EXHIBIT 99.1
CITGO PETROLEUM
CORPORATION
Consolidated Financial Statements as of
December 31, 2002 and 2001, and for
Each of the Three Years in the Period
Ended December 31, 2002, and
Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of CITGO Petroleum
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income and comprehensive income, shareholder's equity
and cash flows for each of the three years in the period ended December 31,
2002. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CITGO Petroleum Corporation and
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 17, the accompanying consolidated financial statements for
2001 and 2000 have been restated to give retroactive effect to the January 1,
2002 merger of CITGO Petroleum Corporation and VPHI Midwest, Inc., which has
been accounted for in a manner similar to "pooling-of-interests" accounting.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 14, 2003
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
DECEMBER 31,
-------------------------------
2002 2001
(AS RESTATED
-SEE NOTE 17)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,025 $ 104,362
Accounts receivable, net 905,178 913,068
Due from affiliates 93,615 64,923
Inventories 1,090,915 1,109,346
Prepaid expenses and other 64,767 95,334
----------- -----------
Total current assets 2,187,500 2,287,033
PROPERTY, PLANT AND
EQUIPMENT - Net 3,750,166 3,292,469
RESTRICTED CASH 23,486 --
INVESTMENTS IN AFFILIATES 716,469 700,701
OTHER ASSETS 309,291 228,906
----------- -----------
$ 6,986,912 $ 6,509,109
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable 830,769 616,854
Payables to affiliates 417,634 265,517
Taxes other than income 229,072 219,699
Other 308,198 300,484
Current portion of long-term debt 190,664 107,864
Current portion of capital
lease obligation 22,713 20,358
----------- -----------
Total current liabilities 1,999,050 1,530,776
LONG-TERM DEBT 1,109,861 1,303,692
CAPITAL LEASE OBLIGATION 24,251 46,964
POSTRETIREMENT BENEFITS OTHER
THAN PENSIONS 247,762 218,706
OTHER NONCURRENT LIABILITIES 211,950 217,121
DEFERRED INCOME TAXES 834,880 767,338
MINORITY INTEREST -- 23,176
COMMITMENTS AND CONTINGENCIES
(Note 14)
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares
authorized, issued and outstanding 1 1
Additional capital 1,659,698 1,659,698
Retained earnings 925,114 745,102
Accumulated other comprehensive loss (25,655) (3,465)
----------- -----------
Total shareholder's equity 2,559,158 2,401,336
----------- -----------
$ 6,986,912 $ 6,509,109
=========== ===========
</Table>
See notes to consolidated financial statements
2
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2002 2001 2000
------------ ------------ ------------
(As restated - See Note 17)
REVENUES:
Net sales $ 19,080,845 $ 19,343,263 $ 21,941,263
Sales to affiliates 277,477 257,905 215,965
------------ ------------ ------------
19,358,322 19,601,168 22,157,228
Equity in earnings of affiliates 101,326 108,915 58,728
Insurance recoveries 406,570 52,868 --
Other income (expense), net (19,735) (58,103) (26,011)
------------ ------------ ------------
19,846,483 19,704,848 22,189,945
------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases of
$6,779,798, $6,558,203 and $8,676,970 from affiliates) 19,211,316 18,734,652 21,370,315
Selling, general and administrative expenses 284,871 292,127 226,601
Interest expense, excluding capital lease 67,394 69,164 85,565
Capital lease interest charge 7,017 9,128 11,019
Minority interest -- 1,971 1,808
------------ ------------ ------------
19,570,598 19,107,042 21,695,308
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 275,885 597,806 494,637
INCOME TAXES 95,873 206,222 182,627
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE 180,012 391,584 312,010
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- 13,600 --
------------ ------------ ------------
NET INCOME 180,012 405,184 312,010
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives, net of related
income taxes of $(850) -- (1,450) --
Less: reclassification adjustment for derivative losses included in
net income, net of related income taxes of $182 in 2002 and $265 in 2001 310 469 --
------------ ------------ ------------
310 (981) --
Foreign currency translation loss, net of related
income taxes of $(78) (172) -- --
Minimum pension liability adjustment, net of deferred taxes of $12,835 in
2002, $69 in 2001 and $(499) in 2000 (22,328) (119) 849
------------ ------------ ------------
Total other comprehensive (loss) income (22,190) (1,100) 849
------------ ------------ ------------
COMPREHENSIVE INCOME $ 157,822 $ 404,084 $ 312,859
============ ============ ============
</Table>
See notes to consolidated financial statements.
3
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(DOLLARS AND SHARES IN THOUSANDS)
- -------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
--------------------------------------------
MINIMUM FOREIGN CASH TOTAL
COMMON STOCK ADDITIONAL RETAINED PENSION CURRENCY FLOW SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS LIABILITY TRANSLATION HEDGES TOTAL EQUITY
-------- -------- ---------- ---------- --------- ----------- ------ --------- -------------
BALANCE, JANUARY 1, 2000
(As restated -
See Note 17) 1 $ 1 $1,667,305 $ 721,020 $ (3,214) $ -- $ -- $ (3,214) $2,385,112
Net income -- -- -- 312,010 -- -- -- -- 312,010
Other comprehensive income -- -- -- -- 849 -- -- 849 849
Tax allocation agreement
amendment -- -- (7,607) 10,788 -- -- -- -- 3,181
Dividend paid -- -- -- (225,000) -- -- -- -- (225,000)
------ ------ ---------- --------- -------- ------- ------- -------- ----------
BALANCE, DECEMBER 31, 2000
(As restated -
See Note 17) 1 1 1,659,698 818,818 (2,365) -- -- (2,365) 2,476,152
Net income -- -- -- 405,184 -- -- -- -- 405,184
Other comprehensive loss -- -- -- -- (119) -- (981) (1,100) (1,100)
Dividend paid -- -- -- (478,900) -- -- -- -- (478,900)
------ ------ ---------- --------- -------- ------- ------- -------- ----------
BALANCE, DECEMBER 31, 2001
(As restated -
See Note 17) 1 1 1,659,698 745,102 (2,484) -- (981) (3,465) 2,401,336
Net income -- -- -- 180,012 -- -- -- -- 180,012
Other comprehensive
(loss) income -- -- -- -- (22,328) (172) 310 (22,190) (22,190)
------ ------ ---------- --------- -------- ------- ------- -------- ----------
BALANCE, DECEMBER 31, 2002 1 $ 1 $1,659,698 $ 925,114 $(24,812) $ (172) $ (671) $(25,655) $2,559,158
====== ====== ========== ========= ======== ======= ======= ======== ==========
</Table>
See notes to consolidated financial statements.
4
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(Dollars in Thousands)
- -------------------------------------------------------------------------------
<Table>
<Caption>
2002 2001 2000
(AS RESTATED - SEE NOTE 17)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 180,012 $ 405,184 $ 312,010
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 298,686 288,882 290,450
Provision for losses on
accounts receivable 17,458 6,239 1,651
Loss on sale of investments -- -- 1
Deferred income taxes 37,642 115,025 52,945
Distributions in excess of equity
in earnings of affiliates 22,313 44,521 68,196
Other adjustments 3,992 24,680 26,260
Changes in operating assets
and liabilities:
Accounts receivable and
due from affiliates (40,009) 427,771 (348,229)
Inventories 18,431 42,960 (58,142)
Prepaid expenses and
other current assets 62,465 (84,280) 550
Accounts payable and
other current liabilities 315,266 (625,313) 512,753
Other assets (128,466) (90,984) (52,550)
Other liabilities 30,483 29,802 (2,609)
--------- --------- ---------
Total adjustments 638,261 179,303 491,276
--------- --------- ---------
Net cash provided by
operating activities 818,273 584,487 803,286
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (711,834) (253,465) (122,049)
Proceeds from sales of property,
plant and equipment 919 3,866 4,491
(Increase) decrease in
restricted cash (23,486) -- 3,015
Investments in LYONDELL-CITGO
Refining LP (32,000) (31,800) (17,600)
Loans to LYONDELL-CITGO Refining LP -- -- (7,024)
Investments in and advances to
other affiliates (22,484) (11,435) (14,500)
--------- --------- ---------
Net cash used in investing activities (788,885) (292,834) (153,667)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments of) proceeds
from short-term bank loans -- (37,500) 21,500
Net (repayments of) proceeds
from revolving bank loans (112,200) 391,500 (462,000)
Proceeds from loans from affiliates 39,000 -- --
Payments on private placement
senior notes (11,364) (39,935) (39,935)
Payments of master shelf
agreement notes (25,000) -- --
Payments on taxable bonds (31,000) (28,000) --
Proceeds from issuance of
tax-exempt bonds 68,502 28,000 --
Payments of capital
lease obligations (20,358) (26,649) (7,954)
Repayments of other debt (8,305) (14,845) (14,179)
Dividends paid -- (478,900) (225,000)
--------- --------- ---------
Net cash used in financing activities (100,725) (206,329) (727,568)
--------- --------- ---------
</Table>
(Continued)
5
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
2002 2001 2000
(AS RESTATED - SEE NOTE 17)
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS $ (71,337) $ 85,324 $ (77,949)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104,362 19,038 96,987
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,025 $ 104,362 $ 19,038
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 72,970 $ 83,972 $ 92,080
========= ========= =========
Income taxes, net of refunds of $50,733 in 2002 $ (45,745) $ 296,979 $ 60,501
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITIES:
Tax allocation agreement amendment $ -- $ -- $ 3,181
========= ========= =========
</Table>
See notes to consolidated financial statements. (Concluded)
6
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AS RESTATED - SEE NOTE 17)
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - CITGO Petroleum Corporation ("CITGO") is a
subsidiary of PDV America, Inc. ("PDV America"), an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil
company of the Bolivarian Republic of Venezuela.
