ITEM 3. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business are pending against the Company. Included among these is 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 refining complex; the plaintiffs seek injunctive relief and monetary damages and have appealed the Court's denial of class certification; the initial trials relating to this litigation are not currently included in the trial docket.
In a case currently pending in the United States District Court for the Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert claims against CITGO, PDVSA, PDV America, PDVMR, and Unocal pursuant to Section 301 of the Labor Management Relations Act ("LMRA"). This complaint alleges that CITGO and the other defendants constitute a single employer, joint employers or alter-egos for purposes of the LMRA, and are therefore bound by the terms of a collective bargaining agreement between UNO-VEN and Local 7-517 covering certain production and maintenance employees at a Lemont, Illinois, petroleum refinery. On May 1, 1997, in a transaction involving the former partners of UNO-VEN, the Lemont refinery was acquired by PDVMR. Pursuant to an operating agreement with PDVMR, CITGO became the operator of the Lemont refinery, and employed the substantial majority of employees previously employed by UNO-VEN pursuant to its initial terms and conditions of employment, but did not assume the existing labor agreement. The union seeks compensation for monetary differences in medical, pension and other benefits between the CITGO and UNO-VEN plans and reinstatement of all of the UNO-VEN benefit plans. The union also seeks to require CITGO to abide by the terms of the collective bargaining agreement between the union and UNO-VEN. The trial of this case currently is set for July 1998.
On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi refinery. There were no reports of serious personal injuries. Affected units were shut down for repair and were returned to full service in early August 1997. The Company has property damage and business interruption insurance which related to this event. As a result, the property damage and business interruption did not have a material adverse effect on the Company's financial condition or results of operations. There are presently five lawsuits against the Company pending in federal and state courts in Corpus Christi, Texas, alleging property damages, personal injury and punitive damages allegedly arising from the incident and other similar lawsuits have been threatened. Approximately 6,000 individual claims have been received by the Company allegedly arising from the incident.
A class action lawsuit is pending against the Company and other operators and owners of nearby industrial facilities which was filed in state court in Corpus Christi, Texas in 1993 on behalf of property owners in the vicinity of these facilities. The certification of this case as a class action in 1995 was appealed to the Texas Supreme Court and a decision is pending. This lawsuit asserts property damage claims and diminution in property values allegedly resulting from environmental contamination in the air, soil, and groundwater, occasioned by ongoing operations of the Company's Corpus Christi refinery and the respective industrial facilities of the other defendants. Two related personal injury and wrongful death lawsuits were filed in 1996 and are in preliminary stages of discovery at this time. In 1997 the Company signed an agreement to settle the property damage class action lawsuit for approximately $17.3 million which included the purchase of approximately 290 properties in an adjacent neighborhood. Of this amount, $15.7 was expensed in 1997. CITGO submitted a settlement proposal to the court. The court appointed a guardian to review the proposed settlement terms. Subsequently, the Texas Supreme Court decided to hear the Company's appeal of the trial court's class certification order. This decision raised questions whether the trial court had authority to proceed with the settlement. Additionally, the trial court sought to impose additional conditions upon the settlement which were unacceptable to the Company. For these reasons, the Company opposed the approval and enforcement of the settlement agreement as proposed to be revised and enforcement has now been stayed pending a ruling by the Texas Supreme Court. If the settlement agreement is enforced, the Company could be liable for the full settlement amount of $17.3 million. CITGO is pursuing an independent program to purchase the properties which were the subject of the purchase provisions of the settlement agreement.
In June 1997, CITGO settled litigation with a contractor who had claimed additional compensation for sludge removal and treatment at CITGO's Lake Charles, Louisiana, refinery. The settlement did not have a material effect on CITGO's financial position or results of operations. CITGO believes that it has no further exposures to losses related to this matter.
In July 1997, the Texas Natural Resources Conservation Commission ("TNRCC") issued a Preliminary Report and Petition alleging that CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's rules relating to operating a hazardous waste management unit without permit and recommended a penalty of $699,200. CITGO Refining disagrees with these allegations and the proposed penalties and is negotiating with the TNRCC to settle this matter.
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 reasonable 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 reporting period. 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 by a material amount, the aggregate of the amounts accrued in respect of such lawsuits and claims and the insurance coverages available to the Company and, therefore, should not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5.
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, a Delaware corporation 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 noncash 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 noncash dividend. In December 1997, $10 million due from PDV America to CITGO under this tax allocation agreement for the 1996 tax year was reclassified and accounted for as a noncash dividend. In January 1998, CITGO declared and paid a dividend of $110 million to PDV America.
ITEM 6.
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, 1997. The following table should be read in conjunction with the consolidated financial statements of CITGO as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, included in Item 8, which have been audited by Deloitte & Touche LLP, independent auditors. The audited consolidated financial statements of CITGO for each of the five years in the period ended December 31, 1997, have been prepared on the basis of United States generally accepted accounting principles. The consolidated financial statements of CITGO at December 31, 1995, 1994 and 1993, and for the years ended December 31, 1994 and 1993, not separately presented herein, have been audited.
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(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).
(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 charges 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.
ITEM 7.
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 including inventory valuation adjustments. 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 61 percent of the crude oil processed in refineries operated by CITGO in the year ended December 31, 1997. 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, 1997. As a result of these factors, the earnings and cash flows of CITGO may experience substantial fluctuations.
Effective January, 1, 1992, the supply agreements between PDVSA and CITGO with respect to the Lake Charles, Corpus Christi and Paulsboro refineries were modified to reduce the price levels to be paid 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.) In 1997, the effect of the adjustments to the original modifications was to reduce the price of crude oil purchased from PDVSA by approximately $25 million. The Company anticipates that the effect of the adjustments to the original modifications will be to reduce the price of crude oil purchased from PDVSA under these agreements by approximately $25 million per year in 1998 and 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.
In July 1997 the Company's senior management implemented a Transformation Program designed to ensure that numerous expense controls, business information systems and business efficiency initiatives underway are effectively coordinated to achieve desired results. Included in this program are reviews of the Company's business units, assets, strategies, and business processes. These combined actions include expected personnel reductions (the "Separation Programs"). The cost of the Separation Programs is approximately $22 million for the year ended December 31, 1997. In addition, as part of the Transformation Program, the first phase of Systems, Applications and Products in Data Processing ("SAP") implementation, which includes the Company's financial reporting systems, went into production on January 1, 1998. Additional SAP modules are to be implemented throughout 1998 and 1999.
The following table summarizes the sources of CITGO's sales revenues and volumes.
CITGO SALES REVENUES AND VOLUMES
The following table summarizes CITGO's cost of sales and operating expenses.
