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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-14380
CITGO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1173881
-------- ----------
(State or other jurisdiction of incorporation or organization) (I. R. S. Employer Identification No.)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
----------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
(Registrant's telephone number, including area code)
N. A.
(Former name, former address and former fiscal year, if
changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
7-7/8% Senior Notes, Due 2006 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No __
The registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore omitting (i) the information
otherwise required by Item 601 of Regulation S-K relating to a list
of subsidiaries of the registrant as permitted by General Instruction
(I)(2)(b) and (ii) certain information otherwise required by Item
11 of Form 10-K relating to executive compensation as permitted
by General Instruction (I)(2)(c).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K:
Not Applicable
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Not Applicable
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1.00 par value 1,000
----------------------------- -----
(Class) (outstanding at December 31, 1996)
DOCUMENTS INCORPORATED BY REFERENCE
None
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CITGO PETROLEUM CORPORATION
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PART I
Items 1 and 2. Business and Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 20-29
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . 29
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 30-32
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . 32
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 33-34
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 35-37
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the captions "Item 1 and 2 - Business and
Properties" and "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to capital expenditures and
investments related to environmental compliance and strategic planning,
purchasing patterns of refined products and capital resources available to the
Company (as defined herein) are forward looking statements. In addition, when
used in this document, the words "anticipate," "estimate," "prospect" and
similar expressions are used to identify forward looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the Company's products as a result of competitive actions or economic
factors and changes in the cost of crude oil, feedstocks, blending components
or refined products. Such statements are also subject to the risks of
increased costs in related technologies and such technologies producing
anticipated results. Should one or more of these risks or uncertainties, among
others, materialize, actual results may vary materially from those estimated,
anticipated or projected. Although CITGO believes that the expectations
reflected by such forward looking statements are reasonable based on
information currently available to the Company, no assurances can be given that
such expectations will prove to have been correct.
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PART I
ITEMS 1. AND 2. BUSINESS AND PROPERTIES
OVERVIEW
CITGO Petroleum Corporation ("CITGO") is a direct wholly-owned
operating subsidiary of PDV America, Inc. ("PDV America"), the holding company
for the U.S. operations of Petroleos de Venezuela, S.A. ("PDVSA", which may
also be used herein to refer to one or more of its subsidiaries), the national
oil company of the Republic of Venezuela. CITGO and its subsidiaries are
engaged in the refining, marketing and transportation of petroleum products
including gasoline, diesel fuel, jet fuel, petrochemicals, lubricants, asphalt
and refined waxes, mainly within the continental United States east of the
Rocky Mountains.
CITGO's aggregate net interest in rated crude oil refining capacity is
606 thousand barrels per day ("MBPD"). The following table shows the capacity
of each U.S. refinery in which CITGO holds an interest and CITGO's share of
such capacity.
CITGO REFINING CAPACITY
TOTAL NET
RATED CITGO
CRUDE OWNERSHIP
CITGO REFINING IN REFINING
OWNER INTEREST CAPACITY CAPACITY
----- ---------------------------------------
(%) (MBPD) (MBPD)
REFINERY INTERESTS HELD
BY CITGO AS OF
DECEMBER 31, 1996
Lake Charles, LA CITGO 100 320 320
Corpus Christi, TX CITGO 100 140 140
Paulsboro, NJ CITGO 100 84 84
Savannah, GA CITGO 100 28 28
Houston, TX LYONDELL-CITGO 13 265 34
----------------------
TOTAL RATED REFINING
CAPACITY AS OF
DECEMBER 31, 1996 837 606
======================
(1) Initial interest acquired on July 1, 1993. CITGO's interest in LYONDELL-
CITGO at December 31, 1996 approximates 13%, which will increase to
approximately 42% on April 1, 1997 in accordance with the agreements
concerning such interest. CITGO has an option, for 18 months after
the completion date and for an additional investment, to increase
its participation interest up to a maximum of 50%. See "CITGO-Refining-
LYONDELL-CITGO". See also "Factors Affecting Forward Looking Statements".
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The following table shows aggregate refined product sales (excluding
lubricants and waxes) of CITGO for the three years in the period ended December
31, 1996.
CITGO REFINED PRODUCT SALES (1)
Year Ended December 31, Year Ended December 31,
-----------------------------------------------------
1996 1995 1994 1996 1995 1994
-----------------------------------------------------
($ in millions) (MM gallons)
LIGHT FUELS
Gasoline $ 7,451 $6,367 $5,252 11,308 11,075 9,747
Jet Fuel 1,489 1,163 1,102 2,346 2,249 2,131
Diesel/#2 fuel 2,312 1,356 1,491 3,728 2,730 3,067
ASPHALT 257 238 194 569 503 506
INDUSTRIAL PRODUCTS AND
PETROCHEMICALS 846 831 707 1,408 1,572 1,509
=====================================================
Total $12,355 $9,955 $8,746 19,359 18,129 16,960
-----------------------------------------------------
(1) Includes all of CITGO (excluding lubricants and waxes) refined product
sales.
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, 1996.
CITGO REFINERY PRODUCTION (1)
Year Ended December 31,
----------------------------------------------
1996(2) 1995(3) 1994(4)
----------------------------------------------
(MBPD, except as otherwise indicated)
RATED REFINING CAPACITY (5) 606 604 601
REFINERY INPUT
Crude oil 488 80.3% 473 79.9% 474 78.7%
Other feedstocks 120 19.7% 119 20.1% 128 21.3%
----------------------------------------------
Total 608 100.0% 592 100.0% 602 100.0%
==============================================
PRODUCT YIELD (6)
Light fuels
Gasoline 269 44.0% 267 44.6% 279 45.8%
Jet Fuel 65 10.6% 61 10.2% 55 9.0%
Diesel/#2 fuel 103 16.8% 101 16.9% 110 18.0%
Asphalt 34 5.6% 32 5.4% 30 4.9%
Industrial products and
petrochemicals 141 23.0% 137 22.9% 136 22.3%
----------------------------------------------
Total 612 100.0% 598 100.0% 610 100.0%
==============================================
UTILIZATION OF RATED REFINING
CAPACITY 81% 78% 79%
(1) Includes all of CITGO refinery production, except as otherwise noted.
(2) Includes a weighted average of 12.89% of the Houston refinery for 1996.
(3) Includes a weighted average of 11.45% of the Houston refinery for 1995.
(4) Includes a weighted average of 10.48% of the Houston refinery for 1994.
(5) At year end.
(6) Does not include Paulsboro Unit 1. See "CITGO-Refining-Paulsboro Refinery".
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COMPETITIVE NATURE OF THE PETROLEUM REFINING BUSINESS
The petroleum refining industry is cyclical and highly volatile,
reflecting capital intensity with high fixed and low variable costs. Petroleum
industry operations and profitability are influenced by a large number of
factors, over some of which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products, and, in some cases, limiting
their profits directly. The U.S. petroleum refining industry is also highly
fragmented, with no company accounting for more than 10% of the total volume of
gasoline sold in the U.S. market. Demand for crude oil and its products is
largely driven by the health of local, and worldwide economies, although
weather patterns and taxation relative to other energy sources also play
significant parts. Generally, U.S. refiners compete for sales on the basis of
price and brand image and, in some product areas, product quality.
CITGO refines, markets and transports gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, refined waxes, asphalt and other refined products,
and markets gasoline through over 14,000 CITGO branded independently owned and
operated retail outlets located throughout the United States, primarily east of
the Rocky Mountains. CITGO also markets jet fuel primarily to airline
customers. A variety of lubricants and waxes are sold to independent
distributors, mass marketers and industrial customers. Petrochemicals and
industrial products are sold directly to various manufacturers and industrial
companies throughout the United States. Asphalt is marketed primarily to
independent paving contractors.
Refining
CITGO produces its light fuels and petrochemicals primarily through
its Lake Charles and Corpus Christi refineries. Asphalt refining operations
are carried out through CITGO's Paulsboro and Savannah refineries. In
addition, CITGO purchases light fuels from LYONDELL-CITGO Refining Company,
Ltd. ("LYONDELL-CITGO"), in which it holds an interest.
Lake Charles Refinery. The Lake Charles refinery, located in Lake
Charles, Louisiana, was originally built in 1944 and since then has been
continuously upgraded. Today it is a modern, complex, high conversion refinery
and is the sixth largest in the United States. It has 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.
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The following table shows the rated refining capacity, refinery input
and product yield at the Lake Charles refinery for the three years in the
period ended December 31, 1996.
LAKE CHARLES REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
-----------------------------------------------
(MBPD, except as otherwise indicated)
RATED REFINING CAPACITY(1) 320 320 320
REFINERY INPUT
Crude oil 274 85.1% 275 85.4% 274 83.0%
Other feedstocks 48 14.9% 47 14.6% 56 17.0%
-----------------------------------------------
Total 322 100.0% 322 100.0% 330 100.0%
===============================================
PRODUCT YIELD
Light fuels
Gasoline 164 50.3% 164 50.0% 169 50.0%
Jet Fuel 62 19.0% 58 17.7% 52 15.4%
diesel/#2 fuel 38 11.7% 42 12.8% 50 14.8%
Petrochemicals and Industrial Products 62 19.0% 64 19.5% 67 19.8%
-----------------------------------------------
Total 326 100.0% 328 100.0% 338 100.0%
===============================================
UTILIZATION OF RATED REFINING CAPACITY 86% 86% 86%
(1) At year end.
Approximately 67%, 64% and 68% of the total crude runs at the Lake
Charles refinery in the years 1996, 1995 and 1994, respectively, consisted of
crude oil with an average API gravity of 24 degrees or less. Due to the complex
processing required to refine such crude oil, the Lake Charles refinery's
economic crude oil throughput capacity is approximately 290 MBPD which is
approximately 90% of its rated capacity of 320 MBPD.
The Lake Charles refinery's Gulf Coast location provides it with
access to crude oil deliveries from multiple sources. Imported crude oil and
feedstocks supplies are delivered by ship directly to the Lake Charles
refinery, and domestic crude oil supplies are delivered by pipeline and barge.
In addition, the refinery is connected by pipelines to the Louisiana Offshore
Oil Port ("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 and Explorer
Pipelines, which are the major refined product pipelines supplying the
northeast and midwest regions of the United States, respectively. The refinery
also uses adjacent terminals and docks, which provide access for ocean tankers
and barges.
The Lake Charles refinery's main petrochemical products are propylene
and benzene. Propylene production was 5.0, 5.7 and 5.2 MBPD, and benzene
production was 3.2, 4.1 and 3.8 MBPD, in each case for the years 1996, 1995
and 1994, respectively. Industrial products include sulphur, residual fuels
and petroleum coke.
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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 extremely high quality oils and waxes,
and is one of the few in the industry designed as a stand-alone lubricants
refinery. Subsequent to enhancements made in 1995, the refinery currently has
a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of wax, and is the
seventh largest rated capacity paraffinic lubricants refinery in the United
States. For the years 1996, 1995 and 1994, utilization at the Cit-Con refinery
was 100%, 101%, and 110%, respectively, of its rated capacity. Feedstocks are
supplied 65% from CITGO's Lake Charles refinery and 35% from Conoco's nearby
refinery. Finished refined products are shared on the same pro rata basis by
CITGO and Conoco. 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. See also "Factors Affecting
Forward Looking Statements".
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).
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The following table shows rated refining capacity, refinery input and
product yield at the Corpus Christi refinery for the three years in the period
ended December 31, 1996.
CORPUS CHRISTI REFINERY PRODUCTION
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
(MBPD, except as otherwise indicated)
RATED REFINING CAPACITY (1) 140 140 140
REFINERY INPUT
Crude oil 133 66.8% 121 64.7% 128 66.3%
Other feedstocks 66 33.2% 66 35.3% 65 33.7%
-------------------------------------------------
Total 199 100.0% 187 100.0% 193 100.0%
=================================================
PRODUCT YIELD
Light Fuels
Gasoline 93 47.0% 90 48.4% 99 51.0%
Diesel/#2 fuel 59 29.8% 53 28.5% 55 28.4%
Petrochemicals and
Industrial Products 46 23.2% 43 23.1% 40 20.6%
-------------------------------------------------
Total 198 100.0% 186 100.0% 194 100.0%
=================================================
UTILIZATION OF RATED
REFINING CAPACITY 95% 86% 91%
(1) At year end.
Corpus Christi crude runs during 1996 consisted of 98% heavy sour
Venezuelan crude. Due to the complex processing required to refine such heavy
sour crude the refinery's economic crude oil throughput 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, methyl
tertiary butyl ether ("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
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while staying within the new, more stringent gasoline specifications of the
Clean Air Act Amendments of 1990.
Paulsboro Refinery. The Paulsboro refinery, located in Paulsboro, New
Jersey, is an asphalt refinery. The Paulsboro 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 high
sulphur, 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 20.5, 19.1 and 19.4 MBPD
of asphalt in the years 1996, 1995, and 1994, respectively, which accounted for
58%, 58% and 57% of Unit II's total production in such years. The remaining
Unit II production in 1996, 1995 and 1994 consisted of distillate products such
as naphthas, marine diesel oil and vacuum gas oils, which in the aggregate
averaged approximately 14.5, 13.7 and 14.9 MBPD, respectively in such years.
Unit II crude oil runs were 35, 33 and 34 MBPD, or a utilization rate of 88%,
83% and 85%, in 1996, 1995, and 1994, respectively.
Unit I was constructed in 1979 primarily to process low sulphur, 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 and to produce asphalt when a crude oil such as Boscan is
available for running on this unit. Crude oil runs for third party processing
in 1996, 1995 and 1994 averaged 0.0, 2.1 and 0.0 MBPD, respectively,
representing processing utilization rates of 0%, 5% and 0%, respectively. In
1996 and 1995, 3.4 and 2.6 MBPD of crude oil was run on Unit I for CITGO's own
account, producing 2.4 and 1.9 MBPD of asphalt and 0.9 and 0.8 MBPD of other
products, respectively.
Savannah Refinery. The Savannah Refinery, located near Savannah,
Georgia, is an asphalt refinery. CITGO acquired the Savannah Refinery on April
30, 1993. 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 11.4 MBPD of asphalt in the year
ended December 31, 1996, which accounted for 76% of total production. An
additional 3.7 MBPD of production included naphthas and light, medium and
heavy gas oils. Total crude runs for the period were 15.1 MBPD, for a
utilization rate of 54%.
LYONDELL-CITGO. On July 1, 1993 subsidiaries of CITGO and Lyondell
Petrochemical Company ("Lyondell") executed definitive agreements with respect
to CITGO's investment in LYONDELL-CITGO, which owns and operates a
sophisticated 265 MBPD refinery previously owned by Lyondell and located on the
ship channel in Houston, Texas. Through December 31, 1996, CITGO had invested
approximately $579 million (excluding reinvested earnings) in LYONDELL-CITGO.
See "Consolidated Financial Statements of CITGO -- Note 3". As of December 31,
1996, LYONDELL-CITGO has spent approximately $1,073 million on a refinery
enhancement project to increase the refinery's heavy crude oil high conversion
capacity and estimates expenditures to complete this project will total
approximately $57 million to $67 million. This refinery enhancement
project was completed at the end of 1996, with an in-service date of March 1,
1997, and is intended to increase the refinery's heavy crude oil high
conversion capacity from approximately 135 MBPD of 22 degrees average API
gravity crude oil to approximately 200 MBPD of 17 degrees average API gravity
crude oil.
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LYONDELL-CITGO has entered into a long-term crude oil supply agreement with
PDVSA for the delivery of approximately 135 MBPD of crude oil which increased
to 200 MBPD on March 1, 1997. In 1996, LYONDELL-CITGO purchased approximately
134 MBPD of crude oil from PDVSA pursuant to this supply agreement.
LYONDELL-CITGO also purchases crude oil from third parties to supplement the
PDVSA supplies. At December 31, 1996, CITGO had an approximate 13%
participation interest in LYONDELL-CITGO, as defined by the agreements with
Lyondell. CITGO's interest in LYONDELL-CITGO will increase with its investment
in the capital improvement program described above and otherwise, up to
approximately 42% at April 1, 1997 in accordance with the agreements concerning
such interest. CITGO has an option, for 18 months after the completion
date and for an additional investment, to increase its participation interest
up to a maximum of 50%. CITGO purchases substantially all of the refined
products, excluding petrochemicals, produced at the LYONDELL-CITGO refinery,
thereby significantly reducing CITGO's need to purchase refined products from
other sources to supply its distribution network. See "-Crude Oil and Refined
Product Purchases". See also "Factors Affecting Forward Looking Statements".
Crude Oil and Refined Product Purchases
CITGO owns no crude oil reserves or production facilities, and must
therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded distributors,
CITGO purchases refined products, primarily gasoline, from other refiners,
including LYONDELL-CITGO.
Crude Oil Purchases. The following chart shows CITGO's purchases of
crude oil for the three years in the period ended December 31, 1996.
CITGO CRUDE OIL PURCHASES
Lake Charles, LA Corpus Christi, TX Paulsboro, NJ Savannah, GA
------------------------------------------------------------------------------------------------
1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994
------------------------------------------------------------------------------------------------
(MBPD) (MBPD) (MBPD) (MBPD)
PDVSA 142 150 129 130 122 128 39 35 36 17 14 12
PEMEX 44 33 63 0 0 0 0 0 0 0 0 0
Occidental 43 43 42 0 0 0 0 0 0 0 0 0
Other Sources 45 52 40 3 0 0 0 0 0 0 0 0
------------------------------------------------------------------------------------------------
Total 274 278 274 133 122 128 39 35 36 17 14 12
================================================================================================
CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered
into long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries. See "Item 13 -- Certain
Relationships and Related Transactions". The following table shows the base
and incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1996.