CITGO manufactures or refines and markets quality transportation fuels as
well as lubricants, refined waxes, petrochemicals, asphalt and other
industrial products. CITGO owns and operates three modern, highly complex
crude oil refineries (Lake Charles, Louisiana, Corpus Christi, Texas, and
Lemont, Illinois) and two asphalt refineries (Paulsboro, New Jersey, and
Savannah, Georgia) with a combined aggregate rated crude oil refining
capacity of 756 thousand barrels per day ("MBPD"). CITGO also owns a
minority interest in LYONDELL-CITGO Refining LP, a limited partnership
(formerly a limited liability company) that owns and operates a refinery in
Houston, Texas, with a rated crude oil refining capacity of 265 MBPD.
CITGO's consolidated financial statements also include accounts relating to
a lubricant and wax plant, pipelines, and equity interests in pipeline
companies and petroleum storage terminals.
CITGO's transportation fuel customers include primarily CITGO branded
wholesale marketers, convenience stores and airlines located mainly east of
the Rocky Mountains. Asphalt is generally marketed to independent paving
contractors on the East and Gulf Coasts and the Midwest of the United
States. Lubricants are sold principally in the United States to independent
marketers, mass marketers and industrial customers. 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. CITGO is also engaged in an effort to
sell lubricants, gasoline and distillates in various Latin American
markets.
PRINCIPLES OF CONSOLIDATION - The condensed consolidated financial
statements include the accounts of CITGO and its subsidiaries including
VPHI Midwest, Inc. ("VPHI" - See Note 17 "Change in Reporting Entity") and
its wholly owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR"), and
Cit-Con Oil Corporation ("Cit-Con"), which was 65 percent owned by CITGO
through December 31, 2001 (collectively referred to as the "Company"). On
January 1, 2002, CITGO acquired the outstanding 35 percent interest in
Cit-Con from Conoco, Inc. The principal asset of Cit-Con is a lubricants
and wax plant in Lake Charles, Louisiana. This transaction did not have a
material effect on the consolidated financial position or results of
operations of the Company. The legal entity, Cit-Con Oil Corporation, was
dissolved effective April 1, 2002. All subsidiaries are wholly owned. All
material intercompany transactions and accounts have been eliminated.
The Company's investments in less than majority-owned affiliates are
accounted for by the equity method. 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.
7
ESTIMATES, RISKS AND UNCERTAINTIES - The preparation of financial
statements in conformity with accounting principles generally accepted in
the United States of America 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.
CITGO's operations can be influenced by 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 CITGO's 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 separately identifiable anticipated
undiscounted net cash flow from such asset 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 value of the long-lived asset. Fair value
is determined primarily using the anticipated net 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 that fair values
are reduced for disposal costs.
REVENUE RECOGNITION - Revenue from sales of products is recognized upon
transfer of title, based upon the terms of delivery.
SUPPLY AND MARKETING ACTIVITIES - The Company engages in the buying and
selling of crude oil to supply its refineries. The net results of this
activity are recorded in cost of sales. The Company also engages in the
buying and selling of refined products to facilitate the marketing of its
refined products. The results of this activity are recorded in cost of
sales and sales.
Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance
with the Company's last-in, first-out ("LIFO") inventory method. Exchanges
that are settled through payment or receipt of cash are accounted for as
purchases or sales.
EXCISE TAXES - The Company collects excise taxes on sales of gasoline and
other motor fuels. Excise taxes of approximately $3.2 billion, $3.3
billion, and $3.2 billion were collected from customers and paid to various
governmental entities in 2002, 2001, and 2000, respectively. Excise taxes
are not included in sales.
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.
INVENTORIES - Crude oil and refined product inventories are stated at the
lower of cost or market and cost is determined using the LIFO method.
Materials and supplies are valued 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 24 years; machinery and equipment - 5 to 24 years; and
vehicles - 3 to 10 years.
8
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 Company capitalizes interest on projects when construction entails
major expenditures over extended time periods. Such interest is allocated
to property, plant and equipment and amortized over the estimated useful
lives of the related assets. Interest capitalized totaled $4 million, $2
million, and $4 million, during 2002, 2001, and 2000, respectively.
RESTRICTED CASH - The Company has restricted cash of $23 million at
December 31, 2002 consisting of highly liquid investments held in trust
accounts in accordance with tax exempt revenue bonds due 2032. Funds are
released solely for financing the qualified capital expenditures as defined
in the bond agreement.
COMMODITY AND INTEREST RATE DERIVATIVES - The Company enters into petroleum
futures contracts, options and other over-the-counter commodity
derivatives, primarily to reduce its inventory purchase and product sale
exposure to market risk. In the normal course of business, the Company also
enters into certain petroleum commodity forward purchase and sale
contracts, which qualify as derivatives. The Company also enters into
various interest rate swap agreements to manage its risk related to
interest rate change on its debt.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). In June
2000, Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment
of SFAS No. 133," was issued. The statement, as amended, 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 adopted SFAS No. 133 on January 1, 2001. Certain of
the derivative instruments identified at January 1, 2001 under the
provisions of SFAS No. 133 had been previously designated in hedging
relationships that addressed the variable cash flow exposure of forecasted
transactions; under the transition provisions of SFAS No. 133, on January
1, 2001 the Company recorded an after-tax, cumulative-effect-type
transition charge of $1.5 million to accumulated other comprehensive income
related to these derivatives. Certain of the derivative instruments
identified at January 1, 2001, under the provisions of SFAS No. 133 had
been previously designated in hedging relationships that addressed the fair
value of certain forward purchase and sale commitments; under the
transition provisions of SFAS No. 133, on January 1, 2001 the Company
recorded fair value adjustments to the subject derivatives and related
commitments resulting in the recording of a net after-tax,
cumulative-effect-type transition charge of $0.2 million to net income. The
remaining derivatives identified at January 1, 2001 under the provisions of
SFAS No. 133, consisting of certain forward purchases and sales, had not
previously been considered derivatives under accounting principles
generally accepted in the United States of America; under the transition
provisions of SFAS No. 133, on January 1, 2001 the Company recorded an
after-tax, cumulative-effect-type benefit of $13.8 million to net income
related to these derivatives. The Company did not elect prospective hedge
accounting for derivatives existing at the date of adoption of SFAS No.
133.
Effective January 1, 2001, fair values of derivatives are recorded in other
current assets or other current liabilities, as applicable, and changes in
the fair value of derivatives not designated in hedging relationships are
recorded in income. Effective January 1, 2001, the Company's policy is to
9
elect hedge accounting only under limited circumstances involving
derivatives with initial terms of 90 days or greater and notional amounts
of $25 million or greater.
Prior to January 1, 2001, gains or losses on contracts which qualified as
hedges were recognized when the related inventory was sold or the hedged
transaction was consummated. Changes in the market value of commodity
derivatives which were not hedges were recorded as gains or losses in the
period in which they occurred. Additionally, prior to January 1, 2001,
premiums paid for purchased interest rate swap agreements were amortized to
interest expense over the terms of the agreements. Unamortized premiums
were included in other assets. The interest rate differentials received or
paid by the Company related to these agreements were recognized as
adjustments to interest expense over the term of the agreements.
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 seven years. Unamortized
costs are included in other assets. Amortization of refinery turnaround
costs is included in depreciation and amortization expense. Amortization
was $75 million, $69 million, and $68 million for 2002, 2001, and 2000,
respectively. Ordinary maintenance is expensed as incurred.
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is
expected to require companies to expense the non-capital portion of major
maintenance costs as incurred. The statement is expected to require that
any existing unamortized deferred non-capital major maintenance costs be
expensed immediately. The exposure draft indicates that this change will be
required to be adopted for fiscal years beginning after June 15, 2003, and
that the effect of expensing existing unamortized deferred non-capital
major maintenance costs will be reported as a cumulative effect of an
accounting change in the consolidated statement of income. Currently, the
AICPA is discussing the future of this exposure draft with the FASB. The
final accounting requirements and timing of required adoption are not known
at this time. At December 31, 2002, the Company had included turnaround
costs of $210 million in other assets. Company management has not
determined the amount, if any, of these costs that could be capitalized
under the provisions of the exposure draft.
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 that 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 and are
recorded without consideration of potential recoveries from third parties.
Subsequent adjustments to estimates, to the extent required, may be made as
more refined information becomes available.
INCOME TAXES - The Company is included in the consolidated U.S. federal
income tax return filed by PDV Holding, Inc., the direct parent of PDV
America. The Company's current and deferred income tax expense has been
computed on a stand-alone basis using an asset and liability approach.
NEW ACCOUNTING STANDARDS - In July 2001, the FASB issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142") which is fully effective in fiscal years beginning
after December 15, 2001, although certain provisions of SFAS No. 142 are
applicable to goodwill and other intangible assets acquired in transactions
completed after June 30, 2001. SFAS No. 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets and
requires that goodwill and intangibles with an indefinite life
10
no longer be amortized but instead be periodically reviewed for impairment.