CITGO COST OF SALES AND OPERATING EXPENSES
RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
Sales revenues and volumes. Sales increased by $639 million, representing a 5% increase from 1996 to 1997. The increase was due to an increase in sales volumes of 8% partially offset by a decrease in average sales prices of 3%. Sales volumes of light fuels (gasoline, diesel/2 fuel and jet fuel), excluding bulk sales made for logistical reasons, were up 7% from 1996 to 1997 and their average unit price decreased $0.02. Gasoline sales volumes increased primarily due to successful marketing efforts, including the net addition of approximately 335 new independently owned CITGO branded outlets since December 31, 1996, as well as additional marketers obtained through the transaction relating to the UNO-VEN Company (see "Item 13. Certain Relationships and Related Transactions"). Petrochemical sales volume rose 30% from 1996 to 1997. This increase, combined with an average increase in unit prices of $0.02, resulted in a 33% increase in petrochemical sales revenue from 1996 to 1997. Petrochemical sales volumes increased primarily due to the increased production of xylene, refinery grade propylene and polymer grade propylene due to favorable economics. Industrial products sales volumes increased 40% and average unit prices increased $0.03 for a 48% increase in industrial products sales revenue from 1996 to 1997. The increase in industrial products sales volumes was due to the availability of product for sale from the PDVMR refinery. Asphalt sales revenue increased 55% from 1996 to 1997. The increase was primarily due to increases in sales volumes, up 32% from 1996 to 1997 and an 18% increase in sales price. The increase in asphalt sales volume is due primarily to the Company's efforts in production and marketing to take advantage of Sun Oil Company's withdrawal from the
East Coast asphalt market. Lubricants and wax sales revenue increased 10% from 1996 to 1997 due to increases in both sales price and volume.
Equity in earnings (losses) of affiliates. Equity in earnings of affiliates increased by approximately $43 million, or 205% from $21 million in 1996 to $64 million in 1997. This increase was due primarily to a $43 million increase in CITGO's equity earnings of LYONDELL-CITGO. This increase was due primarily to the change in CITGO's interest in LYONDELL-CITGO which increased from approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997 and the improvement in LYONDELL-CITGO's operations since completion of its refinery enhancement project during the first quarter of 1997 (See Consolidated Financial Statements of CITGO -- Note 5).
Other income (expense). Other income (expense) was $(10.5) million for the year ended December 31, 1997 as compared to $(4.2) million for the same period in 1996. The 1997 amount includes $8.7 million in loss reserves on a lubricants plant and retail properties, a $5.8 million write off of a capital project, $5.8 million in fees related to the sale of trade accounts, notes and credit card receivables in June and November 1997 and a $2.6 million write off of miscellaneous assets. These items were offset by a net $8.3 million property insurance recovery relating to the Corpus Christi alkylation unit fire during the third quarter, a $3.1 million net management fee charged to PDVMR over the year and a $1.3 million gain on the sale of pipeline assets in the first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and operating expenses increased by $529 million, or 4% from 1996 to 1997. Lower crude oil purchases in 1997 as compared to 1996 resulted from a 7% decrease in crude oil prices in 1997 as compared to 1996, and a 3% decrease in purchased volumes in 1997 as compared to 1996. Higher intermediate feedstock purchases were attributable to an 18% increase in volumes purchased, partially offset by 2% decrease in prices. Refinery production was higher in 1997 than 1996; however, due to the increased sales volumes mentioned above, refined product purchases increased 7%. The increase in refined product purchases includes a 10% increase in volumes offset by 3% lower 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 refinery.
CITGO purchases refined products to supplement the production from its refineries to meet marketing demands and resolve logistical issues. The refined product purchases represented 59% and 57% of cost of sales for the years 1997 and 1996, respectively. These refined product purchases included purchases from LYONDELL-CITGO, PDVMR and Chalmette. CITGO estimates that margins on purchased products, on average, are 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 1997 was $571 million, or 4.2%, compared to $461 million, or 3.6% for 1996. Gross margins in 1997 were positively affected by high crude runs during periods of strong refining margins as well as asphalt and petrochemical activities (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and administrative expenses increased $35 million, or 21%, due primarily to increased selling expenses in 1997 including the effect of the change in focus of the Company's marketing programs initiated in April 1996 and increases in several other areas including purchasing, administrative services, information systems, corporate executive, credit card and other charges, none of which increased more than $6 million individually, but in the aggregate increased approximately $30 million for the year.
Interest expense. Interest expense increased $11.5 million from 1996 to 1997. The increase was primarily due to the public debt and certain industrial revenue bonds which were outstanding for the entire year in 1997 compared to only a partial year during 1996 and CITGO's revolving bank loan which had a higher outstanding balance during most of 1997 as compared to 1996.
Income taxes. CITGO's provision for income taxes in 1997 was $91 million, representing an effective tax rate of 31%. In 1996, CITGO's provision for income taxes was $70 million, representing an effective tax rate of 36%. The decrease is due primarily to the favorable resolution of a significant tax issue related to environmental expenditures with the Internal Revenue Service in the second quarter of 1997. The decrease was partially offset by the recording of a valuation allowance related to a capital loss carryforward that will more likely than not expire in 1998.
Net income. Net income was $207 million for 1997 compared to $127 million for 1996.
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 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 55% and 57% of cost of sales for the years 1995 and 1996, respectively. CITGO estimates that margins on purchased products, on average, are 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 marketers 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%.
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.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, CITGO's net cash provided by operating activities totaled approximately $647 million, primarily reflecting $207 million of net income, $211 million of depreciation and amortization, and the net effect of other items of $229 million. The more significant changes in other items included the decrease in accounts receivable, including receivables from affiliates, of approximately $332 million, the decrease in accounts payable and other current liabilities, including payables to affiliates, of approximately $149 million and the increase of other assets of approximately $75 million. The decrease in accounts receivable is due primarily to the sale of $125 million of trade accounts receivable in June 1997 and the sale of $150 million in credit card receivables in November 1997, proceeds of which were used primarily to make payments on the revolving bank loan. The decrease in accounts payable is related primarily to a reduction in the payable related to crude oil and refined products purchased. The increase of other assets is due primarily to a long-term receivable from PDVMR (see "Item 13. Certain Relationships and Related Transactions").
Net cash used in investing activities in 1997 totaled $294 million consisting primarily of capital expenditures of $244 million, investments in LYONDELL-CITGO of $46 million and a loan to LYONDELL-CITGO of $16.5 million.
During the same period, consolidated net cash used in financing activities totaled approximately $356 million comprised primarily of $215 million of net repayments on revolving bank loans, $50 million net repayments on short term bank loans, $59 million of net repayments on private placement senior notes, $29 million of net repayments on a term loan, a capital contribution of $20 million from PDV America and a $6 million dividend to PDV America.
CITGO currently estimates that its capital expenditures for the years 1998 through 2002 will total approximately $1.4 billion. These include:
CITGO ESTIMATED CAPITAL EXPENDITURES -- 1998 THROUGH 2002(1)
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(1) These estimates may change as future regulatory events unfold. See "Factors Affecting Forward Looking Statements".
As of December 31, 1997, the Company and its subsidiaries had an aggregate of $1,257 million of indebtedness outstanding that matures on various dates through the year 2026. As of December 31, 1997, the Company's contractual commitments to make principal payments on this indebtedness were $98.2 million, $211.5 million and $47.1 million for 1998, 1999 and 2000, respectively. The Company's bank credit facility consists of a $58.8 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 $135 million was outstanding at December 31, 1997. Cit-Con has a separate credit agreement under which $28.6 million was outstanding at December 31, 1997. The Company's other principal indebtedness consists of (i) $199.7 million in senior notes issued in 1996, (ii) $260 million in senior notes issued pursuant to a master shelf agreement with an insurance company, (iii) $235 million in senior notes issued in 1991, (iv) $218.3 million in obligations related to tax exempt bonds issued by various governmental units, and (v) $118 million in obligations related to taxable bonds issued by a governmental unit. See Note 11 to Consolidated Financial Statements.