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CITGO CRUDE OIL SUPPLY CONTRACTS WITH PDVSA
VOLUMES OF CRUDE
OIL PURCHASED
CONTRACT CRUDE FOR THE YEAR ENDED
OIL VOLUME DECEMBER 31, CONTRACT
------------------------------------------------ EXPIRATION
BASE INCREMENTAL(1) 1996 1995 1994 DATE
------------------------------------------------ ----------
(MBPD) (MBPD) (YEAR)
Lake Charles, LA 120 50 121(2) 125(2) 123(2) 2006
Corpus Christi, TX 130 -- 130 122 128 2012
Paulsboro, NJ 30 -- 34(2) 35 36 2010
Savannah, GA 12 -- 11(2) 14 12 2013
Houston, TX(3) 135 -- 134 136 135 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 purchases from
PDVSA shown in the previous table as a result of spot purchases.
(3) CITGO acquired a participation interest in LYONDELL-CITGO, the owner of
the Houston refinery, on July 1, 1993. In connection with such
transaction, LYONDELL-CITGO entered into a long-term crude oil supply
agreement with PDVSA that provided for delivery volumes of 135 MBPD until
the completion of a refinery enhancement project at which time the
delivery volumes increased to 200 MBPD.
Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDV Marina, S.A. ("PDV Marina"), a wholly-owned
subsidiary of PDVSA, or by other PDVSA subsidiaries. In 1996, 87% of the PDVSA
contract crude oil delivered to the Lake Charles and Corpus Christi refineries
was delivered on tankers operated by PDVSA subsidiaries.
CITGO purchases additional crude oil under a 90-day evergreen
agreement with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's
refineries are particularly well suited to refine PEMEX's Maya heavy, sour
crude oil, which is similar in many respects to several types of Venezuelan
crude oil. Effective January, 1995 the PEMEX crude contract was for 23 MBPD of
Maya crude for the first six months of 1995 and 17 MBPD for the last six months
of 1995. Effective January, 1996, PEMEX increased the crude contract to 27
MBPD of Maya crude which increased to 35 MBPD effective July, 1996. This
contract also includes 8 MBPD of Olmeca, light sour crude for 1995 and 10 MBPD
for 1996.
CITGO is a party to a long-term contract with an affiliate of
Occidental Petroleum Corporation ("Occidental") for the purchase of light,
sweet crude oil to produce lubricants. Purchases under this contract, which
expires on August 31, 1998, averaged 53 MBPD in 1996. CITGO also purchases
sweet crude oil under long-standing relationships with numerous other domestic
producers.
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Refined Product Purchases. Refined product purchases are required to
supplement the production of the Lake Charles and Corpus Christi refineries in
order to meet demand of CITGO's marketing network. During 1996, CITGO's
shortage in gasoline production approximated 319 MBPD. However, due to
logistical needs, timing differences and product grade imbalances, CITGO
purchased approximately 484 MBPD of gasoline and sold into the spot market, or
to refined product traders or other refiners approximately 160 MBPD of
gasoline. The following table shows CITGO's purchases of refined products for
the three years in the period ended December 31, 1996.
CITGO REFINED PRODUCT PURCHASES
Year Ended December 31,
------------------------------------
1996 1995 1994
------------------------------------
(MBPD)
LIGHT FUELS
Gasoline 484 471 380
Jet Fuel 92 87 89
Diesel/#2 fuel 153 90 98
------------------------------------
Total 729 648 567
====================================
As of December 31, 1996, CITGO purchased substantially all of the
refined products, excluding petrochemicals, produced at the LYONDELL-CITGO
refinery under a long-term contract through the year 2017. LYONDELL-CITGO was
a major supplier in 1996 providing 101 MBPD of gasoline, 47 MBPD of distillate
and 25 MBPD of jet fuel. See "-Refining - LYONDELL-CITGO".
Marketing
CITGO's major products are light fuels (including gasoline, jet fuel,
and diesel fuel), industrial products and petrochemicals, 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, 1996.
CITGO REFINED PRODUCT SALES
Year Ended December 31,
-------------------------------------------------------
($ in millions, except as otherwise indicated)
LIGHT FUELS $11,252 88.1% $ 8,886 85.8% $7,845 86.0%
PETROCHEMICALS,
INDUSTRIAL PRODUCTS
AND OTHER PRODUCTS 846 6.6% 831 8.0% 707 7.8%
ASPHALT 257 2.0% 238 2.3% 194 2.1%
LUBRICANTS AND WAXES 426 3.3% 404 3.9% 370 4.1%
-------------------------------------------------------
TOTAL $12,781 100.0% $10,359 100.0% $9,116 100.0%
=======================================================
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Light Fuels. CITGO markets gasoline, jet fuel and other distillates
through an extensive marketing network. The following table provides a
breakdown of the sales made by type of product for the three years in the
period ended December 31, 1996.
CITGO LIGHT FUEL SALES
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
1996 1995 1994 1996 1995 1994
----------------------- -----------------------
($ in millions) (MM gallons)
LIGHT FUELS
Gasoline $ 7,451 $6,367 $5,252 11,308 11,075 9,747
Jet Fuel 1,489 1,163 1,102 2,346 2,249 2,131
Diesel/#2 fuel 2,312 1,356 1,491 3,728 2,730 3,067
------------------------ -----------------------
Total $11,252 $8,886 $7,845 17,382 16,054 14,945
------------------------ -----------------------
Gasoline sales accounted for 58%, 61% and 57% of CITGO's total
revenues in the years 1996, 1995 and 1994, respectively. CITGO markets CITGO
branded gasoline through over 14,000 independently owned and operated CITGO
branded retail outlets (including 12,720 branded retail outlets owned and
operated by approximately 790 independent distributors and 1,791 7-Eleven(TM)
convenience stores) located throughout the United States, primarily east of the
Rocky Mountains. In addition, CITGO itself owns, operates or leases 17 retail
outlets. CITGO purchases gasoline to supply its marketing network, as the
gasoline production from the Lake Charles and Corpus Christi refineries was
only equivalent to approximately 49%, 53% and 60% of the volume of CITGO
branded gasoline sold in 1996, 1995 and 1994, respectively. See "-Crude Oil
and Refined Product Purchases - Refined Product Purchases".
CITGO's strategy is to enhance the value of the CITGO brand in order
to obtain premium pricing for its products by appealing to consumer preference
for quality petroleum products and services. This is accomplished through a
commitment to quality, dependability and customer service to its independent
distributors, which constitute CITGO's primary distribution channel. The
number of independent distributor-owned or operated CITGO branded retail
outlets has grown significantly since 1986 when there were approximately 7,000
independently owned and operated branded outlets, including 7-Eleven(TM)
convenience stores, and has increased approximately 3%, 7% and 6% in 1996,
1995 and 1994, respectively. Customers have voted CITGO the top branded
supplier in four successive biannual Supplier's Cup competitions, 1990, 1992,
1994 and 1996. This competition is sponsored by the Petroleum Marketers
Association of America, an organization of independent refined products
distributors.
In 1994 CITGO began offering to their 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, 1996, approximately 3500 retail
outlets had installed the card reader pumps.
Sales to independent branded distributors typically are made under
contracts that range from three to seven years. Sales to 7-Eleven(TM)
convenience stores are made under a contract that extends through the year
2006. Under this contract, CITGO arranges all transportation and delivery of
motor fuels and handles all product ordering. CITGO also acts as processing
agent for the purpose of
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facilitating and implementing orders and purchases from third-party suppliers.
CITGO receives a processing fee for such services.
CITGO markets jet fuel directly to airline customers at 26 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New
York and Miami. Jet fuel sales to airline customers have increased
approximately 6%, 2% and 18% in the years 1996, 1995 and 1994 respectively.
The volume increases in 1996, 1995 and 1994 were due to higher levels of
purchases by existing customers and 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 531 million gallons in 1994 (accounting for
29% of total jet fuel sales volume to airline customers) to 539 million gallons
in 1996 (accounting for 27% of total jet fuel sales volume to airline
customers).
CITGO's diesel/#2 fuel marketing strategy is 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 1,179 million gallons in 1994 to approximately 1,561 million
gallons in 1996. 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 54 refined product terminals located throughout CITGO's primary
market territory. Of these terminals, 41 are wholly-owned by CITGO and 13 are
jointly owned. CITGO's refined product terminals provide a total of nearly 24
million barrels of storage capacity. Thirteen 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 290 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 stations.
Petrochemicals and Industrial Products. CITGO sells petrochemicals in
bulk to a variety of U.S. manufacturers as raw materials for finished goods.
Sulphur is sold to the U.S. and international fertilizer industry; cycle oils
are sold for feedstock processing and blending; natural gas liquids are sold to
the U.S. fuel and petrochemical industry; petroleum coke is sold primarily in
international markets 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 joint venture phenol
production plant in which CITGO is a limited partner. The phenol plant
produces phenol and acetone for sale primarily to the principal partner in the
phenol plant for the production of plastics.
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. Demand for asphalt in the Northeastern U.S. declines
substantially in the winter months as a result of weather conditions.
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 Oil & Grease Corporation ("Cato")
for a purchase price of approximately $47 million.
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CITGO sells its finished lubricant products through three classes of
trade: (i) independent distributors that specialize in lubricant sales
(representing 68% of 1996 sales), (ii) mass merchandisers (representing 9% of
1996 sales) and (iii) directly to large industrial end users (representing 23%
of 1996 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 884 miles of crude oil pipeline systems and
approximately 1,100 miles of products pipeline systems. The crude oil
pipelines provide CITGO with access to gathering systems throughout major
production areas in Louisiana and Texas that provide the Lake Charles refinery
with domestic crude oil to supplement waterborne deliveries. CITGO also has
joint equity interests in three crude oil pipeline companies with a total of
nearly 5,800 miles of pipeline plus equity interest in six refined product
pipeline companies with a total of approximately 8,000 miles of pipeline.
CITGO's pipeline interests provide it with access to substantial refinery
feedstocks and reliable transportation to refined product markets, as well as
cash flows from dividends. One of the refined product pipelines in which CITGO
has an interest, Colonial Pipeline, is the largest refined product pipeline in
the United States transporting gasoline, jet fuel and diesel/#2 fuel oil from
the Gulf Coast to the mid-Atlantic and eastern seaboard states.
In early 1997, CITGO sold approximately 520 miles of crude
gathering/trunk lines in Texas and Louisiana.
Employees
CITGO and its subsidiaries have a total of approximately 4,900
employees, approximately 1,700 of whom are covered by 15 union contracts.
Approximately 1,600 of the union employees are employed in refining operations.
The remaining union employees are located primarily at a lubricant blending and
packaging plant and at other refined product terminals.
ENVIRONMENT AND SAFETY
Environment
Beginning in 1994, the U.S. refining industry was required to comply
with stringent product specifications under the 1990 Clean Air Act ("CAA")
Amendments for reformulated gasoline and low sulphur diesel fuel. These
requirements necessitated additional capital and operating expenditures, and
altered significantly the U.S. refining industry and the return realized on
refinery investments. In addition, numerous other factors affect the Company's
plans with respect to environmental compliance and related expenditures. See
"Factors Affecting Forward Looking Statements".
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In addition, the Company is subject to various federal, state and
local environmental laws and regulations which may require the Company to take
action to correct or improve the effects on the environment of prior disposal
or release of petroleum substances by the Company or other parties. Management
believes the Company is in compliance with these laws and regulations in all
material aspects. Maintaining compliance with environmental laws and
regulations in the future could require significant capital expenditures and
additional operating costs.
Pursuant to a 1992 agreement with a state agency CITGO has ceased
usage of certain surface impoundments at the Lake Charles, Louisiana
refinery in 1994. 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 is in litigation with the contractor who performed sludge
removal and treatment work at one of the Lake Charles Refinery's surface
impoundments. CITGO is seeking contractual penalties for non-performance and
breach of contract, and is vigorously contesting claims and allegations for
additional compensation from the contractor. The Company does not believe that
this litigation will affect the remediation and closure of the impoundments.
See "Item 3 - Legal Proceedings".
Pursuant to New Jersey's Environmental Cleanup Responsibility Act
("ECRA"), CITGO has entered into administrative consent orders with the New
Jersey Department of Environmental Protection and Energy 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, OXY, USA Inc. and
Occidental have 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 Occidental has the
financial capability to fulfill all of its responsibilities under this
agreement. Accordingly, CITGO believes that it's offsite liability exposure
under the Federal Superfund and similar state laws is not material. In
addition, under the 1992 agreement, CITGO assumed responsibility for certain
other environmental contamination at certain terminal properties in return for
cash payments and other agreements.
During 1994 and 1995, CITGO Asphalt Refining Company ("CARCO")
received two Notices of Violation ("NOV") and two Compliance Orders from the
Environmental Protection Agency ("EPA") relating to the operation of certain
units at the Paulsboro Refinery. A Consent Order resolving these issues was
entered by a federal court in February, 1997. Under the terms of the Consent
Order, CARCO paid a $1,230,000 penalty. The Consent Order will terminate
January 30, 1998.
On September 30, 1996, CITGO received an NOV from the EPA, Washington,
D.C., alleging violations of the CAA in the Chicago-Gary-Lake County,
Illinois-Indiana-Wisconsin area, arising from the sale of gasoline that failed
to meet the applicable minimum or maximum oxygen content. The EPA has not yet
proposed penalties, but CITGO anticipates the proposed penalty could possibly
exceed $100,000. CITGO does not expect that such penalties will have a
material adverse effect on its financial condition, results of operations or
liquidity.
CITGO's accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably capable
of estimation. At December 31, 1996 and 1995, CITGO had $56 million and $60
million, respectively, of environmental accruals included in other
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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 with
respect to various Company sites including, but not limited to, CITGO's
operating refinery complexes, closed refineries, service stations and crude oil
and petroleum storage terminals. The amount of such future expenditures, if
any, is indeterminable.
Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 1996, CITGO expended approximately
$69 million for environmental and regulatory capital improvements in its
operations. Management currently estimates that CITGO will spend
approximately $320 million for environmental and regulatory capital projects
over the five-year period 1997-2001. These estimates may vary due to a
variety of factors. See "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources". See also "Factors Affecting Forward Looking Statements".
Safety
Due to the nature of petroleum refining and distribution, CITGO is
subject to stringent occupational health and safety laws and regulations.
CITGO maintains comprehensive safety, training and maintenance programs. CITGO
believes that the company is in substantial compliance with occupational health
and safety laws.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in
the ordinary course of business are pending against the Company. Included among
these are: (i) litigation with a contractor who is claiming additional
compensation of approximately $42 million, including interest and profits, for
sludge removal and treatment at CITGO's Lake Charles, Louisiana refinery; CITGO
is seeking contractual penalties for nonperformance and breach of contract and
also a determination that a portion of any damages awarded would be recoverable
from a former owner; a trial (previously scheduled for March 1997) is currently
scheduled for 1998 concerning the nonperformance and breach of contract issues;
and (ii) litigation against CITGO by a number of current and former employees
and applicants on behalf of themselves and a class of similarly situated persons
asserting claims under Federal and state laws of racial discrimination in
connection with the employment practices at CITGO's Lake Charles, Louisiana
refining complex; the plaintiffs seek injunctive relief and monetary damages;
the plaintiffs have appealed the Court's denial of class certification; the
initial trials relating to this litigation are currently scheduled for July
1997.
In January 1997 the Louisiana Supreme Court ruled in favor of certain
Louisiana refiners in an industry case regarding an assessment of a use tax on
petroleum coke which accumulates on catalyst during refining operations and a
change to the calculation of the sales/use tax on fuel gas generated by
refinery operations. The Company believes that it has no further exposure to
losses related to these matters.
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The Company is vigorously contesting or pursuing, as applicable, such
lawsuits and claims and believes that its positions are sustainable. The
Company has recorded accruals for losses it considers to be probable and
reasonably estimable. However, due to uncertainties involved in litigation,
there are cases, including the significant matters noted above, in which the
outcome is not reasonably predictable, and the losses, if any, are not
reasonably estimable. If such lawsuits and claims were to be determined in a
manner adverse to the Company, and in amounts in excess of the Company's
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Company's results of operations in a given year.
The term "reasonably possible" is used herein to mean that the chance of a
future transaction or event occurring is more than remote but less than likely.