The adoption of SFAS No. 142 did not materially impact the Company's
financial position or results of operations.
On January 1, 2003 the Company adopted Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS No.
143) which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset, except for certain obligations of lessees. The Company
has identified certain asset retirement obligations that are within the
scope of the standard, including obligations imposed by certain state laws
pertaining to closure and/or removal of storage tanks, contractual removal
obligations included in certain easement and right-of-way agreements
associated with the Company's pipeline operations, and contractual removal
obligations relating to a refinery processing unit located within a
third-party entity's facility. The Company cannot currently determine a
reasonable estimate of the fair value of its asset retirement obligations
due to the fact that the related assets have indeterminate useful lives
which preclude development of assumptions about the potential timing of
settlement dates. Such obligations will be recognized in the period in
which sufficient information exists to estimate a range or potential
settlement dates. Accordingly, the adoption of SFAS No. 143 did not impact
the Company's financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS No. 144") which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets by requiring that one
accounting model be used for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired, and by broadening the
presentation of discontinued operations to include more disposal
transactions. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years. The provisions of this statement generally are to be
applied prospectively; therefore, the adoption of SFAS No. 144 did not
impact the Company's financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This interpretation elaborates on
the disclosures to be made by a guarantor in its financial statements about
its obligations under certain guarantees that it has issued. It also
requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligations it has undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of the interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim or annual
periods ending after December 15, 2002. (See Note 14.)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN 46 defines variable interest entities and how an enterprise should
assess its interests in a variable interest entity to decide whether to
consolidate that entity. The interpretation requires certain minimum
disclosures with respect to variable interest entities in which an
enterprise holds significant variable interest but which it does not
consolidate. FIN 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains an interest after that date. It applies in the first
fiscal year or interim period beginning after June 15, 2003 to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public
11
enterprises as of the beginning of the applicable interim or annual period,
and it applies to nonpublic enterprises as of the end of the applicable
annual period. FIN 46 may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year
restated. The Company has not determined the impact on its financial
position or results of operations that may result from the application of
FIN 46.
12
2. RECENT DEVELOPMENTS
CITGO's ultimate parent is PDVSA, the national oil company of the
Bolivarian Republic of Venezuela and its largest supplier of crude oil. The
Company has long-term crude oil supply agreements with PDVSA for a portion
of the crude oil requirements for the Company's Lake Charles, Corpus
Christi, Paulsboro and Savannah refineries.
A nation-wide work stoppage by opponents of President Hugo Chavez began in
Venezuela on December 2, 2002, and has disrupted most activity in that
country, including the operations of PDVSA. A significant number of PDVSA's
employees abandoned their jobs during the month of December. PDVSA also
informed the Company that its production of crude oil and natural gas, as
well as the export of crude oil and refined petroleum products, were
severely affected by these events in December. Subsequently, the production
and export of crude oil has been progressively increasing. PDVSA has
reported that some employees are returning to work.
The Company continues to be able to locate and purchase adequate crude oil,
albeit at higher prices than under the contracts with PDVSA, to maintain
normal operations at its refineries and to meet its refined products
commitments to its customers. In December 2002, the Company received
approximately 61 percent of the crude oil volumes that it received from
PDVSA in December 2001. In January 2003, the Company received approximately
94 percent of the crude oil volumes that it received from PDVSA in January
2002. Historically, the Company purchased approximately 50 percent of its
total crude oil requirements from PDVSA. At December 31, 2002, the Company
had approximately $90 million in accounts payable related to crude oil
deliveries from PDVSA for which CITGO had not received invoices. The
reduction in supply from PDVSA and the purchase of crude oil from
alternative sources has had the effect of increasing CITGO's crude oil cost
and decreasing its gross margin and profit margin from what they would have
been had the crude oil been purchased under its long-term crude oil supply
contracts with PDVSA.
The Company's liquidity has been adversely affected recently as a result of
events directly and indirectly associated with the disruption in its
Venezuelan crude oil supply from PDVSA. During this supply disruption, the
Company has been successful in covering any shortfall with spot market
purchases, but those purchases generally require payment fifteen days
sooner than would be the case for comparable deliveries under its supply
agreements with PDVSA. This shortening of the Company's payment cycle has
increased its cash needs and reduced its liquidity. Also, a number of trade
creditors have sought to tighten credit payment terms on purchases that the
Company makes from them. That tightening, if adopted by all creditors,
would increase the Company's cash needs and reduce its liquidity.
In addition, all three major rating agencies lowered the Company's debt
ratings based upon, among other things, concerns regarding the supply
disruption. This downgrading caused a termination event under its existing
accounts receivable sale facility, which ultimately led to the repurchase
of $125 million in accounts receivable and cancellation of the facility on
January 31, 2003. That facility had a maximum size of $225 million of which
$125 million was used at the time of repurchase. The Company received a
letter of commitment from another lender on February 6, 2003 to replace the
cancelled facility. (See Note 6.)
Additionally, effective following the debt rating downgrade, the Company's
uncommitted, unsecured, short-term borrowing capacity is no longer
available.
Also, letter of credit providers for $76 million of the Company's
outstanding letters of credit have indicated that they will not renew such
letters of credit. These letters of credit support
13
approximately $75 million of tax-exempt bond issues that were issued
previously for the Company's benefit. The Company has an additional $231
million of letters of credit outstanding that back or support other bond
issues that it has issued through governmental entities, which are subject
to renewal during 2003. The Company has not received notice from the
issuers of these additional letters of credit indicating an intention not
to renew. The Company is working on replacing the letters of credit that
will not be renewed with letters of credit issued under its revolving
credit facilities. The Company is also considering arranging for the
redemption of certain tax-exempt bonds and the issuance of new tax-exempt
bonds that would not require letter of credit support.
Operating cash flow represents a primary source for meeting the Company's
liquidity requirements; however, the termination of its accounts receivable
sale facility, the possibility of additional tightened payment terms and
the possible need to replace non-renewing letters of credit has prompted
the Company to examine alternative arrangements to supplement and improve
its liquidity. CITGO management believes that the Company has adequate
liquidity from existing sources to support its operations for the
foreseeable future.
The Company is currently preparing a bond offering of approximately $550
million. The Company currently expects to use the net proceeds for general
corporate purposes. However, the Company may dividend up to $500 million of
the net proceeds to PDV America to provide funds for the repayment of PDV
America's 7 7/8% Senior notes due August 1, 2003 if permitted under the
indenture governing the proposed notes to make such a dividend.
3. REFINERY AGREEMENTS
An affiliate of PDVSA acquired a 50 percent equity interest in a refinery
in Chalmette, Louisiana ("Chalmette") in October 1997, and assigned to
CITGO its option to purchase up to 50 percent of the refined products
produced at the refinery through December 31, 2000 (Note 5). CITGO
exercised this option during 2000, and acquired approximately 67 MBPD of
refined products from the refinery, approximately one-half of which was
gasoline. The affiliate did not assign this option to CITGO for 2001 or
2002.
In October 1998, an affiliate of PDVSA acquired a 50 percent 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 percent 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 5). Pursuant to the above
arrangement, CITGO acquired approximately 100 MBPD, 106 MBPD, and 125 MBPD
of refined products from HOVENSA during 2002, 2001, and 2000, respectively,
approximately one-half of which was gasoline.
4. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%)
and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery
processes heavy crude oil supplied by
14
PDVSA under a long-term supply contract that expires in 2017. CITGO
purchases substantially all of the gasoline, diesel and jet fuel produced
at the refinery under a long-term contract (Note 5).
At various times since April 1998, PDVSA, pursuant to its contractual
rights, declared force majeure and reduced deliveries of crude oil to
LYONDELL-CITGO; this required LYONDELL-CITGO to obtain alternative sources
of crude oil supply in replacement, which resulted in lower operating
margins. Most recently, LYONDELL-CITGO received notice of force majeure
from PDVSA in December 2002. Crude oil was purchased in the spot market to
replace the volume not delivered under the contract during December 2002.
By February 2003, crude oil deliveries had returned to contract volumes.
As of December 31, 2002, CITGO has outstanding loans to LYONDELL-CITGO of
$35 million. The notes bear interest at market rates, which were
approximately 2.4 percent, 2.2 percent, and 6.9 percent at December 31,
2002, 2001 and 2000. Principal and interest are due in December 2004.
Accordingly, 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 which differs from
participation interests. Cash distributions are allocated to the Owners
based on participation interest. Information on CITGO's investment in
LYONDELL-CITGO follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2002 2001 2000
(000'S OMITTED)
Carrying value of investment $ 518,279 $ 507,940 $ 518,333
Notes receivable 35,278 35,278 35,278
Participation interest 41% 41% 41%
Equity in net income $ 77,902 $ 73,983 $ 41,478
Cash distributions received 88,663 116,177 100,972
Summary of LYONDELL-CITGO's financial position:
Current assets $ 357,000 $ 227,000 $ 310,000
Noncurrent assets 1,400,000 1,434,000 1,386,000
Current liabilities:
Debt -- 50,000 470,000
Distributions payable to partners 181,000 29,000 16,000
Other 333,000 298,000 381,000
Noncurrent liabilities (including debt of
$450,000 at December 31, 2002 and 2001
and $-0- at December 31, 2000) 840,000 776,000 321,000
Partners' capital 403,000 508,000 508,000
Summary of operating results:
Revenue $3,392,000 $3,284,000 $4,075,000
Gross profit 299,000 317,000 250,000
Net income 213,000 203,000 128,000
</Table>
15
On December 11, 2002, LYONDELL-CITGO completed a refinancing of its working
capital revolver and its term bank loan. The new term loan and working
capital revolver will mature in June 2004.
