1 FORM 10/A AMENDMENT NO. 3 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934 CITGO PETROLEUM CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 73-1173881 - --------------------------------------------- --------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE WARREN PLACE 6100 SOUTH YALE AVENUE TULSA, OKLAHOMA 74136 - --------------------------------------------- --------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (918) 495-4000 Securities to be registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED - --------------------------------------------- --------------------------------------------- 7 7/8% Senior Notes Due 2006 New York Stock Exchange - --------------------------------------------- --------------------------------------------- - --------------------------------------------- --------------------------------------------- Securities to be registered pursuant to Section 12(g) of the Act: - -------------------------------------------------------------------------------- (Title of class) - -------------------------------------------------------------------------------- (Title of class) 2 Item 1, Item 3 and Item 11 are hereby amended in their entireties as follows: ITEM 1 AND ITEM 3. BUSINESS AND PROPERTIES. OVERVIEW CITGO Petroleum Corporation ("CITGO" or the "Company") is a privately-held company engaged in the refining, marketing and transportation of petroleum products including gasoline, diesel fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes. CITGO is a direct wholly-owned subsidiary of PDV America, Inc., a Delaware corporation ("PDV America"), and an indirect wholly-owned subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"). PDVSA, the national oil company of the Republic of Venezuela, is the world's second largest oil company, behind only Saudi Aramco, according to rankings published by Petroleum Intelligence Weekly, based on a combination of factors, including reserves, production capacity and refined product sales. At December 31, 1995, PDVSA's proved crude oil reserves of approximately 64.8 billion barrels were the largest of any company or country in the Western hemisphere (larger, for example, than the 22.4 billion barrels of proved crude oil reserves located in the United States). CITGO owns and operates two modern, highly complex crude oil refineries (Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt refineries (Paulsboro, New Jersey, and Savannah, Georgia) with a combined aggregate rated crude oil refining capacity of 572 thousand barrels per day ("MBPD"). The Lake Charles refinery is the sixth largest in the United States. The Lake Charles refinery and the Corpus Christi refinery have Solomon Process Complexity Ratings of 15.2 and 15.8, respectively (as compared to an average of 12.6 for U.S. refineries in the most recently available Solomon Associates, Inc. survey). The Solomon Process Complexity Rating is an industry measure of a refinery's ability to produce higher value-added products. CITGO also owns a minority interest in LYONDELL-CITGO Refining Company, Ltd. ("LYONDELL-CITGO"), a limited liability company that owns and operates a refinery in Houston, Texas, with a rated crude oil refining capacity of 265 MBPD. CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into long-term crude oil supply agreements with PDVSA, expiring between 2006 and 2013, which allow CITGO to purchase crude oil and other feedstocks at each of its refineries. The long-term crude oil supply agreements incorporate formula prices based on the market value of a slate of refined products deemed to be produced from each particular grade of crude oil or feedstock less (i) certain deemed refining costs adjustable for inflation, (ii) certain actual costs, including transportation charges, import duties and taxes and (iii) a deemed margin which varies according to the grade of crude oil or feedstock delivered. Deemed margins under certain of the supply agreements are adjusted periodically by a formula based in part upon the rate of inflation. These crude oil supply agreements are designed to provide a relatively stable level of gross margin on crude oil supplied by PDVSA in order to reduce the volatility of earnings and cash flows from the refining operations of CITGO. This supply represented approximately two-thirds of the crude oil processed in refineries operated by CITGO in 1995. CITGO markets branded gasoline through over 14,000 independently owned and operated CITGO branded retail outlets (including 12,286 retail outlets owned or operated by approximately 750 independent branded distributors and 1,752 7-Eleven convenience stores) located throughout the United States, primarily east of the Rocky Mountains. In 1995, the National Petroleum News ranked CITGO second in the number of branded outlets and third in domestic gasoline market share with 8.2%, up from approximately 4.5% in 1989. The number of independent distributor-owned or operated CITGO branded retail outlets increased approximately 7%, 6% and 13% in 1995, 1994, and 1993, respectively. Gasoline sales accounted for 61%, 57% and 58% of CITGO's total sales revenues in 1995, 1994, and 1993, respectively. To supply its marketing network, CITGO not only uses the gasoline production from its refineries but also purchases gasoline from others. In 1995, CITGO sold approximately 11.1 billion gallons of gasoline. 1 3 CITGO sells jet fuel directly to airline customers at 22 airports, including such major hub cities as Chicago, Dallas/Fort Worth, New York and Miami. CITGO also sells diesel/#2 fuel through wholesale rack sales to distributors as well as in bulk through contract sales or on a spot basis. CITGO's delivery of light products is accomplished in part through 52 refined product terminals located throughout CITGO's primary market territory. Of these terminals, 40 were wholly owned by CITGO and 12 were jointly owned as of December 31, 1995. Active exchange relationships give CITGO access to over 370 other refined product terminals. CITGO sells petrochemicals and industrial products in bulk to a variety of U.S. manufacturers as raw materials for finished goods. Sulfur is sold to the U.S. and international fertilizer industry; cycle oils are sold for feedstocks processing and blending; natural gas liquids are sold to the U.S. fuel and petrochemical industry; petroleum coke is sold primarily in international markets for use as kiln and boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil blenders and customers. The majority of CITGO's cumene production is sold to a phenol production plant owned by a partnership in which CITGO is a limited partner. The phenol plant produces phenol and acetone for sale primarily to the principal partner in the phenol plant for the production of plastics. CITGO sells a variety of lubricants, including automotive lubricants and industrial lubricants and waxes, to independent distributors, mass marketers and industrial customers. CITGO markets many different types, grades and container sizes of lubricant and wax products, with the bulk of these sales consisting of automotive oil and lubricants and industrial lubricants. CITGO markets the largest portion of its wax production as coating material for the corrugated container industry. In 1995, CITGO acquired Cato Oil & Grease ("Cato"), a lubes blending, manufacturing and packaging operation. Cato's extensive lines of lubricating fluids and grease continue to be marketed under the Mystik and Cato brands. CITGO markets asphalt through 10 terminals located along the East Coast, from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to independent contractors for use in the construction and resurfacing of roadways. CITGO owns and operates a 959 mile crude oil pipeline system and three product pipelines with a combined total of approximately 1,100 miles. CITGO also owns minority equity interests in three crude oil pipeline companies and six refined product pipeline companies. CITGO's pipeline interests provide it with access to substantial refinery feedstocks and reliable transportation to refined products markets, as well as dividend income. One of these pipelines, Colonial Pipeline, is owned 13.98% by CITGO and is the largest refined product pipeline in the United States. It transports gasoline, jet fuel and diesel/#2 fuel from the Gulf Coast to the mid-Atlantic states, a major market area for CITGO. STRATEGY The Company intends to seek growth in the refining and marketing segment of the petroleum industry by focusing on the costs it can control, mitigating the costs it cannot control and focusing on the gasoline and lubricant distributor class of trade. The Company's principal business strategies, which have remained generally unchanged since 1985, allow it to compete in a very volatile and mature industry. - Enhance and grow the CITGO brand Enhancing and growing the CITGO brand has been the primary focus for CITGO since 1985. While competitors were busy building company-owned stores, CITGO was focusing on building a solid distributor base for the sale of light fuels. Today, over 750 CITGO distributors service more than 14,000 branded retail outlets, and it is by this particular focus that CITGO has gained prominence in the light fuels market. CITGO intends to enhance and grow the CITGO brand in the future by relying on the branded distributor segment of business. This growth is expected to be mostly from existing distributors with the objective of becoming their primary supplier. 2 4 - Retain competitiveness of CITGO refineries by producing higher valued products from lower valued heavy crude oil In the refining industry, it is essential to achieve lower costs and improve product quality and yields. CITGO has made significant refinery investments in its wholly-owned refineries, as well as in the joint venture LYONDELL-CITGO refinery, so that heavy Venezuelan crudes can be processed into high quality valued-added products. - Reduce imbalance resulting from growing product demand by increasing supply through refinery conversion enhancement In order to satisfy demand for petroleum products as well as to increase CITGO's market share, CITGO's objective is to process increasing amounts of crude oil into higher value-added products in the most cost efficient manner. Significant capital expenditures are planned for CITGO's refineries in order to enhance their conversion capabilities. - Seek growth through continued petrochemical upgrading The petrochemicals business segment has been a significant contributor to CITGO's income during the last two years; however, CITGO expects that profit margins in the petrochemical business segment will decrease from 1995 levels in the near term. In order to counteract this, CITGO plans to reduce petrochemical costs and promote growth in higher value-added products such as mixed xylenes, cumene and propylene. In addition, capital improvement projects to improve processing efficiency at both Corpus Christi and Lake Charles are scheduled for completion by 1998. - Optimize profitability in the lubricants business The Lubricants and Specialty Products business division has been a stable contributor to CITGO's profitability for at least the past five years. Furthermore, the acquisition of Cato during 1995 enhanced CITGO's strength in the lubricants market. In order to further strengthen CITGO's market presence, however, it will be necessary to increase both finished lubricants and wax sales. CITGO is reviewing the feasibility of improving manufacturing efficiency through technological improvements and cost reductions while continuing to evaluate various possible responses to the expanded supply of base oils which are expected to be available on the Gulf Coast in the near future. REFINING CITGO and its subsidiaries own and operate two modern, highly complex crude oil refineries and two asphalt refineries that have an aggregate rated crude oil refining capacity of 572 MBPD. The two crude oil refineries, located in Lake Charles, Louisiana and Corpus Christi, Texas, produce light fuels (gasoline, jet fuel and diesel/#2 fuel oil), industrial products and petrochemicals. The two asphalt refineries, located in Paulsboro, New Jersey and Savannah, Georgia, produce asphalt for use primarily in the construction and resurfacing of roadways. All of the Company's refineries are located in areas that qualify as foreign trade zones for purposes of certain import duties and state taxes. CITGO also owns a minority interest in LYONDELL-CITGO, which owns and operates a refinery located in Houston, Texas that has a rated crude oil refining capacity of 265 MBPD. 3 5 The following table shows the rated capacity of each refinery in which CITGO holds an interest and CITGO's share of such capacity. RATED REFINING CAPACITY ---------------------------------- NET CITGO CITGO REFINERY OWNER GROSS PERCENTAGE INTEREST -------- ----- ------ ---------- ---------- (MBPD) (%) (MBPD) Lake Charles, LA................... CITGO 320(1) 100 320 Corpus Christi, TX................. CITGO 140(1) 100 140 Paulsboro, NJ...................... CITGO 84 100 84 Savannah, GA....................... CITGO 28 100 28 Houston, TX........................ LYONDELL-CITGO 265 12(2) 32 --- --- Total Rated Refining Capacity............. 837 604 === === - --------------- (1) CITGO estimates that the actual capacity of the Lake Charles and Corpus Christi refineries to refine heavy crude of the type currently being refined, on an economical basis, is approximately 290 MBPD and 130 MBPD, respectively. (2) Represents CITGO's participation interest in LYONDELL-CITGO. At December 31, 1995, CITGO's equity interest in LYONDELL-CITGO entitled CITGO to participate in approximately 12% of the profits of LYONDELL-CITGO. This participation percentage is expected to increase to approximately 40% as a result of additional planned investments and reinvested earnings by CITGO through the in-service date, currently scheduled for the first quarter of 1997, of a refinery enhancement project. The Company has an option to increase the participation percentage up to 50% that may be exercised within 18 months of the in-service date. In connection with CITGO's investment in LYONDELL-CITGO, CITGO and LYONDELL-CITGO entered into an agreement pursuant to which CITGO purchases substantially all of the refined products produced at the LYONDELL-CITGO refinery. See "-- LYONDELL-CITGO." The following table shows CITGO's aggregate interest in refining capacity, refinery input and product yield for the three years in the period ended December 31, 1995, which aggregate interest includes CITGO's proportionate share of refining capacity, refinery input and product yield of LYONDELL-CITGO based on CITGO's relative participation interests for each of these years. See "-- LYONDELL-CITGO." YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995(1) 1994(1) 1993(1)(2) ------------- ------------- ------------- (MBPD, EXCEPT AS OTHERWISE INDICATED) Rated Refining Capacity(3).................. 604 601 599 Refinery Input: Crude oil................................. 473 79.9% 474 78.7% 454 78.5% Other feedstocks.......................... 119 20.1% 128 21.3% 124 21.5% --- ------ --- ------ --- ------ Total............................. 592 100.0% 602 100.0% 578 100.0% === ====== === ====== === ====== Product Yield(4): Light fuels Gasoline............................... 267 44.6% 279 45.8% 267 45.7% Jet Fuel............................... 61 10.2% 55 9.0% 48 8.2% Diesel/#2 fuel oil..................... 101 16.9% 110 18.0% 114 19.5% Asphalt................................... 32 5.4% 30 4.9% 29 5.0% Petrochemicals and industrial products.... 137 22.9% 136 22.3% 126 21.6% --- ------ --- ------ --- ------ Total............................. 598 100.0% 610 100.0% 584 100.0% === ====== === ====== === ====== 4 6 - --------------- (1) Includes a weighted average of 11.45% and 10.48% of the refining capacity, refining input and product yield of the LYONDELL-CITGO refinery for 1995 and 1994, respectively, and a weighted average of 5% of such items related to the LYONDELL-CITGO refinery for the last six months of 1993. (2) Includes the Savannah refinery from its date of purchase on April 30, 1993. (3) Rated capacity at year end. Due to the specific gravity of the crude oil generally processed at the Lake Charles and Corpus Christi refineries, CITGO estimates that the actual capacity of these refineries to refine heavy crude of the type currently being refined, on an economical basis, is approximately 290 MBPD and 130 MBPD, respectively. (4) Does not include Paulsboro refinery Unit 1. See "-- Paulsboro Refinery." Lake Charles Refinery. The Lake Charles refinery, located in Lake Charles, Louisiana, was originally built in 1944 and since then has been continuously upgraded. As a result of these upgrades, the refinery is a modern, complex, high conversion refinery. The refinery is the sixth largest in the United States, with a rated refining capacity of 320 MBPD, and is capable of processing large volumes of crude oil into a flexible slate of refined products, including significant quantities of high-octane unleaded gasoline and, due to recent modifications, the new reformulated gasoline. The Lake Charles refinery has a Solomon Process Complexity Factor of 15.2 (as compared to an average of 12.6 for U.S. refineries in the most recently available Solomon Associates, Inc. survey). The Solomon Process Complexity Rating is an industry measure of a refinery's ability to produce higher value-added products. A higher rating indicates a greater capability to produce such products. The Lake Charles refinery's major process units and their respective capacities are as follows: NUMBER OF AGGREGATE UNIT TYPE UNITS CAPACITY --------- ------ --------- (MBPD) Atmospheric crude distillation.................................. 