CITGO Petroleum Corporation

Transcription

The information in this preliminary offering memorandum is not complete and may be changed. This preliminary offering memorandum is not an offer to sell these securities and it is not soliciting an offer to buy these securities in
any jurisdiction where the offer or sale is not permitted.
Subject to Completion
Preliminary Offering Memorandum dated May 18, 2010
OFFERING MEMORANDUM
CONFIDENTIAL
$1,500,000,000
$
$
% Senior Secured Notes due 2017
The Company
We are one of the largest independent crude oil refiners and marketers of refined products in the United States. Our distribution activities are focused
primarily within the continental United States, in markets east of the Rocky Mountains, with our refineries and supply distribution networks strategically
located for these markets.
The Notes
We are offering $
aggregate principal amount of our
% Senior Secured Notes due 2017 (the “2017 notes”) and $
aggregate
principal amount of our
% Senior Secured Notes due 2020 (the “2020 notes” and, together with the 2017 notes, the “notes”).
The 2017 notes will mature on , 2017 and the 2020 notes will mature on , 2020. The notes will pay interest semi-annually in arrears on
and
of each year, commencing on , 2010.
The notes will be guaranteed (the “guarantees”), jointly and severally, on a senior secured basis by each of our existing and future restricted
subsidiaries that guarantee our new senior secured revolving credit facility and term loan (collectively, the “New Senior Credit Facility”).
The notes and the guarantees will be secured, subject to certain exceptions and permitted liens, by a first-priority lien on our refineries in Lake Charles,
Louisiana, Lemont, Illinois and, upon acquiring the subleased portion of the refinery pursuant to our purchase option in 2011, our refinery in Corpus Christi,
Texas, our inventory, equity interests in the guarantors and, subject to the execution of an intercreditor agreement by the participants in our accounts receivable
securitization facility, our accounts receivable subsidiary, and related assets, in each case to the extent that such assets secure the New Senior Credit Facility; and
the liens securing the notes and guarantees will rank equally with the liens securing the New Senior Credit Facility and our obligations under our fixed rate
industrial revenue bonds (“IRBs”), provided that in the event of a foreclosure on certain inventory comprising the collateral or of insolvency proceedings, debt
under our new senior secured revolving credit facility will be paid with proceeds of such inventory prior to the notes.
The notes and guarantees will be senior to any of our and the guarantors’ existing and future indebtedness that is expressly subordinated to the notes
and the guarantees and effectively junior to any of our and the guarantors’ existing and future secured indebtedness which is secured by assets that are
not collateral for the notes and the guarantees, to the extent of the value of the assets securing such indebtedness. The notes and guarantees will be our
and the guarantors’ senior secured obligations and will rank equally in right of payment with our and the guarantors’ existing and future senior
indebtedness, including our New Senior Credit Facility and our obligations under our fixed rate IRBs, will be effectively senior in right of payment to all
of our and the guarantors’ existing and future indebtedness that does not have a lien on the collateral securing the notes with respect to and to the extent
of the value of the collateral securing the notes, and will be structurally junior to all obligations of our subsidiaries that in the future are not guarantors,
to the extent of the value of such subsidiaries.
We may redeem some or all of the 2017 notes at any time prior to , 2014 and some or all of the 2020 notes at any time prior to , 2015, in each
case, at a price equal to 100% of the principal amount thereof plus a “make-whole” premium as described herein. We may redeem some or all of the
2017 notes at any time on or after , 2014 and some or all of the 2020 notes at any time on or after , 2015, in each case, at the redemption prices set
forth herein. In addition, at any time and from time to time prior to , 2013, we may redeem up to 35% of the aggregate principal amount of either or
both series of notes using the proceeds of one or more equity offerings at the redemption prices described herein. We must offer to purchase the notes if
we experience specific kinds of changes of control or sell assets under certain circumstances. See “Description of the Notes.”
Use of Proceeds
Concurrently with the closing of this offering, we expect to enter into the New Senior Credit Facility. We will use the net proceeds from this offering,
together with proceeds from the New Senior Credit Facility, to repay all amounts outstanding under our existing senior secured revolving credit facility and term
loans (collectively, the “Existing Senior Credit Facility”), to finance the purchase of our variable rate IRBs and for general corporate purposes. See “Use of
Proceeds.” The consummation of this offering is conditioned upon the concurrent termination of the Existing Senior Credit Facility and entering into the New
Senior Credit Facility.
Investing in the notes involves risks that are described in the “Risk Factors” section beginning on page 16 of this offering memorandum.
Offering Price for the 2017 notes:
Offering Price for the 2020 notes:
% plus accrued interest, if any, from
% plus accrued interest, if any, from
, 2010.
, 2010.
The notes have not been and will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any
state and are being offered and sold in the United States only to qualified institutional buyers in reliance on Rule 144A under the Securities Act and
outside the United States to certain non-U.S. persons in reliance on Regulation S under the Securities Act. Prospective purchasers that are “qualified
institutional buyers” within the meaning of Rule 144A are hereby notified that the seller of the notes may be relying on the exemption from the
provisions of Section 5 of the Securities Act provided by Rule 144A. For further details about eligible offerees and resale restrictions, see “Notice to
Investors.”
The notes will be ready for delivery in book-entry form only through the facilities of The Depository Trust Company for the accounts of its participants,
including Euroclear Bank S.A./N.V., as operator of the Euroclear System, and Clearstream Banking, société anonyme, on or about June , 2010.
We have applied to admit the notes to listing on the Official List of the Luxembourg Stock Exchange and to trading on the Euro MTF market.
Joint Book-Running Managers
RBS
UBS Investment Bank
BNP PARIBAS
Credit Agricole CIB
Co-Managers
DnB NOR Markets
Natixis Bleichroeder LLC
The date of this offering memorandum is
UniCredit Capital Markets
, 2010.
Lemont, IL
Crude Capacity: 167 MBPD
NCI: 11.55
Lake Charles, LA
NCI: 11.83
Corpus Ch
Christi, TX
NCI: 14.75
NCI =
Nelson Refinery
Complexity Index
Explorer Pipeline
Colonial Pipeline
21 million barrels of product
terminal storage
Storage Terminal
Refinery
6,500 independently owned
and operated CITGO-branded
locations
States with a
retail presence
TABLE OF CONTENTS
Page
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . .
USE OF PROCEEDS . . . . . . . . . . . . . . . . .
CAPITALIZATION . . . . . . . . . . . . . . . . . . .
SELECTED HISTORICAL FINANCIAL
DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF OTHER
INDEBTEDNESS . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT . . . . . . . . . . . . . . . . . . . . .
Page
RELATED PARTY TRANSACTIONS . . . .
DESCRIPTION OF THE NOTES . . . . . . . .
SUMMARY OF U.S. FEDERAL INCOME
TAX CONSIDERATIONS . . . . . . . . . . . .
CERTAIN ERISA CONSIDERATIONS . . .
PLAN OF DISTRIBUTION . . . . . . . . . . . .
NOTICE TO INVESTORS . . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . . . . .
INDEPENDENT AUDITORS . . . . . . . . . . .
LISTING AND GENERAL
INFORMATION . . . . . . . . . . . . . . . . . . .
INDEX TO FINANCIAL STATEMENTS . .
1
16
35
36
37
41
65
70
91
93
96
158
163
165
168
173
173
173
F-1
We are furnishing this offering memorandum on a confidential basis to prospective investors in
connection with an offering exempt from registration under the Securities Act and applicable state securities
laws solely for the purpose of enabling such prospective investors to consider the purchase of the notes. This
offering memorandum is personal to each offeree and does not constitute an offer to any person or to the
public generally to subscribe for or otherwise acquire the notes. Delivery of this offering memorandum to any
person other than the prospective investor and any person retained to advise such prospective investor with
respect thereto is unauthorized, and any reproduction of this offering memorandum, in whole or in part,
without our or an initial purchaser’s consent, is prohibited. By accepting delivery of this offering
memorandum, you agree to these restrictions. By accepting delivery you also acknowledge that this offering
memorandum contains confidential information and you agree that the use of such information for any
purpose other than considering a purchase of the notes is prohibited. See “Notice to Investors.”
Notwithstanding anything in this offering memorandum to the contrary, each prospective investor (and each
employee, representative or other agent of the prospective investor) may disclose to any and all persons,
without limitation of any kind, the U.S. tax treatment and U.S. tax structure of any offering and all materials of
any kind (including opinions or other tax analyses) that are provided to the prospective investor relating to
such U.S. tax treatment and U.S. tax structure, other than any information for which nondisclosure is
reasonably necessary in order to comply with applicable securities laws.
Except as otherwise indicated in this offering memorandum, we accept responsibility for the
information contained in this offering memorandum. Except as otherwise indicated in this offering
memorandum, to the best of our knowledge (after having made all reasonable inquiries), the information
contained in this offering memorandum is in accordance with the facts and does not omit anything likely to
affect the import of such information.
You should rely only upon the information contained in this offering memorandum and the documents
to which we refer you. Neither we nor the initial purchasers have authorized any other person to provide you
with different information. If anyone provides you with different or inconsistent information, you should not
rely on it. You should assume the information appearing in this offering memorandum is accurate only as of
the date on the front cover of this offering memorandum. Our business, financial condition, results of
operations and prospects may have changed since that date. The contents of our website do not form part of
this offering memorandum. No representation or warranty, express or implied, is made by the initial purchasers
as to the accuracy or completeness of the information contained in this offering memorandum, and nothing
contained in this offering memorandum is, or may be relied upon as, a promise or representation by the initial
purchasers.
-i-
This offering memorandum contains summaries, believed to be accurate, of the terms we consider
material of certain documents, but reference is made to the actual documents for complete information, and all
such summaries are qualified in their entirety by such reference. Copies of certain documents referred to
herein will be made available to prospective investors upon request to us or the initial purchasers. You should
contact us or the initial purchasers with any questions about the offering or for additional information to verify
the information contained in this offering memorandum. The notes offered in this offering memorandum are
subject to restrictions on transferability and resale and may not be transferred or resold except as permitted
under the Securities Act and applicable state securities laws pursuant to registration or exemption from these
laws. You should be aware that you may be required to bear the financial risks of this investment for an
indefinite period of time. You must comply with all applicable laws and regulations in force in any jurisdiction
in connection with the distribution of this offering memorandum and the offer or sale of the notes. See
“Notice to Investors.”
In making an investment decision, you must rely on your own examination of us and the terms of this
offering, including the merits and risks involved. You should not construe the contents of this offering
memorandum as legal, business or tax advice. You should consult your own attorney, business advisor and tax
advisor as to legal, business, tax and related matters concerning this offer.
Neither the U.S. Securities and Exchange Commission (“SEC”) nor any state or foreign securities
regulator has approved or disapproved of these securities nor have any of the foregoing authorities passed upon
or evaluated the merits of this offering or the accuracy or adequacy of this offering memorandum. Any
representation to the contrary is a criminal offense.
Laws in certain jurisdictions may restrict the distribution of this offering memorandum and the offer
and sale of the notes. Persons into whose possession this offering memorandum or any of the notes are
delivered must inform themselves about, and observe, those restrictions. Each prospective investor in the notes
must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases or sells
the notes or possesses this offering memorandum and must obtain any consent, approval or permission
required under any regulations in force in any jurisdiction to which it is subject or in which it purchases or
sells the notes, and neither we nor the initial purchasers shall have any responsibility therefor.
Neither we nor the initial purchasers are making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR
A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW
HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND
NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR
EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE
SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR
TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
-ii-
NOTICE TO INVESTORS IN THE UNITED KINGDOM
This offering circular is for distribution only to, and is only directed at, persons who (i) have
professional experience in matters relating to investments falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Financial
Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (high net worth companies,
unincorporated associations, etc.) of the Financial Promotion Order or (iii) are persons to whom an
invitation or inducement to engage in investment activity (within the meaning of section 21 of the
Financial Services and Markets Act 2000) in connection with the issue or sale of any notes may
otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”).
This offering circular is directed only at relevant persons and must not be acted on or relied on by
persons who are not relevant persons. Any investment or investment activity to which this document
relates is available only to relevant persons and will be engaged in only with relevant persons.
-iii-
FORWARD-LOOKING STATEMENTS
Certain information included in this offering memorandum may be deemed to be “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements
relate to, among other things, expectations regarding refining margins, revenues, costs and expenses, margins,
profitability, cash flows, capital expenditures, liquidity and capital resources, our working capital requirements,
and other financial and operating items. These statements also relate to our industry, business strategy, goals
and expectations concerning our market position and future operations. We have used the words “anticipate,”
“believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and
similar terms and phrases to identify forward-looking statements, which speak only as of the date of this
offering memorandum.
Any forward-looking statements are not guarantees of our future performance and are subject to risks
and uncertainties that could cause actual results, developments and business decisions to differ materially from
those contemplated by these forward-looking statements. These statements are based on assumptions and
assessments made by our management in light of their experience and their perception of historical trends,
current conditions, expected future developments and other factors they believe to be appropriate. Although we
believe the assumptions upon which these forward-looking statements are based are reasonable, any of these
assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions
could be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of
which are beyond our control, which could result in our expectations not being realized or otherwise
materially affect our financial condition, results of operations, and cash flows. You are cautioned not to place
undue reliance on these forward-looking statements.
While it is not possible to identify all the factors that may cause our future performance to differ
from our expectations, these factors include, among others:
k
changes in global economic conditions and the effects of the global economic downturn on our
business and the business of our suppliers, customers, business partners and lenders;
k
the timing and extent of changes in commodity prices and demand for our refined products;
k
the availability and costs of crude oil, other refinery feedstocks and refined products;
k
changes in the price differentials between light sweet and heavy sour crude oils;
k
changes in the cost or availability of third-party vessels, pipelines and other means of transporting
crude oil, feedstocks and refined products;
k
changes in fuel and utility costs for our facilities;
k
operational hazards inherent in refining operations and in transporting and storing crude oil and
refined products;
k
disruptions due to equipment interruption or failure at our facilities or third-party facilities;
k
effects of and costs relating to compliance with state and federal environmental, economic, health
and safety, energy and other policies and regulations, and any changes thereto;
k
regulatory and market-driven product changes and related capital expenditure requirements and
capital project risks;
k
the price, availability and acceptance of alternative energy sources and alternative energy vehicles;
k
adverse rulings, judgments, or settlements in litigation or other legal or tax matters, including
unexpected environmental remediation costs in excess of any accruals;
k
actions of customers and competitors;
k
weather conditions affecting our operations or the areas in which our refined products are
marketed;
-iv-
k
hurricanes or other natural disasters affecting operations;
k
changes in insurance markets impacting costs and the level and types of coverage available;
k
direct or indirect effects on our business resulting from actual or threatened terrorist incidents or
acts of war; and
k
political developments.
Some of these factors, as well as others that may cause actual results, developments and business
decisions to differ materially from those contemplated by these forward-looking statements, are discussed in
greater detail under the heading “Risk Factors” beginning on page 16.
The forward-looking statements contained in this offering memorandum are made only as of the date
of this offering memorandum. We disclaim any duty to update any forward-looking statements.
-v-
INDUSTRY AND MARKET DATA
We obtained the market and competitive position data used throughout this offering memorandum
from our own research, surveys or studies conducted by third parties, publicly available information and
industry publications. The publicly available information and the surveys, studies and publications provided by
third parties generally state that the information contained therein has been obtained from sources believed to
be reliable, but they do not guarantee the accuracy and completeness of that information. While we believe
these sources are reliable, we have not independently verified the information, and cannot guarantee its
accuracy or completeness. Similarly, we believe our internal research is reliable, but it has not been verified by
any independent sources.
-vi-
SUMMARY
The following summary highlights selected information contained in this offering memorandum. You
should carefully read the entire offering memorandum, including the “Risk Factors” and the consolidated
financial statements and related notes included elsewhere in this offering memorandum, before making an
investment decision. Unless otherwise indicated or the context requires otherwise, all references in this
offering memorandum to “CITGO,” “our company,” “we,” “us,” “our,” or similar references mean CITGO
Petroleum Corporation and its consolidated subsidiaries.
Our Company
We are one of the largest independent crude oil refiners and marketers of refined products in the
United States as measured by refinery capacity. We own and operate three petroleum refineries with a total
rated crude oil capacity of approximately 749,000 barrels per day, or bpd, located in Lake Charles, Louisiana,
Corpus Christi, Texas and Lemont, Illinois. Our refining operations are supported by an extensive distribution
network, which provides reliable access to our refined product end-markets. We own 37 refined product
terminals spread across 17 states with a total storage capacity of 18.4 million barrels, and have equity
ownership of an additional 2.1 million barrels of refined product storage capacity through our joint ownership
of an additional 11 terminals. We also have access to over 150 third-party terminals through exchange,
terminaling and similar arrangements. We believe that we are the seventh largest branded gasoline supplier
within the United States as measured by sales volume, with an approximate 5% market share of the branded
gasoline market. There are approximately 6,500 independently owned and operated CITGO-branded retail
outlets located in our markets, which are located east of the Rocky Mountains. We and our predecessors have
had a recognized brand presence in the United States for approximately 100 years.
Our Refineries
We believe that we are the third largest and the most complex independent refiner in the United
States, with each of our refineries capable of processing large volumes of lower quality, heavy sour crude oils
into a flexible range of refined products. Refinery complexity refers to a refinery’s ability to process and
convert crude oil and other feedstocks into higher-value products and is commonly measured by the Nelson
Refinery Complexity Index. In general, a refinery with a higher complexity is more capable of processing
heavy sour crude oils in an economically efficient manner. Over the 2007 to 2009 period, an average of 71%
of the crude oils processed through our refineries were heavy sour crude oils. In 2009, our total yield of highvalue products was 84%, including gasoline, jet fuel, diesel, no. 2 fuel oil and petrochemicals. Our refineries
also produce industrial products, which are used in a wide variety of end-market applications. Each of our
refineries is supported by an extensive logistics network for receiving foreign and domestic crude oils via
marine facilities and pipelines, and for distributing products via connections to major product pipelines and
marine terminals.
Lake Charles, Louisiana - Our Lake Charles refinery has a rated crude capacity of 425,000 bpd and
is one of the largest refineries in the United States. The Lake Charles refinery, which has a Nelson Refinery
Complexity Index of 11.83, processed an average of 61% heavy sour crude oils over the 2007 to 2009 period.
Light fuel products represented approximately 83% of the Lake Charles refinery’s total product yield in 2009.
The Lake Charles refinery also produces petrochemicals, including refinery-grade propylene, benzene and
mixed xylenes, and industrial products including sulfur, residual oils and petroleum coke. The Lake Charles
refinery has direct marine access to crude oil and other feedstock transportation facilities and is connected via
company-owned or third-party pipelines to various crude oil terminals, as well as to the U.S. Strategic
Petroleum Reserve. For delivery of refined products, the Lake Charles refinery has injecting capabilities
directly into Colonial Pipeline and Explorer Pipeline, which are the major refined product pipelines supplying
the Northeast and Midwest regions of the United States, respectively. The Lake Charles refinery also delivers
refined products via bulk marine shipments to domestic and international markets.
Corpus Christi, Texas - Our Corpus Christi refinery has a rated crude capacity of 157,000 bpd. We
believe that our Corpus Christi refinery is one of the most complex fuel and petrochemical refineries in the
-1-
United States. The Corpus Christi refinery, which has a Nelson Refinery Complexity Index of 14.75,
processed an average of 94% heavy sour crude oils over the 2007 to 2009 period. The high complexity of the
Corpus Christi refinery enables it to produce a greater proportion of high-value petrochemicals, including
cumene, cyclohexane and aromatics such as benzene, toluene and mixed xylenes, than less complex refineries.
In 2009, light fuel products represented approximately 69% of the total product yield for the Corpus Christi
refinery, with petrochemicals representing approximately 10% and the balance comprised of industrial
products. The Corpus Christi refinery receives crude oil and other feedstocks primarily by marine transport,
and delivers refined products via marine and third-party pipeline facilities primarily to the Southeast region of
the United States and Texas.
Lemont, Illinois - Our Lemont refinery has a rated crude capacity of 167,000 bpd and is a major
supplier of transportation fuels primarily to the Upper Midwest region of the United States. We believe our
Lemont refinery has a logistical advantage to refineries located outside the Midwest with respect to both crude
oil purchases and product sales. The Lemont refinery’s deep conversion capacity enables it to process large
amounts of heavy sour Canadian crude oils, giving it an advantage over other Midwest refineries without
similar capabilities. The Lemont refinery also benefits from the lower transportation cost of Canadian heavy
crude oils and its location in a historically net import market for petroleum products. The Lemont refinery,
which has a Nelson Refinery Complexity Index of 11.55, processed an average of 66% heavy sour crude oils
over the 2007 to 2009 period. In 2009, light fuel products represented approximately 79% of the total product
yield for the Lemont refinery, with the remaining output comprised of petrochemicals, including benzene,
toluene and mixed xylenes, plus a range of aliphatic solvents, and industrial products. The majority of the
crude oil processed at our Lemont refinery is transported via third-party pipelines, but the refinery is also
capable of receiving crude oil and other feedstocks by barge and rail. Refined products are delivered through a
variety of third-party pipelines, rail and barges.
Our Marketing and Distribution Network
In 2009, our total product yield was comprised of 78% light fuels, 6% petrochemicals, and 16%
industrial products. Our products are supported by an extensive distribution network and are sold through a
variety of channels, including our branded independently owned and operated retail network, as well as in the
bulk market and directly and indirectly to large manufacturers, retailers and marketers.
Light Fuels. We sell gasoline to approximately 450 marketers who in turn sell to approximately 6,500
independently owned and operated CITGO-branded retail outlets located east of the Rocky Mountains. In
addition, we market jet fuel directly to major airline customers as well as to resellers for use at seven airports,
including major hub cities such as Boston and Miami. Our light fuel marketing activities are supported by an
extensive terminal distribution network throughout our service regions. We own or have equity ownership in
48 refined product terminals located across 22 states with a total storage capacity of approximately 21 million
barrels. In addition, we have access to over 150 third-party terminals through exchange, terminaling and
similar arrangements.
Petrochemicals, Industrial Products and Lubricants. We produce a diverse range of petrochemicals
and industrial products, including benzene, cumene, mixed xylenes, toluene, cyclohexane, refinery-grade
propylene, solvents, sulfur, and natural gas liquids. We sell our petrochemicals primarily to large chemical and
petrochemical manufacturers for use in the production of plastics, fibers and building materials, including
paints, adhesives and coatings. Industrial products are byproducts that are produced or consumed during the
refining process. We sell our industrial products to a wide variety of end-market users, including fuel blenders,
refiners, electric utilities and fertilizer, cement and steel producers. We also blend and market lubricants such
as industrial lubricants and automotive oils on a branded basis, with particular penetration in the retail markets
for 2-cycle and small engine oil, grease products, metal working fluids, and environmentally friendly and foodgrade lubricants.
-2-
Key Market Trends
We believe the following are key factors that will influence the long-term outlook for the overall
refining industry and the markets we serve.
Improving Economic Conditions. In 2008 and 2009, demand for refined petroleum products was
negatively impacted by, among other factors, the economic recession. Starting in the last quarter of 2009,
several key measures of economic conditions in the United States, including gross domestic product and nonfarm payrolls, began to improve. We believe that increases in these measures signal an improvement in general
economic conditions, which we believe will result in an increase in the demand for gasoline, distillate and
other refined products.
Capacity Rationalization. In response to excess refining capacity in the United States throughout
2009, many refiners reduced utilization rates and announced unit or refinery-wide shutdowns. We believe that
capacity rationalization will continue and could result in a reduction of overall refining capacity from current
levels. In particular, our competitors could continue to shut down certain of their refineries that we believe are
at a competitive disadvantage, including their less complex refineries, those requiring significant capital
expenditures in order to remain compliant with current or pending environmental regulations and changing
customer preferences, and those that are not well positioned geographically relative to their distribution
markets. In addition, many refiners have deferred or are considering deferring their investment plans due to
recent refining economics. We believe this capacity rationalization will contribute to keeping the supply of
petroleum products in balance with the longer-term trend in demand.
Increasing Light/Heavy Differentials. In 2009, the continuing economic recession led the
Organization of Petroleum Exporting Countries (“OPEC”) to reduce its production of crude oils. We believe
the reduction was disproportionately related to heavy sour crudes, and contributed to an increase in the price
of heavy sour crudes relative to light sweet crudes and a narrowing of the historical price differential between
light and heavy crudes. In 2009, the average price differential between light and heavy crudes, as illustrated by
the WTI-Maya differential, declined to one of its lowest levels in the past decade, averaging $5.20 per barrel
or 8.4% of WTI.1 By comparison, between 2000 and 2008 the annual average ranged from a low of $5.19 per
barrel to a high of $15.59 per barrel, or between 19.9% and 27.6% of WTI. As economic conditions improve
and demand for petroleum products increases, we believe that OPEC will relax production restrictions, which
should increase the supply of heavy sour crudes and contribute to a widening of the light/heavy differential,
resulting in improved margins for refiners that process significant amounts of heavy crudes.
Trend Towards Lower Quality Crudes. Historically, the crude slate available to U.S. refineries has
become heavier (lower API gravity) and more sour (higher sulfur content). Due to their higher density and
metals and sulfur content, heavy sour crudes require additional conversion units to enable processing into fuel
products. As a result, heavy sour crudes have historically sold at a discount to lighter, sweeter crude oils,
contributing to lower crude oil costs for refineries that can process these types of crudes. Currently, less than
half of U.S. refiners have coking units with the ability to convert heavy crudes into lighter transportation fuels.
Given the world’s current heavy sour crude reserves, such as those in Brazil, Canada, Iraq and Venezuela, the
proportion of lower quality crudes is expected to continue to trend upward over the long term. We believe this
upward trend should result in a widening of the light/heavy differential and improved margins for refineries
that have the ability to process these types of crudes.
Competitive Strengths
Industry-Leading Refining Capability with Significant Asset Value. We own and operate three largescale, high complexity refineries with a total rated crude capacity of approximately 749,000 bpd. We believe
that we are the third largest independent refiner in the United States by refinery capacity, and the most
complex independent refiner in the country. Our refineries have large coking units that enable us to process
1
The WTI-Maya differential is the spot price differential between the lighter, sweeter West Texas Intermediate (“WTI”) crude type and
the heavier, more sour Maya crude type. This differential is a recognized industry measure of the difference between light sweet crudes
and heavy sour crudes. The location basis for the spot WTI price is Cushing, Oklahoma, and the spot Maya price is FOB (“free on
board”).
-3-
substantial amounts of heavy sour crude oils, which are typically priced at a discount to lighter, sweeter crude
oils, giving us a cost advantage over competitors with less complex refineries. Our large downstream
conversion units, such as catalytic cracking, hydrotreating and desulfurization units, enable us to produce a
flexible range of refined products, and optimize margins in response to market changes. Over the 2007 to
2009 period, an average of 71% of the crude oils processed through our refineries were heavy sour crude oils.
In 2009, our total yield of high-value products was 84%, including gasoline, jet fuel, diesel, no. 2 fuel oil and
petrochemicals, with the remaining output comprised primarily of industrial products. According to a
December 2009 appraisal conducted by Turner, Mason & Company (“Turner Mason”), an independent
petroleum and petrochemicals consulting firm, the total asset value of our three refineries is estimated to be
$6 billion (excluding related working capital assets), based on typical industry valuation methodologies. Turner
Mason’s report is subject to a number of estimates and assumptions as discussed in more detail in “Risk
Factors — The appraisal of our three refineries may not reflect the value that would be realized if the
collateral agent were to foreclose on them.”
Strategic Access to Diversified Crude Supplies. The geographic location of our three refineries gives
us access to a diversified supply of crude oil types. In 2009, our crude oil supply was comprised of over
40 different types of crude from 16 different countries. Our Gulf Coast refineries (Lake Charles and Corpus
Christi) have direct marine access and pipeline connections, giving us the ability to optimize our use of low
cost crude oil. Due to its geographic location, our Lemont refinery, which processes mainly heavy sour
Western Canadian crude oils, is able to capture significant discounts on its crude oil costs compared to other
Midwest refineries whose processing capabilities are limited to lighter, sweeter crudes. The diversity of our
three locations also better positions us to withstand potential disruptions in supply and unexpected downtime
at one of the refineries. We are an indirect wholly owned subsidiary of Petróleos de Venezuela, S.A., or
“PDVSA,” the national oil company of the Bolivarian Republic of Venezuela, and we serve as PDVSA’s
principal outlet for heavy sour crude oil in the U.S. market. This relationship gives us access to one of the
largest proven oil reserves in the Western Hemisphere.
Integrated Product Marketing and Distribution System. We market and distribute refined products
through our 48 wholly or partly owned terminals, as well as over 150 additional third-party terminals which
we utilize under exchange, terminaling and similar arrangements. This terminal network enables us to optimize
our refined product distribution across more than 27 states in support of our extensive network of
independently owned and operated CITGO-branded retail locations. Sales through our retail marketing network
provide us with a more secure and consistent distribution outlet while also allowing us to capture additional
margin over the bulk spot market. Our broad refining footprint enables us to distribute our refined products to
different regions of the United States, including the Northeast, Southeast, Southwest and Midwest regions,
each of which has different pricing structures and growth dynamics; it also provides us with marine access to
international markets.
Industry-Leading Safety Track Record. We believe that we have one of the leading safety track
records in the refining industry. According to the National Petrochemical and Refiners Association, in four of
the five years between 2004 and 2008 we had the lowest total recordable incident rate among U.S. refiners
with more than 100 employees. Our safety record reflects our proactive focus on preventive safety measures.
We believe our strong safety focus reduces business, environmental and legal risks and enhances our operating
results.
Experienced, Proven Management Team. Our management team has an average of nearly 30 years of
experience in the energy industry and approximately 13 years with us. This experience underscores our
management’s ability to develop and implement strategies to align our operations with trends in the refining
industry. Since the end of 2008, our management team successfully reduced operating costs, improved our
working capital position and repaid outstanding revolver borrowings, leading to an improvement in our
liquidity position despite a challenging economic environment. We believe our management’s continued efforts
to improve the capabilities and reliability of our refineries and optimize our marketing and distribution
networks, while maintaining a strong focus on operational safety, position us to take advantage of improving
market conditions.
-4-
Our Strategy
Our primary objective is to maximize the profitability and cash flow of our refining and marketing
operations while maintaining our strong environmental and safety track record. Our strategy is focused on
efficiently processing a broad range of low cost, primarily heavy sour crude oils into high-value light fuels,
petrochemicals, and industrial products. We intend to achieve this objective through the following strategies:
Continue to Invest in Safe, Environmentally Sound and Reliable Operations. We will continue to fund
capital investments to maintain and improve our safety performance and to comply with increasingly stringent
environmental regulations. Our capital program also includes capital expenditures designed to upgrade our
operating units and increase the reliability of our refining operations. In 2006, we converted a hydrotreating
unit at our Lake Charles refinery to enable us to produce up to 91,300 bpd of ultra low sulfur diesel
(“ULSD”), and we are currently completing ULSD units at our Corpus Christi and Lemont refineries. By the
end of 2010 we will have completed significant capital expenditures to increase our production of ULSD,
which will help us meet demand for clean fuels products. In 2005, we also completed a project to increase the
crude oil distillation capacity of the Lake Charles refinery by 105,000 bpd.
Capitalize on Our Capability to Process Low Cost, Heavy Sour Crude Oil. We continually seek to
maximize our refining margin through our ability to process low cost, heavy sour crude and optimize our
crude slates. In 2009, the amount of heavy crude oil processed at our refineries was 441,000 bpd (69% of the
total crude oil processed), with an average API gravity of 21.3 degrees (well below the 25 degrees threshold
that defines heavy crudes) and an average sulfur content of 2.2% (well above the 0.5% that defines sour
crudes). We continuously review the economics of multiple available crudes and feedstocks and determine the
optimal crude slate and product yields for our refineries in order to maximize our refining margins.
Optimize Our Refining Production and Marketing Network. We continually seek to optimize the value
of our refining production by distributing our products in markets which can be supplied in a cost-advantaged
manner and by balancing our branded marketing volumes with our production and long-term contract supply
sources. In 2007, we implemented a plan to rationalize our branded marketing sales to focus on more
profitable geographical areas and third-party customers and subsequently divested non-strategic terminal and
pipeline assets. We also seek to maximize the value of our refining and distribution assets by marketing our
underutilized storage capacity at our owned terminals, installing ethanol blending facilities at certain of our
equity-owned terminals, and focusing our sales efforts in regions where our marketing network provides us
with a competitive advantage.
Maintain Focus on Improving Refinery Cost Structure. We seek to continue to perform in the top half
of all U.S. refineries on key cost measures, as reported in industry publications and other publicly available
information. Our management team has successfully reduced our cost structure in response to the economic
conditions resulting from the global recession. In 2009, we reduced refining and manufacturing costs by
approximately $386 million, with approximately $170 million attributable to lower energy costs and
$216 million attributable to non-energy costs, such as labor, third-party services and materials.
-5-
Organizational Structure
The following chart depicts our ownership and organizational structure as of March 31, 2010.
Petróleos de Venezuela, S.A.
(Venezuela)
Issuer
100%
Guarantors
PDV Holding, Inc.
(Delaware)
Pledgors
100%
Equity pledged as
collateral
PDV America, Inc.
(Delaware)
100%
(Delaware)
100%
VPHI
Midwest,
Inc.
100%
100%
100%
CITGO
AR2008
Funding
Company,
LLC
CITGO
Investment
Company
1%
PDV Midwest
Refining, L.L.C.
99%
CITGO Refining and
Chemicals Company
L.P.
Other
Subsidiaries
and Joint
Ventures
100%
CITGO Pipeline
Company
Other Subsidiaries
and Joint Ventures
Concurrent Financing Transactions
Concurrently with the closing of this offering, we expect to enter into a New Senior Credit Facility,
which is expected to include a $700 million senior secured revolving credit facility and a senior secured term
loan in an amount to be determined. We expect to use the proceeds of the New Senior Credit Facility, together
with the proceeds of this offering, to repay amounts outstanding under our Existing Senior Credit Facility and
to finance the purchase of our variable rate IRBs. The consummation of this offering is conditioned upon the
concurrent termination of the Existing Senior Credit Facility and entering into the New Senior Credit Facility.
See “Use of Proceeds,” “Capitalization” and “Description of Other Indebtedness.”
Principal Offices
Our principal executive offices are located at 1293 Eldridge Parkway, Houston, TX 77077, and our
telephone number is (832) 486 4000. Our website address is www.citgo.com. Information contained in or
linked from our website is not a part of this offering memorandum.
Risk Factors
Investing in the notes involves substantial risks. You should read carefully the section of this offering
memorandum entitled “Risk Factors” for a discussion of certain factors that you should consider before
investing in the notes.
-6-
The Offering
The summary below describes the principal terms of the notes. Certain of the terms and conditions described
below are subject to important limitations and exceptions. The “Description of the Notes” section of this
offering memorandum contains a more detailed description of the terms and conditions of the notes.
Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . CITGO Petroleum Corporation, a Delaware corporation.
Notes Offered . . . . . . . . . . . . . . . . . . . . $
aggregate principal amount of
due 2017.
$
aggregate principal amount of
due 2020.
% Senior Secured Notes
% Senior Secured Notes
Maturity . . . . . . . . . . . . . . . . . . . . . . . . The 2017 notes will mature on
, 2017.
The 2020 notes will mature on
, 2020.
Interest Rate . . . . . . . . . . . . . . . . . . . . . Interest on the 2017 notes will accrue from the date of their
issuance at a rate of
% per annum.
Interest on the 2020 notes will accrue from the date of their
issuance at a rate of
% per annum.
Interest Payment Dates . . . . . . . . . . . . . Interest on the notes will be payable semi-annually on
and
of each year, beginning on
, 2010.
Guarantees . . . . . . . . . . . . . . . . . . . . . . Each of our existing and future restricted subsidiaries that
guarantees any of our New Senior Credit Facility will
unconditionally guarantee the notes with guarantees that will rank
equal in right of payment to all of the senior indebtedness of such
guarantor. See “Description of the Notes – Guarantees.” As of
March 31, 2010, the total book value of the issuer and the
guarantors’ assets, net of intercompany items, represented
substantially all of the total consolidated book value of our assets.
Security . . . . . . . . . . . . . . . . . . . . . . . . The notes and the guarantees will be secured, subject to certain
exceptions and permitted liens, by a first-priority lien in the
following collateral, in each case to the extent such assets secure
our New Senior Credit Facility:
k
k
k
our refineries in Lake Charles, Louisiana, Lemont, Illinois
and, upon acquiring the subleased portion of the refinery
pursuant to our purchase option in 2011, our refinery in
Corpus Christi, Texas including, without limitation, all real
property and personal property comprising a part thereof;
all inventory owned by us and each guarantor; provided that
in the event of a foreclosure on inventory located outside the
battery limits of each of the refineries or of insolvency
proceedings, debt under our new revolving credit facility will
be paid with proceeds of such inventory prior to the notes;
all present and future shares of capital stock (or other
ownership or profit interests) of each of the guarantors
(limited, in the case of each entity that is a “controlled
foreign corporation” under the Internal Revenue Code, to a
pledge of 66% of the capital stock of each such first-tier
material foreign subsidiary to the extent the pledge of any
greater percentage would result in material adverse tax
-7-
consequences to us) and, subject to the execution of an
intercreditor agreement by the participants in our accounts
receivable securitization facility, our accounts receivable
subsidiary;
k
all of our present and future accounts receivable (other than
those accounts receivable pledged pursuant to any accounts
receivables securitization facility); and
k
all proceeds and products of the property and assets
described above.
The liens securing the notes and guarantees will rank equally with
the lien securing the New Senior Credit Facility. See “Description
of the Notes – Security.”
For a more detailed description of the collateral securing the notes,
see “Description of the Notes – Security.”
Intercreditor Agreement . . . . . . . . . . . . . An intercreditor agreement which will, among other things, define
the rights, duties, authority and responsibilities of the collateral
agent and the relationships among the creditors regarding their
interests in the collateral securing the notes, borrowings under the
New Senior Credit Facility and our obligations under our fixed rate
IRBs and certain other matters relating to the administration of
their security interests. The terms of the intercreditor agreement are
described under “Description of the Notes – Security – Intercreditor
Agreement.”
Ranking . . . . . . . . . . . . . . . . . . . . . . . . The notes and the guarantees will be our and the guarantors’ senior
secured obligations, secured to the extent described above. The
notes and the guarantees will rank:
k
equally with any existing and future senior indebtedness of
us and the guarantors (other than with respect to proceeds
from inventory located outside the battery limits of each of
the refineries, as to which the new revolving credit facility is
senior to the notes);
k
senior to any of our and the guarantors’ existing and future
indebtedness that is expressly subordinated to the notes and
the guarantees;
k
effectively senior to any of our and the guarantors’ existing
and future indebtedness that does not have a lien on the
assets securing the notes and the guarantees to the extent of
the value of the assets securing the notes and the guarantees;
k
effectively junior to any of our and the guarantors’ existing
and future secured indebtedness which is secured by assets
that are not collateral for the notes and the guarantees, to the
extent of the value of the assets securing such indebtedness;
and
k
structurally junior to all existing and future obligations of
our subsidiaries that are not guarantors, to the extent of the
value of such subsidiaries.
-8-
Optional Redemption . . . . . . . . . . . . . . . On or after , 2014, we may redeem some or all of the 2017
notes at any time at the redemption prices specified under
“Description of the Notes – Optional Redemption.”
Before , 2014, we may redeem some or all of the 2017 notes at
a redemption price equal to 100% of the principal amount of each
2017 note to be redeemed plus a make-whole premium described
in “Description of the Notes – Optional Redemption.”
In addition, at any time prior to , 2013, we may redeem up to
35% of the 2017 notes with the net cash proceeds from specified
equity offerings at a redemption price equal to
% of the
principal amount of each note to be redeemed, plus accrued and
unpaid interest, if any, to the date of redemption.
On or after , 2015, we may redeem some or all of the 2020
notes at any time at the redemption prices specified under
“Description of the Notes – Optional Redemption.”
Before , 2015, we may redeem some or all of the 2020 notes at
a redemption price equal to 100% of the principal amount of each
2020 note to be redeemed plus a make-whole premium described
in “Description of the Notes – Optional Redemption.”
In addition, at any time prior to , 2013, we may redeem up to
35% of the 2020 notes with the net cash proceeds from specified
equity offerings at a redemption price equal to
% of the
principal amount of each note to be redeemed, plus accrued and
unpaid interest, if any, to the date of redemption.
Mandatory Offer to Repurchase . . . . . . . If we undertake specific kinds of asset sales or experience specific
kinds of changes of control, we must offer to repurchase the notes
as more fully described in “Description of the Notes – Repurchase
at the Option of Holders.”
Certain Covenants . . . . . . . . . . . . . . . . . The indenture governing the notes will contain certain covenants,
including limitations and restrictions on our and our restricted
subsidiaries’ ability to:
k
make dividend payments or other restricted payments in
respect of capital stock and subordinated debt;
k
make investments;
k
incur or guarantee additional indebtedness;
k
create liens;
k
sell assets, including securities of our subsidiaries;
k
limit the ability of restricted subsidiaries to make payments
to us;
k
enter into certain types of transactions with shareholders and
affiliates;
k
designate subsidiaries as unrestricted subsidiaries; and
k
enter into mergers, consolidations, or sales of all or
substantially all of our assets.
-9-
These covenants are subject to important exceptions and
qualifications, which are described in “Description of the Notes –
Certain Covenants.” During any period in which the notes have
Investment Grade Ratings from both Rating Agencies (each as
defined) and no default has occurred and is continuing under the
indenture governing the notes, we will not be subject to many of
the covenants. See “Description of the Notes – Certain Covenants –
Suspended Covenants.”
Use of Proceeds . . . . . . . . . . . . . . . . . . We intend to use the net proceeds of this offering, together with
proceeds from the New Senior Credit Facility, to repay all
outstanding amounts under our Existing Senior Credit Facility, to
finance the purchase of our variable rate IRBs, and for other
general corporate purposes. See “Use of Proceeds.”