16
5. RELATED PARTY TRANSACTIONS
The Company purchases approximately one-half 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. The Company purchased
$3.3 billion, $3.0 billion, and $3.2 billion of crude oil, feedstocks and
other products from wholly owned subsidiaries of PDVSA in 2002, 2001, and
2000, respectively, under these and other purchase agreements.
At various times since April 1998, PDVSA deliveries of crude oil to CITGO
were less than contractual base volumes due to PDVSA's declaration of force
majeure pursuant to all four long-term crude oil supply contracts described
above. Under a force majeure declaration, PDVSA may reduce the amount of
crude oil that it would otherwise be required to supply under these
agreements. When PDVSA reduces its delivery of crude oil under these crude
oil supply agreements, CITGO may obtain alternative sources of crude oil
which may result in increased crude costs or increase its purchases of
refined products. As a result, the Company was required to obtain
alternative sources of crude oil. See Note 2 for a description of events
that led to further disruptions of supplies in December 2002.
During 2002, 2001 and 2000, PDVSA did not deliver naphtha pursuant to
certain contracts and has made or will make contractually specified
payments in lieu thereof.
The crude oil supply contracts generally 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, 2002 and
2001, $262 million and $185 million, respectively, were included in
payables to affiliates as a result of these transactions. At December 31,
2002, the Company had approximately $90 million in accounts payable related
to crude oil deliveries from PDVSA for which CITGO had not received
invoices.
The Company 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 $3.5 billion, $3.4
billion, and $5.3 billion for 2002, 2001, and 2000, respectively. At
December 31, 2002 and 2001, $110 million and $73 million, respectively,
were included in payables to affiliates as a result of these transactions.
The Company had refined product, feedstock, and other product sales to
affiliates, primarily at market-related prices, of $277 million, $248
million, and $205 million in 2002, 2001, and 2000, respectively. At
December 31, 2002 and 2001, $94 million and $64 million, respectively, was
included in due from affiliates as a result of these and related
transactions.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and terminating value due under the lease of
the Corpus Christi refinery facilities described in Note 15. The Company
has also guaranteed debt of certain affiliates (Note 14).
In August 2002, three affiliates entered into agreements to advance excess
cash to CITGO from time to time under demand notes for amounts of up to a
maximum of $10 million with PDV Texas, Inc. ("PDV Texas"), $30 million with
PDV America and $10 million with PDV Holding, Inc. ("PDV
17
Holding"). The notes bear interest at rates equivalent to 30-day LIBOR plus
.875% payable quarterly. Amounts outstanding on these notes at December 31,
2002 were $5 million, $30 million and $4 million from PDV Texas, PDV
America and PDV Holding, respectively and are included in payables to
affiliates in the accompanying consolidated balance sheet.
The Company and PDV Holding are parties to a tax allocation agreement that
is designed to provide PDV Holding with sufficient cash to pay its
consolidated income tax liabilities. PDV Holding appointed CITGO as its
agent to handle the payment of such liabilities on its behalf. As such,
CITGO calculates the taxes due, allocates the payments among the members
according to the agreement and bills each member accordingly. Each member
records its amounts due or payable to CITGO in a related party payable
account. At December 31, 2002 and 2001, CITGO had net related party
receivables related to federal income taxes of $25 million and $23 million,
respectively.
Prior to the formation of PDV Holding as the common parent in the 1997 tax
year, the Company and PDV America were parties to a tax allocation
agreement. In 1998, $8 million due from CITGO to PDV America under this
agreement for the 1997 tax year was classified as a noncash contribution of
capital. In 1999, $11 million due from PDV America to CITGO under this
agreement for the 1998 tax year was classified as a noncash dividend.
Amendment No. 2 to the Tax Allocation Agreement was executed during 2000;
this amendment eliminated the provisions of the agreement that provided for
these noncash contribution and dividend classifications effective with the
1997 tax year. Consequently, the classifications made in the prior two
years were reversed in 2000. In the event that CITGO should cease to be
part of the consolidated federal income tax group, any amounts included in
shareholder's equity under this agreement are required to be settled
between the parties in cash (net $2 million payable to PDV America at
December 31, 2002 and 2001).
At December 31, 2002, CITGO has federal income taxes payable of $20 million
included in other current liabilities. At December 31, 2001, CITGO had
income tax prepayments of $76 million included in prepaid expenses.
6. ACCOUNTS RECEIVABLE
<Table>
<Caption>
2002 2001
(000'S OMITTED)
Trade $ 766,824 $ 718,319
Credit card 116,246 121,334
Other 39,313 87,195
--------- ---------
922,383 926,848
Allowance for uncollectible accounts (17,205) (13,780)
--------- ---------
$ 905,178 $ 913,068
========= =========
</Table>
Sales are made on account, based on pre-approved unsecured credit terms
established by CITGO management. The Company also has a proprietary credit
card program which allows commercial customers to purchase fuel at CITGO
branded outlets. Allowances for uncollectible accounts are established
based on several factors that include, but are not limited to, analysis of
specific customers, historical trends, current economic conditions and
other information.
The Company has a limited purpose consolidated subsidiary, CITGO Funding
Corporation, which established a non-recourse agreement to sell trade
accounts receivable to independent third parties. Under the terms of the
agreement, new receivables were added to the pool as collections
18
(administered by CITGO) reduced previously sold receivables. The amount
sold at any one time under the trade accounts receivable sales agreement
was limited to a maximum of $225 million (increased from $125 million
through an amendment in April 2000).
In January 2003, CITGO's debt rating was lowered based upon, among other
things, concerns regarding the supply disruption of crude oil from
Venezuela. This downgrade caused a termination event under the trade
accounts receivable sales agreement, which ultimately led to the repurchase
of $125 million in accounts receivable and cancellation of the facility on
January 31, 2003.
On February 6, 2003, the Company received a letter of commitment from
another lender to replace the cancelled facility. Under the terms of the
proposed agreement, new receivables will be added to the pool as
collections (administered by CITGO) reduce previously sold receivables. The
amount sold at any one time will be limited to a maximum of $200 million.
Fees and expenses of $3.3 million, $7.6 million, and $16 million related to
the agreements were recorded as other expense during the years ended
December 31, 2002, 2001 and 2000, respectively. In 2000, the Company
realized a gain of $5 million resulting from the reversal of the allowance
for uncollectible accounts related to certain receivables sold.
7. INVENTORIES
<Table>
<Caption>
2002 2001
(000'S OMITTED)
Refined product $ 781,495 $ 836,683
Crude oil 221,422 193,319
Materials and supplies 87,998 79,344
---------- ----------
$1,090,915 $1,109,346
========== ==========
</Table>
At December 31, 2002 and 2001, estimated net market values exceeded
historical cost by approximately $572 million and $174 million,
respectively.
The reduction of hydrocarbon LIFO inventory quantities resulted in a
liquidation of prior years' LIFO layers and decreased cost of goods sold by
$29 million in 2002.
8. PROPERTY, PLANT AND EQUIPMENT
<Table>
<Caption>
2002 2001
(000'S OMITTED)
Land $ 138,156 $ 137,927
Buildings and leaseholds 431,899 470,465
Machinery and equipment 4,532,889 3,951,191
Vehicles 24,597 23,866
Construction in process 384,869 219,938
----------- -----------
5,512,410 4,803,387
Accumulated depreciation and amortization (1,762,244) (1,510,918)
----------- -----------
$ 3,750,166 $ 3,292,469
=========== ===========
</Table>
19
Depreciation expense for 2002, 2001, and 2000 was $223 million, $220
million, and $222 million, respectively.
Other income (expense) includes gains and losses on disposals and
retirements of property, plant and equipment. Such net losses were
approximately $5 million, $24 million, and $11 million in 2002, 2001, and
2000, respectively.
9. INVESTMENTS IN AFFILIATES
In addition to LYONDELL-CITGO, the Company's investments in affiliates
consist of equity interests of 6.8 percent to 50 percent in joint interest
pipelines and terminals, including a 15.79 percent interest in Colonial
Pipeline Company; a 49.5 percent partnership interest in Nelson Industrial
Steam Company ("NISCO"), which is a qualified cogeneration facility; a 49
percent partnership interest in Mount Vernon Phenol Plant; and a 25 percent
interest in The Needle Coker Company. The carrying value of these
investments exceeded the Company's equity in the underlying net assets by
approximately $137.6 million and $139 million at December 31, 2002 and
2001, respectively.
At December 31, 2002 and 2001, NISCO had a partnership deficit. CITGO's
share of this deficit, as a general partner, was $34.0 million and $39.5
million at December 31, 2002 and 2001, respectively, which is included in
other noncurrent liabilities in the accompanying consolidated balance
sheets.