However, based upon management's current assessments of these lawsuits and
claims and that provided by counsel in such matters, and the capital resources
available to the Company, management of the Company believes that the ultimate
resolution of these lawsuits and claims would not exceed the aggregate of the
amounts accrued in respect of such lawsuits and claims and the insurance
coverages available to the Company by a material amount and, therefore, should
not have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is not publicly traded. All of the
Company's common stock is held by PDV America, Inc. ("PDV America"), a Delaware
company whose ultimate parent is PDVSA. The Company and PDV America are
parties to a tax allocation agreement which is designed to provide PDV America
with sufficient cash to pay its consolidated income tax liabilities. In April
1996, $12.7 million due from CITGO to PDV America under this tax allocation
agreement for the tax years 1992 through 1994 was reclassified and accounted
for as a contribution of capital. In December 1996, $0.8 million due from PDV
America to CITGO under this tax allocation agreement for the 1995 tax year was
reclassified and accounted for as a dividend.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected historical
consolidated financial and operating data of CITGO as of the end of and for
each of the five years in the period ended December 31, 1996. The following
table should be read in conjunction with the consolidated financial statements
of CITGO as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996 included in Item 8. The audited
consolidated financial statements of CITGO for each of the five years in
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the period ended December 31, 1996 have been prepared on the basis of United
States generally accepted accounting principles. The consolidated financial
statements of CITGO at December 31, 1994, 1993 and 1992 and for the years ended
December 31, 1993 and 1992, not separately presented herein, have been audited
by Deloitte & Touche LLP, independent auditors.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1996 1995(2) 1994 1993(1) 1992
--------------------------------------------
INCOME STATEMENT DATA
Sales $12,952 $10,522 $9,247 $9,107 $9,173
Equity in earnings of
affiliates 21 34 29 30 25
Net revenues 12,969 10,553 9,269 9,134 9,192
Income before extraordinary
items and cumulative effect
of accounting changes 127 136 191 162 120
Extraordinary gain
(charge)(3) - 4 (2) - -
Cumulative effect of
accounting changes(4) - - (4) - (87)
Net income 127 140 185 162 33
RATIO OF EARNINGS TO FIXED
CHARGES 2.49x 2.76x 3.85x 3.71x 2.94x
BALANCE SHEET DATA
Total assets $ 5,630 $ 4,924 $4,440 $3,866 $3,488
Long-term debt (excluding
current portion)(6) 1,599 1,301 1,160 1,074 1,227
Total debt(7) 1,759 1,432 1,283 1,121 1,244
Shareholder's equity 1,870 1,732 1,577 1,350 1,004
- ---------
(1) Includes operations of the Savannah asphalt refinery since April 30, 1993.
(2) Includes operations of Cato Oil & Grease since May 1, 1995.
(3) Represents extraordinary gain (or charges) for the early extinguishment of
debt (net of related income tax provision of $2 million and income tax
benefit of $1 million) in 1995 and 1994, respectively.
(4) Represents the cumulative effect of the accounting change to Statement of
Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
Post-Employment Benefits" in 1994 (net of related income tax benefits of $3
million), and the cumulative effect of the accounting change to SFAS No.
106, "Employers' Accounting for Post-Retirement Benefits Other than
Pensions" in 1992 (net of related income tax benefits of $51 million).
(5) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes and cumulative effect of
accounting changes plus fixed charges (excluding capitalized interest),
amortization of previously capitalized interest and certain adjustments to
equity in income of affiliates. "Fixed charges" include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of
operating lease rent expense deemed to be representative of interest.
(6) Includes long-term debt to third parties and capital lease obligations.
(7) Includes short-term bank loans, current portion of capital lease obligations
and long-term debt, long-term debt and capital lease obligations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the consolidated
financial statements of CITGO included elsewhere herein.
Petroleum industry operations and profitability are influenced by a
large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
limiting their profits directly. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. CITGO's consolidated operating results are affected by these
industry-specific factors and by company-specific factors, such as the success
of wholesale marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by
high fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and in the prices realized
for refined products. Crude oil and refined products are commodities whose
price levels are determined by market forces beyond the control of CITGO.
In general, prices for refined products are significantly influenced
by the price of crude oil, feedstocks and blending components. Although an
increase or decrease in the price for crude oil, feedstocks and blending
components generally results in a corresponding increase or decrease in prices
for refined products, generally there is a lag in the realization of the
corresponding increase or decrease in prices for refined products. The effect
of changes in crude oil prices on CITGO's consolidated operating results
therefore depends in part on how quickly refined product prices adjust to
reflect these changes. A substantial or prolonged increase in crude oil prices
without a corresponding increase in refined product prices, a substantial or
prolonged decrease in refined product prices without a corresponding decrease
in crude oil prices, or a substantial or prolonged decrease in demand for
refined products could have a significant negative effect on the Company's
earnings and cash flows. CITGO purchases a significant amount of its crude oil
requirements from PDVSA under long-term supply agreements (expiring in the
years 2006 through 2013). These supply agreements are designed to reduce the
volatility of earnings and cash flows from CITGO's refining operations by
providing a relatively stable level of gross margin on crude oil supplied by
PDVSA. This supply represented approximately two-thirds of the crude oil
processed in refineries operated by CITGO in the year ended December 31, 1996.
However, CITGO also purchases significant volumes of refined products to
supplement the production from its refineries to meet marketing demands and to
resolve logistical issues. CITGO's earnings and cash flows are also affected
by the cyclical nature of petrochemical prices. Inflation was not a
significant factor in the operations of CITGO during the three years ended
December 31, 1996. As a result of these factors, the earnings and cash flows
of CITGO may experience substantial fluctuations.
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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 and $44 million in 1995 and 1996,
respectively, 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 and $26 million in 1995 and 1996, respectively, 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 reduce the price of crude oil purchased
from PDVSA under these agreements by approximately $25 million per year in 1997
through 1999, in each case as compared to the original modification and without
giving effect to any other factors that may affect the price payable for crude
oil under these agreements. Due to the pricing formula under the supply
agreements, the aggregate price actually paid for crude oil purchased from
PDVSA under these agreements in each of these years will depend primarily upon
the current prices for refined products and certain actual costs of CITGO.
These estimates are also based on the assumption that CITGO will purchase the
base volumes of crude oil under the agreements.
The following table summarizes the sources of CITGO's sales revenue.
CITGO SALES
YEAR YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1996 1995 1994
----------------------------------------------------------
($ IN MILLIONS) (MM GALLONS)
Gasoline $7,451 $6,367 $5,252 11,308 11,075 9,747
Jet fuel 1,489 1,163 1,102 2,346 2,249 2,131
Diesel/#2 fuel 2,312 1,356 1,491 3,728 2,730 3,067
Petrochemicals, industrial products
and other Products 846 831 707 1,408 1,572 1,509
Asphalt 257 238 194 569 503 506
Lubricants and waxes 426 404 370 220 215 213
----------------------------------------------------------
Total refined product sales $12,781 $10,359 $9,116 19,579 18,344 17,173
Other sales 171 163 131
----------------------------------------------------------
Total sales $12,952 $10,522 $9,247 19,579 18,344 17,173
==========================================================
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The following table summarizes CITGO's cost of sales and operating
expenses.
CITGO COST OF SALES AND OPERATING EXPENSES
Year
Ended December 31,
------------------------------
1996 1995 1994
------------------------------
($ in millions)
Crude oil $ 3,053 $ 2,428 $2,180
Refined products 7,139 5,504 4,547
Intermediate feedstocks 1,000 898 854
Refining and manufacturing costs 801 755 725
Other operating costs and expenses and
inventory changes 498 481 425
------------------------------
Total cost of sales and operating expenses $12,491 $10,066 $8,731
==============================
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
Sales revenues and volumes. Sales increased by $2,430 million,
representing a 23% increase from 1995 to 1996. The increase was due to an
increase in sales volumes of 7% and an average increase in sales prices of
16%. Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, were up 10% from 1995 to 1996
and their average unit price increased $0.10. Gasoline sales volumes increased
primarily due to successful marketing efforts, including the net addition of
approximately 470 new independently owned CITGO branded outlets since December
31, 1995. Petrochemical sales volume rose 14% from 1995 to 1996. This
increase, combined with an average decrease in unit prices of $0.16, resulted
in a 3% decrease in petrochemical sales revenue from 1995 to 1996. Industrial
products sales volumes decreased 31% and average unit prices increased $0.02
for a 27% decrease in industrial products sales revenue from 1995 to 1996.
Asphalt sales revenue increased 8% from 1995 to 1996. The increase was
primarily due to increases in sales volumes. Lubricants and wax sales revenue
increased 5% from 1995 to 1996 due to increases in both sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings of
affiliates decreased by approximately $13 million, or 38% from $34 million in
1995 to $21 million in 1996. This decrease was due primarily to a $13 million
decrease in equity earnings of LYONDELL-CITGO. Almost all of the shortfall in
LYONDELL-CITGO's earnings was due to lower fuels margins, lower aromatics
prices, higher natural gas prices, operating problems in the first half of the
year and the impact of the expansion project startup on existing operations.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2,425 million, or 24% from 1995 to 1996. Higher crude
oil purchases in 1996 as compared to 1995 resulted from a 22% increase in crude
oil prices in 1996 as compared to 1995, or approximately $3.21 per barrel which
includes approximately $0.13 per barrel related to the 1995 adjustments of the
PDVSA crude and
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feedstock supply agreements discussed in the overview, and a 3% increase in
volumes in 1996 as compared to 1995. Higher intermediate feedstock purchases
were attributable to a 20% increase in prices, partially offset by 7% decrease
in volumes purchased. Refinery production was higher in 1996 than 1995;
however, due to the increased sales volumes mentioned above, refined product
purchases increased 30%. The increase in refined product purchases includes a
13% increase in volumes and 15% higher refined product prices. The increases
in refining and manufacturing costs are due primarily to increased costs of
purchased fuel and electricity at CITGO's Lake Charles and Corpus Christi
refineries as well as the additional manufacturing costs related to the
lubricants plant acquired in May 1995.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. The
refined product purchases represented 52%, 55% and 57% of cost of sales for the
years 1994, 1995 and 1996, respectively. CITGO estimates that margins on
purchased products, on average, are somewhat lower than margins on produced
products due to the fact that CITGO can only receive the marketing portion of
the total margin received on the produced refined products. However, purchased
products are not segregated from CITGO produced products and margins may vary
due to market conditions and other factors beyond the Company's control. As
such, it is difficult to measure the effects on profitability of changes in
volumes of purchased products. CITGO anticipates its purchased product
requirements will continue to increase, in volume and as a percentage of
refined products sold, in order to meet marketing demands, although in the near
term, other than normal refinery turnaround maintenance, CITGO does not
anticipate operational actions or market conditions which might cause a
material change in anticipated purchased product requirements; however, there
could be events beyond the control of CITGO which impact the volume of refined
products purchased. See also "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for 1996 was $461 million, or 3.6%,
compared to $456 million, or 4.3% for 1995. Gross margins in 1996 were
adversely affected by refinery operations in the first quarter, the scheduled
modifications to the pricing provisions in the crude and feedstock supply
agreements, the decline in petrochemical profitability, increased volumes of
refined products purchased as a percentage of sales volume and increased costs
of purchased fuel and electricity at the refineries throughout the year (in
each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4 million, or 2%, due primarily to increases
in salaries and benefits and increased marketing expenses in 1996 including
the effect of the change in focus of the Company's marketing programs initiated
in April 1996. The primary program in effect through March 1996 was designed
to increase the number of branded outlets and improve CITGO's overall image.
Accordingly, costs were and continue to be expensed as incurred. The program
initiated in April 1996 primarily focuses on defending market share and
increasing volumes sold to existing distributors by providing an incentive
which is earned over time. The accounting for the new program recognizes the
program expenses when the incentives are earned.
Interest expense. Interest expense increased $7.4 million from 1995
to 1996. The increase was primarily due to increased borrowings offset by a
slightly lower weighted average interest rate on indebtedness.
Income taxes. CITGO's provision for income taxes in 1996 was $70
million, representing an effective tax rate of 36%. In 1995, CITGO's provision
for income taxes was $80 million, representing an effective tax rate of 37%.
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Net income. Net income was $127 million for 1996. Net income of $140
million for 1995 included an after-tax extraordinary gain of $3.4 million on
early extinguishment of debt.
RESULTS OF OPERATIONS -- 1995 COMPARED TO 1994
Sales revenues and volumes. Sales increased by $1,275 million, or
14%, from 1994 to 1995. The increase was due to higher sales volumes and a
slight increase in market prices. Sales volumes of light fuels (gasoline,
diesel/#2 fuel and jet fuel), excluding bulk sales made for logistical reasons,
were up 8% from 1994 to 1995 and their average unit price increased $0.03.
Gasoline sales volumes increased primarily due to successful marketing efforts,
including the net addition of approximately 920 new independently-owned CITGO
branded retail outlets since December 31, 1994. Petrochemical sales volume
rose 3% from 1994 to 1995. This increase, combined with an average increase in
unit prices of $0.14 resulted in a 19% increase in petrochemical sales revenue
from 1994 to 1995. Industrial products sales volumes increased 14% and average
unit prices increased, resulting in a 32% increase in industrial products sales
revenue from 1994 to 1995. Asphalt sales increased 23% from 1994 to 1995. The
increase was primarily due to increases in sales prices. Lubricants and wax
sales increased 9% from 1994 to 1995 due to increases in sales prices.
Equity in earnings (losses) of affiliates. Equity in earnings
(losses) of affiliates increased by approximately $5 million, or 17%, from $29
million in 1994 to $34 million in 1995. This increase was due to increases in
equity in earnings of joint interest pipelines and LYONDELL-CITGO of $2 million
and $8 million, respectively, offset by a $6 million decrease in equity
earnings of Nelson Industrial Steam Company ("NISCO"). The decrease in NISCO
earnings in 1995 was attributable to higher interest costs in 1995 as a result
of the NISCO debt refinancing in September 1994.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $1,335 million, or 15%, from 1994 to 1995. Higher crude
oil costs in 1995 as compared to 1994, resulted from a 13% increase in crude
oil prices in 1995 as compared to 1994, or approximately $1.74 per barrel which
includes approximately $0.13 per barrel related to the 1995 adjustments of the
PDVSA crude and feedstock supply agreements discussed in the overview, even
though volumes were down 2%. Higher refined product costs in 1995 as compared
to 1994 resulted from a 7% increase in refined product purchase prices and a
14% increase in purchased volumes. The increased purchased volumes were
primarily due to increased sales to branded distributors.
In the third quarter of 1995, CITGO entered into a contract with
National Response Corporation ("NRC") for marine oil spill removal services
capability and terminated its relationship with the previous provider of that
service. While CITGO paid a cancellation fee of approximately $16 million in
connection with such termination, which is included in cost of sales and
operating expenses, management expects that its contract with NRC will result
in cost savings. Also, a fire damaged an operating unit at CITGO's Corpus
Christi refinery during the third quarter of 1995. There were no injuries.
Property and business interruption insurance policies were in place and
mitigated the losses. Approximately $6 million has been charged to cost of
sales to cover, among other things, the deductible under property insurance
policies. The fire did not materially affect the operations of CITGO.
Gross margin. The gross margin for 1995 was $456 million, or 4.3%,
compared to $516 million, or 5.6% for 1994. The 1995 gross margin percentage
was adversely affected by the PDVSA agreement changes, the oil spill removal
services termination fee, the Corpus Christi fire and increased volumes of
refined product purchases as a percentage of sales volume.
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Selling, general and administrative expenses. Selling, general and
administrative expenses increased $6 million, or 4%, due primarily to increases
in marketing expenses partially offset by the amortization of unrecognized net
gain on postretirement benefit obligations during 1995.
Interest expense. Interest expense increased $30 million from 1994 to
1995. The increase was due to a decrease of the amount of interest capitalized
for 1995 as compared to 1994 and an increase in the level of outstanding debt
due to the acquisition of Cato and investments in LYONDELL-CITGO.
Income taxes. CITGO's provision for income taxes in 1995 was $80
million, representing an effective tax rate of 37%. In 1994, CITGO's provision
for income taxes was $110 million, representing an effective tax rate 37%.
Net income. Net income of $140 million for 1995 included an after-tax
extraordinary gain of $3.4 million on early extinguishment of debt. Net income
of $185 million for 1994 included an after-tax charge of $4.5 million due to
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 112,
"Employers' Accounting for Postemployment Benefits", and an extraordinary
after-tax charge of $1.6 million for the write-off of deferred loan fees and
other costs related to early extinguishment of debt reported by NISCO.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1996, CITGO's net cash provided by
operating activities totaled approximately $265 million, primarily reflecting
$127 million of net income, $189 million of depreciation and amortization, and
the net effect of other items of $(51) million. The more significant changes
in other items included the increase in accounts receivable, including
receivables from affiliates, of approximately $198 million, the increase in
accounts payable and other current liabilities, including payables to
affiliates, of approximately $225 million and the increase of other assets of
approximately $84 million. The increase in accounts receivable is due
primarily to an increase in crude oil receivables and credit card receivables.
The increase in crude oil receivables is a result of an increase in crude oil
sales volumes and prices. The increase in credit card receivables is primarily
the result of an increase in the number of active accounts, higher gasoline
prices and increased use of revolving credit. The increase in accounts payable
is related primarily to purchases of domestic crude oil and refined products.
The increase in payables to affiliates is the result of the timing of cargo
shipments, higher crude oil costs and a specific year-end crude oil purchase
related to CARCO's planned 1997 production. The increase of other assets is
due primarily to refinery turnarounds.
Net cash used in investing activities in 1996 totaled $585 million
consisting primarily of capital expenditures of $438 million and investments in
LYONDELL-CITGO of $143 million.
During the same period, consolidated net cash provided from financing
activities totaled approximately $326 million comprised primarily of proceeds of
approximately $200 million from the issuance of senior notes, the issuance of
$120 million in taxable revenue bonds, $60 million of net borrowings on
revolving bank loans, $28 million net borrowings on short term bank loans, and
$25 million in tax-exempt revenue bonds, less net repayments of $59 million on
private placement senior notes and $29 million on a term loan.