Transfer Restrictions . . . . . . . . . . . . . . . The notes have not been registered under the Securities Act and
may not be offered or sold except pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of
the Securities Act. See “Notice to Investors.”
No Registration Rights . . . . . . . . . . . . . We do not intend to file a registration statement for the public
resale of the notes or for a registered exchange offer with respect
to the notes.
No Established Market . . . . . . . . . . . . . The notes are a new issue of securities, and currently there is no
market for them and we do not expect a market to develop in the
foreseeable future. The initial purchasers have advised us that they
intend to make a market for the notes only if such a market
develops, and they are not obligated to do so. The initial
purchasers may discontinue any market-making in the notes at any
time in their sole discretion. Accordingly, we cannot assure you
that a liquid market will develop for the notes.
Tax Consequences . . . . . . . . . . . . . . . . . For a discussion of material United States federal income tax
consequences of an investment in the notes, see “Summary of U.S.
Federal Income Tax Considerations.” You should consult your own
tax advisor to determine the United States federal, state, local and
other tax consequences of an investment in the notes.
Original Issue Discount . . . . . . . . . . . . . The notes may be issued with original issue discount (“OID”) for
United States federal income tax purposes. If the notes are issued
with OID, in addition to the stated interest on the notes, a taxable
U.S. Holder (as defined in “Summary of U.S. Federal Income Tax
Considerations”) will be required to include such OID in gross
income as it accrues, in advance of the receipt of cash attributable
to such income and regardless of the U.S. Holder’s regular method
of accounting for United States federal income tax purposes. See
“Summary of U.S. Federal Income Tax Considerations.”
Risk Factors . . . . . . . . . . . . . . . . . . . . . You should carefully consider all of the information included in
this offering memorandum before making an investment decision,
including the discussion in the section entitled “Risk Factors” for
an explanation of certain risks of investing in the notes.
-10-
Summary Financial and Operating Data
The following tables present summary financial and operating information as of and for each of the
periods indicated. The summary financial data for the years ended December 31, 2007, 2008 and 2009 are
derived from our audited consolidated financial statements and notes thereto included in this offering
memorandum. The summary financial data as of March 31, 2010 and for the three months ended March 31,
2009 and 2010 are derived from our unaudited condensed consolidated financial statements and the notes
thereto included in this offering memorandum. The unaudited condensed consolidated financial statements
have been prepared on the same basis as the audited consolidated financial statements and include all
adjustments, consisting of only normal, recurring adjustments necessary for the fair presentation of the
information set forth therein. The historical results included below are not necessarily indicative of our future
performance. You should read this table in conjunction with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and our financial statements and the notes thereto included in
this offering memorandum.
Year Ended December 31,
2007(1)
2008(1)
2009
($ in millions)
Statement of Income Data:
Revenues:
Net sales and sales to affiliates . . . . . . . $38,015.0
Equity in earnings of affiliates . . . . . . .
35.4
Other income (expense), net . . . . . . . . .
54.0
Insurance recoveries(2) . . . . . . . . . . . . .
29.1
Gain on sale of assets . . . . . . . . . . . . . .
207.0
Gain on sale of investments in
affiliates . . . . . . . . . . . . . . . . . . . . . .
640.7
Total Revenues . . . . . . . . . . . . . . . . . 38,981.2
Cost of sales and expenses:
Cost of sales and operating expenses . . . 35,950.4
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . .
503.4
Interest expense, excluding capital
lease . . . . . . . . . . . . . . . . . . . . . . . . .
77.5
Capital lease interest charge . . . . . . . . .
3.3
Insurance recoveries(2) . . . . . . . . . . . . .
(17.3)
Total cost of sales and expenses . . . . 36,517.3
Income (loss) before income taxes
(benefit) . . . . . . . . . . . . . . . . . . . . . . . .
2,463.9
Income taxes (benefit) . . . . . . . . . . . . . . .
877.7
Net income (loss) . . . . . . . . . . . . . . . . . . . $ 1,586.2
Cash Flow Data:
Cash flows from operating activities . . . . . $ 685.5
Cash flows from investing activities . . . . .
(396.0)
Cash flows from financing activities . . . . .
(318.9)
Increase (decrease) during the period . . . . $ (29.4)
Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . .
Current liabilities . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . .
Net property, plant and equipment .
Total assets . . . . . . . . . . . . . . . . .
Total debt(3) . . . . . . . . . . . . . . . .
Total shareholder’s equity . . . . . . .
Three Months Ended
March 31,
2009
2010
$41,279.7
36.1
53.4
33.9
404.3
$24,931.7
13.9
20.6
-
$ 4,836.9
3.3
16.4
-
$ 7,291.1
8.3
33.2
-
41,807.4
24,966.2
4,856.6
7,332.6
40,135.1
24,938.4
4,743.9
7,366.0
353.0
373.3
135.4
113.5
49.3
2.2
(47.9)
25,315.3
12.6
0.6
(1.5)
4,891.0
22.2
1.2
(3.8)
7,499.1
1,245.5
444.1
$ 801.4
(349.1)
(147.7)
$ (201.4)
$
(34.4)
(13.7)
(20.7)
(166.5)
(38.8)
$ (127.7)
$ 1,169.5
330.3
(1,484.9)
$
14.9
$
$
108.7
2.7
(37.6)
40,561.9
860.6
(501.9)
(29.9)
$ 328.8
187.4
(225.9)
22.3
$ (16.2)
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
.............................................
-11-
$
93.8
(120.7)
(322.6)
$ (349.5)
$ 2,956.9
2,946.3
$
10.6
4,609.7
7,999.0
2,402.2
1,591.1
2007(1)
2008(1)
2009
Three Months
Ended
March 31,
2009
2010
$ 221.3
107.7
86.5
153.4
699
$ 120.7
112.7
(30.4)
27.8
392
($ in millions)
Other Financial Data:
Capital expenditures . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . .
EBITDA(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA(4) . . . . . . . . . . . . . . . . . . . .
Throughput margin(5) . . . . . . . . . . . . . . . . . . .
Selected Operating Data (thousands of barrels
per day):
Refining capacity . . . . . . . . . . . . . . . . . . . . . .
Crude oil throughput . . . . . . . . . . . . . . . . . . . .
Total throughput . . . . . . . . . . . . . . . . . . . . . . .
Utilization (%) . . . . . . . . . . . . . . . . . . . . . . . .
Selected Industry Markers ($ per barrel)(6):
Average price of WTI . . . . . . . . . . . . . . . . . . .
Gulf Coast 3/2/1 crack spread(7) . . . . . . . . . . .
Chicago 3/2/1 crack spread(8) . . . . . . . . . . . . .
Gulf Coast light/heavy crude oil spread(9) . . . .
Chicago light/heavy crude oil spread(10) . . . . .
$ 370.1
453.8
2,998.5
2,051.3
4,275
$ 485.4
459.0
1,815.9
1,319.1
3,481
$ 524.2
446.0
148.4
(6.6)
1,751
861
761
869
88%
749
650
768
87%
749
636
725
85%
749
632
729
84%
749
629
712
84%
$ 72.32
13.19
17.73
12.42
23.01
$ 99.57
9.37
11.21
15.69
18.89
$ 61.69
7.18
8.61
5.20
9.35
$ 42.91
9.09
9.84
4.47
6.85
$ 78.65
6.68
6.10
8.93
10.28
(1)
Includes asphalt refinery operations at our refineries in Paulsboro, New Jersey and Savannah, Georgia (which had a
total refining capacity of 112,000 bpd) through March 20, 2008, the date we sold the fixed assets and inventories and
certain related rights and obligations associated with these operations. Sales attributable to these operations amounted
to $200 million (or 0.5% of our total net sales and sales to affiliates) in 2008 and $1,882 million (or 5% of our total
net sales and sales to affiliates) in 2007, and their crude oil throughput was 45,000 bpd (or 1.5% of our total crude
oil throughput) in 2008 and 72,000 bpd (or 9.5% of our total crude oil throughput) in 2007.
(2)
We record business interruption insurance recoveries as revenues and property damage and general liability insurance
recoveries as offsets to cost of sales.
(3)
Total debt consists of the current and long-term portions of long-term debt and capital lease obligations. Total debt
includes $277.6 million of obligations represented by the amount of our receivables in which third parties that
participate in our accounts receivable securitization facility hold an undivided interest. Effective January 1, 2010, we
are required to treat these amounts as indebtedness pursuant to Accounting Standard Update (“ASU”) 2009-16,
“Transfers and Servicing — Accounting for Transfer of Financial Assets,” issued by the Financial Accounting
Standards Board (“FASB”). Total debt also includes $41.0 million of payables owed to a third party as of March 31,
2010 under a product financing arrangement in which we sold to and committed to purchase crude oil from the third
party.
-12-
(4)
We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. We define
Adjusted EBITDA as net income before interest expense, income taxes, depreciation and amortization, adjusted for
certain special items identified in the reconciliation table below. EBITDA and Adjusted EBITDA are used as
measures of performance by our management and are not measures of performance under generally accepted
accounting principles, or GAAP. EBITDA and Adjusted EBITDA should not be considered as substitutes for net
income (loss), cash flows from operating activities and other income or cash flow statement data prepared in
accordance with GAAP, or as measures of profitability or liquidity. Shown in the table below is a reconciliation of
EBITDA to net income (loss) and Adjusted EBITDA to EBITDA for each of the periods presented:
2007
2008
2009
Three Months
Ended March 31,
2009
2010
($ in millions)
Net income (loss) . . . . . . . . . . . . . . . . . .
Excluding the impacts of:
Interest expense, excluding capital lease .
Capital lease interest charge . . . . . . . . .
Income taxes (benefit) . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . .
. . . . . . . $1,586.2
.
.
.
.
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of assets and investments in
affiliates(a) . . . . . . . . . . . . . . . . . . . .
LIFO liquidation adjustment(b) . . . . . . . .
Social development donations(c) . . . . . . .
Asset impairment charges(d) . . . . . . . . . .
.
.
.
.
49.3
2.2
(147.7)
446.0
12.6
0.6
(13.7)
107.7
22.2
1.2
(38.8)
112.7
148.4
86.5
(30.4)
(287.4)
80.1
52.3
66.9
-
58.2
-
(6.6)
$ 153.4
......
2,998.5
1,815.9
.
.
.
.
.
.
.
.
$ (127.7)
108.7
2.7
444.1
459.0
.
.
.
.
.
.
.
.
$ (20.7)
77.5
3.3
877.7
453.8
.
.
.
.
.
.
.
.
$ (201.4)
.
.
.
.
.
.
.
.
.
.
.
.
$ 801.4
.
.
.
.
.
.
.
.
(847.7)
(240.3)
140.8
-
Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . $2,051.3
(404.3)
(116.0)
23.5
$1,319.1
$
$
27.8
(a) Gain on sale of assets and investments in affiliates in 2008 includes the gain on sale of assets resulting from the sale
of the fixed assets and inventory of our asphalt refinery operations in Paulsboro, New Jersey and Savannah, Georgia,
and the sale of an unrelated terminal. The gain on sale of assets and investments in affiliates in 2007 includes the
gain on sale of investments in affiliates resulting from the sale of our interests in Explorer Pipeline Company and
Colonial Pipeline Company and the sale of a wholly owned pipeline and four related terminals. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
(b)
Our hydrocarbon inventories are stated at the lower of cost or market, with cost determined using the last-in,
first-out, or LIFO, inventory valuation method. LIFO liquidation is the permanent elimination of all or part of
the LIFO base or old inventory layers when inventory quantities decrease.
(c) Social development donations include the donation of heating oil and cash donations to charitable organizations. We
adjust for this item in calculating Adjusted EBITDA because we believe excluding this item will enable investors
and analysts to compare our performance to our competitors in a more consistent manner. The 2007 donations were
significantly more than other years presented due to the terms of the 2008 heating oil program contract which
caused the 2008 program to be expensed in 2007. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Overview” and “Business – Social Development Programs.”
(d) We periodically evaluate the carrying value of long-lived assets or asset groups to be held and used when events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying
value of a long-lived asset or asset group is considered impaired when the separately identifiable anticipated
undiscounted net cash flow from such asset is less than its carrying value. The charge in 2009 primarily includes
the impairment of our lubes and wax plant in Lake Charles, Louisiana that was taken out of service in 2008.
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance
across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core
operating performance.
Adjusted EBITDA has limitations as an analytical tool, however. Some of these limitations are:
k
Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or
contractual commitments;
k
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
-13-
(5)
k
Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to
service interest or principal payments, on our indebtedness;
k
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have
to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
k
Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to
be indicative of our ongoing operations; and
k
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness
as a comparative measure.
Throughput margin is calculated as net sales and sales to affiliates less hydrocarbon costs, which includes crude oil
and intermediate feedstock costs and refined product purchases (adjusted for purchases in accordance with EITF
04-13, an accounting rule which requires the netting of all buy/sell transactions with the same counterparty made in
contemplation of each other). Throughput margin is not a measure of performance under GAAP, and should not be
considered as substitutes for net income (loss), cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, or as measures of profitability or liquidity. Shown in the table
below is a reconciliation of throughput margin for each of the periods presented. This measure may not be
calculated in the same way as similarly titled measures used by other companies.
2007
2008
Three Months
Ended March 31,
2009
2009
2010
$ 4,837
4,744
$ 7,291
7,366
($ in millions)
Net sales and sales to affiliates . . . . . . . . . . . . . . . . . .
Less cost of sales and operating expenses . . . . . . . . . .
Gross margin . . . . . . . . . . . .
Plus:
Refining and manufacturing
Other operating expenses . .
EITF 99-19(a) . . . . . . . . . .
$38,015
35,950
$41,280
40,135
..................
2,065
1,145
costs . . . . . . . . . . . . . .
..................
..................
1,885
637
(312)
1,913
648
(225)
Throughput margin . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)
$ 4,275
$ 3,481
$24,932
24,938
(6)
1,527
380
(150)
$ 1,751
$
93
(75)
415
218
(27)
418
90
(41)
699
$
392
Reflects sales classified in accordance with EITF 99-19, an accounting rule which requires reporting of
revenues as net, not gross, where an entity acts as an agent for another, and which only impacts other operating
expenses in the costs of sales and operating expenses section of our income statement.
We present throughput margin because we believe it assists investors and analysts by providing a more transparent
picture of our gross refining margin. Our calculation of throughput margin has certain limitations as an analytical
tool, however. Some of these limitations are:
k
our total throughput margin includes contributions from sales of refined products that we purchase (including
lubricants which we blend but do not produce in our refinery operations) in addition to products that we
produce in our refinery operations;
k
our net sales and sales to affiliates include contributions from marketing and other programs such as credit card
programs for which we receive certain commissions for transactions unrelated to our sale of refined products; and
k
other companies in our industry may calculate throughput margin and other similar measures differently than
we do, limiting its usefulness as a comparative measure.
(6)
The per barrel values are calculated using the average of daily prices for the applicable type of crude, gasoline or
distillate during the applicable period, as published by Platts (light and Gulf Coast heavy crudes, gasoline and
distillate) and Argus (Chicago heavy crude).
(7)
The Gulf Coast 3/2/1 crack (or WTI) spread is used as a benchmark for gauging changes in refining industry
margins based upon a hypothetical yield from a barrel of crude oil. The Gulf Coast 3/2/1 crack spread is calculated
as the value of two-thirds of a barrel of Gulf Coast regular unleaded gasoline plus the value of one-third of a barrel
of Gulf Coast no. 2 fuel oil minus the value of one barrel of WTI Cushing crude oil. Heavy crude refiners also
evaluate the Gulf Coast light/heavy crude spread.
(8)
The Chicago 3/2/1 crack (or WTI) spread is used as a benchmark for gauging changes in refining industry margins
based upon a hypothetical yield from a barrel of crude oil. The Chicago 3/2/1 crack spread is calculated as the value
-14-
of two-thirds of a barrel of Chicago regular unleaded gasoline plus the value of one-third of a barrel of Chicago
ULSD minus the value of one barrel of WTI Cushing crude oil. Heavy crude refiners also evaluate the Chicago
light/heavy crude spread.
(9)
(10)
The Gulf Coast light/heavy crude spread uses FOB Maya crude prices as its proxy for heavy crude, and WTI
Cushing crude prices as its proxy for light crude.
The Chicago light/heavy crude spread uses FOB Western Canadian Select (“WCS”) crude prices as its proxy for
heavy crude, and WTI Cushing crude prices as its proxy for light crude.
-15-
RISK FACTORS
An investment in the notes is subject to various risks, including the risks discussed below. These risks
should be considered carefully together with the information provided elsewhere in this offering memorandum
in evaluating an investment in the notes. The risks and uncertainties described in this offering memorandum
are not the only ones we face. Additional risks and uncertainties that we do not presently know about or that
we currently believe are immaterial could have a material adverse effect on our business, financial condition,
results of operations and prospects.
Risks Related to the Notes and Our Other Indebtedness
Our substantial indebtedness could impair our financial condition and our ability to fulfill our debt
obligations, including our obligations under the notes.
We have substantial indebtedness. As of March 31, 2010, after giving effect to this offering, the New
Senior Credit Facility and the repayment of the Existing Senior Credit Facility and purchase of our variable
rate IRBs as shown in “Capitalization,” we would have had total indebtedness of approximately $2.5 billion,
consisting of the notes, $300 million outstanding under the New Senior Credit Facility, $108 million in fixed
rate IRBs, $307 million in capital lease obligations and $319 million attributable to our accounts receivable
securitization facility and a product financing arrangement.
Our indebtedness could have important consequences to you. For example, it could:
k
make it more difficult for us to satisfy our obligations with respect to the notes and our other
indebtedness, which could in turn result in an event of default on the notes or such other
indebtedness;
k
require us to dedicate a substantial portion of our cash flow from operations to debt service
payments, thereby reducing the availability of cash for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes;
k
impair our ability to obtain additional financing in the future for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes;
k
diminish our ability to withstand a downturn in our business, the industry in which we operate or the
economy generally;
k
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which
we operate; and
k
place us at a competitive disadvantage compared to certain competitors that may have proportionately
less debt.
If we are unable to meet our debt service obligations, we could be forced to restructure or refinance
our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell
assets on satisfactory terms, or at all.
In addition, at March 31, 2010, after giving effect to this offering, the New Senior Credit Facility and
the repayment of the Existing Senior Credit Facility and purchase of our variable rate IRBs as shown in
“Capitalization,” $300 million of our debt (comprised of the anticipated principal amount of our new term
loan) would be variable rate debt, and we would have the capacity to incur up to $700 million of additional
variable rate debt under our new revolving credit facility. If market interest rates increase, such variable rate
debt will have higher debt service requirements, which would adversely affect our cash flow. While we may
enter into agreements limiting our exposure to higher interest rates, we do not currently have plans to do so
and any such agreements may not offer complete protection from this risk.
-16-
In addition to our current indebtedness, we may be able to incur substantially more indebtedness.
If we do, this could exacerbate the risks associated with our substantial indebtedness.
We and our subsidiaries may be able to incur substantially more debt in the future. Although the
indenture governing the notes and the New Senior Credit Facility contain restrictions on our incurrence of
additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and, under
certain circumstances, additional indebtedness incurred in compliance with these restrictions, including
additional secured indebtedness could be substantial. If we incur any additional indebtedness secured by liens
on the collateral that rank equally with those securing the notes, the holders of that indebtedness will be
entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation,
reorganization, dissolution of us or if we are wound up.
Also, these restrictions do not prevent us from incurring obligations that do not constitute
indebtedness. To the extent new indebtedness or such new obligations are added to our current levels, the risks
described above could intensify.
To service our indebtedness, we will require a significant amount of cash, which may not be
available to us.
Our ability to make payments on, or repay or refinance, our indebtedness, including the notes, and to
fund planned capital expenditures, will depend largely upon our future operating performance. Our future
performance, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make
payments on our indebtedness will depend on the satisfaction of the covenants in the indenture and the New
Senior Credit Facility, and other agreements we may enter into in the future. We cannot assure you that our
business will generate sufficient cash flow from operations or that future borrowings will be available to us
under the New Senior Credit Facility or from other sources in an amount sufficient to enable us to pay our
indebtedness, including the notes, or to fund our other liquidity needs.
We cannot assure you that we will be able to refinance any of our indebtedness, including the New
Senior Credit Facility, on commercially reasonable terms or at all. In particular, the New Senior Credit Facility
matures prior to the maturity of the notes. If we were unable to make payments or refinance our indebtedness
or obtain new financing under these circumstances, we would have to consider other options, such as the sale
of assets, the sales of equity and/or negotiations with our lenders to restructure the applicable indebtedness.
The indenture governing the notes and our other debt agreements may restrict, or market or business
conditions may limit, our ability to take some or all of these actions.
If we default on our obligations to pay our other indebtedness, we may not be able to make
payments on the notes.
If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary
to meet required payments of principal and premium, if any, and interest on our indebtedness other than the
notes, initially the New Senior Credit Facility, or if we otherwise fail to comply with the various covenants,
including financial and operating covenants, in the instruments governing our indebtedness, we could be in
default under the terms of the agreements governing such indebtedness. In the event of such default, the
holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable,
together with accrued and unpaid interest, the lenders under the New Senior Credit Facility could elect to
terminate their commitments, cease making further loans and institute foreclosure proceedings against our
assets, and we could be forced into bankruptcy or liquidation. Any default under our other indebtedness that is
not waived by the required lenders and the remedies sought by the holders of such indebtedness could make us
unable to pay principal and premium, if any, and interest on the notes and substantially decrease the market
value of the notes.
-17-
The agreements governing the notes and the New Senior Credit Facility contain various covenants
that impose restrictions on us that may affect our ability to operate our business and to make
payments on the notes.
The indenture governing the notes and the New Senior Credit Facility impose and future financing
agreements are likely to impose operating and financial restrictions on our activities. These restrictions require
us to comply with or maintain certain financial tests and limit or prohibit our ability to, among other things:
k
incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging
arrangements;
k
incur liens or agree to negative pledges in other agreements;
k
make loans and investments;
k
declare dividends, make payments or redeem or repurchase capital stock;
k
limit the ability of our subsidiaries to enter into agreements restricting dividends and distributions;
k
engage in mergers, acquisitions and other business combinations;
k
prepay, redeem or purchase certain indebtedness including the notes;
k
amend or otherwise alter the terms of our organizational documents, our indebtedness, including the
notes, and other material agreements;
k
sell assets (including in connection with sale leaseback transactions); and
k
enter into transactions with affiliates.
These restrictions on our ability to operate our business could seriously harm our business by, among
other things, limiting our ability to take advantage of financing, merger and acquisition and other corporate
opportunities. See “Description of Other Indebtedness” and “Description of the Notes.”
Various risks, uncertainties and events beyond our control could affect our ability to comply with
these covenants and maintain these financial tests. Failure to comply with any of the covenants in our existing
or future financing agreements could result in a default under those agreements and under other agreements
containing cross-default provisions. A default would permit lenders to accelerate the maturity of the
indebtedness under these agreements and to foreclose upon any collateral securing such indebtedness. Under
these circumstances, we might not have sufficient funds or other resources to satisfy all of our obligations,
including our obligations under the notes. In addition, the limitations imposed by financing agreements on our
ability to incur additional indebtedness and to take other actions might significantly impair our ability to
obtain other financing. We cannot assure you that we will be granted waivers or amendments to these
agreements if for any reason we are unable to comply with these agreements, or that we will be able to
refinance our indebtedness on terms acceptable to us, or at all.
We may not have the ability to raise the funds necessary to finance the change of control offer
required by the indenture governing the notes.
Upon the occurrence of certain kinds of change of control events, we will be required to offer to
repurchase all outstanding notes at 101% of the principal amount thereof plus accrued and unpaid interest, if
any, to the date of repurchase, unless all the notes have been previously called for redemption. Any holders of
other debt securities that we may issue in the future may also have this right. Our failure to purchase tendered
notes would constitute an event of default under the indenture governing the notes, which in turn would
constitute a default under the New Senior Credit Facility. In addition, the occurrence of a change of control
would also constitute an event of default under the New Senior Credit Facility. Any default under the New
Senior Credit Facility would result in a default under the indenture if the lenders accelerate the indebtedness
under the New Senior Credit Facility.
-18-
It is possible that we would not have sufficient funds at the time of the change of control to make the
required purchase of the notes.
In addition, certain important corporate events, such as leveraged recapitalizations that would increase
the level of other indebtedness, would not constitute a change of control under the indenture. See “Description
of the Notes – Repurchase at the Option of Holders – Change of Control.”
Holders of the notes and guarantees will share all collateral equally and ratably with the lenders
under our New Senior Credit Facility and holders of our fixed rate IRBs, and we will be permitted
to incur certain additional secured indebtedness under the indenture in the future. If there is a
default, the value of that collateral may not be sufficient to repay the holders of the notes and
guarantees, the lenders under our New Senior Credit Facility, holders of our fixed rate IRBs and
such additional secured indebtedness.
The notes and guarantees will be secured equally and ratably with our obligations under our New
Senior Credit Facility, our fixed rate IRBs and certain additional secured indebtedness we will be permitted by
the indenture to incur in the future. The indenture will permit the incurrence of additional secured
indebtedness which would share the collateral equally and ratably with the notes. See “Description of the
Notes – Certain Covenants – Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock” and “Description of the Notes – Certain Covenants – Liens.” As a result, if there is a default,
the value of the remaining collateral may not be sufficient to repay the holders of the notes and guarantees,
the lenders and other secured parties under our New Senior Credit Facility, and holders of our fixed rate IRBs
and any such additional secured indebtedness.
Even though the holders of the notes will benefit from a first-priority lien on the collateral that
secures our New Senior Credit Facility, the representative of the lenders under the New Senior
Credit Facility will initially control actions with respect to that collateral.
The rights of the holders of the notes with respect to the collateral that will secure the notes on a
first-priority basis will be subject to an intercreditor agreement among all holders of obligations secured by
that collateral on a first-priority basis, including the obligations under our New Senior Credit Facility and our
fixed rate IRBs.
Under the intercreditor agreement, any actions that may be taken with respect to the collateral,
including the ability to cause the commencement of enforcement proceedings against such collateral, to
control such proceedings and to approve amendments to documents relating to such collateral, will be at the
direction of the authorized representative for the lenders under the New Senior Credit Facility until (1) our
obligations under the New Senior Credit Facility are discharged (which discharge does not include certain
refinancings of the New Senior Credit Facility) or (2) if the authorized representative of the lenders under our
New Senior Credit Facility or the collateral agent has not commenced and is not diligently pursuing an
enforcement action, 120 days after the occurrence of an event of default under the indenture governing the
notes offered hereby and acceleration of the obligations under the notes, if the authorized representative of the
holders of the notes represents the largest outstanding principal amount of indebtedness secured by a firstpriority lien on the collateral (other than New Senior Credit Facility) and has complied with the applicable
notice provisions. BNP Paribas, the administrative agent under our New Senior Credit Facility, is also the
collateral agent for such facilities and will initially be the collateral agent for the noteholders as well.
However, even if the trustee as authorized representative of the holders of the notes offered hereby
gains the right to direct the collateral agent in the circumstances described in clause (2) above, such authorized
representative must stop doing so (and those powers with respect to the collateral would revert to the
authorized representative of the lenders under the New Senior Credit Facility) if the authorized representative
of the lenders under the New Senior Credit Facility notifies the authorized representative of the holders of the
notes that it has commenced and is diligently pursuing enforcement action with respect to the collateral.
-19-
In addition, the New Senior Credit Facility and the indenture will permit us to issue additional series
of notes or other debt that also have a first-priority lien on the same collateral. At any time that the authorized
representative of the lenders under the New Senior Credit Facility does not have the right to take actions with
respect to the collateral pursuant to the intercreditor agreement, that right passes to the authorized
representative of the holders of the next largest outstanding principal amount of indebtedness secured by a
first-priority lien on the collateral. If we issue additional first lien notes or other debt in the future in a greater
principal amount than the notes offered hereby, then the authorized representative for those additional notes or
other debt would be next in line to exercise rights under the first lien intercreditor agreement, rather than the
authorized representative for the holders of the notes offered hereby.
It is also possible that disputes may occur between the holders of the notes and lenders under our
New Senior Credit Facility or other secured parties as to the appropriate manner of pursuing enforcement
remedies with respect to the collateral which may delay enforcement of the collateral, result in litigation
and/or result in enforcement actions against the collateral that are not approved by the holders of the notes.
The collateral that will secure the notes on a first-priority basis will also be subject to any and all
exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the authorized
representative of the lenders under our New Senior Credit Facility during any period that such authorized
representative controls actions with respect to the collateral pursuant to the first lien intercreditor agreement.
The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely
affect the value of the collateral securing the notes as well as the ability of the collateral agent to realize or
foreclose on such collateral for the benefit of the holders of the notes.
Even though holders of the notes and guarantees will share all collateral equally and ratably with
the lenders under our New Senior Credit Facility, the lenders under the new revolving credit
facility will have priority to proceeds of certain inventory that constitutes collateral.
Under the terms of the intercreditor agreement by and among the collateral agent and the other
parties, from time to time thereto, the liens on the collateral securing the obligations under the New Senior
Credit Facility, our fixed rate IRBs and certain other obligations permitted under the indenture will generally
rank equally with the liens on such assets securing our and the guarantors’ obligations under the notes and the
guarantees. However, the intercreditor agreement provides that upon enforcement against certain inventory
located outside the battery limits of each of the refineries (including refined product inventory located in our
pipelines) the proceeds of such enforcement will first be used to pay obligations outstanding under our new
revolving credit facility prior to paying our new term loans and the notes offered hereby. See “Description of
the Notes – Security.”
We will in most cases have control over the collateral, and the sale of particular assets by us could
reduce the pool of assets securing the notes and the guarantees.
The security documents allow us to remain in possession of, retain exclusive control over, freely
operate, and collect, invest and dispose of any income from, the collateral securing the notes and the
guarantees. For example, so long as no default or event of default under the indenture would result therefrom,
we may, among other things, without any release or consent by the trustee (whether or not acting at the
direction of the holders), conduct ordinary course activities with respect to collateral, such as selling,
factoring, abandoning or otherwise disposing of collateral and making ordinary course cash payments
(including repayments of indebtedness) with the proceeds thereof. See “Description of the Notes – Security.”
Under various circumstances, including the following, collateral securing the notes will be released
without your consent or the consent of the trustee (whether or not acting at the direction of the holders).
k
a sale, transfer or other disposition of such collateral in a transaction not prohibited under the
indenture; and
k
in respect of the property and assets of a guarantor, upon the release or discharge of the pledge
granted by such guarantor which resulted in the obligation to become a guarantor with respect to
-20-
the notes other than in connection with a release or discharge by or as a result of payment in full
in respect of the New Senior Credit Facility.
In addition, the guarantee of a subsidiary guarantor will be released to the extent it is released under
our New Senior Credit Facility or in connection with a sale of such subsidiary guarantor in a transaction not
prohibited by the indenture.
The indenture will also permit us to designate one or more of our restricted subsidiaries that is a
guarantor of the notes as an unrestricted subsidiary. If we designate a guarantor as an unrestricted subsidiary
for purposes of the indenture governing the notes, all of the liens on any collateral owned by such subsidiary
or any of its subsidiaries and any guarantees of the notes by such subsidiary or any of its subsidiaries will be
released under the indenture but not necessarily under our New Senior Credit Facility. Designation of an
unrestricted subsidiary will reduce the aggregate value of the collateral securing the notes to the extent that
liens on the assets of the unrestricted subsidiary and its subsidiaries are released. In addition, the creditors of
the unrestricted subsidiary and its subsidiaries will have a senior claim on the assets of such unrestricted
subsidiary and its subsidiaries. See “Description of the Notes.”
The imposition of certain permitted liens will cause the assets on which such liens are imposed to
be excluded from the collateral securing the notes and the guarantees. There are also certain other
categories of property that are excluded from the collateral.
The indenture will permit liens in favor of third parties to secure additional debt, including purchase
money indebtedness and capital lease obligations, and any assets subject to such liens will be automatically
excluded from the collateral securing the notes and the guarantees. Our ability to incur purchase money
indebtedness and capital lease obligations is subject to the limitations as described in “Description of the
Notes.” In addition, not all of our assets will be pledged to secure the notes and the guarantees, and certain
categories of assets will be excluded from the collateral. Excluded assets include among others, accounts
receivables and inventory outside the battery limits of the refineries (including refined product inventory
located in our pipelines) that we transfer to accounts receivables or inventory securitization vehicles and
property on which we are prohibited from granting a lien pursuant to law or existing agreements. See
“Description of the Notes – Security” and “– Certain Definitions – Excluded Property.” If an event of default
occurs and the notes are accelerated, the notes and the guarantees will rank equally with the holders of other
unsubordinated and unsecured indebtedness of the relevant entity with respect to such excluded assets and
property.
The collateral is subject to property damage and condemnation risks, and insurance proceeds and
condemnation awards are not shared equally and ratably.
We are required to maintain insurance or otherwise insure against property loss or damage in a
manner appropriate and customary for our business. There are, however, certain losses that may be either
uninsurable or not economically insurable, in whole or in part. Insurance proceeds may not compensate us
fully for our losses. If there is a complete or partial loss of any collateral, we are permitted by the terms of the
indenture governing the notes and by our New Senior Credit Facility to apply the insurance proceeds to repair
or replace the collateral. If we determine not to do so, or in the event of a condemnation, the insurance
proceeds or condemnation award may not be sufficient to satisfy all or a proportionate part of the secured
obligations, including the notes and the guarantees. In the event of a total or partial loss to any of our
properties, certain items of equipment, fixtures and other improvements, and inventory may not be easily
replaced. Accordingly, even though there may be insurance coverage, the extended period needed to
manufacture or construct replacement for such items could cause significant delays.
Your rights in the collateral may be adversely affected by the failure to perfect security interests in
certain collateral in the future.
Applicable law requires that a security interest in certain tangible and intangible assets can only be
properly perfected and its priority retained through certain actions undertaken by the secured party. The
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collateral securing the notes includes cash and monies, for which a lien is perfected only if in the possession
of the secured creditor (or its agent). The liens in the collateral securing the notes may not be perfected with
respect to the claims of the notes if the collateral agent is not able to take the actions necessary to perfect any
of these liens on or prior to the date of the indenture governing the notes. There can be no assurance that the
collateral agent on behalf of the lenders under our New Senior Credit Facility has taken all actions necessary
to create properly perfected security interests in the collateral securing the notes, which, as a result of the
intercreditor agreement, may result in the loss of the priority of the security interest in favor of the noteholders
to which they would have been entitled as a result of such non-perfection. In addition, applicable law provides
that certain property and rights acquired after the grant of a general security interest, such as real property,
equipment subject to a certificate and certain proceeds, can only be perfected at the time such property and
rights are acquired and identified. We and our guarantors have limited obligations to perfect the noteholders’
security interests in specified after-acquired collateral. There can be no assurance that the collateral agent for
the notes will monitor, or that we will inform the collateral agent of, the future acquisition of property and
rights that constitute collateral, and that the necessary action will be taken to properly perfect the security
interest in such after-acquired collateral. The collateral agent for the notes has no obligation to monitor the
acquisition of additional property or rights that constitute collateral or the perfection of any security interest.
Such failure may result in the loss of the security interest in the collateral or the priority of the security
interest in favor of the notes against third parties.
The security interest in the collateral will be subject to practical challenges.
The security interest of the collateral agent will be subject to perfection, the consent of third parties,
priority issues, state law requirements and practical problems generally associated with the realization of
security interests in collateral. For example, the collateral agent may need to obtain the consent of a third
party to obtain or enforce a security interest in a contract. We cannot assure you that the collateral agent will
be able to obtain any such consent. We also cannot assure you that the consents of any third parties or
approval of governmental entities will be given or obtained when required to facilitate a foreclosure on such
assets. Accordingly, the collateral agent may not have the ability to foreclose upon those assets and the value
of the collateral may significantly decrease. We cannot assure you that foreclosure on the collateral will be
sufficient to acquire all assets necessary for operations or to make all payments on the notes.
Mortgages and lender’s title insurance policies covering the Corpus Christi refinery and a portion of
the Lemont refinery securing the notes will not be in place at the time of the issuance of the notes.
Our Corpus Christi refinery complex, which the Turner Mason appraisal has estimated is valued at
approximately $2.0 billion as of December 2009, consists of an East Plant, which we own, and a West Plant,
which we operate under a sublease expiring on January 31, 2011. We have an option to purchase the West
Plant for a nominal amount upon expiration of the sublease, and in 2009 we gave notice of our intent to
exercise this option. Within 120 days after we acquire title to the West Plant, we are required to put a
mortgage in place on the Corpus Christi refinery securing the notes and the New Senior Credit Facility and to
obtain lender’s title insurance on the Corpus Christi refinery in favor of the collateral agent.
We do not have a survey of the Corpus Christi refinery but we are required to deliver a new survey of
the Corpus Christi refinery prior to the end of 2010. Accordingly, although at the time of issuance of the
notes, owner’s and leasehold title policies will be issued insuring that we own the East Plant and sublease the
West Plant, because we will not have the new survey in place prior to the issuance of the notes, these policies
will not insure that there are no adverse circumstances affecting title to the property that would have been
disclosed by a survey.
Our Lemont refinery, which the Turner Mason appraisal has estimated is valued at approximately
$1.5 billion as of December 2009, includes various parcels of land which we own, as well as certain parcels
which we lease. Due to restrictions on our ability to grant liens on our leasehold interests in the leased land,
there can be no assurance that such interests will be included under the mortgage of the Lemont refinery
securing the notes. In addition, there is a title defect affecting one parcel of land included in the Lemont
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refinery; however, this defect will either be cured or the lender’s title insurance policy on the Lemont refinery
will cover this defect at the time of issuance of the notes.
Delivery of a mortgage of the Corpus Christi refinery after the issuance of the notes increases the
risk that the liens on that property for the benefit of the holders of the notes could be avoidable in bankruptcy,
as a preference on grounds that it constitutes a new transfer of property on account of antecedent debt or as a
fraudulent transfer on grounds that the debtor is not receiving fair consideration at the time of transfer.
The appraisal of our three refineries may not reflect the value that would be realized if the
collateral agent were to foreclose on them.
If we do not make payments of principal and interest on our secured indebtedness, including the
notes, when due, in order to obtain such payments the holders of our secured indebtedness may have to rely on
the proceeds from the sale of, or other exercise of remedies against, the collateral securing the indebtedness.
Those proceeds may be insufficient to cover payments due under our secured indebtedness, including
payments due under the notes.
Turner, Mason & Company (“Turner Mason”), an independent petroleum and petrochemicals
consulting firm, was engaged to complete an appraisal estimating the value of our three refineries, which will
comprise a substantial portion of the collateral securing the notes. Turner Mason estimated the total asset
value of our three refineries to be $6 billion (excluding related working capital assets) as of December 2009,
based on typical industry valuation methodologies. Although the appraisal is based upon a number of
estimates and assumptions that are considered reasonable by the appraiser issuing the appraisal, these
estimates and assumptions are subject to significant business and economic uncertainties and contingencies,
many of which are beyond our control or the ability of the appraiser to accurately assess and estimate. An
appraisal that is subject to different assumptions and limitations or based on different methodologies may
result in valuations that are materially different from those contained in Turner Mason’s appraisal.
An appraisal is only an estimate of value as of its date and should not be relied upon as a measure of
realizable value. The proceeds realized upon a sale of any of our refineries may be less than the appraised
value of the refineries at the time of any foreclosure by the collateral agent for many reasons, including the
potential for technological obsolescence, the condition of the refineries, general market and economic
conditions, the availability of buyers, petroleum prices, refining margins, and other key price relationships and
factors. Accordingly, we can provide no assurance that the proceeds realized upon any such exercise of
remedies would be sufficient to satisfy in full the payments due under our secured indebtedness, including
payments due under the notes.
There may not be sufficient collateral value to cover payment of all or any of the notes, especially
if we incur additional senior secured indebtedness, which will dilute the value of the collateral
securing the notes and guarantees.
The fair market value of the collateral is subject to fluctuations based on factors that include, among
others, the condition of the markets and sectors in which we operate, the ability to sell the collateral in an
orderly sale, the condition of the national and local economies, the availability of buyers and other similar
factors. The value of the assets pledged as collateral for the notes also could be impaired in the future as a
result of our failure to implement our business strategy, competition, or other future trends.
In the event of foreclosure on the collateral, the proceeds from the sale of the collateral may not be
sufficient to satisfy in full our obligations under the notes, the New Senior Credit Facility, our fixed rate IRBs
and any additional indebtedness secured equally and ratably with the notes. The amount to be received upon
such a sale would be dependent on numerous factors, including but not limited to the timing and the manner
of the sale.
By its nature, portions of the collateral may be illiquid and may have no readily ascertainable market
value. Accordingly, there can be no assurance that the collateral can be sold in a short period of time in an
orderly manner. A significant portion of the collateral includes assets that may only be usable, and thus retain
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value, as part of our existing operating business. Accordingly, any such sale of the collateral separate from the
sale of our business as an operating unit may not be feasible or of significant value.
To the extent that pre-existing liens, liens permitted under the indenture and other rights, encumber
any of the collateral securing the notes and the guarantees, those parties have or may exercise rights and
remedies with respect to the collateral that could adversely affect the value of the collateral and the ability of
the collateral agent to realize or foreclose on the collateral. Consequently, liquidating the collateral securing
the notes may not result in proceeds in an amount sufficient to pay any amounts due under the notes after also
satisfying the obligations to pay any creditors with superior liens. If the proceeds of any sale of collateral are
not sufficient to repay all amounts due on the notes, the holders of the notes (to the extent not repaid from the
proceeds of the sale of the collateral) would have only an unsecured, unsubordinated claim against our and the
guarantors’ remaining assets.