Information on the Company's investments, including LYONDELL-CITGO,
follows:
<Table>
<Caption>
DECEMBER 31,
-----------------------------------
2002 2001 2000
(000'S OMITTED)
Company's investments in affiliates
(excluding NISCO) $716,469 $700,701 $712,560
Company's equity in net income of affiliates 101,326 108,915 58,728
Dividends and distributions received from affiliates 123,639 153,435 126,600
</Table>
20
Selected financial information provided by the affiliates is summarized as
follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------------
2002 2001 2000
(000'S OMITTED)
Summary of financial position:
Current assets $ 740,019 $ 566,204 $ 638,297
Noncurrent assets 3,396,209 3,288,950 3,005,582
Current liabilities (including debt of $52,417,
$685,089 and $729,806 at December 31,
2002, 2001, and 2000, respectively) 846,623 1,240,391 1,336,989
Noncurrent liabilities (including debt of
$2,185,502, $1,460,196 and $1,274,069
at December 31, 2002, 2001, and 2000,
respectively) 2,863,505 2,082,573 1,874,465
Summary of operating results:
Revenues $4,906,397 $4,603,136 $5,221,382
Gross profit 879,907 781,630 700,317
Net income 449,779 397,501 325,489
</Table>
10. SHORT-TERM BANK LOANS
As of December 31, 2002, the Company has established $90 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 2002, 2001, and 2000
were 2.5 percent, 2.3 percent, and 6.4 percent, respectively. The Company
had no borrowings outstanding under these facilities at December 31, 2002
and 2001.
As of January 13, 2003, following a debt rating downgrade, this
uncommitted, unsecured, short-term borrowing capacity is no longer
available.
21
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
<Table>
<Caption>
2002 2001
(000'S OMITTED)
Revolving bank loans $ 279,300 $ 391,500
Senior Notes $200 million face amount, due 2006 with
interest rate of 7.875% 199,898 199,867
Private Placement Senior Notes, due 2003 to 2006 with an
interest rate of 9.30% 45,455 56,819
Master Shelf Agreement Senior Notes, due 2003 to
2009 with interest rates from 7.17% to 8.94% 235,000 260,000
Tax-Exempt Bonds, due 2004 to 2032 with variable
and fixed interest rates 425,872 357,370
Taxable Bonds, due 2026 to 2028 with
variable interest rates 115,000 146,000
----------- -----------
1,300,525 1,411,556
Current portion of long-term debt (190,664) (107,864)
----------- -----------
$ 1,109,861 $ 1,303,692
=========== ===========
</Table>
REVOLVING BANK LOANS - The Company's credit agreements with various banks
consist of (i) a $260 million, three-year, revolving bank loan maturing in
December 2005; (ii) a $260 million, 364-day, revolving bank loan maturing
in December 2003; and (iii) a $25 million, 364-day, revolving bank loan
maturing in May 2003, all of which are unsecured and have various interest
rate options. Interest rates on the revolving bank loans ranged from 2.4
percent to 2.5 percent at December 31, 2002; $279 million was outstanding
under these credit agreements at December 31, 2002.
SHELF REGISTRATION - SENIOR NOTES - In April 1996, the Company 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, the Company 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 the
Company under the shelf registration. No amounts were sold under this
agreement as of December 31, 2002.
PRIVATE PLACEMENT - At December 31, 2002, the Company has outstanding
approximately $45 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.
MASTER SHELF AGREEMENT - At December 31, 2002, the Company has outstanding
$235 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.
22
COVENANTS - The various debt agreements above contain certain covenants
that, depending upon the level of the Company's capitalization and
earnings, could impose limitations on the Company's ability to pay
dividends, incur additional debt, place liens on property, and sell fixed
assets. The Company's debt instruments described above do not contain any
covenants that trigger prepayment or increased costs as a result of a
change in its debt ratings. The Company was in compliance with the debt
covenants at December 31, 2002.
TAX-EXEMPT BONDS - At December 31, 2002, through state entities, CITGO has
outstanding $49.8 million of industrial development bonds for certain Lake
Charles port facilities and pollution control equipment and $356.2 million
of environmental revenue bonds to finance a portion of the Company's
environmental facilities at its Lake Charles and Corpus Christi refineries
and at the LYONDELL-CITGO refinery. The bonds bear interest at various
fixed and floating rates, which ranged from 2.1 percent to 8.0 percent at
December 31, 2002 and ranged from 2.5 percent to 6.0 percent at December
31, 2001. Additional credit support for the variable rate bonds is provided
through letters of credit.
PDVMR has issued $19.9 million of 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.
TAXABLE BONDS - At December 31, 2002, through state entities, the Company
has outstanding $115 million of taxable environmental revenue bonds to
finance a portion of the Company's environmental facilities at its Lake
Charles refinery and at the LYONDELL-CITGO refinery. Such bonds are secured
by letters of credit and have floating interest rates (2.5 percent at
December 31, 2002 and 3.1 percent at December 31, 2001). At the option of
the Company and upon the occurrence of certain specified conditions, all or
any portion of such taxable bonds may be converted to tax-exempt bonds.
During 2002, 2001 and 2000, $31 million, $28 million and $0 of originally
issued taxable bonds were converted to tax-exempt bonds.
DEBT MATURITIES - Future maturities of long-term debt as of December 31,
2002, are: 2003 - $190.7 million, 2004 - $47.2 million, 2005 - $161.3
million, 2006 - $251.2 million, 2007 - $61.8 million and $588.3 million
thereafter.
INTEREST RATE SWAP AGREEMENTS - The Company has entered into the following
interest rate swap agreements to reduce the impact of interest rate changes
on its variable interest rate debt:
<Table>
<Caption>
NOTIONAL PRINCIPAL AMOUNT
-------------------------------
EXPIRATION FIXED RATE 2002 2001
VARIABLE RATE INDEX DATE PAID (000'S OMITTED)
J.J. Kenny February 2005 5.30% $ 12,000 $ 12,000
J.J. Kenny February 2006 5.27% 15,000 15,000
J.J. Kenny February 2007 5.49% 15,000 15,000
------------- -------------
$ 42,000 $ 42,000
============= =============
</Table>
Interest expense includes $0.6 million in 2000 related to the net
settlements on these agreements. Effective January 1, 2001, changes in the
fair value of these agreements are recorded in other income (expense). The
fair value of these agreements at December 31, 2002, based on the estimated
23
amount that CITGO would receive or pay to terminate the agreements as of
that date and taking into account current interest rates, was a loss of
$3.5 million, the offset of which is recorded in the balance sheet caption
other current liabilities.
12. 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 expensed $23 million, $20
million and $17 million related to its contributions to these plans in
2002, 2001 and 2000, respectively.
PENSION BENEFITS - CITGO sponsors three qualified noncontributory defined
benefit pension plans, two covering eligible hourly employees and one
covering eligible salaried employees. CITGO also sponsors three
nonqualified defined benefit plans for certain eligible employees. The
qualified plans' assets include corporate securities, shares in 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.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - In addition to pension
benefits, CITGO also provides certain health care and life insurance
benefits for eligible salaried and hourly employees at retirement. These
benefits are subject to deductibles, copayment provisions and other
limitations and are primarily funded on a pay-as-you-go basis. CITGO
reserves the right to change or to terminate the benefits at any time.
24
The following sets forth the changes in benefit obligations and plan assets
for the CITGO pension and postretirement plans for the years ended December
31, 2002 and 2001, and the funded status of such plans reconciled with
amounts reported in the Company's consolidated balance sheets:
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
------------------------ ------------------------
2002 2001 2002 2001
(000S OMITTED) (000S OMITTED)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 336,917 $ 288,188 $ 260,696 $ 206,276
Service cost 17,171 15,680 7,191 5,754
Interest cost 24,007 21,798 18,603 15,708
Plan vesting changes 30 -- -- --
Actuarial loss 27,371 23,130 55,654 40,556
Benefits paid (11,670) (11,879) (7,993) (7,598)
--------- --------- --------- ---------
Benefit obligation at end of year 393,826 336,917 334,151 260,696
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year 263,953 272,889 1,115 1,053
Actual return on plan assets (20,666) (10,185) 67 62
Employer contribution 9,182 13,128 7,993 7,598
Benefits paid (11,670) (11,879) (7,993) (7,598)
--------- --------- --------- ---------
Fair value of plan assets at end of year 240,799 263,953 1,182 1,115
--------- --------- --------- ---------
Funded status (153,027) (72,965) (332,969) (259,581)
Unrecognized net actuarial loss (gain) 69,184 (1,991) 75,206 30,840
Unrecognized prior service cost 1,972 2,293 -- --
Net gain at date of adoption (207) (475) -- --
--------- --------- --------- ---------
Net amount recognized $ (82,078) $ (73,138) $(257,763) $(228,741)
========= ========= ========= =========
Amounts recognized in the Company's
consolidated balance sheets consist of:
Accrued benefit liability $ (91,093) $ (80,238) $(257,763) $(228,741)
Intangible asset 2,308 3,035 -- --
Accumulated other comprehensive income 6,707 4,065 -- --
--------- --------- --------- ---------
Net amount recognized $ (82,078) $ (73,138) $(257,763) $(228,741)
========= ========= ========= =========
</Table>
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2002 2001 2002 2001
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
DECEMBER 31:
Discount rate 6.75 % 7.25 % 6.75 % 7.25 %
Expected return on plan assets 8.50 % 9.00 % 6.00 % 6.00 %
Rate of compensation increase 5.00 % 5.00 % -- --
</Table>
25
For measurement purposes, a 10 percent pre-65 and an 11 percent post-65
annual rate of increase in the per capita cost of covered health care
benefits was assumed for 2002. These rates are assumed to decrease 1
percent per year to an ultimate level of 5 percent by 2008 for pre-65 and
2009 for post-65 participants, and to remain at that level thereafter.
