................................
Tradecal, S.A., as assignee of Petroleos de Venezuela, S.A.
*** 10.18 $150,000,000 Credit Agreement, dated May 13, 1998 between
CITGO Petroleum Corporation and the Bank of America National
Trust and Savings Association, The Bank of New York, the Royal
Bank of Canada and Other Financial Institutions................................
*** 10.19 $400,000,000 Credit Agreement, dated May 13, 1998 between
CITGO Petroleum Corporation and the Bank of America National
Trust and Savings Association, The Bank of New York, the Royal
Bank of Canada and Other Financial Institutions................................
- ------------------
<FN>
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's ("CITGO")
Form 10-K (File No. 1-14380) and incorporated herein by this reference.
</FN>
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
*** 10.20 Limited Partnership Agreement of LYONDELL-CITGO Refining LP,
dated December 31, 1998
10.21 Loan agreement with PDVSA Finance Ltd. consisting of a Promissory Note
in the amount of $130,000,000, dated November 10, 1998
10.22 Loan agreement with PDVSA Finance Ltd. consisting of a Promissory Note
in the amount of $130,000,000, dated November 10, 1998
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of the Registrant
27.1 Financial Data Schedule
- ------------------
<FN>
* Previously filed in connection with the Registrant's Registration Statement
on Form F-1, Registration No. 33-63742, originally filed with the
Commission on June 2, 1993.
** Previously filed in connection with the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1994.
*** Previously filed as an Exhibit to CITGO Petroleum Corporation's ("CITGO")
Form 10-K (File No. 1-14380) and incorporated herein by this reference.
</FN>
</TABLE>
(iv)
Exhibit 10.21
PROMISSORY NOTE
US$130 million November 10, 1998
PDVSA Finance Ltd. ("PDVSA Finance"), for value received,
hereby unconditionally promises to pay to the order of PDV America, Inc., or to
its assigns (the "Lender"), in lawful money of the United States of America, the
principal amount of One Hundred Thirty Million Dollars (US$130 million) (the
"Loan") in installments as described below. PDVSA Finance further promises to
pay interest on the unpaid principal amount of the Loan at the interest rate and
on the dates described below.
1. General
1.1. General PDVSA Finance covenants and agrees that, so long
as any amount payable under the Loan remains unpaid it shall observe and perform
each of the covenants and obligations set forth in Article 4 and Article 7 of
the Fiscal and Paying Agency Agreement, (the "Fiscal Agency Agreement"), dated
May 14, 1998, among PDVSA Finance and The Chase Manhattan Bank, as Fiscal Agent,
and Chase Manhattan Bank Luxembourg S.A., as Paying Agent, which Articles are
incorporated by reference in this promissory note as if fully set forth herein,
in accordance with their terms. Capitalized terms used in this promissory note
have the meanings specified in the Fiscal Agency Agreement unless otherwise
defined herein. This promissory note constitutes a Debt Agreement as defined in
the Fiscal Agency Agreement.
2. Definitions
2.1. Definitions. For purposes of this Note, the following
terms shall have the meanings indicated:
"Business Day" means a day that in the city in which Loan
amounts are payable, is not a day on which banking institutions are authorized
or required by law or regulation to close.
"Dollars" or "$" means the lawful currency of the United
States of America.
"Loan" means the loan to PDVSA Finance evidenced hereby.
"Make-Whole Premium" means a premium determined as of the
Business Day prior to the prepayment date for a prepayment being made pursuant
to Section 3.2 of this promissory note, in respect of the outstanding Loan
amount (or the portion thereof) to be prepaid, equal to the amount (but not less
than zero) obtained by subtracting (a) the sum of the unpaid principal amount of
such Loan (or the portion thereof) being prepaid and the amount of interest
thereon accrued to such prepayment date, from (b) the Current Value of the
amount of principal and interest on such Loan (or the portion thereof) being
prepaid that would otherwise have become due on and after the date of such
determination if the Note were not being prepaid (each such amount of principal
or
<PAGE>
interest being referred to herein as an "Amount Payable"). The "Current Value"
means such Amount Payable discounted (on a monthly basis) to its present value
on the date of determination, in accordance with the following formula:
Amount Payable
Current Value = ---------------------
(1+d/12)n
where "d" is the sum of (i) 50 basis points, plus (ii) the Treasury Yield per
annum expressed as a decimal, and "n" is an exponent (which need not be an
integer) equal to the number of monthly periods and portions thereof (any such
portion of a period to be determined by dividing the number of days in such
portion of such period by the total number of days in such period, both computed
on the basis of twelve 30-day months in a 360-day year) between the date of such
determination and the due date of the Amount Payable. The "Treasury Yield" shall
be determined by reference to the yields for U.S. Treasury Notes as indicated
(currently on page "500" thereof) on the Telerate Screen for actively traded
U.S. Treasury Notes at approximately 10:00 a.m. (New York City time) on the
Business Day next preceding such prepayment date or, if such yields shall not be
reported as of such time or the yields reported as of such time shall not be
ascertainable, by reference to the most recent Federal Reserve Statistical
Release H.15 (519) which has become publicly available at least two Business
Days prior to such prepayment date, and shall be the most recent weekly average
yield on actively traded U.S. Treasury Notes adjusted to a constant maturity
equal to the then remaining weighted average life of the outstanding principal
amount of the Note (the "Remaining Life"), computed by dividing (A) the sum of
all remaining principal payments into (B) the total of the products obtained by
multiplying (1) the amount of each remaining principal payment by (2) the number
of years (calculated to the nearest one-twelfth) which will elapse between the
date as of which such computation is made and the due date of each remaining
principal payment. If the Remaining Life is not equal to the constant maturity
of a U.S. Treasury Note for which a weekly average yield is given, the Treasury
Yield shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of (x) the actively traded
U.S. Treasury Note with the average life closest to and greater than the
Remaining Life and (y) the actively traded U.S. Treasury Note with the average
life closest to and less than the Remaining Life, except that if the Remaining
Life is less than one year, the weekly average yield on actively traded U.S.