The security interest of the collateral agent is subject to practical problems generally associated with
the realization of security interests in collateral. For example, the collateral agent may need to obtain the
consent of a third party to enforce a security interest in certain of the assets consisting of the collateral, and
we cannot assure you that the collateral agent will be able to obtain any such consent. Accordingly, the
collateral agent may not have the ability to foreclose upon such assets, and the value of the collateral may
significantly decrease.
We or any guarantor may incur additional secured indebtedness under the indenture governing the
notes, including the issuance of additional notes or the incurrence of other forms of indebtedness secured
equally and ratably with the notes and/or borrowings under the New Senior Credit Facility and our fixed rate
IRBs, subject to certain specified conditions. See “Description of the Notes – Certain Covenants – Limitation
on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.” Any such incurrence
could dilute the value of the collateral securing the notes and guarantees.
The subsidiary guarantees could be avoided under fraudulent transfer laws, which could prevent
the holders of the notes from relying on that subsidiary to satisfy claims.
Under U.S. bankruptcy law and/or comparable provisions of state fraudulent transfer laws, a guarantee
can be voided, or claims under the guarantee may be subordinated to all other debts of that guarantor, if,
among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee or, in
some states, when payments become due under the guarantee, received less than reasonably equivalent value
or fair consideration for the incurrence of the guarantee and:
k
was insolvent or rendered insolvent by reason of such incurrence;
k
was engaged in a business or transaction for which the guarantor’s remaining assets constituted
unreasonably small capital; or
k
intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they
mature.
A guarantee may also be avoided, without regard to the above factors, if a court were to find that the
guarantor entered into the guarantee with the actual intent to hinder, delay or defraud its creditors.
A court would likely find that a guarantor did not receive reasonably equivalent value or fair
consideration for its guarantee if the guarantor did not substantially benefit directly or indirectly from the
issuance of the notes. If a court were to void a guarantee, then you may no longer have a claim against the
guarantor. In addition, the loss of a guarantee (other than in accordance with the terms of the indenture) could
constitute a default under the indenture, which default could cause all notes to become immediately due and
payable. Sufficient funds to repay the notes may not be available from other sources, including the remaining
guarantors, if any. In addition, the court might direct you to repay any amounts that you already received from
the subsidiary guarantor.
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The measures of insolvency for purposes of fraudulent transfer laws vary depending upon the
governing law. Generally, a guarantor would be considered insolvent if:
k
the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its
assets;
k
the present fair saleable value of its assets was less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as they became absolute and
mature; or
k
it could not pay its debts as they became due.
Each subsidiary guarantee will contain a provision intended to limit the guarantor’s liability to the
maximum amount that it could incur without causing the incurrence of obligations under its subsidiary
guarantee to be a fraudulent transfer. This provision may not be effective to protect the subsidiary guarantees
from being avoided under fraudulent transfer law.
To the extent that any of the subsidiary guarantees is avoided, then, as to that subsidiary, the guaranty
will not be enforceable.
In the event of our bankruptcy, the ability of the holders of the notes to realize upon the collateral
will be subject to certain bankruptcy law limitations.
The ability of holders of the notes to realize upon the collateral will be subject to certain bankruptcy
law limitations in the event of our bankruptcy. Under applicable U.S. bankruptcy laws, secured creditors are
prohibited from repossessing their security from a debtor in a bankruptcy case without bankruptcy court
approval and may be prohibited from disposing of security repossessed from such debtor without bankruptcy
court approval. Moreover, applicable federal bankruptcy laws generally permit the debtor to continue to retain
collateral, including cash collateral, even though the debtor is in default under the applicable debt instruments,
provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate
protection” may vary according to the circumstances, but is intended generally to protect the value of the
secured creditor’s interest in its collateral as of the commencement of the bankruptcy case and may include
cash payments or the granting of additional security if and at such times as the court, in its discretion,
determines that a diminution in the value of the collateral occurs as a result of the stay of repossession or the
disposition of the collateral during the pendency of the bankruptcy case. In view of the lack of a precise
definition of the term “adequate protection” and the broad discretionary powers of a U.S. bankruptcy court, we
cannot predict whether or when the collateral agent would be able to foreclose upon or sell the collateral or
whether or to what extent holders of notes would be compensated for any delay in payment or loss of value of
the collateral through the requirement of “adequate protection.”
Moreover, the collateral agent may need to evaluate the impact of the potential liabilities before
determining to foreclose on collateral consisting of real property, if any, because secured creditors that hold a
security interest in real property may be held liable under environmental laws for the costs of remediating or
preventing the release or threatened releases of hazardous substances at such real property. Consequently, the
collateral agent may decline to foreclose on such collateral or exercise remedies available in respect thereof if
it does not receive indemnification to its satisfaction from the holders of the notes.
In the event of a bankruptcy of us or any of the guarantors, then as to the obligor in bankruptcy,
holders of the notes may be deemed to have an unsecured claim to the extent that the obligor’s
obligations in respect of the notes exceed the fair market value of its property which secures the
notes.
In any bankruptcy proceeding with respect to us or any of the guarantors, it is possible that the
bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the
collateral with respect to the notes on the date of the bankruptcy filing is less than the then-current principal
amount of the notes. Upon a finding by the bankruptcy court that the notes were under-collateralized, the
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claims in the bankruptcy proceeding with respect to the notes could be bifurcated between a secured claim in
an amount equal to the value of the collateral and an unsecured claim with respect to the remainder of its
claim which would not be entitled to the benefits of security in the collateral. Other consequences of a finding
of undercollateralization would be, among other things, a lack of entitlement on the part of the holders of the
notes to receive post-petition interest and costs, including attorneys’ fees, and a lack of entitlement on the part
of the unsecured portion of the notes to receive “adequate protection” under federal bankruptcy laws. In
addition, if any payments of post-petition interest had been made at any time prior to such a finding of undercollateralization, those payments would be recharacterized by the bankruptcy court as a reduction of the
principal amount of the secured claim with respect to the notes.
The value of the collateral securing the notes may not be sufficient to secure post-petition interest.
In the event we are subject of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding, holders of the notes will only be entitled to post-petition interest under the U.S. bankruptcy law to
the extent that the value of their security interest in the collateral is greater than their pre-bankruptcy claim.
Holders of the notes that have a security interest in collateral with a value equal to or less than their prebankruptcy claim will not be entitled to post-petition interest under U.S. bankruptcy law. The value of the
noteholders’ interest in the collateral may not equal or exceed the principal amount of the notes.
The notes may be issued with original issue discount for U.S. federal income tax purposes.
If the issue price of the notes is less than their stated principal amount by more than a statutory de
minimis amount, the notes will be treated as being issued with OID for U.S. federal income tax purposes. If
notes are issued with OID, U.S. Holders (as defined in “Summary of U.S. Federal Income Tax
Considerations”) will have to annually report accrued OID, regardless of such holder’s regular method of
accounting for U.S. federal income tax purposes. Thus, any OID income on a note will be taxable before it is
received in cash. For more information, see “Summary of U.S. Federal Income Tax Considerations –
U.S. Holders – OID on the Notes.”
If the notes are issued with OID and a bankruptcy petition were filed by or against us, holders of
the notes may receive a lesser amount for their claim than they would have been entitled to receive
under the indenture governing the notes.
If a bankruptcy petition were filed by or against us under U.S. bankruptcy law after the issuance of
the notes, there is a risk that a bankruptcy court could determine that the claim by any holder of the notes for
the principal amount of the notes should be limited to an amount equal to the sum of:
k
the original issue price for the notes; and
k
that portion of the OID that does not constitute “unmatured interest” for purposes of the
Bankruptcy Code.
Generally, any OID that was not amortized as of the date of the bankruptcy filing may constitute
unmatured interest, which is not allowable as a claim in bankruptcy. Under U.S. bankruptcy law, the holders of
the notes would only have the right to receive interest accruing after the commencement of a bankruptcy
proceeding to the extent that the value of the collateral (after taking into account all prior liens on such
collateral) exceeds the claim of the holders of the notes for principal and pre-petition interest on the notes.
Accordingly, holders of the notes under these circumstances may receive a lesser amount than they would be
entitled to under the terms of the notes indenture, even if sufficient funds are available.
No public market exists for the notes and an active trading market may not develop for the notes,
which may hinder your ability to liquidate your investment.
The notes will constitute a new issue of securities for which there is no established trading market.
We have been informed by the initial purchasers that they intend to make a market in the notes after the
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offering is completed. However, the initial purchasers are not obligated to do so and may cease their marketmaking activities at any time. In addition, the liquidity of the trading market in the notes, and the market price
quoted for the notes, may be adversely affected by changes in the overall market for non-investment grade
securities, prevailing interest rates and by changes in our financial performance or prospects or in the financial
performance or prospects of companies in our industry generally. As a result, we cannot assure you that an
active trading market will develop or be maintained for the notes. If an active market does not develop or is
not maintained, the market price and liquidity of the notes may be adversely affected.
Even if a trading market for the notes does develop, you may not be able to sell your notes at a
particular time, if at all, or you may not be able to obtain the price you desire for your notes. If the notes are
traded after their initial issuance, they may trade at a discount from their initial offering price depending on
many factors, including prevailing interest rates, the market for similar securities, our credit rating, the interest
of securities dealers in making a market for the notes, the price of any other securities we issue, our
performance, prospects, operating results and financial condition, as well as of those of other companies in our
industry.
Historically, the market for non-investment grade debt has been subject to disruptions that have
caused substantial fluctuations in the price of securities. Therefore, even if a trading market for the notes
develops, it may be subject to disruptions and price volatility.
The notes are subject to transfer restrictions.
The notes have not been registered under the Securities Act or any state securities laws. Absent
registration, the notes may be offered or sold only in transactions that are not subject to or that are exempt
from the registration requirements of the Securities Act and applicable state securities laws. See “Notice to
Investors” for a description of restrictions on transfer of the notes.
Risks Related to Our Business and the Petroleum Industry
Volatile commodity prices in the refining industry may negatively affect our future operating results
and decrease our cash flow.
Our financial results are primarily affected by the relationship, or margin, between refined product
prices and the prices for crude oil and other feedstocks. The cost to acquire our feedstocks and the price at
which we can ultimately sell refined products depend on a variety of factors beyond our control. These factors
include the global supply of and demand for crude oil, gasoline and other refined products, which in turn are
subject to, among other things, changes in domestic and foreign economies, weather conditions, hurricanes and
other natural disasters, domestic and foreign political affairs, refinery capacities and utilization rates, the
availability and quantity of imports, the price and availability of alternative fuels and the extent of government
regulation. Historically, refining margins have been volatile, and we believe they are likely to continue to be
volatile in the future. Although an increase or decrease in prices for crude oil, other feedstocks and blending
components generally will result in a corresponding increase or decrease in prices for refined products, there
is generally a lag in the realization of the corresponding increase or decrease in prices for refined products. In
addition, even if we are able to pass on increases in crude oil and feedstock prices to our customers, demand
for our products may decrease as a result of price increases. Future volatility in the prices for crude oil could
have a material adverse effect on our financial condition and results of operations, since the margin between
refined products prices and feedstock prices as well as our sales volumes could decrease below the amount
needed for us to generate net cash flow sufficient to meet our needs.
In recent years, the prices of crude oil, other feedstocks, and refined products have fluctuated
substantially. This volatility has had, and may continue to further have, a negative effect on our results of
operations to the extent that the margin between refined product prices and feedstock prices narrows further,
as was the case throughout much of 2009.
Refining margins have also been extremely volatile in recent years. Our refining margins in particular
were significantly lower in 2009 compared to the 2000 to 2008 period due in part to narrower light/heavy
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differentials which we believe resulted from reduced production of heavy sour crude oils and related price
increases. In 2009, the average price differential between light and heavy crudes, as illustrated by the WTIMaya differential, averaged $5.20 per barrel or 8.4% of WTI, as compared to the 2000 to 2008 period, when
the annual average ranged from a low of $5.19 per barrel to a high of $15.59 per barrel, or between 19.9%
and 27.6% of WTI. This increase in the price of heavy crudes and the narrowing of the light/heavy
differentials contributed to lower margins for us and other refiners that process significant amounts of heavy
crudes.
The nature of our business requires us to maintain substantial quantities of crude oil and petroleum
product inventories. Crude oil and petroleum products are commodities. As a result, we have no control over
the changing market value of these inventories. Because our crude oil and petroleum product inventories are
stated at the lower of cost or market, with cost determined using the last-in, first-out, or LIFO, inventory
valuation method, if the market value of our inventory were to decline to an amount less than our LIFO cost,
we would record a write-down of inventory and a non-cash charge to cost of products sold.
In addition, the volatility in costs of fuel, principally natural gas, and other utility services, principally
electricity, used by our refineries affects operating costs. Fuel and utility prices have been, and will continue
to be, affected by factors outside our control, such as supply and demand for fuel and utility services in both
local and regional markets. Natural gas prices have historically been volatile. Typically, electricity prices
fluctuate with natural gas prices. Future increases in fuel and utility prices may have a negative effect on our
results of operations.
We rely on a single source of supply for a significant portion of our crude oil requirements.
We have historically purchased a significant portion of our crude oil requirements from PDVSA, our
parent, and its affiliates. In 2009, we purchased approximately 40% of our crude oil requirements under a
long-term contract with PDVSA which expires on March 31, 2012, with automatic renewals for successive
12-month terms unless terminated by either party. The supply agreement has market-based price terms and a
30-day payment term. We also purchased approximately 5% of our crude oil requirements in 2009 from
PDVSA and other affiliated Venezuelan suppliers on the spot market. Although we expect that, as long as
PDVSA remains our shareholder, the supply agreement will be renewed or replaced, and we will be able to
continue sourcing significant portions of our crude oil requirements from PDVSA and its affiliates, we cannot
assure you that this would be the case, or that any such renewal or replacement would be on commercially
competitive terms for us. In addition, as is customary for commodities supply agreements, our supply
agreement with PDVSA contains force majeure provisions which permit PDVSA to decrease or stop our
supply upon certain force majeure events and provisions that permit PDVSA to terminate the supply
agreement based upon certain defaults and other actions by and events affecting us. PDVSA has invoked the
force majeure provisions in the past and could do so in the future. If our supply of crude oil from PDVSA and
its affiliates were disrupted, we would be required to replace this supply with supply from third parties,
including spot market purchases. Depending on market conditions at the time of the disruption, these
purchases from third parties may be at higher prices than our purchases under our supply agreement with
PDVSA. In addition, purchases on the spot market may require payment on less than a 30-day term. Thus, if
we experience disruption to our purchases of crude under our PDVSA supply agreement, we could experience
additional volatility in our earnings, cash flow and liquidity.
Our crude oil supply could be disrupted as a result of factors related to the Bolivarian Republic of
Venezuela.
Global crude oil supplies and prices fluctuate due to many factors, including political and economic
events in major oil producing countries such as the Bolivarian Republic of Venezuela, and actions taken by the
Organization of Petroleum Exporting Countries, or OPEC, of which Venezuela is a member. Historically,
OPEC members have entered into agreements to reduce their production of crude oil. Such agreements have
sometimes increased global crude oil prices by decreasing global supply of crude oil. PDVSA has been
required in the past and could be required in the future to curtail its production of crude oil in response to a
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curtailment decision by OPEC. Such a curtailment of PDVSA’s production could be an event of force majeure
under our crude oil supply agreement, giving PDVSA the right to reduce crude oil deliveries under that
agreement for so long as such curtailment is in effect. At the same time, if the production cutbacks by OPEC
members cause a tightening of global crude oil supply and an increase in prices, we could experience
difficulty replacing our supply from PDVSA with third party purchases, and these purchases could be
primarily on the spot market at higher prices and on less favorable payment terms than our purchases under
our supply agreement with PDVSA. As a result, our earnings, cash flow and liquidity could be adversely
affected.
Similarly, the political and economic environment in Venezuela, including periods of significant
social turmoil and instability, has disrupted PDVSA’s operations in the past and could do so again in the
future, which could disrupt our crude oil supplies.
A significant interruption or casualty loss at one of our refineries could reduce our production.
Our business includes owning and operating refineries. As a result, our operations could be subject to
significant interruption if one of our refineries were to experience a major accident, be damaged by severe
weather or other natural disaster, or otherwise be forced to shut down. Any such shutdown would reduce the
production from the refinery. We have experienced accidents at our facilities that have required us to shut
down operations for significant periods of time. We also face risks of mechanical failure and equipment
shutdowns. In any of these situations, undamaged refinery processing units may be dependent on or interact
with damaged sections of our refineries and, accordingly, are also subject to being shut down. A shutdown of
any of our refining facilities for a significant period of time would be expected to have a material adverse
effect on our financial condition and results of operations.
Our insurance coverage may be inadequate to cover all losses.
Our assets and operations are subject to various hazards common to the industry, including
explosions, fires, spills, toxic emissions, mechanical failures, security breaches, labor disputes, maritime
hazards and natural disasters, any of which could result in loss of life or equipment, business interruptions,
environmental pollution, personal injury and damage to our property and that of others. As protection against
these hazards, we maintain property, casualty, and business interruption insurance in accordance with industry
standards. However, not all operating risks are insurable, and there can be no assurance that the insurance will
be available in the future or that insurance will cover all unanticipated losses in the event of a loss. The
occurrence of an event that is not fully covered by insurance could have a material adverse effect on our
business, financial condition and results of operations.
In the future, we may not be able to maintain or obtain insurance of the type and amount we desire at
reasonable rates. As a result of factors affecting the insurance market, insurance premiums with respect to
renewed insurance policies may increase significantly compared to what we are currently paying. In addition,
the level of coverage provided by renewed policies may decrease, while deductibles and/or waiting periods
may increase, compared to our existing insurance policies. If there is a total or partial loss of any of the assets
that secure the notes, we cannot assure holders of the notes that the proceeds received in respect thereof will
be sufficient to satisfy all the secured obligations, including the notes.
Our insurance program includes a number of insurance carriers. Disruptions in the global financial
markets have resulted in the deterioration in the financial condition of many financial institutions, including
insurance companies. We are not currently aware of any information that would indicate that any of our
insurers is unlikely to perform in the event of a covered incident. However, in light of this uncertainty and the
volatile current market environment, we can make no assurances that we will be able to obtain the full amount
of our insurance coverage for insured events.
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Environmental statutes and regulations impose significant costs and liabilities.
Our operations are subject to extensive federal, state and local environmental, health and safety laws
and regulations, including those governing discharges to the air and water, the handling and disposal of solid
and hazardous wastes and the remediation of contamination. Consistent with the experience of all
U.S. refineries, environmental laws and regulations have raised operating costs and necessitated significant
capital investments at our refineries. For example, in recent years we have made significant capital
expenditures to comply with low sulfur gasoline and diesel standards, to upgrade and close surface
impoundments and other solid waste management units, to respond to bans on the use of methyl tertiary butyl
ether, or MTBE, and other ether-based gasoline additives and to comply with a consent decree with the
U.S. Environmental Protection Agency, or the EPA, under its New Source Review program that is similar to
other consent decrees entered into with the EPA by other major refiners. We estimate that our capital
expenditures required to comply with the Clean Air Act and other environmental laws and regulations between
2010 and 2014 will be $665 million, including $282 million in 2010 in connection with completion of our
ULSD upgrades. We believe that existing physical facilities at our refineries are substantially adequate to
maintain compliance with existing applicable laws and regulatory requirements. Additional material
expenditures could be required in the future, however, as a result of new, or more stringent enforcement of
existing, environmental, health and safety, and energy laws, regulations or requirements. We also could be
required to address information or conditions that may be discovered in the future and require a response. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources” and “Business – Governmental Regulation.”
Various federal and state legislative and regulatory measures to address greenhouse gas emissions
(including carbon dioxide, methane and nitrous oxides) are in varying phases of discussion or implementation
at the federal, state and regional levels. These measures include EPA-enacted regulations to require reporting
of greenhouse gas emissions as well as proposed federal legislation (including cap-and-trade programs) and
state actions to develop programs which, among other things, would regulate or require reductions in
greenhouse gas emissions. The proposed actions could result in increased costs to (i) operate and maintain our
facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any greenhouse
gas emissions program. The proposed actions could also impact demand for refined products, thereby affecting
our financial condition and results of operations. In addition, certain states have adopted or are considering
adopting Low Carbon Fuel Standards which would in effect place a penalty on fuels made from carbon
intensive sources to curb greenhouse gas emissions. These types of regulations could adversely impact demand
for or the cost of our products derived from heavy crude oil from Venezuela used at our Lake Charles and
Corpus Christi refineries and from heavy crude oil from Canada used at our Lemont refinery.
In December 2007, the U.S. Congress passed the Energy Independence and Security Act, which,
among other things, modified the industry requirements for the Renewable Fuel Standard (“RFS”). In February
2010, the EPA issued final regulations implementing the standard. This standard requires the total volume of
renewable transportation fuels (including ethanol and biodiesel) sold or introduced in the United States to be
12.95 billion gallons in 2010 rising to 36 billion gallons by 2022. Both requirements could reduce demand
growth for petroleum products in the future. In the near term, the RFS presents ethanol production and
logistics challenges for both the ethanol and refining and marketing industries and may require additional
expenditures by us to accommodate increased ethanol use.
We expect that the refining business will continue to be subject to increasingly stringent
environmental and other laws and regulations that may increase the costs of operating our refineries above
currently projected levels and require future capital expenditures, including increased costs associated with
more stringent standards for air emissions, wastewater discharges and the remediation of contamination. It is
difficult to predict the effect of future laws and regulations on our financial condition or results of operations.
We cannot assure you that environmental or health and safety liabilities and expenses will not have a material
adverse effect on our financial condition or results of operations.
Failure to comply with applicable environmental, health and safety laws and regulations can lead,
among other things, to civil and criminal penalties and, in some circumstances, the temporary or permanent
-30-
curtailment or shutdown of all or part of our operations in one or more of our refineries or terminals. Failure
to modify our facilities and operations in order to comply with applicable environmental laws and regulations
requiring product changes could also adversely impact our sales volumes and our financial condition and
results of operations. We are a defendant in a variety of lawsuits under environmental laws, including one
brought by the EPA in Texas involving our Corpus Christi refinery seeking criminal penalties, a claim for civil
penalties by the EPA involving an alleged violation of the Clean Water Act involving our Lake Charles
refinery, and claims by private parties seeking damages for alleged personal injuries, property damage and/or
business interruption related to both our Corpus Christi and Lake Charles refineries. We believe we have valid
defenses to these claims and are vigorously defending them. However, there can be no assurance that the
ultimate resolution of these matters would not result in a material adverse effect on our financial condition or
results of operation. See “Business – Government Regulation” and “– Legal Proceedings.”
Permitting and regulatory matters may impact the operation of our refineries.
We are required to obtain certain permits and to comply with changing provisions of numerous
statutes and regulations relating to, among other things, business operations, the safety and health of
employees and the public, the environment, employment and hiring and anti-discrimination.
New statutes and regulations or new permit provisions may become applicable to our refineries,
resulting in the imposition of significant additional costs. Failure to comply with these permits, statutes and
regulatory requirements could result in significant civil or criminal liability and, in certain circumstances, the
temporary or permanent curtailment or shutdown of all or part of our operations or the inability to produce
marketable products. We cannot assure you that we will at all times be in compliance with all applicable
statutes and regulations or have all necessary permits. Such failure could adversely affect our financial
condition and results of operations.
Our operations are inherently subject to discharges or other releases of petroleum or hazardous
substances for which we may face significant liabilities.
Our operations, as with others in the industry in which we operate, are inherently subject to spills,
discharges or other releases of petroleum or hazardous substances that may give rise to liability to
governmental entities and private parties under federal, state or local environmental laws, as well as under
common law. Under certain laws such liability is strict and under certain circumstances joint and several. We
could incur substantial costs in connection with these liabilities, including cleanup costs, fines and civil or
criminal sanctions, and personal injury or property or natural resource damage claims. Spills, discharges or
other releases of contaminants have occurred from time to time in the course of our operations. We cannot
assure you that additional spills, discharges and other releases will not occur in the future, that governmental
agencies will not assess clean up costs or obligations or penalties against us in connection with any past or
future discharges or incidents, or that third parties will not assert claims against us for damages allegedly
arising out of any such past or future discharges or incidents.
Competitors who produce their own supply of crude oil and other feedstocks, make alternative fuels
or have greater financial resources may have a competitive advantage over us.
The refining industry is highly competitive with respect to both crude oil and other feedstock supply
and refined product markets. We compete with numerous other companies for available supplies of crude oil
and other feedstocks and for outlets for our refined products. We are not engaged in the petroleum exploration
and production business and therefore do not produce any of our crude oil feedstocks. Competitors that have
their own production are at times able to offset losses from refining operations with profits from production
operations, and may be better positioned to withstand periods of depressed refining margins or feedstock
shortages. A number of our competitors have greater financial and other resources than we do. These
competitors have a greater ability to enhance their facilities and operations and bear the economic risks
inherent in all phases of the refining industry. Some of our competitors have more efficient refineries and may
have lower per barrel crude oil refinery processing costs. In addition, we compete with other industries that
-31-
provide alternative means to satisfy the energy and fuel requirements of our industrial, commercial and
individual consumers. If we are unable to compete effectively with these competitors, our financial condition,
results of operations and business prospects could be materially adversely affected.
Our derivative activities could result in financial losses or could reduce our earnings.
To reduce our exposure to adverse fluctuations in the price of crude oil and refined products, we
currently, and expect to in the future, enter into derivative contracts for petroleum commodities, including
futures, forwards, options and swap contracts. Our open positions in commodity derivatives as of March 31,
2010 are summarized below in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Quantitative and Qualitative Disclosures About Market Risk – Non-Trading Commodity
Derivatives.” We do not designate any of our derivative instruments as hedges for accounting purposes, as
these instruments are designed to hedge risk associated with market price fluctuations or for trading purposes.
As of March 31, 2010, we have recorded all derivative contracts on our balance sheet at fair value. Changes in
the fair value of our derivative contracts are recorded under cost of sales and operating expense on our
statement of income. Accordingly, to the extent our positions in commodity derivatives may be material in the
future, our earnings could fluctuate significantly as a result of changes in fair value of our derivative contracts.
Our failure to maintain an adequate system of internal control over financial reporting could
adversely affect our ability to accurately report our results.
Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with GAAP. Effective internal controls are necessary for us to provide reliable financial reports
and effectively prevent material fraud. If we cannot provide reliable financial reports or prevent fraud, our
reputation and operating results could be harmed. Although we maintain internal control over financial
reporting, we are not currently subject to SEC internal control requirements. Our efforts to maintain our
internal controls may not be successful, and we may be unable to maintain adequate controls over our
financial processes and reporting in the future.
Risks Related to Our Relationship with PDVSA
We are indirectly owned by PDVSA, which is wholly owned by the Bolivarian Republic of
Venezuela.
PDVSA, a Venezuelan corporation 100% owned and controlled by the Bolivarian Republic of
Venezuela, owns, indirectly, 100% of our capital stock. The members of the board of directors of PDVSA are
appointed by the President of the Bolivarian Republic of Venezuela, and the Minister of the Popular Power for
Energy and Petroleum of the Bolivarian Republic of Venezuela is the president of PDVSA. Major corporate
actions of PDVSA may be subject to the approval of the Venezuelan government, as its sole shareholder.
However, the Bolivarian Republic of Venezuela is not legally liable for the obligations of PDVSA or the
obligations of its subsidiaries. We cannot assure you that PDVSA or the Bolivarian Republic of Venezuela will
not exercise their indirect control of us in a manner that might adversely affect your interests.
As our indirect shareholder, PDVSA has the ability to control the election and change the members of
our board of directors, indirectly control the selection of our senior management and exercise significant
influence over our management and policies. No assurance can be given that the Venezuelan government’s
policy as PDVSA’s sole shareholder and, ultimately, our shareholder, will not change in the future, or that
PDVSA or the Venezuelan government will not make sovereign decisions that could impact our commercial
affairs or management in a manner adverse to the interests of the holders of the notes. Similarly, in
circumstances involving a conflict of interest between PDVSA, as our sole owner, and the holders of the notes,
PDVSA may exercise the rights arising from its ownership interest in a manner that would benefit PDVSA to
the detriment of the holders of the notes.
-32-
The operations of PDVSA and its subsidiaries are subject to regulation and supervision by various
levels and agencies of the Venezuelan government, and there can be no assurance that the applicable legal or
regulatory framework will not change in a manner that could indirectly adversely affect us.
PDVSA’s sale or reduction to less than 50% of its ownership of our voting shares would be a change
of control under the agreement governing our New Senior Credit Facility, which would constitute an event of
default under such agreement and consequently, a cross-default under the indenture. Separately, if a change of
control (as defined under the indenture) occurs, we would be required to make an offer to purchase the notes.
In the event that we are required to make such an offer, there can be no assurance that we would have
sufficient funds available to purchase any of the notes and we may be required to refinance the notes. There
can be no assurance that we would be able to accomplish a refinancing. If we were unable to refinance the
notes, our failure to purchase the notes would constitute an event of default under the indenture governing the
notes.
Certain Other Risks
Volatility in the capital markets could affect the value of certain assets as well as our ability to
obtain capital.
Despite recent improvements in market conditions, global financial markets and economic conditions
have been, and continue to be, disrupted and volatile due to a variety of factors, including significant writeoffs in the financial services sector and, high levels of unemployment. In some cases, the markets have
produced downward pressure on credit capacity for certain issuers without regard to those issuers’ underlying
financial and/or operating strength. As a result, the cost of raising money in the capital markets has increased
substantially while the availability of funds from those markets has diminished significantly. In particular, as a
result of concerns about the stability of financial markets generally and the solvency of lending counterparties
specifically, the cost of obtaining money from the credit markets generally has increased as many lenders and
institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance
existing debt on similar terms or at all, and reduced, or in some cases ceased, to provide funding to borrowers.
Recently, a number of financial institutions have experienced serious financial difficulties and, in
some cases, have entered bankruptcy proceedings or are in regulatory enforcement actions. If the current credit
conditions of United States and international capital markets persist or deteriorate, the lending counterparties
under our New Senior Credit Facility and our Existing Senior Credit Facility and other debt instruments may
become unable or unwilling to fund borrowings under their credit commitments to us, which could have a
material adverse effect on our financial condition and our ability to borrow additional funds, if needed, for
working capital, capital expenditures and other corporate purposes. In addition, if current economic conditions
persist or deteriorate, we may be required to impair the carrying value of assets associated with derivative
contracts to account for non-performance by counterparties to those contracts.
The United States federal government, state governments and foreign governments have implemented
and are considering a broad range of measures to address the current negative economic conditions.
Nevertheless, government responses to the disruptions in the financial markets may not restore consumer
confidence, stabilize the markets or increase liquidity and the availability of credit.
Terrorist attacks and threats or actual war may negatively impact our business.
Our business is affected by general economic conditions and fluctuations in consumer confidence and
spending, which can decline as a result of numerous factors outside of our control. Terrorist attacks in the
United States, as well as sanctions and other events occurring in response to or in connection with them,
rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade
disruptions impacting our suppliers or our customers may adversely impact our operations. As a result, there
could be delays or losses in the delivery of supplies and raw materials to us, decreased sales of our products
and delays in our customers’ payment of our accounts receivable. Strategic targets such as energy-related
assets (which could include refineries such as ours) may be at greater risk of future terrorist attacks than other
-33-
targets in the United States. These occurrences could have an adverse impact on energy prices, including
prices for our products, which could drive down demand for our products. In addition, disruption or significant
increases in energy prices could result in government-imposed price controls. Any or a combination of these
occurrences could have a material adverse effect on our business, financial condition and results of operations.
Recourse against our directors for securities laws claims may be limited.
Certain members of our board of directors and certain of our executive officers are residents or
citizens of Venezuela, and all or a substantial portion of the assets of those directors and officers may be
located outside the United States. As a result, it may be difficult for investors to effect service of process
within the United States upon those directors and officers or to enforce, in U.S. courts, judgments obtained in
such courts and predicated upon the civil liability provisions of the U.S. federal securities laws. In addition,
PDVSA may replace members of our board of directors, which could in turn replace our executive officers, at
any time. This could make it even more difficult to effect service of process on our directors and executive
officers. We have been advised that liabilities predicated solely upon the civil liability provisions of the
U.S. federal securities laws in actions brought in Venezuela, in original actions or in actions for enforcement
of judgments of U.S. courts, may not be enforceable in Venezuela.
-34-
USE OF PROCEEDS
We expect the net proceeds from the offering of the notes to be approximately $1.45 billion, after
deducting the initial purchasers’ discounts and estimated offering expenses payable by us. We intend to use the
net proceeds of this offering, together with the proceeds of borrowings under our New Senior Credit Facility,
to repay all outstanding amounts under our Existing Senior Credit Facility, to finance the purchase of our
variable rate IRBs and for general corporate purposes.
The following table illustrates the anticipated sources and uses of funds for our pending financings,
including the offering of the notes.
Source of Funds
Amount
($ in millions)
New Revolving Credit Facility(1) . . . . . .
$
New Term Loan . . . . . . . . . . . . . . . . . .
300
Senior Secured Notes offered hereby(2) . .
1,500
Total Sources . . . . . . . . . . . . . . . . . . . .
(1)
(2)
$
1,800
Use of Funds
Repay Existing Senior Credit Facility
Purchase of variable rate IRBs . . . . .
Cash on balance sheet . . . . . . . . . . .
Transaction fees and expenses . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
Total Uses . . . . . . . . . . . . . . . . . . . . . .
Amount
($ in millions)
$
1,124
545
81
50
$
1,800
The new revolving credit facility is expected to have total availability of $700 million. Approximately $24 million is
expected to be utilized under letters of credit upon closing as adjusted for the purchase of variable rate IRBs.
This excludes the effect of any OID.
As noted above, the proceeds of this offering will be used to repay our Existing Senior Credit Facility,
which consists of our existing revolving credit facility and two term loan facilities, Term Loan A and Term
Loan B. As of March 31, 2010, we had no borrowings outstanding under our existing revolving credit facility;
however, letters of credit for an aggregate of $537 million, of which $513 million support our obligations
under our variable rate IRBs, were issued and outstanding. The existing revolving credit facility has a final
maturity and termination date of November 15, 2010. As of March 31, 2010, the outstanding principal amount
of the Term Loan A was $515 million and the interest rate was 5.25% and the outstanding principal amount of
the Term Loan B was $609 million and the interest rate was 5.25%.
As of March 31, 2010, our outstanding IRB obligations totaled $653 million, of which $545 million
related to variable rate IRBs and $108 million related to fixed rate IRBs. The IRBs bear interest at various
fixed and variable rates, which ranged from 1.1% to 8.0% as of March 31, 2010. On July 1, 2010, we intend
to use a portion of the proceeds of this offering and the New Senior Credit Facility to finance the purchase of
the $545 million of variable rate IRBs. Of this amount, $292 million will be purchased and held by us in
treasury until such time as we either repay or remarket these bonds as fixed rate IRBs. See “Description of
Other Indebtedness.”
-35-
CAPITALIZATION
The following table sets forth our cash and cash equivalents and capitalization as of March 31, 2010
on an actual basis and on an as adjusted basis to reflect this offering, our New Senior Credit Facility and the
application of the net proceeds therefrom as described above under “Use of Proceeds” as if these events had
occurred on March 31, 2010. This table should be read in conjunction with the information contained in
“Description of Other Indebtedness,” “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Liquidity and Capital Resources,” and our financial statements and the notes thereto
included in this offering memorandum.
As of March 31, 2010
Actual
As Adjusted
(Unaudited)
($ in millions)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Debt, including current portion:
Existing Senior Credit Facility:
Existing revolving credit facility . . . . . . . . . . . . . . . . . . . .
Term Loan A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Senior Credit Facility:
New revolving credit facility(1) . . . . . . . . . . . . . . . . . . . . .
New Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior secured notes offered hereby(2) . . . . . . . . . . . . . . . . .
Fixed rate IRBs due 2023 to 2032 . . . . . . . . . . . . . . . . . . . . .
Variable rate IRBs due 2024 to 2043(3) . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable facility(4) . . . . . . . . . . . . . . . . . . . . . . .
Other debt(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2
$
84.2
...........
...........
...........
515.0
608.7
-
...........
...........
...........
...........
...........
...........
...........
...........
107.9
544.8
307.2
277.6
41.0
300.0
1,500.0
107.9
307.2
277.6
41.0
Total debt, including current portion(1): . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder’s equity(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,402.2
1,591.1
2,533.7
1,576.1
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,993.3
$
4,109.8
(1)
The new revolving credit facility is expected to have total availability of $700 million, of which approximately
$24 million is expected to be utilized under letters of credit upon closing as adjusted for the purchase of variable
rate IRBs.
(2)
This excludes the effect of any OID.
(3) Proceeds of this offering and the New Senior Credit Facility will be used to finance the purchase of $544.8 million
of the variable rate IRBs, $292 million of which we will hold in treasury until we subsequently repay or remarket
these bonds as fixed rate IRBs.
(4) Represents the amount of our receivables in which third parties that participate in our accounts receivable
securitization facility hold an undivided interest. Effective January 1, 2010, we are required to treat these amounts
as indebtedness pursuant to ASU 2009-16 issued by the FASB.
(5) Represents payables owed to a third party as of March 31, 2010 under a product financing arrangement in which
we sold to and committed to purchase crude oil from the third party. The arrangement was settled in April 2010.
(6) March 31, 2010, as adjusted reflects the acceleration of deferred financing costs.
-36-
SELECTED HISTORICAL FINANCIAL DATA
The following tables present selected financial data as of and for each of the periods indicated. The
selected financial data as of December 31, 2005, 2006 and 2007 and for the years ended December 31, 2005 and
2006 are derived from our audited consolidated financial statements for those periods, which are not included
herein. The selected financial data as of December 31, 2006 and 2007 and for the years ended December 31, 2007,
2008 and 2009 are derived from our audited consolidated financial statements and notes thereto included in this
offering memorandum. The selected financial data as of March 31, 2010 and for the three months ended March 31,
2009 and 2010 are derived from our unaudited condensed consolidated financial statements and the notes thereto
included in this offering memorandum. The unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting
of only normal, recurring adjustments necessary for the fair presentation of the information set forth therein. The
historical results included below are not necessarily indicative of our future performance. You should read this table
in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and
our financial statements and the notes thereto included in this offering memorandum.
2005(1)
2006(1)
2007(1)
2008(1)
2009
Three Months Ended
March 31,
2009
2010
($ in millions, except ratio data)
Statement of Income Data:
Revenues:
Net sales and sales to
affiliates . . . . . . . . . . . . . . . . $ 41,421.8 $47,564.4 $ 38,015.0 $ 41,279.7 $ 24,931.7 $
Equity in earnings of
affiliates . . . . . . . . . . . . . . . .
129.6
203.1
35.4
36.1
13.9
Other income (expense), net . . .
36.1
47.7
54.0
53.4
20.6
Insurance recoveries(2) . . . . . . .
29.1
33.9
Gain on sale of assets . . . . . . . .
207.0
404.3
Gain on sale of investments in
affiliates . . . . . . . . . . . . . . . .
1,432.0
640.7
Total Revenues . . . . . . . . . 41,587.5 49,247.2 38,981.2 41,807.4 24,966.2
Cost of sales and operating
expenses . . . . . . . . . . . . . . . . 40,143.4 45,950.5 35,950.4 40,135.1 24,938.4
Selling, general and
administrative expenses . . . . .
327.9
450.8
503.4
353.0
373.3
Interest expense, excluding
capital lease . . . . . . . . . . . . .
108.6
75.7
77.5
108.7
49.3
Capital lease interest charge . . .
4.1
4.3
3.3
2.7
2.2
Insurance recoveries(2) . . . . . . .
(15.8)
(62.1)
(17.3)
(37.6)
(47.9)
Total cost of sales and
expenses . . . . . . . . . . . . 40,568.2 46,419.2 36,517.3 40,561.9 25,315.3
Income (loss) before income
taxes (benefit) and
cumulative effect of change
in accounting principle . . . . .
1,019.3
2,828.0
2,463.9
1,245.5
(349.1)
Income taxes (benefit) . . . . . . .
280.1
1,051.8
877.7
444.1
(147.7)
Cumulative effect of change in
accounting principle, net
of tax . . . . . . . . . . . . . . . . . .
(9.2)
Net income (loss) . . . . . . . . . . . $ 730.0 $ 1,776.2 $ 1,586.2 $ 801.4 $ (201.4) $
-37-
4,836.9 $ 7,291.1
3.3
16.4
-
8.3
33.2
-
4,856.6
7,332.6
4,743.9
7,366.0
135.4
113.5
12.6
0.6
(1.5)
4,891.0
22.2
1.2
(3.8)
7,499.1
(34.4)
(13.7)
(166.5)
(38.8)
(20.7) $
(127.7)
2005(1)
2006(1)
2007(1)
2008(1)
Three Months Ended
March 31,
2009
2010
2009
($ in millions, except ratio data)
Cash Flow Data:
Cash flows from operating
activities . . . . . . . . . . . . . . . . $ 1,339.9 $ 421.6 $
Cash flows from investing
activities . . . . . . . . . . . . . . . .
(463.7)
1,284.9
Cash flows from financing
activities . . . . . . . . . . . . . . . .
(716.7) (1,850.6)
Increase (decrease) during the
period . . . . . . . . . . . . . . . . . . $ 159.5 $ (144.1) $
685.5 $ 1,169.5 $
(396.0)
(318.9)
(29.4) $
330.3
(1,484.9)
14.9 $
860.6 $
187.4 $
93.8
(501.9)
(225.9)
(120.7)
(29.9)
22.3
(322.6)
328.8 $
(16.2) $
(349.5)
Balance Sheet Data:
Current assets . . . . . . . . . . . . . . $ 3,445.9 $ 3,328.6 $ 4,767.0 $ 3,222.6 $ 2,770.9 $ 2,952.5 $ 2,956.9
Current liabilities . . . . . . . . . . .