<Table>
<Caption>
PENSION BENEFITS OTHER BENEFITS
------------------------------------- ------------------------------------
2002 2001 2000 2002 2001 2000
(000S OMITTED) (000S OMITTED)
Components of net periodic benefit cost:
Service cost $ 17,171 $ 15,680 $ 15,533 $ 7,191 $ 5,754 $ 5,769
Interest cost 24,007 21,798 19,680 18,603 15,708 14,392
Expected return on plan assets (23,668) (24,165) (24,397) (67) (63) (59)
Amortization of prior service cost 350 351 143 -- -- --
Amortization of net gain at date
of adoption (268) (268) (268) -- -- --
Recognized net actuarial gain 530 (3,021) (4,824) 11,288 -- (17,254)
-------- -------- -------- -------- -------- --------
Net periodic benefit cost $ 18,122 $ 10,375 $ 5,867 $ 37,015 $ 21,399 $ 2,848
======== ======== ======== ======== ======== ========
One-time adjustment $ -- $ -- $ 2,875 $ -- $ -- $ --
======== ======== ======== ======== ======== ========
</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 percent 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 $37.3 million, $32.7 million and
$0, respectively, as of December 31, 2002, and $33.4 million, $29.3 million
and $0, respectively, as of December 31, 2001.
Assumed health care cost trend rates 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:
<Table>
<Caption>
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(000'S OMITTED)
Increase (decrease) in total of service and interest cost
components $ 4,623 $ (3,679)
Increase (decrease) in postretirement benefit obligation 52,653 (42,496)
</Table>
PDVMR PENSION PLANS - In connection with the creation of PDVMR, on May 1,
1997, PDVMR assumed the responsibility for a former partnership'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
employees of the partnership who were participants in the plans as of April
30, 1997. At December 31, 2002 and 2001, plan assets consisted of equity
securities, bonds and cash.
26
The following sets forth the changes in benefit obligations and plan assets
for the CITGO pension and postretirement plans for the years ended December
31, 2002 and 2001, and the funded status of such plans reconciled with
amounts reported in the Company's consolidated balance sheets:
<Table>
<Caption>
2002 2001
-------- --------
(000S OMITTED)
Change in benefit obligation:
Benefit obligation at beginning of year $ 53,590 $ 51,446
Interest cost 3,873 3,934
Actuarial loss (gain) 1,079 (2)
Benefits paid (2,713) (1,788)
-------- --------
Benefit obligation at end of year 55,829 53,590
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year 60,288 66,737
Actual return on plan assets (7,886) (4,661)
Employer contribution 106 --
Benefits paid (2,713) (1,788)
-------- --------
Fair value of plan assets at end of year 49,795 60,288
-------- --------
Funded status (6,033) 6,698
Unrecognized net actuarial loss 21,676 6,091
-------- --------
Net amount recognized $ 15,643 $ 12,789
======== ========
Amounts recognized in the Company's consolidated balance sheets consist of:
Prepaid Pension Cost -- 13,179
Accrued benefit liability (6,033) (487)
Accumulated other comprehensive income 21,676 97
-------- --------
Net amount recognized $ 15,643 $ 12,789
======== ========
</Table>
<Table>
<Caption>
2002 2001
-------- --------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 6.75% 7.25%
Expected return on plan assets 8.50% 9.50%
</Table>
27
<Table>
<Caption>
2002 2001 2000
------- ------- -------
COMPONENTS OF NET PERIODIC BENEFIT CREDIT:
Interest cost $ 3,873 $ 3,934 $ 3,823
Expected return on plan assets (6,625) (6,421) (6,123)
Recognized net actuarial loss (gain) 4 3 (55)
------- ------- -------
Net periodic benefit credit $(2,748) $(2,484) $(2,355)
======= ======= =======
</Table>
The projected benefit obligation of the nonqualified plan (which equals the
accumulated benefit obligation for this plan) was $380,000 as of December
31, 2002 and $487,000 as of December 31, 2001. The plan is unfunded.
13. INCOME TAXES
The provisions for income taxes are comprised of the following:
<Table>
<Caption>
2002 2001 2000
(000'S OMITTED)
Current:
Federal $ 47,087 $ 84,960 $125,068
State 751 5,686 4,614
Foreign 222 -- --
-------- -------- --------
48,060 90,646 129,682
Deferred 47,813 115,576 52,945
-------- -------- --------
$ 95,873 $206,222 $182,627
======== ======== ========
</Table>
The federal statutory tax rate differs from the effective tax rate due to
the following:
<Table>
<Caption>
2002 2001 2000
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.4% 0.9% 1.6%
Dividend exclusions (3.0)% (1.2)% (1.3)%
Other 0.4% (0.2)% 1.6%
---- ---- ----
Effective tax rate 34.8% 34.5% 36.9%
==== ==== ====
</Table>
28
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the financial and tax bases of assets and liabilities,
and (ii) loss and tax credit carryforwards. The tax effects of significant
items comprising the Company's net deferred tax liability as of December
31, 2002 and 2001 are as follows:
<Table>
<Caption>
2002 2001
(000'S omitted)
Deferred tax liabilities:
Property, plant and equipment $ 754,990 $ 710,131
Inventories 81,912 93,459
Investments in affiliates 173,603 173,724
Other 95,886 58,170
---------- ----------
1,106,391 1,035,484
---------- ----------
Deferred tax assets:
Postretirement benefit obligations 99,234 88,049
Employee benefit accruals 58,002 57,243
Alternative minimum tax credit carryforwards 64,687 59,929
Net operating loss carryforwards 25,997 1,602
Marketing and promotional accruals 4,815 4,989
Other 48,275 51,970
---------- ----------
301,010 263,782
---------- ----------
Net deferred tax liability (of which $29,499 is included in current
assets at December 31, 2002 and $4,365 is included in current
liabilities at December 31, 2001.) $ 805,381 $ 771,702
========== ==========
</Table>
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.
14. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the
ordinary course of business 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 given
reporting period. The most significant lawsuits and claims are discussed
below.
A class action lawsuit brought by four former marketers of the UNO-VEN
Company ("UNO-VEN") in U.S. District Court in Wisconsin against UNO-VEN
alleging improper termination of the UNO-VEN Marketer Sales Agreement under
the Petroleum Marketing Practices Act in connection with PDVMR's 1997
acquisition of Unocal's interest in UNO-VEN has resulted in the judge
granting the Company's motion for summary judgment. The plaintiffs appealed
the summary judgment and the Seventh Circuit of the U.S. Court of Appeals
has affirmed the judgment. The time for an appeal to the U.S. Supreme court
has expired, and therefore, this action is concluded.
The Company has settled a lawsuit against PDVMR and CITGO in Illinois state
court which claimed damages as a result of PDVMR invoicing a partnership in
which it is a partner, and an
29
affiliate of the other partner of the partnership, allegedly excessive
charges for electricity by these entities' facilities located adjacent to
the Lemont, Illinois refinery. The electricity supplier to the refinery is
seeking recovery from the Company of alleged underpayments for electricity.
The Company has denied all allegations and is pursuing its defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery.
Approximately seventeen related lawsuits were filed in federal and state
courts in Corpus Christi, Texas against CITGO on behalf of approximately
9,000 individuals alleging property damages, personal injury and punitive
damages. In September 2002, CITGO reached an agreement to settle
substantially all of the claims related to this incident for an amount that
did not have a material financial impact on the Company.
In September 2002, a state District Court in Corpus Christi, Texas has
ordered CITGO to pay property owners and their attorneys approximately $6
million based on alleged settlement of class action property damage claims
as a result of alleged air, soil and groundwater contamination from
emissions released from CITGO's Corpus Christi, Texas refinery. CITGO has
appealed the ruling to Texas Court of Appeals.
Litigation is pending in federal court in Lake Charles, Louisiana against
CITGO by a number of current and former refinery employees and applicants
asserting claims of racial discrimination in connection with CITGO's
employment practices. A trial involving two plaintiffs resulted in verdicts
for the Company. The Court granted the Company summary judgment with
respect to another group of plaintiffs' claims, which rulings were appealed
and affirmed by the Fifth Circuit Court of Appeals. Trials of the remaining
cases are set to begin in December 2003. The Company does not expect that
the ultimate resolution of these cases will have an adverse material effect
on its financial condition or results of operations.