Treasury Notes adjusted to a constant maturity of one year shall be used. The
Treasury Yield shall be computed to the fifth decimal place (one-thousandth of a
percentage point) and then rounded to the fourth decimal place (one-hundredth of
a percentage point).
"Next Payment of Scheduled Debt Service" means on any date of
determination for any Debt Agreement, the amount of the first payment of
Scheduled Debt Service in respect of Indebtedness outstanding under such Debt
Agreement that is scheduled to be paid in cash after such date of determination.
For this purpose, amounts scheduled to be paid on the same date shall be treated
as a single payment whether such amounts shall be principal, interest or
otherwise.
"Note" means this promissory note of PDVSA Finance evidencing
the payment obligations of PDVSA Finance in respect of the Loan.
2
<PAGE>
"Payment Date" means each February 10, May 10, August 10 and
November 10 of each year. If a Payment Date falls on any day which is not a
Business Day, such Payment Date will be postponed to the next day which is a
Business Day.
3
<PAGE>
"Taxes" has the meaning assigned to that term in Section 6.1
below.
3. Repayment
3.1. Repayment. (a) PDVSA Finance shall repay the outstanding
principal amount of the Loan commencing on February 10, 2009, in 20 equal
quarterly installments of principal as illustrated in Exhibit A.
(b) In the event of any prepayment pursuant to Section 3.2
hereof, the remaining unpaid installments of principal of the Loan will be
ratably reduced by an aggregate amount equal to the principal amount so being
repaid.
3.2. Optional Prepayment. PDVSA Finance may prepay the Loan,
at any time, in whole or in part, in an integral multiple of $1,000,000 at the
Prepayment Price as provided in this Section 3.2. The Prepayment Price shall be
an amount equal to 100% of the outstanding principal amount to be prepaid
together with accrued and unpaid interest thereon together with an amount equal
to the Make-Whole Premium, if any, calculated as of the Business Day prior to
the prepayment date. PDVSA Finance shall no later than the third Business Day
preceding the date it designates for any prepayment, give the Lender written
notice of the amount to be prepaid on such date. Any notice so given will be
irrevocable.
4. Interest
4.1. Rate. Interest shall be payable in arrears quarterly on
each Payment Date commencing on February 10, 1999 as illustrated in Exhibit A.
Except as otherwise expressly provided in Section 4.2, interest shall accrue on
the outstanding principal amount of the Loan, at a rate per annum equal to 8.558
percent (8.558%).
4.2. Interest on Late Payments. If PDVSA Finance shall fail to
pay when due any installment of principal of or interest on the Note, it shall
pay the Lender on demand interest on the amount in default (after giving effect
to any applicable grace period) from the date such payment became due until
payment in full at the rate of 1% over the applicable per annum interest rate.
5. Payments; Computations
5.1. Making of Payments. Each payment by PDVSA Finance to the
Lender under this Note shall be made in Dollars pursuant to the terms of Section
3.02 of the Fiscal Agency Agreement or, if the Fiscal Agency Agreement shall no
longer be in effect, pursuant to such other instructions as the Lender may give
by prior written notice to PDVSA Finance.
5.2. Computations. Accrued interest on the Loan shall be
calculated on the basis of a 360-day year of twelve 30-day months and shall be
payable quarterly in arrears on each Payment Date.
4
<PAGE>
6. Taxes
6.1. Taxes. All payments by PDVSA Finance hereunder shall be
made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings imposed by the
Cayman Islands or Venezuela or any political subdivision or taxing authority
therein (all such taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be
required by law to be deducted from or in respect of any amount payable
hereunder, (i) the amount payable by PDVSA Finance shall be increased as may be
necessary so that after making all required deductions the Lender shall receive
an amount equal to the sum it would have received had no such deductions been
made, (ii) PDVSA Finance shall make such deductions and (iii) PDVSA Finance
shall pay the full amount deducted to the relevant taxing authority in
accordance with applicable law. Within 30 days after the date of any payment of
Taxes by PDVSA Finance in respect of any payment hereunder, PDVSA Finance will
furnish to the Lender the original or a certified copy of a receipt evidencing
payment thereof.
7. Events of Default
7.1. Events of Default. If one or more of the following events
of default (each an "Event of Default") shall occur and be continuing, the
Lender shall be entitled to the remedies set forth in Sections 7.2 and 7.3
hereof.