2,815.0
2,896.2
3,593.5
1,948.0
2,459.2
1,782.2
2,946.3
Working capital . . . . . . . . . . . . $ 630.9 $ 432.4 $ 1,173.5 $ 1,274.6 $ 311.7 $ 1,170.3 $
10.6
Cash and cash equivalents . . . . .
182.5
38.4
9.1
23.9
352.7
7.7
3.2
Net property, plant and
equipment . . . . . . . . . . . . . . .
4,099.8
4,231.0
4,130.7
4,241.4
4,313.5
4,297.4
4,609.7
Total assets. . . . . . . . . . . . . . . .
8,403.6
8,173.0
9,360.9
7,917.5
7,529.3
7,708.0
7,999.0
Total debt(3). . . . . . . . . . . . . . .
1,298.7
1,298.2
2,375.4
2,227.8
2,202.3
2,250.1
2,402.2
Total shareholder’s equity . . . . .
2,653.9
2,375.2
2,794.5
1,956.0
1,718.8
1,906.1
1,591.1
Other Financial Data:
Capital expenditures . . . . . . . . . $ 369.0 $ 432.1 $ 370.1 $ 485.4 $
Depreciation and amortization . .
398.2
413.7
453.8
459.0
EBITDA(4) . . . . . . . . . . . . . . .
1,521.0
3,321.7
2,998.5
1,815.9
Adjusted EBITDA(4) . . . . . . . .
1,451.0
1,948.1
2,051.3
1,319.1
Ratio of earnings to fixed
charges(5) . . . . . . . . . . . . . . .
8.00x
18.95x
14.53x
6.92x
524.2 $
446.0
148.4
(6.6)
-
221.3 $
107.7
86.5
153.4
-
120.7
112.7
(30.4)
27.8
-
(1)
Includes asphalt refinery operations at our refineries in Paulsboro, New Jersey and Savannah, Georgia (which had a total
refining capacity of 112,000 bpd) through March 20, 2008, the date we sold the fixed assets and inventories and certain
related rights and obligations associated with these operations. Sales attributable to these operations amounted to
$200 million (or 0.5% of our total net sales and sales to affiliates) in 2008, $1,882 million (or 5% of our total net sales and
sales to affiliates) in 2007, $2,087 million (or 4.4% of our total net sales and sales to affiliates) in 2006, and $1,610 million
(or 3.9% of our total net sales and sales to affiliates) in 2005. Crude oil throughput attributable to these operations was
45,000 bpd (or 1.5% of our total crude oil throughput) in 2008, 72,000 bpd (or 9.5% of our total crude oil throughput) in
2007, 80,000 bpd (or 10.7% of our total crude oil throughput) in 2006, and 79,000 bpd (or 9.5% of our total crude oil
throughput) in 2005.
(2)
(3)
Total debt consists of the current and long-term portions of long-term debt and capital lease obligations. Total debt includes
$277.6 million of obligations represented by the amount of our receivables in which third parties that participate in our
accounts receivable securitization facility hold an undivided interest. Effective January 1, 2010, we are required to treat
these amounts as indebtedness pursuant to ASU 2009-16, “Transfers and Servicing — Accounting for Transfer of Financial
Assets,” issued by the FASB. Total debt also includes $41.0 million of payables owed to a third party as of March 31, 2010
under a product financing arrangement in which we sold to and committed to purchase crude oil from the third party.
(4)
We define EBITDA as net income before interest expense, income taxes, depreciation and amortization. We define Adjusted
EBITDA as net income before interest expense, income taxes, depreciation and amortization, adjusted for certain special
items identified in the reconciliation table below. EBITDA and Adjusted EBITDA are used as measures of performance by
our management and are not measures of performance under generally accepted accounting principles, or GAAP. EBITDA
and Adjusted EBITDA should not be considered as substitutes for net income (loss), cash flows from operating activities
and other income or cash flow statement data prepared in accordance with GAAP, or as measures of profitability or
-38-
liquidity. Shown in the table below is a reconciliation of EBITDA to net income (loss) and Adjusted EBITDA to EBITDA
for each of the periods presented:
2005
Net income (loss) . . . . . . . . . . . . . .
Excluding the impacts of:
Interest expense, excluding capital
lease . . . . . . . . . . . . . . . . . . .
Capital lease interest charge . . . . .
Income taxes (benefit) . . . . . . . . .
Depreciation and amortization . . .
EBITDA . . . . . . . . . . . . . . . . . . .
Gain on sale of assets and
investments in affiliates(a) . . .
LIFO liquidation adjustment(b). .
Social development donations(c) .
Asset impairment charges(d) . . .
. . $ 730.0
.
.
.
.
108.6
4.1
280.1
398.2
75.7
4.3
1,051.8
413.7
77.5
3.3
877.7
453.8
108.7
2.7
444.1
459.0
...
1,521.0
3,321.7
2,998.5
1,815.9
.
.
.
.
.
.
.
.
2006
2007
2008
2009
($ in millions)
$1,776.2
$1,586.2 $ 801.4 $ (201.4)
.
.
.
.
.
.
.
.
(77.4)
7.4
-
Adjusted EBITDA . . . . . . . . . . . . . . . $1,451.0
(1,432.0)
(15.9)
62.6
11.7
$1,948.1
(847.7)
(240.3)
140.8
$2,051.3
(404.3)
(116.0)
23.5
$1,319.1
$
Three Months
Ended
March 31,
2009
2010
$ (20.7)
$ (127.7)
49.3
2.2
(147.7)
446.0
12.6
0.6
(13.7)
107.7
22.2
1.2
(38.8)
112.7
148.4
86.5
(30.4)
(287.4)
80.1
52.3
66.9
-
58.2
-
(6.6)
$ 153.4
$
27.8
(a)
Gain on sale of assets and investments in affiliates in 2008 includes the gain on sale of assets resulting from the sale of
the fixed assets and inventory of our asphalt refinery operations in Paulsboro, New Jersey and Savannah, Georgia, and
the sale of an unrelated terminal. The gain on sale of assets and investments in affiliates in 2007 includes the gain on
sale of assets resulting from the sale of our interests in Explorer Pipeline Company and Colonial Pipeline Company
and the sale of a wholly owned pipeline and four related terminals. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
(b)
Our hydrocarbon inventories are stated at the lower of cost or market, with cost determined using the last-in, first-out,
or LIFO, inventory valuation method. LIFO liquidation is the permanent elimination of all or part of the LIFO base or
old inventory layers when inventory quantities decrease.
(c)
Social development donations include the donation of heating oil and cash donations to charitable organizations. We
adjust for this item in calculating Adjusted EBITDA because we believe excluding this item will enable investors and
analysts to compare our performance to our competitors in a more consistent manner. The 2007 donations were
significantly more than other years presented due to the terms of the 2008 heating oil program contract which caused
the 2008 program to be expensed in 2007. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Overview” and “Business – Social Development Programs.”
(d)
We periodically evaluate the carrying value of long-lived assets or asset groups to be held and used when events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying value of a
long-lived asset or asset group is considered impaired when the separately identifiable anticipated undiscounted net
cash flow from such asset is less than its carrying value. The charge in 2009 primarily includes the impairment of our
lubes and wax plant in Lake Charles, Louisiana that was taken out of service in 2008.
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our performance across
reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating
performance.
Adjusted EBITDA has limitations as an analytical tool, however. Some of these limitations are:
k
Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or
contractual commitments;
k
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
k
Adjusted EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service
interest or principal payments, on our indebtedness;
-39-
(5)
k
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often
have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such
replacements;
k
Adjusted EBITDA does not reflect the impact of certain cash charges resulting from matters we consider not to be
indicative of our ongoing operations; and
k
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as
a comparative measure.
For the purposes of calculating the ratio of earnings to fixed charges, “earnings” consist of income before income taxes and
cumulative effect of accounting changes plus fixed charges (excluding capitalized interest), amortization of previously
capitalized interest and certain adjustments to equity in income of affiliates. “Fixed charges” include interest expense,
capitalized interest, amortization of debt issuance costs and a portion of operating lease rent expense deemed to be
representative of interest. Earnings were inadequate to cover fixed charges for 2009 and each of the three month periods
ended March 31, 2009 and March 31, 2010. The fixed charge coverage deficiency for these periods amounted to
$347 million, $35 million and $176 million, respectively.
-40-
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in
conjunction with our financial statements and the notes thereto included in this offering memorandum. The
following discussion includes certain forward-looking statements. See “Forward-Looking Statements” and
“Risk Factors.”
Overview
We are one of the largest independent crude oil refiners and marketers of refined products in the United
States as measured by refinery capacity. We own and operate three petroleum refineries with a total rated crude oil
capacity of approximately 749,000 bpd, located in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont,
Illinois. Our refining operations are supported by an extensive distribution network, which provides reliable access
to our refined product end-markets. We own 37 refined product terminals spread across 17 states with a total
storage capacity of 18.4 million barrels, and have equity ownership of an additional 2.1 million barrels of refined
product storage capacity through our joint ownership of an additional 11 terminals. We also have access to over
150 third-party terminals through exchange, terminaling and similar arrangements. We believe that we are the
seventh largest branded gasoline supplier within the United States as measured by sales volume, with an
approximate 5% market share of the branded gasoline market. There are approximately 6,500 independently owned
and operated CITGO-branded retail outlets located in our markets, which are located east of the Rocky Mountains.
We and our predecessors have had a recognized brand presence in the United States for approximately 100 years.
As with other refining companies, our earnings and cash flows are primarily affected by refined
product prices, which impacts our net sales, and crude oil and other feedstock prices, which impacts our cost
of sales. Crude oil, feedstocks, including primarily naphtha and catalytic feed, and refined products are all
commodities, the price of which depends on numerous factors. These factors include the supply and demand
for each of these commodities, which in turn depend on changes in domestic and foreign economies, weather
conditions, domestic and foreign political affairs, energy commodity investment activity, refinery capacities
and utilization rates, imports, alternative fuels and government regulation. Although the net sales and cost of
sales of refining companies may fluctuate significantly with movements in crude oil and refined products
prices, it is primarily the spread between crude oil and refined product prices that affects profitability in the
refining industry. The following table presents certain recognized industry markers that demonstrate the
margin relationship between specified crude oil inputs and refined products.
2007
2008
2009
Three Months Ended
March 31,
2009
2010
($ per barrel)
Selected Industry Markers(1):
Average price of WTI . . . . . . . . . . . . . . . . . . . . . . .
$72.32
$99.57
$61.69
$42.91
$78.65
Gulf Coast 3/2/1 crack spread(2) . . . . . . . . . . . . . . .
Gulf Coast gasoline crack spread(3) . . . . . . . . . . . .
Gulf Coast heat crack spread(4). . . . . . . . . . . . . . . .
Chicago 3/2/1 crack spread(5) . . . . . . . . . . . . . . . . .
Chicago gasoline crack spread(6). . . . . . . . . . . . . . .
Chicago distillate crack spread(7) . . . . . . . . . . . . . .
13.19
13.82
11.94
17.73
16.50
20.19
9.37
4.89
18.34
11.21
4.89
23.84
7.18
7.66
6.22
8.61
8.90
8.01
9.09
8.22
10.83
9.84
8.83
11.85
6.68
7.16
5.73
6.10
5.76
6.77
(1)
The per barrel values are calculated using the average of daily prices for the applicable type of crude, gasoline or
distillate during the applicable period, as published by Platts (light and Gulf Coast heavy crudes, gasoline and
distillate) and Argus (Chicago heavy crude).
(2)
The Gulf Coast 3/2/1 crack (or WTI) spread is used as a benchmark for gauging changes in refining industry margins
based upon a hypothetical yield from a barrel of crude oil. The Gulf Coast 3/2/1 crack spread is calculated as the
value of two-thirds of a barrel of Gulf Coast regular unleaded gasoline plus the value of one-third of a barrel of Gulf
-41-
Coast no. 2 fuel oil minus the value of one barrel of WTI Cushing crude oil. Heavy crude refiners also evaluate the
Gulf Coast light/heavy crude spread.
(3)
The Gulf Coast gasoline crack spread is calculated as the value of one barrel of Gulf Coast regular unleaded gasoline
less the value of one barrel of WTI Cushing crude oil.
(4)
The Gulf Coast heat crack spread is calculated as the value of one barrel of Gulf Coast no. 2 fuel oil less the value of
one barrel of WTI Cushing crude oil.
(5)
The Chicago 3/2/1 crack (or WTI) spread is used as a benchmark for gauging changes in refining industry margins
based upon a hypothetical yield from a barrel of crude oil. The Chicago 3/2/1 crack spread is calculated as the value
of two-thirds of a barrel of Chicago regular unleaded gasoline plus the value of one-third of a barrel of Chicago
ULSD minus the value of one barrel of WTI Cushing crude oil. Heavy crude refiners also evaluate the Chicago light/
heavy crude spread.
(6)
The Chicago gasoline crack spread is calculated as the value of one barrel of Chicago regular unleaded gasoline less
the value of one barrel of WTI Cushing crude oil.
(7)
The Chicago distillate crack spread is calculated as the value of one barrel of Chicago ULSD less the value of one
barrel of WTI Cushing crude oil.
Factors Impacting Our Profitability
Crude Oil and Feedstock Costs. Our crude oil and feedstock costs may vary from published industry
crude markers such as WTI crude prices due to the quality of crude oils that we purchase, location basis
differentials, the timing of our purchases and the mix of crude oils and feedstocks we purchase. Since our
crude oil purchases are heavily weighted toward heavy crude oils that historically have been purchased at
lower prices than light crude oils, our profitability is also significantly affected by the spread between light
crude oil and heavy crude oil prices, referred to as the “light/heavy crude oil spread” or the “light/heavy
differential.” Typically, wider spreads contribute to higher margins and profitability for us. Between 2000 and
2008, the light/heavy differential, as illustrated by the WTI-Maya differential (the price differential between
the lighter, sweeter WTI crude type and the heavier, more sour Maya crude type), ranged from a low of $5.19
per barrel to a high of $15.59 per barrel, or between 19.9% and 27.6% of WTI. In 2009, the differential fell to
$5.20 per barrel or 8.4% of WTI, one of the lowest differentials in nearly a decade.
The following table presents certain recognized industry markers that demonstrate the average price
differentials between certain lighter, sweeter crude oils and their heavier, more sour counterparts during the
indicated periods.
Year Ended
December 31,
2007
2008
2009
Three Months Ended
March 31,
2009
2010
($ per barrel)
Selected Industry Markers(1):
Average price of WTI . . . . . . . . . . . . . . . . . . . . . . . . . . $72.32
Gulf Coast light/heavy crude oil spread(2). . . . . . . . . . .
12.42
Chicago light/heavy crude oil spread(3) . . . . . . . . . . . .
23.01
$99.57 $61.69 $42.91
15.69
5.20
4.47
18.89
9.35
6.85
$78.65
8.93
10.28
(1)
The per barrel values are calculated using the average of daily prices for the applicable type of crude during the
applicable period, as published by Platts (light and Gulf Coast heavy crudes) and Argus (Chicago heavy crude).
(2)
The Gulf Coast light/heavy crude spread uses FOB Maya crude prices as its proxy for heavy crude, and WTI Cushing
crude prices as its proxy for light crude.
(3)
The Chicago light/heavy crude spread uses FOB Western Canadian Select (“WCS”) crude prices as its proxy for
heavy crude, and WTI Cushing crude prices as its proxy for light crude.
-42-
Product Prices. The prices we realize from the sale of refined products may vary from published
industry prices due to differences in the grades of products we sell, the geographic regions and locations where
we sell our products and the mix of the products we sell. As suggested by the historical Gulf Coast gasoline
and heat crack spreads presented above, refined product prices may behave differently over different periods of
time. This is the case for petrochemicals and industrial products, as well as gasoline and other light fuel
products.
Refining Margins. The refining margins we realize from our operations may vary from published
industry markers such as the “Gulf Coast gasoline crack spread” and the “Gulf Coast heat crack spread” due
to variances between our actual crude oil costs, feedstock costs and product sales values and the prices used to
calculate these industry markers. Likewise, our actual refining margins may vary from the “Gulf Coast 3/2/1
crack spread” for similar reasons, as well as because of differences between the proportions of products our
refineries produce versus the proportions of products assumed in the calculation of the industry crack spreads.
Although our actual refining margins may differ from these industry markers, we believe that over time our
actual margins tend to track these markers, and in that respect they serve as a general indicator of our
performance.
Refining margins are also affected by the cyclical nature of demand for refined products. Demand for
gasoline is generally higher during the summer months than during the winter months. This decrease in
demand during the winter months can lower gasoline prices during that time. As a result, our operating results
for the first and fourth calendar quarters are generally lower than those for the second and third calendar
quarters of each year. The effects of seasonal demand for gasoline are partially offset by increased demand for
heating oil during the winter months.
Other Factors Impacting Our Profitability. Other factors which may impact our normal operating
profitability include refinery utilization rates, refinery energy costs such as natural gas and electricity,
petrochemical margins, maintenance costs and wholesale branded marketing margins.
Non-operating factors, including LIFO inventory adjustments due to fluctuations in our inventory
levels, impairments of assets, other non-cash charges and receipts of insurance proceeds, may also impact our
profitability. Expenses associated with our social development programs can also impact our results from
period to period.
2008-2009 Market Environment
The deterioration in global economic conditions, which began in 2008 and persisted through 2009,
weakened demand for refined products, resulting in high inventory levels of crude and refined products. We
believe that OPEC producers responded by reducing crude production, and that this reduction was
disproportionately related to lower-priced heavy sour crudes. Together, these market factors acted to compress
our refined product margins and erode our historic crude differential advantage. These impacts were most
significant in the distillate market, which is closely tied to economic growth.
Outlook
Consistent with prevailing market sentiment, we anticipate that economic conditions will demonstrate
modest improvement in 2010. We believe that this improvement will result in increased product demand,
which will serve to improve product margins. In the near term, the resulting improvement in gasoline margins
in the United States is expected to be largely offset by the effects of mandated increases in the ethanol and
other renewable fuel content of gasoline.
As economic conditions improve and demand for petroleum products increases, we believe OPEC
will relax restrictions on production, which should increase the supply of heavy sour crudes and contribute to
a widening of the light/heavy differential, improving margins for complex refineries such as ours. Independent
of the economic climate, over the long term the proportion of lower quality crudes is expected to continue to
trend upward, which we expect will continue to benefit complex refineries beyond the initial economic
recovery.
-43-
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are discussed in Note 1 to our audited consolidated
financial statements included in this offering memorandum. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States requires that management apply
accounting policies and make estimates and assumptions that affect results of operations and the reported
amounts of assets and liabilities. The following areas are those that management believes are most critical to
the preparation of our financial statements and which require significant judgment and estimation because of
inherent uncertainty.
Environmental Expenditures. The costs to comply with environmental regulations are significant.
Environmental expenditures incurred currently that relate to present or future revenues are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations and that
do not contribute to current or future revenue generation are expensed. We continually monitor our compliance
with environmental regulations and respond promptly to issues raised by regulatory agencies. Liabilities are
recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably
estimated. Environmental liabilities are not discounted to their present value and are recorded without
consideration of potential recoveries from third parties, which are separately recorded in other noncurrent
assets. Subsequent adjustments to estimates, to the extent required, may be made as more refined information
becomes available.
Litigation and Injury Claims. Various lawsuits and claims arising in the ordinary course of business
are pending against us. The status of these lawsuits and claims are continually reviewed by external and
internal legal counsel. These reviews provide the basis on which we determine whether or not to record
accruals for potential losses. Accruals for losses are recorded when, in management’s opinion, such losses are
probable and reasonably estimable. If known lawsuits and claims were to be determined in a manner adverse
to us and in amounts greater than our accruals, such determinations could have a material adverse effect on
our results of operations in a given reporting period.
Inventories. Our crude oil and petroleum product inventories are carried at the lower of cost or
market. Cost is determined principally under the last-in, first-out or LIFO valuation method. Ending inventory
costs in excess of market value are written down to market values and charged to cost of products sold in the
period recorded. We determine market value inventory adjustments by evaluating crude oil and petroleum
product inventories on an aggregate basis by geographic region. The market value of our inventories exceeded
the LIFO cost by $1.8 billion at March 31, 2010.
Health Care Costs. The cost of providing health care to current employees and retired employees
continues to increase at a significant rate. Historically, we have absorbed the majority of these cost increases
which increase our liability and reduce our profitability. There is no indication that the trend of increasing
health care costs will be reversed in future periods. Our recorded liability for such health care costs is based
on actuarial calculations that could be subject to significant revision as the underlying assumptions regarding
future health care costs and interest rates change.
Pensions. Our recorded pension costs and liability are based on actuarial calculations, which are
dependent on assumptions concerning discount rates, expected rates of return on plan assets, employee
turnover, estimated retirement dates, salary levels at retirement and mortality rates. In addition, differences
between actual experience and the assumption also affect the actuarial calculations. While management
believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions
may significantly affect our future pension cost and liability.
Impairment of Long-Lived Assets. We periodically evaluate the carrying value of long-lived assets to
be held and used when events and circumstances warrant such a review. The carrying value of a long-lived
asset is considered impaired when the separately identifiable anticipated undiscounted net cash flow from such
asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the
anticipated net cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived
-44-
assets to be disposed of are determined in a similar manner, except that fair values are reduced for disposal
costs.
Commodity Derivatives. We balance our crude oil and petroleum product supply/demand and manage
a portion of our price risk by entering into petroleum commodity derivatives. We use futures, forwards, swaps
and options primarily to reduce our exposure to market risk. To manage these exposures, management has
defined certain benchmarks consistent with our preferred risk profile for the environment in which we operate
and finance our assets. We do not attempt to manage the price risk related to all of our inventories of crude oil
and refined products. We elect hedge accounting only under limited circumstances involving derivatives with
initial terms of 90 days or greater and notional amounts of $50 million or greater. We do not designate any of
our derivative instruments as hedges for accounting purposes. Fair value of derivatives are recorded in other
current assets or other current liabilities, as applicable, and changes in the fair value of derivatives not
designated in hedging relationships are recorded in cost of sales.
New Accounting Standards
Certain new financial accounting pronouncements have been issued that either have already been
reflected in the accompanying financial statements, or will become effective for our financial statements at
various dates in the future. These pronouncements are described in Notes 1 and 2 to our audited consolidated
financial statements and Note 2 to our unaudited condensed consolidated financial statements included in this
offering memorandum. Except as disclosed in these Notes, the adoption of new financial accounting
pronouncements has not had, and is not expected to have, a material effect on our financial condition or
results of operations, or on the presentation in our financial statements.
-45-
Results of Operations
Summary Consolidated Financial and Operating Data
The following tables summarize our consolidated financial data and certain key operating information
as of and for the years ended December 31, 2007, 2008 and 2009 and as of March 31, 2010 and for the three
months ended March 31, 2009 and 2010. The information for the years ended December 31, 2008 and 2007
includes the asphalt refinery operations of our refineries in Paulsboro, New Jersey and Savannah, Georgia
through March 20, 2008, the date we sold the fixed assets and inventories and certain related rights and
obligations associated with these operations. The financial results reflect adjustments to reclassify sales and
purchases of crude oil and other feedstocks and refined products in accordance with (i) EITF 04-13, an
accounting rule promulgated by the Emerging Issues Task Force of the Financial Accounting Standards Board,
which requires the netting of all buy/sell transactions with the same counterparty made in contemplation of
each other, and (ii) EITF 99-19, an accounting rule which requires the reporting of revenues as net, not gross,
where an entity acts as an agent for another. The following data should be read in conjunction with our
consolidated financial statements and the notes thereto included in this offering memorandum.
Statement of Income and Selected Operating Data
2007(1)
2008(1)
2009
Revenues:
Three Months Ended
March 31,
2009
2010
($ in millions, except operating data)
Net sales and sales to affiliates . . . . . . . . . . . . . $38,015.0 $41,279.7 $24,931.7 $ 4,836.9 $ 7,291.1
Equity in earnings of affiliates . . . . . . . . . . . . . .
35.4
36.1
13.9
3.3
8.3
Other income (expense), net . . . . . . . . . . . . . . .
54.0
53.4
20.6
16.4
33.2
Insurance recoveries(2) . . . . . . . . . . . . . . . . . . .
29.1
33.9
Gain on sale of assets . . . . . . . . . . . . . . . . . . . .
207.0
404.3
Gain on sale of investments in affiliates . . . . . . .
640.7
Total Revenues . . . . . . . . . . . . . . . . . . . . . . . 38,981.2
Cost of sales and operating expenses . . . . . . . . . 35,950.4
Selling, general and administrative expenses. . . .
503.4
Interest expense, excluding capital lease . . . . . . .
77.5
Capital lease interest charge. . . . . . . . . . . . . . . .
3.3
Insurance recoveries(2) . . . . . . . . . . . . . . . . . . .
(17.3)
41,807.4
24,966.2
4,856.6
7,332.6
40,135.1
353.0
108.7
2.7
(37.6)
24,938.4
373.3
49.3
2.2
(47.9)
4,743.9
135.4
12.6
0.6
(1.5)
7,366.0
113.5
22.2
1.2
(3.8)
Total cost of sales and expenses . . . . . . . . . . . 36,517.3
Income (loss) before income taxes (benefit) . . . . . . 2,463.9
Income taxes (benefit). . . . . . . . . . . . . . . . . . . . . .
877.7
40,561.9
1,245.5
444.1
25,315.3
(349.1)
(147.7)
4,891.0
(34.4)
(13.7)
7,499.1
(166.5)
(38.8)
(20.7)
$ (127.7)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,586.2
Refining capacity (thousands of barrels per day) . . . .
Crude oil throughput (thousands of barrels per day). .
Total throughput (thousands of barrels per day) . . .
Utilization (%) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average price per gallon of gasoline(3) . . . . . . . . . $
Average cost per barrel of crude oil(4) . . . . . . . . . . $
(1)
$
861
761
869
88%
2.14 $
64.34 $
801.4 $ (201.4)
749
650
768
87%
2.54 $
90.33 $
$
749
636
725
85%
1.73 $
58.52 $
749
632
729
84%
1.29 $
39.95 $
749
629
712
84%
2.09
76.25
Includes asphalt refinery operations at our refineries in Paulsboro, New Jersey and Savannah, Georgia (which had a
total refining capacity of 112,000 bpd) through March 20, 2008, the date we sold the fixed assets and inventories and
-46-
certain related rights and obligations associated with these operations. Sales attributable to these operations amounted
to $200 million (or 0.5% of our total net sales and sales to affiliates) in 2008 and $1,882 million (or 5% of our total
net sales and sales to affiliates) in 2007, and crude oil throughput was 45,000 bpd (or 1.5% of our total crude oil
throughput) in 2008 and 72,000 bpd (or 9.5% of our total crude oil throughput) in 2007.
(2)
(3)
Average price per gallon of gasoline is calculated by dividing our total gasoline sales revenues for the applicable
period by our total gasoline sales volume for the same period and may not be calculated in the same way as similarly
titled measures used by other companies. Sales revenues and volumes used for these calculations do not reflect sales
reclassified in accordance with EITF 04-13 and EITF 99-19 and, as a result, average price per gallon of gasoline is a
non-GAAP performance measure which may not be calculated in the same way as similarly titled measures by other
companies. We present this measure here because securities analysts, investors and other interested parties use it in
evaluating companies in our industry. This measure should not be considered an alternative to operating income,
revenues or any other measure of financial performance presented in accordance with GAAP.
(4)
Average cost per barrel of crude oil is calculated by dividing our total crude oil cost for the applicable period by our
total volume of refinery crude inputs for the same period and may not be calculated in the same way as similarly
titled measures used by other companies. Costs and volumes used for these calculations do not reflect purchases
reclassified in accordance with EITF 04-13 and EITF 99-19 and, as a result, average cost per barrel of crude oil is a
non-GAAP performance measure which may not be calculated in the same way as similarly titled measures by other
companies. We present this measure here because securities analysts, investors and other interested parties use it in
evaluating companies in our industry. This measure should not be considered an alternative to costs of sales,
operating expenses or any other measure of financial performance presented in accordance with GAAP.
-47-
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
..........
..........
..........
..........
..........
..........
Total refined product sales . . . . . .
EITF 04-13 reclassification(1) . . . . .
Other sales . . . . . . . . . . . . . . . . . . .
Net sales and sales to affiliates . .
Cost of Sales and Operating
Expenses:
Crude oil . . . . . . . . . . . . . . . . . . . .
Refined products . . . . . . . . . . . . . . .
Intermediate feedstocks . . . . . . . . . .
Refining and manufacturing costs . .
Other operating expenses . . . . . . . . .
Total cost of sales and operating
expenses . . . . . . . . . . . . . . . . .
Selected Operating Data:
Throughput margin(3) . . . . . . . . . . .
Throughput margin per barrel(3) . . .
Three Months Ended
March 31,
2009
2009
2010
($ in millions, except
per barrel data)
Refined Product Sales Revenues and
Volumes:
Light Fuels
Gasoline . . . . . . . . .
Diesel/#2 fuel . . . . .
Jet fuel . . . . . . . . . .
Petrochemicals . . . . . .
Industrial products. . . .
Lubricants and waxes .
Three Months Ended
March 31,
$
2,404
1,392
459
272
374
95
$
4,996
(138)
(27)
6
4,837
$
2,274
1,465
537
415
218
(138)
(27)
$
4,744
$
$
699
10.65
2010
(Gallons in millions)
3,653
1,666
784
544
889
82
1,860
984
331
192
419
14
1,748
804
377
192
497
13
7,618
(309)
(41)
23
7,291
3,800
3,800
3,631
3,631
4,314
1,827
1,067
418
90
(309)
(41)
7,366
$
$
392
6.12
(1)
Reflects sales reclassified in accordance with EITF 04-13. In cost of sales and operating expenses, EITF 04-13
impacts only refined product costs.
(2)
Reflects sales reclassified in accordance with EITF 99-19. In costs of sales and operating expenses, EITF 99-19
impacts only other operating expenses.
(3)
and intermediate feedstock costs and refined product purchases (adjusted for EITF 04-13 purchases). Throughput
margin per barrel is calculated by dividing total throughput margin by total throughput barrels. Total throughput
barrels were 65.6 million and 64.0 million for the three months ended March 31, 2009 and 2010, respectively.
Throughput margin and throughput margin per barrel are not measures of performance under GAAP, and should not
be considered as substitutes for net income (loss), cash flows from operating activities and other income or cash flow
statement data prepared in accordance with GAAP, or as measures of profitability or liquidity. Shown in the table
below is a reconciliation of throughput margin and throughput margin per barrel for each of the periods presented.
These measures may not be calculated in the same way as similarly titled measures used by other companies.
-48-
Three Months Ended
March 31,
2009
2010
($ in millions, except
per barrel data)
Net sales and sales to affiliates . . . . . . . . . . . . . . . . . . . .
Less Cost of sales and operating expenses . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . .
Plus:
Refining and manufacturing costs
Other operating expenses . . . . . .
EITF 99-19(a) . . . . . . . . . . . . . .
$
................
4,837
4,744
$
93
7,291
7,366
(75)
................
................
................
$
415
218
(27)
$
418
90
(41)
Throughput margin . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
699
$
392
Throughput margin per barrel . . . . . . . . . . . . . . . . . . . . .
$
10.65
$
6.12
(a)
Reflects sales classified in accordance with EITF 99-19, which impacts only other operating expenses in the
costs of sales and operating expenses section of our income statement.
We present throughput margin and throughput margin per barrel because we believe it assists investors and analysts
by providing a more transparent picture of our gross refining margin. Our calculation of throughput margin and
throughput margin per barrel has certain limitations as an analytical tool, however. Some of these limitations are:
•
produce in our refinery operations; however, in calculating throughput margin per barrel we divide total
throughput margin only by throughput barrels (i.e., barrels of crude oil and intermediate feedstock that we
process), without including barrels of purchased refined products;
•
our net sales and sales to affiliates include contributions from marketing and other programs such as credit
card programs for which we receive certain commissions for transactions unrelated to our sale of refined
products; and
•
other companies in our industry may calculate throughput margin and throughput margin per barrel and other
similar measures differently than we do, limiting its usefulness as a comparative measure.
Net Sales and Sales to Affiliates. Net sales and sales to affiliates increased by $2.5 billion, or 52%,
from $4.8 billion in the first three months of 2009 to $7.3 billion in the same period in 2010. The increase
was due to an increase in average sales price of 60%, offset by a decrease in sales volumes of 4%. The
increase in average sales price was driven largely by significant industry-wide increases in crude oil prices.
Average sales price per gallon for gasoline increased from $1.29 in the first three months of 2009 to $2.09 in
the same period in 2010. The average sales price per gallon for diesel increased from $1.41 in the first three
months of 2009 to $2.07 in the first three months of 2010. The average sales price per gallon for jet fuel
increased from $1.39 in the first three months of 2009 to $2.08 in the same period in 2010. Average sales
prices per gallon for both petrochemicals and industrial products doubled from the first three months of 2009
to the first three months of 2010.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased $2.7 billion, or
58%, from $4.7 billion in the first three months of 2009 to $7.4 billion in the same period in 2010. The
increase is due primarily to an 87% increase in crude oil costs of $2.0 billion, from $2.3 billion in the first
three months of 2009 to $4.3 billion in the first three months of 2010. Our average cost per barrel of crude oil
increased approximately $36, or 90%, from approximately $40 in the first three months of 2009 to
approximately $76 in the first three months of 2010. Refined product and intermediate feedstock costs also
experienced substantial increases, with refined product costs increasing by 20% from $1.5 billion to
$1.8 billion, and feedstock costs almost doubling from $537 million to $1.1 billion. Refining and
manufacturing costs experienced a slight increase, while other operating expenses decreased from $218 million
to $90 million, primarily due to our cost reduction efforts and third-party revenues for use of our terminals.
-49-
Throughput Margin. Throughput margin decreased $307 million, or 44%, from $699 million in the
first three months of 2009 to $392 million in the first three months of 2010. During the same period,
throughput margin per barrel decreased $4.53, or 43%, from $10.65 to $6.12. The decrease was due primarily
to substantial increases in crude oil, refined product and intermediate feedstock costs, which more than offset
the 52% increase in net sales and sales to affiliates. While throughput margin benefitted from improvements in
the Gulf Coast light/heavy crude oil spread as compared to the first three months of 2009, this benefit was
more than offset by a substantial narrowing of both the Gulf Coast and Chicago 3/2/1 crack spreads, primarily
as a result of decreased distillate crack spreads.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased
$21 million, or 16%, from $135 million in the first three months of 2009 to $114 million in the first three
months of 2010. The decrease was due primarily to a decrease of $9 million, or 13%, in donations made to
our social development programs in the first three months of 2010 as compared to the first three months of
2009.
Interest Expense, Including Capital Lease. Interest expense increased by $10 million, or 77%, in the
first three months of 2010 as compared to the first three months of 2009. This was due primarily to an
increase in the interest rate under our 2005 senior secured credit agreement, following an amendment that
closed on February 4, 2010. See “Description of Other Indebtedness.”
Income Taxes (Benefit). We recorded an income tax charge of $28 million during the first three
months of 2010 as compared with the prior year period as a result of the Patient Protection and Affordable
Care Act and the related Health Care and Education Reconciliation Act (the “Health Care Acts”). The Health
Care Acts, enacted by Congress in March 2010, included a provision to reduce the amount of retiree medical
costs that will be deductible after December 31, 2012. The deferred tax asset associated with the tax treatment
of these retiree medical costs was reduced as a result of this legislation. Beginning in 2013, the Company will
no longer be able to claim an income tax deduction related to prescription drug benefits provided to retirees
and reimbursed under the Medicare Part D retiree drug subsidy.
Net Income (Loss). We recorded a net loss in the first three months of 2010 of $128 million
compared to a net loss of $21 million in the same period in 2009.
-50-
Summary Fiscal Year Financial and Operating Data
Refined Product Sales
Revenues and Volumes:
Light Fuels
Gasoline . . . . . . . . . . .
Diesel/#2 fuel . . . . . . .
Jet fuel . . . . . . . . . . . .
Petrochemicals . . . . . . . .
Industrial products . . . . . .
Lubricants and waxes. . . .
Asphalt . . . . . . . . . . . . . .
Total refined product
sales . . . . . . . . . . . .
EITF 04-13
reclassification(1). . . . . .
EITF 99-19
reclassification(2) . . . . .
Other sales . . . . . . . . . . .
Net sales and sales to
affiliates . . . . . . . . .
Cost of Sales and
Operating Expenses:
Crude oil . . . . . . . . . . . . .
Refined products . . . . . . .
Intermediate feedstocks . .
Refining and
manufacturing costs . . .
Other operating
expenses . . . . . . . . . . .
EITF 04-13
reclassification(1) . . . .
EITF 99-19
reclassification(2) . . . .
Total cost of sales and
operating expenses . .
Selected Operating Data:
Throughput margin(3) . . .
Throughput margin per
barrel(3) . . . . . . . . . . .
$
2007
2008
2009
2007
2008
2009
($ in millions, except per barrel data)
19,911 $
9,122
4,311
2,376
3,306
883
1,318
21,110 $
11,791
5,192
2,348
3,325
680
86
13,436
6,295
2,427
1,425
2,118
340
-
9,320
4,309
2,026
859
2,259
221
1,004
8,314
4,014
1,731
761
1,674
126
59
7,781
3,722
1,422
723
1,643
54
-
41,227
44,532
26,041
19,998
16,679
15,345
(2,960)
(3,030)
(968)
-
-
-
(312)
60
(224)
2
(150)
9
-
-
-
19,998
16,679
15,345
38,015
$
17,838
14,481
4,381
$
41,280
24,932
21,493 $
13,788
5,548
13,684
7,693
2,772
1,885
1,913
1,527
637
647
380
(2,960)
(3,030)
(968)
(312)
(224)
(150)
35,950
40,135
24,938
$
4,275
$
3,481 $
1,751
$
13.50
$
12.38 $
6.61
(1)
Reflects sales reclassified in accordance with EITF 04-13. In cost of sales and operating expenses, EITF 04-13
impacts only refined product costs.
(2)
Reflects sales reclassified in accordance with EITF 99-19. In costs of sales and operating expenses, EITF 99-19
impacts only other operating expenses.
(3)
and intermediate feedstock costs and refined product purchases (adjusted for EITF 04-13 purchases). Throughput
margin per barrel is calculated by dividing total throughput margin by total throughput barrels. Total throughput
barrels were 316.6 million, 281.3 million and 264.8 million for the three years ended December 31, 2007, 2008 and
2009, respectively. Throughput margin and throughput margin per barrel are not measures of performance under
GAAP, and should not be considered as substitutes for net income (loss), cash flows from operating activities and
-51-
other income or cash flow statement data prepared in accordance with GAAP, or as measures of profitability or
liquidity. Shown in the table below is a reconciliation of throughput margin and throughput margin per barrel for each
of the periods presented. These measures may not be calculated in the same way as similarly titled measures used by
other companies.
2007
2008
2009
($ in millions, except per barrel data)
Net sales and sales to affiliates . . . . . . . . . . . . . . . . . . . . . . . .
Less cost of sales and operating expenses. . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . .
Plus:
Refining and manufacturing costs
Other operating expenses . . . . . .
EITF 99-19(a) . . . . . . . . . . . . . .
$
38,015
35,950
$
41,280
40,135
$
24,932
24,938
....................
2,065
1,145
(6)
....................
....................
....................
1,885
637
(312)
1,913
647
(224)
1,527
380
(150)
Throughput margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4,275
$
3,481
$
1,751
Throughput margin per barrel . . . . . . . . . . . . . . . . . . . . . . . . .
$
13.50
$
12.38
$
6.61
(a)
Reflects sales classified in accordance with EITF 99-19, which impacts only other operating expenses in the
costs of sales and operating expenses section of our income statement.
We present throughput margin and throughput margin per barrel because we believe it assists investors and analysts
by providing a more transparent picture of our gross refining margin. Our calculation of throughput margin and
throughput margin per barrel has certain limitations as an analytical tool, however. Some of these limitations are:
•
produce in our refinery operations; however, in calculating throughput margin per barrel we divide total
throughput margin only by throughput barrels (i.e., barrels of crude oil and intermediate feedstock that we
process), without including barrels of purchased refined products;
•
our net sales and sales to affiliates include contributions from marketing and other programs such as credit card
programs for which we receive certain commissions for transactions unrelated to our sale of refined
products; and
•
other companies in our industry may calculate throughput margin and throughput margin per barrel and other
similar measures differently than we do, limiting its usefulness as a comparative measure.
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net Sales and Sales to Affiliates. Net sales and sales to affiliates decreased by $16.4 billion, or 40%,
from $41.3 billion in 2008 to $24.9 billion in 2009. This decrease was due to a decrease in average sales price
of 36% and a decrease in sales volume of 8%. The decrease in average sales price and sales volume was
primarily driven by the global recession, which decreased demand for, and created a surplus supply of, refined
products. Decreased sales volume was also due in part to lower refinery utilization as a result of planned
reductions in the first quarter of 2009. Average sales price per gallon of gasoline decreased from $2.54 in
2008 to $1.73 in 2009. The average sales price of diesel and our other refined products also trended down in
2009 compared to 2008. Our total refined products sales volume decreased by 1.4 billion gallons, or 8%, from
16.7 billion gallons in 2008 to 15.3 billion gallons in 2009.
Other Revenue and Income (Expense) Items. Other revenue and income (expense) items, net, in 2009
totaled $35 million, compared to $528 million in 2008. Other revenue and income (expense) items, net, in
2008 were primarily attributable to gains on sales of certain assets and interest earned on the $1 billion loan
we made to PDVSA in December 2007 (the “PDVSA Loan”). See “Related Party Transactions – Loans and
Other Financing Arrangements.” We recorded insurance recoveries of $48 million in 2009 compared to
$72 million in 2008. Total insurance recoveries (including the portion treated as an offset to cost of sales)
-52-
were primarily related to a 2006 torrential rainfall event affecting the Lake Charles refinery, 2005 Hurricane
Rita damage affecting the Lake Charles refinery, and MTBE litigation settlement costs.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses decreased $15.2 billion,
or 38%, from $40.1 billion in 2008 to $24.9 billion in 2009. Approximately 50% of the decrease (or
$7.8 billion) is attributable to a reduction in crude oil costs, which decreased from $21.5 billion in 2008 to
$13.7 billion in 2009. The decrease in crude oil costs was primarily a function of an overall decrease in
industry crude oil prices and the effects of liquidating lower cost LIFO inventory levels. Our average cost per
barrel of crude oil decreased by $31, or 34%, from approximately $90 in 2008 to approximately $59 in 2009.