CITGO is among refinery defendants to state and federal lawsuits in New
York and state actions in Illinois and California alleging contamination of
water supplies by methyl tertiary butyl ether ("MTBE"), a component of
gasoline. Plaintiffs claim that MTBE is a defective product and that
refiners failed to adequately warn customers and the public about risks
associated with the use of MTBE in gasoline. These actions allege that MTBE
poses public health risks and seek testing, damages and remediation of the
alleged contamination. Plaintiffs filed putative class action lawsuits in
federal courts in Illinois, California, Florida and New York. CITGO was
named as a defendant in all but the California case. The federal cases were
all consolidated in a Multidistrict Litigation case in the United States
District Court for the Southern District of New York ("MDL 1358"). In July
2002, the court in the MDL case denied plaintiffs' motion for class
certification. The Company does not expect that the resolution of the MDL
and California lawsuits will have a material impact on CITGO's financial
condition or results of operations. In August 2002, a New York state court
judge handling two separate but related individual MTBE lawsuits dismissed
plaintiffs' product liability claims, leaving only traditional nuisance and
trespass claims for leakage from underground storage tanks at gasoline
stations near plaintiffs' water wells. Subsequently, a putative class
action involving the same leaking underground storage tanks has been filed.
CITGO anticipates filing a motion to dismiss the product liability claims
and will also oppose class certification. Also, in late October 2002, The
County of Suffolk, New York, and the Suffolk County Water Authority filed
suit in state court, claiming MTBE contamination of that county's water
supply. The judge in the Illinois state court action is expected to hear
plaintiffs' motion for class certification in that case sometime within the
next year.
In August 1999, the U.S. Department of Commerce rejected a petition filed
by a group of independent oil producers to apply antidumping measures and
countervailing duties against imports of crude oil from Venezuela, Iraq,
Mexico and Saudi Arabia. The petitioners appealed this decision
30
before the U.S. Court of International Trade based in New York, where the
matter is still pending. On September 19, 2000, the Court of International
Trade remanded the case to the Department of Commerce with instructions to
reconsider its August 1999 decision. The Department of Commerce was
required to make a revised decision as to whether or not to initiate an
investigation within 60 days. The Department of Commerce appealed to the
U.S. Court of Appeals for the Federal Circuit, which dismissed the appeal
as premature on July 31, 2001. The Department of Commerce issued its
revised decision, which again rejected the petition, in August 2001. The
revised decision was affirmed by the Court of International Trade at
December 17, 2002. The independent oil producers may or may not appeal the
Court of International Trade's decision.
Approximately 140 lawsuits are currently pending against the Company in
state and federal courts, primarily in Louisiana and Texas. The cases were
brought by former employees and contractor employees seeking damages for
asbestos related illnesses allegedly resulting from exposure at refineries
owned or operated by the Company in Lake Charles, Louisiana and Corpus
Christi, Texas. In many of these cases, there are multiple defendants. In
some cases, the Company is indemnified by or has the right to seek
indemnification for losses and expense that it may incur from prior owners
of the refineries or employers of the claimants. The Company does not
believe that the resolution of the cases will have an adverse material
effect on its financial condition or results of operations.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The U.S. refining industry is
required to comply with increasingly stringent product specifications under
the 1990 Clean Air Act Amendments for reformulated gasoline and low sulphur
gasoline and diesel fuel that have necessitated additional capital and
operating expenditures. Also, regulatory interpretations by the U.S. EPA
regarding "modifications" to refinery equipment under the New Source Review
("NSR"), provisions of the Clean Air Act have created uncertainty about the
extent to which additional capital and operating expenditures will be
required and administrative penalties imposed. In addition to the Clean Air
Act, CITGO is subject to various other federal, state and local
environmental laws and regulations which may require CITGO to take
additional compliance actions and also actions to remediate the effects on
the environment of prior disposal or release of petroleum, hazardous
substances and other waste and/or pay for natural resource damages.
Maintaining compliance with environmental laws and regulations could
require significant capital expenditures and additional operating costs.
Also, numerous other factors affect the Company's plans with respect to
environmental compliance and related expenditures.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. CITGO believes the amounts provided in its consolidated
financial statements, as prescribed by generally accepted accounting
principles, are adequate in light of probable and estimable liabilities and
obligations. However, there can be no assurance that the actual amounts
required to discharge alleged liabilities and obligations and to comply
with applicable laws and regulations will not exceed amounts provided for
or will not have a material adverse affect on its consolidated results of
operations, financial condition and cash flows.
In 1992, the Company reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at the Lake Charles refinery by 1994. A mutually acceptable
closure plan was filed with the LDEQ in 1993. The Company and its former
owner are participating in the closure and sharing the related costs based
on estimated contributions of waste and ownership periods. The remediation
commenced in December 1993. In 1997, the Company presented a proposal to
the LDEQ revising the 1993 closure plan. In 1998 and 2000, the Company
submitted further revisions as requested by the LDEQ. The LDEQ issued an
31
administrative order in June 2002 that addressed the requirements and
schedule for proceeding to develop and implement the corrective action or
closure plan for these surface impoundments and related waste units.
Compliance with the terms of the administrative order has begun.
The Texas Commission on Environmental Quality ("TCEQ") conducted a
multi-media investigation of the Corpus Christi Refinery during the second
quarter of 2002 and has issued a Notice of Enforcement to the Company which
identifies approximately 35 items of alleged violations of Texas
environmental regulations. The Company anticipates that penalties will be
proposed with respect to these matters, but no amounts have yet been
specified.
In June 1999, CITGO and numerous other industrial companies received notice
from the U.S. EPA that the U.S. EPA believes these companies have
contributed to contamination in the Calcasieu Estuary, in the proximity of
Lake Charles, Calcasieu Parish, Louisiana and are Potentially Responsible
Parties ("PRPs") under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). The U.S. EPA made a demand for
payment of its past investigation costs from CITGO and other PRPs and is
conducting a Remedial Investigation/Feasibility Study ("RI/FS") under its
CERCLA authority. CITGO and other PRPs may be potentially responsible for
the costs of the RI/FS, subsequent remedial actions and natural resource
damages. CITGO disagrees with the U.S. EPA's allegations and intends to
contest this matter.
In January and July 2001, CITGO received Notices of Violation ("NOVs") from
the U.S. EPA alleging violations of the Federal Clean Air Act. The NOVs are
an outgrowth of an industry-wide and multi-industry U.S. EPA enforcement
initiative alleging that many refineries and electric utilities modified
air emission sources without obtaining permits or installing new control
equipment under the New Source Review provisions of the Clean Air Act. The
NOVs followed inspections and formal Information Requests regarding the
Company's Lake Charles, Louisiana and Corpus Christi, Texas refineries and
the Lemont, Illinois refinery. Since mid-2002, CITGO has been engaged in
settlement negotiations with the U.S. EPA. The settlement negotiations have
focused on different levels of air pollutant emission reductions and the
merits of various types of control equipment to achieve those reductions.
No settlement agreement, or agreement in principal, has been reached. Based
primarily on the costs of control equipment reported by the U.S. EPA and
other petroleum companies and the types and number of emission control
devices that have been agreed to in previous petroleum companies' NSR
settlement with the U.S. EPA, CITGO estimates that the capital costs of a
settlement with the U.S. EPA could range from $130 million to $200 million.
Any such capital costs would be incurred over a period of years,
anticipated to be from 2003 to 2008. Also, this cost estimate range, while
based on current information and judgment, is dependent on a number of
subjective factors, including the types of control devices installed, the
emission limitations set for the units the year the technology may be
installed, and possible future operational changes. CITGO also may be
subject to possible penalties. If settlement discussions fail, CITGO is
prepared to contest the NOVs. If CITGO is found to have violated the
provisions cited in the NOVs CITGO estimates the capital expenditures or
penalties that might result could range up to $290 million to be incurred
over a period of years if a court makes a number of legal interpretations
that are adverse to CITGO.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations
covering benzene emissions from wastewater treatment operations at the
Lemont, Illinois refinery operated by CITGO. CITGO is in settlement
discussions with the U.S. EPA. The Company believes this matter will be
consolidated with the matters described in the previous paragraph.
32
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air
quality regulations at the Lake Charles, Louisiana refinery. CITGO is in
settlement discussions with the LDEQ.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of the Company's and its
subsidiaries' facilities and operations. Those audits have the potential to
reveal matters that those authorities believe represent non-compliance in
one or more respects with regulatory requirements and for which those
authorities may seek corrective actions and/or penalties in an
administrative or judicial proceeding. Other than matters described above,
based upon current information, the Company is not aware that any such
audits or their findings have resulted in the filing of such a proceeding
or is the subject of a threatened filing with respect to such a proceeding,
nor does the Company believe that any such audit or their findings will
have a material adverse effect on its future business and operating
results.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, CITGO'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.
Increasingly stringent environmental regulatory provisions and obligations
periodically require additional capital expenditures. During 2002, CITGO
spent approximately $148 million for environmental and regulatory capital
improvements in its operations. Management currently estimates that CITGO
will spend approximately $1.3 billion for environmental and regulatory
capital projects over the five-year period 2003-2007. These estimates may
vary due to a variety of factors.
SUPPLY AGREEMENTS - The Company purchases the crude oil processed at its
refineries and also purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical
issues. In addition to supply agreements with various affiliates (Notes 3
and 5), the Company has various other crude oil, refined product and
feedstock purchase agreements with unaffiliated entities with terms ranging
from monthly to annual renewal. The Company believes these sources of
supply are reliable and adequate for its current requirements.