3 320 Vacuum distillation............................................. 2 81 Catalytic cracking.............................................. 3 130 Catalytic reforming............................................. 3 102 Hydrocracking................................................... 1 40 Hydrotreating (distillates)..................................... 3 53 Hydrotreating (naphtha)......................................... 3 102 Alkylation (sulfuric)........................................... 1 23 Delayed coking.................................................. 2 94 MTBE............................................................ 1 3 TAME............................................................ 1 3 Petrochemical units: Sulfolane (benzene)........................................... 1 5 Propylene fractionation....................................... 1 6 The Lake Charles refinery has more than one unit in a number of different process areas. This "multiple stream capacity" allows it to continue to operate even while one unit or group of units is shut down. The Lake Charles refinery has significant flexibility to take advantage of market opportunities through the ability to shift production between low and high sulfur diesel, diesel and jet fuel, and jet fuel and naphtha, depending on market prices and demand. Flexibility in gasoline blending and logistics allows the refinery to make a variety of gasoline grades, from conventional to reformulated, depending on market pricing. 5 7 The following table shows the refining capacity, refinery input and product yield at the Lake Charles refinery for the three years in the period ended December 31, 1995. YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- (MBPD, EXCEPT AS OTHERWISE INDICATED) Rated Refining Capacity(1).................. 320 320 320 Refinery Input: Crude oil................................. 275 85.4% 274 83.0% 271 83.1% Other feedstocks.......................... 47 14.6% 56 17.0% 55 16.9% --- ------ --- ------ --- ------ Total............................. 322 100.0% 330 100.0% 326 100.0% === ====== === ====== === ====== Product Yield: Light fuels Gasoline............................... 164 50.0% 169 50.0% 163 49.3% Jet Fuel............................... 58 17.7% 52 15.4% 47 14.2% Diesel/#2 fuel......................... 42 12.8% 50 14.8% 54 16.3% Petrochemicals and industrial products.... 64 19.5% 67 19.8% 67 20.2% --- ------ --- ------ --- ------ Total(2).......................... 328 100.0% 338 100.0% 331 100.0% === ====== === ====== === ====== Utilization................................. 86% 86% 85% - --------------- (1) Rated refining capacity at year end. (2) Total product yields exceed crude oil refining capacity due to the use of other feedstocks, in addition to crude oil, in the refining process and the volumetric increases which can result from the refining process. Approximately 64%, 68% and 64% of the total crude runs at the Lake Charles refinery in the years 1995, 1994 and 1993, respectively, consisted of crude oil with an average API gravity of 24(degree) or less. Due to the complex processing required to refine such heavy crude oil, the Lake Charles refinery's economic crude oil throughput capacity is approximately 290 MBPD, which is approximately 90% of its rated capacity of 320 MBPD. The Lake Charles refinery's Gulf Coast location provides it with access to crude oil deliveries from multiple sources. Imported crude oil and feedstocks supplies are delivered by ship directly to the Lake Charles refinery, and domestic crude oil supplies are delivered by pipeline and barge. In addition, the refinery is connected by pipelines to the Louisiana Offshore Oil Port ("LOOP") and to terminal facilities in the Houston area through which it can receive crude oil deliveries if the Lake Charles docks are temporarily inaccessible. For delivery of refined products, the refinery is connected through the Lake Charles Pipeline directly to the Colonial Pipeline and the Explorer Pipeline, which are the major refined product pipelines supplying the Northeast and Midwest regions of the United States, respectively. The refinery also uses adjacent terminals and docks, which provide access for ocean tankers and barges. The Lake Charles refinery's main petrochemical products are propylene and benzene. Propylene production was 5.7, 5.2 and 4.7 MBPD, and benzene production was 4.1, 3.8 and 3.8 MBPD, in each case for the years 1995, 1994 and 1993, respectively. Industrial products include sulfur, residual fuels and petroleum coke. Located adjacent to the Lake Charles refinery is a lubricants refinery operated by CITGO and owned by Cit-Con Oil Corporation, which is owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily because of its specific design, the Cit-Con refinery produces high quality oils and waxes, and is one of the few in the industry designed as a stand-alone lubricants refinery. It currently has a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of wax, and is the sixth largest rated capacity paraffinic lubricants refinery in the United States. For the years 1995, 1994 and 1993, the refinery capacity utilization of the Cit-Con refinery was 101%, 110%, and 107%, respectively. Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from Conoco's nearby refinery. Finished refined 6 8 products are shared on the same pro rata basis by CITGO and Conoco. Conoco is a participant in a project to build a new refinery that will produce base oils. CITGO anticipates that such refinery will be more efficient than the Cit-Con refinery and, as a result, such new refinery may be able to produce base oils at a lower cost than those produced at the Cit-Con refinery. CITGO is reviewing the feasibility of improving the manufacturing efficiency of the Cit-Con refinery through technological improvements and cost reductions while continuing to evaluate various other responses to the expanded supply of base oils which are expected to be available in the Gulf Coast area when such new refinery is placed in service. Corpus Christi Refinery. The Corpus Christi refinery complex consists of the East and West Plants, located within five miles of each other in Corpus Christi, Texas. Construction began on the East Plant in 1937, and it was extensively reconstructed and modernized during the 1970's and 1980's. The West plant was completed in 1983. The Corpus Christi refinery is an efficient and highly complex facility, capable of processing high volumes of crude oil into a flexible slate of refined products, with a Solomon Process Complexity Factor of 15.8 (as compared to an average 12.6 for U.S. refineries in the most recently available Solomon Associates, Inc. survey). The Corpus Christi refinery has a rated capacity of 140 MBPD, and its major process units and their respective capacities are as follows: NUMBER OF AGGREGATE UNIT TYPE UNITS CAPACITY ---------------------------------------------------------------- ------ --------- (MBPD) Atmospheric crude distillation.................................. 1 140 Vacuum distillation............................................. 1 67 Fluidized catalytic cracking.................................... 2 78 Platforming..................................................... 2 54 Hydrotreating (distillates)..................................... 1 42 Hydrotreating (naphtha)......................................... 2 60 Hydrotreating (gasoils)......................................... 1 65 Alkylation (hydrofluoric)....................................... 1 19 Delayed coking.................................................. 1 34 MTBE............................................................ 1 2 Petrochemical units: UDEX extraction (benzene, toluene, xylene).................... 1 7 Cumene........................................................ 1 8 Cyclohexane................................................... 1 3 Aromatics disproportionation.................................. 1 3 7 9 The following table shows refining capacity, refinery input and product yield at the Corpus Christi refinery for the three years in the period ended December 31, 1995. YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- (MBPD, EXCEPT AS OTHERWISE INDICATED) Rated Refining Capacity(1).................. 140 140 140 Refinery Input: Crude oil................................. 121 64.7% 128 66.3% 127 65.8% Other feedstocks.......................... 66 35.3% 65 33.7% 66 34.2% --- ------ --- ------ --- ------ Total............................. 187 100.0% 193 100.0% 193 100.0% === ====== === ====== === ====== Product Yield: Light fuels Gasoline............................... 90 48.4% 99 51.0% 99 51.6% Diesel/#2 fuel......................... 53 28.5% 55 28.4% 57 29.7% Petrochemicals and industrial products.... 43 23.1% 40 20.6% 36 18.7% --- ------ --- ------ --- ------ Total(2).......................... 186 100.0% 194 100.0% 192 100.0% === ====== === ====== === ====== Utilization................................. 86% 91% 91% - --------------- (1) Rated capacity at year end. (2) Total product yields exceed crude oil refining capacity in 1994 due to the use of other feedstocks, in addition to crude oil, in the refining process and the volumetric increases which can result from the refining process. All of the crude oil processed at the Corpus Christi refinery is heavy Venezuelan crude oil having a high sulfur content. Due to the complex processing required to refine such heavy sour crude oil, the Corpus Christi refinery's economic crude oil throughput capacity is approximately 130 MBPD, which is approximately 93% of its rated capacity of 140 MBPD. Crude oil supplies are delivered directly to the Corpus Christi refinery through the Port of Corpus Christi. CITGO operates the West Plant under a sublease agreement (the "Sublease") from Union Pacific Corporation ("Union Pacific"). The basic term of the Sublease ends on January 1, 2004, but CITGO may renew the Sublease for successive renewal terms through January 31, 2011. CITGO has the right to purchase the West Plant from Union Pacific at the end of the basic term, the end of any renewal term, or on January 31, 2011, at a nominal price. During the last several years, CITGO has increased the capacity of the Corpus Christi refinery to produce petrochemical products. The Corpus Christi refinery's main petrochemical products include cumene, cyclohexane, MTBE and aromatics (including benzene, toluene, and xylene). The Company produces a significant quantity of cumene, an important petrochemical product used in the engineered plastics market. The production of xylene, a basic building block used in the manufacture of consumer plastics, allows the refinery to take advantage of its reforming capacity while staying within the new, more stringent gasoline specifications of the Clean Air Act Amendments of 1990. Paulsboro Refinery. This asphalt refinery, purchased in 1991, is located in Paulsboro, New Jersey. The refinery consists of Unit I, with a rated capacity of 44 MBPD, and Unit II, with a rated capacity of 40 MBPD. Unit II, originally constructed in 1980 to produce asphalt from higher sulfur, heavy crude oil high in naphthenic acid, is a combination atmospheric and vacuum distillation facility. The crude oil purchased by CITGO from PDVSA to supply Unit II's crude oil requirements is particularly well suited for the production of asphalt. Unit II produced an average of 19.1, 19.4 and 16.4 MBPD of asphalt in the years 1995, 1994, and 1993, respectively, which accounted for 58%, 57% and 57% of Unit II's total production in such years. The remaining Unit II production in 1995, 1994 and 1993 consisted of distillate products such as 8 10 naphthas, marine diesel oil and vacuum gas oils, which in the aggregate averaged approximately 13.7, 14.9 and 12.5 MBPD, respectively in such years. Unit II crude oil runs averaged 33, 34 and 29 MBPD resulting in a utilization rate of 83%, 85% and 73% of rated capacity in 1995, 1994, and 1993, respectively. Unit I was constructed in 1979 to process low sulfur, light crude oil. The unit produces naphthas and diesel/#2 and #6 fuels. Unit I is run primarily when there is demand for toll processing of sweet crudes at attractive economics. Crude oil runs for third party processing in 1995, 1994 and 1993 averaged 2.1, 0.0 and 0.8 MBPD, respectively. In 1995, 2.6 MBPD of crude oil was run on Unit I for CITGO's own account, producing 1.9 MBPD of asphalt and 0.8 MBPD of other products. Savannah Refinery. On April 30, 1993, CITGO purchased an asphalt refinery located near Savannah, Georgia, one asphalt distribution terminal and throughput rights at two additional distribution terminals. The Savannah refinery and the related distribution terminals have been integrated with CITGO's existing asphalt operations. The 100 acre facility is located on the Savannah River. The facility includes two crude distillation units, with a combined rated capacity of 28 MBPD. The primary crude oil run by the refinery is Boscan, a heavy Venezuelan crude oil that is rich in asphalt. The units produced an average of 10.5 MBPD of asphalt in the year ended December 31, 1995, which accounted for 77% of total production. An additional 3.4 MBPD of production included naphthas and light, medium and heavy gas oils. Total crude runs for the period averaged 13.7 MBPD, for a utilization rate of 49% of rated capacity. LYONDELL-CITGO. In July 1993, CITGO and Lyondell Petrochemical Company ("Lyondell") executed agreements pursuant to which Lyondell contributed a 265 MBPD refinery and related assets to LYONDELL-CITGO, a newly formed limited liability company, and CITGO and Lyondell agreed to provide certain amounts necessary to fund a refinery enhancement project to increase the refinery's heavy crude oil conversion capacity from approximately 130 MBPD of 22(degrees) average API gravity crude oil to approximately 200 MBPD of 17(degrees) average API gravity crude oil. The refinery enhancement project is expected to be completed at the end of 1996, with an in-service date occurring in the first quarter of 1997. In connection with this project, PDVSA entered into a long-term contract with LYONDELL-CITGO to supply 135 MBPD of heavy Venezuelan crude oil to the refinery until the completion date of the refinery enhancement project, at which time PDVSA will be required to supply 200 MBPD of such crude oil. The supply agreement, which extends through 2017, incorporates formula prices based on the market value of a slate of refined products deemed to be produced from each particular grade of crude oil, less (i) certain deemed refining costs adjustable for inflation, (ii) certain actual costs, including transportation charges, import duties and taxes, and (iii) a deemed margin, which varies according to the grade of crude oil delivered. See "-- Crude Oil Supply." LYONDELL-CITGO also purchases crude oil from third parties to supplement the PDVSA supplies. In addition, CITGO entered into a long-term contract with LYONDELL-CITGO to purchase substantially all of the refined products produced at the refinery through the year 2017 at market related prices, thereby significantly reducing CITGO's need to purchase refined products from third party sources to supply its distribution network. See "-- Marketing -- Refined Product Purchases." The Company anticipates that the total cost of the refinery enhancement project will be approximately $1 billion, of which approximately $600 million had been expended as of December 31, 1995. At such date, CITGO had invested an aggregate of $461 million (including reinvested earnings), of which $258 million was funded through equity contributions from PDV America. As of December 31, 1995, CITGO was committed to make additional investments in LYONDELL-CITGO consisting of (i) $30 million at the in-service date of the refinery enhancement project and (ii) up to an additional approximately $150 million through the in-service date provided that the total refinery enhancement project costs do not exceed 110% of the current estimate. In addition, CITGO is required to fund certain fees, expenses and interest on LYONDELL-CITGO's initial $200 million construction loan, and is committed to fund up to $22 million for certain maintenance and environmental costs to the extent that such costs exceed certain estimates. CITGO does not currently expect that its aggregate investments in LYONDELL-CITGO will 9 11 exceed $630 million (exclusive of reinvested earnings) through the in-service date. At December 31, 1995, CITGO had an approximate 12% participation interest in the profits and losses of LYONDELL-CITGO. CITGO's expected aggregate investment in LYONDELL-CITGO, plus its share of LYONDELL-CITGO's earnings (which must be reinvested through the completion date of such project), will give CITGO an approximate 40% participation interest in the profits and losses of LYONDELL-CITGO. CITGO also has the option, exercisable on one occasion within 18 months after the in-service date, to increase its participation in the profits and losses of LYONDELL-CITGO up to a maximum of 50% which, if exercised, would require CITGO to make an additional investment in LYONDELL-CITGO. CRUDE OIL SUPPLY CITGO owns no crude oil reserves or production facilities, and must therefore rely on purchases of crude oil and feedstocks for its refinery operations. The following chart shows CITGO's purchases of crude oil (for refining) for the three years in the period ended December 31, 1995. LAKE CHARLES, LA CORPUS CHRISTI, TX PAULSBORO, NJ SAVANNAH, GA(1) ------------------ ------------------ ------------------ ------------------ 1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (MBPD) (MBPD) (MBPD) (MBPD) PDVSA......... 