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CITGO currently estimates that its capital expenditures for the years
1997 through 2001 will total approximately $1.6 billion, exclusive of
investments in LYONDELL-CITGO. These include:
CITGO ESTIMATED CAPITAL EXPENDITURES - 1997 THROUGH 2001 (1)
Strategic $ 880 million
Maintenance 400 million
Regulatory/Environmental 320 million
--------------
TOTAL $1,600 million
==============
(1) These estimates may change as future regulatory events unfold. See
"Factors Affecting Forward Looking Statements".
In addition, as of December 31, 1996, 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, which is currently
scheduled for early 1997, (ii) up to an additional approximately $10 million
through the in-service date, and (iii) additional funding for operations in the
event that the refinery enhancement project startup did not proceed as
anticipated. In addition, CITGO is committed to fund up to $22 million for
certain maintenance and environmental costs to the extent that such costs
exceed certain estimates. CITGO expects to fund the Company's remaining
commitment through cash generated from operations and available credit
facilities.
The LYONDELL-CITGO expansion project was completed at the end of 1996
and the in-service date was March 1, 1997. CITGO has made its additional
investment of $30 million which was required at the in-service date.
As of December 31, 1996, the Company and its subsidiaries had an
aggregate of $1,617 million of indebtedness outstanding that matures on various
dates through the year 2026. As of December 31, 1996, the Company's
contractual commitments to make principal payments on this indebtedness were
$148.2 million, $95.2 million and $426.5 million for 1997, 1998 and 1999,
respectively. The Company's bank credit facility consists of an $88.2 million
term loan, payable in quarterly installments of principal and interest through
December 1999, and a $675 million revolving credit facility maturing in
December 1999, of which $350 million was outstanding at December 31, 1996.
Cit-Con has a separate credit agreement under which $35.7 million was
outstanding at December 31, 1996. The Company's other principal indebtedness
consists of (i) $199.7 million in senior notes issued in 1996, (ii) $260
million in outstanding principal amount of senior notes issued pursuant to a
master shelf agreement with an insurance company, (iii) $294 million in
outstanding principal amount of senior notes issued in 1991, (iv) $216.3
million in outstanding principal amount of obligations related to tax exempt
bonds issued by various governmental units, and (v) $120 million in outstanding
principal amount of obligations related to taxable bonds issued by a
governmental unit. See Note 11 to Consolidated Financial Statements.
As of December 31, 1996, capital resources available to CITGO include
cash generated by operations, available borrowing capacity of $325 million
under CITGO's revolving credit facility and $127 million in unused availability
under uncommitted short-term borrowing facilities with various banks.
Additionally, the remaining $400 million from CITGO's shelf registration with
the Securities and Exchange Commission for $600 million of debt securities may
be offered and sold from time to time. CITGO believes that it has sufficient
capital resources to carry out planned capital spending programs, including
regulatory and environmental projects in the near term, and to meet currently
anticipated future obligations as they arise. CITGO periodically evaluates
other sources of capital in the marketplace and
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anticipates long-term capital requirements will be satisfied with current
capital resources and future financing arrangements, including the issuance of
debt securities. The Company's ability to obtain such financings will depend on
numerous factors, including market conditions and the perceived creditworthiness
of the Company at that time. See "Factors Affecting Forward Looking
Statements".
CITGO's debt instruments impose significant restrictions on CITGO's
ability to incur additional debt, place liens on property and sell or acquire
fixed assets and make restricted payments, including dividends.
CITGO is a member of the PDV America, Inc. consolidated Federal income
tax return. CITGO has a tax allocation agreement with PDV America, Inc. which
is designed to provide PDV America, Inc. with sufficient cash to pay its
consolidated income tax liabilities. See Note 1 and Note 5 of the Notes to
Consolidated Financial Statements included in Item 14a.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS
The Company enters into petroleum futures contracts primarily to
reduce the Company's inventory exposure to price risk. The Company also buys
and sells commodity options for delivery and receipt of crude oil and refined
products. Such contracts are entered into through major brokerage houses and
traded on national exchanges and although usually settled in cash, can be
settled through delivery of the commodity. Such contracts generally qualify
for hedge accounting and correlate to price movements of crude oil and refined
products. In order for a transaction to qualify as a hedge, the Company
requires that the item to be hedged exposes the Company to price risk and that
the commodity contract reduce that risk and be designated as a hedge. The high
correlation between price movements of a product and the commodity contract in
that product is well demonstrated in the petroleum industry and, generally, the
Company relies on those historical relationships and on periodic comparisons of
market price changes to price changes of futures and options contracts
accounted for as hedges. Gains or losses on contracts which qualify as hedges
are recognized when the related inventory is sold or the hedged transaction is
consummated. Changes in the market value of futures and option positions which
are not hedges are recorded as gains or losses in the period in which they
occur.
Since the contracts described above generally qualify for hedge
accounting and correlate to price movements of crude oil and refined products
gains or losses resulting from market changes in these contracts generally will
be offset by losses or gains on CITGO's hedged inventory or future purchases
and sales. The Company's derivative commodity activity is closely monitored by
management. Contract periods are generally less than 30 days. Unrealized and
deferred gains and losses on these contracts at December 31, 1996 and 1995 and
the effects on cost of sales and pretax earnings for 1996, 1995 and 1994 were
not material. At times, the Company enters into commodity futures and option
agreements that are not related to the hedging program discussed above. This
activity and its results were not material in 1996, 1995 or 1994.
The Company from time to time enters into other over-the-counter
derivative commodity agreements. No premiums are required for these
agreements. Gains and losses under these agreements, which primarily fix
margins on anticipated sales, are accrued as receivables or payables and as
adjustments of the carrying amount of inventories. The amounts are recognized
in income through cost of sales when the related petroleum products are sold,
unless an earlier write-down is required to recognize anticipated nonrecovery
of deferred amounts. At December 31, 1996 and 1995, CITGO had no such
agreements in place. At December 31, 1993, the Company had one turbine fuel
price collar in effect which effectively established a ceiling and floor price
for 52 thousand barrels of turbine fuel sales per month. The agreement expired
in August 1994.
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CITGO has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to
manage well defined interest rate and commodity price risks arising out of
CITGO's core activities.
CITGO has entered into various interest rate swap and cap agreements
to manage its risk related to interest rate changes on its debt. Premiums paid
for purchased interest rate swap and cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are included in
other assets. The interest rate differentials received or paid by the Company
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place or are recognized immediately if the hedged
borrowings are no longer held.
CITGO has entered into the following interest rate swap agreements to
reduce the impact of interest rate changes on its variable interest rate debt:
CITGO INTEREST RATE SWAP AGREEMENTS
Notional Principal Amount
Expiration Fixed Rate -------------------------
Variable Rate Index Date Paid 1996 1995
- ------------------- ---------- ---------- ---- ----
(000's Omitted)
One-month LIBOR September 1998 4.85% $ 25,000 $ 25,000
One-month LIBOR November 1988 5.09% 25,000 25,000
One-month LIBOR May 2000 6.28% 25,000 25,000
J.J. Kenny May 2000 4.72% 25,000 25,000
J.J. Kenny February 2005 5.30% 12,000 12,000
J.J. Kenny February 2005 5.27% 15,000 15,000
J.J. Kenny February 2005 5.49% 15,000 15,000
-------------------------
$142,000 $142,000
=========================
The fair value of the interest rate swap agreements in place at
December 31, 1996, based on the estimated amount that CITGO would receive or
pay to terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1.1 million. In connection with
the determination of said fair market value, CITGO considers the
creditworthiness of the counterparties, but no adjustment was determined to be
necessary as a result.
Interest expense includes $1.1 million, $0.1 million, and $0.4 million
in 1996, 1995 and 1994, respectively, related to interest paid on these
agreements. During 1995, the Company converted $25 million of variable rate
debt to fixed rate borrowings and terminated the interest rate swap agreement
matched to the variable rate debt. Other income in 1995 included a $2.4
million gain related to the termination of this interest rate swap agreement.
There were no transactions of this type in 1996.
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During 1995, the Company entered into a 9 percent interest cap
agreement with a notional amount of $25 million, a reference rate of
three-month LIBOR and an expiration date of February, 1997. Other interest
rate cap agreements to which the Company was a party expired in November, 1994.
The effect of these agreements was not material in 1996, 1995 or 1994.
Neither CITGO nor the counterparties are required to collateralize
their obligations under these derivative commodity and financial instruments.
CITGO is exposed to credit loss in the event of nonperformance by the
counterparties to these agreements, but has no off-balance-sheet credit risk of
accounting loss for the notional amounts. CITGO does not anticipate
nonperformance by the counterparties, which consist primarily of major
financial institutions at December 31, 1996.
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No.
121 establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS No.121 did not have a
material effect on the consolidated financial position or results of operations
of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, the Notes to Consolidated
Financial Statements and the Independent Auditors' Report are included in Item
14a of this report. The Quarterly results of Operations are reported in Note
17 of the Notes to Consolidated Financial Statements included in Item 14a.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of CITGO are as follows:
NAME AGE POSITION
- ---- --- --------
Luis Urdaneta 55 Chairman of the Board and Director
Ralph S. Cunningham 56 President, Chief Executive Officer and
Director
Roberto V. Mandini 56 Executive Vice President and Director
William J. Beckert 54 Senior Vice President, Operations
Lawrence H. Brittain, Jr. 62 Senior Vice President, Marketing, Light
Oils and Lubricants
Eduardo Lopez Quevedo 56 Director
Remigio Fernandez 61 Director
Directors are elected to serve until their successors are dully
elected and qualified. Executive officers are appointed by and serve at the
discretion of the Board of Directors.
The only standing committee of the Company's Board of Directors is the
Audit Committee. The Audit Committee is comprised of Messrs. Lopez Quevedo,
Fernandez and Mandini.
Set forth below are the biographies of each of the Company's directors
and executive officers.
Luis Urdaneta, Chairman of the Board and Director. Mr. Urdaneta has
been a Vice President of PDVSA since March 1994. Prior to such time, he was a
Vice President of Lagoven, a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from
February 1992 to February 1994; the President of Carbozulia, the coal
subsidiary of PDVSA from 1986 to 1992; a Director of Pequiven, the
petrochemical subsidiary of PDVSA from January 1985 to 1986; a Director of
Intevep, the research and development subsidiary of PDVSA from January 1985 to
1986; a Director of Bariven, a subsidiary of PDVSA engaged in materials
purchasing for U.S. and European operations, from January 1985 to 1986; the
General Refining Manager of Lagoven, a subsidiary of PDVSA engaged in the
exploration, production, refining and retailing of crude, products, gas and
LPG, in 1984; and the Manager of Amuay Refinery, from 1981 to 1983.
Ralph S. Cunningham, President, Chief Executive Officer and Director.
Mr. Cunningham has been President and Chief Executive Officer since May 1,
1995. Prior to such time, he was Vice Chairman of Huntsman Corporation (a
privately held petrochemical company headquartered in Houston, Texas) from 1994
to 1995, President of Texaco Chemical Company from 1990 to 1994, Chairman and
Chief Executive Officer of Clark Oil & Refining Corporation from 1989 to 1990,
President of Tenneco Oil Processing & Marketing from 1982 to 1989 and Executive
Vice President of Tenneco Oil Processing & Marketing from 1980 to 1982. Mr.
Cunningham is a Director of Bank of Oklahoma, N.A., Enterprise Products Company
(a natural gas liquids service business), Huntsman Corporation, International
Technology corporation (an environmental waste management company), and
Sherritt, Inc. (a fertilizer production company).
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Roberto V. Mandini, Executive Vice President and Director. Mr.
Mandini has been Executive Vice President since January 1995. Prior to such
time, he was Chief Executive Officer and Chairman of the Board of Directors of
Corpoven S.A., a subsidiary of PDVSA engaged in the exploration, production,
refining and retailing of crude, products, gas and LPG, from December 1986 to
December 1994. Mr. Mandini was also Executive Vice President of Corpoven S.A.
from June 1986 to December 1986, Executive Vice President of Meneven S.A., a
company that was merged into Corpoven in 1986, from January 1985 to June 1986,
a member of the Board of Directors of Lagoven S.A., a subsidiary of PDVSA
engaged in the exploration, production, refining and retailing of crude,
products, gas and LPG, from 1981 to 1985, and Producing Function Coordinator
with PDVSA from 1980 to 1981.
William J. Beckert, Senior Vice President, Operations. Mr. Beckert
has been Senior Vice President, Operations since December 1994, with
responsibility for the Lake Charles Manufacturing Complex, Corpus Christi
Refinery, Petrochemicals, Supply and Logistics, Asphalt Business Unit, Refinery
Coordination, Industrial Products, Corporate Planning and Economics, and
Health, Safety and Environmental. Prior to such time, he was Vice President,
Corporate Planning and Economics from 1986 to 1995 and General Manager,
Operations and Planning from 1985 to 1986. Prior to such time, he was Manager,
Product Management with Gulf Oil Corporation from 1982 to 1985 and Manager,
Business Performance and Coordination from 1980 to 1982 and Manager,
International Planning and Coordination from 1978 to 1980.
Lawrence H. Brittain, Jr., Senior Vice President, Marketing, Light
Oils and Lubricants. Mr. Brittain has been Senior Vice President Marketing,
Light Oils & Lubricants since March 1, 1996. Prior to such time, he was Vice
President, Marketing of CITGO from 1986 to 1996 with responsibility for Light
Oils Marketing, Credit Card Operations, Pricing, Aviation and Government Sales,
Advertising, Brand Operations and Program Development, Business Services and
Terminal Facilities. Prior to such time, he was General Manager Retail
Operations of CITGO from 1985 to 1986. Prior to such time, he was Division
Manager with Chevron in 1985; District Sales Manager (Atlanta) from 1971 to
1974; Sales Manager (Jacksonville) from 1968 to 1971; Regional Merchandising
Manager, Southern Region from 1967 to 1968 and All Markets Sales Representative
from 1962 to 1966.
Eduardo Lopez Quevedo, Director. Mr. Lopez Quevedo has been a member
of the Board of Directors of CITGO since 1995. Mr. Lopez Quevedo has been
Chief Executive Officer and a member of the Board of Directors of Interven
Venezuela, S.A., a subsidiary of PDVSA engaged in the monitoring of PDVSA's
investments in the United States of America and Europe, since 1995 and 1994,
respectively. Prior to such time, Mr. Lopez Quevedo was Chief Executive
Officer and Chairman of the Board of Directors of Maraven, S.A., a subsidiary
of PDVSA engaged in the exploration, production, refining and retailing of
crude, products, gas and LPG, from 1992 to 1994; Executive Vice President of
Maraven, S.A. from 1990 to 1992; Executive Vice President of Interven
Venezuela, S.A. from 1988 to 1990; Executive Vice President of Corpoven, S.A.,
a subsidiary of PDVSA engaged in the exploration, production, refining and
retailing of crude, products, gas and LPG, from 1986 to 1988; Chief Executive
Officer and Chairman of the Board of Directors Cevegas, S.A., an industrial gas
company in Venezuela, from 1986 to 1988; a member of the Board of Directors of
Lagoven, S.A., a subsidiary of PDVSA engaged in the exploration, production,
refining and retailing of crude, products, gas and LPG, from 1985 to 1986; a
member of the Board of Directors of Corpoven, S.A. from 1978 to 1985; the
Supply and Marketing Coordinator of PDVSA from 1977 to 1978; and a member of
the Board of Directors of Llanoven, S.A., the successor of Mobil Oil Company de
Venezuela, from 1975 to 1977. Currently, Mr. Lopez Quevedo is also the Vice
Chairman of the Board of Directors of AB Nynas Petroleum (Sweden); a member of
the Shareholder Committee of Ruhr Oel GmbH (Germany); and the Chairman of the
Management Board of PDV Europa, B.V. (The Netherlands).
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Remigio Fernandez, Director. Mr. Fernandez has been a member of the
Board of Directors of PDVSA since March 1996. Prior to such time, he was the
Managing Director of PDV(UK), PDVSA's representative office for Europe, from
September 1994 to March 1996; the Chairman of the Managing Board and Chief
Executive Officer of PDV Europa B.V., the PDVSA affiliate responsible for
investments and other commercial activities in Europe, from February 1991 to
August 1994; the President and Chief Executive Officer of Interven S.A., the
affiliate then in charge of PDVSA's overseas investments, from May 1986 to
January 1991; a member of PDVSA's Board of Directors from September 1983 to
April 1986; a member of the Board of Directors of Lagoven S.A., a subsidiary of
PDVSA engaged in the exploration, production, refining and retailing of crude,
products, gas and LPG, from December 1977 to August 1983. Mr. Fernandez
currently also serves as President of PROESCA, a PDVSA affiliate engaged in
specialty products obtained from refinery streams; as member of the Board of
Directors of Interven Venezuela, S.A., the PDVSA affiliate responsible for
monitoring overseas investments; and as Chairman of the Shareholder's Committee
of Ruhr Oel GmbH, a German joint venture between PDVSA and Veba Oel, engaged in
petroleum refining and distribution, a position he has held since 1983. He has
also been Chairman and Vice-Chairman of the Board of Directors of AB Nynas
Petroleum, a Swedish-based joint venture of PDVSA and Neste Oy, engaged in the
production and marketing of asphalt and naphthenic lubricants in Europe, from
1991 through 1996; the Chairman of the Board of Directors of Champlin Refining
and Chemicals, formerly a PDVSA wholly-owned refining and distribution company,
now owned by CITGO, from 1988 through 1990; and was previously a member of
CITGO's Board of Directors from 1986 to 1988.