As of December 31, 1997, capital resources available to CITGO included cash on hand, available borrowing capacity of $540 million under CITGO's revolving credit facility and $212 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. See "Item 14b. Reports on Form 8-K". CITGO management believes that it has sufficient capital resources to carry out planned capital spending programs, including regulatory and environmental projects in the near term, and to meet currently anticipated future obligations as they arise. CITGO periodically evaluates other sources of capital in the marketplace and anticipates long-term capital requirements will be satisfied with current capital resources and future financing arrangements, including the issuance of debt securities. The Company's ability to obtain such financing 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 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, 1997.
CITGO is a member of the PDV America consolidated Federal income tax return. CITGO has a tax allocation agreement with PDV America which is designed to provide PDV America 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
In 1995, 1996 and 1997 the Company used commodity and financial instrument derivatives to manage defined commodity price and interest rate risks which arose out of the Company's core activities. The
Company had only limited involvement with other derivative financial instruments and did not use them for trading purposes. Beginning in 1998, the Company is reevaluating its use of derivative commodity and financial instruments, therefore non-hedging activity may increase.
The Company enters into petroleum futures contracts, options and other over the counter commodity derivatives, primarily to hedge a portion of the price risk associated with crude oil and refined products. In order for a transaction to qualify for hedge accounting, the Company requires that the item to be hedged exposes the Company to price risk and that the commodity contract reduces that risk and is designated as a hedge. The high correlation between price movements of a product and the commodity contract in that product is well demonstrated in the petroleum industry and, generally, the 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 commodity derivatives which are not hedges are recorded as gains or losses in the period in which they occur.
The Company also enters into various interest rate swap and cap agreements to manage its risk related to interest rate changes on its debt. Premiums paid for purchased interest rate swap and cap agreements are amortized to interest expense over the terms of the agreements. Unamortized premiums are included in other assets. The interest rate differentials received or paid by the Company related to these agreements are recognized as adjustments to interest expense over the term of the agreements. Gains or losses on terminated swap agreements are either amortized over the original term of the swap agreement if the hedged borrowings remain in place, or are recognized immediately if the hedged borrowings are no longer held.
The Company's commodity derivatives are generally entered into through major brokerage houses and traded on national exchanges and can be settled in cash or through delivery of the commodity. Such contracts generally qualify for hedge accounting and correlate to market price movements of crude oil and refined products. Resulting gains and losses, therefore, will generally be offset by gains and losses on the Company's hedged inventory or future purchases and sales. The Company's derivative commodity activity is closely monitored by management and contract periods are generally less than 30 days. Unrealized and deferred gains and losses on these contracts at December 31, 1997 and 1996, and the effects on cost of sales and pretax earnings for 1997, 1996 and 1995 were not material. At times during 1996 and 1995, the Company entered into commodity derivatives activities that were not related to the hedging program discussed above. This activity and its results were not material in 1996 or 1995. There was no such activity in 1997.
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
The fair value of the interest rate swap agreements in place at December 31, 1997, 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 $2.9 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 $0.8 million, $1.1 million, and $0.1 million in 1997, 1996 and 1995, 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 or 1997.
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. The effect of this agreement was not material in 1997, 1996 or 1995.
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, 1997.
NEW ACCOUNTING STANDARDS
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. Effective January 1, 1997, the Company adopted Statement of Position 96-1 -- "Environmental Remediation Liabilities" ("SOP 96-1"). The statement provides guidance on environmental liabilities and disclosures. The adoption of SOP 96-1 did not have a material effect on the consolidated financial position or results of operations of CITGO.
Effective for the Company's year ended December 31, 1997, CITGO adopted Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes standards for disclosing information about the Company's capital structure. The adoption of this standard related to disclosure within the financial statements and did not have a material effect on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which is effective for the Company's fiscal year ending December 31, 1998. The statement addresses the reporting and display of comprehensive income and its components. The Company does not currently believe adoption of SFAS No. 130 will result in material differences between comprehensive income and net income.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"),which is effective for the fiscal year ending December 31, 1998. SFAS No. 131 modifies current segment reporting requirements and establishes, for public companies, criteria for reporting disclosures about a company's products and services, geographic areas and major customers in annual and interim financial statements. The Company is unable to determine the full extent of disclosure changes that may result from adoption of SFAS No. 131 because of the potential for change as a result of the Company's Transformation Program (see the Consolidated Financial Statements of CITGO -- Note 12), which began in July 1997.
In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132") which is effective for the Company's fiscal year ending December 31, 1998. The statement revises current employers' disclosure
requirements for pensions and other postretirement benefits. It does not change the measurement or recognition of those plans.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a two digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information.
CITGO is replacing major elements of its information systems by implementing Systems, Applications and Products in Data Processing ("SAP"). The first phase of SAP implementation, which included the financial reporting systems, was brought into production on January 1, 1998. Additional SAP modules will be implemented throughout 1998 and 1999. The total estimated cost of the SAP implementation is approximately $111 million, which includes software, hardware, reengineering and change management. Costs incurred relating to this project are either capitalized or expensed as incurred in accordance with generally accepted accounting principles. Management has determined that SAP is an appropriate solution to the Year 2000 Compliance issue related to the systems on which SAP is implemented.
CITGO estimates that $1 million will be spent in 1998 and 1999 to address the Year 2000 Compliance issue by testing, upgrading or replacing its information systems which will not be replaced by SAP. In addition, approximately $3 million will be spent in 1998 and 1999 to determine the nature and cost of upgrades or replacements necessary to address the Year 2000 issue in equipment other than information systems and to assess the extent to which the Company is vulnerable to any third party Year 2000 Compliance issues. These efforts are led by a CITGO team supplemented by external resources. The cost to upgrade and or replace such equipment and to address any third party Year 2000 Compliance issues is not known at this time. Although management believes solutions and alternatives to the Year 2000 issue in these systems will be identified, there is no guarantee that the systems which will not be replaced by SAP and other equipment will all be Year 2000 compliant before the end of 1999. This could result in a system failure or disruptions of operations which may have a material adverse effect on the Company. Further, there can be no guarantee that the systems of other companies on which the Company's systems rely will be upgraded or replaced on a timely basis, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company.
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of CITGO as of December 31, 1997 are as follows:
Directors are elected to serve until their successors are duly elected and qualified. Executive officers are appointed by and serve at the discretion of the Board of Directors.
The only standing committee of the Company's Board of Directors is the Audit Committee. The Audit Committee is comprised of Messrs. Fernandez, Lopez Quevedo and Velasco.
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.