150 129 125 122 128 127 35 36 31 14 12 14 PEMEX......... 33 63 65 0 0 0 0 0 0 0 0 0 Occidental.... 43 42 41 0 0 0 0 0 0 0 0 0 Other Sources..... 52 40 40 0 0 0 0 0 0 0 0 0 --- --- --- --- --- --- -- -- -- -- -- -- Total.. 278 274 271 122 128 127 35 36 31 14 12 14 === === === === === === == == == == == == - --------------- (1) CITGO acquired the Savannah refinery on April 30, 1993. CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into long-term crude oil supply agreements with PDVSA with respect to each of CITGO's refineries. In addition, LYONDELL-CITGO has entered into a long-term crude oil supply agreement with PDVSA with respect to its refinery. The following table shows the base and incremental volumes of crude oil contracted for delivery and the volumes of crude oil purchased from PDVSA under these agreements in the three years in the period ended December 31, 1995. VOLUMES OF CRUDE OIL PURCHASED UNDER PDVSA PDVSA AGREEMENTS SUPPLY AGREEMENT FOR THE YEAR ENDED OIL VOLUME DECEMBER 31, YEAR OF ---------------------- ---------------------- AGREEMENT REFINERY BASE INCREMENTAL(1) 1995 1994 1993 EXPIRATION -------- ---- -------------- ---- ---- ---- ---------- (MBPD) (MBPD) Lake Charles, LA..................... 120 50 126(2) 125(2) 125 2006 Corpus Christi, TX................... 130 N/A 122 126 127 2012 Paulsboro, NJ........................ 30 N/A 35 36 31 2010 Savannah, GA (3)..................... 12 N/A 13 12 14 2013 Houston, TX (4)...................... 135 N/A 136 135 131 2017 - --------------- (1) The supply agreement for the Lake Charles refinery gives PDVSA the right to sell to CITGO incremental volumes up to the maximum amount specified in the table, subject to certain restrictions relating to the type of crude oil to be supplied, refining capacity and other operational considerations at the refinery. (2) Volumes purchased under the supply agreements do not equal the purchases from PDVSA shown in the previous table as a result of spot purchases. (3) CITGO acquired the Savannah refinery on April 30, 1993. (4) CITGO acquired an equity interest in LYONDELL-CITGO, the owner of the Houston refinery, on July 1, 1993. In connection with such transaction, LYONDELL-CITGO entered into a long-term crude 10 12 oil supply agreement with PDVSA that provides for delivery volumes of 135 MBPD until the completion of a planned refinery enhancement project at which time the delivery volumes will increase to 200 MBPD. These crude oil supply agreements require PDVSA to supply minimum quantities of crude oil and other feedstocks to CITGO for a fixed period, usually 20 to 25 years from the inception of the agreement. These supply agreements are designed to reduce the inherent earnings volatility of the refining operations of CITGO. The supply agreements incorporate formula prices based on the market value of a slate of refined products deemed to be produced from each particular grade of crude oil or feedstock, less (i) certain deemed refining costs, (ii) certain actual costs, including transportation charges, import duties and taxes and (iii) a deemed margin, which varies according to the grade of crude oil or feedstock delivered. Under each supply agreement, deemed costs are adjusted periodically by a formula primarily based on the rate of inflation. In addition, deemed margins under certain of the supply agreements are adjusted periodically by a formula based in part on the rate of inflation. Because deemed operating costs and the slate of refined products deemed to be produced for a given barrel of crude oil or other feedstock do not necessarily reflect the actual costs and yields in any period, the actual refining margin earned by CITGO under the various supply agreements will vary depending on, among other things, the efficiency with which CITGO conducts its operations during such period. Effective January 1, 1992, the supply agreements between PDVSA and CITGO with respect to the Lake Charles, Corpus Christi and Paulsboro refineries were modified to reduce the price levels to be paid by CITGO by a fixed amount per barrel of crude oil purchased from PDVSA. Such reductions were intended to defray CITGO's costs of certain environmental compliance expenditures. This modification resulted in a decrease in the cost of crude oil purchased under these agreements of approximately $70 million per year for the years 1992 through 1994 as compared to the amount that would otherwise have been payable thereunder. This modification was to expire at December 31, 1996; however, in 1995, PDVSA and CITGO agreed to adjust this modification so that the 1992 fixed amount per barrel would be reduced and the adjusted modification would not expire until December 31, 1999. The effect of this adjustment to the original modification was to increase the cost of crude oil purchased under these agreements by approximately $22 million in 1995 as compared to the amount that would otherwise have been payable thereunder based on the original modification (resulting in a net decrease of approximately $48 million from the amount otherwise payable under the agreement prior to the 1992 original modification). The Company anticipates that the effect of the adjustments to the original modifications will be to increase the price of crude oil purchased from PDVSA under these agreements by approximately $45 million in 1996 (resulting in a net decrease of approximately $25 million from the amount otherwise payable under the agreement prior to the 1992 original modification) and to reduce the price of crude oil purchased from PDVSA under these agreements by approximately $25 million per year in 1997 through 1999, in each case as compared to the original modification and without giving effect to any other factors that may affect the price payable for crude oil under these agreements. Due to the pricing formula under the supply agreements, the aggregate price actually paid for crude oil purchased from PDVSA under these agreements in each of these years will depend primarily upon the then current prices for refined products and certain actual costs of CITGO. These estimates are also based on the assumption that CITGO will purchase the base volumes of crude oil under the agreements. Under certain of these agreements, if supplies from PDVSA are interrupted, PDVSA is required to compensate CITGO for any additional costs incurred in securing crude oil or other feedstocks. These crude oil supply agreements may be terminated (i) by mutual agreement, (ii) by either party in the event of a material default, bankruptcy or similar financial hardship on the part of the other party or (iii) in the case of contracts with CITGO, if PDVSA no longer holds specified ownership interests in CITGO. See "Item 11. Description of Registrant's Securities to be Registered -- Covenants -- Specified Agreements." Most of the crude oil and feedstocks purchased by CITGO from PDVSA are delivered on tankers owned by PDVSA subsidiaries. In 1995, 71% of the PDVSA contract crude oil delivered to the Lake Charles and Corpus Christi refineries was delivered on tankers operated by PDVSA subsidiaries. 11 13 CITGO purchases additional crude oil under a 90-day evergreen agreement with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries are particularly well suited to refine PEMEX's Maya heavy, sour crude oil, which is similar in many respect to several types of Venezuelan crude oil. Effective January 1995, the PEMEX crude agreement provided for the purchase of 23 MBPD for the first six months of 1995 and 17 MBPD for the last six months of 1995. The PEMEX agreement provides for the purchase of 37 MBPD of crude for the first six months of 1996 and 45 MBPD for the last six months of 1996. CITGO is a party to a contract with an affiliate of Occidental Petroleum Corporation ("Occidental") for the purchase of crude oil at contract reference prices. Purchases under this contract, which expires on August 31, 1998, averaged 54.5 MBPD in 1995. CITGO also purchases crude oil under long-standing relationships with numerous other domestic producers. MARKETING CITGO's major products are light fuels (including gasoline, jet fuel, and diesel fuel), petrochemicals, industrial products, asphalt, and lubricants and waxes. The following table shows revenue of each of these product categories for the three years in the period ended December 31, 1995. YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1995 1994 1993 ----------------- ---------------- --------------- ($ IN MILLIONS, EXCEPT AS OTHERWISE INDICATED) Light Fuels................... $ 8,886 85.8% $ 7,845 86.0% $ 7,841 87.2% Petrochemicals and industrial products.................... 831 8.0% 707 7.8% 602 6.7% Asphalt....................... 238 2.3% 194 2.1% 179 2.0% Lubricants and Waxes.......... 404 3.9% 370 4.1% 370 4.1% ------- ------ ------ ------ ------ ------ Total............... $ 10,359 100.0% $ 9,116 100.0% $ 8,992 100.0% ======= ====== ====== ====== ====== ====== Refined Product Purchases. Refined product purchases are required to supplement the production of the Lake Charles and Corpus Christi refineries in order to meet the demand of CITGO's marketing network. During 1995, CITGO's shortage in gasoline production approximated 277 MBPD. However, due to logistical needs, timing differences and product grade imbalances, in 1995 CITGO purchased approximately 471 MBPD of gasoline, and CITGO sold into the spot market or to traders or other refiners approximately 194 MBPD of gasoline. The following table shows CITGO's purchases of refined products for the three years in the period ended December 31, 1995. YEAR ENDED DECEMBER 31, ----------------- 1995 1994 1993 --- --- --- (MBPD) Gasoline.......................................................... 471 380 352 Jet Fuel.......................................................... 87 89 74 Diesel/#2 fuel.................................................... 90 98 88 --- --- --- Total................................................... 648 567 514 === === === CITGO purchases substantially all of the refined products produced at the LYONDELL-CITGO refinery under a long-term contract extending through the year 2017. In 1995, CITGO purchased 103 MBPD of gasoline, 46 MBPD of distillate and 27 MBPD of jet fuel from LYONDELL-CITGO. See "-- Refining -- LYONDELL-CITGO". 12 14 Light Fuels Sales. CITGO markets gasoline, jet fuel and other distillates through an extensive marketing network. The following table provides a breakdown of the sales made by type of product for the three years ended December 31, 1995. YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, -------------------------- -------------------------- 1995 1994 1993 1995 1994 1993 ------ ------ ------ ------ ------ ------ ($ IN MILLIONS) (MILLIONS OF GALLONS) Gasoline...................... $6,367 $5,252 $5,256 11,075 9,747 9,380 Jet Fuel...................... 1,163 1,102 1,019 2,249 2,131 1,827 Diesel/#2 fuel................ 1,356 1,491 1,566 2,730 3,067 3,005 ------ ------ ------ ------ ------ ------ Total............... $8,886 $7,845 $7,841 16,054 14,945 14,212 ====== ====== ====== ====== ====== ====== Gasoline sales accounted for 61%, 57% and 58% of CITGO's total revenues in the years 1995, 1994 and 1993, respectively. CITGO markets CITGO branded gasoline through more than 14,000 independently owned and operated CITGO branded retail outlets (including 12,286 branded retail outlets owned and operated by approximately 750 independent distributors and 1,752 7-Eleven convenience stores) located throughout the United States, primarily east of the Rocky Mountains. In addition, CITGO itself owns, operates or leases 16 retail outlets that operate under the name "Quik Mart." CITGO purchases gasoline to supply its marketing network, as the gasoline production from the Lake Charles and Corpus Christi refineries was equivalent to approximately 53%, 60% and 65% of the volume of CITGO branded gasoline sold in 1995, 1994 and 1993, respectively. See "-- Refined Product Purchases." CITGO's strategy is to enhance the value of the CITGO brand in order to obtain premium pricing for its products by appealing to consumer preference for quality petroleum products and services. This is accomplished through a commitment to quality, dependability and customer service to its independent distributors, which constitute CITGO's primary distribution channel. CITGO also promotes the CITGO brand through various cost-sharing arrangements between CITGO and the distributors to fund local and regional advertising and other promotional efforts, as well as to fund image enhancement and other improvements to the retail outlets, such as signage, lighting and card reader pumps. As a result of the implementation of this strategy, the number of independent distributor-owned or operated CITGO branded retail outlets has grown significantly since 1986 when there were approximately 7,000 outlets (including 7-Eleven convenience stores), with such number increasing by approximately 7%, 6% and 13% in 1995, 1994 and 1993, respectively. In 1995, the National Petroleum News ranked CITGO third in domestic gasoline market share with 8.2%, up from approximately 4.5% in 1989. In addition, customers have selected CITGO as the top branded supplier in three successive biannual Supplier's Cup competitions, held in 1990, 1992 and 1994 and sponsored by the Petroleum Marketers Association of America, an organization of independent refined products distributors. In 1994 CITGO began offering to its distributors a program to enhance their stations with new card reader pumps. These pumps allow customers to pay for their gasoline at the pumps with their credit cards instead of going into the stores to pay. As of December 31, 1995, approximately 1,000 retail outlets had installed the card reader pumps. CITGO has also engaged in a strategy to aggressively expand its credit card program since credit card sales generally are higher per transaction than cash sales. Since 1992, CITGO has experienced growth in the number of new accounts of 8%, 9% and 11% in 1995, 1994 and 1993, respectively. The point-of-sale ("POS") system that supports the credit card program has expanded to the point that approximately 94% of CITGO's branded credit card sales in 1995 were processed on the POS system. Sales to 7-Eleven convenience stores are made under a contract that extends through the year 2006. Under this contract, CITGO arranges all transportation and delivery of motor fuels and handles all product ordering. CITGO also acts as processing agent for the purpose of facilitating and implementing orders and purchases from third-party suppliers. CITGO receives a processing fee for such services. Sales to independent branded distributors are typically made under three-year contracts. 13 15 CITGO markets jet fuel directly to airline customers at 22 airports, including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York and Miami. Jet fuel sales volumes to airline customers increased approximately 2%, 18% and 12% in 1995, 1994 and 1993, respectively. The volume increases were due both to higher levels of purchases by existing customers and to sales to new customers. Sales of bonded jet fuel, which are exempt from import duties as well as certain state and local taxes, have increased from 482 million gallons in 1993 to 555 million gallons in 1995 (accounting for over 30% of total jet fuel sales volume to airline customers in both years). CITGO's diesel/#2 fuel marketing strategy aims to obtain the best value for the products manufactured at the Lake Charles and Corpus Christi refineries, as well as those received from LYONDELL-CITGO. Growth in wholesale rack sales to distributors has been the primary focus of marketing efforts. Such efforts have resulted in increases in wholesale rack sales volume from approximately 896 million gallons in 1993 to approximately 1,283 million gallons in 1995. The remaining diesel/#2 fuel production is sold either in bulk through contract sales (primarily as heating oil in the Northeast) or on a spot basis. CITGO's delivery of light fuels to its customers is accomplished in part through 52 refined product terminals located throughout CITGO's primary market territory. Of these terminals, 40 are wholly-owned by CITGO and 12 are jointly owned. CITGO's refined product terminals provide a total of approximately 22 million barrels of storage capacity. Fifteen of CITGO's product terminals have waterborne docking facilities, which greatly enhance the flexibility of CITGO's logistical system. In addition, CITGO has active exchange relationships with over 370 other refined product terminals, providing flexibility and timely response to distribution needs. CITGO operates fleets of leased and owned trucks for delivery of refined products from the product terminals to retail locations. The following table identifies by state the number and capacity of CITGO's wholly- and jointly-owned refined products terminals: NUMBER OF REFINED STORAGE STATE PRODUCTS TERMINALS CAPACITY(1) ----- ------------------ ----------- (THOUSANDS OF BARRELS) Indiana............................................... 