(a) Default in the payment of all or any part of the principal
on the Loan and when the same shall become due and payable either at maturity,
upon any prepayment, or otherwise; or
(b) Default in the payment of any installments of interest
upon or other amount in respect of the Loan (other than principal) as and when
the same shall become due and payable, and continuance of such default for a
period of 5 days; or
(c) The occurrence of any "Event of Default" set forth in the
Fiscal Agency Agreement; or
(d) A court having jurisdiction in the premises shall enter a
decree or order for relief in respect of PDVSA Finance, PDVSA-P&G or PDVSA in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, sequestrator (or similar official) of PDVSA Finance, PDVSA-P&G or
PDVSA, as appropriate, or for all or any substantial part of its Property or
ordering the winding up or liquidation of its affairs or its dissolution or
reorganization, and in each case such decree or order shall remain unstayed and
in effect for a period of 60 consecutive days; or (ii) PDVSA Finance, PDVSA-P&G
or PDVSA shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consent to the
entry of an order for relief in an involuntary case under any such law, or
consent to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar
5
<PAGE>
official) of PDVSA Finance, PDVSA-P&G or PDVSA, as appropriate, or for all or
any substantial part of its Property, or make any general assignment for the
benefit of creditors or admits its inability to pay its debts as they come due;
or
(e) Failure by PDVSA Finance to remedy a breach of any
covenant set forth herein in any material respect (other than those covenants
incorporated by reference in Section 1.1) within 60 days after PDVSA Finance
became aware or should have become aware of such breach; or
(f) It becomes unlawful for PDVSA Finance to perform any of
its obligations under the Fiscal Agency Agreement or the Note; or
(g) At any time, and for 7 consecutive Business Days, the
aggregate amount of cash and Permitted Investments held in, or credited to, the
Liquidity Facility (including Acceptable Letters of Credit held in lieu of cash
or Permitted Investments pursuant to Section 5.03 of the Fiscal Agency
Agreement) is less than an amount, determined at such time, equal to the sum of
Next Payments of Scheduled Debt Service for all Debt Agreements pursuant to
which Indebtedness is outstanding on such date; or
(h) PDVSA Finance (or any entity that has assumed its
obligations thereunder) revokes or terminates the Fiscal Agency Agreement or the
Note or the Fiscal Agency Agreement or the Note ceases to be in full force and
effect other than pursuant to its terms or is repudiated by PDVSA Finance.
7.2. Default Remedies. (a) If any Event of Default shall occur
and be continuing, the Lender may, by notice to PDVSA Finance, declare all
amounts payable hereunder by PDVSA Finance that would otherwise be due after the
date of such declaration to be immediately due and payable, whereupon all such
amounts shall become immediately due and payable, all without diligence,
presentment, demand or payment, protest or notice of any kind, which are
expressly waived by the PDVSA Finance, subject to paragraph (b) below.
(b) The Lender shall be deemed to agree that it shall only be
entitled to receive payment (in respect of the Loan), and shall not ask, demand,
sue for, take or receive from PDVSA Finance, by set-off or in any other manner,
or retain, payment (in whole or in part) of such amounts other than the Lender's
ratable share of amounts, if any, on deposit in the Retention Account
established and maintained with the Fiscal Agent; provided that such agreement
shall automatically cease to have any force and effect upon the occurrence and
during the continuance of any Event of Default of the type referred to in
Section 7.01(a), (c), (d), (g), (h), (i), (k)(ii), (l) or (m) of the Fiscal
Agency Agreement as specified therein. The foregoing shall not limit the right
of any person to enforce the Receivables Documents against any party thereto or
to exercise any right thereunder.
7.3. Rights Not Exclusive. The rights provided for herein are
cumulative and are not exclusive of any other rights, powers, privileges or
remedies provided by law.
6
<PAGE>
8. General
8.1. Choice of Law. This Note shall be governed by and
construed and interpreted in accordance with the law of the State of New York.
8.2. Jurisdiction. PDVSA Finance agrees that any legal suit,
action or proceeding relating to this Note may be brought in the federal courts
of the United States for the Southern District of New York (and the courts of
appeal thereto), and if they cannot or will not hear such an action, then in the
state courts of the County and State of New York (and the courts of appeal
thereto), waives any claim that such proceeding has been brought in an
inconvenient forum and irrevocably submits to and accepts the nonexclusive
jurisdiction of such courts in any such proceeding. PDVSA Finance agrees to
appoint CT Corporation System (the "Authorized Agent"), with an office on the
date hereof at 1633 Broadway, New York, New York 10019, United States, as its
agent to receive on behalf of PDVSA Finance and its property service of copies
of the summons and complaint and any other process which may be served in any
such action or proceeding. The Authorized Agent may be served in any such action
which may be instituted in any such court. PDVSA Finance agrees to take any and
all action, including the filing of any and all documents and instruments that
may be necessary to continue such appointment in full force and effect as
aforesaid. Service of process upon the Authorized Agent and written notice of
such service to PDVSA Finance (mailed or delivered to PDVSA Finance at its
address as set forth herein) shall be deemed effective service of process upon
PDVSA Finance.
8.3. Notices. All notices pursuant to this Note shall be given
in writing and sent by certified or registered mail, postage-prepaid or by
facsimile transmission. All such notices shall be sent to the telecopier number
or address (as the case may be) specified for the intended recipient on the
signature page hereof, or to such other number or address as such recipient may
have last specified by notice to the other party. All such notices shall be
effective upon receipt.
8.4. Assignment. This Note shall be binding upon and inure to
the benefit of the Lender and PDVSA Finance and their respective successors and
assigns; provided, however, that PDVSA Finance may not assign any of its rights
or delegate any of its obligations under this Note without the prior written
consent of the Lender.
(b) The Lender may at any time assign any of its rights (in
whole but not in part) under this Note and shall promptly give written notice
thereof to PDVSA Finance. PDVSA Finance shall, from time to time at the request
of the Lender, execute and deliver such documents as may be necessary to give
full force and effect to any such assignment.
8.5. Enforcement Expenses. PDVSA Finance shall reimburse the
Lender on demand for all reasonable expenses incurred as a consequence of, or in
connection with, any Event of Default or the preservation or enforcement of any
right of the Lender under this Note.