Refined product and intermediate feedstock costs also decreased substantially, with refined product costs
decreasing by 44% from $13.8 billion to $7.7 billion, and feedstock costs decreasing by 49% from $5.5 billion
to $2.8 billion. The decrease in refined product purchases reflected primarily a 16% decrease in volumes
purchased, combined with the effects of the industry-wide decreases in refined product prices. Refined product
purchases represented 34% and 31% of cost of sales for 2008 and 2009, respectively. Refining and
manufacturing costs decreased by 21% from $1.9 billion to $1.5 billion, and other operating expenses
decreased by 41% from $647 million to $380 million, primarily reflecting the divestment of our asphalt
business in March 2008, lower energy costs, and our cost-cutting measures.
Throughput Margin. Throughput margin decreased $1.7 billion, or 49%, from $3.5 billion in 2008 to
$1.8 billion in 2009. During the same period, throughput margin per barrel decreased $5.77, or 47%, from
$12.38 to $6.61. Throughput margins in 2009 were negatively affected by a substantial decrease in average
Gulf Coast and Chicago light/heavy crude oil spreads as compared to 2008, as well as by a narrowing of Gulf
Coast and Chicago 3/2/1 crack spreads, which were primarily driven by substantially lower average distillate
crack spreads.
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased
$20 million, or 6%, from $353 million in 2008 to $373 million in 2009. The increase was primarily driven by
the timing of expense recognition under the contract for our heating oil donation program, which caused
donation expenses related to our 2008 donations to be recognized in 2007, resulting in expenses related to
donations to social development programs of $80 million in 2009 compared to $24 million in 2008. See
“Business – Social Development Programs” for a discussion of our social development programs.
Interest Expense, Including Capital Lease. Interest expense, including capital lease interest charges,
decreased approximately $59 million, or 53%, from $111 million in 2008 to $52 million in 2009. This
decrease was due primarily to a decrease from 2008 to 2009 in our average debt outstanding and average
interest rates.
Income Taxes (Benefit). We had income tax benefits in 2009 of $148 million. In 2008, our provision
for income taxes was $444 million.
Net Income (Loss). We recorded a net loss in 2009 of $201 million compared to net income of
$801 million in 2008.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
Net Sales and Sales to Affiliates. Net sales and sales to affiliates increased by $3.3 billion, or 9%,
from $38 billion in 2007 to $41.3 billion in 2008. This increase was due to an increase in average sales price
of 30%, offset by a decrease in sales volume of 17%. The increase in average sales price reflected primarily
an increase in the average sales price of gasoline and diesel, which was driven largely by significant industrywide increases in crude oil prices. Average sales price per gallon of gasoline increased from $2.14 in 2007 to
$2.54 in 2008. The average sales price per gallon of diesel increased from $2.12 in 2007 to $2.94 in 2008.
The decrease in sales volume was partially due to our market realignment initiative, which included decisions
not to renew a sales agreement involving one of our largest retail customers and to discontinue marketing
efforts in certain less profitable geographic regions. We also exited the asphalt business in March 2008 with
the sale of the fixed assets and inventory of our asphalt refineries, which contributed to the reduction in our
total sales volume in 2008 compared to 2007.
-53-
Other Revenue and Income (Expense) Items. Other revenue and income (expense) items, net, in 2008
totaled $528 million, compared to $966 million in 2007. Other revenue and income (expense) items, net, in
2008 were primarily attributable to a $404 million gain on sale of assets, and $58 million of interest earned on
the $1 billion PDVSA Loan we made in December 2007. See “Related Party Transactions – Loans and Other
Financing Arrangements.” $396 million of the gain on sale of assets in 2008 related to the sale of the fixed
assets and inventories at our asphalt refineries in Paulsboro, New Jersey and Savannah, Georgia. Other revenue
and income (expense) items, net, in 2007 related to gain on sales of assets of $207 million, primarily the sale
of Eagle Pipeline, a common carrier pipeline that transports refined petroleum products from delivery points
in the Gulf Coast area to Texas and Oklahoma, which we wholly owned, four related terminals, and
$641 million related to the sale of our interests in Explorer Pipeline Company and Colonial Pipeline Company.
We also recorded insurance recoveries of $72 million in 2008, compared to $46 million in 2007. Total
insurance recoveries (including the portion treated as an offset to cost of sales) were primarily related to the
losses at the Lake Charles refinery as a result of torrential rainfall in 2006, property damage from Hurricane
Rita in 2005 at the Lake Charles refinery and a refinery in Houston, Texas, in which we previously owned a
41.25% interest through LYONDELL-CITGO Refining L.P., a joint venture between us and Lyondell Chemical
Company, a 2005 fire at a coker unit at the Lake Charles refinery, and litigation settlement costs related to the
MTBE litigations.
Cost of Sales and Operating Expenses. Cost of sales and operating expenses increased $4.1 billion, or
11%, from $36 billion in 2007 to $40.1 billion in 2008. The majority of the increase, $3.7 billion or 90%, is
due to an increase in crude oil cost, which increased by 21% from $17.8 billion in 2007 to $21.5 billion in
2008. The increase in crude oil cost reflected an industry-wide increase in crude oil prices, offset in part by a
decrease in volume of crude oil runs. Our average cost per barrel of crude oil increased $26, or 41%, from
$64 in 2007 to $90 in 2008, consistent with overall industry crude oil prices. The remaining increase is due
primarily to a 25% increase in intermediate feedstock costs, from $4.4 billion in 2007 to $5.5 billion in 2008,
offset by a 5% decrease in refined product costs. The decrease in refined product costs, from $14.5 billion in
2007 to $13.8 billion in 2008, reflected primarily a 24% decrease in volumes purchased due primarily to our
market realignment initiative, offset by the industry-wide increases in refined product prices. Refined product
costs represented 40% and 34% of cost of sales for 2007 and 2008, respectively. Refining and manufacturing
costs remained flat at $1.9 billion, with other operating expenses increasing slightly from $637 million to
$647 million.
Throughput Margin. Throughput margin decreased $794 million, or 19%, from $4.3 billion in 2007
to $3.5 billion in 2008. During the same period, throughput margin per barrel decreased $1.12, or 8%, from
$13.50 to $12.38. These decreases were due primarily to increases in crude oil and intermediate feedstock
costs, which outpaced a 9% increase in net sales and sales to affiliates. While throughput margin benefitted
from improvements in the Gulf Coast light/heavy crude oil spread as compared to 2007, this benefit was
partially offset by decreasing Chicago light/heavy crude oil spreads. Throughput margins in 2008 were also
negatively affected by decreases in both Gulf Coast and Chicago 3/2/1 crack spreads, driven by large
reductions in Gulf Coast and Chicago gasoline crack spreads that were only partially offset by improved heat
crack spreads.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased
$150 million, or 30%, from $503 million in 2007 to $353 million in 2008. The decrease is primarily related to
the timing of expense recognition under the contract for our heating oil donation program, which caused
donation expenses related to our 2007 as well as our 2008 donations to be recognized in 2007, resulting in
donation expenses related to our social development programs of $24 million in 2008 compared to
$141 million in 2007. See “Business – Social Development Programs” for a discussion of our social
development programs.
Interest Expense, Including Capital Lease. Interest expense, including capital lease interest charges,
increased $30 million, or 37%, from $81 million in 2007 to $111 million in 2008. This increase was due
primarily to an increase from 2007 to 2008 in our average debt outstanding and the amortization of financing
costs associated with the bridge term loan entered into in December 2007.
-54-
Income Taxes (Benefit). Our provision for income taxes in 2008 was $444 million. In 2007, our
provision for income taxes was $878 million.
Net Income (Loss). Our net income in 2008 was $801 million compared to $1,586 million in 2007.
Liquidity and Capital Resources
Capital Resources
As of March 31, 2010, we had $3 million of cash and cash equivalents. By comparison, as of
December 31, 2009, 2008 and 2007, we had $353 million, $24 million and $9 million of cash and cash
equivalents, respectively.
Our principal sources of liquidity are cash generated from our operations and proceeds of our
financing arrangements, including principally our existing revolving credit facility. As of March 31, 2010, we
had $613 million of available borrowing capacity under our revolving credit facility, net of $537 million of
issued outstanding letters of credit. Concurrently with the closing of this offering, we expect to enter into a
New Senior Credit Facility, the proceeds of which, together with the proceeds of the offering of the notes, will
be applied to repay all outstanding amounts under our Existing Senior Credit Facility and to finance the
purchase of our variable rate IRBs. On an as adjusted basis, after giving effect to the offering of the notes and
the New Senior Credit Facility, and the application of the proceeds therefrom, as of March 31, 2010 cash and
cash equivalents would have been $84 million, and total available capacity under our new revolving credit
facility would have been $676 million. See “Capitalization.” See also “Description of Other Indebtedness” for
summaries of our New Senior Credit Facility and certain of our other financing arrangements. We also have a
non-recourse facility under which a maximum of $450 million of undivided interests in specified eligible trade
accounts receivable may be held by independent third parties. As of March 31, 2010, interests in receivables
totaling $278 million were held by independent third parties under this facility. We are currently in discussions
to renew this facility, which is scheduled to expire in June 2010.
During some periods, we have also generated cash from sales of assets and investments in affiliates.
During 2008 and 2007, cash proceeds from sales of assets and sales of investments in affiliates totaled
$815 million and $1 billion, respectively. See Note 7 to our audited consolidated financial statements included
in this offering memorandum, which describes certain assets identified by our management, the sale of which
we are actively discussing with third parties pursuant to management approval. There is no assurance,
however, that we will be able to sell these assets or of the amount of cash any such sale would generate.
In the near term, the amortization of the PDVSA Loan through the offset arrangement is expected to
improve our cash position by $386 million, an amount equivalent to the outstanding principal amount of the
PDVSA Loan as of March 31, 2010, together with interest thereon. See “Related Party Transactions – Loans
and Other Financing Arrangements.”
We believe we will have sufficient cash and other resources to carry out planned capital spending
programs, including regulatory and environmental projects in the near term, and to meet working capital and
other cash needs as they arise. However, we cannot guarantee that we will have sufficient cash and other
resources to fund these programs or our other obligations, including our obligations under the notes. We
periodically evaluate other sources of capital in the marketplace and anticipate that longer-term capital
requirements will be satisfied with current capital resources and future financing arrangements. Our ability to
obtain such financing, and the terms thereof, would depend on numerous factors, including market conditions,
compliance with existing debt covenants and our perceived creditworthiness at that time. There can be no
assurances regarding the availability of any future financing arrangements or whether such arrangements can
be made available on terms that are acceptable to us. If we are unable to generate or borrow sufficient funds
to meet our current and anticipated capital requirements, we may be required to sell assets, reduce capital
expenditures, or take other actions which may have a material adverse effect on our operations. See also
“Forward-Looking Statements.”
In addition, the agreements relating to our New Senior Credit Facility and our fixed rate IRB
facilities impose certain restrictions and require compliance with certain specified financial ratios and other
-55-
requirements, and impose certain restrictions on our activities, including on our ability to incur additional
indebtedness, grant liens on our assets, sell assets, make restricted payments, including dividends, repurchases
of equity and certain specified investments, and merge, consolidate or transfer assets. Our failure to comply
with these restrictions, requirements or covenants, or other defaults under these agreements, would prevent us
from being able to utilize these financing sources, and further could result in the acceleration of the maturity
of the indebtedness under these facilities. For example, we are required to post letters of credit to secure
certain of our variable rate IRBs. See “Risk Factors – Risks Related to the Notes and Our Other Indebtedness.”
See also “Description of Other Indebtedness.”
Cash Flows Summary
The following summarizes cash flows during the three years ended December 31, 2007, 2008 and
2009 and during the three months ended March 31, 2009 and 2010:
2007
2008
2009
Three Months Ended
March 31,
2009
2010
($ in millions)
Beginning cash and cash equivalents
balance: . . . . . . . . . . . . . . . . . . . . .
Net cash provided by/(used in):
Operating activities . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . .
$
$
686
(396)
(319)
Net increase (decrease) in cash
and cash equivalents. . . . . . . .
Ending cash and cash equivalents
balance: . . . . . . . . . . . . . . . . . . . . .
38
9
$
1,170
330
(1,485)
(29)
$
9
15
$
24
$
24
$
24
$
353
861
(502)
(30)
188
(226)
22
94
(121)
(323)
329
(16)
(350)
353
$
8
$
3
Cash Flows for the Three Months Ended March 31, 2010
Net cash provided by operating activities during the first three months of 2010 was $94 million. A
weak, but improving refining margin environment negatively impacted first quarter cash flows from operating
activities. However, operating cash flows benefited from a net increase in accounts payable (net of an increase
in accounts receivable) of $521 million due to an increase in commodity prices, increased crude purchases to
take advantage of increased margins expected in April 2010 and the repayment of $223 million of the PDVSA
Loan through the set-off arrangement. These cash flow impacts enabled us to build approximately 4.5 million
barrels of additional inventory in response to improved refining margins and in preparation for the summer
driving season, while still maintaining positive operating cash flows for the quarter. The increase in inventory
levels decreased cash flows from operating activities by $370 million. In addition, an increase in prepaid
expenses and other current assets, due to an increase in estimated taxes receivable, decreased cash flows from
operating activities by $63 million.
Net cash used in investing activities of $121 million was primarily due to capital expenditures on the
ULSD projects at our Lemont and Corpus Christi refineries.
Net cash used in financing activities of $323 million reflected the repayment of the outstanding
balance of our existing revolving credit facility of $400 million, incremental proceeds from our accounts
receivable securitization facility of $51 million, and a net increase in other debt of approximately $26 million,
primarily due to costs associated with the February 4, 2010 amendment and waiver of our 2005 senior secured
credit agreement. See “Description of Other Indebtedness.”
The net cash provided by operating activities of $94 million, together with the opening cash balance
of $353 million, were primarily used to fund our capital expenditures of $121 million, including the ULSD
-56-
projects at our Lemont and Corpus Christi refineries, as well as debt issuance costs and debt reduction of
approximately $414 million, resulting in an ending cash position of approximately $3 million.
Cash Flows for the Year Ended December 31, 2009
Net cash provided by operating activities during 2009 totaled $861 million, down from $1.2 billion
during 2008, largely due to the weak refining margin environment. This negative impact was partially offset
by increased capacity under our accounts receivable securitization facility, which provided cash of
$187 million. Operating cash flows benefited from an increase in our accounts payable and a decrease in
accounts receivable for 2009, as a result of increases in commodity prices in 2009 compared to commodity
prices at December 2008 and the repayment of $393 million of the principal amount of the PDVSA Loan
through the offset arrangement, which we account for as an account receivable. Cash flow from operating
activities in 2009 also benefited from a decrease in inventory of 5 million barrels of inventory, which resulted
in an $87 million reduction in our inventory balance for the period.
Net cash used in investing activities of $502 million included $524 million in capital expenditures,
including the ULSD projects at our Lemont and Corpus Christi refineries.
Net cash used in financing activities decreased by $30 million primarily due to $25 million of debt
repayment and capital lease payments.
The net cash provided by operating activities of $861 million in 2009 was primarily used to fund our
2009 capital expenditures of $524 million, including the ULSD projects at our Lemont and Corpus Christi
refineries. The remaining net cash provided by operating activities was used to fund debt issuance costs,
capital lease obligations and a net debt reduction in an aggregate amount of approximately $30 million,
resulting in an increase in our cash position of approximately $329 million.
Net cash provided by operating activities during 2008 totaled $1.2 billion, up from $686 million
during 2007. Refined product margins were less favorable in 2008 than in 2007, due to the global economic
slowdown. Despite improved distillate margins and the favorable refining margin impacts that resulted from
Hurricanes Ike and Gustav, annual average refined product margins declined due primarily to a sharp decline
in gasoline margins. Substantial declines in crude oil and other commodity prices in the fourth quarter of 2008
negatively impacted our net accounts receivable and payable balances, and the capacity under our accounts
receivable securitization facility. Cash flow from operating activities in 2008 benefited from a decrease in
inventory of 11.8 million barrels, which had a $68 million impact.
Net cash provided by investing activities was $330 million and reflected $485 million in capital
expenditures, including the ULSD projects at our Lemont and Corpus Christi refineries, as well as sales of
assets that generated cash proceeds of $815 million.
Net cash used in financing activities was $1.5 billion, and reflected cash dividends of $1.3 billion, the
repayment of the $1 billion bridge term loan we borrowed in December 2007, and the incurrence of
$515 million of new borrowings under our Term Loan A, as well as additional net increases in other debt of
approximately $330 million. See “Description of Other Indebtedness.”
The net cash provided by operating activities in 2008 was primarily used to fund our 2008 capital
expenditures of $485 million, including the ULSD projects at our Lemont and Corpus Christi refineries. The
remaining net cash provided by operating activities, combined with proceeds from sales of assets of
$815 million, were primarily used to fund cash dividends of $1.3 billion and to fund debt issuance costs and a
net debt reduction of approximately $155 million, resulting in an increase in cash and cash equivalents of
approximately $15 million.
Net cash provided by operating activities during 2007 totaled $686 million. In response to strong
market conditions, our results of operations benefited from strong and sustained gasoline margins, as well as
improved distillate margins. Working capital benefited from a reduction in inventories of 4.8 million barrels,
resulting in a benefit to operating cash flows of $173 million. Partially offsetting these benefits were
-57-
prepayments to PDVSA of $331 million for crude oil purchases and a reduction in cash from changes in noncurrent assets of approximately $198 million.
Net cash used in investing activities was $396 million. Investing activities included $361 million in
capital expenditures, the PDVSA Loan of $1 billion, the sale of assets which generated cash proceeds of
$248 million and the sale of investments in affiliates which generated cash proceeds of $756 million.
Net cash used in financing activities was $319 million. Financing activities included cash dividends
of $1.3 billion, borrowings under a $1 billion bridge term loan, as well as a net increase in other debt and debt
issuance costs of approximately $20 million.
Cash flows from operating activities of $686 million combined with proceeds from sales of assets and
investments in affiliates of approximately $1 billion were primarily used to fund capital expenditures of
$370 million and pay cash dividends of $1.3 billion. Borrowings under a bridge term loan of $1 billion were used
to fund the PDVSA Loan in the principal amount of $1 billion. Net debt, other than the $1 billion bridge term
loan, increased by approximately $20 million resulting in a net cash decrease of approximately $29 million.
See “Capital Expenditures” below for further discussion of our capital expenditures during the years
ended December 31, 2007, 2008 and 2009, and for the three month periods ended March 31, 2009 and 2010,
as well as our projected capital expenditures.
Capital Expenditures
In general, our capital expenditures fall into five categories: regulatory/environmental, strategic,
maintenance, safety/risk mitigation and other. Strategic projects are discretionary projects that are implemented
to improve or increase the overall performance of a facility and which typically generate new earnings or cost
savings. Capital expenditures during the years ended December 31, 2007, 2008 and 2009 and during the three
months ended March 31, 2009 and 2010 consisted of:
2007
2008
2009
Three Months Ended
March 31,
2009
2010
($ in millions)
Regulatory/Environmental . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . .
Strategic. . . . . . . . . . . . . . . . . . . . . . .
Safety/Risk Mitigation . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . .
Total capital expenditures . . . . . . .
$185
103
58
24
$370
$249
126
45
65
$485
$296
90
11
5
122
$524
$ 66
36
37
1
81
$221
$105
14
1
1
$121
(1) Reflects the acquisition of certain non-operating assets subsequently distributed as indirect non-cash dividends. See
“Related Party Transactions – Other Arrangements.”
Regulatory/environmental and strategic capital expenditures during the 2007 through 2009 fiscal years
and the first three months of 2010 included $470 million related to our ULSD projects at the Lemont and
Corpus Christi refineries.
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Our projected capital expenditures for 2010 and for 2011 through 2014 are as follows:
Capital Expenditures – 2010 through 2014(1)
2010
Projected
2011-2014
Projected
Total
($ in millions)
Regulatory/Environmental . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Safety/Risk Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
...... $
......
......
......
349
115
3
7
$
316
554
51
81
$
665
669
54
88
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
474
$
1,002
$
1,476
(1) These estimates may change as future regulatory events unfold. See “Forward-Looking Statements.”
Estimated capital expenditures necessary to comply with the Clean Air Act and other environmental
laws and regulations, not including safety/risk mitigation items, are provided in additional detail below. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical
Accounting Policies – Environmental Expenditures,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Environmental and Safety Liabilities,” “Business – Government
Regulation.” As shown in the table, we expect our ULSD capital expenditures to be largely completed in 2010.
2010
2011
2012
$
$
2013
2014
Total
$
89
$ 290
375
$ 89
$ 665
($ in millions)
ULSD(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 282
Other environmental(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
67
Total regulatory/environmental . . . . . . . . . . . . . . . . . . . $ 349
8
74
$ 82
74
$ 74
$
71
$ 71
(1) As of March 31, 2010, we had spent $470 million to be able to manufacture ULSD at the Corpus Christi and Lemont
refineries. The projected capital expenditures for ULSD do not include two hydrogen plants which are planned at the
Corpus Christi and Lemont refineries. These hydrogen plants have been treated as capital leases and are expected to be
operational in 2010.
(2) Other environmental spending assumes $33 million in spending during the period shown in the table to comply with
CITGO’s New Source Review consent decree with the EPA, which requires us to implement control equipment at our
refineries and a supplemental environmental project at our Corpus Christi refinery. See “Risk Factors – Risks Related
to Our Business and the Petroleum Industry – Environmental statutes and regulations impose significant costs and
liabilities” and “Business – Governmental Regulation – Environmental Matters.”
Environmental and Safety Liabilities
The petroleum refining and marketing industry is subject to extensive and constantly evolving federal,
state and local environmental and safety laws and regulations, including, but not limited to, those relating to
the discharge of materials into the environment or that otherwise relate to the protection of the environment,
waste management and the characteristics and composition of fuels. As described above, we have made, and
will continue to make, significant capital and other expenditures in order to comply with these laws and
regulations and minimize our impact on the environment. Compliance with these current and future laws and
regulations also increases our operating costs. We are also subject to public and private actions in relation to
environmental matters. See “Risk Factors – Risks Related to Our Business and the Petroleum Industry,”
“Business – Governmental Regulation” and “– Legal Proceedings.”
At March 31, 2010, our balance sheet included an environmental accrual of $81 million compared
with $83 million at December 31, 2009. We estimate that an additional loss of $23 million as of March 31,
2010 is reasonably possible in connection with environmental matters. Potential liability for environmental
-59-
matters is inherently uncertain, however, and we are not always able to predict the extent or magnitude of such
potential liabilities. Our accounting policy establishes environmental reserves as probable site restoration and
remediation obligations become reasonably capable of estimation. Environmental liabilities are not discounted
to their present value, but are recorded at their actual estimated amounts, and without consideration of
potential recoveries from third parties. Subsequent adjustments to estimates, to the extent required, may be
made as more refined information becomes available. We believe the amounts provided in our financial
statements, as prescribed by GAAP, are adequate in light of probable and estimable liabilities and obligations.
However, there can be no assurance that the actual amounts required to discharge alleged liabilities and
obligations and to comply with applicable laws and regulations will not exceed amounts provided for or will
not have a material adverse affect on our consolidated results of operations, financial condition and cash
flows.
Litigation Contingencies
In the ordinary course of business, we become party to or otherwise involved in lawsuits,
administrative proceedings and governmental investigations, including environmental, regulatory, personal
injury and property damage, commercial, tax, anti-trust and employment-related matters. We record accruals
for losses when, in management’s opinion, such losses are probable and reasonably estimable. As of March 31,
2010 and December 31, 2009, our balance sheet included an accrual for lawsuits and claims of $69 million.
We estimate that in addition to the accrued amount, losses of $52 million as of March 31, 2010 are reasonably
possible in connection with such lawsuits and claims. While we cannot provide assurance of the outcome of
any matter, we do not believe that an adverse resolution of currently known or pending claims, individually or
in the aggregate, would have a material adverse effect on our financial position or results of operations,
although certain identified matters could significantly adversely affect us during individual financial reporting
periods. See “Business – Legal Proceedings.”
Pension and Other Postretirement Benefit Obligations
Our employees participate in one or more of four qualified and three nonqualified noncontributory
defined benefit pension plans. Our recorded pension cost and liability are based on actuarial calculations,
which are dependent on assumptions concerning discount rates, expected rates of return on plan assets,
employee turnover, estimated retirement dates, salary levels at retirement and mortality rates. In addition,
differences between actual experience and the assumptions also affect the actuarial calculations. While
management believes that the assumptions used are appropriate, differences in actual experience or changes in
assumptions may significantly affect our future pension cost and liability. Benefit obligations for our pension
plans as of December 31, 2009 were $733 million. The fair value of our pension plan assets at December 31,
2009 was $535 million. As of December 31, 2009, we have recognized a net liability of $198 million for the
difference between the benefit obligation and the fair value of the plan assets.
In addition to pension benefits, we also provide certain health care and life insurance benefits for
current and former employees. These benefits are subject to deductibles, copayment provisions and other
limitations and are funded on a pay-as-you-go basis. We reserve the right to change or terminate the benefits
at any time. Benefit obligations for postretirement benefits other than pensions, as reported in our audited
consolidated balance sheet at December 31, 2009, were $555 million. The cost of providing health care to
current employees and retired employees continues to increase at a significant rate. Historically, we have
absorbed the majority of these cost increases which increase our liability and reduce our profitability. There is
no indication that the trend of increasing health care costs will be reversed in future periods. Our recorded
liability for such health care costs is based on actuarial calculations that could be subject to significant
revision as the underlying assumptions regarding future health care costs and interest rates change.
-60-
Contractual Obligations and Commercial Commitments
The following table summarizes future payments for our contractual obligations as of December 31,
2009.
Contractual Obligations at December 31, 2009
Payments Due by Period
Less than
1 Year
1-3 Years
3-5 Years
More
than
5 Years
Total
($ in millions)
Long-term debt(1) . . . . . . . . . . . . . . . . . .
Interest expense(2) . . . . . . . . . . . . . . . . . .
Capital lease obligations(3) . . . . . . . . . . . .
Operating leases(4) . . . . . . . . . . . . . . . . . .
Estimated crude purchase obligations(5) . .
Estimated product purchase
obligations(6) . . . . . . . . . . . . . . . . . . . .
Estimated capital project spending
commitments . . . . . . . . . . . . . . . . . . . .
Other commitments(7) . . . . . . . . . . . . . . .
Total contractual cash obligations . . . . .
$
406
36
9
120
10,330
$ 1,119
95
4
50
9,058
6,265
317
20
189
326
$17,375
$10,969
$
$
81
4
19
-
$
653
909
17
20
-
$ 2,178
1,121
34
209
19,388
9
-
6,591
328
1,996
20
2,839
441
$ 3,595
$32,380
(1) Includes maturities of principal, but excludes interest payments. Does not reflect letters of credit issued under our
existing revolving credit facility, which are reflected on the following table summarizing our contingent commitments.
See “Description of Other Indebtedness.” On an “As Adjusted” basis, after giving effect to this offering and the
concurrent financing and the application of the proceeds therefrom, and assuming no amounts are initially drawn under
our new revolving credit facility, future payments for our debt obligations as defined under “Capitalization” would be
$331 million for less than one year, $18 million for one to three years, $20 million for three to five years, $2,165 for
more than five years, and a total of $2,534 million. Total debt obligations as defined in “Capitalization” as of
March 31, 2010 include: (i) $307 million in capital lease obligations (included in “Capital lease obligations” and
“Other commitments” in the table above); (ii) $278 million of obligations represented by the amount of our receivables
in which third parties that participate in our accounts receivable securitization facility hold an undivided interest and
(iii) $41 million of payables owed to a third party under a product financing arrangement in which we sold to and
committed to purchase crude oil from the third party (the arrangement was settled in April 2010).
(2) Includes interest on fixed and variable rate debt. Variable rate debt was estimated using the all-in rate at December 31,
2009.
(3) Includes amounts classified as interest.
(4) Represents future minimum lease payments for noncancelable operating leases.
(5) Represents an estimate of contractual crude oil purchase commitments. These supply contracts specify minimum
volumes to be purchased through March 2012. Prices were estimated using actual prices paid in December 2009 or
December 2009 market prices, as appropriate.
(6) Represents an estimate of contractual refined product and feedstock purchase commitments. These supply contracts
specify minimum volumes to be purchased. Prices were estimated using actual prices paid in December 2009 or
December 2009 market prices, as appropriate.
(7) Represents an estimate of contractual commitments to purchase various commodities and services, including hydrogen,
electricity, steam and fuel gas. Includes commitments for future purchases of hydrogen related to the ULSD projects,
which were recorded as capital leases in March 2010.
See Notes 4, 11, 14 and 15 to our audited consolidated financial statements included in this offering
memorandum.
-61-
The following table summarizes our contingent commitments at December 31, 2009.
Other Commercial Commitments at December 31, 2009
Payments Due by Period
Less than
1 Year
1-3 Years
3-5 Years
More
than
5 Years
Total
($ in millions)
Letters of credit(1) . . . . . . . . . . . . . . . . . .
Guarantees . . . . . . . . . . . . . . . . . . . . . . . .
Surety bonds . . . . . . . . . . . . . . . . . . . . . .
$ 99
104
$
6
-
$
-
$ -
$ 99
6
104
Total commercial commitments . . . . . . .
$203
$
6
$
-
$ -
$209
(1) As of December 31, 2009, letters of credit for $612 million were issued and outstanding under our existing
revolving credit facility, of which $513 million support our obligations under the variable rate IRBs in an amount
equivalent to the outstanding principal and 30 days of interest payments. These letters of credit issued for our
variable rate IRBs have been excluded from this table as the related amounts are included in long-term debt in our
contractual obligations table above. As of December 31, 2009, our variable rate IRBs were also supported by a
separate $41 million letter of credit, which is excluded from this table for the same reason. In addition, as of
March 31, 2010, a $75 million letter of credit was issued and outstanding to support certain trade payables.
See Note 14 to our audited consolidated financial statements included in this offering memorandum.
Quantitative and Qualitative Disclosures About Market Risk
Introduction. We have exposure to price fluctuations of crude oil and refined products and changes in
interest rates associated with our variable rate debt. The fluctuations in future prices create risk to us as our
activities involve commitments to pay or receive fixed prices in the future. To manage and reduce exposures
in connection with the commodity price, management enters into certain derivative instruments. Our petroleum
commodity derivatives, comprised of physical and financial derivatives, include exchange-traded futures
contracts, forward purchase and sale contracts, exchange-traded and over-the-counter (“OTC”) options and
OTC swaps. We do not currently utilize derivative instruments to manage our interest rate risk but may do so
in the future.
We have risk management policies and practices in place to identify, analyze and act on the risks we
face. We do not attempt to manage the price risk related to all of our inventories of crude oil and refined
products. As a result, at March 31, 2010, we were exposed to the risk of broad market price volatility with
respect to a substantial portion of our crude oil and refined product inventories. As of March 31, 2010, our
total crude oil and refined products inventory was approximately 30 million barrels. The aggregate commodity
derivative positions held in the regulated exchanges and OTC markets related to the management of the price
movement was approximately 5 million barrels. The following disclosures do not attempt to quantify the price
risk associated with such commodity inventories. The disclosures included in the following table include the
derivatives referenced above as well as all other derivatives.
Commodity Instruments. We balance our crude oil and petroleum product supply and demand by
entering into petroleum commodity derivative contracts. We do not designate any of our derivative instruments
as hedges, as these instruments are designed to hedge risk associated with the market price fluctuations or for
trading purposes. Changes in the fair value of these contracts are recorded in cost of sales and operating
expense.
-62-
The following table summarizes our non-trading commodity derivatives open positions at March 31,
2010.
Non-Trading Commodity Derivatives
Open Positions at March 31, 2010
Commodity
Maturity
Date
Derivative
Number Of
Contracts
Long/(Short)
Unleaded Gasoline(1) . . .
Distillates(1) . . . . . . . . .
Crude Oil(1) . . . . . . . . .
Natural Gas(3) . . . . . . . .
Futures Purchased . . . . . . . . . . . . . . . .
2010
Forward Purchase Contracts . . . . . . . . .
2010
Forward Sale Contracts . . . . . . . . . . . .
2010
175
276
(1,200)
Contract
Value
Market
Value(2)
Asset/(Liability)
($ in Millions)
$ 16.6
$ 17.0
24.8
25.4
(109.6)
(109.4)
2010
314
25.5
29.2
2011
20
1.8
2.0
Futures Sold . . . . . . . . . . . . . . . . . . . .
2010
(217)
(18.7)
(20.0)
Futures Sold . . . . . . . . . . . . . . . . . . . .
2011
(1)
(0.1)
(0.1)
OTC Swaps (Pay Fixed / Receive
Float)(4) . . . . . . . . . . . . . . . . . . . . . . .
2010
Forward Purchase Contracts . . . . . . . . .
2010
45
4.0
4.1
2010
(468)
(41.8)
(43.3)
2010
(278)
(23.7)
(26.3)
2011
(22)
(2.1)
(2.2)
184
-
1.2
2010
340
27.8
28.2
Futures Sold . . . . . . . . . . . . . . . . . . . .
2010
(515)
(41.8)
(42.9)
OTC Swaps (Pay Fixed / Receive
Float)(4) . . . . . . . . . . . . . . . . . . . . . . .
2010
-
-
0.1
NYMEX Call Options Purchased . . . . .
2010
300
-
0.6
NYMEX Call Options Sold . . . . . . . . .
2010
(300)
-
(0.8)
NYMEX Put Options Purchased . . . . . .
2010
300
-
0.0
NYMEX Put Options Sold . . . . . . . . . .
2010
(300)
2010
247
14.4
12.8
Futures Sold . . . . . . . . . . . . . . . . . . . .
2010
(222)
(11.4)
(9.5)
NYMEX Call Options Purchased . . . . .
2010
600
-
0.2
NYMEX Call Options Sold . . . . . . . . .
2010
(200)
-
(0.1)
-
(1) Thousands of barrels per contract.
(2) Based on actively quoted prices.
(3) Ten-thousands of million British thermal units (“MMBtu”) per contract.
(4) Floating price based on market index designated in contract. Fixed price agreed upon at date of contract.
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(0.1)
Debt Related Instruments. We have fixed and variable U.S. currency denominated debt. At March 31,
2010, our primary exposures were to LIBOR and variable rates on tax-exempt bonds. We currently manage the
risk related to interest rates by using both fixed and variable rate debt. We do not currently utilize derivative
instruments to manage our interest rate risk but may do so in the future.
For debt obligations, the tables below present principal cash flows and related weighted average
interest rates by expected maturity dates on an actual basis at March 31, 2010. Weighted average variable rates
are based on implied forward rates in the yield curve at the reporting date.
Debt Obligations
at March 31, 2010
Expected Maturities
Fixed
Rate Debt
Average Fixed
Interest Rate
Variable Rate
Debt
($ in millions)
Expected
Average
Variable Interest
Rate
($ in millions)
2010 . . . . . . . . . . . . $
2011 . . . . . . . . . . . .
2012 . . . . . . . . . . . .
2013 . . . . . . . . . . . .
2014 . . . . . . . . . . . .
Thereafter . . . . . . . .
108
7.71%
$
5
206
913
544
1.29%
1.85%
2.43%
8.66%
Total . . . . . . . . . . . . $
108
7.71%
$
1,668
4.39%
Fair Value . . . . . . . . $
110
$
1,665
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DESCRIPTION OF OTHER INDEBTEDNESS
New Senior Credit Facility
Concurrently with the closing of the offering of the notes we expect to enter into a New Senior Credit
Facility. The New Senior Credit Facility is expected to consist of a $700 million senior secured revolving
credit facility and a senior secured term loan (the “New Term Loan”). The final principal amount of the New
Term Loan will be determined based on market demand for the New Term Loan and the notes. The proceeds
of the New Senior Credit Facility, together with the proceeds of the notes, will be used to repay the Existing
Senior Credit Facility, to finance the purchase of our variable rate IRBs and for general corporate purposes.
New Revolving Credit Facility. We expect that the new revolving credit facility will have a total size
of $700 million. We may increase the amount available to us under the new revolving credit facility on one or
more occasions for up to one year following the closing of the facility, subject to satisfaction of customary
conditions. We expect that the new revolving credit facility will be available for three years following the
closing date and may be used to refinance existing indebtedness, to fund working capital and capital
expenditures, and for general corporate purposes. Amounts borrowed under the new revolving credit facility
will bear interest at variable rates based on the credit rating of our New Senior Credit Facility. We will also
incur quarterly commitment fees for the unused portion of the new revolving credit facility (less outstanding
letters of credit).
New Term Loan. Our New Senior Credit Facility is also expected to include a New Term Loan in an
amount to be determined based on market demand for both the New Term Loan and the notes. We expect that
the New Term Loan will mature five years following the closing date and, together with the proceeds of the
notes, will be used to refinance our Existing Senior Credit Facility and to purchase our variable rate IRBs. The
New Term Loan will bear interest at a variable interest rate based on the credit rating of our New Senior
Credit Facility. The New Term Loan will also be subject to quarterly amortization of principal, in an amount
to be determined.
Guarantees. The New Senior Credit Facility will be guaranteed by our subsidiaries that will also
guarantee the notes. All guarantees will be guarantees of payment and not of collection and will rank equal in
right of payment to all of the senior indebtedness of the guarantors.
Security. The New Senior Credit Facility will be secured, subject to certain exceptions and permitted
liens, on a first priority basis by:
k
our refineries in Lake Charles, Louisiana, Lemont Illinois and, upon acquiring the West Plant
pursuant to our purchase option in 2011, our refinery in Corpus Christi, Texas, including, without
limitation, all real and personal property comprising a part thereof;
k
our and the guarantors’ accounts receivable (other than accounts receivable pledged pursuant to
any permitted receivables securitization program) and inventory (with certain conditions for
inventory not located in our three refineries);
k
all capital stock of our guarantors and, subject to the execution of an intercreditor agreement by
the participants in our accounts receivable securitization facility, CITGO AR2008 Funding
Company, LLC, our accounts receivable subsidiary; and
k
all proceeds and products of the property and assets described above.
Representations and Warranties, Covenants and Events of Default. The New Senior Credit Facility
will contain customary representations and warranties, funding and yield protection provisions, borrowing
conditions precedent, financial and other covenants and restrictions, and events of default. The covenants
contained in the New Senior Credit Facility will restrict (with certain exceptions), among other things, our
ability and our restricted subsidiaries’ ability to:
k
engage in mergers, consolidations, liquidations and dissolutions, or dispose of assets;
k
make loans, investments and advances;
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k
incur additional indebtedness, guarantee indebtedness or create or incur liens;
k
enter into certain sale and leaseback transactions;
k
make certain dividend, debt and other restricted payments; and
k
make changes to our business.
The New Senior Credit Facility will also be governed by three financial covenants, to be calculated
on a consolidated basis and for each consecutive four fiscal quarter period:
k
a maximum indebtedness to total capitalization of 60%;
k
a minimum interest coverage ratio of 1.5x as of December 31, 2010, increasing quarterly to 3.0x
as of December 31, 2011; and
k
a minimum liquidity of $400 million as of June 30, 2010 and each fiscal quarter thereafter until
December 31, 2011.
Payments of Dividends. The New Senior Credit Facility will allow us to pay dividends equal to
100% of our cumulative net income (commencing with fiscal year 2009 and excluding the after-tax effect of
gain on sales of assets) plus net after-tax proceeds from certain permitted assets sales. The New Senior Credit
Facility will prohibit us from paying dividends during the existence of an event of default and to the extent
payment of dividends would trigger an event of default, and further restrict our payment of dividends by
instituting a number of debt incurrence tests, including the following:
k
minimum liquidity of $500 million post-dividend plus the excess, if any, of (i) budgeted
maintenance and regulatory capital expenditures over (ii) budgeted amortization and depreciation
expense; and
k
maximum indebtedness to total capitalization of 55% post dividend.
Incurrence of Indebtedness. The New Senior Credit Facility will allow us to issue the notes offered
hereby. In addition, the New Senior Credit Facility will allow us to issue up to $400 million in fixed rate
IRBs, which will share in the collateral securing the New Senior Credit Facility and the notes offered hereby
on a pari passu basis. We currently have $108 million fixed rate IRBs outstanding, allowing us to issue up to
$292 million in additional fixed rate IRBs, either by conversion of existing variable rate IRBs or issuance of
new fixed rate IRBs.
Existing Senior Credit Facility
Our Existing Senior Credit Facility is evidenced by a credit agreement, dated as of November 15,
2005, as amended and supplemented on May 30, 2007, December 17, 2007, June 13, 2008 and February 4,
2010 (as amended, the “Existing Senior Credit Agreement”).
Existing Revolving Credit Facility. The Existing Senior Credit Agreement provides us with a
$1.15 billion revolving credit facility, for which BNP Paribas serves as the administrative agent. The existing
revolving credit facility provides for letters of credit and swing line loans, in addition to cash draws, and can
be used to refinance existing indebtedness, to fund working capital and capital expenditures, and for other
general corporate purposes. Amounts borrowed under the existing revolving credit facility bear interest at
variable rates based on the credit rating of our Existing Senior Credit Facility. As of March 31, 2010, we had
no borrowings outstanding under our existing revolving credit facility. As of March 31, 2010, letters of credit
for $537 million were also issued and outstanding under our existing revolving credit facility. Of this amount,
$513 million support our obligations under the variable rate IRBs (discussed below) in an amount equivalent
to the outstanding principal and 30 days of interest payments. We incur quarterly commitment fees for the
unused portion of the existing revolving credit facility (less outstanding letters of credit) at rates ranging from
0.50% to 1.25% per annum. As of March 31, 2010, the quarterly commitment fee for the unused portion of
the facility was 0.625% per annum. The existing revolving credit facility has a final maturity and termination
date of November 15, 2010.