2 4,554 New Jersey............................................ 2 4,341 New York.............................................. 3 1,764 Florida............................................... 5 1,613 Texas................................................. 11 1,359 Massachusetts......................................... 1 1,314 Virginia.............................................. 4 1,079 Wisconsin............................................. 3 946 North Carolina........................................ 3 753 Michigan.............................................. 3 675 All others (9 states)................................. 15 3,430 -- ------ Total (19 states)........................... 52 21,828 == ====== - --------------- (1) CITGO's joint ownership interest in 12 refined products terminals ranges from 25% to 50%, and the aggregate storage capacity attributable to jointly-owned refined products terminals is 4,592 thousand barrels. Petrochemicals and Industrial Products. CITGO sells petrochemicals and industrial products in bulk to a variety of U.S. manufacturers as raw materials for finished goods. Sulfur is sold to the U.S. and international fertilizer industry; cycle oils are sold for feedstock processing and blending; natural gas liquids are sold to the U.S. fuel and petrochemical industry; petroleum coke is sold primarily in international markets for use as kiln and boiler fuel; and residual fuel blendstocks are sold to a variety of fuel oil blenders and customers. The majority of CITGO's cumene production is sold to a phenol 14 16 production plant owned by a partnership in which CITGO is a limited partner. The phenol plant produces phenol and acetone for sale primarily to the principal partner in the phenol plant for the production of plastics. Asphalt. CITGO markets asphalt through 10 terminals located along the East Coast, from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to independent contractors for use in the construction and resurfacing of roadways. Lubricants and Waxes. CITGO markets many different types, grades and container sizes of lubricants and wax products, with the bulk of sales consisting of automotive oil and lubricants and industrial lubricants. Other major lubricant products include 2-cycle engine oil and automatic transmission fluid. In April 1995, CITGO acquired Cato for a purchase price of approximately $46.8 million. CITGO sells its finished lubricant products through three classes of trade: (i) independent distributors that specialize in lubricant sales (representing 66% of 1995 sales), (ii) mass merchandisers (representing 8% of 1995 sales) and (iii) directly to large industrial end users (representing 26% of 1995 sales). CITGO emphasizes sales to independent distributors in its lubricants marketing because of the higher margins realized from these sales. Large industrial end users include steel manufacturers for industrial lubricants and automobile manufacturers for "original equipment" quantities of automotive oils and fluids. CITGO markets the largest portion of its wax production as coating materials for the corrugated container industry. CITGO also provides wax for the manufacture of candles, drinking cups, waxed papers, and a variety of building and rubber products. PIPELINE OPERATIONS CITGO owns and operates a 959 mile crude oil pipeline system and three product pipelines located in Texas, Oklahoma and Louisiana with a combined total of approximately 1,100 miles. The crude oil pipeline provides CITGO with access to extensive gathering systems throughout major production areas in Louisiana and Texas that provide the Lake Charles refinery with domestic crude oil to supplement supplies delivered by ship. CITGO also has joint equity interests in three crude oil pipeline companies with a total of nearly 5,800 miles of crude oil pipeline. In addition, CITGO has joint equity interests in six refined product pipeline companies with a total of approximately 8,000 miles of refined product pipeline. One of the refined product pipelines in which CITGO has an interest, the Colonial Pipeline, is the largest refined product pipeline in the United States. It transports gasoline, jet fuel and diesel/#2 fuel from the Gulf Coast to the mid-Atlantic states. These equity interest pipelines provide CITGO with access to substantial refinery feedstocks and reliable transportation to refined product markets. 15 17 For the year ended December 31, 1995, CITGO's equity interest pipeline interests provided it with $29 million of dividends. The following table identifies the pipelines in which CITGO held an ownership interest at December 31, 1995. CITGO CITGO 1995 PIPELINE LOCATION SIZE OWNERSHIP DIVIDENDS -------- -------- ----- --------- --------- (MILES) (%) ($ IN MILLIONS) Crude Oil Pipelines: CITGO.................. Various locations in TX, LA and AR 959 100.0 $ -- West Texas-Gulf..... Colorado City, TX to Nederland, TX 579 11.4 0.9 Texas-New Mexico.... Aneth, UT to Houston, TX 3,803 10.0 0.9 Kaw................. Ray, KS to Chase, KS 1,396 33.3 0.1 Products Pipelines: Colonial............... Houston, TX to Linden, NJ 5,317 13.98 $21.5 Explorer............... Lake Charles, LA to Hammond, IN 1,413 6.8 2.8 Eagle.................. Houston, TX to Drumright, OK 722 100.0 -- Casa................... Victoria, TX to Austin, TX 247 100.0 -- Badger................. E. Chicago, IN to Rockford, IL 334 32.0 1.2 Wolverine.............. Joliet, IL to Detroit, MI 618 9.5 1.0 West Shore............. Hammond, IN to Green Bay, WI 321 8.0 0.4 Lake Charles........... Lake Charles, LA 13 50.0 0.2 Lakemont............... Lake Charles, LA to 108 100.0 -- Mont Belvieu, TX These pipelines are all common carriers regulated by the Federal Energy Regulatory Commission except for the Kaw crude oil pipeline, an intrastate pipeline, regulated by a Kansas state agency. Historically, these pipelines have paid out 100% of net earnings as dividends, with depreciation expense and deferred taxes providing adequate cash flow to fund capital expenditures. CITGO, along with other joint-interest owners (primarily major oil companies), has obligations with respect to certain throughput and deficiency agreements in connection with some of its joint-interest pipeline companies under the terms of which the owners are obliged to transport sufficient product through the pipeline in the event of a shortfall in transportation volumes. CITGO has experienced no product shipment requirements under the throughput and deficiency agreements, and does not anticipate any transportation volume shortfalls in the foreseeable future. COMPETITION The U.S. petroleum refining and marketing industry is highly fragmented and the Company's competitors include large integrated major oil companies as well as independent refiners and marketers. No company accounts for more than 10% of the total volume of gasoline sold in the U.S. Generally, U.S. refiners compete for sales on the basis of price and brand image and recognition and, in some product areas, product quality. Competitive factors also include: (i) the relative balance between a refiner's crude supply sources, refining capacity, and volumes of refined products needed to supply its marketing network, (ii) market penetration, (iii) refining margin volatility, (iv) transportation differentials, and (v) overall capital strength and financial flexibility. EMPLOYEES CITGO and its subsidiaries have a total of approximately 5,000 employees, approximately 1,800 of whom are covered by 15 union contracts. Approximately 1,700 of the union employees are employed in refining operations. The remaining union employees are located primarily at a lubricant blending and packaging plant and at certain refined product terminals. The Company has recently completed negotiations on labor contracts relating to a majority of its union employees and the Company anticipates that contracts will be negotiated with respect to the remainder of its union employees before the 16 18 expiration of existing union contracts at the end of 1996. The Company has not experienced any work stoppages or significant labor disputes and the Company believes that its relationship with its employees is good. ENVIRONMENT AND SAFETY CITGO's operations are subject to extensive Federal, state and local environmental laws and regulations governing air emissions, water discharges, site remediation and the generation, handling and disposal of wastes. CITGO believes that its operations are in substantial compliance with these laws and regulations or are operating under consent decrees or similar arrangements with governmental authorities to attain compliance. Past and present refining, marketing and distribution activities have resulted in contamination at certain CITGO properties which may, in some cases, have migrated to adjacent properties. Upon the discovery of contamination at its refineries, terminals or other properties, CITGO investigates and, where required, undertakes remedial measures in accordance with applicable laws and regulations. The Company is subject to environmental regulations adopted by the U.S. Environmental Protection Agency ("EPA") and state environmental agencies to implement the Clean Air Act Amendments of 1990 (the "CAA Amendments"). Among other things, the CAA Amendments require all major sources of hazardous air pollutants, as well as certain other sources of air pollutants, to obtain state operating permits. The permits must contain applicable federal and state emission limitations and standards as well as satisfy other statutory requirements. The CAA Amendments also mandated numerous comprehensive specifications for reformulated motor vehicle fuel, including reduced Reid vapor pressure, lower benzene content and increased oxygenate content. In addition, the CAA Amendments mandated significant reductions in the sulfur content of diesel fuel. In particular, the CAA Amendments specified standards for the "simple" model of reformulated gasoline to be used after January 1, 1995 in the nine cities in the United States with the worst air quality and other cities that voluntarily impose the stringent reformulated fuel specifications. CITGO has incurred significant capital expenditures during the last several years in order to satisfy these requirements of the CAA Amendments, and the Company believes that it currently satisfies such requirements. The CAA Amendments also provided that more stringent "complex" model requirements for reformulated fuels are to be utilized in these cities beginning in May 1997, although these "complex" model requirements have yet to be developed. The Company has budgeted approximately $195 million for capital expenditures in the five-year period from 1996 to 2000 to modify refinery operations to satisfy the requirements of the CAA Amendments relating to reformulated gasoline. These estimates may change due to a variety of factors. See "Item 2. Financial Information -- Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In 1992, CITGO reached an agreement with a state agency to cease usage of certain surface impoundments at CITGO's Lake Charles, Louisiana refinery by 1994, which has been complied with by CITGO. A mutually acceptable closure plan was filed with the state in 1993. The Company and a former owner agreed to share closure costs. Final closure of these impoundments is expected to be completed no earlier than 1998. Equipment to replace these impoundments required approximately $146 million of capital expenditures. CITGO has entered into administrative consent orders with the New Jersey Department of Environmental Protection to investigate and remediate three New Jersey properties. While CITGO is named as a potentially responsible party ("PRP") at a number of "Superfund" sites, pursuant to a 1992 agreement, a former owner of CITGO has agreed to indemnify CITGO with respect to Superfund damages where offsite hazardous waste disposal occurred prior to September 1, 1983. Based on publicly available information, CITGO believes that such former owner has the financial capability to fulfill all of its responsibilities under this agreement. Accordingly, CITGO believes that its offsite liability exposure under the Federal Superfund and similar state laws is immaterial. In addition, under the 1992 agreement, CITGO assumed any responsibility for certain other environmental contamination at certain owned terminal properties in return for cash payments and other agreements. 17 19 During 1994 and 1995, CITGO received two notices of violations and two compliance orders from the EPA relating to the operation of certain units at the Paulsboro Refinery. CITGO has disputed the allegations contained therein, and is currently in confidential settlement negotiations with the EPA to resolve such allegations. The resolution of this matter is anticipated shortly and is expected to include a Consent Decree which will contain the assessment of a penalty and compliance measures requiring certain capital expenditures. CITGO does not believe the ultimate resolution of these matters will have a material adverse effect on CITGO's consolidated financial position or results of operations. On March 4, 1994, CITGO received a notice of violation from the EPA alleging violations related to a crude oil discharge in November 1992 into Claiborne Parish, Louisiana, and a crude oil discharge in March 1993 into Moody Creek in Gregg County, Texas. CITGO has agreed to pay $62,100 to the EPA to settle this matter. Increasingly stringent regulatory provisions periodically require additional capital expenditures. During 1995, CITGO expended approximately $34 million for environmental and regulatory capital improvements in its operations. CITGO currently anticipates that it will spend approximately $330 million for environmental and regulatory capital projects over the five-year period 1996-2000. CITGO's accounting policy establishes environmental reserves as probable site restoration and remediation obligations become reasonably capable of estimation. At December 31, 1995 and 1994, CITGO had $60 million and $58 million of environmental accruals included in other noncurrent liabilities. Based on currently available information, including the continuing participation of former owners in remediation actions, CITGO believes that these accruals are sufficient to address its environmental clean-up obligations. Conditions which require additional expenditures may exist for various Company sites including, but not limited to, the Company's operating refinery complexes, closed refinery sites, service stations and crude oil and petroleum storage terminals. The amount of such future expenditures, if any, is indeterminable. CITGO is subject to stringent occupational health and safety laws and regulations. CITGO maintains comprehensive safety, training and maintenance programs, and management believes that CITGO is in substantial compliance with occupational health and safety laws. ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED. The Notes are to be issued under an Indenture (the "Indenture") between the Company and The First National Bank of Chicago, as Trustee (the "Trustee"). A copy of the form of Indenture is an exhibit to this Registration Statement on Form 10. The following summaries of certain provisions of the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indenture, including the definitions therein of certain terms. Wherever particular provisions of the Indenture or terms defined therein are referred to herein, such provisions or defined terms are incorporated herein by reference, and the statements are qualified in their entirety by such reference. Capitalized terms not otherwise defined herein shall have the meanings given to them in the Indenture. GENERAL The Notes will be general unsecured senior obligations of the Company. The Notes will rank pari passu in right of payment with all existing and future senior unsecured indebtedness of the Company and senior in right of payment to all existing and future indebtedness of the Company that is designated as subordinate or junior in right of payment to the Notes. The Notes will be effectively subordinated to all obligations (including trade payables) of the Company's subsidiaries. At December 31, 1995, the Company's subsidiaries had balance sheet liabilities of approximately $606 million. The subsidiaries also have other liabilities (including contingent liabilities) which may be substantial. 