7
<PAGE>
8.6. Waiver of Immunity. To the extent that PDVSA Finance
(including any of its revenues, assets or properties) has or hereafter may
acquire any immunity from jurisdiction of any court, from service or notice,
attachment prior to judgment, attachment in aid of execution of judgment, or any
other legal process for enforcement of judgment in any action or proceeding in
any manner arising out of the Fiscal Agency Agreement or the transactions
contemplated hereby, PDVSA Finance hereby irrevocably agrees not to plead or
claim, and irrevocably waives any such immunity, and any defense based on such
immunity, in respect of its obligations arising out of the Fiscal Agency
Agreement and the transactions contemplated hereby. Without limiting the
foregoing, PDVSA Finance hereby expressly and irrevocably waives (and agrees not
to plead or claim or raise as a defense) any sovereign immunity under the
Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. ss.ss. 1602-1611
from (i) any action or proceeding in any Federal or state court in the United
States arising out of the Fiscal Agency Agreement and the transactions
contemplated thereby and (ii) attachment prior to judgment, attachment in aid of
execution, or execution of a judgment arising out of the Fiscal Agency Agreement
and the transactions contemplated thereby against the revenues, assets or
properties of PDVSA Finance located in the United States.
8
<PAGE>
IN WITNESS HEREOF, PDVSA Finance has caused this Instrument to
be duly executed.
PDVSA FINANCE LTD.
Address: Caledonian Bank & Trust Ltd.
Caledonian House
Mary Street, P.O. Box 1043
George Town, Grand Cayman
Cayman Islands
Attn:
Telecopier:
By: /s/ Michael Austin
-----------------------------
Name: Michael Austin
Title: Director
9
<PAGE>
Exhibit A
Amortization Schedule
(in millions of US dollars)
Payment Principal Interest Balance after
Date Payment Payment Principal Payment
---- ------- ------- -----------------
2/10/99 $0.0 $2.7813500 $130.0
5/10/99 0.0 2.7813500 130.0
8/10/99 0.0 2.7813500 130.0
11/10/99 0.0 2.7813500 130.0
2/10/99 0.0 2.7813500 130.0
5/10/00 0.0 2.7813500 130.0
8/10/00 0.0 2.7813500 130.0
11/10/00 0.0 2.7813500 130.0
2/10/01 0.0 2.7813500 130.0
5/10/01 0.0 2.7813500 130.0
8/10/01 0.0 2.7813500 130.0
11/10/01 0.0 2.7813500 130.0
2/10/02 0.0 2.7813500 130.0
5/10/02 0.0 2.7813500 130.0
8/10/02 0.0 2.7813500 130.0
11/10/02 0.0 2.7813500 130.0
2/10/03 0.0 2.7813500 130.0
5/10/03 0.0 2.7813500 130.0
8/10/03 0.0 2.7813500 130.0
11/10/03 0.0 2.7813500 130.0
2/10/04 0.0 2.7813500 130.0
5/10/04 0.0 2.7813500 130.0
8/10/04 0.0 2.7813500 130.0
11/10/04 0.0 2.7813500 130.0
2/10/05 0.0 2.7813500 130.0
5/10/05 0.0 2.7813500 130.0
8/10/05 0.0 2.7813500 130.0
11/10/05 0.0 2.7813500 130.0
2/10/06 0.0 2.7813500 130.0
5/10/06 0.0 2.7813500 130.0
8/10/06 0.0 2.7813500 130.0
11/10/06 0.0 2.7813500 130.0
2/10/07 0.0 2.7813500 130.0
5/10/07 0.0 2.7813500 130.0
10
<PAGE>
8/10/07 0.0 2.7813500 130.0
11/10/07 0.0 2.7813500 130.0
2/10/08 0.0 2.7813500 130.0
5/10/08 0.0 2.7813500 130.0
8/10/08 0.0 2.7813500 130.0
11/10/08 0.0 2.7813500 130.0
2/10/09 6.5 2.7813500 123.5
5/10/09 6.5 2.6422825 117.0
8/10/09 6.5 2.5032150 110.5
11/10/09 6.5 2.3641475 104.0
2/10/10 6.5 2.2250800 97.5
5/10/10 6.5 2.0860125 91.0
8/10/10 6.5 1.9469450 84.5
11/10/10 6.5 1.8078775 78.0
2/10/11 6.5 1.6688100 71.5
5/10/11 6.5 1.5297425 65.0
8/10/11 6.5 1.3906750 58.5
11/10/11 6.5 1.2516075 52.0
2/10/12 6.5 1.1125400 45.5
5/10/12 6.5 0.9734725 39.0
8/10/12 6.5 0.8344050 32.5
11/10/12 6.5 0.6953375 26.0
2/10/13 6.5 0.5562700 19.5
5/10/13 6.5 0.4172025 13.0
8/10/13 6.5 0.2781350 6.5
11/10/13 6.5 0.1390675 0.0
11
Exhibit 10.22
PROMISSORY NOTE
US$130 million
November 10, 1998
PDVSA Finance Ltd. ("PDVSA Finance"), for value received,
hereby unconditionally promises to pay to the order of PDV America, Inc., or to
its assigns (the "Lender"), in lawful money of the United States of America, the
principal amount of One Hundred Thirty Million Dollars (US$130 million) (the
"Loan") in installments as described below. PDVSA Finance further promises to
pay interest on the unpaid principal amount of the Loan at the interest rate and
on the dates described below.
1. General
1.1. General PDVSA Finance covenants and agrees that, so long
as any amount payable under the Loan remains unpaid it shall observe and perform
each of the covenants and obligations set forth in Article 4 and Article 7 of
the Fiscal and Paying Agency Agreement, (the "Fiscal Agency Agreement"), dated
May 14, 1998, among PDVSA Finance and The Chase Manhattan Bank, as Fiscal Agent,
and Chase Manhattan Bank Luxembourg S.A., as Paying Agent, which Articles are
incorporated by reference in this promissory note as if fully set forth herein,
in accordance with their terms. Capitalized terms used in this promissory note
have the meanings specified in the Fiscal Agency Agreement unless otherwise
defined herein. This promissory note constitutes a Debt Agreement as defined in
the Fiscal Agency Agreement.