David J. Tippeconnic, President, Chief Executive Officer and Director. Mr. Tippeconnic has been President and Chief Executive Officer of CITGO and a member of the Owners Committee of LYONDELL-CITGO since July 1997. Prior to such time, he was President and Chief Executive Officer of The UNO-VEN Company. Prior to joining UNO-VEN, he served 33 years with Phillips Petroleum Company, holding various operating positions before being named Vice President, Human Resources. He was later named Senior Vice President, Planning and Technology, and then Executive Vice President of Phillips Petroleum Company and President of the Phillips 66 Company, the refining, marketing, transportation and chemicals division of the company. He was also a member of the Board of Directors of Phillips Petroleum Company.
Roberto V. Mandini, Executive Vice President and Director. Mr. Mandini has been Executive Vice President since January 1995 and has been a member of the Owners Committee of LYONDELL-CITGO and President of PDVMR since January 1998. 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.
Ezra C. Hunt, Senior Vice President and Chief Financial Officer. Mr. Hunt has been Senior Vice President and Chief Financial Officer of CITGO since July 1997. He was formerly Senior Vice President and Chief Financial Officer, Commercial Specialty Programs, for TIG Insurance, Irving, Texas. Prior to joining TIG Insurance, he served 20 years with Atlantic Richfield Company. During that time, he held various positions, including Vice President, Centralized Dallas Operations; Vice President, Finance, ARCO Oil and Gas; and Controller, ARCO Alaska.
W. A. DeVore, Senior Vice President, Marketing. Mr. DeVore has been Senior Vice President, Marketing since November 1997. Prior to such time, he was Marketing Vice President of The UNO-VEN Company from 1995 to 1997. Mr. DeVore held positions in marketing and chemicals general management at Phillips Petroleum Company.
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 a member of the Board of Directors of Interven Venezuela, S.A., the PDVSA affiliate responsible for monitoring overseas investments; and as Chairman of the Shareholders' 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.
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 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 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).
Alonso Velasco, Director. Mr. Velasco has been a member of the Board of Directors of CITGO and a member of the Management Committee of PDVMR since May 1997. He has also been a director of PDV America since 1991 and President, Chief Executive and Financial Officer since 1993. Mr. Velasco was Control and Finance Coordinator of PDVSA from 1991 until March 1994, at which time he was appointed a director of PDVSA. Between 1987 and 1991, he was director of Interven, S.A., an affiliate of PDVSA.
In 1997, Messrs. William J. Beckert, Senior Vice President, Operations; Lawrence H. Brittain, Jr., Senior Vice President, Marketing, Light Oils and Lubricants; and Ralph S. Cunningham, President, Chief Executive Officer and Director, retired.
ITEM 11.
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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Not applicable.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain members of the Board of Directors of CITGO are also directors or executive officers of PDVSA.
CITGO has entered into several transactions with PDVSA or other affiliates of PDVSA, including crude oil and feedstock supply agreements, agreements for the purchase of refined products and transportation agreements. These crude oil supply agreements require PDVSA to supply minimum quantities of crude oil and other feedstocks to CITGO for a fixed period, usually 20 to 25 years. The supply agreements differ somewhat for each entity and each 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. 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. In 1997, the effect of the adjustments to the original modifications was to reduce the price of crude oil purchased from PDVSA by approximately $25 million. The Company anticipates that the effect of the adjustments to the original modifications will be to reduce the price of crude oil purchased from PDVSA under these agreements by approximately $25 million per year in 1998 and 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. See also "Factors Affecting Forward Looking Statements".
LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") is a Texas limited liability company which owns and operates a 265 MBPD refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and Lyondell Petrochemical Company ("Lyondell"), referred to as the owners. CITGO contributed cash during the years 1993 through 1997 for a participation interest and other commitments related to LYONDELL-CITGO's refinery enhancement project, and Lyondell contributed the Houston refinery and related assets for the remaining participation interest. The refinery enhancement project to increase the refinery's heavy crude oil high conversion capacity was substantially completed at the end of 1996 with an in-service date of March 1, 1997. The heavy crude oil processed by the Houston refinery is supplied by PDVSA under a long-term crude oil supply contract through the year 2017, and CITGO purchases substantially all of the refined products produced at the Houston refinery under a long-term contract (see the Consolidated Financial Statements of CITGO -- Note 5).
CITGO's participation interest in LYONDELL-CITGO increased from approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997, in accordance with agreements between the owners concerning such interest. CITGO has a one time option for 18 months from April 1, 1997, to increase, for an additional investment, its participation interest to 50%.
CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The notes bear interest at market rates and are due July 1, 2003. These notes are included in other assets at December 31, 1997.
CITGO accounts for its investment in LYONDELL-CITGO using the equity method of accounting and records its share of the net earnings of LYONDELL-CITGO based on allocations of income agreed to by the owners.
On May 1, 1997, PDV America and Union Oil Company of California ("Unocal") closed a transaction relating to The UNO-VEN Company ("UNO-VEN"). The transaction transferred certain assets and liabilities to PDV Midwest Refining, L.L.C. ("PDVMR"), a subsidiary of PDV America, in liquidation of PDV America's 50% ownership interest in UNO-VEN. The assets include a refinery in Lemont, Illinois, as well as product distribution terminals and retail sites located in the Midwest. CITGO operates these facilities and purchases the products produced at the refinery (see the Consolidated Financial Statements of CITGO -- Note 2 and Note 5). A portion of the crude oil processed by PDVMR is supplied by PDVSA under a long-term crude supply contract.
An affiliate of PDVSA entered into an agreement to acquire a 50% equity interest in a refinery in Chalmette, Louisiana ("Chalmette"), in October 1997 and has assigned to CITGO its option to purchase up to 50% of the refined products produced at the refinery through December 31, 1998 (see the Consolidated Financial Statements of CITGO -- Note 5). CITGO exercised this option on November 1, 1997, and is acquiring approximately 66 MBPD of refined products from the refinery, approximately one-half of which is gasoline.
Under such long-term supply agreements and refined product purchase agreements, CITGO and LYONDELL-CITGO purchased approximately $2 billion and $0.9 billion respectively, of crude oil, feedstocks and refined products at market related prices from PDVSA in 1997. At December 31, 1997, $138 million was included in CITGO's current payable to affiliates as a result of these transactions.
The Company also purchases refined products from various other affiliates including LYONDELL-CITGO, PDVMR and Chalmette, under various supply contracts. These agreements incorporate various formula prices based on published market prices and other factors. Such purchases totaled $2.8 billion, $1.6 billion and $1.4 billion for 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, $59 million and $38 million, respectively, were included in payables to affiliates as a result of these transactions.