18 20 Except as otherwise set forth below under "Book-Entry System", the Notes will be represented by Global Securities deposited with a Depositary (as defined below). Owners of beneficial interests will not be entitled to receive certificated Notes and will not be considered the "holders" of the Notes for purposes of the Indenture. See "-- Book-Entry System." The Indenture does not contain covenants or other provisions designed to afford Holders of Notes protection in the event of a highly leveraged transaction, change in credit rating or other similar occurrence. MATURITY AND PAYMENT DATES The Notes will mature on May 15, 2006, and will be limited to an aggregate principal amount of $200,000,000. The Notes will bear interest at 7 7/8% per annum from May 15, 1996 (the "Issue Date"), or from the most recent interest payment date to which interest has been paid, payable semi-annually on May 15 and November 15 of each year, beginning on November 15, 1996, to the person in whose name the Note (or any predecessor Note) is registered at the close of business on the preceding May 1 or November 1, as the case may be. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. OPTIONAL REDEMPTION The Notes are not redeemable at the option of the Company prior to their maturity. DENOMINATIONS, PAYMENTS OF PRINCIPAL AND INTEREST The Notes will be issuable in denominations of $1,000 and integral multiples thereof (Section 302 of the Indenture) and will be issued only in fully registered form without coupons. The principal of (and applicable premium, if any) and interest, if any, on the Notes will be payable at the corporate trust office of the Trustee, provided that, at the option of the Company, payment of interest may be made by check mailed to the address of the person entitled thereto as it appears in the Security Register or by wire transfer of funds to such Person at an account maintained within the United States (Sections 301, 305, 306, 307 and 1002 of the Indenture). BOOK-ENTRY SYSTEM The Depository Trust Company, New York, New York, will act as securities depositary (the "Depositary") for the Notes. The Notes will be represented by one or more global securities (collectively, the "Global Securities") registered in the name of Cede & Co., the Depositary's nominee. Accordingly, beneficial interests in the Notes will be shown on, and transfers thereof will be effected only through, records maintained by the Depositary and its participants. Except as described below, owners of beneficial interests in the Global Securities will not be entitled to receive Notes in definitive form and will not be considered holders of Notes. Upon the issuance of a Global Security, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the Notes represented by such Global Security to the accounts of institutions that have accounts with the Depositary or its nominee ("participants"). The accounts to be credited will be designated by the underwriters, dealers or agents. Ownership of beneficial interests in a Global Security will be limited to participants or persons that may hold interests through participants. Ownership of interests in such Global Security will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the Depositary (with respect to participants' interests) and such participants (with respect to the owners of beneficial interests in such Global Security). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to transfer beneficial interests in a Global Security. 19 21 So long as the Depositary, or its nominee, is the registered holder and owner of such Global Security, the Depositary or such nominee, as the case may be, will be considered the sole owner and holder of the related Notes for all purposes of such Notes and for all purposes under the Indenture. Except as set forth below, owners of beneficial interests in a Global Security will not be entitled to have the Notes represented by such Global Security registered in their names, will not receive or be entitled to receive physical delivery of Notes in definitive form and will not be considered to be the owners or Holders of any Notes under the Indenture or such Global Security. Accordingly, each person owning a beneficial interest in a Global Security must rely on the procedures of the Depositary and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder of Notes under the Indenture or such Global Security. The Indenture permits the Depositary to authorize participants, as its agents, to take any action which the Depositary, as the holder of a Global Security, is entitled to take under the Indenture or such Global Security. The Company understands that under existing industry practice, in the event the Company requests any action of Holders of Notes or an owner of a beneficial interest in a Global Security desires to take any action that the Depositary, as the holder of such Global Security is entitled to take, the Depositary would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. Payment of principal of and premium, if any, and interest, if any, on Notes represented by a Global Security will be made to the Depositary or its nominee, as the case may be, as the registered owner and holder of such Global Security. Upon receipt of any payment of principal, premium, if any, or interest, if any, in respect of a Global Security, the Depositary will credit immediately participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Security as shown on the records of the Depositary. Payments by participants to owners of beneficial interests in a Global Security held through such participants will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such participants. The Company will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in a Global Security for any Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between the Depositary and its participants or the relationship between such participants and the owners of beneficial interests in such Global Security owning through such participants. Unless and until it is exchanged in whole or in part for Notes in definitive form, a Global Security may not be transferred except as a whole by the Depositary to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary. Securities represented by a Global Security are exchangeable for Notes in definitive form of like tenor as such Global Security in denominations of $1,000 and in any greater amount that is an integral multiple thereof if (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for such Global Security or if at any time the Depositary ceases to be a clearing agency registered under the Securities Exchange Act of 1934, as amended, (ii) the Company in its discretion at any time determines not to have all of the Notes represented by a Global Security and notifies the Trustee thereof, or (iii) an Event of Default has occurred and is continuing with respect to the Notes. Any Note that is exchangeable pursuant to the preceding sentence is exchangeable for Notes issuable in authorized denominations and registered in such names as the Depositary shall direct. Subject to the foregoing, a Global Security is not exchangeable, except for a Global Security or Global Securities of the same aggregate denominations to be registered in the name of the Depositary or its nominee. 20 22 The following summary is based on information furnished by the Depositary: The Depositary is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the United States Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the United States Securities Exchange Act of 1934, as amended. The Depositary holds securities that its participants ("Direct Participants") deposit with the Depositary. The Depositary also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers (including the Underwriters), banks, trust companies, clearing corporations and certain other organizations. The Depositary is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the Depositary's system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to the Depositary and its Direct and Indirect Participants are on file with the United States Securities and Exchange Commission. Purchases of Notes under the Depositary's system must be made by or through Direct Participants, which will receive a credit for such Notes on the Depositary's records. The ownership interest of each actual purchaser of each Note represented by the Global Security ("Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confirmation from the Depositary of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which such Beneficial Owner entered into the transaction. Transfers of ownership interests in the Global Securities are to be accomplished by entries made on the books of Direct or Indirect Participants acting on behalf of Beneficial Owners. The Depositary has no knowledge of the actual Beneficial Owners of the Global Securities; the Depositary's records reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by the Depositary to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Neither the Depositary nor Cede & Co. will consent or vote with respect to the Global Security. Under its usual procedures, the Depositary mails an omnibus proxy (an "Omnibus Proxy") to the Company as soon as possible after the applicable record date. The Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts the Notes are credited on the applicable record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Global Security representing the Notes will be made in immediately available funds to the Depositary. The Depositary's practice is to credit Direct Participants' accounts on the applicable payment date in accordance with their respective holdings shown on the Depositary's records unless the Depositary has reason to believe that it will not receive payment on such date. Payments by Direct or Indirect Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name", and will be the responsibility of such Participant and not of the Depositary, the Trustee or the Company, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, premium, if any, and interest to the Depositary is the responsibility of the Company or the Trustee, disbursement of such payments to Direct Participants shall 21 23 be the responsibility of the Depositary, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. Neither the Company nor the Trustee will have any responsibility or liability for the disbursement of payments in respect of ownership interests in the Notes by the Depositary or the Direct or Indirect Participants or for maintaining or reviewing any records of the Depositary or the Direct or Indirect Participants relating to ownership interests in the Notes or the disbursement of payments in respect thereof. The Depositary may discontinue providing its services as securities depositary with respect to the Notes at any time by giving reasonable notice to the Company or the Trustee. Under such circumstances, and in the event that a successor securities depositary is not obtained, Notes in definitive form are required to be printed and delivered to each holder. The Company may decide to discontinue use of the system of book-entry transfers through the Depositary (or a successor securities depositary). In that event, Notes in definitive form will be printed and delivered. The information in this section concerning the Depositary and the Depositary's system has been obtained from sources that the Company believes to be reliable, but the Company takes no responsibility for the accuracy thereof and such information is subject to any changes to the arrangements between the Company and the Depositary and any changes to such procedures that may be instituted unilaterally by the Depositary. SAME-DAY SETTLEMENT Settlement for the Notes will be made by the Underwriters in immediately available funds. So long as the Depositary continues to make its Same-Day Funds Settlement System available to the Company, all payments of principal and interest on the Notes will be made by the Company in immediately available funds. Secondary trading in long term notes and debentures of corporate issuers is generally settled in clearing-house or next-day funds. In contrast, the Notes will trade in the Depositary's Same-Day Funds Settlement System until maturity, and secondary market trading activity in the Notes will therefore be required by the Depositary to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. CERTAIN COVENANTS The Indenture contains, among others, the following covenants: Limitation on Restricted Payments. The Company will not (and will not permit any Restricted Subsidiary to), directly or indirectly, make any Restricted Payment, unless: (a) after giving effect thereto, the aggregate amount of all Restricted Payments during the period commencing on April 1, 1996, and ending on the date of the payment of such Restricted Payment (the "Computation Period") shall not exceed an amount equal to the sum of: (1) $450,000,000, plus (2) 100% of the aggregate amount received by the Company as (i) the net cash proceeds or (ii) the Fair Market Value of Marketable Assets from the sale (other than to a Subsidiary of the Company) of shares of Capital Stock of the Company or otherwise received as a capital contribution during the Computation Period, minus (3) 100% of the aggregate amount of all PDVSA Investments made during the Computation Period, plus (4) 100% of the aggregate amount received during the Computation Period by the Company and its Restricted Subsidiaries (except, in the case of any such amount received and held by a Restricted Subsidiary, to the extent that such Restricted Subsidiary is prohibited, 22 24 whether by contract, applicable law or otherwise, from paying such amount as dividends to the Company or any other Restricted Subsidiary) (i) as earnings (whether in the form of dividends or otherwise) on PDVSA Investments and (ii) as net cash proceeds in connection with the sale, redemption or other disposition of one or more PDVSA Investments or any part thereof or any interest therein, plus (5) 75% (or minus 100% if negative) of the aggregate Consolidated Net Income for the period commencing on April 1, 1996, and ending on and including the last day of the fiscal quarter ended immediately prior to the date of payment of such Restricted Payment, plus (6) 100% of the aggregate principal amount of any Senior Indebtedness of the Company converted into or exchanged for Capital Stock of the Company during the Computation Period; (b) immediately after giving effect to such Restricted Payment, no Default or Event of Default shall have occurred and be continuing; and (c) immediately after giving effect to any such Restricted Payment, Consolidated Net Worth shall be at least equal to the sum of: (1) $1,400,000,000, plus (2) an amount equal to $10,000,000 multiplied by the number of completed fiscal quarters of the Company since April 1, 1996. Notwithstanding the foregoing, the foregoing provisions do not prohibit the payment of any dividend or making of any distribution within 90 days after the date of its declaration if the dividend or distribution would have been permitted on the date of declaration; provided, however, that such dividend shall be deemed to have been made as of its date of declaration for purposes of this covenant. Specified Agreements. The Company will not, and will not permit any of its Restricted Subsidiaries to, amend, modify or waive: (a) any Pricing Term of any Specified Agreement, unless the Trustee shall have first received (i) a certified resolution of the Board of Directors of the Company to the effect that such amendment, modification or waiver would not have a Materially Adverse Effect and (ii) the written opinion of a nationally recognized firm of investment bankers that such amendment, modification or waiver is fair, from a financial point of view, to the Company and its Restricted Subsidiaries; (b) any Material Non-Pricing Term of any Specified Agreement; or (c) any provision of the CITGO Supplemental Supply Agreement (unless an amendment thereto shall be required to conform the CITGO Supplemental Supply Agreement to the CITGO Supply Agreement following an amendment of the CITGO Supply Agreement effected in compliance with the provisions of this covenant or otherwise not in violation of the Indenture). Transactions with Affiliates. The Company will not, and will not permit any of its Restricted Subsidiaries to, engage in any transaction with an Affiliate of the Company (other than the Company or a Restricted Subsidiary of the Company) on terms less favorable to the Company or such Restricted Subsidiary (as the case may be) than would have been obtainable in arms' length dealing with a Person other than an Affiliate; provided that nothing in this covenant shall prohibit any transaction where the amount involved is less than $1,000,000; provided further that the aggregate amount involved in all transactions consummated in reliance on the preceding proviso in any twelve-month period shall not exceed $10,000,000. In determining whether, for purposes of this covenant, any transaction between or among parties is arms' length, all other contemporaneous transactions between or among such parties shall be taken into account so that such transaction and such other transactions shall be considered as a single transaction. 