2. Definitions
2.1. Definitions. For purposes of this Note, the following
terms shall have the meanings indicated:
"Business Day" means a day that in the city in which Loan
amounts are payable, is not a day on which banking institutions are authorized
or required by law or regulation to close.
"Dollars" or "$" means the lawful currency of the United
States of America.
"Loan" means the loan to PDVSA Finance evidenced hereby.
"Make-Whole Premium" means a premium determined as of the
Business Day prior to the prepayment date for a prepayment being made pursuant
to Section 3.2 of this promissory note, in respect of the outstanding Loan
amount (or the portion thereof) to be prepaid, equal to the amount (but not less
than zero) obtained by subtracting (a) the sum of the unpaid principal amount of
such Loan (or the portion thereof) being prepaid and the amount of interest
thereon accrued to such prepayment date, from (b) the Current Value of the
amount of
<PAGE>
principal and interest on such Loan (or the portion thereof) being prepaid that
would otherwise have become due on and after the date of such determination if
the Note were not being prepaid (each such amount of principal or interest being
referred to herein as an "Amount Payable"). The "Current Value" means such
Amount Payable discounted (on a monthly basis) to its present value on the date
of determination, in accordance with the following formula:
Amount Payable
Current Value = ---------------------
(1+d/12)n
where "d" is the sum of (i) 50 basis points, plus (ii) the Treasury Yield per
annum expressed as a decimal, and "n" is an exponent (which need not be an
integer) equal to the number of monthly periods and portions thereof (any such
portion of a period to be determined by dividing the number of days in such
portion of such period by the total number of days in such period, both computed
on the basis of twelve 30-day months in a 360-day year) between the date of such
determination and the due date of the Amount Payable. The "Treasury Yield" shall
be determined by reference to the yields for U.S. Treasury Notes as indicated
(currently on page "500" thereof) on the Telerate Screen for actively traded
U.S. Treasury Notes at approximately 10:00 a.m. (New York City time) on the
Business Day next preceding such prepayment date or, if such yields shall not be
reported as of such time or the yields reported as of such time shall not be
ascertainable, by reference to the most recent Federal Reserve Statistical
Release H.15 (519) which has become publicly available at least two Business
Days prior to such prepayment date, and shall be the most recent weekly average
yield on actively traded U.S. Treasury Notes adjusted to a constant maturity
equal to the then remaining weighted average life of the outstanding principal
amount of the Note (the "Remaining Life"), computed by dividing (A) the sum of
all remaining principal payments into (B) the total of the products obtained by
multiplying (1) the amount of each remaining principal payment by (2) the number
of years (calculated to the nearest one-twelfth) which will elapse between the
date as of which such computation is made and the due date of each remaining
principal payment. If the Remaining Life is not equal to the constant maturity
of a U.S. Treasury Note for which a weekly average yield is given, the Treasury
Yield shall be obtained by linear interpolation (calculated to the nearest
one-twelfth of a year) from the weekly average yields of (x) the actively traded
U.S. Treasury Note with the average life closest to and greater than the
Remaining Life and (y) the actively traded U.S. Treasury Note with the average
life closest to and less than the Remaining Life, except that if the Remaining
Life is less than one year, the weekly average yield on actively traded U.S.
Treasury Notes adjusted to a constant maturity of one year shall be used. The
Treasury Yield shall be computed to the fifth decimal place (one-thousandth of a
percentage point) and then rounded to the fourth decimal place (one-hundredth of
a percentage point).
"Next Payment of Scheduled Debt Service" means on any date of
determination for any Debt Agreement, the amount of the first payment of
Scheduled Debt Service in respect of Indebtedness outstanding under such Debt
Agreement that is scheduled to be paid in cash after
2
<PAGE>
such date of determination. For this purpose, amounts scheduled to be paid on
the same date shall be treated as a single payment whether such amounts shall be
principal, interest or otherwise.
"Note" means this promissory note of PDVSA Finance evidencing
the payment obligations of PDVSA Finance in respect of the Loan.
"Payment Date" means each February 10, May 10, August 10 and
November 10 of each year. If a Payment Date falls on any day which is not a
Business Day, such Payment Date will be postponed to the next day which is a
Business Day.
"Taxes" has the meaning assigned to that term in Section 6.1
below.
3. Repayment
3.1. Repayment. (a) PDVSA Finance shall repay the outstanding
principal amount of the Loan commencing on February 10, 2009, in 20 equal
quarterly installments of principal as illustrated in Exhibit A.
(b) In the event of any prepayment pursuant to Section 3.2
hereof, the remaining unpaid installments of principal of the Loan will be
ratably reduced by an aggregate amount equal to the principal amount so being
repaid.
3.2. Optional Prepayment. PDVSA Finance may prepay the Loan,
at any time, in whole or in part, in an integral multiple of $1,000,000 at the
Prepayment Price as provided in this Section 3.2. The Prepayment Price shall be
an amount equal to 100% of the outstanding principal amount to be prepaid
together with accrued and unpaid interest thereon together with an amount equal
to the Make-Whole Premium, if any, calculated as of the Business Day prior to
the prepayment date. PDVSA Finance shall no later than the third Business Day
preceding the date it designates for any prepayment, give the Lender written
notice of the amount to be prepaid on such date. Any notice so given will be
irrevocable.
4. Interest
4.1. Rate. Interest shall be payable in arrears quarterly on
each Payment Date commencing on February 10, 1999 as illustrated in Exhibit A.
Except as otherwise expressly provided in Section 4.2, interest shall accrue on
the outstanding principal amount of the Loan, at a rate per annum equal to 8.558
percent (8.558%).
4.2. Interest on Late Payments. If PDVSA Finance shall fail to
pay when due any installment of principal of or interest on the Note, it shall
pay the Lender on demand interest on the amount in default (after giving effect
to any applicable grace period) from the date such payment became due until
payment in full at the rate of 1% over the applicable per annum interest rate.