ITEM 11. EXECUTIVE COMPENSATION
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore omitting certain information
otherwise required by Item 11 of Form 10-K relating to executive compensation
as permitted by General Instruction (I)(2)(c).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
32
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CITGO is a wholly-owned indirect subsidiary of PDVSA. As a result,
PDVSA, either directly or indirectly, nominates and selects the members of the
Board of Directors of CITGO and its subsidiaries. Certain members of the Board
of Directors of CITGO are also directors or executives officers of PDVSA.
CITGO and LYONDELL-CITGO have entered into several transactions with
PDVSA or other affiliates of PDVSA, including crude oil and feedstock supply
agreements, agreements for the purchase of refined products and transportation
agreements. These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO and LYONDELL-CITGO for a
fixed period, usually 20 to 25 years. The supply agreements differ somewhat
for each entity and each CITGO refinery but generally incorporate formula
prices based on the market value of a slate of refined products deemed to be
produced for each particular grade of crude oil or feedstock, less (i) certain
deemed refining costs; (ii) certain actual costs, including transportation
charges, import duties and taxes; and (iii) a deemed margin, which varies
according to the grade of crude oil or feedstock delivered. Under each supply
agreement, deemed margins and deemed costs are adjusted periodically by a
formula primarily based on the rate of inflation. Because deemed operating
costs and the slate of refined products deemed to be produced for a given
barrel of crude oil or other feedstock do not necessarily reflect the actual
costs and yields in any period, the actual refining margin earned by a
purchaser under the various supply agreements will vary depending on, among
other things the efficiency with which such purchaser conducts its operations
during such period. These supply agreements are designed to reduce the
inherent earnings volatility of the refining and marketing operations of CITGO
and LYONDELL-CITGO. Prior to 1995, certain costs were used in the CITGO supply
agreement formulas, aggregating approximately $70 million per year, which were
to cease being deductible after 1996. Commencing in the third quarter of 1995,
a portion of such deductions were deferred from 1995 and 1996 to the years 1997
through 1999. As a result of the deferral, crude oil costs for 1995 increased
by approximately $22 million, which is included in cost of sales and operating
expenses, and increased approximately $44 million for the year 1996 under these
agreements. However, from 1997 through 1999, crude oil costs are estimated to
decrease by approximately $25 million per year as a result of the deferral.
These estimates are based on the assumption that CITGO will purchase the base
volumes of crude oil under the related agreements. See also "Factors
Affecting Forward Looking Statements".
Under such long-term supply agreements and refined product purchase
agreements, CITGO and LYONDELL-CITGO purchased approximately $2.4 billion and
$0.7 billion respectively, of crude oil, feedstocks and refined products at
market related prices from PDVSA in 1996. At December 31, 1996, $237 million
was included in CITGO's current payable to affiliates as a result of these
transactions. The LYONDELL-CITGO crude oil supply agreement increased to 200
MBPD on March 1, 1997.
During 1996, CITGO purchased approximately $1.6 billion of crude oil,
feedstocks and refined products from LYONDELL-CITGO primarily under a long-term
product sales agreement. Such agreement incorporates formula prices based on
published market prices, defined marketing discounts and variable factors. At
December 31, 1996, $38 million was included in payables to affiliates as a
result of these transactions.
CITGO had refined product, feedstock and crude oil and other product
sales of $254 million to affiliates, including the Mount Vernon Phenol plant
and LYONDELL-CITGO, in 1996. At December 31, 1996, $28 million was included in
due from affiliates as a result of these transactions.
33
35
Under a separate guarantee of rent agreement, PDVSA has guaranteed
payment of rent, stipulated loss value and termination value due under the
lease of the Corpus Christi refinery facilities. See "Consolidated Financial
Statements - Note 15".
The Company and PDV America are parties to a tax allocation agreement
which is designed to provide PDV America with sufficient cash to pay its
consolidated income tax liabilities. In April 1996, $12.7 million due from
CITGO to PDV America under this tax allocation agreement for the tax years 1992
through 1994 was reclassified and accounted for as a contribution of capital.
In December 1996, $0.8 million due from PDV America to CITGO under this tax
allocation agreement for the 1995 tax year was reclassified and accounted for
as a dividend. In the event that CITGO should cease to be part of the
consolidated federal income tax return, any amounts included in shareholder's
equity under this agreement are required to be paid to PDV America. Current
amounts payable to PDV America under this agreement of $12 million and $12.2
million are included in other current liabilities at December 31, 1996 and
1995, respectively.
34
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
a. CERTAIN DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements:
Page
----
Independent Auditors' Report 1
Consolidated Balance Sheets at December 31, 1996 and 1995 2
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 3
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1996, 1995 and 1994 4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 5
Notes to Consolidated Financial Statements 7
(2) Exhibits:
The Exhibit Index in part c. below lists the exhibits that are
filed as part of, or incorporated by reference into, this
report.
b. REPORTS ON FORM 8-K
On January 8, 1997, CITGO filed a Report on Form 8-K relating to the
announcement that its parent company, PDV America, Inc., had signed a
letter of intent with Union Oil Company of California for the
restructuring of the UNO-VEN Company's refining and marketing
business.
35
37
c. EXHIBITS
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of CITGO Petroleum
Corporation.
*4.1 Indenture, dated as of May 1, 1996, between CITGO Petroleum
Corporation and the First National Bank of Chicago, relating
to the 7 7/8% Senior Notes due 2006 of CITGO Petroleum
Corporation.
*4.2 Form of Senior Note (included in Exhibit 4.1).
**10.1 Crude Supply Agreement between CITGO Petroleum Corporation and
Petroleos de Venezuela, S.A., dated as of September 30, 1986.
**10.2 Supplemental Crude Supply Agreement dated as of September 30,
1986 between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
**10.3 Crude Oil and Feedstock Supply Agreement dated as of March 31,
1987 between Champlin Refining Company and Petroleos de
Venezuela, S.A.
**10.4 Supplemental Crude Oil and Feedstock Supply Agreement dated as
of March 31, 1987 between Champlin Refining Company and
Petroleos de Venezuela, S.A.
**10.5 Contract for the Purchase/Sale of Boscan Crude Oil dated as of
June 2, 1993 between Tradecal, S.A. and CITGO Asphalt Refining
Company.
**10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil dated December 28, 1990 among Maraven, S.A.,
Lagoven, S.A. and Seaview Oil Company.
**10.7 Sublease Agreement dated as of March 31, 1987 between Champlin
Petroleum Company, Sublessor, and Champlin Refining Company,
Sublease.
**10.8 Operating Agreement dated as of May 1, 1984 among Cit-Con Oil
Corporation, CITGO Petroleum Corporation and Conoco, Inc.
**10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd., dated July 1, 1993.
**10.10 Contribution Agreement between Lyondell Petrochemical Company
and LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
**10.11 Crude Oil Supply Agreement between LYONDELL-CITGO Refining
Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993.
36
38
**10.12 Supplemental Supply Agreement dated as of May 5, 1993 between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
**10.13 Tax Allocation Agreement dated as of June 24, 1993 among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., as amended.
**10.14 CITGO Credit Facility.
*10.15(i) First Amendment to the Second Amended and Restated Senior
Term Loan Agreement, by and between CITGO Petroleum
Corporation and Bank of America National Trust and Savings
Association et al, dated as of February 15, 1994.
*10.15(ii) Second Amendment to Second Amended and Restated Senior Term
Loan Agreement by and among CITGO Petroleum Corporation and
Bank of America Illinois et al, dated as of October 21, 1994.
*10.15(iii) First Amendment to the Second Amended and Restated Senior
Revolving Credit Facility Agreement by and among CITGO
Petroleum Corporation and Bank of America National Trust and
Savings Association et al, dated as of February 15, 1994.
*10.15(iv) Second Amendment to Second Amended and Restated Senior
Revolving Credit Facility Agreement by and among CITGO
Petroleum Corporation and Bank of America Illinois et al,
dated as of October 21, 1994.
*10.16 Master Shelf Agreement (1994) by and between Prudential
Insurance Company of America and CITGO Petroleum Corporation
($100,000,000), dated March 4, 1994.
*10.17(i) Letter Agreement by and between the Company and Prudential
Insurance Company of America, dated March 4, 1994.
*10.17(ii) Letter Amendment No. 1 to Master Shelf Agreement with
Prudential Insurance Company of America, dated November 14,
1994.
**10.18 CITGO Senior Debt Securities(1991) Agreement.
*10.19 CITCON Credit Agreement between CITCON Oil Corporation and
The Chase Manhattan Bank N.A., as Agent, dated as of
April 30, 1992.
*10.20(i) First Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of June 30, 1992.
*10.20(ii) Second Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of March 31, 1994.
*10.20(iii) Third Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of June 10, 1994.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule (filed electronically only).
__________
* Previously filed in connection with the Registrant's Report on Form
10, Registration No. 333-3226.
** Incorporated by reference to the Registration Statement on Form F-1 of
PDV America, Inc. (No. 33-63742).
d. FINANCIAL STATEMENT SCHEDULES
The schedules filed by the Company are listed in Item 14a above
as required.
37
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CITGO PETROLEUM CORPORATION
Date: March 27, 1997 /s/ R. M. Bright
-------------------------
R. M. Bright
Controller (Chief Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
By /s/ Luis Urdaneta Chairman of the Board March 27, 1997
--------------------------------------- and Director
Luis Urdaneta
By /s/ Ralph S. Cunningham President, Chief Executive March 27, 1997
--------------------------------------- Officer and Director
Ralph S. Cunningham
By /s/ Roberto Mandini Executive Vice President March 27, 1997
--------------------------------------- and Director
Roberto Mandini
By /s/ Eduardo Lopez Quevedo Director March 27, 1997
---------------------------------------
Eduardo Lopez Quevedo
By /s/ Remigio Fernandez Director March 27, 1997
---------------------------------------
Remigio Fernandez
38
40
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS AS OF
DECEMBER 31, 1996 AND 1995, AND RELATED
CONSOLIDATED STATEMENTS OF INCOME,
SHAREHOLDER'S EQUITY, AND CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1996
AND INDEPENDENT AUDITORS' REPORT
41
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of CITGO Petroleum
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholder's equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of CITGO Petroleum Corporation and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits to conform
with Statement of Financial Accounting Standards No. 112.
DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 14, 1997
42
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
DECEMBER 31,
-----------------------
1996 1995
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,856 $ 19,863
Accounts receivable 1,004,098 817,990
Due from affiliates 27,738 28,991
Inventories 833,191 785,275
Prepaid expenses and other 21,626 30,199
---------- ----------
Total current assets 1,913,509 1,682,318
PROPERTY, PLANT AND EQUIPMENT - Net 2,786,703 2,491,849
RESTRICTED CASH 9,369 1,258
INVESTMENTS IN AFFILIATES 790,576 650,360
OTHER ASSETS 129,972 97,793
---------- ----------
$5,630,129 $4,923,578
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 53,000 $ 25,000
Accounts payable 530,505 438,172
Payables to affiliates 275,375 176,800
Taxes other than income 200,863 173,915
Other 219,648 224,077
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 11,778 10,557
---------- ----------
Total current liabilities 1,386,409 1,143,761
LONG-TERM DEBT 1,468,738 1,159,263
CAPITAL LEASE OBLIGATION 129,726 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 183,370 167,905
OTHER NONCURRENT LIABILITIES 194,802 186,376
DEFERRED INCOME TAXES 370,117 367,644
MINORITY INTEREST 26,631 25,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,235,009 1,222,345
Retained earnings 635,326 509,161
---------- ----------
Total shareholder's equity 1,870,336 1,731,507
---------- ----------
$5,630,129 $4,923,578
========== ==========
See notes to consolidated financial statements.
-2-
43
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
REVENUES:
Net sales $ 12,698,366 $ 10,279,579 $ 9,093,562
Sales to affiliates 253,694 242,581 153,143
------------ ------------ ------------
12,952,060 10,522,160 9,246,705
Equity in earnings (losses) of affiliates - net 21,481 33,530 28,585
Other income (expense) - net (4,178) (2,985) (6,265)
------------ ------------ ------------
12,969,363 10,552,705 9,269,025
------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $4,001,471, $3,321,128, and
$2,915,696 from affiliates) 12,491,003 10,066,012 8,730,971
Selling, general and administrative expenses 166,108 162,260 156,635
Interest expense, excluding capital lease 97,171 88,655 58,899
Capital lease interest charge 16,818 17,913 18,893
Minority interest 1,013 1,993 2,394
------------ ------------ ------------
12,772,113 10,336,833 8,967,792
------------ ------------ ------------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY
ITEMS AND CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 197,250 215,872 301,233
INCOME TAXES 70,281 79,528 110,444
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE 126,969 136,344 190,789
EXTRAORDINARY GAIN, early extinguishment of debt,
net of related income taxes of $2,160 -- 3,380 --
EXTRAORDINARY CHARGE, early extinguishment of
debt, net of related income tax benefit of $956 -- -- (1,627)
CUMULATIVE EFFECT, change in accounting for
postemployment benefits, net of related income tax
benefit of $2,823 -- -- (4,477)
------------ ------------ ------------
NET INCOME $ 126,969 $ 139,724 $ 184,685
============ ============ ============
See notes to consolidated financial statements.
- 3 -
44
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
COMMON STOCK TOTAL
------------------------- ADDITIONAL RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
BALANCE, JANUARY 1, 1994 1 $ 1 $ 1,164,804 $ 184,752 $ 1,349,557
Net income -- -- -- 184,685 184,685
Capital contributions received
from Parent -- -- 42,541 -- 42,541
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 1 1 1,207,345 369,437 1,576,783
Net income -- -- -- 139,724 139,724
Capital contributions received
from Parent -- -- 15,000 -- 15,000
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1995 1 1 1,222,345 509,161 1,731,507
Net income -- -- -- 126,969 126,969
Noncash capital contributions
received from Parent -- -- 12,664 -- 12,664
Noncash dividend to Parent -- -- -- (804) (804)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 1 $ 1 $ 1,235,009 $ 635,326 $ 1,870,336
=========== =========== =========== =========== ===========
See notes to consolidated financial statements.
- 4 -
45
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 126,969 $ 139,724 $ 184,685
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 189,063 164,570 157,071
Provision for losses on accounts receivable 13,275 9,070 6,250
Deferred income taxes 4,612 16,957 29,087
Distributions in excess of (less than) equity in earnings (losses)
of affiliates 9,677 (4,490) (3,930)
(Gain) charge from early extinguishment of debt -- (3,380) 1,627
Other adjustments 2,577 3,652 5,483
Changes in operating assets and liabilities, net of investment in
subsidiary:
Accounts receivable and due from affiliates (198,080) (77,412) (170,874)
Inventories (47,916) 2,212 (46,878)
Prepaid expenses and other current assets 6,434 4,766 2,653
Accounts payable and other current liabilities 225,288 133,110 98,187
Other assets (83,858) (68,114) (38,688)
Other liabilities 17,325 9,685 55,422
--------- --------- ---------
Total adjustments 138,397 190,626 95,410
--------- --------- ---------
Net cash provided by operating activities 265,366 330,350 280,095
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (437,743) (314,225) (350,492)
Proceeds from sales of property, plant and equipment 3,923 843 2,734
(Increase) decrease in restricted cash (8,111) 41,629 (42,887)
Return of partnership capital -- -- 49,256
Investments in LYONDELL-CITGO Refining Company Ltd. (142,638) (178,875) (138,416)
Investment in subsidiary and advances to other affiliates (10) (46,805) (1,531)
--------- --------- ---------
Net cash used in investing activities (584,579) (497,433) (481,336)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans 28,000 (28,500) 16,500
Net borrowings of revolving bank loan 60,000 95,000 55,000
Payments on term bank loan (29,412) (7,353) (150,000)
Payments on private placement senior notes (58,685) (47,321) --
Proceeds from issuance of senior notes 199,694 -- --
Proceeds from master shelf agreement -- 100,000 160,000
Proceeds from issuance of taxable bonds 120,000 -- --
Proceeds from issuance of tax-exempt bonds 25,000 90,700 70,000
Payments on tax-exempt bonds -- (40,237) --
Payments of capital lease obligations (11,248) (9,011) (8,691)
(Repayments) borrowings of other debt (7,143) 2,397 18,510
Capital contributions received from Parent -- 15,000 42,541
--------- --------- ---------
Net cash provided by financing activities 326,206 170,675 203,860
--------- --------- ---------
(Continued)
- 5 -
46
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
INCREASE IN CASH AND CASH EQUIVALENTS $ 6,993 $ 3,592 $ 2,619
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,863 16,271 13,652
--------- ---------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 26,856 $ 19,863 $ 16,271
========= ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 120,532 $ 97,788 $ 75,538
========= ========== =========
Income taxes, net of refunds of $3,682 in 1995 $ 54,939 $ 64,437 $ 94,551
========= ========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Noncash capital contribution from parent (PDV America) $ 12,664 $ -- $ --
========= ========== =========
Noncash dividend to parent (PDV America) $ (804) $ -- $ --
========= ========== =========
(Concluded)
See notes to consolidated financial statements.
-6-
47
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - CITGO Petroleum Corporation ("CITGO") is a
subsidiary of PDV America, Inc. ("PDV America"), an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil
company of the Republic of Venezuela.