23 25 The limitations of the preceding paragraph do not apply to transactions with Affiliates contemplated by agreements in effect on the date of the Indenture in accordance with the terms of such agreements as in effect on the date of the Indenture or any renewals or extensions thereof on substantially the same terms (and, with respect to Specified Agreements, as amended in compliance with the "Specified Agreements" covenant or otherwise not in violation of the Indenture). Limitation on Liens. The Indenture provides that the Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, Incur any Lien on or with respect to any Significant Property of the Company or such Restricted Subsidiary, or any interest therein or any income or profits therefrom, unless the Notes are secured equally and ratably with (or prior to) any and all other Indebtedness secured by such Lien, except for: (a) Liens existing on the Issue Date; (b) Liens on Property existing at the time of acquisition thereof or Liens affecting Property of a Person existing at the time it becomes a Subsidiary of the Company or at the time it is merged into or consolidated with the Company or a Subsidiary of the Company; provided that, in either case, such Liens do not extend to or cover any Property of the Company or of any of its Restricted Subsidiaries other than the Property that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Subsidiary; (c) Liens on Property Incurred to secure payment of all or a part of the purchase price thereof or to secure Indebtedness Incurred prior to, at the time of, or within 12 months after the acquisition thereof for the purpose of financing all or part of the purchase price thereof; (d) Liens on any Property to secure all or part of the cost of improvements or construction thereon or Indebtedness Incurred to provide funds for such purpose in a principal amount not exceeding the cost of such improvements or construction and Incurred within 12 months after completion of such improvements or construction; (e) Liens to government entities granted to secure pollution control or industrial revenue bond financings; (f) Liens which secure Indebtedness owing by a Restricted Subsidiary of the Company to the Company, by the Company to a Restricted Subsidiary or by one Restricted Subsidiary to another Restricted Subsidiary; (g) Liens imposed by law, including mechanics', materialmens', carriers' or other like Liens, arising in the ordinary course of business; (h) any Lien Incurred to secure the performance of surety or appeal bonds Incurred in the ordinary course of business consistent with past practice; (i) any Lien incidental to the normal conduct of the business of the Company or any Restricted Subsidiary or the ownership of its property or the conduct of the ordinary course of its business (including, without limitation, (A) zoning restrictions, easements, rights of way, licenses, covenants, reservations, restrictions on the use of real property and other minor irregularities of title, (B) rights of lessees under leases, (C) rights of collecting banks having rights of setoff, revocation, refund or chargeback with respect to money or instruments of the Company or any Restricted Subsidiary on deposit with or in the possession of such banks, (D) Liens to secure the performance of statutory obligations, tenders, bids, leases, progress payments, performance or return-of-money bonds, performance or other similar bonds or other obligations of a similar nature incurred in the ordinary course of business, (E) Liens required by any contract or statute in order to permit the Company or a Subsidiary of the Company to perform any contract or subcontract made by it with or pursuant to the requirements of a governmental entity and (F) "first purchaser" Liens on crude oil), in each case which are not Incurred in connection with the borrowing of money, the obtaining of advances or credit or the payment of the deferred purchase price of Property and which do not in the aggregate impair the use of Property in the operation of the business of the Company and its Restricted Subsidiaries taken as a whole; (j) Liens for taxes not yet due or which are being contested in good faith by appropriate proceedings, so long as reserves have been established to the extent required by GAAP; (k) Liens securing obligations in respect of Interest Rate Protection Agreements or Exchange Rate Contracts; (l) Liens on the assets of the Company or any Restricted Subsidiary created or existing to secure stay or appeal bonds or otherwise resulting from any litigation or legal proceeding which are currently being contested in good faith by appropriate action promptly initiated and diligently conducted, including the Lien of any judgment, provided that the aggregate amount secured by all such Liens does not exceed $25 million; and (m) any extension, renewal, replacement or refinancing of any Lien referred to in the foregoing clauses (a) through (e); provided, however, that (X) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements on such property) and (Y) the 24 26 Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (a) through (e) at the time the original Lien became a Lien permitted under this "Limitation on Liens" covenant and (B) an amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, renewal or replacement. Notwithstanding the foregoing, the Company and any one or more of its Restricted Subsidiaries may, without securing the Notes, Incur Liens which would otherwise be subject to the foregoing restrictions securing (x) Current Indebtedness and (y) Funded Indebtedness in an aggregate principal amount which, together with all other such Funded Indebtedness of the Company and its Restricted Subsidiaries which would otherwise be subject to the foregoing restrictions (not including Indebtedness permitted to be secured under clauses (f) through (k), inclusive, above) and the aggregate Attributable Indebtedness of Sale and Leaseback Transactions does not at the time such Lien is Incurred exceed 15% of Consolidated Net Tangible Assets of the Company and its consolidated Restricted Subsidiaries. Limitation on Sale and Leaseback Transactions. The Indenture provides that the Company will not, and will not cause or permit any Restricted Subsidiary to, enter into, assume, Guarantee or otherwise become liable with respect to any Sale and Leaseback Transaction, unless (a) the obligation of the Company or such Restricted Subsidiary with respect thereto would be permitted under the "Limitation on Liens" covenant; (b) after the Issue Date and within a period commencing six months prior to the effective date of such Sale and Leaseback Transaction (or, if later, commencing on the Issue Date) and ending six months after such effective date, the Company or any Restricted Subsidiary shall have expended (or entered into a binding commitment to expend) for any Property (including amounts expended or committed for the acquisition of such Property, and for additions, alterations, improvements and repairs thereto; provided that such expenditures constitute additions to property, plant and equipment under GAAP; and provided further that any expenditure which shall have been financed by Indebtedness secured by a Lien permitted under clause (c) or (d) of the "Limitation on Liens" covenant shall be disregarded for purposes of determining whether the Company or such Restricted Subsidiary shall have satisfied the requirements of this clause (b)) an amount equal to all or a portion of the net proceeds received from such transaction (but excluding any portion of such proceeds which are applied as set forth in (c) below); or (c) the Company, within six months after the effective date of any such Sale and Leaseback Transaction, applies to the defeasance or retirement of the Notes or other Senior Indebtedness an amount equal to the net proceeds of the sale or transfer of the Property leased in such transaction (with any such amount required to be applied under this clause (c) to be reduced to reflect any amount utilized by the Company or a Restricted Subsidiary as set forth in (b) above). Restricted and Unrestricted Subsidiaries. Subject to the following paragraph, the Company may designate a Subsidiary (including a newly formed or newly acquired Subsidiary) of itself or of any of its Restricted Subsidiaries as an Unrestricted Subsidiary if (i) such Subsidiary does not have any obligations which, if in default, would result in a cross default on Indebtedness of the Company and (ii) either (a) such Subsidiary has total assets of $1,000 or less, or (b) such designation is effective immediately upon such Person becoming a Subsidiary of the Company or any of its Restricted Subsidiaries. Unless so designated an Unrestricted Subsidiary, any Person that becomes a wholly-owned Subsidiary of the Company or its Restricted Subsidiaries shall be classified as a Restricted Subsidiary thereof. Except as provided in the first sentence of this paragraph, no Restricted Subsidiary may be redesignated as an Unrestricted Subsidiary. Subject to the following paragraph, an Unrestricted Subsidiary may be redesignated as a Restricted Subsidiary. No Restricted Subsidiary may be a Subsidiary of an Unrestricted Subsidiary. The designation of an Unrestricted Subsidiary or the removal of such designation in compliance with the following paragraph shall be made by the delivery to the Trustee of a certificate of designation executed by the President, the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, any Executive Vice President, any Senior Vice President or the Treasurer of the Company. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, take any action or enter into any transaction or series of transactions that would result in a Person becoming a Restricted 25 27 Subsidiary (whether through an acquisition, the redesignation of an Unrestricted Subsidiary or otherwise) unless after giving effect to such action, transaction or series of transactions, on a pro forma basis, (i) no Default or Event of Default would occur or be continuing, and (ii) there exist no Liens with respect to the Property of such Person other than Liens permitted under the "Limitation on Liens" covenant. Reports to Holders. Whether or not the Company is then required to do so under the Exchange Act, the Company will file with the Securities and Exchange Commission (the "Commission") the documents, reports and other information required by the Exchange Act to be filed by domestic issuers of debt securities registered under the Exchange Act and, upon such filing, will promptly furnish such reports, documents and information to the Trustee and, within 15 days after such filing with the Commission, the Holders of the Notes. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company shall not, and shall not permit any Restricted Subsidiary to, consolidate or merge with or into any other Person, or convey, transfer or lease all or substantially all its assets to any Person, unless: (1) either (a) the Company shall be the continuing Person in the case of a merger or consolidation or (b) the resulting, surviving or transferee Person if other than the Company (the "Successor Company") shall be a solvent corporation, limited partnership or limited liability company organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia, and the Successor Company shall expressly assume, by a supplement to the Indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Notes and the Indenture; (2) immediately before and after giving effect to such transaction on a pro forma basis (and treating any Indebtedness which becomes an obligation of the Successor Company or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Company or such Restricted Subsidiary at the time of such transaction), no Default or Event of Default shall have occurred and be continuing; and (3) the Company shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such transaction and such supplemental indenture (if any) comply with the Indenture. The Successor Company will succeed to, and be substituted for, and may exercise every right and power of the Company under the Indenture, and the predecessor Company (except in the case of a lease and except in the case of any conveyance or transfer of assets in which the transferee does not acquire the assets of the Company as an entirety or virtually as an entirety) will be released from its obligations in respect of the Notes. MODIFICATION OF THE INDENTURE; WAIVER OF COVENANTS Subject to certain exceptions, the provisions of the Indenture applicable to the Notes may be amended or supplemented with the written consent of the Holders of at least a majority in principal amount of the Notes then outstanding and compliance with any provisions may be waived with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding. However, without the consent of each Holder of each Note so affected, no amendment or waiver may, among other things, (i) reduce the amount of Notes whose Holders must consent to an amendment, (ii) reduce the rate of or extend the time for payment of interest on any Notes, (iii) reduce the principal of or extend the Stated Maturity of any Notes, (iv) reduce the premium payable upon the redemption of any Note or change the time or times at which any Notes may be redeemed, (v) make any Note payable in money other than that stated in the Note, or (vi) impair the right of any Holder to institute suit for the enforcement of any payment on or with respect to any Notes. Without the consent of any Holder of the Notes, the Company and the Trustee may, among other things, amend or supplement the Indenture to cure any ambiguity, omission, defect or inconsistency provided that such change does not adversely affect the rights of any Holder, to provide for the assumption by a Successor Company of the obligations of the Company under the Indenture, to add Guarantees with respect to the Notes or to secure the Notes, to add to the covenants of the Company for 26 28 the benefit of the Holders or to surrender any right or power conferred upon the Company, to make any change that does not adversely affect the rights of any Holder or to comply with any requirement of the Securities and Exchange Commission in connection with the qualification of the Indenture under the Trust Indenture Act of 1939. EVENTS OF DEFAULT An "Event of Default" will occur under the Notes if: (i) the Company defaults in the payment of interest on any Note when it becomes due and payable and such default continues for a period of 30 days; or (ii) the Company defaults in the payment of the principal of or premium, if any, on any Note when the same becomes due and payable at maturity, upon acceleration, required repurchase or otherwise; or (iii) the Company fails to comply with any of its agreements or covenants in, or provisions of, the Notes or the Indenture (other than clause (i) or (ii) above) and the default continues for the period and after the notice specified below; or (iv) any Indebtedness of the Company or any Restricted Subsidiary having an outstanding principal amount of $25 million or more in the aggregate, whether such Indebtedness now exists or shall hereafter be created, is (A) declared to be due and payable prior to its Stated Maturity or (B) not paid when due by the Company or any Restricted Subsidiary (after giving effect to any extension of such due date by the holder of such Indebtedness and after the expiration of any grace period in respect of such due date contained in the instrument under which such Indebtedness is outstanding), or any combination of (A) and (B); or (v) one or more judgments or orders for the payment of money are entered by a court of competent jurisdiction against the Company or any Restricted Subsidiary in an aggregate amount in excess of $50 million and such judgments or orders are not discharged, waived, stayed or satisfied for a period of 60 consecutive days after judgment is entered; or (vi) certain events involving bankruptcy, insolvency or reorganization of the Company or any Restricted Subsidiary occur. A default under clause (iii) above is not an Event of Default with respect to the Notes until the Trustee notifies the Company in writing, or the Holders of at least 25% in principal amount of the Notes then Outstanding notify the Company and the Trustee, in writing, of the default, and the Company does not cure the default within 60 days after receipt of the notice. The notice must specify the default, demand that it be remedied and state that the notice is a "Notice of Default". Such notice to the Company shall be given by the Trustee if so requested in writing by the Holders of at least 25% of the principal amount of the Notes then Outstanding. If an Event of Default with respect to Notes (other than an Event of Default specified in clause (vi)) occurs and is continuing, the Trustee, by written notice to the Company, or the Holders of at least 25% in principal amount of the Notes by written notice to the Company and the Trustee, may declare the principal of all Notes to be due and payable immediately. Upon such declaration, such principal will be due and payable