CITGO had refined product, feedstock and crude oil and other product sales of $221 million to affiliates, including the Mount Vernon Phenol Plant Partnership and LYONDELL-CITGO, in 1997. At December 31, 1997, $23 million was 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 termination value due under the lease of the Corpus Christi Refinery West Plant 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 noncash dividend. In 1997, $10 million due from PDV America under this tax allocation agreement, for the year 1996, was classified and accounted for as a noncash 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 $9.7 million, $12 million and $12.2 million are included in other current liabilities at December 31, 1997, 1996 and 1995, respectively.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
a. CERTAIN DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements:
(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
A Form 8-K was filed with the Securities and Exchange Commission on November 18, 1997 in regard to the fact that on October 28, 1997, CITGO Petroleum Corporation entered into a Selling Agency Agreement with Salomon Brothers Inc. and Chase Securities Inc. providing for the sale of up to $235 million in aggregate principal amount of notes in tranches from time to time by the Company under a Medium Term Note Program. Any tranche of notes could have a maturity ranging from nine months to 30 years from the date of issuance and could bear interest at a fixed rate or at a fluctuating rate based on one of several possible indices. The Medium Term Note Program was established under the shelf registration of $600 million in aggregate principal amount of debt securities pursuant to the Registration Statement (333-3226) declared effective by the Securities and Exchange Commission on May 17, 1996.
c. EXHIBITS
- ---------------
* Previously filed in connection with the Registrant's Report on Form 10, Commission file number 1-14380.
** Incorporated by reference to the Registration Statement on Form of PDV America, Inc. (No. 33-63742).
*** Incorporated by reference to the Registrant's Report on Form 8-K filed with the Commission on November 18, 1997.
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
By: /s/ R. M. BRIGHT ------------------------------------ R. M. Bright Controller (Chief Accounting Officer) Date: March 26, 1998
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.
CITGO PETROLEUM CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1997 and 1996, and for Each of the Three Years in the Period Ended December 31, 1997 and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholder of CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheets of CITGO Petroleum Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Tulsa, Oklahoma February 13, 1998
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
ASSETS
See notes to consolidated financial statements.
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997 (AMOUNTS IN THOUSANDS)
See notes to consolidated financial statements.
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
See notes to consolidated financial statements.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
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. CITGO owns and operates two modern, highly complex crude oil refineries (Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt refineries (Paulsboro, New Jersey, and Savannah, Georgia) with a combined aggregate rated crude oil refining capacity of 527 thousand barrels per day ("MBPD"). CITGO also owns a minority interest in LYONDELL-CITGO Refining Company Ltd., a limited liability company that owns and operates a refinery in Houston, Texas, with a rated crude oil refining capacity of 265 MBPD. CITGO also operates a 153 MBPD refinery in Lemont, Illinois, owned by PDV Midwest Refining L.L.C. CITGO's assets also include a 65 percent owned lubricant and wax plant, pipelines and equity interests in pipeline companies and petroleum storage terminals.
CITGO's transportation fuel customers include primarily CITGO branded wholesale marketers, convenience stores and airlines located primarily east of the Rocky Mountains. Lubricants are sold to independent marketers, mass marketers and industrial customers, and petrochemical feedstocks and industrial products are sold to various manufacturers and industrial companies throughout the United States.
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.
Estimates, Risks and Uncertainties -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CITGO is sensitive to domestic and international political, legislative, regulatory and legal environments. Significant changes in the prices or availability of crude oil and refined products could have a significant impact on CITGO's results of operations for any particular year.
Revenue Recognition -- Revenue is recognized upon transfer of title to products sold, based upon the terms of delivery.
Supply and Marketing Activities -- The Company engages in the buying and selling of crude oil to supply its refineries. The net results of this activity are recorded in cost of sales. The Company also engages in the buying and selling of refined products to facilitate the marketing of its refined products. The results of this activity are recorded in cost of sales and sales.
Refined product exchange transactions that do not involve the payment or receipt of cash are not accounted for as purchases or sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the Company's last-in, first-out ("LIFO") inventory method. Exchanges that are settled through payment or receipt of cash are accounted for as purchases or sales.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Excise Taxes -- The Company collects excise taxes on sales of gasoline and other motor fuels. Excise taxes of approximately $3.2 billion, $2.7 billion, and $2.2 billion were collected from customers and paid to various governmental entities in 1997, 1996, and 1995, respectively. Excise taxes are not included in sales.
Cash and Cash Equivalents -- Cash and cash equivalents consist of highly-liquid short-term investments and bank deposits with initial maturities of three months or less.
Restricted Cash -- Restricted cash represents highly-liquid, short-term investments held in trust accounts in accordance with a tax-exempt bond agreement. Funds are released solely for financing environmental facilities as defined in the bond agreements.
Inventories -- Crude oil and refined product inventories are stated at the lower of cost or market and cost is primarily determined using the LIFO 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 $7 million, $12 million, and $5 million in 1997, 1996, and 1995, respectively.
The Company periodically evaluates the carrying values of its property, plant and equipment and other long-lived assets for circumstances which may indicate impairment.
Commodity and Interest Rate Derivatives -- The Company uses commodity and financial instrument derivatives to manage defined commodity price and interest rate risks arising out of the Company's core activities. The Company has only limited involvement with other derivative financial instruments and does not use them for trading purposes.
The Company enters into petroleum futures contracts, options and other over the counter commodity derivatives, primarily to hedge a portion of the price risk associated with crude oil and refined products. In order for a transaction to qualify for hedge accounting, the Company requires that the item to be hedged exposes the Company to price risk and that the commodity contract reduces that risk and is designated as a hedge. The high correlation between price movements of a product and the commodity contract in that product is well demonstrated in the petroleum industry and, generally, the 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 commodity derivatives which are not hedges are recorded as gains or losses in the period in which they occur.
The Company also enters 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Refinery Maintenance -- Costs of major refinery turnaround maintenance are charged to operations over the estimated period between turnarounds. Turnaround periods range approximately from one to seven years. Unamortized costs are included in other assets. Amortization of refinery turnaround costs is included in depreciation and amortization expense. Amortization was $49 million, $53 million, and $43 million for 1997, 1996, and 1995, 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. Effective January 1, 1997, the Company adopted Statement of Position 96-1 -- "Environmental Remediation Liabilities" ("SOP 96-1"). The statement provides guidance on environmental liabilities and disclosures. The adoption of SOP 96-1 did not have a material effect on the consolidated financial position or results of operations of CITGO.
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 using an asset and liability approach.
Capital Structure -- Effective for the Company's year ended December 31, 1997, CITGO adopted Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes standards for disclosing information about the Company's capital structure. The adoption of this standard related to disclosure within the financial statements and did not have a material effect on the Company's financial statements.
Comprehensive Income -- In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") which is effective for the Company's fiscal year ending December 31, 1998. The statement addresses the reporting and display of comprehensive income and its components. The Company does not currently believe adoption of SFAS No. 130 will result in material differences between comprehensive income and net income.
Segments -- In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" which is effective for the fiscal year ending December 31, 1998. SFAS No. 131 modifies current segment reporting requirements and establishes, for public companies, criteria for reporting disclosures about a company's products and services, geographic areas and major customers in annual and interim financial statements. The Company is unable to determine the full extent of disclosure changes that may result from adoption of SFAS No. 131 because of the potential for change as a result of the Company's Transformation Program (Note 12), which began in July 1997.