CITGO manufactures or refines and markets quality transportation fuels as
well as lubricants, refined waxes, petrochemicals, asphalt and other
industrial products. Transportation fuel customers include primarily
CITGO branded wholesale distributors, convenience stores and airlines
located primarily east of the Rocky Mountains. Crude oil and refined
products are also sold for refinery supply, logistical and marketing
purposes. Such sales are primarily to major and independent oil companies
and traders. Lubricants are sold to independent distributors, mass
marketers and industrial customers, and petrochemical feedstocks and
industrial products are sold to various manufacturers and industrial
companies throughout the United States. Sales are made primarily on
account, based on pre-approved unsecured credit terms established by
CITGO management, except sales to airlines, which are made primarily on a
prepaid basis. The Company also has a proprietary credit card program and
a Companion VISA bank card program which allow retail consumers to
purchase fuel and convenience items at CITGO branded outlets. Allowances
for uncollectible accounts are established based on several factors which
include, but are not limited to, analysis of specific customers,
historical trends, current economic conditions and other information.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of CITGO and its subsidiaries (collectively referred
to as the "Company"). All subsidiaries are wholly owned except for
Cit-Con Oil Corporation ("Cit-Con"), which is 65 percent owned. All
material intercompany transactions and accounts have been eliminated.
The Company's investments in affiliates are accounted for by the equity
method. The excess of the investments over the equity in the underlying
net assets of the affiliates is amortized on a straight-line basis over
40 years, which is based upon the estimated useful lives of the
affiliates' assets.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION - Revenue is recognized upon transfer of title to
products sold, based upon the terms of delivery.
SUPPLY AND MARKETING ACTIVITIES - The Company engages in the buying and
selling of crude oil to supply its refineries. The net results of this
activity are recorded in cost of sales. The Company also engages in the
buying and selling of refined products to facilitate the marketing of its
refined products. The results of this activity are recorded in cost of
sales and sales.
-7-
48
Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any
resulting volumetric exchange balances are accounted for as inventory in
accordance with the Company's LIFO inventory method. Exchanges that are
settled through payment or receipt of cash are accounted for as purchases
or sales.
EXCISE TAXES - The Company collects excise taxes on sales of gasoline and
other motor fuels. Excise taxes of approximately $2.7 billion, $2.2
billion, and $2.1 billion were collected from customers and paid to
various governmental entities in 1996, 1995, and 1994, respectively.
Excise taxes are not included in sales.
INVENTORIES - Crude oil and refined product inventories are stated at the
lower of cost or market and cost is primarily determined using the
last-in, first-out ("LIFO") method. Materials and supplies are valued
primarily using the average cost method.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is reported
at cost, less accumulated depreciation. Depreciation is based upon the
estimated useful lives of the related assets using the straight-line
method. Depreciable lives are generally as follows: buildings and
leaseholds - 10 to 24 years; machinery and equipment - 5 to 24 years; and
vehicles - 3 to 10 years.
Upon disposal or retirement of property, plant and equipment, the cost
and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recognized in income.
The Company capitalizes interest on projects when construction takes
considerable time and entails major expenditures. Such interest is
allocated to property, plant and equipment and amortized over the
estimated useful lives of the related assets. Capitalized interest
totaled $12 million, $5 million, and $12 million in 1996, 1995, and 1994,
respectively.
FUTURES CONTRACTS AND COMMODITY OPTIONS ACTIVITY AND OTHER DERIVATIVES
The Company enters into petroleum futures contracts primarily to hedge a
portion of the price risk associated with crude oil and refined products.
The Company also buys and sells commodity options for delivery and
receipt of crude oil and refined products. In order for a transaction to
qualify as a hedge, the Company requires that the item to be hedged
exposes the Company to price risk and that the commodity contract reduce
that risk and be designated as a hedge. The high correlation between
price movements of a product and the commodity contract in that product
is well demonstrated in the petroleum industry and, generally, the
Company relies on those historical relationships and on periodic
comparisons of market price changes to price changes of futures and
options contracts accounted for as hedges. Gains or losses on contracts
which qualify as hedges are recognized when the related inventory is sold
or the hedged transaction is consummated. Changes in the market value of
futures and option positions which are not hedges are recorded as gains
or losses in the period in which they occur.
The Company has only limited involvement with other derivative financial
instruments and does not use them for trading purposes. They are used to
manage well defined interest rate and commodity price risks arising out
of the Company's core activities.
The Company has entered into various interest rate swap and cap
agreements to manage its risk related to interest rate changes on its
debt. Premiums paid for purchased interest rate swap and cap agreements
are amortized to interest expense over the terms of the agreements.
Unamortized premiums are included in other assets. The interest rate
differentials received or paid by the Company related to these agreements
are recognized as adjustments to interest expense over the term of the
agreements. Gains or losses on terminated swap agreements are either
amortized over the original term of the swap
-8-
49
agreement if the hedged borrowings remain in place or are recognized
immediately if the hedged borrowings are no longer held.
The Company from time to time enters into other over-the-counter
derivative commodity agreements. No premiums are required for these
agreements. Gains and losses under these agreements, which primarily fix
margins on anticipated sales, are accrued as receivables or payables and
as adjustments of the carrying amount of inventories. The amounts are
recognized in income through cost of sales when the related petroleum
products are sold, unless an earlier write-down is required to recognize
anticipated nonrecovery of deferred amounts.
REFINERY MAINTENANCE - Costs of refinery turnaround maintenance are
charged to operations over the average period between turnarounds.
Turnaround periods range approximately from one to seven years.
Unamortized costs are included in other assets. Amortization of refinery
turnaround costs is included in depreciation and amortization expense.
Amortization was $53 million, $43 million, and $54 million for 1996,
1995, and 1994, respectively. Ordinary maintenance is expensed as
incurred.
ENVIRONMENTAL EXPENDITURES - Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past
operations and do not contribute to current or future revenue generation
are expensed. Liabilities are recorded when environmental assessments
and/or cleanups are probable and the costs can be reasonably estimated.
Environmental liabilities are not discounted to their present value.
Subsequent adjustments to estimates, to the extent required, may be made
as more refined information becomes available.
INCOME TAXES - The Company accounts for income taxes, using an asset and
liability approach, in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes."
The Company is included in the consolidated U.S. Federal income tax
return filed by PDV America. The Company's current and deferred income
tax expense has been computed on a stand-alone basis.
POSTRETIREMENT BENEFITS - In addition to pension benefits, the Company,
at present, provides certain health care and life insurance benefits to
eligible employees at retirement. The Company accounts for these benefits
in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This statement requires
costs related to postretirement benefits to be accrued during the period
an employee provides service.
POSTEMPLOYMENT BENEFITS - The Company provides various postemployment
benefits for eligible former or inactive employees, including disability,
severance, and salary continuation benefits. Effective January 1, 1994,
the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." The principal effect of adopting this standard
is the accrual of postemployment benefits during the period the employees
provide service rather than expensing costs as paid. The cumulative
effect of adopting this standard was $4.5 million, which is net of the
income tax benefit of $2.8 million. The effect on 1994 net income,
excluding the cumulative effect, was not material.
RESTRICTED CASH - Restricted cash represents short-term, highly liquid
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing environmental
facilities as defined in the bond agreements.
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50
CONSOLIDATED STATEMENT OF CASH FLOWS - For purposes of the consolidated
statement of cash flows, the Company considers highly liquid short-term
investments with original maturities of three months or less to be cash
equivalents. In addition, borrowings with original maturities of three
months or less are presented net of repayments.
ACCOUNTING FOR LONG-LIVED ASSETS - Effective January 1, 1996, CITGO
adopted Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long- Lived Assets to be
Disposed Of" ("SFAS No. 121"). SFAS No. 121 establishes the accounting
for the impairment of long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used and the
accounting for long-lived assets and certain identifiable intangibles to
be disposed of. The adoption of SFAS No. 121 did not have a material
effect on the consolidated financial position or results of operations of
CITGO.
2. REFINERY AGREEMENT
In December 1996, PDV America ("PDVA") signed a letter of intent with
Union Oil Company of California for PDVA and/or an affiliate to acquire
the refining, distribution and marketing assets of The Uno-Ven Company, a
general partnership in which a subsidiary of PDVA owns 50%. The assets
include a 153,000 barrel per day crude oil refinery in Lemont, Illinois,
as well as eleven product distribution terminals and 60 retail locations
located in the Midwest. It is anticipated that CITGO will operate these
assets and acquire the refined products produced at the refinery. The
transaction is expected to close on or about March 31, 1997.
3. INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD.
On July 1, 1993, subsidiaries of CITGO and Lyondell Petrochemical Company
("Lyondell") executed definitive agreements with respect to
LYONDELL-CITGO Refining Company Ltd. ("LYONDELL- CITGO"), a Texas limited
liability company which owns and operates a 265 MBPD refinery previously
owned by Lyondell and located in Houston, Texas. As of December 31, 1996,
CITGO has invested approximately $579 million in cash for a minority
participation interest in LYONDELL-CITGO and to fund the initial portion
of CITGO's commitment to the refinery enhancement project described
below, while Lyondell contributed the refinery and related assets in
exchange for the remaining participation interest in the new company. As
of December 31, 1996, LYONDELL-CITGO has spent approximately $1,073
million on a refinery enhancement project to increase the refinery's
heavy crude oil high conversion capacity. This heavy crude oil will be
entirely supplied by a subsidiary of PDVSA under a long-term crude oil
supply contract. CITGO purchases substantially all of the refined
products produced at the Houston refinery under a long-term contract
through the year 2017, thereby significantly reducing CITGO's need to
purchase refined products from third party sources to supply its
distribution network. As of December 31, 1996, LYONDELL-CITGO estimates
expenditures to complete this project will total approximately $57
million to $67 million.
As of December 31, 1996, CITGO is committed to invest an additional (i)
$30 million at the in-service date (as defined in the definitive
agreements) of the refinery enhancement project, which is currently
scheduled for early 1997, (ii) up to an additional approximately $10
million through the in-service date, and (iii) additional funding for
operations in the event that the refinery enhancement project startup
does not proceed as anticipated. In addition, CITGO is required to fund
certain fees, expenses and interest on LYONDELL-CITGO's $450 million of
construction loans, and is committed to fund up to $22 million for
certain maintenance and environmental costs, to the extent that
maintenance and environmental costs exceed expectations. Although CITGO
is committed to fund the investments described above, CITGO does not
currently expect that its aggregate investments will exceed
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51
$626 million (including the initial investment, but exclusive of
reinvested earnings) through the in-service date. CITGO's expected
aggregate investment in LYONDELL-CITGO, plus its share of
LYONDELL-CITGO's earnings, which must be reinvested through the
in-service date, will give CITGO approximately a 42 percent participation
interest in LYONDELL-CITGO; CITGO also has a one-time option within 18
months of the in-service date to make an additional investment which, if
made, would increase CITGO's participation interest to 50 percent. As of
December 31, 1996, CITGO has received $258 million of equity
contributions to fund the investments in LYONDELL-CITGO. CITGO expects to
fund the Company's remaining commitment through cash generated from
operations and available credit facilities.
The Company accounts for its investment in LYONDELL-CITGO using the
equity method based on allocations of income agreed to by the owners. At
December 31, 1996 and 1995, the Company's investment, including
reinvested earnings, was $605 million and $461 million, which represented
an approximate 13 percent and 12 percent participation interest,
respectively, as defined by the agreement. The Company's equity in the
earnings of LYONDELL-CITGO was $1 million, $14 million, and $6 million
for 1996, 1995, and 1994, respectively.
4. ACQUISITION OF BUSINESS
On May 1, 1995, the Company purchased Cato Oil & Grease ("Cato"). Cato is
primarily engaged in the manufacture and distribution of lubricants. The
results of operations of Cato are included in the accompanying financial
statements since the date of acquisition. Proforma results of operations
for this business are not material to the Company's consolidated
statement of income. The total cost of this acquisition was $46.8 million
which was allocated as follows:
Property, plant and equipment $27,000,000
Inventory 8,643,000
Accounts receivable 6,144,000
Other assets (net) 5,018,500
-----------
$46,805,500
===========
5. RELATED PARTY TRANSACTIONS
The Company purchases approximately two-thirds of the crude oil processed
in Company refineries from subsidiaries of PDVSA under long-term supply
agreements. Under these supply agreements, which extend through the years
2006 and 2013, and other agreements, including feedstock and product
purchase agreements and vessel transportation contracts, the Company
purchased $2.4 billion, $1.9 billion, and $1.8 billion of crude oil,
feedstocks and other products from wholly owned subsidiaries of PDVSA in
1996, 1995, and 1994, respectively. These crude oil, feedstock, and other
product purchases comprised 29 percent, 31 percent, and 34 percent of the
Company's total acquisitions in 1996, 1995, and 1994, respectively. The
crude oil supply contracts incorporate formula prices based on the market
value of a number of refined products deemed to be produced from each
particular crude oil, less (i) certain 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. Effective January 1, 1992, the
supply agreements with respect to CITGO's 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
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52
approximately $70 million per year for the years 1992 through 1994 as
compared to the amount that would otherwise have been payable thereunder.
This modification was to expire at December 31, 1996; however, in the
third quarter of 1995, PDVSA and CITGO agreed to adjust this modification
so that the 1992 fixed amount per barrel would be reduced and the
adjusted modification would not expire until December 31, 1999. The
impact of this adjustment was an increase in crude cost of $44 million
for 1996 and $22 million for 1995, over what would otherwise have been
payable under the original 1992 modification. The Company anticipates
that the effect of the adjustments to the original modifications will be
to reduce the price of crude oil purchased from PDVSA under these
agreements by $25 million per year in 1997 through 1999, in each case
without giving effect to any other factors that may affect the price
payable for crude oil under these agreements. Due to the pricing formula
under the supply agreements, the aggregate price actually paid for crude
oil purchased from 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. At December 31, 1996 and 1995, $237 million and $146
million, respectively, were included in payables to affiliates as a
result of these transactions.
The Company purchases substantially all of the refined products produced
at the LYONDELL-CITGO refinery under a long-term contract through the
year 2017. During 1996, 1995, and 1994, the Company purchased $1.6
billion, $1.4 billion, and $1.1 billion of crude oil, feedstocks and
refined products from LYONDELL-CITGO primarily under this product sales
agreement. The product sales agreement incorporates formula prices based
on published market prices and defined marketing discounts and variable
factors. At December 31, 1996 and 1995, $38 million and $31 million,
respectively, were included in payables to affiliates as a result of
these transactions.
The Company had refined product, feedstock, crude oil and other product
sales of $254 million, $243 million, and $153 million to affiliates in
1996, 1995, and 1994, respectively. At December 31, 1996 and 1995, $28
million and $29 million, respectively, were included in due from
affiliates as a result of these transactions.
Under a separate guarantee of rent agreement, PDVSA has guaranteed
payment of rent, stipulated loss value and terminating value due under
the lease of the Corpus Christi refinery facilities described in Note 15.
The Company and PDV America are parties to a tax allocation agreement
which is designed to provide PDV America with sufficient cash to pay its
consolidated income tax liabilities. In April 1996, $12.7 million due
from CITGO to PDV America under this tax allocation agreement for the tax
years 1992 through 1994 was reclassified and accounted for as a
contribution of capital. In December 1996, $0.8 million due from PDV
America to CITGO under this tax allocation agreement for the 1995 tax
year was reclassified and accounted for as a dividend. In the event that
CITGO should cease to be part of the consolidated federal income tax
return, any amounts included in shareholder's equity under this agreement
are required to be paid to PDV America. Current amounts payable to PDV
America under this agreement of $12 million and $12.2 million are
included in other current liabilities at December 31, 1996 and 1995,
respectively.
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53
6. ACCOUNTS RECEIVABLE
1996 1995
(000'S OMITTED)
Trade $ 770,069 $ 620,690
Credit card 203,329 166,492
Other 48,406 49,105
----------- -----------
1,021,804 836,287
Allowance for uncollectible accounts (17,706) (18,297)
----------- -----------
$ 1,004,098 $ 817,990
=========== ===========
7. INVENTORIES
1996 1995
(000'S OMITTED)
Refined product $616,527 $588,696
Crude oil 165,564 149,414
Materials and supplies 51,100 47,165
-------- --------
$833,191 $785,275
======== ========
As of December 31, 1996 and 1995, replacement costs exceeded LIFO
carrying values by approximately $294 million and $112 million,
respectively.
8. PROPERTY, PLANT AND EQUIPMENT
1996 1995
(000'S OMITTED)
Land $ 113,158 $ 112,542
Buildings and leaseholds 439,998 410,903
Machinery and equipment 2,421,458 2,184,920
Vehicles 42,977 44,211
Construction in process 373,006 218,146
----------- -----------
3,390,597 2,970,722
Accumulated depreciation and amortization (603,894) (478,873)
----------- -----------
$ 2,786,703 $ 2,491,849
=========== ===========
Depreciation expense for 1996, 1995, and 1994 was $136 million, $122
million, and $103 million, respectively.
Other income includes gains and losses on disposals and retirements of
property, plant and equipment. Such net losses were approximately $2
million, $4 million, and $7 million in 1996, 1995, and 1994,
respectively.