immediately. If an Event of Default specified in clause (vi) occurs, the principal of all Notes will become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holders. The Holders of a majority in principal amount of the Notes by written notice to the Company and the Trustee may rescind an acceleration and its consequences if the rescission is made before any judgment or decree for payment of the money due has been obtained by the Trustee and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of acceleration and the Company has paid or deposited with the Trustee a 27 29 sum sufficient to pay in the currency or currency unit or composite currency in which the Notes are payable (except as otherwise specified): (A) all overdue installments of interest on and any Additional Amounts payable in respect of all Outstanding Notes and any related coupons, (B) the principal of (and premium, if any, on) any Outstanding Notes which have become due otherwise than by such declaration of acceleration and interest thereon at the rate or rates borne by or provided for in the Notes, (C) to the extent that payment of such interest is lawful, interest upon overdue installments of interest and any Additional Amounts at the rate or rates borne by or provided for in the Notes, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. No such rescission will affect any subsequent default or impair any right consequent thereto. The Holders of a majority in principal amount of the Outstanding Notes by notice to the Trustee may on behalf of all Holders of Notes and any related coupons waive an existing or past default and its consequences except (i) a default in the payment of the principal of or interest on or Additional Amounts payable in respect of any Note or any related coupons or (ii) a default in respect of a provision that cannot be amended without the consent of each Holder of each Outstanding Note. When a default is waived such default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured, but no such waiver will extend to any subsequent or other default or Event of Default or impair any consequent right thereon. The Holders of a majority in principal amount of the Outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee with respect to the Notes. However, such direction may not be in conflict with any rule of law or with the Indenture and the Trustee may refuse to follow any direction that the Trustee determines is unduly prejudicial to the rights of other Holders of each Outstanding Note or would involve the Trustee in personal liability; provided, however, that the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction. A Holder of Notes or any related coupons may not pursue any remedy with respect to the Indenture or any Notes unless: (i) such Holder has previously given to the Trustee written notice stating that an Event of Default with respect to the Notes is continuing; (ii) Holders of at least 25% in principal amount of the Outstanding Notes shall have made a written request to the Trustee to pursue the remedy; (iii) such Holder or Holders offer to the Trustee reasonable security or indemnity against any loss, liability or expense to be incurred in compliance with such request; (iv) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of security or indemnity; and (v) the Holders of a majority in principal amount of the Notes do not give the Trustee a written direction inconsistent with the request during such 60-day period; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under the Indenture, except in the manner provided in the Indenture and for the equal and ratable benefit of all such Holders. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other capitalized terms used herein for which no definition is provided. 28 30 "Acquired Indebtedness" of any Person means Indebtedness of another Person and any of its Subsidiaries existing at the time such other Person becomes a Subsidiary (or a Restricted Subsidiary, in the case of the Company) of the referent Person or at the time it merges or consolidates with the referent Person or any of the referent Person's Subsidiaries (or Restricted Subsidiaries, in the case of the Company) or assumed by the referent Person or any Subsidiary (or any Restricted Subsidiary, in the case of the Company) of the referent Person in connection with the acquisition of assets from such other Person. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, controls, is under common control with, or is controlled by, such Person. As used in this definition, "control" (and, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise), provided that (a) each Unrestricted Subsidiary shall be deemed to be an Affiliate of the Company and of each Restricted Subsidiary of the Company, (b) no individual shall be deemed to be an Affiliate of a Person solely by reason of his or her being an officer or director (or equivalent) of such Person and (c) none of the Company or any of its Restricted Subsidiaries shall be deemed to be Affiliates of each other. "Attributable Indebtedness" means, in respect of a Sale and Leaseback Transaction at the time of determination thereof, the capitalized amount in respect of such transaction that would appear on the face of a balance sheet of the lessee thereunder in accordance with GAAP. "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. "Board of Directors" means either the board of directors of the Company or any duly authorized committee thereof. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other arrangement conveying the right to use) real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with GAAP. For purposes of the "Limitation on Liens" covenant, a Capital Lease Obligation shall be deemed to be secured by a Lien on the property being leased. "Capital Stock" in any Person means any and all shares, interests, participations or other equivalents in the equity interest (however designated) in such Person and any rights (other than debt securities convertible into an equity interest), warrants or options to subscribe for or to acquire an equity interest in such Person; provided, however, that "Capital Stock" shall not include Redeemable Stock. "Cit-Con" means Cit-Con Oil Corporation, a Delaware corporation. "CITGO Supplemental Supply Agreement" means that certain Supplemental Crude Supply Agreement, dated as of September 30, 1986, by and between the Company and PDVSA, and as amended, supplemented, restated or otherwise modified from time to time in compliance with the provisions of the "Specified Agreements" covenant or otherwise not in violation of the Indenture. "CITGO Supply Agreement" means that certain Crude Supply Agreement dated as of September 30, 1986, by and between the Company and PDVSA, and as amended, supplemented, restated or otherwise modified from time to time in compliance with the provisions of the "Specified Agreements" covenant or otherwise not in violation of the Indenture, which Agreement has been heretofore assigned by the Company to CIVESCO, and by PDVSA to Commercit, S.A., a Venezuelan corporation and a Subsidiary of PDVSA, and by Commercit, S.A. partially to PMI. "CIVESCO" means CITGO Venezuela Supply Company, a Delaware corporation and a Restricted Subsidiary of the Company. 29 31 "Common Stock" of any Person means any and all shares, interests or other participations or other equivalents in the equity interest (however designated and whether voting or non-voting) of such Person, which have no preference as to dividends or liquidation over any other equity interest, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated Net Income" means, for any period, the net income of the Company and its Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP (as in effect and applied by the Company on the Issue Date), after eliminating (without duplication) all (a) gains (net of expenses and taxes applicable thereto) or losses arising from the sale or other disposition of assets other than current assets, (b) gains arising from any write-up of assets (other than write-ups of inventories as a result of the lower of cost or market adjustments), (c) gains arising from the acquisition by any such Person of its outstanding Indebtedness, (d) that portion (if any) of the net income of any Restricted Subsidiary which such Restricted Subsidiary is prohibited (whether by contract, applicable law or otherwise) from paying as dividends to the Company or any other Restricted Subsidiary, (e) amounts representing the equity of the Company or any Restricted Subsidiary in the undistributed earnings of any other Person (other than a Restricted Subsidiary), (f) in the case of a successor to the Company by consolidation or merger or a transferee of its assets after the Issue Date, any earnings of the successor or transferee corporation prior to the consolidation, merger or transfer of assets, (g) any earnings of any Restricted Subsidiary prior to becoming a Restricted Subsidiary, (h) any deferred credit (or amortization of a deferred credit) arising from the acquisition after the date hereof of any Restricted Subsidiary representing the excess of equity in such Restricted Subsidiary at the date of acquisition thereof over the cost of investment in such Restricted Subsidiary, (i) any reversal of any contingency reserve, except to the extent that provision for such contingency reserve shall have been made from income arising after the Issue Date and (j) the aggregate amount received during such period by the Company and all Restricted Subsidiaries as earnings (whether in the form of dividends or otherwise) on PDVSA Investments or as net cash proceeds in connection with the sale, redemption or other disposition of one or more PDVSA Investments or any part thereto or interest therein. "Consolidated Net Tangible Assets" means, as of any date of determination, the sum of the amounts that would appear on a consolidated balance sheet of the Company and its Restricted Subsidiaries for the total assets (less accumulated depletion, depreciation or amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) of the Company and its Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, after giving effect to purchase accounting and after deducting therefrom, to the extent included in total assets, in each case as determined on a consolidated basis in accordance with GAAP (without duplication): (a) the aggregate amount of liabilities of the Company and its Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated); (b) current Indebtedness and current maturities of long-term Indebtedness; (c) minority interests in the Company's Restricted Subsidiaries held by Persons other than the Company or a wholly owned Restricted Subsidiary of the Company; and (d) unamortized debt discount and expenses and other unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, licenses, organization or developmental expenses and other intangible items. "Consolidated Net Worth" means, at any date, all assets of the Company and its Restricted Subsidiaries at such date determined on a consolidated basis in accordance with GAAP minus all liabilities of the Company and its Restricted Subsidiaries (including minority interests in consolidated Subsidiaries of the Company) at such date determined on a consolidated basis in accordance with GAAP. "CRCCLP" means CITGO Refining and Chemicals Company L.P., a Delaware limited partnership and successor by merger to CRCI, and a Restricted Subsidiary. "CRCCLP Supply Agreement" means that certain Crude Oil and Feedstock Supply Agreement dated as of March 31, 1987, originally by and between CRCI and PDVSA, and currently between CRCCLP and 30 32 PDVSA, and as amended, supplemented, restated or otherwise modified from time to time in compliance with the provisions of the "Specified Agreements" covenant or otherwise not in violation of the Indenture. "CRCI" means CITGO Refining and Chemicals, Inc., a Delaware corporation formerly known as Champlin Refining & Chemicals, Inc., and a Restricted Subsidiary. "Current Indebtedness" means any Indebtedness for borrowed money which is not Funded Indebtedness. "Custodian" will mean any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. "Default" will mean any event which is, or after notice or passage of time or both would be, an Event of Default. "Exchange Rate Contract" means, with respect to any Person, any currency swap agreements, forward exchange rate agreements, foreign currency futures or options, exchange rate collar agreements, exchange rate insurance and other agreements or arrangements, or combination thereof, designed to provide protection against fluctuations in currency exchange rates. "Fair Market Value" means, with respect to any assets to be transferred or any noncash consideration or Property received by any Person, the fair market value of such consideration or Property (a) in the case of a contribution to capital in the form of Marketable Assets, as determined by the applicable readily ascertainable market price and (b) in all other cases, as determined in good faith by the Board of Directors of the Company, as evidenced by a certified resolution delivered to the Trustee, provided that, in the case of clause (b) above, if such resolution indicates that such fair market value exceeds $25 million, such resolution shall be accompanied by the written opinion of a nationally recognized firm of investment bankers to the effect that such consideration or Property is fair, from a financial point of view, to such Person. "Funded Indebtedness" means Indebtedness having a Stated Maturity, as of the time such Indebtedness was Incurred, in excess of one year (or outstanding under a revolving credit agreement with a scheduled expiration date in excess of one year after the date such facility originally became available to the obligor thereunder). "GAAP" means generally accepted accounting principles in the United States as in effect as of the date of the Indenture, including those set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as approved by a significant segment of the accounting profession. All ratios and computations based on GAAP contained in the Indenture shall be computed in conformity with GAAP consistently applied. "Guarantee" by any person means any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any Lien on the assets of such Person securing obligations of the primary obligor and any obligation of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase or payment of) any security for the payment of such Indebtedness, (b) to purchase Property, securities or services for the purpose of assuring the holder of such Indebtedness of the payment of such Indebtedness, or (c) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness (and "Guaranteed" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that a Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. 31 33 "Incur" means, with respect to any Indebtedness or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), extend, assume, Guarantee or otherwise become liable in respect of such Indebtedness or other obligation or the recording, as required pursuant to GAAP or otherwise, of any such Indebtedness or obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in GAAP that results in an obligation of such Person that exists at such time becoming Indebtedness shall not be deemed an Incurrence of such Indebtedness. "Indebtedness" means at any time (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person, and whether or not contingent, (a) any obligation of such Person for borrowed money, (b) any obligation of such Person evidenced by bonds, debentures, notes, Guarantees or other similar instruments, including, without limitation, any such obligations Incurred in connection with the acquisition of Property, assets or businesses, (c) any reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (d) any obligation of such Person issued or assumed as the deferred purchase price of Property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business), (e) any Capital Lease Obligation of such Person, (f) the maximum fixed redemption or repurchase price of Redeemable Stock of such Person at the time of determination, (g) any obligation to pay rent or other payment amounts of such person with respect to any Sale and Leaseback Transaction to which such Person is a party and (h) any obligation of the type referred to in clauses (a) through (g) of this paragraph of another Person and all dividends of another Person the payment of which, in either case, such Person has Guaranteed or is responsible or liable, directly or indirectly, as obligor, Guarantor or otherwise. For purposes of this definition, the maximum fixed repurchase price of any Redeemable Stock that does not have a fixed repurchase price shall be calculated in accordance with the terms of such Redeemable Stock as if such Redeemable Stock were repurchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture; provided, however, that if such Redeemable Stock is not then permitted to be repurchased, the repurchase price shall be the book value of such Redeemable Stock. The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability of any contingent obligations in respect thereof at such date. "Interest Rate Protection Agreement" means, with respect to any Person, any interest rate swap agreement, interest rate cap or collar agreement or other financial agreement or arrangement designed to protect such Person or its Restricted Subsidiaries against fluctuations in interest rates, as in effect from time to time. "Investment" means, as applied to the Company or any Restricted Subsidiary, (a) any direct or indirect purchase or other acquisition by the Company or such Restricted Subsidiary (as the case may be) of stock or other securities of any Person or (b) any direct or indirect loan, advance or capital contribution by the Company or such Restricted Subsidiary (as the case may be) to any other Person. "Issue Date" means, with respect to the Notes, the date of original issue of the Notes by the Company. "Lien" means, with respect to any Property, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien (statutory or other), charge, easement, encumbrance, preference, priority or other security or similar agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such Property (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). For purposes of the "Limitation on Liens" covenant, a Capital Lease Obligation shall be deemed to be secured by a Lien on the property being leased. "Marketable Assets" means crude oil or petroleum products which are readily marketable and have a readily ascertainable market price. 