2. REFINERY AGREEMENTS
On May 1, 1997, PDV America and Union Oil Company of California ("Unocal") closed a transaction relating to The UNO-VEN Company ("UNO-VEN"). The transaction transferred certain assets and liabilities to PDV Midwest Refining, L.L.C. ("PDVMR"), a subsidiary of PDV America, in liquidation of PDV America's 50 percent ownership interest in UNO-VEN. The assets include a 153 MBPD refinery in Lemont, Illinois, as well as eleven product distribution terminals and 89 retail sites located in the Midwest. CITGO operates these facilities and purchases the products produced at the refinery (Note 5).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
An affiliate of PDVSA entered into an agreement to acquire a 50 percent equity interest in a refinery in Chalmette, Louisiana ("Chalmette"), in October, 1997 and has assigned to CITGO its option to purchase up to 50 percent of the refined products produced at the refinery through December 31, 1998 (Note 5). CITGO exercised this option on November 1, 1997, and is acquiring approximately 80 MBPD of refined products from the refinery, approximately one-half of which is gasoline.
3. INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD.
LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") is a Texas limited liability company which owns and operates a 265 MBPD refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and Lyondell Petrochemical Company ("Lyondell"), referred to as the owners. CITGO has contributed cash during the years 1993 through 1997 for a participation interest and other commitments related to LYONDELL-CITGO's refinery enhancement project and Lyondell contributed the Houston refinery and related assets for the remaining participation interest. The refinery enhancement project to increase the refinery's heavy crude oil high conversion capacity was substantially completed at the end of 1996 with an in-service date of March 1, 1997. The heavy crude oil processed by the Houston refinery is supplied by a subsidiary of PDVSA under a long-term crude oil supply contract through 2017, and CITGO purchases substantially all of the refined products produced at the Houston refinery under a long-term contract (Note 5).
CITGO's participation interest in LYONDELL-CITGO increased from 13% at December 31, 1996 to approximately 42% on April 1, 1997, in accordance with agreements between the owners concerning such interest. CITGO has a one time option for 18 months from April 1, 1997, to increase, for an additional investment, its participation interest to 50%.
CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The notes bear interest at market rates and are due July 1, 2003. These notes are included in other assets at December 31, 1997.
CITGO accounts for its investment in LYONDELL-CITGO using the equity method of accounting and records its share of the net earnings of LYONDELL-CITGO based on allocations of income agreed to by the owners. Information on CITGO's investment in LYONDELL-CITGO follows:
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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
material to the Company's consolidated statement of income. The total cost of this acquisition was $46.8 million which was allocated as follows:
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. These supply agreements extend through the year 2006 for the Lake Charles refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi refinery and 2013 for the Savannah refinery. The Company purchased $2 billion, $2.4 billion, and $1.9 billion of crude oil, feedstocks and other products from wholly owned subsidiaries of PDVSA in 1997, 1996, and 1995, respectively, under these and other purchase agreements.
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 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 effect of the adjustments to the original modifications reduced the price of crude oil purchased from PDVSA under these agreements by $25 million in 1997 and is anticipated by management to also reduce the cost by approximately $25 million in 1998 and 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, 1997 and 1996, $138 million and $237 million, respectively, were included in payables to affiliates as a result of these transactions.
The Company also purchases refined products from various other affiliates including LYONDELL-CITGO, PDVMR and Chalmette, under long-term contracts. These agreements incorporate various formula prices based on published market prices and other factors. Such purchases totaled $2.8 billion, $1.6 billion and $1.4 billion for 1997, 1996, and 1995, respectively. At December 31, 1997 and 1996, $59 million and $38 million, respectively, were included in payables to affiliates as a result of these transactions.
The Company had refined product, feedstock, and other product sales to affiliates of $221 million, $190 million, and $210 million in 1997, 1996, and 1995, respectively. The Company also sold crude oil to affiliates of $3 million, $64 million and $32 million in 1997, 1996 and 1995, respectively. At December 31,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1997 and 1996, $23 million and $28 million, respectively, were included in due from affiliates as a result of these and related transactions.
Pursuant to the operating agreement with PDVMR (Note 2), on May 1, 1997, CITGO became the operator of the Lemont refinery, and employed a substantial number of employees previously employed by UNO-VEN and as a result, CITGO assumed a liability for postretirement benefits other than pensions (Note 12) of approximately $27 million related to those employees. A corresponding amount due from PDVMR is included in other assets at December 31, 1997, pending final determination of the method of settlement by the Parent company. CITGO charges PDVMR a management fee which covers payroll expenses, including pension and benefit costs incurred for the former UNO-VEN hourly and salaried employees, and for various other support services. Such reimbursement charges totaled $43 million for 1997.
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 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 noncash 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 noncash dividend. In 1997, $10 million due from PDV America under this tax allocation agreement for the year 1996 was classified and accounted for as a noncash 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 $9.7 million and $12 million are included in other current liabilities at December 31, 1997 and 1996, respectively.
6. ACCOUNTS RECEIVABLE
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.
Effective June 27, 1997, and November 19, 1997, the Company established two new limited purpose subsidiaries, CITGO Funding Corporation and CITGO Funding Corporation II, which entered into agreements to sell, on an ongoing basis and without recourse, up to a maximum of $125 million of trade accounts receivable and $150 million of credit card receivables at any one point in time. These agreements have a minimum term of one year expiring in June, 1998 and November, 1998, respectively, and are renewable for successive one-year terms by mutual agreement. Fees and expenses related to the agreements were recorded
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as other expense and were $5.8 million for the year ended December 31, 1997. Proceeds of approximately $275 million from the initial sales were used primarily to make payments on the Company's revolving bank loan.
7. INVENTORIES
At December 31, 1997, replacement costs approximated LIFO carrying values. As of December 31, 1996, replacement costs exceeded LIFO carrying values by approximately $294 million.
8. PROPERTY, PLANT AND EQUIPMENT
Depreciation expense for 1997, 1996, and 1995 was $161 million, $136 million, and $122 million, respectively.
In 1997 the Company incurred property damages from a fire at the Company's Corpus Christi, Texas, refinery (Note 14). As a result, the Company capitalized $14.5 million of replacement machinery and equipment. Other income (expense) includes $9.4 million of insurance recoveries related to this event.
Other income (expense) includes gains and losses on disposals and retirements of property, plant and equipment. Such net losses were approximately $14 million, $2 million, and $4 million, in 1997, 1996, and 1995, respectively.
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 $155 million and $160 million at December 31, 1997 and 1996, respectively.
Due to various financing and capital transactions and net losses, at December 31, 1997 and 1996, NISCO had a partnership deficit. At December 31, 1997 and 1996, CITGO's share of this deficit, as a general partner,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
was $49.6 million and $47 million, respectively, which is included in other noncurrent liabilities in the accompanying consolidated balance sheets.
Information on the Company's investments, including LYONDELL-CITGO, follows:
Selected financial information provided by the affiliates is summarized as follows:
10. SHORT-TERM BANK LOANS
As of December 31, 1997, the Company has established $215 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 1997, 1996, and 1995 were 5.9 percent, 5.7 percent, and 6.2 percent, respectively. The Company had $3 million and $53 million of borrowings outstanding under these facilities at December 31, 1997 and 1996, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. LONG-TERM DEBT
Revolving and Term Bank Loans -- The Company's credit agreement with various banks 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 6.6 percent and 6.8 percent at December 31, 1997 and 1996, respectively), and principal amounts are payable in quarterly installments. The revolving loan is unsecured, has various borrowing maturities and interest rate options (year-end rate of 6.9 percent and 6.7 percent at December 31, 1997 and 1996, respectively), and is committed through December 31, 1999.