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54
9. INVESTMENTS IN AFFILIATES
In addition to LYONDELL-CITGO, the Company's investments in affiliates
consist of equity interests of 6.8 to 50 percent in joint interest
pipelines and terminals, including a 13.98 percent interest in Colonial
Pipeline Company; a 49.5 percent partnership interest in Nelson
Industrial Steam Company ("NISCO"), which is a qualified cogeneration
facility; and a 49 percent partnership interest in Mount Vernon Phenol
Plant. The carrying value of these investments exceeded the Company's
equity in the underlying net assets by approximately $160 million and
$164 million at December 31, 1996 and 1995, respectively.
In September 1994, NISCO refinanced its long-term debt. In connection
with this transaction, CITGO received a $75 million cash distribution
from NISCO and NISCO wrote off deferred loan fees and other costs
associated with the extinguished debt. CITGO's share of NISCO's
write-off, $1.6 million, was reported as an extraordinary after tax
charge in 1994. The distribution received exceeded CITGO's investment and
capital account in NISCO by approximately $26 million. This amount was
recorded in other noncurrent liabilities based on the terms of the NISCO
partnership agreement and has subsequently been adjusted to reflect
capital transactions and CITGO's share of NISCO's earnings and losses. At
December 31, 1996 and 1995, other noncurrent liabilities include
approximately $47 million and $40 million related to the Company's
partnership interest in NISCO.
Information on the Company's investments, including LYONDELL-CITGO,
follows:
1996 1995 1994
(000'S OMITTED)
Company's investments in affiliates $790,576 $650,360 $461,807
Company's equity in net income (losses) of affiliates 21,481 33,530 28,585
Dividends received from affiliates 31,157 29,040 26,282
Selected financial information provided by the affiliates is summarized
as follows:
1996 1995 1994
(000'S OMITTED)
Summary of financial position:
Current assets $ 543,692 $ 547,479 $ 529,206
Noncurrent assets 2,859,091 2,345,695 1,876,688
Current liabilities 697,046 596,723 510,613
Noncurrent liabilities 1,999,276 1,659,729 1,400,805
Summary of operating results:
Revenues $4,158,684 $3,900,653 $3,474,306
Gross profit 475,227 574,103 522,059
Net income 242,434 344,817 276,633
10. SHORT-TERM BANK LOANS
As of December 31, 1996, the Company has established $180 million of
uncommitted, unsecured, short-term borrowing facilities with various
banks. Interest rates on these facilities are determined daily based upon
the Federal funds' interest rates, and maturity options vary up to 30
days. The weighted average interest rates actually incurred in 1996,
1995, and 1994 were 5.7 percent, 6.2 percent,
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55
and 6.4 percent, respectively. The Company had $53 million and $25
million of borrowings outstanding under these facilities at December 31,
1996 and 1995, respectively.
11. LONG-TERM DEBT
1996 1995
(000'S OMITTED)
Revolving bank loan $ 350,000 $ 290,000
Term bank loan 88,235 117,647
7.875% Senior Notes, $200 million face amount, due 2006 199,715 --
Private Placement:
8.75% Series A Senior Notes due 1998 37,500 56,250
9.03% Series B Senior Notes due 2001 142,857 171,429
9.30% Series C Senior Notes due 2006 113,637 125,000
Master Shelf Agreement:
8.55% Senior Notes due 2002 25,000 25,000
8.68% Senior Notes due 2003 50,000 50,000
7.29% Senior Notes due 2004 20,000 20,000
8.59% Senior Notes due 2006 40,000 40,000
8.94% Senior Notes due 2007 50,000 50,000
7.17% Senior Notes due 2008 25,000 25,000
7.22% Senior Notes due 2009 50,000 50,000
Tax-Exempt Bonds:
Pollution control revenue bonds due 2004 15,800 15,800
Port facilities revenue bonds due 2007 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023 3,020 3,020
Louisiana wastewater facility revenue bonds due 2024 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026 25,000 --
Taxable Louisiana wastewater facility revenue bonds due 2026 120,000 --
Cit-Con bank credit agreement 35,714 42,857
----------- -----------
1,563,978 1,254,503
Current portion of long-term debt (95,240) (95,240)
----------- -----------
$ 1,468,738 $ 1,159,263
=========== ===========
REVOLVING AND TERM BANK LOANS - The Company's credit agreement with
various banks was amended during 1994. The primary result of the
amendments was a reduction in borrowings under the term bank loan of $150
million. At December 31, 1996, this agreement consists of a $125 million
term loan and a $675 million revolving loan. The term loan is unsecured,
has various interest rate options (year-end rate of 6.8 percent, 6.3
percent, and 6.6 percent at December 31, 1996, 1995, and 1994,
respectively) and principal amounts are payable in quarterly installments
commencing in December 1995. The revolving loan is unsecured, has various
borrowing maturities and interest rate options (year-end rate of 6.7
percent, 6.4 percent, and 6.7 percent at December 31, 1996, 1995, and
1994, respectively), and is committed through December 31, 1999.
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SENIOR NOTES - In April 1996, the Company filed a registration statement
with the Securities and Exchange Commission relating to the shelf
registration of $600 million of debt securities that may be offered and
sold from time to time. In May 1996, the registration became effective
and CITGO sold a tranche of debt securities with an aggregate offering
price of $200 million. The Company used the net proceeds from the sale of
the notes for working capital and the repayment of borrowings under the
Company's revolving credit facility. This repayment will not permanently
reduce the Company's borrowing capacity thereunder. The Company may, in
the future, borrow additional amounts under its revolving credit facility
to fund capital expenditures, to fund working capital requirements, or
for other corporate purposes.
PRIVATE PLACEMENT - At December 31, 1996, the Company has outstanding
approximately $294 million of privately placed, unsecured Senior Notes
(the "Notes"). Guarantees of these Notes by significant subsidiaries of
CITGO were released during 1995. Principal amounts are payable in annual
installments commencing in November, 1995 for the Series A and Series B
Notes and in November, 1996 for the Series C Notes. Interest is payable
semi-annually in May and November.
MASTER SHELF AGREEMENT - During 1994, CITGO entered into an unsecured
Master Shelf Agreement with an insurance company to place up to $260
million of senior notes in private markets. A total of $260 million has
been drawn under this facility as of December 31, 1996, with various
fixed interest rates and maturities.
COVENANTS - The various agreements above contain certain covenants that,
depending upon the level of the Company's capitalization and earnings,
could impose limitations on the Company for paying dividends, incurring
additional debt, placing liens on property, and selling fixed assets. The
Company was in compliance with the debt covenants at December 31, 1996.
TAX-EXEMPT BONDS - Through state entities, the Company has issued $27.6
million of industrial development bonds for certain Lake Charles,
Louisiana port facilities and pollution control equipment and $188.7
million of environmental revenue bonds to finance a portion of the
Company's environmental facilities at its Lake Charles, Louisiana and
Corpus Christi, Texas refineries and at the LYONDELL- CITGO refinery.
The pollution control and port facilities revenue bonds are secured by
letters of credit. Interest rates vary weekly and the interest rates at
December 31, 1996, 1995, and 1994 were 4.1 percent, 5.1 percent, and 5.5
percent, respectively. The Louisiana Revenue Bonds due in the year 2023
have a fixed interest rate of 6 percent. Guarantees of these bonds by
certain CITGO subsidiaries were released during 1995. During 1995, the
Company repurchased approximately $47 million of these bonds at a
discount, resulting in an extraordinary gain of approximately $3.4
million, net of related income taxes of approximately $2.2 million. The
remaining tax-exempt revenue bonds are secured by letters of credit and
have a floating interest rate which was 5.1 percent, 6.2 percent, and 5.7
percent at December 31, 1996, 1995, and 1994, respectively, as
applicable.
TAXABLE LOUISIANA REVENUE BONDS - Through a state entity, the Company has
issued $120 million of taxable environmental revenue bonds to finance a
portion of the Company's environmental facilities at its Lake Charles,
Louisiana refinery. Such bonds are secured by a letter of credit and have
a floating interest rate which was 5.5% at December 31, 1996. At the
option of the Company and upon the occurrence of certain specified
conditions, all or any portion of such taxable bonds may be converted to
tax-exempt bonds. At December 31, 1996, no such bonds had been converted
to tax-exempt bonds.
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57
CIT-CON BANK CREDIT AGREEMENT - The Cit-Con bank credit agreement was
converted to a term loan during 1995. The agreement is collateralized by
throughput agreements of the owner companies, has various interest rate
options (weighted average effective rates of 6.3 percent, 6.8 percent,
and 6.7 percent at December 31, 1996, 1995, and 1994, respectively), and
requires quarterly principal payments through December 2001.
DEBT MATURITIES - Future maturities of long-term debt as of December 31,
1996 are: 1997 - $95.2 million; 1998 - $95.2 million; 1999 - $426.5
million; 2000 - $47.1 million, 2001 - $47.1 million, and $852.9 million
thereafter.
INTEREST RATE SWAP AND CAP AGREEMENTS - The Company has entered into the
following interest rate swap agreements to reduce the impact of interest
rate changes on its variable interest rate debt:
NOTIONAL PRINCIPAL AMOUNT
---------------------------
EXPIRATION FIXED RATE 1996 1995
VARIABLE RATE INDEX DATE PAID (000'S OMITTED)
One-month LIBOR September 1998 4.85 % $ 25,000 $ 25,000
One-month LIBOR November 1998 5.09 % 25,000 25,000
One-month LIBOR May 2000 6.28 % 25,000 25,000
J. J. Kenny May 2000 4.72 % 25,000 25,000
J. J. Kenny February 2005 5.30 % 12,000 12,000
J. J. Kenny February 2005 5.27 % 15,000 15,000
J. J. Kenny February 2005 5.49 % 15,000 15,000
-------- --------
$142,000 $142,000
======== ========
Interest expense includes $1.1 million, $0.1 million, and $0.4 million in
1996, 1995, and 1994, respectively, related to interest paid on these
agreements. During 1995, the Company converted $25 million of variable
rate debt to fixed rate borrowings and terminated the interest rate swap
agreement matched to the variable rate debt. Other income in 1995
included a $2.4 million gain related to the termination of this interest
rate swap agreement.
During 1995, the Company entered into a 9 percent interest rate cap
agreement with a notional amount of $25 million, a reference rate of
three-month LIBOR and an expiration date of February, 1997. Other
interest rate cap agreements to which the Company was a party expired in
November, 1994. The effect of these agreements was not material in 1996,
1995 or 1994.
12. EMPLOYEE BENEFIT PLANS
EMPLOYEE SAVINGS - The Company sponsors three qualified defined
contribution retirement and savings plans covering substantially all
eligible salaried and hourly employees. Participants make voluntary
contributions to the plans and the Company makes contributions, including
matching of employee contributions, based on plan provisions. The Company
charged $16 million, $16 million, and $15 million to operations related
to its contributions to these plans for the years 1996, 1995, and 1994,
respectively.
PENSION BENEFITS - The Company sponsors three qualified noncontributory
defined benefit pension plans, two of which cover eligible hourly
employees and one of which covers eligible salaried employees. The
Company also sponsors three nonqualified defined benefit plans for
certain eligible
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58
employees. The qualified plans' assets include corporate securities, a
fixed income mutual fund, and a short-term investment fund. The
nonqualified plans are not funded.
The Company's policy is to fund the qualified pension plans in accordance
with applicable laws and regulations and not to exceed the tax deductible
limits. The nonqualified plans are funded as necessary to pay retiree
benefits. The plan benefits for each of the qualified pension plans are
primarily based on an employee's years of plan service and compensation
as defined by each plan.
The Company's net periodic pension costs for these plans included the
following components:
1996 1995 1994
(000'S OMITTED)
Service cost-benefits earned during the year $ 13,356 $ 11,498 $ 11,757
Interest cost on projected benefit obligation 12,787 11,496 10,164
Actual loss (return) on plan assets (24,645) (34,784) 3,166
Net amortization and deferral 10,068 23,777 (14,529)
-------- -------- --------
Net periodic pension cost $ 11,566 $ 11,987 $ 10,558
======== ======== ========
The following table summarizes the funded status of these plans and the
related amounts recognized in the Company's consolidated financial
statements:
1996 1995
------------------------------ -----------------------------
OVERFUNDED UNDERFUNDED OVERFUNDED UNDERFUNDED
PLANS PLANS PLANS PLANS
(000'S OMITTED) (000'S OMITTED)
Plan assets at fair value $184,236 $ -- $155,997 $ --
Actuarial present value of benefit obligation:
Vested benefits (114,259) (13,643) (103,046) (10,292)
Nonvested benefits (18,569) (85) (16,661) --
-------- -------- -------- --------
Accumulated benefit obligation (132,828) (13,728) (119,707) (10,292)
Effect of projected long-term compensation
increases (46,140) (380) (41,012) (1,729)
-------- -------- -------- --------
Total projected benefit obligation ("PBO") (178,968) (14,108) (160,719) (12,021)
-------- -------- -------- --------
Plan assets in excess of (less than) PBO $5,268 $(14,108) $ (4,722) (12,021)
======== ======== ======== ========
Pension liability recognized in the consolidated
balance sheets $(27,974) $(13,728) $(27,467) $(10,292)
Amounts not recognized:
Prior service costs 1,731 (1,956) 1,928 (1,786)
Net gain at date of adoption 1,816 -- 2,085 --
Net amount resulting from plan experience and
changes in actuarial assumptions 29,695 (1,582) 18,732 (862)
Additional minimum liability -- 3,158 -- 919
-------- -------- -------- --------
Funded status as of year end $ 5,268 $(14,108) $ (4,722) (12,021)
======== ======== ======== ========
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The underfunded plans relate to the plans in which plan assets at fair
value are exceeded by the accumulated benefit obligation.
Following are the significant assumptions used in determining the costs
and funded status of these plans:
1996 1995 1994
Discount rate:
Pension costs 7.5 % 8.0 % 7.5 %
Benefit obligations 7.5 % 7.5 % 8.0 %
Rate of long-term compensation increase:
Pension costs 5.0 % 5.0 % 5.0 %
Benefit obligations 5.0 % 5.0 % 5.0 %
Expected long-term rate of return on assets 8.5 % 8.5 % 9.0 %
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS - In addition to pension
benefits, the Company also provides certain health care and life
insurance benefits for eligible salaried and hourly employees at
retirement. These benefits are subject to deductibles, copayment
provisions and other limitations and are primarily funded on a pay as you
go basis. The Company reserves the right to change or to terminate the
benefits at any time.
The following sets forth the funded status of the accumulated
postretirement benefit obligation reconciled with amounts reported in the
Company's consolidated balance sheets:
1996 1995
(000'S OMITTED)
Accumulated postretirement benefit obligation ("APBO"):
Retirees $ 45,793 $ 49,853
Fully eligible active employees 38,955 38,393
Other active employees 64,402 73,295
-------- --------
Total APBO 149,150 161,541
Trust assets at fair value 843 799
-------- --------
APBO in excess of trust assets 148,307 160,742
Plus unrecognized net gain 38,763 10,863
-------- --------
Postretirement benefit liability recognized in the consolidated
balance sheets including $3.7 million in other current
liabilities in 1996 and 1995 $187,070 $171,605
======== ========
The Company's net periodic postretirement benefit cost (credit) included
the following components:
1996 1995 1994
(000'S OMITTED)
Service cost - benefits earned during the year $ 7,047 $ 5,819 $ 7,421
Interest cost on APBO 11,982 12,089 11,833
Actual return on trust assets (50) (43) (41)
Other - amortization of unrecognized net gain -- (21,603) (5,333)
-------- -------- --------
Net periodic postretirement benefit cost (credit) $ 18,979 $ (3,738) $ 13,880
======== ======== ========
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The amortization of unrecognized net gain (or loss) is due to changes in
the APBO resulting from experience different from that assumed and from
changes in assumptions. Gains (or losses) are recognized as a component
of net postretirement benefit cost by the amount the beginning of year
unrecognized net gain (or loss) exceeds 7.5 percent of the APBO.
Increases in the per capita costs of covered health care benefits of 10
percent, 11 percent, and 12 percent were assumed for 1996, 1995, and
1994, respectively, gradually decreasing to a 5.5 percent ultimate rate
by the year 2002. Increasing the assumed health care cost trend rates by
one percentage point in each future year would increase the accumulated
postretirement benefit obligation as of December 31, 1996 by $26 million
and increase the aggregate of the service cost and interest cost
components of net periodic postretirement benefit cost for 1996 by $4.3
million. Discount rates of 7.5 percent, 8 percent, and 7.5 percent for
1996, 1995, and 1994, respectively, were used to determine the net
periodic postretirement cost. Discount rates of 7.5 percent for 1996 and
1995 were used to determine the accumulated postretirement benefit
obligation.