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Term Loan B. Our Existing Senior Credit Agreement also includes a $700 million term loan (the
“Term Loan B”). BNP Paribas serves as the administrative agent for the Term Loan B. The Term Loan B
bears interest at a variable interest rate based on the credit rating of our Existing Senior Credit Facility. As of
March 31, 2010, the outstanding principal amount of the Term Loan B was $609 million and the interest rate
was 5.25%. The Term Loan B amortizes in scheduled amounts of $6.4 million annually, and has a final
maturity date of November 15, 2012.
Term Loan A. The June 13, 2008 supplement to our Existing Senior Credit Agreement established a
$515 million term loan facility (the “Term Loan A”), for which Sumitomo Mitsui Banking Corporation serves
as administrative agent. The Term Loan A bears interest at a variable interest rate based on the credit rating of
our Existing Senior Credit Facility. As of March 31, 2010, the outstanding principal amount of the Term Loan
A was $515 million and the interest rate was 5.25%. The Term Loan A amortizes in scheduled amounts of
$200 million in February 2011 and $100 million in February 2012, and has a final maturity date of
November 15, 2012.
Security. The Existing Senior Credit Facility is secured on a first priority basis by our interests in the
Lake Charles, Corpus Christi and Lemont refineries and a portion of our trade accounts receivable and
inventories (together, the “Existing Collateral”).
Representations and Warranties, Covenants and Events of Default. The Existing Senior Credit
Agreement contains customary representations and warranties, funding and yield protection provisions,
borrowing conditions precedent, financial and other covenants and restrictions, and events of default. The
covenants contained in the Existing Senior Credit Agreement restrict (with certain exceptions), among other
things, our ability and our restricted subsidiaries’ ability to:
k
engage in mergers, consolidations, liquidations and dissolutions, or dispose of assets;
k
make loans, investments and advances;
k
incur additional indebtedness, guarantee indebtedness or create or incur liens;
k
enter into certain sale and leaseback transactions;
k
make certain dividend, debt and other restricted payments; and
k
make changes to our business.
The Existing Senior Credit Agreement also requires us to maintain a maximum debt to capitalization
ratio, a minimum interest coverage ratio and certain minimum liquidity levels, in each case as defined in the
Existing Senior Credit Agreement.
Certain Interest Rate Adjustments. In the event of a downgrade in the ratings of our Existing Senior
Credit Facility, the interest rate on the facilities would increase.
Recent Amendments and Waivers of Existing Senior Credit Facility. The February 4, 2010 amendment
to the Existing Senior Credit Facility permits us to:
k
refinance the Existing Senior Credit Facility in whole or in part;
k
issue the notes; and
k
enter into the New Senior Credit Facility.
The amendments also, among other things (including certain amendments to the financial covenants
and their calculations) modify certain covenants under the Existing Senior Credit Agreement to:
k
permit us to issue up to $400 million of secured indebtedness incurred in connection with
pollution control or IRB financings secured by the Existing Collateral, subject to an intercreditor
agreement acceptable to the lenders;
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k
restrict us from paying any dividends in 2010, and to subject our ability to pay dividends to a
liquidity incurrence test of $500 million, after giving effect to such dividends, and a maximum
debt to capitalization ratio of 0.55 to 1.00;
k
waive the then-existing debt to capitalization ratio requirement of 0.55 to 1.00 for December 31,
2009 and revise it to 0.60 to 1.00 thereafter; and
k
impose a minimum liquidity requirement of $300 million at March 31, 2010, increasing to
$400 million at June 30, 2010, which will remain in effect through September 30, 2011. Liquidity
for these purposes consists of our cash and cash equivalents as well as availability under our
existing revolving credit facility.
The lenders under our Existing Senior Credit Facility also agreed to waive compliance with the
interest coverage ratio for fiscal quarters ending December 31, 2009 through September 30, 2010, and to
revise the ratio to 1.50 to 1.00 at December 31, 2010. Thereafter, the interest coverage ratio requirement will
increase each quarter until it reaches 3.00 to 1.00 at December 31, 2011. Furthermore, the lenders agreed that
in connection with requests for borrowings, letters of credit and other extensions of credit under the Existing
Senior Credit Facility, we will be required to represent and warrant that since September 30, 2009, no event or
condition has occurred that has had or could reasonably be expected to have a material adverse effect. Prior to
the amendment we were required to represent and warrant that no such event or condition had occurred since
December 31, 2004.
Industrial Revenue Bonds
As of March 31, 2010, we had outstanding indebtedness of $653 million under 19 series of industrial
revenue bonds (“IRBs”) issued through various governmental issuers in Illinois, Louisiana and Texas to
finance solid waste disposal and environmental facilities at our refineries in those states. Of the bonds
outstanding at March 31, 2010, $593 million were tax-exempt and the remaining $60 million were taxable. At
our option and upon the occurrence of certain specified conditions, all or any portion of the taxable bonds
may be converted to tax-exempt bonds. The final maturity dates for the bonds range from 2023 to 2043.
Interest Rates. The bonds bear interest at various fixed and variable rates, which ranged from 1.1% to
8.0% as of March 31, 2010. Of the $653 million of outstanding bonds at that date, $545 million were variable
rate IRBs, while $108 million were fixed rate IRBs. As discussed in “Use of Proceeds,” we are seeking to
purchase our variable rate IRBs, a portion of which we will hold in treasury until such time as we either repay
or remarket the bonds as fixed rate IRBs.
Security; Covenants Applicable to Variable Rate IRBs. The variable rate IRBs are supported by direct
pay letters of credit issued under our existing revolving credit facility and under a separate letter of credit
issued by Sumitomo Mitsui Banking Corporation. The covenants and events of default contained in the
reimbursement agreements for the letters of credit generally match those contained in our existing revolving
credit facility. Our obligations under the reimbursement agreements are unsecured, although we may be
required to cash collateralize our obligations following an event of default and if the letters of credit issued
under our existing revolving credit facility are drawn, the borrowings would also be secured by the collateral
for the Existing Senior Credit Facility. In addition, if new collateral is pledged to secure the Existing Senior
Credit Facility, we would be required to grant an equal and ratable lien to certain of the letter of credit lenders.
The reimbursement agreements have a remaining term of one year or less and are subject to renewal or
extension at the discretion of the lender or lenders party to the particular reimbursement agreement. As of
March 31, 2010, we had approximately $554 million of letters of credit issued and outstanding to support our
obligations under the variable rate IRBs, which amount is equivalent to the outstanding principal and 30 days
of interest payments, of which $513 million are under our existing revolving credit facility and the remaining
$41 million is under the letter of credit issued by Sumitomo.
Covenants Applicable to Fixed Rate IRBs. We have agreed with the holders of the fixed rate IRBs,
through separate guarantees of the individual bond issues, to extend to them the benefit of specified covenants.
The covenants and events of default contained in these guarantees generally match those contained in our
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Existing Senior Credit Facility. The fixed rate IRBs share pari passu in the collateral securing our Existing
Senior Credit Facility.
Accounts Receivable Securitization Facility
In June 2008, our limited purpose consolidated subsidiary, CITGO AR2008 Funding Company, LLC,
established a one-year non-recourse trade accounts receivables facility with BNP Paribas and certain other
independent third parties. Under the facility, we transfer to CITGO AR2008 Funding Company, LLC our trade
accounts receivables from which undivided interests in specified eligible accounts are acquired by independent
third parties. The proceeds from these transactions are released to us. The maximum interest that may be held
by third parties as of any date of determination cannot exceed $450 million. As of March 31, 2010,
$946 million of our accounts receivable were included in the pool of eligible receivables under the facility and
undivided interests in an aggregate of $278 million were held by third parties. We are currently engaged in
discussions to renew this facility, which is scheduled to expire in June 2010.
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BUSINESS
Our Company
We are one of the largest independent crude oil refiners and marketers of refined products in the
United States as measured by refinery capacity. We own and operate three petroleum refineries with a total
rated crude oil capacity of approximately 749,000 bpd, located in Lake Charles, Louisiana, Corpus Christi,
Texas and Lemont, Illinois. Our refining operations are supported by an extensive distribution network, which
provides reliable access to our refined product end-markets. We own 37 refined product terminals spread
across 17 states with a total storage capacity of 18.4 million barrels, and have equity ownership of an
additional 2.1 million barrels of refined product storage capacity through our joint ownership of an additional
11 terminals. We also have access to over 150 third-party terminals through exchange, terminaling and similar
arrangements. We believe that we are the seventh largest branded gasoline supplier within the United States as
measured by by sales volume, with an approximate 5% market share of the branded gasoline market. There
are approximately 6,500 independently owned and operated CITGO-branded retail outlets located in our
markets, which are located east of the Rocky Mountains. We and our predecessors have had a recognized
brand presence in the United States for approximately 100 years.
Key Market Trends
We believe the following are key factors that will influence the long-term outlook for the overall
refining industry and the markets we serve.
Improving Economic Conditions. In 2008 and 2009, demand for refined petroleum products was
negatively impacted by, among other factors, the economic recession. Starting in the last quarter of 2009,
several key measures of economic conditions in the United States, including gross domestic product and nonfarm payrolls, began to improve. We believe that increases in these measures signal an improvement in general
economic conditions, which we believe will result in an increase in the demand for gasoline, distillate and
other refined products.
Capacity Rationalization. In response to excess refining capacity in the United States throughout
2009, many refiners reduced utilization rates and announced unit or refinery-wide shutdowns. We believe that
capacity rationalization will continue and could result in a reduction of overall refining capacity from current
levels. In particular, our competitors could continue to shut down certain of their refineries that we believe are
at a competitive disadvantage, including their less complex refineries, those requiring significant capital
expenditures in order to remain compliant with current or pending environmental regulations and changing
customer preferences, and those that are not well positioned geographically relative to their distribution
markets. In addition, many refiners have deferred or are considering deferring their investment plans due to
recent refining economics. We believe this capacity rationalization will contribute to keeping the supply of
petroleum products in balance with the longer-term trend in demand.
Increasing Light/Heavy Differentials. In 2009, the continuing economic recession led OPEC to reduce
its production of crude oils. We believe the reduction was significantly related to heavy sour crudes, and
contributed to an increase in the price of heavy sour crudes relative to light sweet crudes and a narrowing of
the historical price differential between light and heavy crudes. In 2009, the average price differential between
light and heavy crudes, as illustrated by the WTI-Maya differential, declined to one of its lowest levels in the
past decade, averaging $5.20 per barrel or 8.4% of WTI. By comparison, between 2000 and 2008 the annual
average ranged from a low of $5.19 per barrel to a high of $15.59 per barrel, or between 19.9% and 27.6% of
WTI. As economic conditions improve and demand for petroleum products increases, we believe that OPEC
will relax production restrictions, which should increase the supply of heavy sour crudes and contribute to a
widening of the light/heavy differential, resulting in improved margins for refiners that process significant
amounts of heavy crudes.
Trend Towards Lower Quality Crudes. Historically, the crude slate available to U.S. refineries has
become heavier (lower API gravity) and more sour (higher sulfur content). Due to their higher density and
metals and sulfur content, heavy sour crudes require additional conversion units to enable processing into fuel
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products. As a result, heavy sour crudes have historically sold at a discount to lighter, sweeter crude oils,
contributing to lower crude oil costs for refineries that can process these types of crudes. Currently, less than
half of U.S. refiners have coking units with the ability to convert heavy crudes into lighter transportation fuels.
Given the world’s current heavy sour crude reserves, such as those in Brazil, Canada, Iraq and Venezuela, the
proportion of lower quality crudes is expected to continue to trend upward over the long term. We believe this
upward trend should result in a widening of the light/heavy differential and improved margins for refineries
that have the ability to process these types of crudes.
Competitive Strengths
Industry-Leading Refining Capability with Significant Asset Value. We own and operate three largescale, high complexity refineries with a total rated crude capacity of approximately 749,000 bpd. We believe
that we are the third largest independent refiner in the United States by refinery capacity, and the most
complex independent refiner in the country. Our refineries have large coking units that enable us to process
substantial amounts of heavy sour crude oils, which are typically priced at a discount to lighter, sweeter crude
oils, giving us a cost advantage over competitors with less complex refineries. Our large downstream
conversion units, such as catalytic cracking, hydrotreating and desulfurization units, enable us to produce a
flexible range of refined products, and optimize margins in response to market changes. Over the 2007 to
2009 period, an average of 71% of the crude oils processed through our refineries were heavy sour crude oils.
In 2009, our refineries had a total yield of 84% high-value products, including gasoline, jet fuel, diesel, no. 2
fuel oil and petrochemicals, with the remaining output comprised primarily of industrial products. According
to a December 2009 appraisal conducted by Turner Mason, an independent petroleum and petrochemicals
consulting firm, the total asset value of our three refineries is estimated to be $6 billion (excluding related
working capital assets), based on typical industry valuation methodologies. Turner Mason’s report is subject to
a number of estimates and assumptions as discussed in more detail in “Risk Factors – The appraisal of our
three refineries may not reflect the value that would be realized if the collateral agent were to foreclose on
them.”
Strategic Access to Diversified Crude Supplies. The geographic location of our three refineries gives
us access to a diversified supply of crude oil types. In 2009, our crude oil supply was comprised of over 40
different types of crude from 16 different countries. Our Gulf Coast refineries (Lake Charles and Corpus
Christi) have direct marine access and pipeline connections, giving us the ability to optimize our use of low
cost crude oil. Due to its geographic location, our Lemont refinery, which processes mainly heavy sour
Western Canadian crude oils, is able to capture significant discounts on its crude oil costs compared to other
Midwest refineries whose processing capabilities are limited to lighter, sweeter crudes. The diversity of our
three locations also better positions us to withstand potential disruptions in supply and unexpected downtime
at one of the refineries. We are an indirect wholly owned subsidiary of PDVSA, the national oil company of
the Bolivarian Republic of Venezuela, and we serve as PDVSA’s principal outlet for heavy sour crude oil in
the U.S. market. This relationship gives us access to one of the largest proven oil reserves in the Western
Hemisphere.
Integrated Product Marketing and Distribution System. We market and distribute refined products
through our 48 wholly or partly owned terminals, as well as over 150 additional third-party terminals which
we utilize under exchange, terminaling and similar arrangements. This terminal network enables us to optimize
our refined product distribution across more than 27 states in support of our extensive network of
independently owned and operated CITGO-branded retail locations. Sales through our retail marketing network
provide us with a more secure and consistent distribution outlet while also allowing us to capture additional
margin over the bulk spot market. Our broad refining footprint enables us to distribute our refined products to
different regions of the United States, including the Northeast, Southeast, Southwest and Midwest regions,
each of which has different pricing structures and growth dynamics; it also provides us with marine access to
international markets.
Industry-Leading Safety Track Record. We believe that we have one of the leading safety track
records in the refining industry. According to the National Petrochemical and Refiners Association, in four of
the five years between 2004 and 2008 we had the lowest total recordable incident rate among U.S. refiners
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with more than 100 employees. Our safety record reflects our proactive focus on preventive safety measures.
We believe our strong safety focus reduces business, environmental and legal risks and enhances our operating
results.
Experienced, Proven Management Team. Our management team has an average of nearly 30 years of
experience in the energy industry and approximately 13 years with us. This experience underscores our
management’s ability to develop and implement strategies to align our operations with trends in the refining
industry. Since the end of 2008, our management team successfully reduced operating costs, improved our
working capital position and repaid outstanding revolver borrowings, leading to an improvement in our
liquidity position despite a challenging economic environment. We believe our management’s continued efforts
to improve the capabilities and reliability of our refineries and optimize our marketing and distribution
networks, while maintaining a strong focus on operational safety, position us to take advantage of improving
market conditions.
Our Strategy
Our primary objective is to maximize the profitability and cash flow of our refining and marketing
operations while maintaining our strong environmental and safety track record. Our strategy is focused on
efficiently processing a broad range of low cost, primarily heavy sour crude oils into high-value light fuels,
petrochemicals, and industrial products. We intend to achieve this objective through the following strategies:
Continue to Invest in Safe, Environmentally Sound and Reliable Operations. We will continue to fund
capital investments to maintain and improve our safety performance and to comply with increasingly stringent
environmental regulations. Our capital program also includes capital expenditures designed to upgrade our
operating units and increase the reliability of our refining operations. In 2006, we converted a hydrotreating
unit at our Lake Charles refinery to enable us to produce up to 91,300 bpd of ULSD, and we are currently
completing ULSD units at our Corpus Christi and Lemont refineries. By the end of 2010 we will have
completed significant capital expenditures to increase our production of ULSD, which will help us meet
demand for clean fuels products. In 2005, we also completed a project to increase the crude oil distillation
capacity of the Lake Charles refinery by 105,000 bpd.
Capitalize on Our Capability to Process Low Cost, Heavy Sour Crude Oil. We continually seek to
maximize our refining margin through our ability to process low cost, heavy sour crude and optimize our
crude slates. In 2009, the amount of heavy crude oil processed at our refineries was 441,000 bpd (69% of the
total crude oil processed), with an average API gravity of 21.3 degrees (well below the 25 degrees threshold
that defines heavy crudes) and an average sulfur content of 2.2% (well above the 0.5% that defines sour
crudes). We continuously review the economics of multiple available crudes and feedstocks and determine the
optimal crude slate and product yields for our refineries in order to maximize our refining margins.
Optimize Our Refining Production and Marketing Network. We continually seek to optimize the value
of our refining production by distributing our products in markets which can be supplied in a cost-advantaged
manner and by balancing our branded marketing volumes with our production and long-term contract supply
sources. In 2007, we implemented a plan to rationalize our branded marketing sales to focus on more
profitable geographical areas and third-party customers and subsequently divested non-strategic terminal and
pipeline assets. We also seek to maximize the value of our refining and distribution assets by marketing our
underutilized storage capacity at our owned terminals, installing ethanol blending facilities at our certain of
equity-owned terminals, and focusing our sales efforts in regions where our marketing network provides us
with a competitive advantage.
Maintain Focus on Improving Refinery Cost Structure. We seek to continue to perform in the top half
of all U.S. refineries on key cost measures, as reported in industry publications and other publicly available
information. Our management team has successfully reduced our cost structure in response to the economic
conditions resulting from the global recession. In 2009, we reduced refining and manufacturing costs by
approximately $386 million, with approximately $170 million attributable to lower energy costs and
$216 million attributable to non-energy costs, such as labor, third-party services and materials.
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Our Refineries
We own and operate three large-scale, high complexity petroleum refineries with a total rated crude
oil capacity of approximately 749,000 bpd, located in Lake Charles, Louisiana, Corpus Christi, Texas, and
Lemont, Illinois. We believe that we are the third largest and the most complex independent refiner in the
United States, with each of our refineries capable of processing large volumes of heavy sour crude oils into a
flexible range of refined products. Refinery complexity refers to a refinery’s ability to process and convert
crude oil and other feedstocks into higher-value products and is commonly measured by the Nelson Refinery
Complexity Index. In general, a refinery with a higher complexity is more capable of processing heavy sour
crude oils in an economically efficient manner. Over the 2007 to 2009 period, an average of 71% of the crude
oils processed through our refineries were heavy sour crude oils. In 2009, our total yield of high-value
products was 84%, including gasoline, jet fuel, diesel, no. 2 fuel oil and petrochemicals. Our refineries also
produce industrial products, which are used in a wide variety of end-market applications. Each of our
refineries is supported by an extensive logistics network for receiving foreign and domestic crude oils via
marine facilities and pipelines, and for distributing products via connections to major product pipelines and
marine terminals.
Total Rated Crude
Refining Capacity
Location
2010 Nelson
Refinery Complexity
Index(1)
(bpd in thousands)
Lake Charles, LA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corpus Christi, TX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lemont, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
425
157
167
Total rated crude oil refining capacity . . . . . . . . . . . . . . . . .
749
11.83
14.75
11.55
(1) The average 2010 Nelson Refinery Complexity Index for independent U.S. refineries is 10.11, as calculated by the
Oil & Gas Journal. We internally calculate the Nelson Refinery Complexity Index using our current unit specifications
and believe these values are a more accurate representation of our current refinery complexity.
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The following table summarizes the rated refining capacity and utilization rates, crude oil and
feedstock input, and product yield of our three refineries for the three years ended December 31, 2007, 2008
and 2009 and the three months ended March 31, 2009 and 2010.
Total Refinery Production(1)
2007(1)
2008(1)
2009
Three Months Ended
March 31,
2009
2010
(bpd in thousands, except percentages)
Rated refining crude capacity at
year/period end . . . . . . . . . . .
Refinery input. . . . . . . . . . . . . .
Crude oil
Heavy(2) . . . . . . . . . . . . . .
Light(3)
Sour(4) . . . . . . . . . . . . .
Sweet(5) . . . . . . . . . . . .
Total % of crude oil . . . . . . .
Total crude oil . . . . . . . . . . . .
Other feedstocks . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
Product yield
Light fuels
Gasoline . . . . . . . . . . . . . .
Jet fuel . . . . . . . . . . . . . . .
Diesel/#2 fuel . . . . . . . . . .
Petrochemicals . . . . . . . . . . . . .
Industrial products. . . . . . . . . . .
Asphalt . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
Utilization of rated capacity. . . .
861
749
749
559 73%
446
69%
112 15%
90 12%
100%
128
76
749
69%
490
78%
20%
11%
100%
85 14%
110 17%
100%
87
55
14%
8%
100%
90 14%
144 23%
100%
761 88%
108 12%
869 100%
650 85%
118 15%
768 100%
636 88%
89 12%
725 100%
632 87%
97 13%
729 100%
629 88%
83 12%
712 100%
351
70
197
46
163
50
877
338 44%
71
9%
184 24%
44
5%
130 17%
7
1%
774 100%
87%
328
71
175
43
116
733
326
68
175
46
123
738
324
79
154
48
110
715
40%
8%
22%
5%
19%
6%
100%
88%
441
749
45%
9%
24%
6%
16%
100%
85%
44%
9%
24%
6%
17%
100%
84%
395
63%
45%
11%
22%
7%
15%
100%
84%
(1) Includes asphalt refinery operations at our refineries in Paulsboro, New Jersey and Savannah, Georgia through
March 20, 2008, the date we sold the fixed assets and inventories and certain related rights and obligations associated
with these operations.
(2) Heavy crude oil is defined as crude oil with an average API gravity of less than 25 degrees.
(3) Light crude oil is defined as crude oil with an average API gravity of 25 degrees or greater.
(4) Sour crude oil is defined as crude oil with an average sulfur content greater than 0.5%.
(5) Sweet crude oil is defined as crude oil with an average sulfur content of 0.5% or less.
Lake Charles Refinery
Our Lake Charles refinery has a rated crude capacity of 425,000 bpd and is one of the largest
refineries in the United States. The Lake Charles refinery, which has a Nelson Refinery Complexity Index of
11.83, processed an average of 61% heavy sour crude oils over the 2007 to 2009 period. Light fuel products
represented approximately 83% of Lake Charles’ total product yield in 2009. The Lake Charles refinery’s light
fuel products include significant quantities of unleaded gasoline and reformulated gasoline, as well as jet fuel
and ULSD. The Lake Charles refinery also produces, petrochemicals, including refinery-grade propylene,
benzene and mixed xylenes, and industrial products including sulfur, residual oils and petroleum coke.
The major conversion units at our Lake Charles refinery include three fluid catalytic cracking units
with a combined capacity of 143,000 bpd, three naphtha reforming units, two coking units with a combined
capacity of 110,000 bpd, an alkylation unit, and a two-stage hydrocracking unit. Our Lake Charles refinery’s
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high coking capacity enables us to run a heavier crude slate and to convert heavy residual oils to high-value
transportation fuels. The hydrocracking unit is used to upgrade gas oil or low quality distillates to high quality
naphtha, jet fuel and diesel fuel. Additionally, hydrotreating units such as our ULSD and gasoline
hydrotreating units help us meet regulatory and customer demands for clean fuels products. Our Lake Charles
refinery’s petrochemical units produce high-value aromatic-based petrochemicals and refinery-grade propylene.
The following table shows the rated refining capacity and utilization rates, crude oil and feedstock
input, and product yield at our Lake Charles refinery for the three years ended December 31, 2007, 2008 and
2009 and the three months ended March 31, 2009 and 2010.
Lake Charles Refinery Production
Three Months Ended
March 31,
2007
2008
2009
2009
2010
year/period end . . . . . . . . . . .
Refinery input. . . . . . . . . . . . . .
Crude oil
Heavy(1) . . . . . . . . . . . . . .
Light(2)
Sour(3) . . . . . . . . . . . . .
Sweet(4) . . . . . . . . . . . .
Total crude oil . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
Product yield
Light fuels
Gasoline . . . . . . . . . . . . . .
Jet fuel . . . . . . . . . . . . . . .
Diesel/#2 fuel . . . . . . . . . .
Petrochemicals . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
425
425
425
236 64%
200
57%
72
76
425
62%
252
78%
21%
22%
100%
32
9%
100 29%
100%
24
48
7%
15%
100%
53 15%
135 38%
100%
372 94%
25 6%
397 100%
348 93%
26
7%
374 100%
349 94%
21
6%
370 100%
324 95%
16
5%
340 100%
356 94%
22
6%
378 100%
160
69
96
16
64
405
152 40%
69 18%
94 25%
14
4%
51 13%
380 100%
82%
155
68
92
18
48
381
133 38%
63 18%
82 24%
19
5%
52 15%
349 100%
76%
166
77
78
22
43
386
52
84
14%
22%
100%
39%
17%
24%
4%
16%
100%
88%
217
425
41%
18%
24%
5%
12%
100%
82%
(1)
Heavy crude oil is defined as crude oil with an average API gravity of less than 25 degrees.
(2)
Light crude oil is defined as crude oil with an average API gravity of 25 degrees or greater.
(3)
Sour crude oil is defined as crude oil with an average sulfur content greater than 0.5%.
(4)
Sweet crude oil is defined as crude oil with an average sulfur content of 0.5% or less.
168
47%
43%
20%
20%
6%
11%
100%
84%
The Lake Charles refinery’s Gulf Coast location provides it with access to crude oil feedstock
deliveries from multiple sources. The Lake Charles refinery has direct marine access to crude oil and other
feedstock transportation facilities and is connected via company-owned or third-party pipelines to various
crude oil terminals, as well as to the U.S. Strategic Petroleum Reserve. Imported heavy crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, while light sour crude oil supplies are
delivered to a nearby third-party marine terminal and delivered to Lake Charles by our Sour Lake, Texas
pipeline. In addition, the refinery is connected by pipelines to the Louisiana Offshore Oil Port and to terminal
facilities in St. James, Louisiana and the Houston, Texas area through which it can receive crude oil deliveries.
The wide range of logistics options enhances the refinery’s ability to access low cost feedstock and major
product pipelines.
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For delivery of refined products, the Lake Charles refinery has injecting capabilities directly into two
of the largest product pipelines in the United States, Colonial Pipeline and Explorer Pipeline, which are the
major refined product pipelines supplying the Northeast and Midwest regions of the United States,
respectively. Other pipelines carry our light end products such as butanes, refinery-grade propylene and
propane to the market. The Lake Charles refinery also uses adjacent terminals and docks, which provide
access for ocean tankers and barges to load refined products for shipment to domestic and international
markets.
The vice president of the Lake Charles refinery, Eduardo Assef, has over 25 years of experience in
the energy industry, 11 of which have been spent with us. Mr. Assef is supported at Lake Charles by a senior
management team that, together with Mr. Assef, has an average of almost 30 years of energy industry
experience, including an average of approximately 21 years with us.
Corpus Christi Refinery
Our Corpus Christi refinery has a rated crude capacity of 157,000 bpd. We believe that our Corpus
Christi refinery is one of the most complex petrochemical refineries in the United States. The Corpus Christi
refinery, which has a Nelson Refinery Complexity Index of 14.75, processed an average of 94% heavy sour
crude oils over the 2007 to 2009 period. In 2009, light fuel products represented approximately 69% of the
total product yield for the Corpus Christi refinery, with petrochemicals representing approximately 10% and
the balance comprised of industrial products.
The major conversion units at our Corpus Christi refinery include two fluid catalytic cracking units
with a combined capacity of 78,000 bpd, two state-of-the-art naphtha continuous catalytic reforming units, a
43,000 bpd delayed coking unit, and an alkylation unit. Our Corpus Christi refinery’s high coking capacity
enables us to run a heavier crude slate and to convert heavy residual oils into high-value transportation fuels.
Corpus Christi’s conversion units are able to process approximately 60,000 bpd of intermediate feedstock in
addition to intermediate feedstock from its crude topping capacity. We completed the conversion of an existing
diesel hydrotreating unit at our Corpus Christi refinery for production of ULSD in May 2010 at a capacity of
approximately 30,000 bpd, and are building another new unit for production of ULSD at a capacity of
approximately 40,000 bpd, scheduled for completion in December 2010. These units will help us meet
regulatory and customer demands for clean fuels products. The Corpus Christi refinery is also capable of
producing high-value aromatic-based petrochemicals from gasoline, in addition to producing cumene and
cyclohexane.
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input, and product yield at our Corpus Christi refinery for the three years ended December 31, 2007, 2008 and
2009 and the three months ended March 31, 2009 and 2010.
Corpus Christi Refinery Production
2007
2008
2009
Three Months Ended
March 31,
2009
2010
year/period end . . . . . . . . . . .
Refinery input
Crude oil
Heavy(1) . . . . . . . . . . . . . .
Light(2)
Sour(3) . . . . . . . . . . . . .
Sweet(4) . . . . . . . . . . . .
Total crude oil . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
Product yield
Light fuels
Gasoline . . . . . . . . . . . . . .
Jet fuel . . . . . . . . . . . . . . .
Diesel/#2 fuel . . . . . . . . . .
Petrochemicals . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
157
157
141 90%
137
99%
132
92%
135
89%
137
94%
2
-
1%
100%
4
7
3%
5%
100%
9
7
6%
5%
100%
7
2
5%
1%
100%
9
6
6%
4%
100%
157
157
157
156 72%
62 28%
218 100%
139 65%
74 35%
213 100%
143 74%
51 26%
194 100%
151 69%
67 31%
218 100%
146 76%
46 24%
192 100%
97
60
22
39
218
99
50
22
43
214
88
47
18
41
194
102
53
21
44
220
86
44
18
44
192
44%
28%
10%
18%
100%
99%
46%
24%
10%
20%
100%
89%
45%
24%
10%
21%
100%
91%
(1)
(2)
(3)
(4)
46%
24%
10%
20%
100%
96%
45%
23%
9%
23%
100%
93%
The Corpus Christi refinery receives crude oil and other feedstock supplies primarily by marine
transport, utilizing six wholly owned ship docks and a jointly owned dock, as well as third-party docks.
For delivery of refined products, the refinery utilizes marine, pipeline and adjoining terminal
facilities. More than half of the Corpus Christi refinery’s shipments are made via marine transport and thirdparty pipelines, primarily to the Southeast region of the United States and Texas.
The vice president of the Corpus Christi refinery, Kevin Ferrall, has over 30 years of experience in
the energy industry, 15 of which have been spent with us. Mr. Ferrall is supported at Corpus Christi by a
senior management team that, together with Mr. Ferrall, has an average of more than 26 years of energy
industry experience, including an average of more than 20 years with us.
Lemont Refinery
Our Lemont refinery has a rated crude capacity of 167,000 bpd and is a major supplier of
transportation fuels primarily to the Upper Midwest region of the United States. We believe our Lemont
refinery has a logistical advantage to refineries located outside the Midwest with respect to both crude oil
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purchases and product sales. The Lemont refinery’s deep conversion capacity enables it to process large
amounts of heavy sour Canadian crude oils, which gives it an advantage over other Midwest refineries without
similar capabilities. The Lemont refinery also benefits from the lower transportation cost of Canadian heavy
crude oils and its location in a historically net import market for petroleum products. The Lemont refinery,
which has a Nelson Refinery Complexity Index of 11.55, processed an average of 66% heavy sour crude oils
over the 2007 to 2009 period. In 2009, light fuel products represented approximately 79% of the total product
yield for the Lemont refinery, with the remaining output comprised of petrochemicals, including benzene,
toluene and mixed xylenes, plus a range of aliphatic solvents, and industrial products.
The major conversion units at our Lemont refinery include a fluid catalytic cracking unit, two
reforming units, two coking units, and an alkylation unit. As with our other refineries, Lemont’s high coking
capacity enables us to run a heavier crude slate and to convert heavy residual oils into high-value
transportation fuels. We are building a new unit at our Lemont refinery for production of ULSD at a capacity
of approximately 45,000 bpd, scheduled to be completed in July 2010. This unit will help us meet regulatory
and customer demands for lean fuels products. Petrochemical units give Lemont the capability of producing
aromatic-based petrochemicals in addition to aliphatic solvents.
input, and product yield at the Lemont refinery for the three years ended December 31, 2007, 2008 and 2009
the three months ended March 31, 2009 and 2010.
Lemont Refinery Production
Three Months Ended
March 31,
2009
2010
2007
2008
2009
year/period end . . . . . . . . . . . . . . . . . 167
Refinery input
Crude oil
Heavy(1) . . . . . . . . . . . . . . . . . . . . 108 68%
Light(2) . . . . . . . . . . . . . . . . . . . . .
Sour(3) . . . . . . . . . . . . . . . . . . . . 52 32%
Sweet(4) . . . . . . . . . . . . . . . . . . .
Total % crude oil . . . . . . . . . . . . . . . .
100%
Total crude oil . . . . . . . . . . . . . . . . . . 160 88%
Other feedstocks . . . . . . . . . . . . . . . 21 12%
Total. . . . . . . . . . . . . . . . . . . . . . 181 100%
Product yield
Light fuels
Gasoline . . . . . . . . . . . . . . . . . . . . . 94 52%
Jet fuel . . . . . . . . . . . . . . . . . . . . . .
1 1%
Diesel/#2 fuel . . . . . . . . . . . . . . . . . 41 23%
Petrochemicals . . . . . . . . . . . . . . . . . . . .
8 4%
Industrial products . . . . . . . . . . . . . . . . . 37 20%
Total . . . . . . . . . . . . . . . . . . . . . . . 181 100%
Utilization of rated capacity . . . . . . . . . .
96%
167
99
167
65%
92
167
64%
103
66%
90 71%
54 35%
100%
49 34%
3 2%
100%
54 34%
100%
30 24%
7
5%
100%
153 89%
18 11%
171 100%
144 89%
17 11%
161 100%
157 92%
14
8%
171 100%
127 89%
15 11%
142 100%
87
2
40
8
33
170
85
3
36
7
27
158
91
5
40
6
27
169
72
2
32
8
23
137
51%
1%
24%
5%
19%
100%
92%
54%
2%
23%
4%
17%
100%
86%
(1)
(2)
(3)
(4)
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167
54%
3%
23%
4%
16%
100%
94%
53%
1%
23%
6%
17%
100%
76%
Approximately 64% of the Lemont refinery’s crude oil input is heavy Canadian crude oil, which is
transported from Western Canada via a third-party pipeline, the Enbridge Pipeline system. The refinery is also
capable of receiving crude oil and other feedstocks by barge and rail.
The Lemont refinery is strategically positioned along major shipping routes. The facility is adjacent
to the Chicago Sanitary and Ship Canal, which connects by the Des Plaines River to the Illinois and
Mississippi Rivers. This system of waterways provides access to the Great Lakes area of the United States and
the Gulf of Mexico for delivery of product. The Lemont refinery also is positioned in close proximity to two
major rail systems as well as to third-party pipelines for the delivery of product.
The vice president of the Lemont refinery, Jim Cristman, has over 30 years of experience in the
energy industry, all of which have been spent with us. Mr. Cristman is supported at Lemont by a senior
management team that, together with Mr. Cristman, has an average of more than 25 years of energy industry
experience, including an average of more than 25 years with us.
Crude Oil and Other Feedstock Purchases
We do not own any crude oil reserves or production facilities, and must therefore rely on purchases of crude
oil and feedstocks for our refinery operations. The complexity and geographic location of our three refineries gives us
the flexibility to process a wide range of crude oils, including heavy sour grades, and better positions us to withstand
potential disruptions in supply and unexpected downtime at one of the refineries. In 2009, our crude oil supply was
comprised of over 40 different types of crude from 16 different countries. Our Gulf Coast refineries (Lake Charles
and Corpus Christi) have direct marine access and pipeline connections, giving us the ability to optimize on low cost
feedstocks. Due to its geographic location, our Lemont refinery, which processes mainly Western Canadian crude oils,
is able to capture significant discounts on its crude oil costs to most other refineries in the United States.
The following table shows our net purchases of crude oil by type for our three refineries for the three
years ended December 31, 2007, 2008 and 2009 and the three months ended March 31, 2009 and 2010.
Crude Oil Purchases by Type
Lake Charles, LA
2007 2008 2009
Corpus Christi, TX
Lemont, IL
2007
2008
2009
2007 2008 2009
2007
Total
2008
2009
(bpd in thousands)
Crude Oil Type
Heavy(1) . . . . . . .
Light(2)
Sour(3) . . . . . . .
Sweet(4) . . . . . .
235
198
222
146
133
130
109
99
91
490
430
443
55
86
73
77
32
103
4
-
-
4
3
50
-
52
1
46
5
109
86
125
78
82
111
Total(5) . . . . . . . .
376
348
357
150
133
137
159
152
142
685
633
636
Lake Charles, LA
2009
2010
Three Months Ended March 31,
Corpus Christi, TX
Lemont, IL
2009
2010
2009
2010
Crude Oil Type
(bpd in thousands)
119
108
Total
2009
2010
90
529
390
Heavy(1) . . . . . . . .
Light(2)
Sour(3) . . . . . . .
Sweet(4) . . . . . . .
277
181
144
29
36
67
144
12
4
5
5
53
2
29
8
94
42
101
157
Total(5) . . . . . . . . .
342
392
160
129
163
127
665
648
(1)
(2)
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(3)
(4)
(5)
Total crude oil purchases do not equal crude oil refinery inputs because of changes in inventory.
Our largest single supplier of crude oil is PDVSA, from whom we source a substantial amount of the
crude oil requirements for our Lake Charles and Corpus Christi refineries. We also purchase additional
Venezuelan crude oil from other affiliated Venezuelan suppliers. In 2009, approximately 40% of our crude oil
purchases were from PDVSA, with an additional 5% coming from other affiliated Venezuelan suppliers. See
“Related Party Transactions.” The remaining 55% of our crude oil purchases in 2009 were supplied by more
than 45 suppliers. This included approximately 25 suppliers of Canadian crude oil for our Lemont refinery.
In total in 2009, approximately 64% of our crude oil requirements were purchased under term
contracts, with the remainder being purchased on the spot market.
Our largest contractual relationship is with PDVSA. Our contract purchases with PDVSA are
currently under a supply agreement with a term expiring March 31, 2012. This agreement requires PDVSA to
supply minimum quantities of crude oil to us, and incorporates formula pricing based on the average spot
market values of widely traded crudes and other hydrocarbons plus an adjustment for market change similar to
the Maya crude price formula, which is a common market-based price mechanism. Our crude oil purchase
commitment under the agreement is approximately 250,000 bpd. We also purchase Venezuelan crude oil for
our Lake Charles and Corpus Christi refineries on a spot basis from PDVSA and other affiliated suppliers. See
“Related Party Transactions – Supply and Sales Agreements.”
Approximately 67% of the Canadian crude oil requirements for our Lemont refinery in 2009 were
purchased under supply contracts with various suppliers. These contracts generally have terms of one year,
which are typically renewed upon expiration. The contracts generally incorporate formula pricing based on
spot market values of widely traded crude oils.
The following tables summarize our purchases of crude oil by source and type of purchase
arrangement for the three years ended December 31, 2007, 2008 and 2009 and the three months ended
March 31, 2009 and 2010.
Crude Oil Purchases by Source(1)
Lake Charles, LA
2007 2008 2009
Corpus Christi, TX
Lemont, IL
2007 2008 2009
2007 2008 2009
Total . . . . . . . . . . . . . . . . . . .
Total
2008
2009
(bpd in thousands)
Supplier/Source
PDVSA and Other Affiliates
Contract Purchases. . . . . . .
Spot Purchases. . . . . . . . . .
Canadian Crude Oil Suppliers
Spot Purchases. . . . . . . . . .
Other sources
Spot Purchases. . . . . . . . . .
2007
119
21
122
16
128
38
129
-
120
-
119
-
-
-
-
248
21
242
16
247
38
-
-
-
-
-
-
77
82
82
70
95
47
77
82
82
70
95
47
98
138
75
135
61
130
1
20
3
10
4
14
-
-
-
99
158
78
145
65
144
376
348
357
150
133
137
159
152
142
685
633
636
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Lake Charles, LA
2009
2010
Corpus Christi, TX
Lemont, IL
2009
2010
2009
2010
Total . . . . . . . . . . . . . . . . . . . . . .
2010
(bpd in thousands)
Supplier/Source
PDVSA and Other Affiliates
Contract Purchases. . . . . . . . . .
Spot Purchases. . . . . . . . . . . . .
Canadian Crude Oil Suppliers
Spot Purchases. . . . . . . . . . . . .
Other sources
Spot Purchases. . . . . . . . . . . . .
Total
2009
161
38
123
16
138
-
109
-
-
-
299
38
232
16
1
-
-
-
101
60
85
38
101
61
85
38
58
84
42
211
5
17
11
9
2
4
63
103
53
224
342
392
160
129
163
127
665
648
(1) Total crude oil purchases do not equal crude oil refinery inputs because of changes in inventory.