Shelf Registration -- In April 1996, the Company filed a registration statement with the Securities and Exchange Commission relating to the shelf registration of $600 million of debt securities that may be offered and sold from time to time. In May 1996, the registration became effective and CITGO sold a tranche of debt securities with an aggregate offering price of $200 million. On October 28, 1997, the Company entered into a Selling Agency Agreement with Salomon Brothers Inc. and Chase Securities Inc. providing for the sale of up
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to an additional $235 million in aggregate principal amount of notes in tranches from time to time by the Company under the shelf registration.
Private Placement -- At December 31, 1997, the Company has outstanding approximately $235 million of privately placed, unsecured Senior Notes. 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 -- At December 31, 1997, the Company has outstanding $260 million of privately-placed senior notes under an unsecured Master Shelf Agreement with an insurance company. The notes have various fixed interest rates and maturities.
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, 1997.
Tax-Exempt Bonds -- Through state entities, the Company has issued $27.6 million of industrial development bonds for certain Lake Charles port facilities and pollution control equipment and $190.7 million of environmental revenue bonds to finance a portion of the Company's environmental facilities at its Lake Charles and Corpus Christi refineries and at the LYONDELL-CITGO refinery. These bonds are secured by letters of credit. The bonds bear interest at various floating rates which ranged from 3.7 percent to 5.2 percent at December 31, 1997, and 4.1 percent to 5.1 percent at December 31, 1996.
During 1995, the Company repurchased approximately $47 million of the Louisiana Revenue Bonds due in 2023 at a discount, resulting in an extraordinary gain of approximately $3.4 million, net of related income taxes of approximately $2.2 million.
Taxable Louisiana Revenue Bonds -- Through a state entity, the Company has issued and currently outstanding $118 million of taxable environmental revenue bonds to finance a portion of the Company's environmental facilities at its Lake Charles refinery. Such bonds are secured by a letter of credit and have a floating interest rate which was 5.8 percent and 5.5 percent at December 31, 1997 and 1996, respectively. 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, 1997, $2 million of the original $120 million bonds had been converted to tax-exempt bonds.
Cit-Con Bank Credit Agreement -- The Cit-Con bank credit agreement consists of a term loan collateralized by throughput agreements of the owner companies. The loan contains various interest rate options (weighted average effective rates of 6.5 percent and 6.3 percent at December 31, 1997 and 1996, respectively), and requires quarterly principal payments through December 2001.
Debt Maturities -- Future maturities of long-term debt as of December 31, 1997, are: 1998 -- $95.2 million, 1999 -- $211.5 million, 2000 -- $47.1 million, 2001 -- $47.1 million, 2002 -- $36.4 million and $816.4 million thereafter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
Interest expense includes $0.8 million, $1.1 million, and $0.1 million in 1997, 1996, and 1995, 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.
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 $19 million, $16 million, and $16 million to operations related to its contributions to these plans for the years 1997, 1996, and 1995, 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 employees. The qualified plans' assets include corporate securities and shares in a fixed income mutual fund, two collective funds 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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the funded status of these plans and the related amounts recognized in the Company's consolidated balance sheets:
The underfunded plans relate to plans in which the 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:
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the funded status of the accumulated postretirement benefit obligation reconciled with amounts reported in the Company's consolidated balance sheets:
The Company's net periodic postretirement benefit cost (credit) included the following components:
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 8.0 percent, 10.0 percent, and 11.0 percent were assumed for 1997, 1996, and 1995, 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, 1997, by $32.4 million and increase the aggregate of the service cost and interest cost components of net periodic postretirement benefit cost for 1997 by $4.0 million. Discount rates of 7.5 percent, 7.5 percent, and 8.0 percent for 1997, 1996, and 1995, respectively, were used to determine the net periodic postretirement cost. Discount rates of 7.0 percent and 7.5 percent for 1997 and 1996, respectively, were used to determine the APBO.
Employee Separation Programs -- During 1997, the Company's senior management implemented a Transformation Program designed to ensure that numerous expense control, business information systems and business efficiency initiatives underway are effectively coordinated to achieve desired results. Included in this program are reviews of the Company's business units, assets, strategies, and business processes. These combined actions include expected personnel reductions (the "Separation Programs"). The cost of the Separation Programs is approximately $22 million for the year ended December 31, 1997.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The provisions for income taxes are comprised of the following:
The Federal statutory tax rate differs from the effective tax rate due to the following:
The effective tax rate for 1997 decreased due primarily to the favorable resolution of a significant tax issue related to environmental expenditures with the Internal Revenue Service in 1997. The decrease was partially offset by the recording of a valuation allowance related to a capital loss carryforward that will more likely than not expire in 1998.
Deferred income taxes reflect the net tax effects of (i) temporary differences between the financial and tax bases of assets and liabilities, and (ii) loss and tax credit carryforwards. The tax effects of significant items comprising the Company's net deferred tax liability as of December 31, 1997 and 1996, are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997, the Company has capital loss carryforwards of $13.8 million, $9.6 million of which expire in 1998, $0.4 million of which expire in 2000, $2.3 million of which expire in 2001 and $1.5 million of which expire in 2002. At December 31, 1997, a valuation allowance of $1.4 million has been established related to the carryforward.
The Company's alternative minimum tax credit carryforwards are available to offset regular Federal income taxes in future years without expiration, subject to certain alternative minimum tax limitations.
14. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims arising in the ordinary course of business are pending against the Company. The Company 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 below, 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 reporting period. 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 by a material amount, the aggregate of the amounts accrued in respect of such lawsuits and claims and the insurance coverages available to the Company and, therefore, should not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
Included among these lawsuits and claims is 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 refining complex; the plaintiffs seek injunctive relief and monetary damages and have appealed the Court's denial of class certification; the initial trials relating to this litigation are not currently included in the trial docket.
In a case currently pending in the United States District Court for the Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert claims against CITGO, PDVSA, PDV America., PDVMR, and Unocal pursuant to Section 301 of the Labor Management Relations Act ("LMRA"). This complaint alleges that CITGO and the other defendants constitute a single employer, joint employers or alter-egos for purposes of the LMRA, and are therefore bound by the terms of a collective bargaining agreement between UNO-VEN and Local 7-517 covering certain production and maintenance employees at a Lemont, Illinois, petroleum refinery. On May 1, 1997, in a transaction involving the former partners of UNO-VEN, the Lemont refinery was acquired by PDVMR. Pursuant to an operating agreement with PDVMR, CITGO became the operator of the Lemont refinery, and employed the substantial majority of employees previously employed by UNO-VEN pursuant to its initial terms and conditions of employment, but did not assume the existing labor agreement. The union seeks compensation for monetary differences in medical, pension and other benefits between the CITGO and UNO-VEN plans and reinstatement of all of the UNO-VEN benefit plans. The union also seeks to require CITGO to abide by the terms of the collective bargaining agreement between the union and UNO-VEN.