13. INCOME TAXES
The provisions for income taxes are comprised of the following:
1996 1995 1994
(000'S OMITTED)
Current:
Federal $ 63,056 $ 57,435 $ 70,665
State 2,613 5,136 6,913
-------- -------- --------
65,669 62,571 77,578
Deferred 4,612 16,957 32,866
-------- -------- --------
$ 70,281 $ 79,528 $110,444
======== ======== ========
The Federal statutory tax rate differs from the effective tax rate due to
the following:
1996 1995 1994
Federal statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of Federal benefit 2.9% 3.2% 2.5%
Dividend exclusions (3.8)% (3.3)% (2.2)%
Other 1.5% 1.9% 1.4%
---- ---- ----
Effective tax rate 35.6% 36.8% 36.7%
==== ==== ====
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Deferred income taxes reflect the net tax effects of (i) temporary
differences between the financial and tax bases of assets and liabilities
and (ii) loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax liability as
of December 31, 1996 and 1995 are as follows:
1996 1995
(000'S OMITTED)
Deferred tax liabilities:
Property, plant and equipment $420,415 $387,298
Inventories 72,308 72,452
Investments in affiliates 72,971 68,038
Other 30,758 7,957
-------- --------
596,452 535,745
-------- --------
Deferred tax assets:
Postretirement benefit obligations 76,325 70,284
Employee benefit accruals 27,365 25,487
Alternative minimum tax credit carryforwards 51,322 18,166
Marketing and promotional accruals 23,236 23,603
Other 58,771 43,384
-------- --------
237,019 180,924
-------- --------
Net deferred tax liability (of which $10,684 is a current asset at
December 31,1996 and $12,823 is a current asset at December 31, 1995) $359,433 $354,821
======== ========
At December 31, 1996, the Company has capital loss carryforwards of $10.9
million, $9 million of which expire in 1998, $0.4 million of which expire
in 2000, and $1.5 million of which expire in 2001.
The Company's alternative minimum tax credit carryforwards are available
to offset regular Federal income taxes in future years without
expiration, subject to certain alternative minimum tax limitations.
14. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. Included
among these are: (i) litigation with a contractor who is claiming
additional compensation of approximately $42 million, including interest
and profits, for sludge removal and treatment at the Company's Lake
Charles, Louisiana refinery; the Company is seeking contractual penalties
for non-performance and breach of contract and also a determination that
a portion of any damages awarded would be recoverable from a former
owner; a trial is currently scheduled for March 1997 concerning the
nonperformance and breach of contract issues; and (ii) litigation against
the Company by a number of current and former employees and applicants on
behalf of themselves and a class of similarly situated persons asserting
claims under Federal and state laws of racial discrimination in
connection with the employment practices at the Company's Lake Charles,
Louisiana refining complex; the plaintiffs have appealed the Court's
denial of class certification; the initial trials on this litigation are
currently scheduled for July 1997. The Company is vigorously contesting
or pursuing, as applicable, such lawsuits and claims and believes that
its positions are sustainable. The Company has recorded accruals for
losses it considers to be probable and reasonably estimable. However, due
to uncertainties involved in litigation, there are cases, including the
significant matters noted above, in which the outcome is not reasonably
predictable and the losses, if any, are not reasonably estimable. If such
lawsuits and claims were to be determined in a manner
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adverse to the Company, and in amounts in excess of the Company's
accruals, it is reasonably possible that such determinations could have a
material adverse effect on the Company's results of operations in a given
year. The term "reasonably possible" is used herein to mean that the
chance of a future transaction or event occurring is more than remote but
less than likely. However, based upon management's current assessments of
these lawsuits and claims and that provided by counsel in such matters,
and the capital resources available to the Company, management of the
Company believes that the ultimate resolution of these lawsuits and
claims would not exceed the aggregate of the amounts accrued in respect
of such lawsuits and claims and the insurance coverages available to the
Company by a material amount and, therefore, should not have a material
adverse effect on the Company's financial condition, results of
operations or liquidity.
In January, 1997 the Louisiana Supreme Court ruled in favor of certain
Louisiana refiners in an industry case regarding an assessment of a use
tax on petroleum coke which accumulates on catalyst during refining
operations and a change to the calculation of the sales/use tax on fuel
gas generated by refinery operations. The Company believes that it has no
further exposure to losses related to these matters.
ENVIRONMENTAL MATTERS - The Company is subject to various Federal, state
and local environmental laws and regulations which may require the
Company to take action to correct or improve the effects on the
environment of prior disposal or release of petroleum substances by the
Company or other parties. Management believes the Company is in
compliance with these laws and regulations in all material aspects.
Maintaining compliance with environmental laws and regulations could
require significant capital expenditures and additional operating costs.
In 1992, the Company reached an agreement with a state agency to cease
usage of certain surface impoundments at the Company's Lake Charles,
Louisiana refinery by 1994. A mutually acceptable closure plan was filed
with the state in 1993. The Company and a former owner are participating
in the closure and sharing the related costs based on estimated
contributions of waste and ownership periods. The remediation commenced
in December 1993 and is expected to be completed no earlier than 1998.
In 1992, an agreement was reached between the Company and a former owner
concerning a number of environmental issues. The agreement consisted, in
part, of payments to the Company totaling $46 million, of which $31
million was received in 1992 and $5 million in each of the years 1993,
1994, and 1995. The former owner will continue to share the costs of
certain specific environmental remediation and certain tort liability
actions based on ownership periods and specific terms of the agreement.
At December 31, 1996 and 1995, the Company had $56 million and $60
million, respectively of environmental accruals included in other
noncurrent liabilities. Based on currently available information,
including the continuing participation of former owners in remediation
actions and other environmental- related matters, management believes
these accruals are adequate. Conditions which require additional
expenditures may exist for various Company sites including, but not
limited to, the Company's operating refinery complexes, closed
refineries, service stations and crude oil and petroleum product storage
terminals. The amount of such future expenditures, if any, is
indeterminable.
CAPITAL EXPENDITURES - The Company's anticipated capital expenditures,
excluding the investments in LYONDELL-CITGO, for the five-year period
1997 to the year 2001 total approximately $1.6 billion (unaudited). The
expenditures include environmental and regulatory capital projects as
well as strategic capital expenditures. At December 31, 1996, authorized
expenditures on incomplete capital projects totaled approximately $229
million.
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SUPPLY AGREEMENTS - The Company has a long-term contract through August
31, 1998 which provides CITGO the option to purchase domestic crude oil
at contract reference prices from an independent supplier. Purchases
under this contract totaled $318 million, $261 million, and $239 million
in 1996, 1995, and 1994, respectively.
The Company has various other crude oil, refined product and feedstock
purchase agreements with unaffiliated entities with terms ranging from
monthly to annual renewal. The Company believes numerous sources of
supply are readily available on comparable terms.
THROUGHPUT AGREEMENTS - The Company has throughput agreements with
certain pipeline affiliates (Note 9). These throughput agreements may be
used to secure obligations of the pipeline affiliates. Under these
agreements, the Company may be required to provide its pipeline
affiliates with additional funds through advances against future charges
for the shipping of petroleum products. The Company currently ships on
these pipelines and has not been required to advance funds in the past.
At December 31, 1996, the Company has no fixed and determinable,
unconditional purchase obligations under these agreements.
MARINE SPILL RESPONSE ARRANGEMENTS - During the third quarter of 1995,
the Company entered into a contract with National Response Corporation
for marine oil removal services capability and terminated its
relationship with the previous provider of that service. The Company paid
a cancellation fee of approximately $16 million, which is included in
cost of sales and operating expenses in 1995.
DERIVATIVE COMMODITY ACTIVITY - The Company enters into petroleum futures
contracts primarily to reduce the Company's inventory exposure to price
risk. The Company also buys and sells commodity options for delivery and
receipt of crude oil and refined products. Such contracts are entered
into through major brokerage houses and traded on national exchanges and
although usually settled in cash, can be settled through delivery of the
commodity. Such contracts generally qualify for hedge accounting and
correlate to price movements of crude oil and refined products. Resulting
gains or losses on such contracts, therefore, will generally be offset by
gains and losses on the Company's hedged inventory or future purchases
and sales. The Company's derivative commodity activity is closely
monitored by management. Contract periods are generally less than 30
days. Unrealized and deferred gains and losses on these contracts at
December 31, 1996 and 1995 and the effects on cost of sales and pretax
earnings for 1996, 1995, and 1994 were not material. At times, the
Company enters into commodity futures and option agreements that are not
related to the hedging program discussed above. This activity and its
results were not material in 1996, 1995, or 1994.
From time to time, the Company uses other over-the-counter derivative
commodity agreements to hedge exposure to changes in prices of refined
products. At December 31, 1996 and 1995, the Company had no such
agreements in place. At December 31, 1993, the Company had one turbine
fuel price collar in effect which effectively established a ceiling and
floor price for 52 thousand barrels of turbine fuel sales per month. The
agreement expired in August 1994.
OTHER CREDIT AND OFF-BALANCE SHEET RISK INFORMATION AS OF DECEMBER 31,
1996 - The Company has guaranteed approximately $13 million of debt of
certain CITGO distributors and an affiliate. Such debt is substantially
collateralized by assets of these entities. The Company has outstanding
letters of credit totaling approximately $364 million, which includes
$218 million related to the Company's tax-exempt bonds. The Company has
also acquired surety bonds totaling $24 million primarily due to
requirements of various government entities. The Company does not expect
liabilities to be incurred related to such guarantees, letters of credit
or surety bonds.
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Neither the Company nor the counterparties are required to collateralize
their obligations under interest rate swaps or caps or over-the-counter
derivative commodity agreements. The Company is exposed to credit loss in
the event of nonperformance by the counterparties to these agreements,
but has no off- balance sheet risk of accounting loss for the notional
amounts. The Company does not anticipate nonperformance by the
counterparties, which consist primarily of major financial institutions
as of December 31, 1996.
Management considers the market risk to the Company related to futures
contracts, commodity options activity, and other derivatives to be
insignificant during the periods presented.
15. LEASES
The Company leases certain of its Corpus Christi refinery facilities
under a long-term lease. The basic term of the lease expires on January
1, 2004; however, the Company may renew the lease until January 31, 2011,
the date of its purchase option. Capitalized costs included in property,
plant and equipment related to the leased assets were approximately $209
million at December 31, 1996 and 1995. Accumulated amortization related
to the leased assets was approximately $86 million and $78 million at
December 31, 1996 and 1995, respectively. Amortization is included in
depreciation expense.
The Company also has various noncancelable operating leases, primarily
for product storage facilities, office space, computer equipment and
vehicles. Rent expense on all operating leases totaled $33 million in
1996 and 1995, and $34 million in 1994. Future minimum lease payments for
the capital lease and noncancelable operating leases are as follows:
CAPITAL OPERATING
LEASE LEASES TOTAL
YEAR (000'S OMITTED)
1997 $ 27,375 $ 25,424 $ 52,799
1998 27,375 22,345 49,720
1999 27,375 16,880 44,255
2000 27,375 15,356 42,731
2001 27,375 14,165 41,540
Thereafter 90,750 48,131 138,881
--------- --------- ---------
Total minimum lease payments 227,625 $ 142,301 $ 369,926
========= =========
Amount representing interest (86,121)
---------
Present value of minimum lease payments 141,504
Current portion 11,778
---------
$ 129,726
=========
16. FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by the Company, using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
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presented herein are not necessarily indicative of the amounts that the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents and restricted cash
approximate fair values because of the short maturity of these
instruments. The carrying amounts and estimated fair values of the
Company's other financial instruments are as follows:
1996 1995
------------------------------- ----------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(000'S OMITTED) (000'S OMITTED)
LIABILITIES:
Short-term bank loans $ 53,000 $ 53,000 $ 25,000 $ 25,000
Long-term debt 1,563,978 1,600,118 1,254,503 1,327,684
DERIVATIVE AND OFF-BALANCE
SHEET FINANCIAL INSTRUMENTS -
UNREALIZED GAINS (LOSSES):
Interest rate swap agreements -- (1,093) -- (3,030)
Interest rate cap agreements -- -- -- --
Guarantees of debt -- (60) -- (48)
Letters of credit -- (1,741) -- (842)
Surety bonds -- (100) -- (90)
SHORT-TERM BANK LOANS AND LONG-TERM DEBT - The fair value of short-term
bank loans and long-term debt is based on interest rates that are
currently available to the Company for issuance of debt with similar
terms and remaining maturities.
INTEREST RATE SWAP AND CAP AGREEMENTS - The fair value of these
agreements is based on the estimated amount that the Company would
receive or pay to terminate the agreements at the reporting dates, taking
into account current interest rates and the current creditworthiness of
the counterparties.
GUARANTEES, LETTERS OF CREDIT AND SURETY BONDS - The estimated fair value
of contingent guarantees of third-party debt, letters of credit and
surety bonds is based on fees currently charged for similar one-year
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since
that date, and current estimates of fair value may differ significantly
from the amounts presented herein.
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17. QUARTERLY RESULTS OF OPERATIONS - UNAUDITED
The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995 (in thousands):
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
1996
Sales $2,607,195 $3,333,996 $3,310,456 $3,700,413
========== ========== ========== ==========
Cost of sales and operating expenses $2,521,851 $3,228,540 $3,186,413 $3,554,199
========== ========== ========== ==========
Net income $ 14,800 $ 31,229 $ 33,739 $ 47,201
========== ========== ========== ==========
1995
Sales $2,357,482 $2,952,144 $2,707,483 $2,505,051
========== ========== ========== ==========
Cost of sales and operating expenses $2,237,897 $2,850,103 $2,596,968 $2,381,044
========== ========== ========== ==========
Income before extraordinary gain $ 47,161 $ 25,743 $ 31,087 $ 32,353
Extraordinary gain 3,380 -- -- --
---------- ---------- ---------- ----------
Net income $ 50,541 $ 25,743 $ 31,087 $ 32,353
========== ========== ========== ==========
* * * * * *
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INDEX TO EXHIBITS
Exhibits
--------
*3.1 Certificate of Incorporation, Certificate of Amendment of
Certificate of Incorporation and By-laws of CITGO Petroleum
Corporation.
*4.1 Indenture, dated as of May 1, 1996, between CITGO Petroleum
Corporation and the First National Bank of Chicago, relating
to the 7 7/8% Senior Notes due 2006 of CITGO Petroleum
Corporation.
*4.2 Form of Senior Note (included in Exhibit 4.1).
**10.1 Crude Supply Agreement between CITGO Petroleum Corporation and
Petroleos de Venezuela, S.A., dated as of September 30, 1986.
**10.2 Supplemental Crude Supply Agreement dated as of September 30,
1986 between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A.
**10.3 Crude Oil and Feedstock Supply Agreement dated as of March 31,
1987 between Champlin Refining Company and Petroleos de
Venezuela, S.A.
**10.4 Supplemental Crude Oil and Feedstock Supply Agreement dated as
of March 31, 1987 between Champlin Refining Company and
Petroleos de Venezuela, S.A.
**10.5 Contract for the Purchase/Sale of Boscan Crude Oil dated as of
June 2, 1993 between Tradecal, S.A. and CITGO Asphalt Refining
Company.
**10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil dated December 28, 1990 among Maraven, S.A.,
Lagoven, S.A. and Seaview Oil Company.
**10.7 Sublease Agreement dated as of March 31, 1987 between Champlin
Petroleum Company, Sublessor, and Champlin Refining Company,
Sublease.
**10.8 Operating Agreement dated as of May 1, 1984 among Cit-Con Oil
Corporation, CITGO Petroleum Corporation and Conoco, Inc.
**10.9 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd., dated July 1, 1993.
**10.10 Contribution Agreement between Lyondell Petrochemical Company
and LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
**10.11 Crude Oil Supply Agreement between LYONDELL-CITGO Refining
Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993.
**10.12 Supplemental Supply Agreement dated as of May 5, 1993 between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A.
**10.13 Tax Allocation Agreement dated as of June 24, 1993 among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., as amended.
**10.14 CITGO Credit Facility.
*10.15(i) First Amendment to the Second Amended and Restated Senior
Term Loan Agreement, by and between CITGO Petroleum
Corporation and Bank of America National Trust and Savings
Association et al, dated as of February 15, 1994.
*10.15(ii) Second Amendment to Second Amended and Restated Senior Term
Loan Agreement by and among CITGO Petroleum Corporation and
Bank of America Illinois et al, dated as of October 21, 1994.
*10.15(iii) First Amendment to the Second Amended and Restated Senior
Revolving Credit Facility Agreement by and among CITGO
Petroleum Corporation and Bank of America National Trust and
Savings Association et al, dated as of February 15, 1994.
*10.15(iv) Second Amendment to Second Amended and Restated Senior
Revolving Credit Facility Agreement by and among CITGO
Petroleum Corporation and Bank of America Illinois et al,
dated as of October 21, 1994.
*10.16 Master Shelf Agreement (1994) by and between Prudential
Insurance Company of America and CITGO Petroleum Corporation
($100,000,000), dated March 4, 1994.
*10.17(i) Letter Agreement by and between the Company and Prudential
Insurance Company of America, dated March 4, 1994.
*10.17(ii) Letter Amendment No. 1 to Master Shelf Agreement with
Prudential Insurance Company of America, dated November 14,
1994.
**10.18 CITGO Senior Debt Securities(1991) Agreement.
*10.19 CITCON Credit Agreement between CITCON Oil Corporation and
The Chase Manhattan Bank N.A., as Agent, dated as of
April 30, 1992.
*10.20(i) First Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of June 30, 1992.
*10.20(ii) Second Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of March 31, 1994.
*10.20(iii) Third Amendment to the CITCON Credit Agreement, between
CITCON Oil Corporation and The Chase Manhattan Bank
(National Association), dated as of June 10, 1994.
12.1 Computation of Ratio of Earnings to Fixed Charges.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule (filed electronically only).
____________
* Previously filed in connection with the
Registrant's Report on Form 10 (No. 333-3226).
** Incorporated by reference to the Registration Statement
on Form F-1 of PDV America, Inc. (No. 33-63742).
d. FINANCIAL STATEMENT SCHEDULES
The schedules filed by the Company are listed in Item 14a above
as required.
40