In addition to crude oil, we utilize intermediate feedstocks to optimize the capacity of our refinery
conversion units. Although the majority of our intermediate feedstocks are produced internally from crude
processing, we also purchase intermediate feedstocks in order to utilize refinery spare capacity and optimize
unit run rates.
Purchased intermediate feedstocks include naphtha, a refined product used as a feedstock for catalytic
reforming units; catalytic feed, used as a feedstock for fluid catalytic cracking units; coker feed, used as a
feedstock for coking units; and cycle oil, used as a feedstock for hydrocracking units. The mix of intermediate
feedstocks purchased varies by refinery because of the differences in available capacity. For example, our Lake
Charles refinery has available hydrocracking capacity, which allows us to purchase more cycle oil, while our
Corpus Christi refinery has available fluid catalytic cracking capacity, which allows us to purchase more
catalytic feed.
Purchased intermediate feedstocks include naphtha, a refined product used as a feedstock for catalytic
reforming units; catalytic feed, used as a feedstock for fluid catalytic cracking units; coker feed, used as a
feedstock for coking units; and cycle oil, used as a feedstock for hydrocracking units. The mix of intermediate
feedstocks purchased varies by refinery because of the differences in available capacity. For example, our Lake
Charles refinery has available hydrocracking capacity, which allows us to purchase more cycle oil, while our
Corpus Christi refinery has available fluid catalytic cracking capacity, which allows us to purchase more
catalytic feed.
Intermediate feedstocks are purchased from a number of different sources. We purchase the majority
of our naphtha requirements for our Lake Charles and Corpus Christi refineries under a feedstock supply
agreement with PDVSA expiring January 1, 2012. The agreement requires PDVSA to supply a minimum
quantity of 10,000 bpd of naphtha at formula prices that are based primarily on gasoline market prices and
adjusted for the value of the content of other products, associated expenses, and a deemed margin. See
“Related Party Transactions – Supply and Sales Agreements.” Other intermediate feedstocks are purchased
mainly on a spot basis.
Refined Product Marketing and Distribution
In 2009, our total product yield was composed of 78% light fuels, 6% petrochemicals, and 16%
industrial products. Our products are supported by an extensive distribution network and are sold through a
variety of channels, including our branded independently owned and operated retail network, as well as in the
bulk market and directly and indirectly to large manufactures, retailers and markets. The following table shows
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revenues and volumes of each of our refined product categories for the three years ended December 31, 2007,
2008 and 2009.
Refined Product Sales Revenues and Volumes(1)
Light fuels
Gasoline . . . . . . . . . . . . . . . . . . . . . .
Diesel/#2 fuel . . . . . . . . . . . . . . . . . .
Jet fuel . . . . . . . . . . . . . . . . . . . . . . .
Petrochemicals . . . . . . . . . . . . . . . . . . . . .
Industrial Products. . . . . . . . . . . . . . . . . . .
Lubricants and waxes . . . . . . . . . . . . . . . .
Asphalt . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total refined product sales . . . . . . . . .
EITF 04-13 reclassification(2) . . . . . . . . . .
EITF 99-19 reclassification(3) . . . . . . . . . .
Other sales . . . . . . . . . . . . . . . . . . . . . . . .
Total sales . . . . . . . . . . . . . . . . . . . . .
2007
2008
2009
2007
2008
2009
($ in millions)
$19,911
9,122
4,311
2,376
3,306
883
1,318
$21,110
11,791
5,192
2,348
3,325
680
86
41,227
(2,960)
(312)
60
$38,015
44,532
(3,030)
(224)
2
$41,280
$13,436
6,295
2,427
1,425
2,118
340
26,041
(968)
(150)
9
$24,932
9,320
4,309
2,026
859
2,259
221
1,004
8,314
4,014
1,731
761
1,674
126
59
7,781
3,722
1,422
723
1,643
54
-
19,998
-
16,679
-
15,345
-
19,998
16,679
15,345
(1)
Includes asphalt refinery operations at our refineries in Paulsboro, New Jersey and Savannah, Georgia through
March 20, 2008, the date we sold the fixed assets and inventories and certain related rights and obligations associated
with these operations.
(2)
Reflects sales reclassified in accordance with EITF 04-13.
(3)
Reflects sales reclassified in accordance with EITF 99-19.
Light Fuels
We sell gasoline to approximately 450 marketers who in turn sell to approximately 6,500
independently owned and operated CITGO-branded retail outlets located east of the Rocky Mountains. We
believe that we are the seventh largest branded gasoline supplier within the United States as measured by sales
volume, with an approximate 5% market share of the branded gasoline market. Our extensive branded retail
network provides us with a more secure and consistent distribution outlet while also allowing us to capture
additional margin over the bulk spot market. We sell diesel and a small portion of our gasoline through a
network of unbranded or commercial customers. In addition, we market jet fuel directly to major airline
customers as well as to resellers for use at seven airports, including major hub cities such as Boston and
Miami. We sell our heating oil primarily through distributors.
Our refineries and supply distribution networks are strategically located for our service markets. Our
broad refining footprint enables us to distribute our refined products to different regions of the United States,
including the Northeast, Southeast, Southwest and Midwest regions, each of which have different pricing
structures and growth dynamics.
Our light fuel marketing activities are supported by an extensive terminal distribution network
throughout our service regions. We own or have equity ownership in 48 refined product storage and transfer
terminals located across 22 states. Of these terminals, 37 are wholly owned by us and 11 are jointly owned
and are operated by us. Eleven of our product terminals have waterborne docking facilities, which greatly
enhance our logistical flexibility. Refined product terminals owned or operated by us provide a total storage
capacity of approximately 21 million barrels. In addition, we have access to over 150 third-party terminals
through exchange, terminaling and similar arrangements with other major refined product suppliers and
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terminal operators. These arrangements provide us the flexibility and timely response capability to meet the
distribution needs of our customers, while allowing us to optimize our refinery utilization, balance refined
product supply and demand, and minimize transportation costs.
Sales to our independent branded marketers are typically made under contracts which run for an
initial term of three years and automatically renew for successive three year periods unless earlier terminated.
The contracts require the marketers to purchase a minimum amount of CITGO-branded gasoline each month
at prices established by CITGO on a point-of-sale basis. In addition, the contracts require the marketers to
display the CITGO brand and maintain certain minimum standards relating to cleanliness, safety and
appearance at their retail facilities.
Petrochemicals, Industrial Products and Lubricants
We produce a diverse range of petrochemicals, industrial products and lubricants.
The petrochemicals we produce include benzene, cumene, mixed xylenes, toluene, cyclohexane,
refinery-grade propylene, and solvents. We sell petrochemicals primarily to large chemical and petrochemical
manufacturers for use in the production of plastics, fibers and building materials, including paints, adhesives
and coatings. Our petrochemicals sales are typically governed by contracts that range from one to five years
and have a minimum volume requirement.
Industrial products are byproducts that are produced or consumed during the refining process. Our
industrial products include sulfur, which is sold to the U.S. and international fertilizer industries; cycle oils,
which are sold for feedstock processing and blending; natural gas liquids, which are sold to the U.S. fuel and
petrochemical industry for gasoline blending, heating and as feedstocks for petrochemicals; petroleum coke,
which is sold primarily in international markets for use as kiln and boiler fuel; and residual fuel blendstocks,
which are sold to a variety of fuel oil blenders or other refiners for further processing.
We blend and market lubricants such as industrial lubricants and automotive oils on a branded basis,
with particular penetration in the retail markets for 2-cycle and small engine oil, grease products, metal
working fluids, and environmentally friendly and food-grade lubricants. Besides direct sales to large direct
accounts, we have over 200 contract marketers that distribute our finished lubricant products throughout the
United States and internationally.
Refined Product Purchases
We supply our distribution network primarily from our three refineries in Lake Charles, Corpus
Christi, and Lemont, as well as from the products we purchase from HOVENSA, L.L.C. (“HOVENSA”), a
50-50 joint venture between a subsidiary of PDVSA and Hess Corporation. See “Related Party Transactions.”
We purchased approximately 134,000 bpd, 142,000 bpd and 157,000 bpd from HOVENSA in 2009, 2008 and
2007, respectively. In 2009, our internal production, together with our supply from HOVENSA, exceeded our
marketing sales by approximately 39,000 bpd for gasoline, 62,000 bpd for distillate, and 45,000 bpd for jet
fuel. In addition, to optimize our refineries and meet our customers’ demands, we also buy and sell gasoline
and distillate through bulk sales channels. Our bulk purchases and sales are with various unaffiliated oil
companies and trading companies and allow us to balance location, grade, volume, and timing differences
between our supply sources and demand from our customers.
Properties
Our principal properties are described above under the caption “Our Refineries.” We also own
directly or have interests in pipelines and terminals, as described under the caption “Refined Product
Marketing and Distribution.”
Our Corpus Christi refinery complex consists of an East Plant and a West Plant, located within five
miles of each other. While we own the East Plant, we operate the West Plant under a sublease agreement. The
sublease expires on January 31, 2011. We have an option to purchase the facility for a nominal amount upon
expiration of the sublease. We gave notice during 2009 of our intent to exercise this option. In addition,
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certain third parties own and operate hydrogen production plants located near or within the boundaries of our
Corpus Christi and Lemont refineries, which are treated as capital leases scheduled to expire between August
2023 and March 2030.
We also have various other operating leases, primarily for product storage facilities, office space,
marine vessels, computer equipment and various facilities and equipment used to store and transport
feedstocks and refined products. Operating lease expense totaled $90 million and $43 million for the three
months ended March 31, 2010 and 2009, respectively, and $171 million and $266 million for the years ended
December 31, 2009 and 2008, respectively. See Note 15 to our audited consolidated financial statements
included in this offering memorandum for a discussion of certain of our lease arrangements.
Competition
The petroleum refining and marketing business is highly competitive. Our competitors include
companies engaged in petroleum refining, as well as companies that produce similar or alternative products or
services to meet the needs of industrial, commercial and individual consumers. Within the refining industry,
we compete with other independent refiners as well as with integrated oil companies. Increasing environmental
regulations and changing consumer preferences could in the future increase the level of competition from
companies that produce alternative products and services. For example, mandated increases in the ethanol and
other alternative fuel content of gasoline have benefited and are expected to continue to benefit producers of
these products. Many of our competitors have significantly greater capital resources at their disposal, which
may provide them greater flexibility in responding to volatile or changing industry and market conditions.
We compete on the basis of competitive pricing, brand loyalty, quality products and services,
dependability and excellent customer services to our network of independent marketers. We also seek to
enhance the CITGO brand through advertising and promotional campaigns, including campaigns that
emphasize the value of our social development programs and the contributions that local owners and operators
of CITGO-branded retail outlets make to their neighboring communities.
We believe the size and complexity of our refineries, which enable us to process large volumes of
lower cost, heavy sour crude oils into a flexible slate of refined products, gives us a significant advantage over
our competitors. See “– Competitive Strengths and “– Our Refineries.”
Employees
We have a total of approximately 3,600 employees, approximately 1,300 of whom are covered by
union contracts. Most of our union employees are employed in refining operations. The remaining union
employees are located in various refined product terminals. Our collective bargaining agreements will expire
between January 2012 and July 2012. We believe our relations with our employees are satisfactory.
Social Development Programs
Social responsibility and a commitment to helping others are core values of CITGO, consistent with
the social development principles of our shareholder. In this regard, we create value for our stakeholders by
using our core resources to design, develop and implement social development programs that give back, invest
in the development of people and communities, particularly the underprivileged, and help make the world a
better place for future generations. Our social responsibility framework focuses on four key areas: energy
assistance and conservation; environmental protection and restoration; education; and health.
The CITGO-Venezuela Heating Oil Program program began in the winter of 2005 and has grown to
provide heating assistance to people in 25 states plus the District of Columbia. Additionally, CITGO promotes
the efficient use of energy by providing compact fluorescent light bulbs to low-income families. The use of
compact fluorescent light bulbs produces additional environmental benefits by reducing carbon dioxide
emissions.
Our recent donation to the State of New Jersey of a conservation easement affecting Petty’s Island
was pursuant to an agreement whereby we will transfer title to Petty’s Island to the State by 2017. Our
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continuing commitment to its restoration evidences our focus on preserving and protecting the environment.
Petty’s Island will be used as an ecological preserve that will provide both historical and environmental
education for future generations.
Our focus on education and social investment can be seen in various projects initiated in the South
Bronx area of New York which promote community and economic sustainability through education, job
training and environmental conservation. Additionally, we have implemented an aggressive initiative, our
Supplier Diversity Initiative, which gives minority- and/or women-owned businesses the opportunity to
participate in the CITGO supply chain.
Our 24-year relationship with the Muscular Dystrophy Association and the creation of the Simón
Bolívar Foundation in 2006 demonstrate our dedication to improving the lives of people with critical illnesses.
Through the Simón Bolívar Foundation patients receive specialized medical care, including cochlear implants,
liver transplants and bone marrow transplants.
Our commitment to helping those in need is further demonstrated by our aid efforts to Haiti following
the earthquake that struck the island nation on January 12, 2010. We donated 300 tons of humanitarian aid to
Haiti. In addition, we conducted a fund-raising campaign involving our employees and more than a thousand
energy companies, suppliers, marketers and owners of CITGO-branded service stations, and non-governmental/
non-profit organizations.
These programs, combined with our other local initiatives, provide support to a wide range of people
and communities and illustrate our corporate commitment to social responsibility.
Governmental Regulation
We are subject to extensive and evolving federal, state and local environmental laws and regulations,
including, but not limited to, those relating to the discharge of materials into the environment or that otherwise
relate to the protection of the environment, waste management and the characteristics and composition of
fuels. These laws and regulations, and enforcement actions thereunder, may require us to take additional
compliance actions and actions to remediate the effects on the environment of prior disposal or release of
petroleum, hazardous substances and other regulated materials and/or pay for natural resource and other
related damages. Compliance with these laws and regulations also increases our operating costs and requires
significant capital expenditures. For additional information on and discussion of environmental matters relating
to our business, see “Risk Factors – Risks Relating to Our Business and the Petroleum Industry,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and
Capital Resources – Capital Expenditures” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Environmental and Safety Liabilities.”
We are subject to the federal Clean Air Act, which includes the New Source Review program as well
as the Title V Air Permitting Program; the federal Clean Water Act, which includes the National Pollution
Discharge Elimination System program; and the federal Resource Conservation and Recovery Act (“RCRA”)
and their equivalent state programs. For each of our refineries, we are required to obtain permits under each of
these programs and believe we are in material compliance with the terms of these permits. We are subject to
liability under the RCRA and the Comprehensive Environmental Response, Compensation and Liability Act
(“CERCLA”) for remediation of contamination at or migrating from our refineries. Such liability is offset
because the former owners of our Lake Charles and Lemont refineries have assumed all or the material
portion of the remediation obligations related to those assets. We are currently incurring costs to remediate
certain sites. We do not expect these costs to be material if indemnifying parties continue to indemnify us for
a significant portion of these costs at the Lake Charles and Lemont refineries. However, we could incur
significant costs if the former owners are unwilling or unable to pay their shares.
The U.S. refining industry is required to comply with increasingly stringent product specifications
under the 1990 Clean Air Act Amendments for reformulated gasoline and low sulfur gasoline and diesel fuel.
The EPA adopted regulations under the Clean Air Act that require significant reductions in the sulfur content
in gasoline, on-road diesel fuel, and off-road diesel fuel. These regulations required most refineries to begin
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reducing sulfur content in gasoline to 30 parts per million, or ppm, on January 1, 2004, with full compliance
by January 1, 2006, and required reductions in sulfur content in on-road diesel to 15 ppm beginning on
June 1, 2006, with full compliance by January 1, 2010. We have incurred additional operating costs and made
significant capital expenditures in order to maintain compliance with these requirements. See “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources –
Capital Expenditures.”
Various federal and state legislative and regulatory measures to address greenhouse gas emissions
(including carbon dioxide, methane and nitrous oxides) are in varying phases of discussion or implementation
at the federal, state and regional levels. These measures include EPA-enacted regulations to require reporting
of greenhouse gas emissions as well as proposed federal legislation (including cap-and-trade programs) and
state actions to develop programs which, among other things, would regulate or require reductions in
greenhouse gas emissions. The proposed actions could result in increased costs to (i) operate and maintain our
facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any greenhouse
gas emissions program. The proposed actions could also impact demand for refined products, thereby affecting
our operations.
The petroleum refining and distribution industry is subject to stringent federal and state occupational
health and safety laws and regulations. We also believe that the safety of our employees and facilities is tied
directly to productivity in our facilities and financial results. We maintain a comprehensive safety management
system which includes safety policies, procedures, recordkeeping, internal reviews, training, incident reviews
and corrective actions. We track not only accidents, but also “near miss” events and conditions, equipment
malfunctions, first aid events and medical treatments. Each employee at our facilities has a role in maintaining
safe work conditions and has the authority to stop unsafe acts or unsafe conditions.
While we do not believe that any currently pending or proposed environmental or safety compliance
or remediation requirements or currently pending or asserted litigation, investigatory or other matters,
including those described below and in our consolidated financial statements included herein, will have a
material adverse impact on our financial condition, results of operations or cash flows, we cannot assure you
that such requirements or the outcome of such matters would not, individually or in the aggregate, have a
material adverse effect on our financial condition and results of operations and certain indicated matters could
significantly affect us during individual financial reporting periods. At March 31, 2010, our balance sheet
included an environmental accrual of $81 million. We estimate that an additional loss of $23 million as of
March 31, 2010 is reasonably possible in connection with environmental matters.
Environmental Matters
In 1992, we reached an agreement with the Louisiana Department of Environmental Quality (the
“LDEQ”) to cease usage of certain surface impoundments at the Lake Charles refinery by 1994. A mutually
acceptable closure plan was filed with the LDEQ in 1993. The remediation commenced in December 1993.
We are now implementing the plan pursuant to a June 2002 LDEQ administrative order. We and the former
owner of the refinery are sharing the related closure costs based on estimated contributions of waste and
ownership periods.
In June 1999, we and numerous other industrial companies received notice from the EPA that the
EPA believes these companies have contributed to contamination in the Calcasieu Estuary, near Lake Charles,
Louisiana and are potentially responsible parties (“PRPs”) under CERCLA. The EPA made a demand for
payment of its past investigation costs from us and other PRPs and since 1999 has been conducting a remedial
investigation/feasibility study under its CERCLA authority. The LDEQ has also made similar allegations
against us and other industrial companies. While we disagree with many of the EPA’s and LDEQ’s earlier
allegations and conclusions, in December 2003 we signed a Cooperative Agreement with the LDEQ on issues
relative to the Bayou d’Inde tributary section of the Calcasieu Estuary. Other companies have entered into
similar agreements with the LDEQ and the companies are proceeding with a related Feasibility Study Work
Plan. We intend to continue to contest this matter if necessary.
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In January and July 2001, we received notices of violation (“NOVs”) from the EPA alleging
violations of the Clean Air Act at our refineries. The NOVs are an outgrowth of an industry-wide and multiindustry EPA enforcement initiative alleging that many refineries, electric utilities and other industrial sources
modified air emission sources without complying with the New Source Review provisions of the Clean Air
Act. Without admitting any violations, we executed a consent decree with the United States and the states of
Louisiana, Illinois, New Jersey and Georgia. The consent decree requires the implementation of pollution
control equipment at our refineries and a supplemental environment project at our Corpus Christi refinery. We
have incurred $434 million in capital costs related to the consent decree, primarily between 2006 and 2008.
We expect to incur an additional $26 million in related capital costs through the end of 2011.
On June 19, 2006, as the result of torrential rainfall, two stormwater storage tanks at the Lake Charles
refinery wastewater treatment plant overflowed and, according to the EPA’s estimate, approximately
53,000 barrels of slop oil were discharged to the Indian Marais and the Calcasieu River. In connection with
the same event, hydrogen sulfide and sulfur dioxide were released to the air. The EPA and the LDEQ
commenced the following three enforcement actions:
(i) The EPA commenced a criminal proceeding against us alleging the negligent discharge of oil
under the Clean Water Act. In September 2008, we entered into a plea agreement under which we pleaded
guilty to one misdemeanor charge of negligent discharge of oil, paid a $13 million fine and entered into an
Environmental Compliance Program. Our Environmental Compliance Program is ongoing.
(ii) On April 9, 2007, the LDEQ issued a Consolidated Compliance Order and Notice of Potential
Penalty to us with regards to the June 19, 2006 event and several other alleged violations over a five-year
period. The Order does not set forth a specific penalty amount, but the LDEQ has separately indicated that the
maximum penalty it would seek would be approximately $155,000. On May 14, 2007, we filed an appeal of
this Order.
(iii) On June 24, 2008, the EPA and the LDEQ filed civil complaints against us under the Clean
Water Act in the U.S. District Court for the Western District of Louisiana for slop oil release to the Calcasieu
River. The EPA is seeking injunctive relief and penalties to prevent a recurrence of this release. On April 7,
2009, the EPA filed a Motion for Partial Summary Judgment based in part on our prior admission of liability
under the criminal plea agreement. We filed a motion admitting to liability but challenging the
characterization of the facts alleged. The EPA’s complaint does not set forth a specific penalty; however, under
Section 311 of the Clean Water Act, the EPA can seek penalties up to $1,100 per barrel released for ordinary
negligence and up $4,300 per barrel for gross negligence or willful misconduct. The trial of the EPA case is
expected to take place in the fall of 2010.
In addition to the above actions, trustees from both the federal government and the State of Louisiana
are seeking payment from us for alleged damages to natural resources. We have submitted the required Natural
Resource Damage Assessment (“NRDA”) studies and have since agreed with the federal government to a
partial NRDA of approximately $316,000 for loss of recreational use of the Calcasieu and Intercoastal
Waterway; however, we have deferred payment until completion of the entire NRDA process. In connection
with the NRDA, in February 2009 the National Oceanic and Atmospheric Administration (“NOAA”)
submitted a request for cost reimbursement in the amount of $901,000 for expenses incurred through
December 2007. Separately, the LDEQ is seeking reimbursement of an unspecified amount for its response
costs to the incident.
We do not believe that the resolution of these matters will have a material adverse effect on our
financial condition over an extended period; however they may have a significant effect on our financial
results for a given period.
In February 2009, the EPA issued an NOV to our Lemont refinery for alleged violations of the Clean
Air Act resulting from the combustion of pollutants in its refinery flares. According to the EPA, the Lemont
NOV was the beginning of a nationwide effort to improve flaring operations in the industry by requiring
continuous monitoring and control equipment that will record steam-to-waste gas ratios during flaring events.
The EPA contends that only through conducting such monitoring can refineries determine whether the flares
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are maintained in conformance with their design and conform to good air pollution control practices. The
purported goal is to control these ratios in an automated fashion as well as create a new body of operations
and monitoring records. The EPA envisions refining companies entering into agreements with the EPA similar
to the NSR consent decree we executed concerning alleged modifications of air emission sources. We have
informed the EPA that its proposed program is neither required nor necessary and have provided it with
records indicating that our flare operations conform to recommended design standards.
We own Petty’s Island, an island in the Delaware River under the jurisdiction of New Jersey that
contains a closed petroleum terminal and other industrial facilities. The island is a habitat for the bald eagle
and other wildlife. In April 2009, we granted a conservation easement encumbering Petty’s Island to the New
Jersey Natural Lands Trust. In connection with the April 2009 conservation easement, we entered into an
Agreed Consent Order and related agreements with the New Jersey Department of Environment Protection,
which among other things provide for us to remediate hydrocarbon contamination on Petty’s Island. We must
remove the structures associated with the former petroleum operations and remediate the soil and groundwater
contamination on the island before title can be transferred to the New Jersey Lands Trust. In connection with
the conservation easement, we obtained a release for all claims for natural resource damages to ground water
arising from discharges at Petty’s Island and five other properties in New Jersey prior to October 14, 2009.
As a result of a July 19, 2009 fire at the hydrogen fluoride alkylation unit at our Corpus Christi
refinery, the refinery exceeded its waste water treatment and storage capacity and was compelled to release
fire control water that exceeded some of the permit limits of the refinery’s discharge permit to the Corpus
Christi Bay. The U.S. Chemical Safety Board, the Occupational Safety and Health Administration (“OSHA”),
the EPA, the U.S. Coast Guard, and the Texas Commission on Environmental Quality (“TCEQ”) have
investigated the incident. On December 18, 2009, the TCEQ issued a Notice of Enforcement for alleged
discharges in excess of certain Texas Pollution Discharge Elimination System limits and demanded an
administrative civil penalty of $963,000, and on January 15, 2010, OSHA issued a citation against us in the
amount of $237,000 for alleged violations of its regulations. In February 2010, the TCEQ increased the
amount of its civil penalty to approximately $1 million to include additional alleged violations discovered
during an air investigation. We are engaged in discussions and negotiations of the terms of a settlement with
the TCEQ. The safety aspects of this fire are discussed below under “— Safety” and certain civil lawsuits
related to the incident are discussed under “— Legal Proceedings.”
Safety Matters
As described above under “— Environmental Matters,” on July 19, 2009, a fire occurred at the
alkylation unit at our Corpus Christi refinery. One of our employees was seriously burned during the incident
and another employee sustained minor injuries. We have completed internal and external investigations of the
incident and are in the process of implementing the recommended improvements. On December 9, 2009, the
U.S. Chemical Safety Board issued urgent recommendations regarding the incident, which we are
implementing. We do not believe that implementation of these recommendations will have a material adverse
effect on our financial condition.
Legal Proceedings
In the ordinary course of business, we become party to or otherwise involved in lawsuits,
administrative proceedings and governmental investigations, including environmental, regulatory, personal
injury and property damage, commercial, tax, anti-trust and employment-related matters. Large and sometimes
unspecified damages or penalties may be sought from us in some matters and some matters may require years
for us to resolve. We cannot provide assurance of the outcome of any matter. However, we vigorously defend
claims filed against us. While we do not believe that an adverse resolution of currently known or pending
claims, including those described below, would have a material adverse effect on our financial position or
results of operations, we cannot assure you that the outcome of these matters would not, individually or in one
aggregate, have a material adverse effect on our financial conditions and results of operations and certain
indicated matters could significantly adversely affect us during individual financial reporting periods. For
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information on our accruals and potential exposure for legal proceedings see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Litigation Contingencies.”
We, along with most of the other major oil companies in the United States, are a defendant in a
number of federal and state lawsuits alleging contamination of private and public water supplies by methyl
tertiary butyl ether (“MTBE”), a gasoline additive. In general, the plaintiffs, which include individuals and
businesses as well as state and local governments and governmental authorities, claim that MTBE renders the
water not potable. In addition to compensatory and punitive damages, plaintiffs seek injunctive relief to abate
the contamination. The first MTBE cases were filed in 2001. We and some of the other defendants previously
settled 60 of the MTBE cases, with our share of the settlement being $34.4 million ($16 million of which we
recovered from our insurance carriers). In addition, the defendants are responsible for any future claims for
cleanup costs for any new MTBE-contamination in certain wells, with our share being 5.76% of any such
costs. As of July 12, 2009, a settlement agreement was executed with the City of New York City to resolve the
City’s MTBE claims for approximately $13.8 million, of which our approximately $1 million share has been
paid. We and the other defendants are also contingently liable for the future cleanup of certain wells if those
wells become contaminated. On April 15, 2010, we and most of the other MTBE defendants entered into a
settlement with 47 plaintiffs in New York and Florida. The total settlement is for $35 million, of which our
share is approximately $2.3 million. As of December 31, 2009, there were approximately 30 cases pending,
the majority of which were filed by municipal authorities. Many of the remaining cases are pending in federal
court and are consolidated for pre-trial proceedings in the U.S. District Court for the Southern District of New
York in Multi-District Litigation (“MDL”) No. 1358. Six cases are also pending against us in state courts in
New York, New Hampshire, New Jersey, California and the Commonwealth of Puerto Rico. While we do not
believe that the resolution of these matters will have a material adverse effect on our financial condition, a
significant adverse effect on our financial results for a given period is possible.
Claims have been made against us in a number of asbestos, silica and benzene lawsuits pending in
state and federal courts. Most of these cases involve multiple defendants and are brought by former employees
or contract employees seeking damages for asbestos, silica and benzene related illnesses allegedly caused, at
least in part, from exposure at refineries owned or operated by us in Lake Charles, Louisiana, Corpus Christi,
Texas, and Lemont, Illinois. In many of these cases, the plaintiffs’ alleged exposure occurred over a period of
years extending back to a time before we owned or operated the premises at issue. There have been no further
hearings or developments since 2007.
In November 2004, the Athos I, a merchant tanker, struck a submerged anchor in the public channel
of the Delaware River near Paulsboro, New Jersey and released crude oil owned by CITGO Asphalt Refining
Company (“CARCO”), our then wholly owned subsidiary. Frescati Shipping Company Ltd. (“Frescati”), the
owner of the Athos I, filed suit against CARCO in the U.S. District Court for the Eastern District of
Pennsylvania for over $125 million in oil spill recovery and cleanup costs. In 2008, we were also sued in the
same court by the federal government, which is seeking to recover $87 million it paid out of the Oil Spill
Liability Trust Fund to Frescati for its costs in responding to the oil spill. The cost of the entire cleanup and
damages was approximately $268 million. We do not believe CARCO has any liability for the oil spill;
however, we have entered into an agreement with the government to cap our potential damages at
$123.5 million if we were to lose the Frescati lawsuit.
In addition to the government and regulatory claims and investigations relating to the slop oil
discharge into the Indian Marais and the Calcasieu River and the hydrogen sulfide and sulfur dioxide releases
resulting the June 19, 2006 torrential rainfall that affected our Lake Charles, Louisiana refinery, numerous
claims have been made against us by private claimants, who allege bodily injury, property damage, business
interruption and demurrage. We have settled many of these claims and a number of these cases have been
resolved at trial; however, numerous other claims, including individual and class action lawsuits remain to be
resolved. Most recently, on July 28, 2009, a state trial judge in Lake Charles entered a judgment of
approximately $560,000 against us in favor of 14 individuals who claimed to have suffered personal injuries
resulting from releases associated with the rainfall event. Most of the judgment, $420,000, represents an award
of punitive damages against us. We are appealing this decision. See “— Governmental Regulation” for further
information concerning the rainfall event and related government and regulatory actions.
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In 2006 and 2007, a number of class action lawsuits were filed against us and certain other oil
companies and other oil producers in federal courts across the country, which alleged that we and the other
defendants violated the antitrust laws by conspiring and aiding and abetting with PDVSA and OPEC to fix
crude prices and hence, refined petroleum products prices. These cases were consolidated in the U.S. District
Court for the Southern District of Texas in MDL No. 1886, and in January 2009, the court granted the
defendants’ motion to dismiss. The plaintiffs, Spectrum Stores and Fast Break Foods, LLC, appealed this
decision. The appeal was heard in March 2010, and the parties are awaiting a decision.
In 2007, we were tried in the U.S. District Court for the Southern District of Texas for five criminal
violations of the Clean Air Act for having uncovered water equalization tanks and incorrectly computing
benzene emission amounts and exceeding benzene permitted levels in waste water streams and we and the
former environmental manager at our Corpus Christi refinery were tried for five criminal violations under the
Migratory Bird Treaty Act for killing migratory birds. We were found guilty under the Clean Air Act on
felony charges regarding the uncovered water equalization tanks, the charges pertaining to the computation of
benzene emission levels were dismissed and we were found not guilty on the charges relating to the benzene
level in waste water streams. With respect to the five misdemeanor counts under the Migratory Bird Treaty
Act, the court granted directed verdicts of not guilty for CITGO on two counts pertaining to 25 birds, found
us guilty on three counts involving 10 birds and found our former environmental manager not guilty. We
intend to appeal the felony convictions once a sentence is pronounced. We filed a motion for a not guilty
verdict notwithstanding the jury verdict for the felony conviction based on a subsequent U.S. Supreme Court
decision. Sentencing for the 2007 convictions has not yet been scheduled. The probation officer assigned to
the matter to recommend a fine recommended a $19.6 million fine based on our alleged economic gain from
delaying the installation of roofs on the two tanks in question. He did not adopt the Government’s argument
for a fine in the amount of gross profits it claims were earned during the period of the alleged Clean Air Act
violation, which the Government asserts could approach $600 million. We believe that no economic benefit
resulted from this delay and that, if the felony conviction were to be upheld on appeal, the maximum fine
under applicable law should be less than proposed by the probation officer.
In January 2007, we were named one of several defendants in at least 19 consumer class action cases
in California, Missouri, Kansas, Oklahoma, Kentucky, Maryland, Virginia, Alabama, Mississippi, North
Carolina, Nevada, New Mexico, Florida, Puerto Rico, and Tennessee. The complaints allege that the
defendants sold gasoline to the plaintiffs when the temperature was greater than 60™ Fahrenheit. The plaintiffs
claim that they received less gasoline at the retail pump because gasoline expands at temperatures above 60™
Fahrenheit and the gasoline was not temperature corrected to 60™ and the defendants prohibited dealers from
temperature correcting the gasoline at the retail pump. We have filed a motion to dismiss.
On June 30, 2008, Stephenson Oil Company, as a purported class action representative on behalf of
all CITGO-branded distributors, sued us in U.S. District Court for the Northern District of Oklahoma for
allegedly breaching the implied covenant of good faith and fair dealing in the distributor agreements through
differential pricing of gasoline sold to distributors in the same market. Extensive discovery against us is
continuing. On October 2, 2009, the judge denied our motion to dismiss. In late October 2009, Stephenson
filed a brief for class certification.
See also “— Governmental Regulation” above for information regarding various enforcement and
safety-related actions.
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MANAGEMENT
The following table sets forth the names and titles of our directors and executive officers:
Executive Officers
Name
Position
Alejandro Granado . . . . . . . . . .
Robert Kent . . . . . . . . . . . . . . .
Gustavo Velásquez . . . . . . . . . .
Brian O’Kelly . . . . . . . . . . . . . .
Daniel Cortez . . . . . . . . . . . . . .
Jim Cristman . . . . . . . . . . . . . .
Eduardo Assef . . . . . . . . . . . . .
Kevin Ferrall . . . . . . . . . . . . . .
Wladimir Noriega . . . . . . . . . . .
Dean Hasseman . . . . . . . . . . . .
John Butts . . . . . . . . . . . . . . . .
Maritza Villanueva . . . . . . . . . .
President, Chief Executive Officer and Chairman
Vice President, Refining
Vice President, Supply and Marketing
Vice President, Finance
Vice President, Government and Public Affairs
Vice President and General Manager, Lemont Refinery
Vice President and General Manager, Lake Charles Manufacturing Complex
Vice President and General Manager, Corpus Christi Refinery
General Auditor
General Counsel
Corporate Controller
Corporate Treasurer
Directors
Name
Position
Alejandro Granado . . . . . . . . . .
Eudomario Carruyo. . . . . . . . . .
Asdrúbal Chávez. . . . . . . . . . . .
Eulogio Del Pino . . . . . . . . . . .
President, Chief Executive Officer and Chairman
Director
Director
Director
Executive Officers
Alejandro Granado has served as President and CEO since 2007 and has been Chairman of the Board
of Directors since 2005. With 28 years in the oil industry, Mr. Granado began his CITGO career in 1997 and
served in various roles, including Technology Manager at the Lemont refinery. Prior to joining CITGO, he had
an illustrious career at PDVSA, holding many supervisory and managerial positions responsible for refining at
both domestic and international levels. These included Managing Director of Refining for PDVSA’s Eastern
Division, Managing Director of Domestic and International Refining and Vice President of both PDV Marina
and PDVSA.
Robert Kent has served as Vice President, Refining since 2008. Mr. Kent began his CITGO career in
1999 as an Engineering Consultant at the Corpus Christi refinery. He also has served as Vice President and
General Manager for both the Lemont refinery and our Lake Charles Manufacturing Complex.
Gustavo Velásquez has served as Vice President, Supply and Marketing since 2008. He joined CITGO
in 1997, initially serving as Manager, Crude Supply and Refining Coordination and General Manager, Crude
Supply. In his current position, Mr. Velásquez is responsible for the supply, commercial and operational
activities related to Crude Supply and Transportation, Product Supply and Distribution, Branded Light Oils
Marketing, Petrochemicals and Lubricants Marketing, Terminals and Pipelines and Procurement.
Brian O’Kelly has served as Vice President, Finance since 2009. Before coming to CITGO,
Mr. O’Kelly spent 27 years at PDVSA where he held a number of supervisory positions managing financial
endeavors with PDVSA subsidiaries in South America, North America, the Caribbean and Europe.
Daniel Cortez has served as Vice President, Strategic Shareholder Relations, Government and Public
Affairs since 2007. Mr. Cortez began his career at PDVSA in 1992 where he held multiple supervisory and
managerial positions, including International Communications Manager, Communications Manager,
Communication and International Relations Advisor, and Head of Communications for the Refining, Supply
and Marketing Division.
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Jim Cristman has served as Vice President and General Manager, Lemont refinery since 2008.
Mr. Cristman joined CITGO in 1980 and has held various positions at the refinery, including Operations
Manager, Area Manager and Operations Central Services Manager.
Eduardo Assef has served as Vice President and General Manager, Lake Charles Manufacturing
Complex since 2008. Mr. Assef began his career with PDVSA in 1985. He joined CITGO in 1999 and has
held various positions, including General Manager, Operations and Maintenance and Vice President and
General Manager for the Corpus Christi refinery.
Kevin Ferrall has served as Vice President and General Manager, Corpus Christi refinery since 2009.
Mr. Ferrall joined CITGO in 1995 and has held various technical and operations management positions at both
the Corpus Christi and Lake Charles refineries, including General Manager of Technical and Administrative
Services at the Corpus Christi refinery.
Wladimir Noriega has served as General Auditor since 2004. In this position he leads the CITGO
audit group in directing a program of company audits to evaluate operating, administrative and financial
controls and testing the adequacy of operating and accounting systems. Before coming to CITGO in 2003
Mr. Noriega spent 22 years at PDVSA where he served in several capacities, including International Business
Audit Manager.
Dean Hasseman has served as General Counsel since 2006. Mr. Hasseman joined CITGO in 1991 as
Senior Corporate Counsel after holding general counsel and attorney positions in the oil and gas industry.
John Butts has served as Corporate Controller since 2007. Mr. Butts joined CITGO in 1991, and has
held numerous supervisory positions, including Assistant Controller of Manufacturing and Operational
Accounting, Manager of General Accounting, Bank Operations Manager and Feedstock Accounting Manager.
Maritza Villanueva has served as Corporate Treasurer since 2006. In this position, she is responsible
for cash management activities, debt negotiations and debt compliance reporting. Ms. Villanueva previously
served as General Manager Accounting and President of CITGO International Latin America during the period
from 2003 to 2006. Prior to joining CITGO in 2003, Ms. Villanueva served in several capacities at PDVSA,
including Functional Manager of Treasury and Manager of Financial Operations.
Board of Directors
In addition to Mr. Granado, who is our President, CEO and Chairman of the Board of Directors, the
following individuals serve on our Board of Directors:
Eudomario Carruyo has served as a Board Member of CITGO and PDVSA since 2005. In 1964, he
started his career in the Corporación Venezolana del Petróleo (“CVP”), a subsidiary of PDVSA. He has held
multiple supervisory and managerial positions in PDVSA, including Corporate Treasury Manager of Corpoven
S.A., Finance Director of Palmaven, and Controller and Executive Director of finance. Currently, Mr. Carruyo
is a member of the Boards of Directors of PDVSA, responsible for finance, PDVSA Oil, PDVSA Insurance,
Isla Refinery, S.A. and Vice President of PDV Marina.
Asdrúbal Chávez has served as a Board Member since 2005. In 1979, Mr. Chávez joined PDVSA and
has held several supervisory and managerial positions including Process Engineering Superintendent, Human
Resources Manager of the subsidiary BITOR, Manager of El Palito Refinery, Executive Director for Human
Resources, and Executive Director for Commerce and Supply. In 2005, he was appointed to the Board of
Directors of PDVSA, President of PDV Marina, the Board of Directors of CITGO and representative of other
affiliates. Since 2007, Mr. Chávez has held the position of Vice President of PDVSA responsible for Refining,
Commerce and Supply.
Eulogio Del Pino has served as a Board Member since 2005. In 1979, Mr. Del Pino started his career
in the Venezuelan oil industry at INTEVEP, PDVSA’s technology and research center. Throughout his career
he has held many supervisory and managerial positions, including Exploration and Delineation Manager of
PDVSA, General Manager of Strategic Associations of CVP, and Director of PDVSA. He also holds the
positions of Vice President of PDVSA responsible for Exploration and Production, and President of CVP.
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RELATED PARTY TRANSACTIONS
We have engaged and expect to continue to engage in various transactions with our shareholder,
PDVSA, and its other subsidiaries and affiliates. We purchase significant portions of the crude oil processed in
our refineries from PDVSA under contracts and in spot transactions. We also purchase other feedstock and
refined products, and obtain transportation services, from PDVSA and its other subsidiaries and affiliates. In
addition, we sell feedstocks and refined products to PDVSA, and from time to time we advance or otherwise
lend funds to and participate in other financing and other arrangements with PDVSA. At March 31, 2010,
December 31, 2009 and December 31, 2008, we owed PDVSA and its other subsidiaries and affiliates (other
than our consolidated subsidiaries and owned affiliates) an aggregate of $629 million, $678 million and
$358 million, respectively, primarily in respect of payments under supply arrangements, and PDVSA and its
other subsidiaries and affiliates (other than our consolidated subsidiaries and direct affiliates) owed us an
aggregate of $510 million, $729 million and $1.1 billion, respectively, primarily in respect of the PDVSA
Loan (as defined below). See “Risk Factors – Risks Related to Our Relationship with PDVSA” for a
discussion of certain risks relating to the reduction or termination of our relationship with PDVSA. See
Notes 3 and 4 to our audited consolidated financial statements included in this offering memorandum.