3
<PAGE>
5. Payments; Computations
5.1. Making of Payments. Each payment by PDVSA Finance to the
Lender under this Note shall be made in Dollars pursuant to the terms of Section
3.02 of the Fiscal Agency Agreement or, if the Fiscal Agency Agreement shall no
longer be in effect, pursuant to such other instructions as the Lender may give
by prior written notice to PDVSA Finance.
5.2. Computations. Accrued interest on the Loan shall be
calculated on the basis of a 360-day year of twelve 30-day months and shall be
payable quarterly in arrears on each Payment Date.
6. Taxes
6.1. Taxes. All payments by PDVSA Finance hereunder shall be
made free and clear of and without deduction for any and all present or future
taxes, levies, imposts, deductions, charges or withholdings imposed by the
Cayman Islands or Venezuela or any political subdivision or taxing authority
therein (all such taxes, levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be
required by law to be deducted from or in respect of any amount payable
hereunder, (i) the amount payable by PDVSA Finance shall be increased as may be
necessary so that after making all required deductions the Lender shall receive
an amount equal to the sum it would have received had no such deductions been
made, (ii) PDVSA Finance shall make such deductions and (iii) PDVSA Finance
shall pay the full amount deducted to the relevant taxing authority in
accordance with applicable law. Within 30 days after the date of any payment of
Taxes by PDVSA Finance in respect of any payment hereunder, PDVSA Finance will
furnish to the Lender the original or a certified copy of a receipt evidencing
payment thereof.
7. Events of Default
7.1. Events of Default. If one or more of the following events
of default (each an "Event of Default") shall occur and be continuing, the
Lender shall be entitled to the remedies set forth in Sections 7.2 and 7.3
hereof.
(a) Default in the payment of all or any part of the principal
on the Loan and when the same shall become due and payable either at maturity,
upon any prepayment, or otherwise; or
(b) Default in the payment of any installments of interest
upon or other amount in respect of the Loan (other than principal) as and when
the same shall become due and payable, and continuance of such default for a
period of 5 days; or
(c) The occurrence of any "Event of Default" set forth in the
Fiscal Agency Agreement; or
4
<PAGE>
(d) A court having jurisdiction in the premises shall enter a
decree or order for relief in respect of PDVSA Finance, PDVSA-P&G or PDVSA in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or appointing a receiver, liquidator, assignee,
custodian, sequestrator (or similar official) of PDVSA Finance, PDVSA-P&G or
PDVSA, as appropriate, or for all or any substantial part of its Property or
ordering the winding up or liquidation of its affairs or its dissolution or
reorganization, and in each case such decree or order shall remain unstayed and
in effect for a period of 60 consecutive days; or (ii) PDVSA Finance, PDVSA-P&G
or PDVSA shall commence a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consent to the
entry of an order for relief in an involuntary case under any such law, or
consent to the appointment or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or similar official) of PDVSA
Finance, PDVSA-P&G or PDVSA, as appropriate, or for all or any substantial part
of its Property, or make any general assignment for the benefit of creditors or
admits its inability to pay its debts as they come due; or
(e) Failure by PDVSA Finance to remedy a breach of any
covenant set forth herein in any material respect (other than those covenants
incorporated by reference in Section 1.1) within 60 days after PDVSA Finance
became aware or should have become aware of such breach; or
(f) It becomes unlawful for PDVSA Finance to perform any of
its obligations under the Fiscal Agency Agreement or the Note; or
(g) At any time, and for 7 consecutive Business Days, the
aggregate amount of cash and Permitted Investments held in, or credited to, the
Liquidity Facility (including Acceptable Letters of Credit held in lieu of cash
or Permitted Investments pursuant to Section 5.03 of the Fiscal Agency
Agreement) is less than an amount, determined at such time, equal to the sum of
Next Payments of Scheduled Debt Service for all Debt Agreements pursuant to
which Indebtedness is outstanding on such date; or
(h) PDVSA Finance (or any entity that has assumed its
obligations thereunder) revokes or terminates the Fiscal Agency Agreement or the
Note or the Fiscal Agency Agreement or the Note ceases to be in full force and
effect other than pursuant to its terms or is repudiated by PDVSA Finance.
7.2. Default Remedies. (a) If any Event of Default shall occur
and be continuing, the Lender may, by notice to PDVSA Finance, declare all
amounts payable hereunder by PDVSA Finance that would otherwise be due after the
date of such declaration to be immediately due and payable, whereupon all such
amounts shall become immediately due and payable, all without diligence,
presentment, demand or payment, protest or notice of any kind, which are
expressly waived by the PDVSA Finance, subject to paragraph (b) below.
5
<PAGE>
(b) The Lender shall be deemed to agree that it shall only be
entitled to receive payment (in respect of the Loan), and shall not ask, demand,
sue for, take or receive from PDVSA Finance, by set-off or in any other manner,
or retain, payment (in whole or in part) of such amounts other than the Lender's
ratable share of amounts, if any, on deposit in the Retention Account
established and maintained with the Fiscal Agent; provided that such agreement
shall automatically cease to have any force and effect upon the occurrence and
during the continuance of any Event of Default of the type referred to in
Section 7.01(a), (c), (d), (g), (h), (i), (k)(ii), (l) or (m) of the Fiscal
Agency Agreement as specified therein. The foregoing shall not limit the right
of any person to enforce the Receivables Documents against any party thereto or
to exercise any right thereunder.
7.3. Rights Not Exclusive. The rights provided for herein are
cumulative and are not exclusive of any other rights, powers, privileges or
remedies provided by law.