On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi refinery. There were no reports of serious personal injuries. Affected units were shut down for repair and were returned to full service in early August, 1997. The Company has property damage, business interruption and general liability
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
insurance which related to this event. As a result, the property damage and business interruption did not have a material adverse effect on the Company's financial condition or results of operations. There are presently five lawsuits against the Company pending in federal and state courts in Corpus Christi, Texas, alleging property damages, personal injury and punitive damages allegedly arising from the incident and other similar lawsuits have been threatened. Approximately 6,000 individual claims have been received by the Company allegedly arising from the incident.
Additionally, there is a class action lawsuit pending against the Company and other operators and owners of nearby industrial facilities which was filed in state court in Corpus Christi, Texas, in 1993 on behalf of property owners in the vicinity of these facilities. The certification of this case as a class action in 1995 was appealed by CITGO and other parties. This lawsuit asserts property damage claims and diminution in property values allegedly resulting from environmental contamination in the air, soil, and groundwater, occasioned by ongoing operations of the Company's Corpus Christi refinery and the respective industrial facilities of the other defendants. Two related personal injury and wrongful death lawsuits were filed in 1996 and are in preliminary stages of discovery at this time. In 1997 the Company signed an agreement to settle the property damage class action lawsuit for approximately $17.3 million which included the purchase of approximately 290 properties in an adjacent neighborhood. Of this amount, $15.7 million was expensed in 1997.
CITGO submitted a settlement proposal to the court. The court appointed a guardian to review the proposed settlement terms. Subsequently, the Texas Supreme Court decided to hear the Company's appeal of the trial court's class certification order. This decision raised questions whether the trial court had authority to proceed with the settlement. Additionally, the trial court sought to impose additional conditions upon the settlement which were unacceptable to the Company. For these reasons, the Company opposed the approval and enforcement of the settlement agreement as proposed to be revised and enforcement has now been stayed pending a ruling by the Texas Supreme Court. If the settlement agreement is enforced, the Company could be liable for the full settlement amount of $17.3 million. CITGO is pursuing an independent program to purchase the properties which were the subject of the purchase provisions of the settlement agreement.
In June 1997, CITGO settled litigation with a contractor who had claimed additional compensation for sludge removal and treatment at CITGO's Lake Charles, Louisiana, refinery. The settlement did not have a material effect on CITGO's financial position or results of operations. CITGO believes that it has no further exposures to losses related to this matter.
Environmental Compliance and Remediation -- The Company is subject to various federal, state and local environmental laws and regulations which may require the Company to take action to correct or improve the effects on the environment of prior disposal or release of petroleum substances by the Company or other parties. Management believes the Company is in compliance with these laws and regulations in all material aspects. Maintaining compliance with environmental laws and regulations in the future could require significant capital expenditures and additional operating costs.
In 1992, the Company reached an agreement with a state agency to cease usage of certain surface impoundments at the Company's Lake Charles 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. In 1997, the Company presented a proposal to a state agency revising the 1993 closure plan. A ruling on this proposal is expected in 1998 and actual closure is expected to be completed during 2000.
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. 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.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the Company had $48.7 million and $56 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, management believes these accruals are adequate. Conditions which would require additional expenditures may exist for various Company sites including, but not limited to, the Company's operating refinery complexes, former refinery sites, service stations and crude oil and petroleum product storage terminals. The amount of such future expenditures, if any, is indeterminable.
Capital Expenditures -- The Company's anticipated capital expenditures, excluding the investments in LYONDELL-CITGO, for the five-year period 1998 to the year 2002 total approximately $1.4 billion (unaudited). The expenditures include environmental and regulatory capital projects as well as strategic capital expenditures. At December 31, 1997, authorized expenditures on incomplete capital projects totaled approximately $109 million.
Supply Agreements -- CITGO purchases the crude oil processed at its refineries and also purchases refined products to supplement the production from its refineries to meet marketing demands and resolve logistical issues. In addition to supply agreements with various affiliates (Note 5), the Company has various other crude oil, refined product and feedstock purchase agreements with unaffiliated entities with terms ranging from monthly to annual renewal. The Company believes these sources of supply are reliable and adequate for its current requirements.
Throughput Agreements -- The Company has throughput agreements with certain pipeline affiliates (Note 9). These throughput agreements may be used to secure obligations of the pipeline affiliates. Under these agreements, the Company may be required to provide its pipeline affiliates with additional funds through advances against future charges for the shipping of petroleum products. The Company currently ships on these pipelines and has not been required to advance funds in the past. At December 31, 1997, 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.
Commodity Derivative Activity -- The Company's commodity derivatives are generally entered into through major brokerage houses and traded on national exchanges and can be settled in cash or through delivery of the commodity. Such contracts generally qualify for hedge accounting and correlate to market price movements of crude oil and refined products. Resulting gains and losses, therefore, will generally be offset by gains and losses on the Company's hedged inventory or future purchases and sales. The Company's derivative commodity activity is closely monitored by management and contract periods are generally less than 30 days. Unrealized and deferred gains and losses on these contracts at December 31, 1997 and 1996 and the effects on cost of sales and pretax earnings for 1997, 1996, and 1995 were not material. At times during 1996 and 1995, the Company entered into commodity derivatives activities that were not related to the hedging program discussed above. This activity and its results were not material in 1996 or 1995. There was no such activity in 1997.
Other Credit and Off-Balance Sheet Risk Information as of December 31, 1997 -- The Company has guaranteed approximately $12 million of debt of certain CITGO marketers and an affiliate. Such debt is substantially collateralized by assets of these entities. The Company has outstanding letters of credit totaling approximately $366 million, which includes $346 million related to the Company's tax-exempt and taxable revenue bonds (Note 11). The Company has also acquired surety bonds totaling $42 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.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997.
Management considers the market risk to the Company related to its commodity and interest rate derivatives to be insignificant during the periods presented.
15. LEASES
The Company leases certain of its Corpus Christi refinery facilities under a 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, 1997 and 1996. Accumulated amortization related to the leased assets was approximately $94 million and $86 million at December 31, 1997 and 1996, 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 $39 million in 1997, and $33 million in 1996 and 1995. Future minimum lease payments for the capital lease and noncancelable operating leases are as follows:
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 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.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts of cash and cash equivalents and restricted cash approximate fair values because of the short maturity of these instruments. The carrying amounts and estimated fair values of the Company's other financial instruments are as follows:
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.
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
The following is a summary of the quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands):
18. SUBSEQUENT EVENT
On January 26, 1998, a cash dividend of $110 million was paid to PDV America.
* * * * *
COMMISSION FILE NUMBER 001-14380 ================================================================================
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
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EXHIBITS
FILED WITH
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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CITGO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
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INDEX TO EXHIBITS
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* Previously filed in connection with the Registrant's Report on Form 10, Commission file number 1-14380.
** Incorporated by reference to the Registration Statement on Form of PDV America, Inc. (No. 33-63742).
*** Incorporated by reference to the Registrant's Report on Form 8-K filed with the Commission on November 18, 1997.