THROUGHPUT AGREEMENTS - The Company has throughput agreements with certain
pipeline affiliates (Note 9). These throughput agreements may be used to
secure obligations of the pipeline affiliates. Under these agreements, the
Company may be required to provide its pipeline affiliates with additional
funds through advances against future charges for the shipping of petroleum
products. The Company currently ships on these pipelines and has not been
required to advance funds in the past. At December 31, 2002, the Company
has no fixed and determinable, unconditional purchase obligations under
these agreements.
COMMODITY DERIVATIVE ACTIVITY - As of December 31, 2002 the Company's
petroleum commodity derivatives included exchange traded futures contracts,
forward purchase and sale contracts, exchange traded and over-the-counter
options, and over-the-counter swaps. At December 31, 2002, the balance
sheet captions other current assets and other current liabilities include
$29.5 million and $32.9 million, respectively, related to the fair values
of open commodity derivatives.
33
GUARANTEES - As of December 31, 2002, the Company has guaranteed the debt
of others in a variety of circumstances including letters of credit issued
for an affiliate, bank debt of an affiliate, bank debt of an equity
investment, bank debt of customers and customer debt related to the
acquisition of marketing equipment as shown in the following table:
<Table>
<Caption>
(000s OMITTED)
Letters of credit $50,740
Bank debt
Affiliate 10,000
Equity investment 5,500
Customers 4,471
Financing debt of customers
Equipment acquisition 2,766
-------
Total $73,477
=======
</Table>
In each case, if the debtor fails to meet its obligation, CITGO would be
obligated to make the required payment. The guarantees related to letters
of credit, affiliate's bank debt and equity investment bank debt expire in
2003. The guarantees related to customer bank debt expire between 2004 and
2009. The guarantees related to financing debt associated with equipment
acquisition by customers expire between 2003 and 2007. The Company has not
recorded any amounts on the Company's balance sheet relating to these
guarantees.
In the event of debtor default on the letters of credit, CITGO has been
indemnified by PDV Holding, Inc., the direct parent of PDV America. In the
event of debtor default on the affiliate's and equity investment bank debt,
CITGO has no recourse. In the event of debtor default on customer bank
debt, CITGO generally has recourse to personal guarantees from principals
or liens on property, except in one case, in which the guaranteed amount is
$170 thousand, CITGO has no recourse. In the event of debtor default on
financing debt incurred by customers, CITGO would receive an interest in
the equipment being financed after making the guaranteed debt payment.
CITGO has granted indemnities to the buyers in connection with past sales
of product terminal facilities. These indemnities provide that CITGO will
accept responsibility for claims arising from the period in which CITGO
owned the facilities. Due to the uncertainties in this situation, the
Company is not able to estimate a liability relating to these indemnities.
The Company has not recorded a liability on its balance sheet relating to
product warranties because historically, product warranty claims have not
been significant.
OTHER CREDIT AND OFF-BALANCE SHEET RISK INFORMATION AS OF DECEMBER 31, 2002
- The Company has outstanding letters of credit totaling approximately $451
million, which includes $428 million related to CITGO's tax-exempt and
taxable revenue bonds and $20.3 million related to PDVMR's pollution
control bonds (Note 11).
The Company has also acquired surety bonds totaling $71 million primarily
due to requirements of various government entities. The Company does not
expect liabilities to be incurred related to such guarantees, letters of
credit or surety bonds.
34
Neither the Company nor the counterparties are required to collateralize
their obligations under interest rate swaps or over-the-counter derivative
commodity agreements. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to these agreements. The Company does
not anticipate nonperformance by the counterparties, which consist
primarily of major financial institutions.
Management considers the credit risk to the Company related to its
commodity and interest rate derivatives to be insignificant during the
periods presented.
15. LEASES
The Company leases certain of its Corpus Christi refinery facilities under
a capital lease. The basic term of the lease expires on January 1, 2004;
however, the Company may renew the lease until January 31, 2011, the date
of its option to purchase the facilities for a nominal amount. Capitalized
costs included in property, plant and equipment related to the leased
assets were approximately $209 million at December 31, 2002 and 2001.
Accumulated amortization related to the leased assets was approximately
$134 million and $126 million at December 31, 2002 and 2001, respectively.
Amortization is included in depreciation expense.
The Company also has various noncancelable operating leases, primarily for
product storage facilities, office space, computer equipment, vessels and
vehicles. Rent expense on all operating leases totaled $102 million in
2002, $77 million in 2001, and $63 million in 2000. Future minimum lease
payments for the capital lease and noncancelable operating leases are as
follows:
<Table>
<Caption>
CAPITAL OPERATING
LEASE LEASES TOTAL
YEAR (000'S OMITTED)
2003 $ 27,375 $105,580 $132,955
2004 5,000 64,296 69,296
2005 5,000 37,171 42,171
2006 5,000 21,038 26,038
2007 5,000 14,393 19,393
Thereafter 16,000 12,659 28,659
-------- -------- --------
Total minimum lease payments 63,375 $255,137 $318,512
======== ========
Amount representing interest 16,411
--------
Present value of minimum lease payments 46,964
Current portion (22,713)
--------
$ 24,251
========
</Table>
35
16. FAIR VALUE INFORMATION
The following estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative
of the amounts that the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
The carrying amounts of cash equivalents approximate fair values. The
carrying amounts and estimated fair values of the Company's other financial
instruments are as follows:
<Table>
<Caption>
2002 2001
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(000'S OMITTED) (000'S OMITTED)
LIABILITIES:
Long-term debt $ 1,300,524 $ 1,285,795 $ 1,411,556 $ 1,423,388
DERIVATIVE AND OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS -
UNREALIZED LOSSES:
Interest rate swap agreements (3,450) (3,450) (2,816) (2,816)
Guarantees of debt -- (2,012) -- (1,470)
Letters of credit -- (6,548) -- (5,903)
Surety bonds -- (303) -- (292)
</Table>
At February 11, 2003, using current rates, the estimated fair values of
guarantees of debt and letters of credit are approximately $4.2 million and
$13.5 million, respectively.
SHORT-TERM BANK LOANS AND LONG-TERM DEBT - The fair value of short-term
bank loans and long-term debt is based on interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities.
INTEREST RATE SWAP AGREEMENTS - The fair value of these agreements is based
on the estimated amount that the Company would receive or pay to terminate
the agreements at the reporting dates, taking into account current interest
rates and the current creditworthiness of the counterparties.
GUARANTEES, LETTERS OF CREDIT AND SURETY BONDS - The estimated fair value
of contingent guarantees of third-party debt, letters of credit and surety
bonds is based on fees currently charged for similar one-year agreements or
on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and
current estimates of fair value may differ significantly from the amounts
presented herein.
36
17. CHANGE IN REPORTING ENTITY
On January 1, 2002, PDV America, the parent company of CITGO, made a
contribution to the capital of CITGO of all of the common stock of PDV
America's wholly owned subsidiary, VPHI. No additional shares of the
capital stock of CITGO were issued in connection with the contribution. The
principal asset of VPHI is a petroleum refinery owned by its wholly owned
subsidiary, PDVMR, located in Lemont, Illinois. CITGO has operated this
refinery and purchased substantially all of its primary output, consisting
of transportation fuels and petrochemicals, since 1997.
Effective January 1, 2002, the accounts of VPHI were included in the
consolidated financial statements of CITGO at the historical carrying value
of PDV America's investment in VPHI. CITGO recorded the effects of this
transaction in a manner similar to pooling-of-interests accounting;
accordingly the accompanying financial statements and notes thereto have
been restated to present the Company's consolidated financial position as
of December 31, 2001 and results of operations for the years ended December
31, 2001 and 2000 as if the transaction had occurred on January 1, 2000.
All significant intercompany transactions, balances and profits were
eliminated; no other adjustments to previously reported results of
operations of either entity were necessary in preparation of the restated
financial statements.
The following presents the separate results of operations for CITGO and
VPHI for the years ended December 31, 2001 and 2000:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
(000'S OMITTED)
CITGO net income as previously reported $317,024 $231,984
Effect of VPHI 88,160 80,026
-------- --------
Net income restated $405,184 $312,010
======== ========
</Table>
The restated results of operations do not purport to be indicative of the
results of operations that actually would have resulted had the combination
occurred on January 1, 2000, or of future results of operations of the
combined entities.
37
18. INSURANCE RECOVERIES
On August 14, 2001, a fire occurred at the crude oil distillation unit of
the Lemont refinery. The crude unit was destroyed and the refinery's other
processing units were temporarily taken out of production. A new crude unit
was operational at the end of May 2002.
On September 21, 2001, a fire occurred at the hydrocracker unit of the Lake
Charles refinery. The hydrocracker unit was damaged and operations at other
processing units were temporarily affected. Operation of the other refinery
units returned to normal on October 16, 2001. Operations at the
hydrocracker resumed on November 22, 2001.
The Company recognizes property damage insurance recoveries in excess of
the amount of recorded losses and related expenses, and business
interruption insurance recoveries when such amounts are realized. During
the years ended December 31, 2002 and 2001, the Company recorded $407
million and $52 million, respectively, of insurance recoveries related to
these fires. Additionally, during 2001, the Company recorded in other
income (expense), property losses and related expenses totaling $54.3
million related to these fires. The Company received cash proceeds of $442
million and $29 million during the years ended December 31, 2002 and 2001.
The Company expects to recover additional amounts related to the Lemont
refinery event subject to final settlement negotiations.
******
38