8. General
8.1. Choice of Law. This Note shall be governed by and
construed and interpreted in accordance with the law of the State of New York.
8.2. Jurisdiction. PDVSA Finance agrees that any legal suit,
action or proceeding relating to this Note may be brought in the federal courts
of the United States for the Southern District of New York (and the courts of
appeal thereto), and if they cannot or will not hear such an action, then in the
state courts of the County and State of New York (and the courts of appeal
thereto), waives any claim that such proceeding has been brought in an
inconvenient forum and irrevocably submits to and accepts the nonexclusive
jurisdiction of such courts in any such proceeding. PDVSA Finance agrees to
appoint CT Corporation System (the "Authorized Agent"), with an office on the
date hereof at 1633 Broadway, New York, New York 10019, United States, as its
agent to receive on behalf of PDVSA Finance and its property service of copies
of the summons and complaint and any other process which may be served in any
such action or proceeding. The Authorized Agent may be served in any such action
which may be instituted in any such court. PDVSA Finance agrees to take any and
all action, including the filing of any and all documents and instruments that
may be necessary to continue such appointment in full force and effect as
aforesaid. Service of process upon the Authorized Agent and written notice of
such service to PDVSA Finance (mailed or delivered to PDVSA Finance at its
address as set forth herein) shall be deemed effective service of process upon
PDVSA Finance.
8.3. Notices. All notices pursuant to this Note shall be given
in writing and sent by certified or registered mail, postage-prepaid or by
facsimile transmission. All such notices shall be sent to the telecopier number
or address (as the case may be) specified for the intended recipient on the
signature page hereof, or to such other number or address as such recipient may
have last specified by notice to the other party. All such notices shall be
effective upon receipt.
6
<PAGE>
8.4. Assignment. This Note shall be binding upon and inure to
the benefit of the Lender and PDVSA Finance and their respective successors and
assigns; provided, however, that PDVSA Finance may not assign any of its rights
or delegate any of its obligations under this Note without the prior written
consent of the Lender.
(b) The Lender may at any time assign any of its rights (in
whole but not in part) under this Note and shall promptly give written notice
thereof to PDVSA Finance. PDVSA Finance shall, from time to time at the request
of the Lender, execute and deliver such documents as may be necessary to give
full force and effect to any such assignment.
8.5. Enforcement Expenses. PDVSA Finance shall reimburse the
Lender on demand for all reasonable expenses incurred as a consequence of, or in
connection with, any Event of Default or the preservation or enforcement of any
right of the Lender under this Note.
8.6. Waiver of Immunity. To the extent that PDVSA Finance
(including any of its revenues, assets or properties) has or hereafter may
acquire any immunity from jurisdiction of any court, from service or notice,
attachment prior to judgment, attachment in aid of execution of judgment, or any
other legal process for enforcement of judgment in any action or proceeding in
any manner arising out of the Fiscal Agency Agreement or the transactions
contemplated hereby, PDVSA Finance hereby irrevocably agrees not to plead or
claim, and irrevocably waives any such immunity, and any defense based on such
immunity, in respect of its obligations arising out of the Fiscal Agency
Agreement and the transactions contemplated hereby. Without limiting the
foregoing, PDVSA Finance hereby expressly and irrevocably waives (and agrees not
to plead or claim or raise as a defense) any sovereign immunity under the
Foreign Sovereign Immunities Act of 1976, as amended, 28 U.S.C. ss.ss. 1602-1611
from (i) any action or proceeding in any Federal or state court in the United
States arising out of the Fiscal Agency Agreement and the transactions
contemplated thereby and (ii) attachment prior to judgment, attachment in aid of
execution, or execution of a judgment arising out of the Fiscal Agency Agreement
and the transactions contemplated thereby against the revenues, assets or
properties of PDVSA Finance located in the United States.
7
<PAGE>
IN WITNESS HEREOF, PDVSA Finance has caused this Instrument to
be duly executed.
PDVSA FINANCE LTD.
Address: Caledonian Bank & Trust Ltd.
Caledonian House
Mary Street, P.O. Box 1043
George Town, Grand Cayman
Cayman Islands
Attn: Telecopier:
By: /s/ Michael Austin
----------------------------
Name: Michael Austin
Title: Director
8
<PAGE>
Exhibit A
Amortization Schedule
(in millions of US dollars)
Balance after
Payment Date Principal Payment Interest Payment Principal Payment
- ------------ ----------------- ---------------- -----------------
2/10/99 $0.0 $2.7813500 $130.0
5/10/99 0.0 2.7813500 130.0
8/10/99 0.0 2.7813500 130.0
11/10/99 0.0 2.7813500 130.0
2/10/99 0.0 2.7813500 130.0
5/10/00 0.0 2.7813500 130.0
8/10/00 0.0 2.7813500 130.0
11/10/00 0.0 2.7813500 130.0
2/10/01 0.0 2.7813500 130.0
5/10/01 0.0 2.7813500 130.0
8/10/01 0.0 2.7813500 130.0
11/10/01 0.0 2.7813500 130.0
2/10/02 0.0 2.7813500 130.0
5/10/02 0.0 2.7813500 130.0
8/10/02 0.0 2.7813500 130.0
11/10/02 0.0 2.7813500 130.0
2/10/03 0.0 2.7813500 130.0
5/10/03 0.0 2.7813500 130.0
8/10/03 0.0 2.7813500 130.0
11/10/03 0.0 2.7813500 130.0
2/10/04 0.0 2.7813500 130.0