32 34 "Material Non-Pricing Term" means (a) any provision of Section 2.10 (force majeure; liability exemptions), 2.11 (limitation of liabilities; remedies), 3.1 (grounds for termination), 3.2 (other rights and remedies) or 4.3 (commercial acts and obligations; waiver of immunities; consent to jurisdiction) of the CITGO Supply Agreement; and (b) any provision of Section 2.10 (force majeure; liabilities exemptions), 2.11 (limitation of liabilities; and remedies), 3.1 (grounds for termination), 3.2 (other rights and remedies) or 5.3 (commercial acts and obligations; waiver of immunities) of the CRCCLP Supply Agreement. "Materially Adverse Effect" means, relative to any occurrence of whatever nature (including any adverse determination in any litigation, arbitration or governmental investigation or proceeding) and after taking into account insurance coverage and effective indemnification with respect to such occurrence, a materially adverse effect on a consolidated basis for the Company and its Restricted Subsidiaries on (a) the consolidated financial condition, business, operations or properties of the Company and its Restricted Subsidiaries or (b) the ability of the Company to perform any of its payment obligations or other obligations under the Indenture. "Officers' Certificate" will mean a certificate signed by two officers of the Company at least one of whom shall be the principal executive officer, principal accounting officer or principal financial officer of the Company. "Opinion of Counsel" will mean a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "PDVSA" means Petroleos de Venezuela, S.A., a Venezuelan corporation. "PDVSA Investment" means any Investments made by the Company or any Restricted Subsidiary (other than Investments in the Company or a Restricted Subsidiary) using funds or other Property contributed after March 31, 1996, to the Company or any Restricted Subsidiary by PDVSA or its Affiliates (but excluding the Company and its Restricted Subsidiaries) in exchange for Capital Stock or as an equity contribution. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "PMI" means PDVSA Marketing International, S.A., a Panamanian corporation and a Subsidiary of PDVSA. "Pricing Term" means (a) any provision of a Supply Agreement or the CITGO Supplemental Supply Agreement, the proposed amendment, modification or waiver of which, directly or indirectly, would (i) materially increase the price the purchaser under such agreement (the "Purchaser") would pay for oil or feedstocks or (ii) materially reduce the volumes of oil or feedstocks (whether base, supplemental or incremental) the seller thereunder would be required to sell and the Purchaser would be required or entitled to purchase; or (b) any provision of the Tax Allocation Agreement, the proposed amendment, modification or waiver of which, directly or indirectly, would materially increase the amount or materially accelerate the payment of amounts otherwise payable thereunder by the Company or its Restricted Subsidiaries. "Property" means, with respect to any Person, any interest of such Person in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, including, without limitation, Capital Stock in any other Person. "Redeemable Stock" of any Person means any equity security of such Person that by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or otherwise (including on the happening of an event), is or could be required to be redeemed or is or could be redeemable at the option of the holder thereof, in whole or in part, on or prior to the Stated Maturity of the Debt Securities, or is or could be exchangeable for Indebtedness at any time, in whole or in part, on or prior to the Stated Maturity of the Debt Securities. 33 35 "Restricted Payment" means: (a) the payment of dividends by the Company on, or (b) other payments or distributions (whether made by the Company or any of its Restricted Subsidiaries) on account, or to the Holders, of, or (c) the purchase, redemption, retirement or other acquisition (whether by the Company or any of its Restricted Subsidiaries) of, any shares of any class of Capital Stock or Redeemable Stock of the Company or any warrant, option or other right to acquire such Capital Stock or Redeemable Stock (whether in cash, Property, obligations or other securities), but excluding dividends or other distributions payable solely in Common Stock of the Company. Notwithstanding the foregoing, Restricted Payments shall not include (i) the acquisition of Capital Stock of the Company either (A) solely in exchange for shares of Capital Stock of the Company, or (B) through application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Capital Stock of the Company; and (ii) payments by the Company under the Tax Allocation Agreement. "Restricted Subsidiary" means any direct or indirect wholly-owned Subsidiary of the Company that, as of the date of determination, is not an Unrestricted Subsidiary. "Sale and Leaseback Transaction" means, with respect to any Person, any direct or indirect arrangement (excluding, however, any such arrangement between such Person and a Restricted Subsidiary of such Person or between one or more Restricted Subsidiaries of such Person) pursuant to which a Significant Property is sold or transferred by such Person or a Restricted Subsidiary of such Person and is thereafter leased back from the purchaser or transferee thereof by such Person or one of its Restricted Subsidiaries for a term of more than one year. "Senior Indebtedness" means, at any date, any outstanding Indebtedness of the Company that is pari passu in right of payment with the Notes. "Significant Property" means (a) the Company's refinery located at Lake Charles, Louisiana, (b) the Company's lubricants blending plant located at Cicero, Illinois and (c) CRCCLP's refinery located at Corpus Christi, Texas, in each case including all associated interests in real property, fixtures, equipment and other tangible and intangible assets used in connection with such facilities. "Specified Agreements" means (a) the Supply Agreements, (b) the CITGO Supplemental Supply Agreement and (c) the Tax Allocation Agreement. "Stated Maturity" means, when used with respect to any security or debt obligation, the date specified in such security or obligation as the fixed date on which the principal or redemption price of such security or obligation is due and payable and, when used with respect to any installment of interest on a security or debt obligation, the fixed date on which such installment of interest is due and payable. The Stated Maturity of the deemed principal amount of a Capital Lease Obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Subsidiary" of a Person means (a) a corporation a majority of whose Voting Stock is at the time, directly or indirectly, owned by such Person, by one or more subsidiaries of such Person or by such Person and one or more subsidiaries of such Person, (b) a partnership in which such Person or a subsidiary of such Person is, at the date of determination, a general or limited partner of such partnership, but only if such Person or its subsidiary is entitled to receive more than 50% of the assets of such partnership upon its dissolution, or (c) any other Person (other than a corporation or partnership) in which such Person, directly or indirectly, at the date of determination thereof, has (i) at least a majority ownership interest or (ii) the power to elect or direct the election of a majority of the directors or other governing body of such Person. 34 36 "Supply Agreements" means (a) the CRCCLP Supply Agreement and (b) the CITGO Supply Agreement. "Tax Allocation Agreement" means the Tax Allocation Agreement dated as of June 24, 1993, among PDV America, VPHI Midwest, Inc., the Company, and PDV USA, Inc., as in effect on the date of the Indenture and as amended, supplemented, restated or otherwise modified from time to time in compliance with the "Specified Agreements" covenant or otherwise not in violation of the Indenture. "Unrestricted Subsidiary" means Cit-Con and any other Subsidiary of the Company that the Company has classified, in accordance with the terms of the Indenture, as an Unrestricted Subsidiary and that has not been reclassified as a Restricted Subsidiary. "Voting Stock" means all classes of Capital Stock of a Person then outstanding normally entitled to vote in elections of directors or Persons performing similar functions. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Indenture provides that the Company may at its option, by Board Resolution, at any time, elect to (a) defease all of the Company's obligations with respect to the Notes and any coupons appertaining thereto ("legal defeasance option") or (ii) defease the Company's obligations to comply with certain restrictive covenants, including certain of the covenants described under "Certain Covenants" ("covenant defeasance option") with respect to the Notes and any coupons appertaining thereto. The Company may exercise its legal defeasance option with respect to the Notes notwithstanding its prior exercise of its covenant defeasance option with respect thereto. If the Company exercises its legal defeasance option with respect to the Notes, payment of the Notes may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option with respect to the Notes, payment of the Notes may not be accelerated because of certain Events of Default described under "Events of Default" (not including, among others, Events of Default relating to nonpayment, bankruptcy and insolvency events) or because of the failure of the Company to comply with certain covenants specified in the Indenture. The Company may exercise its legal defeasance option or its covenant defeasance option with respect to the Notes only if (a) the Company irrevocably deposits with the Trustee in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Notes and any coupons appertaining thereto, (i) an amount in such currency, currencies or currency unit in which the Notes and any coupons appertaining thereto are then specified as payable at Stated Maturity, (ii) U.S. Government Obligations applicable to the Notes and coupons appertaining thereto (determined on the basis of the currency, currencies or currency unit in which the Notes and coupons appertaining thereto are then specified as payable at Stated Maturity) which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide money in an amount, or (iii) a combination thereof, in any case, in an amount, sufficient, without consideration of any reinvestment of such principal and interest, to pay (A) the principal of (and premium, if any) and interest, if any, on the Outstanding Notes and any coupons appertaining thereto on the Stated Maturity of such principal or installment of principal or interest and (B) any mandatory sinking fund payments or analogous payments applicable to the Outstanding Notes and any coupons appertaining thereto on the day on which such payments are due and payable in accordance with the terms of the Indenture and of the Notes and any coupons appertaining thereto; (b) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent certified public accountants expressing their opinion that such deposit without reinvestment will provide cash at such times and in such amounts as will be sufficient to pay (i) the principal of (and premium, if any) and interest, if any, on the Outstanding Notes and any coupons appertaining thereto on the Stated Maturity of such principal or installment of principal or interest and (ii) any mandatory sinking fund payments or analogous payments applicable to the Outstanding Notes and any coupons appertaining thereto on the day on which such payments are due and payable in accordance with the terms of the Indenture and of the Notes and any coupons appertaining thereto; (c) the deposit does not constitute a 35 37 default under any other agreement or instrument binding on the Company; (d) no Default or Event of Default has occurred and is continuing on the date of such deposit and after giving effect thereto; (e) the Company delivers to the Trustee an Opinion of Counsel to the effect that the trust resulting from the deposit does not constitute, or is not qualified as, a regulated investment company under the Investment Company Act of 1940; (f) in the case of the legal defeasance option, the Company delivers to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of the Indenture there has been a change in the applicable Federal income tax law, to the effect, in either case, that, and based thereon such Opinion of Counsel shall confirm that, the Holders of the Notes and any coupons relating thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (g) in the case of the covenant defeasance option, the Company delivers to the Trustee an Opinion of Counsel to the effect that the Holders of the Notes and any coupons relating thereto will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; and (h) the Company delivers to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance have been complied with as required by the Indenture. SATISFACTION AND DISCHARGE OF THE INDENTURE The Indenture will cease to be of further effect with regard to the Notes (except as otherwise expressly provided for in the Indenture) when (a) either (i) all Outstanding Notes and all coupons relating thereto have been delivered (other than (A) coupons appertaining to the Notes in bearer form surrendered for exchange for Notes in registered form and maturing after such exchange, whose surrender is not required or has been waived, (B) the Notes and all coupons relating thereto which have been destroyed, lost or stolen and which have been replaced or paid, (C) coupons appertaining to the Notes called for redemption and maturing after the relevant Redemption Date, whose surrender has been waived and (D) Notes and all coupons relating thereto for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003 of the Indenture) to the Trustee for cancellation or (ii) all outstanding Notes and all coupons relating thereto (A) have become due and payable, (B) will become due and payable at their Stated Maturity within one year or (C) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company has irrevocably deposited with the Trustee funds in the currency or currencies, currency unit or units or composite currency or currencies in which the Notes are payable, sufficient to pay at maturity or upon redemption all outstanding Notes and such coupons, including interest thereon and any Additional Amounts with respect thereto, to the date of such deposit (in the case of Notes which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be, (b) the Company has paid all sums payable by it under the Indenture and (c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of the Indenture as to such series have been complied with. The Trustee will be required to acknowledge satisfaction and discharge of the Indenture on demand of the Company accompanied by such Officer's Certificate and Opinion of Counsel at the cost and expense of the Company. NOTICES Notices to holders of Notes will be given by mail to the registered addresses of such holders. 36 38 CONCERNING THE TRUSTEE The First National Bank of Chicago is the Trustee under the Indenture. The Trustee has lending and other customary banking relationships with the Company and its subsidiaries in the ordinary course of business and receives customary fees and compensation in connection therewith. GOVERNING LAW The Indenture will provide that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the laws of another jurisdiction would be required thereby. 37 39 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. CITGO Petroleum Corporation By: /s/ Eddie R. Humphrey ---------------------------------- Name: Eddie R. Humphrey Title: Treasurer Date: May 20, 1996