5/10/04 0.0 2.7813500 130.0
8/10/04 0.0 2.7813500 130.0
11/10/04 0.0 2.7813500 130.0
2/10/05 0.0 2.7813500 130.0
5/10/05 0.0 2.7813500 130.0
8/10/05 0.0 2.7813500 130.0
11/10/05 0.0 2.7813500 130.0
2/10/06 0.0 2.7813500 130.0
5/10/06 0.0 2.7813500 130.0
8/10/06 0.0 2.7813500 130.0
11/10/06 0.0 2.7813500 130.0
9
<PAGE>
Amortization Schedule
(in millions of US dollars)
(continued)
Balance after
Payment Date Principal Payment Interest Payment Principal Payment
- ------------ ----------------- ---------------- -----------------
2/10/07 0.0 2.7813500 130.0
5/10/07 0.0 2.7813500 130.0
8/10/07 0.0 2.7813500 130.0
11/10/07 0.0 2.7813500 130.0
2/10/08 0.0 2.7813500 130.0
5/10/08 0.0 2.7813500 130.0
8/10/08 0.0 2.7813500 130.0
11/10/08 0.0 2.7813500 130.0
2/10/09 6.5 2.7813500 123.5
5/10/09 6.5 2.6422825 117.0
8/10/09 6.5 2.5032150 110.5
11/10/09 6.5 2.3641475 104.0
2/10/10 6.5 2.2250800 97.5
5/10/10 6.5 2.0860125 91.0
8/10/10 6.5 1.9469450 84.5
11/10/10 6.5 1.8078775 78.0
2/10/11 6.5 1.6688100 71.5
5/10/11 6.5 1.5297425 65.0
8/10/11 6.5 1.3906750 58.5
11/10/11 6.5 1.2516075 52.0
2/10/12 6.5 1.1125400 45.5
5/10/12 6.5 0.9734725 39.0
8/10/12 6.5 0.8344050 32.5
11/10/12 6.5 0.6953375 26.0
2/10/13 6.5 0.5562700 19.5
5/10/13 6.5 0.4172025 13.0
8/10/13 6.5 0.2781350 6.5
11/10/13 6.5 0.1390675 0.0
10
Exhibit 12.1
PDV America, Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Income before provision for income taxes 361,703 334,185 215,781 226,482 322,940
Distributions in excess of equity
earnings 46,180 33,506 -- -- --
Equity earnings (losses) in excess of
distributions -- -- (8,672) (19,090) (14,991)
Interest 180,241 209,465 194,362 186,546 157,575
Amortization of previously capitalized
interest 2,858 4,115 3,600 3,440 3,039
Portion of rent representative of interest
factor 11,333 13,000 11,000 10,928 11,305
------- ------- ------- ------- -------
Total earnings 602,315 594,271 416,071 408,306 479,868
======= ======= ======= ======= =======
Fixed Charges
Interest expense 180,241 209,465 194,362 186,546 157,575
Capitalized interest 5,000 7,800 12,000 5,000 12,000
Portion of rent representative of interest
factor 11,333 13,000 11,000 10,928 11,305
------- ------- ------- ------- -------
Total fixed charges 196,574 230,265 217,362 202,474 180,880
======= ======= ======= ======= =======
Ratio of earnings to fixed charges 3.06x 2.58x 1.91x 2.02x 2.65x
</TABLE>
EXHIBIT 21.1
List of PDV America, Inc. Subsidiaries
Subsidiary Jurisdiction
- ---------- ------------
CITGO Petroleum Corporation.............................................Delaware
Cit-Con Oil Corporation..............................................Delaware
CITGO Canada Petroleum Corporation...................................Delaware
CITGO Funding Corporation............................................Delaware
CITGO Funding Corporation II.........................................Delaware
CITGO Gulf Coast Refining, Inc.......................................Delaware
CITGO International Marketing, Inc. .................................Delaware
CITGO International Supply Company...................................Delaware
Champlin Corporation.................................................Delaware
CITGO Puerto Rico Petroleum Corporation..............................Delaware
CITGO Venezuela Supply Company.......................................Delaware
CITGO Refining Investment Company....................................Oklahoma
Trimark Insurance Company Ltd.........................................Bermuda
CITGO Investment Company.............................................Delaware
Cumene Associates, Inc............................................Delaware
Texas Phenol Plant Limited Partnership............................Texas
CITGO Pipeline Investment Company....................................Delaware
CITGO Pipeline Company............................................Delaware
CITGO Products Pipeline Company...................................Delaware
Lafitte Gas Pipeline Company......................................Delaware
CITGO East Coast Oil Corporation.....................................Delaware
CITGO Asphalt Refining Company.....................................New Jersey
TCP Petcoke Corporation..............................................Delaware
TCP Venezuela, Inc...................................................Delaware
CITGO Refining and Chemicals Company L.P.............................Delaware
PDV USA, Inc............................................................Delaware
VPHI Midwest, Inc.......................................................Delaware
PDV Midwest Refining, L.L.C..........................................Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from PDV America,
Inc.'s December 31, 1998 condensed consolidated financial statements and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000906422
<NAME> PDV America, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 34,822
<SECURITIES> 0
<RECEIVABLES> 664,426
<ALLOWANCES> 19,445
<INVENTORY> 835,128
<CURRENT-ASSETS> 1,600,502
<PP&E> 4,368,488
<DEPRECIATION> 948,435
<TOTAL-ASSETS> 7,075,410
<CURRENT-LIABILITIES> 1,218,999
<BONDS> 2,071,843
0
0
<COMMON> 1
<OTHER-SE> 2,601,331
<TOTAL-LIABILITY-AND-EQUITY> 7,075,410
<SALES> 10,960,247
<TOTAL-REVENUES> 11,107,068
<CGS> 10,305,535
<TOTAL-COSTS> 10,563,901
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,826
<INTEREST-EXPENSE> 180,241
<INCOME-PRETAX> 361,703
<INCOME-TAX> 130,985
<INCOME-CONTINUING> 230,718
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 230,718
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