Supply and Sales Arrangements
We are party to a crude oil supply agreement with PDVSA Petróleo, S.A., entered into December 1,
2008, under which we purchase crude oil for our Lake Charles and Corpus Christi refineries (the “PDVSA
Crude Oil Supply Agreement”). Under the PDVSA Crude Oil Supply Agreement we have a minimum
purchase commitment of 250,000 bpd. The PDVSA Crude Oil Supply Agreement utilizes a formula pricing
mechanism based on the average spot market values of widely traded crude oil types and other hydrocarbons
with an adjustment for market change. The pricing formula is intended to approximate U.S. Gulf Coast spot
prices for market crude grades and residual fuel. The PDVSA Crude Oil Supply Agreement extends through
March 31, 2012 and automatically renews for successive 12-month terms unless terminated by either party.
We are also party to a feedstock supply agreement with PDVSA (the “Feedstock Supply Agreement”),
which supplies naphtha for our Corpus Christi refinery. The Feedstock Supply Agreement requires PDVSA to
supply a minimum quantity of 10,000 bpd of naphtha at formula prices that are based primarily on gasoline
market prices and adjusted for the value of the content of other products, associated expenses, and a deemed
margin. The Feedstock Supply Agreement expires on January 1, 2012.
In addition to purchases under contracts, we also purchase significant amounts of crude oil and other
feedstocks from PDVSA on a spot basis. These purchases are typically at market prices.
We purchased $1.7 billion and $1.3 billion of crude oil, feedstocks, and other products from PDVSA
and its wholly owned subsidiaries for the three months ended March 31, 2010 and 2009, respectively, under
the PDVSA Crude Oil Supply Agreement, the Feedstock Supply Agreement and other purchase agreements
and in spot transactions. We purchased $6.2 billion, $9.6 billion and $9.5 billion of crude oil, feedstocks, and
other products from PDVSA and its wholly owned subsidiaries for the years ended December 31, 2009, 2008,
and 2007, respectively, under the PDVSA Crude Oil Supply Agreement, the Feedstock Supply Agreement and
other purchase agreements and in spot transactions. At March 31, 2010, December 31, 2009 and
December 31, 2008, $428 million, $459 million and $263 million, respectively, were included in payables to
affiliates as a result of these transactions.
We also purchase refined products from various other affiliates, including HOVENSA and Mount
Vernon Phenol Plant Partnership, a joint venture in which we have a 49% equity interest, under long-term
contracts which incorporate various formula prices based on published market prices and other factors. Our
purchases from HOVENSA are made pursuant to a product sales agreement in which a subsidiary of PDVSA
assigned to us its option to purchase 50% of the refined products produced by HOVENSA (less any portion of
such products that HOVENSA elects to market directly). The product sales agreement will be in effect for the
life of the joint venture, which is indefinite, subject to termination events based on default by either of, or
mutual agreement of both of, the PDVSA subsidiary and Hess Corporation. Refined product purchases from
these other affiliates totaled $919 million and $722 million for the three months ended March 31, 2010 and
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2009, respectively, and $3.4 billion, $5.8 billion, and $5.1 billion for the years ended December 31, 2009,
2008, and 2007, respectively. At March 31, 2010, December 31, 2009 and December 31, 2008, $136 million,
$150 million and $33 million, respectively, were included in payables to affiliates as a result of these
transactions.
We sell refined products, feedstocks, and other products to affiliates at market prices in spot and
contract transactions. These sales totaled $110 million and $58 million for the three months ended March 31,
2010 and 2009, respectively, and $400 million, $545 million and $544 million for the years ended
December 31, 2009, 2008, and 2007, respectively. At March 31, 2010, December 31, 2009 and December 31,
2008, $77 million, $61 million and $85 million, respectively, were included in due from affiliates as a result of
these and related transactions.
Loans and Other Financing Arrangements
In December 2007, we lent $1 billion to PDVSA (the “PDVSA Loan”). The PDVSA Loan was
evidenced by a note, payable in one year, and bearing interest at a rate of 3.82% per annum, payable quarterly.
In December 2008, the transaction was restructured, and the original note was replaced and superseded by a
new one-year, $1 billion note bearing interest at a rate of 1.36% per annum, payable quarterly. In October
2009, we restructured the PDVSA Loan to amortize in part through offsets of amounts payable by us for crude
oil delivered by PDVSA Petróleo, S.A. under the PDVSA Crude Oil Supply Agreement, and on February 2,
2010, we restructured the PDVSA Loan, which had a then-outstanding principal amount of $529 million, to
provide for the amortization of the remaining outstanding amount of the PDVSA Loan through continued
offsets of amounts payable by us under the PDVSA Crude Oil Supply Agreement. Under the restructured
arrangement, we are entitled to designate two cargoes per month from deliveries under the PDVSA Crude Oil
Supply Agreement to be subject to the offset arrangement until the PDVSA Loan is repaid in full. The
remaining outstanding balance of the PDVSA Loan will become due no later than December 31, 2010 if the
offset arrangement is to be terminated for any reason. The restructured loan continues to bear interest at a rate
of 1.36% per annum, payable quarterly. At March 31, 2010, December 31, 2009 and December 31, 2008, the
outstanding principle balance of the PDVSA Loan was $384 million, $607 million and $1 billion, respectively.
We recorded interest income of approximately $2 million and $3 million related to the PDVSA Loan in the
consolidated statement of income for the three months ended March 31, 2010 and 2009, respectively. We
recorded interest income of approximately $12 million, $58 million and $2 million related to the PDVSA Loan
in the consolidated statement of income for the years ended December 31, 2009, 2008, and 2007, respectively.
We have guaranteed $6 million of debt of an unconsolidated affiliate. See Note 14 to our audited
consolidated financial statements included in this offering memorandum.
PDVSA has guaranteed our obligations under the lease for the West Plant at our Corpus Christi
refinery.
Other Arrangements
We are party to a tax allocation agreement with PDV Holding, our ultimate U.S. parent company, and
its other subsidiaries. In addition to the tax allocation requirements under the agreement, we serve as PDV
Holding’s agent to handle the payment of income tax liabilities on its behalf. In this capacity, we may be
required to advance, on behalf of other members of the consolidated group, amounts required to pay tax
liabilities allocable to them under the tax allocation agreement. At March 31, 2010, we had net related party
payables related to federal income taxes of $35 million included in payables to affiliates. At December 31,
2009, we had net related party payables related to federal income taxes of $31 million included in payables to
affiliates. At December 31, 2008 we had net related party receivables of $16 million related to federal income
taxes included in due from affiliates.
From time to time we provide services for and make payments on behalf of PDVSA for various items
such as medical expenses, travel and accommodations, advertising and transportation. We have in the past and
may in the future declare and pay indirect non-cash dividends in order to settle such payments. In 2009, we
declared indirect non-cash dividends in the amount of $100 million, consisting of $28 million to settle such
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payments and $72 million to settle the transfer of certain non-operating assets to PDVSA. In 2008, we
declared indirect non-cash dividends of $105 million to settle the transfer of non-operating assets to PDVSA.
As of March 31, 2010, PDVSA and its other subsidiaries and affiliates (other than our consolidated
subsidiaries and direct affiliates) owed us an aggregate of approximately $6.5 million in respect of such
services.
In November 2009, we sold certain non-operating assets and related spare parts to PDVSA for an
aggregate price of $69 million, which is payable to us on a deferred basis. Interest income of $1 million was
recorded in our consolidated statement of operations for the three months ended March 31, 2010 as well as for
the year ended December 31, 2009, and $2 million was due from PDVSA at March 31, 2010. The payment
schedule and future interest terms are currently being negotiated.
We purchase a portion of our insurance coverage through a wholly owned captive insurance
subsidiary of PDVSA’s at competitive market rates. At March 31, 2010, we had $14 million in payables to
affiliates relating to insurance coverage we purchase from this subsidiary.
From time to time we enter into agreements with PDVSA under which we manage and administer the
procurement of equipment and other goods and services on PDVSA’s behalf. Under these agreements, we
provide all services required for the procurement and delivery to PDVSA or its affiliate of the specified
equipment, goods or services. We arrange payment for all or any portion of the purchase price or service fee to
the vendor and all other costs and expenses incurred in connection with the procurement as and when they
become due. Before we process any such payments, PDVSA is required to provide us with the requisite funds by
offsetting amounts otherwise payable by us under the long-term crude oil supply agreement. Under the
agreements, PDVSA is required to indemnify us for any liabilities, costs or expenses incurred in connection with
the agreements and the provision of services thereunder and to pay us a fee for our services, which is intended
to cover our internal costs incurred in providing the services and provide additional compensation to us.
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DESCRIPTION OF THE NOTES
General
Certain terms used in this description are defined under the subheading “Certain Definitions.” In this
description, (i) the term “Issuer” refers to CITGO Petroleum Corporation and not to any of its Subsidiaries,
and (ii) the terms “we,” “our” and “us” each refer to the Issuer and its consolidated Subsidiaries.
The Issuer will issue the Notes under an indenture (the “Indenture”) among the Issuer, the Guarantors
and Wilmington Trust FSB, as trustee (the “Trustee”). The Notes will be issued in a private transaction that is
not subject to the registration requirements of the Securities Act. See “Notice to Investors.” The terms of the
Notes will include those stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act.
The following description is only a summary of the material provisions of the Indenture, the
Intercreditor Agreement and the Security Documents and does not purport to be complete and is qualified in
its entirety by reference to the provisions of the Indenture, the Intercreditor Agreement and the Security
Documents, including the definitions therein of certain terms used below. We urge you to read the Indenture,
the Intercreditor Agreement and the Security Documents because those agreements, not this description, define
your rights as Holders of the Notes. You may request a copy of the Indenture, the Intercreditor Agreement and
the Security Documents at our address set forth under the heading “Summary—Principal Offices.”
Brief Description of Notes
The Notes will:
k
be secured by a first-priority security interest, subject to permitted liens, in the Collateral granted
to the Collateral Agent for its benefit and the benefit of the Trustee and the Holders of the Notes,
which liens will be pari passu with the liens securing the Senior Credit Facilities Obligations, the
Fixed Rate IRB Obligations and the Additional First Priority Lien Obligations, subject to certain
exceptions (including the fact that proceeds from the disposition of assets (other than the
refineries and certain inventory) may be applied as a mandatory prepayment of Senior Credit
Facility Obligations);
k
rank equally in right of payment with all of the Issuer’s existing and future senior debt (including
the Senior Credit Facilities, the Fixed Rate IRBs and Additional First Priority Lien Obligations)
and other obligations that are not, by their terms, expressly subordinated in right of payment to
the Notes;
k
rank senior in right of payment to the Issuer’s existing and future debt and other obligations that
are, by their terms, expressly subordinated in right of payment to the Notes;
k
be effectively equal in right of payment to all of the Issuer’s existing and future senior secured
debt and other obligations (including the Senior Credit Facilities, the Fixed Rate IRBs and
Additional First Priority Lien Obligations) secured on a pari passu basis with the Notes to the
extent of the value of the Collateral securing the Notes and such indebtedness; provided that our
new revolving credit facility will be senior to the Notes with respect to proceeds from inventory
located outside the battery limits of each of the refineries and inventory located in our pipelines;
k
be effectively senior in right of payment to all of the Issuer’s existing and future unsecured debt
and other obligations to the extent of the value of the Collateral securing the Notes;
k
be structurally subordinated to all obligations of each of the Issuer’s Subsidiaries that is not a
guarantor of the Notes; and
k
be effectively subordinated in right of payment to all of the Issuer’s secured debt and other
obligations to the extent of the value of the collateral securing such indebtedness and other
obligations which does not also secure the Notes.
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Guarantees
The Guarantors, as primary obligors and not merely as sureties, will initially jointly and severally
irrevocably and unconditionally guarantee, on a senior secured basis, the performance and full and punctual
payment when due, whether at maturity, by acceleration or otherwise, of all obligations of the Issuer under the
Indenture and the Notes, whether for payment of principal of or interest on the Notes, expenses,
indemnification or otherwise, on the terms set forth in the Indenture by executing the Indenture.
The Restricted Subsidiaries that guarantee the Senior Credit Facilities will initially guarantee the
Notes. Each of the Guarantees of the Notes will:
k
be secured by a first-priority security interest, subject to permitted liens, in the Collateral granted
to the Collateral Agent for its benefit and the benefit of the Trustee and the holders of the Notes,
which liens will be pari passu with the liens securing the Senior Credit Facilities Obligations, the
Fixed Rate IRB Obligations and the Additional First Priority Lien Obligations, subject to certain
exceptions;
k
rank equally in right of payment with all of the applicable Guarantor’s existing and future senior
debt (including the guarantees under the Senior Credit Facilities, the Fixed Rate IRBs and
Additional First Priority Lien Obligations) and other obligations that are not, by their terms,
expressly subordinated in right of payment to such Guarantor’s Guarantee;
k
rank senior in right of payment to all of the applicable Guarantor’s existing and future debt and
other obligations that are, by their terms, expressly subordinated in right of payment to such
Guarantor’s Guarantee;
k
be effectively equal in right of payment to all of the applicable Guarantor’s existing and future
senior secured debt and other obligations (including such Guarantor’s guarantees of the Senior
Credit Facilities, the Fixed Rate IRBs and Additional First Priority Lien Obligations) secured on a
pari passu basis with such Guarantor’s Guarantee to the extent of the value of the Collateral
securing such Guarantor’s Guarantee and such indebtedness; provided that our new revolving
credit facility will be senior to the Notes with respect to proceeds from inventory located outside
the battery limits of each of the refineries and inventory located in our pipelines;
k
be effectively senior in right of payment to all of the applicable Guarantor’s existing and future
senior unsecured debt and other obligations to the extent of the value of the Collateral securing
such Guarantor’s Guarantee;
k
be structurally subordinated to all obligations of any Subsidiary of a Guarantor if that Subsidiary
is not also a Guarantor of the Notes; and
k
be effectively subordinated in right of payment to all of the applicable Guarantor’s secured debt to
the extent of the value of the collateral securing such indebtedness which does not secure such
Guarantor’s Guarantee.
The obligations of each Guarantor under its Guarantee will be limited as necessary to prevent the
Guarantee from constituting a fraudulent conveyance under applicable law.
Any entity that makes a payment under its Guarantee will be entitled upon payment in full of all
guaranteed obligations under the Indenture to a contribution from each other Guarantor in an amount equal to
such other Guarantor’s pro rata portion of such payment based on the respective net assets of all the
Guarantors at the time of such payment determined in accordance with GAAP.
If a Guarantee is rendered voidable, it could be subordinated by a court to all other indebtedness
(including guarantees and other contingent liabilities) of the Guarantor, and, depending on the amount of such
indebtedness, a Guarantor’s liability on its Guarantee could be reduced to zero. See “Risk Factors—Risks
Related to the Notes and Our Other Indebtedness—The subsidiary guarantees could be avoided under
fraudulent transfer laws, which could prevent the holders of the notes from relying on that subsidiary to satisfy
claims.”
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Each Guarantee by a Guarantor shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon:
(1)
(a) any sale, exchange or transfer (by merger or otherwise) of (i) the Capital Stock
of such Guarantor (including any sale, exchange or transfer), after which the applicable Guarantor is
no longer a Restricted Subsidiary or (ii) all or substantially all the assets of such Guarantor to a
Person other than a Restricted Subsidiary which sale, exchange or transfer is made in a manner in
compliance with the applicable provisions of the Indenture;
(b)
the release or discharge of the guarantee by such Guarantor of the Senior
Credit Facilities or the guarantee which resulted in the creation of such Guarantee, except a
discharge or release by or as a result of payment under such guarantee;
(c)
the designation of any Restricted Subsidiary that is a Guarantor as an
Unrestricted Subsidiary; or
(d)
the Issuer exercising its legal defeasance option or covenant defeasance
option as described under “Legal Defeasance and Covenant Defeasance” or the Issuer’s
obligations under the Indenture being discharged in a manner not in violation of the terms of
the Indenture; and
(2)
such Guarantor delivering to the Trustee an Officer’s Certificate and an Opinion of
Counsel, each stating that all conditions precedent provided for in the Indenture relating to such
release have been complied with.
Upon any release of a Guarantor from its Guarantee, such Guarantor shall be automatically and
unconditionally released from its obligations under the Security Documents.
Ranking
The payment of the principal of, premium, if any, and interest on the Notes and the payment of any
Guarantee will rank pari passu in right of payment to all senior indebtedness of the Issuer or the relevant
Guarantor, as the case may be, including the obligations of the Issuer and such Guarantor under the Senior
Credit Facilities but, to the extent of the value of the Collateral securing the Notes, will be effectively senior
to unsecured senior indebtedness of the Issuer and each Guarantor.
Although the Indenture will contain limitations on the amount of additional Indebtedness that the
Issuer and the Guarantors may incur, under certain circumstances the amount of such Indebtedness could be
substantial and, in any case, such Indebtedness may be Senior Indebtedness. See “Certain Covenants—
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock.”
Security
General
The Notes and Guarantees will be secured by first-priority security interests (subject to Permitted
Liens) in the Collateral, and the Notes and the Guarantees will share in the benefit of such security interests
on a pari passu basis with the Senior Credit Facilities Obligations, the Fixed Rate IRBs and Additional First
Priority Lien Obligation; provided that our new revolving credit facility will be senior to the Notes with
respect to proceeds from inventory located outside the battery limits of each of the refineries (including
refined product and inventory located in our pipelines). The Collateral shall exclude Excluded Property.
We do not expect that mortgages on and lender’s title insurance with respect to our Corpus Christi
refinery will be in place at the time of issuance of the Notes. In addition certain leasehold parcels may not be
included in the mortgage nor covered under the lender’s title insurance policy relating to our Lemont refinery.
See “Risk Factors—Risks Relating to the Our Indebtedness and the Notes—mortgages and lender’s title
insurance policies covering the Corpus Christi refinery and a portion of the Lemont refinery securing the
notes will not be in place at the time of the issuance of the notes.
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In connection with any enforcement action with respect to the Collateral or any insolvency or
liquidation proceeding of the Issuer or any Guarantor, all proceeds of Collateral (after paying the fees and
expenses of the Collateral Agent and the Trustee and any expenses of selling or otherwise foreclosing on the
Collateral) will be applied pro rata to the repayment of the obligations under the Notes and the other
outstanding First Priority Lien Obligations, subject to the terms of the Intercreditor Agreement; provided that
our new revolving credit facility will be senior to the Notes with respect to proceeds from inventory located
outside the battery limits of each of the refineries and inventory located in our pipelines and proceeds from
such inventory will be applied first to the payment of borrowings under the revolving credit facility.
The Issuer and the Guarantors are and will be able to incur additional Indebtedness in the future
which could share in or be senior with respect to the Collateral, including Additional First Priority Lien
Obligations and Obligations secured by Permitted Liens. The amount of such additional secured Obligations is
and will be limited by the covenant described under “Certain Covenants—Liens” and the covenant described
under “Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock.” Under certain circumstances, the amount of any such additional secured Obligations could be
significant.
After-Acquired Collateral
From and after the Issue Date and subject to certain limitations and exceptions, if the Issuer or any
Guarantor creates any additional security interest to secure any First Priority Lien Obligations in any property
or assets that are not at the time of such creation of such additional security interest included in Collateral
under the Security Documents, such Issuer or Guarantor must concurrently grant a first-priority perfected
security interest (subject to Permitted Liens) in such property as security for the Notes and such property or
assets shall thereafter become Collateral.
Liens with Respect to the Collateral
The Issuer, the Guarantors and the Collateral Agent will enter into Security Documents on the Issue
Date (or, in the case of the mortgage on the Corpus Christi refinery, within 120 days after we acquire title to
the West Plant of the Corpus Christi refinery), that will define the terms of the security interests that secure
the Notes, the Guarantees as well as the Senior Credit Facilities Obligations, the Fixed Rate IRB Obligations
and the Additional First Priority Lien Obligations with respect to such Collateral.
Intercreditor Agreement
The Issuer, the Trustee, the Collateral Agent and the Fixed Rate IRB Trustees will enter into the
Intercreditor Agreement with the Authorized Representative of the Senior Credit Facilities Obligations with
respect to the Collateral, pursuant to which the Collateral Agent will be appointed, which may be amended,
restated, amended and restated, supplemented or otherwise modified from time to time without the consent of
the Holders to add other parties holding First Priority Lien Obligations permitted to be incurred under the
Indenture, the Senior Credit Facilities and the Intercreditor Agreement.
Under the Intercreditor Agreement, as described below, the Collateral Agent may take such actions
under the Security Documents and with respect to the Collateral, and refrain from taking any such actions, in
its sole discretion, unless the Applicable Authorized Representative, acting on behalf of the Controlling
Secured Parties, have delivered written direction to the Collateral Agent in which case the Collateral Agent
shall take or refrain from taking any such action as specified in such direction. The Collateral Agent shall be
fully justified in failing or refusing to take action under the Intercreditor Agreement or the Security
Documents unless it shall first receive such direction from the Applicable Authorized Representative on behalf
of the Controlling Secured Parties, and it shall first be indemnified to its reasonable satisfaction by the First
Priority Lien Secured Parties (other than the agent under the Senior Secured Facilities, the Trustee, and the
Fixed Rate IRB Trustee) against any and all liability and expense which may be incurred by it by reason of
taking, continuing to take or refraining from taking any such action. The Authorized Representatives of other
Series of First Priority Lien Obligations have no right to take actions with respect to the Collateral. The
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Applicable Authorized Representative will initially be the administrative agent under the Credit Agreement, as
Authorized Representative in respect of the Senior Credit Facilities Obligations.
The Applicable Authorized Representative shall have the sole right to instruct the Collateral Agent to
act or refrain from acting with respect to the Collateral, the Collateral Agent shall not follow any instructions
with respect to such Collateral from any representative of any Non-Controlling Secured Party or other First
Priority Lien Secured Party (other than the Applicable Authorized Representative), and no Authorized
Representative of any Non-Controlling Secured Party or other First Priority Lien Secured Party (other than the
Applicable Authorized Representative) will instruct the Collateral Agent to commence any judicial or nonjudicial foreclosure proceedings with respect to, seek to have a trustee, receiver, liquidator or similar official
appointed for or over, attempt any action to take possession of, exercise any right, remedy or power with
respect to, or otherwise take any action to enforce its interests in or realize upon, or take any other action
available to it in respect of, the Collateral.
In the event that the Trustee, on behalf of the Holders of the Notes, shall be the Applicable
Authorized Representative, the Trustee shall only act in its capacity as Applicable Authorized Representative
as directed by the Holders of the Notes pursuant to the terms of the Indenture.
The administrative agent under the Senior Credit Facilities will remain the Applicable Authorized
Representative until the earlier of (1) the Discharge of Senior Credit Facilities Obligations and (2) the NonControlling Authorized Representative Enforcement Date (such date, the “Applicable Authorized Agent Date”).
After the Applicable Authorized Agent Date, the Applicable Authorized Representative will be the Major
Non-Controlling Authorized Representative.
Each First Priority Lien Secured Party will agree to, subject to certain exceptions, (a) refrain from
taking or filing any action, judicial or otherwise, to enforce any rights or pursue any remedy under the
Security Documents, except for delivering notices under the Intercreditor Agreement; (b) refrain from
accepting any guaranty of, or any other security for, the First Priority Lien Obligations from the Issuer or any
of its Affiliates, except for any guaranty or security granted to the Collateral Agent for the benefit of all First
Priority Lien Secured Parties; (c) refrain from exercising any rights or remedies under the Security Documents
which have or may have arisen or which may arise as a result of a default; and (d) refrain from accepting any
mandatory prepayment or offer to purchase with respect to a disposition of assets under the terms of the
Senior Credit Facilities and/or the Indenture, as applicable, except as set forth in the Intercreditor Agreement.
Each of the Trustee, for itself and on behalf of the Holders of the Notes, and the administrative agent
under the Senior Credit Facilities, for itself and on behalf of the lenders under the Senior Credit Facilities, will
agree that it will not, directly or indirectly, contest or support any other Person in contesting, in any
proceeding (including a bankruptcy proceeding): (a) the priority, validity or enforceability of a Lien on the
Collateral held by or on behalf of the Collateral Agent, (b) the priority, validity or enforceability of any First
Priority Lien Secured Obligation in any bankruptcy proceeding or (c) the provisions of the Intercreditor
Agreement.
If an “Event of Default” under and as defined in the Senior Credit Facilities, the Indenture or any
other First Priority Lien Documents governing First Priority Lien Obligations has occurred and is continuing
and the Collateral Agent is taking action to enforce rights in respect of any Collateral, or any distribution is
made with respect to any Collateral in any bankruptcy case of the Issuer or any Guarantor, the proceeds of any
sale, collection or other liquidation of any such collateral by the Collateral Agent or any other First Priority
Lien Secured Party, as applicable, and proceeds of any such distribution shall be applied among the First
Priority Lien Obligations to the payment in full of the First Priority Lien Obligations on a ratable basis, after
payment of all amounts owing to the Collateral Agent and the Trustee; provided that our new revolving credit
facility will be senior to the Notes with respect to proceeds from the sale of inventory located outside the
battery limits of each of our refineries (including refined product inventory located in our pipelines) and
proceeds from such inventory will be applied first to the payment of the revolving credit facility.
The Collateral Agent shall not be required to marshal any present or future security for (including,
without limitation, the Collateral), or guaranties of, the First Priority Lien Secured Obligations or any of them,
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or to resort to such security or guaranties in any particular order; and all of each of such Person’s rights in
respect of such security and guaranties shall be cumulative and in addition to all other rights, however existing
or arising. To the extent that they lawfully may, the First Priority Lien Secured Parties will agree that they will
not invoke any law relating to the marshalling of collateral which might cause delay in or impede the
enforcement of the First Priority Lien Secured Parties’ rights under the Security Documents or under any other
instrument evidencing any of the First Priority Lien Obligations or under which any of First Priority Lien
Obligations is outstanding or by which any of the First Priority Lien Obligations is secured or guaranteed.
During the term of the Intercreditor Agreement, whether or not any bankruptcy proceeding has commenced
against the Issuer or any Guarantor, the parties will agree, subject to the provisions of the Intercreditor
Agreement, that neither the Issuer nor any Guarantor shall grant or suffer to exist any additional Lien on
assets, unless the Issuer or such Guarantor shall grant a Lien on such asset in favor of the Collateral Agent for
the benefit of all the First Priority Lien Secured Parties. If, in contravention of the foregoing, the
administrative agent under the Senior Credit Facilities, the Trustee or any First Priority Lien Secured Party
obtains possession of any Collateral or realizes any proceeds or payment in respect thereof, at any time prior
to the discharge of each of the First Priority Lien Obligations, then it must hold such Collateral, proceeds or
payment in trust for the other First Priority Lien Secured Parties and promptly transfer such Collateral,
proceeds or payment to the Collateral Agent to be distributed in accordance with the Intercreditor Agreement.
The First Priority Lien Secured Parties acknowledge that the First Priority Lien Obligations of any
Series may, subject to the limitations set forth in the other First Priority Lien Documents, be increased,
extended, renewed, replaced, restated, supplemented, restructured, repaid, refunded, refinanced or otherwise
amended or modified from time to time, all without affecting the priorities set forth in the Intercreditor
Agreement defining the relative rights of the First Priority Lien Secured Parties of any Series. The
Intercreditor Agreement may also be amended from time to time to add other parties holding Additional First
Priority Lien Obligations permitted to be incurred under the Indenture.
Subject to the terms of the Security Documents, the Issuer and the Guarantors have the right to
remain in possession and retain exclusive control of the Collateral securing the Notes and the Notes
Obligations, to freely operate the Collateral and to collect, invest and dispose of any income therefrom.
Release of Collateral
Under the Intercreditor Agreement, unless an Event of Default has occurred and is continuing and the
Collateral Agent has received written notice thereof from the Applicable Authorized Representative, the
Collateral Agent may, without the approval of the lenders under the Senior Credit Facilities, the Holders of the
Notes, the Authorized Representatives or any other First Priority Lien Secured Party, release (a) any Collateral
under the Security Documents which is permitted to be sold or disposed of by the Issuer and its Affiliates
(other than any such sale to another grantor), including, without limitation, the Guarantors, and (b) release any
Guarantor that is permitted to be sold or disposed of, or released, in each case pursuant to the Senior Credit
Facilities, the Indenture and each agreement governing any additional First Priority Lien Obligations, and
execute and deliver such releases as may be necessary to terminate of record the Collateral Agent’s security
interest in such Collateral or release such Guarantor and Guarantees. In determining whether any such release
is permitted, the Collateral Agent may rely upon a certificate of the Issuer that the Collateral is permitted to
be released under the Senior Credit Facilities and the Indenture or that the Guarantor is permitted to be
released under the Senior Credit Facilities and the Indenture, as applicable.
The Issuer and the Guarantors will be entitled to the release of property and other assets constituting
Collateral from the Liens securing the Notes and the Notes Obligations under any one or more of the
following circumstances:
(1)
to enable the Issuer and the Guarantors to consummate the sale, transfer or other
disposition of such property or assets (other than any such sale, transfer or other disposition to the
Issuer or another Guarantor) to the extent not prohibited under the covenant described under
“Repurchase at the Option of Holders—Asset Sales”;
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(2)
in respect of the property and assets of a Guarantor, upon the designation of such
Guarantor to be an Unrestricted Subsidiary in accordance with the covenant described under
“— Certain Covenants—Limitation on Restricted Payments” and the definition of “Unrestricted
Subsidiary”; and
(3)
in respect of the property and assets of a Guarantor, upon the release or discharge
of the pledge granted by such Guarantor to secure the obligations under the Senior Credit Facilities or
any other Indebtedness or the guarantee of any other Indebtedness which resulted in the obligation to
become a Guarantor with respect to the Notes other than in connection with a release or discharge by
or as a result of payment in full in respect of the Senior Credit Facilities or such other Indebtedness.
The Liens on the Collateral securing the Notes and the Guarantees also will be released upon
(i) payment in full of the principal of, together with accrued and unpaid interest on, the Notes and all other
Obligations under the Indenture, the Guarantees and the Security Documents that are due and payable at or
prior to the time such principal, together with accrued and unpaid interest, is paid or (ii) a legal defeasance or
covenant defeasance under the Indenture as described below under “Legal Defeasance and Covenant
Defeasance” or a discharge of the Indenture as described under “Satisfaction and Discharge.”
The Issuer and the Guarantors may, subject to the provisions of the Indenture, among other things,
without any release or consent by the Collateral Agent, conduct ordinary course activities with respect to the
Collateral, including, without limitation:
k
disposing of obsolete or worn out property, whether now owned or hereafter acquired, in the
ordinary course of business;
k
abandoning, terminating, canceling, releasing or making alterations in or substitutions of or
waiving rights under any leases or contracts or in respect of any tort or other claim;
k
surrendering or modifying any franchise, license or permit that they may own or under which
they may be operating;
k
altering, repairing, replacing, changing the location or position of and adding to its structures,
machinery, systems, equipment, fixtures and appurtenances;
k
granting a license of any intellectual property;
k
selling, transferring or otherwise disposing of inventory in the ordinary course of business;
k
disposing of property by any Subsidiary to the Issuer or to a Wholly-Owned Subsidiary that is a
Guarantor;
k
disposing of assets with a book value of zero and an immaterial market value to be disposed with
no consideration or for non-cash consideration;
k
collecting, discounting and compromising accounts receivable in the ordinary course of business;
k
making payments (including for the repayment of Indebtedness or interest) from cash and Cash
Equivalents that is at any time part of the Collateral in the ordinary course of business that are
not otherwise prohibited by the Indenture and the Security Documents; and
k
abandoning any intellectual property that is no longer used or useful in the Issuer’s business.
Paying Agent and Registrar for the Notes
The Issuer will maintain one or more paying agents for the Notes. The initial paying agent for the
Notes will be the Trustee.
The Issuer will also maintain a registrar in respect of the Notes. The registrar will maintain a register
reflecting ownership of the Notes outstanding from time to time to facilitate transfer of Notes on behalf of the
Issuer. The initial registrar shall be the Trustee.
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The Issuer may change the paying agents or the registrars without prior notice to the Holders. The
Issuer or any Restricted Subsidiary may act as a paying agent or registrar.
For as long as the Notes are admitted to trading on the Euro MTF market of the Luxembourg Stock
Exchange, the Issuer will maintain a paying agent and transfer agent in Luxembourg. The Issuer has appointed
Deutsche Bank Luxembourg S.A. to act as initial Luxembourg Paying Agent or Luxembourg Transfer Agent.
The Issuer may replace the Luxembourg Paying Agent or Luxembourg Transfer Agent, at any time, subject to
the appointment of a replacement Luxembourg Paying Agent or Luxembourg Transfer Agent.
Transfer and Exchange
A Holder may transfer or exchange Notes in accordance with the Indenture. The registrar and the
Trustee may require a Holder to furnish appropriate endorsements and transfer documents in connection with a
transfer of Notes. Holders will be required to pay all taxes due on transfer. The Issuer is not required to
transfer or exchange any Note selected for redemption. Also, the Issuer is not required to transfer or exchange
any Note for a period of 15 days before a selection of Notes to be redeemed.
Principal, Maturity and Interest
The Issuer will issue $
million in aggregate principal amount of Senior Secured Notes due 2017
(the “2017 Notes”) and $
million in aggregate principal amount of Senior Secured Notes due 2020 (the
“2020 Notes” and, together with the 2017 Notes, the “Notes”) in this offering. The 2017 Notes will mature on
, 2017 and the 2020 Notes will mature on
, 2020. Subject to compliance with the
covenants described below under the caption “Certain Covenants—Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock and Preferred Stock” and “Certain Covenants—Liens” the Issuer may issue
additional Notes from time to time after this offering under the Indenture (“Additional Notes”). The Notes
issued by the Issuer on the Issue Date and any Additional Notes subsequently issued under the Indenture will
be treated as a single class for all purposes under the Indenture, including waivers, amendments, redemptions
and offers to purchase. Unless the context requires otherwise, references to “Notes” for all purposes of the
Indenture and this “Description of the Notes” include any Additional Notes that are actually issued.
Interest will accrue on the Notes from the Issue Date, or from the most recent date to which interest
has been paid or provided for. Interest will be payable semiannually using a 360-day year comprised of twelve
30-day months to Holders of record at the close of business on the
or
immediately
preceding the interest payment date, on
and
of each year, commencing
, 2010. If
a payment date is not on a Business Day at the place of payment, payment may be made at the place on the
next succeeding Business Day and no interest will accrue for the intervening period.
Interest on the 2017 Notes will accrue at a rate of
% per annum and be payable in cash. Interest
on the 2020 Notes will accrue at a rate of
% per annum and be payable in cash.
Principal of, premium, if any, and interest on the Notes will be payable at the office or agency of the
Issuer maintained for such purpose or, at the option of the Issuer, payment of interest may be made by check
mailed to the Holders of the Notes at their respective addresses set forth in the register of Holders; provided
that all payments of principal, premium, if any, and interest with respect to the Notes represented by one or
more global notes registered in the name of or held by The Depository Trust Company or its nominee will be
made by wire transfer of immediately available funds to the accounts specified by the Holder or Holders
thereof. Until otherwise designated by the Issuer, the Issuer’s office or agency will be the office of the Trustee
maintained for such purpose.
Offers to Purchase; Open Market Purchases
The Issuer is not required to make any sinking fund payments with respect to the Notes. However,
under certain circumstances, the Issuer may be required to offer to purchase Notes as described under the
caption “Repurchase at the Option of Holders.”
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Optional Redemption
2017 Notes
At any time prior to
, 2014, the Notes may be redeemed or purchased (by the Issuer or any
other Person), in whole or in part, at a redemption price equal to 100% of the principal amount of Notes
redeemed plus the Applicable Premium as of the date of redemption (the “Redemption Date”), and, without
duplication, accrued and unpaid interest to the Redemption Date, subject to the rights of Holders on the
relevant record date to receive interest due on the relevant interest payment date. Such redemption or purchase
may be made upon notice mailed by first-class mail to each Holder’s registered address and to the Trustee at
its corporate trust office, not less than 30 nor more than 60 days prior to the Redemption Date. The Issuer
may provide in such notice that payment of the redemption price and performance of the Issuer’s obligations
with respect to such redemption or purchase may be performed by another Person.
On and after
, 2014, the Notes may be redeemed, at the Issuer’s option, in whole or in part,
at any time and from time to time at the redemption prices set forth below. Such redemption may be made
upon notice mailed by first-class mail to each Holder’s registered address and to the Trustee at its corporate
trust office, not less than 30 nor more than 60 days prior to the Redemption Date. The Issuer may provide in
such notice that the payment of the redemption price and the performance of the Issuer’s obligations with
respect to such redemption may be performed by another Person. The Notes will be redeemable at the
applicable redemption price (expressed as percentages of principal amount of the Notes to be redeemed) plus
accrued and unpaid interest thereon to the applicable Redemption Date, subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed
during the twelve-month period beginning on
of each of the years indicated below:
Year
Percentage
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
%
%
100%
In addition, until
, 2013, the Issuer may, at its option, redeem up to 35% of the then
outstanding aggregate principal amount of Notes at a redemption price equal to
% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the applicable Redemption Date, subject
to the right of Holders of record on the relevant record date to receive interest due on the relevant interest
payment date, with the net cash proceeds of one or more Equity Offerings to the extent such net cash proceeds
are contributed to the Issuer; provided that at least 65% of the sum of the aggregate principal amount of 2017
Notes originally issued under the Indenture and any Additional Notes that are 2017 Notes issued under the
Indenture after the Issue Date remains outstanding immediately after the occurrence of each such redemption;
provided further that each such redemption occurs within 90 days of the date of closing of each such Equity
Offering or sale.
2020 Notes
At any time prior to
, 2015, the Notes may be redeemed or purchased (by the Issuer or any
other Person), in whole or in part, at a redemption price equal to 100% of the principal amount of Notes
redeemed plus the Applicable Premium as of the Redemption Date, and, without duplication, accrued and
unpaid interest to the Redemption Date, subject to the rights of Holders on the relevant record date to receive
interest due on the relevant interest payment date. Such redemption or purchase may be made upon notice
mailed by first-class mail to each Holder’s registered address and to the Trustee at its corporate trust office,
not less than 30 nor more than 60 days prior to the Redemption Date. The Issuer may provide in such notice
that payment of the redemption price and performance of the Issuer’s obligations with respect to such
redemption or purchase may be performed by another Person.
On and after
, 2015, the Notes may be redeemed, at the Issuer’s option, in whole or in part,
at any time and from time to time at the redemption prices set forth below. Such redemption may be made
upon notice mailed by first-class mail to each Holder’s registered address and to the Trustee at its corporate
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trust office, not less than 30 nor more than 60 days prior to the Redemption Date. The Issuer may provide in
such notice that the payment of the redemption price and the performance of the Issuer’s obligations with
respect to such redemption may be performed by another Person. The Notes will be redeemable at the
applicable redemption price (expressed as percentages of principal amount of the Notes to be redeemed) plus
accrued and unpaid interest thereon to the applicable Redemption Date, subject to the right of the Holders of
record on the relevant record date to receive interest due on the relevant interest payment date, if redeemed
during the twelve-month period beginning on
of each of the years indicated below:
Year
Percentage
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 and thereafter . . . . . . . . . . . . . . . . . . . . . .
.......................
.......................
.......................
.......................
%
%
%
100%
In addition, until
, 2013, the Issuer may, at its option, redeem up to 35% of the then
outstanding aggregate principal amount of Notes at a redemption price equal to
% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon to the applicable Redemption Date, subject
to the right of Holders of record on the relevant record date to receive interest due on the relevant interest
payment date, with the net cash proceeds of one or more Equity Offerings to the extent such net cash proceeds
are contributed to the Issuer; provided that at least 65% of the sum of the aggregate principal amount of Notes
originally issued under the Indenture and any Additional Notes that are 2020 Notes issued under the Indenture
after the Issue Date remains outstanding immediately after the occurrence of each such redemption; provided
further that each such redemption occurs within 90 days of the date of closing of each such Equity Offering or
sale.
Optional Redemption Notices
The Issuer may provide in such notice that payment of the redemption price and performance of the
Issuer’s obligations with respect thereto may be performed by another Person. Notice of any redemption upon
any Equity Offering may be given prior to the completion of the related Equity Offering, and any such
redemption or notice may, at the Issuer’s discretion, be subject to one or more conditions precedent, including,
but not limited to, completion of the related Equity Offering. If the Issuer elects to partially redeem the Notes
of a series, the Trustee will select in a fair and appropriate manner the Notes of that series to be redeemed.
Unless the Issuer defaults in payment of redemption price, on or after the applicable Redemption Date, interest
will cease to accrue on the Notes or portions thereof called for redemption on and after the redemption date.
The Trustee shall select the Notes to be redeemed in the manner described under “Repurchase at the
Option of Holders—Selection and Notice.”
Repurchase at the Option of Holders
Change of Control
The Notes will provide that if a Change of Control occurs, unless the Issuer has previously or
concurrently sent a redemption notice with respect to all the outstanding Notes as described under “Optional
Redemption,” the Issuer will make an offer to purchase all of the Notes pursuant to the offer described below
(the “Change of Control Offer”) at a price in cash (the “Change of Control Payment”) equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, to the date of purchase, subject to the
right of Holders of the Notes of record on the relevant record date to receive interest due on the relevant
interest payment date. Within 30 days following any Change of Control, the Issuer will send notice of such
Change of Control Offer by electronic transmission or by first-class mail, with a copy to the Trustee, to each
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Holder of Notes to the address of such Holder appearing in the note register with a copy to the Trustee or
otherwise in accordance with applicable procedures, with the following information:
(1)
that a Change of Control Offer is being made pursuant to the covenant entitled
“Repurchase at the Option of Holders—Change of Control,” and that all Notes properly tendered
pursuant to such Change of Control Offer will be accepted for payment by the Issuer;
(2)
the purchase price and the purchase date, which will be no earlier than 30 days nor
later than 60 days from the date such notice is sent (the “Change of Control Payment Date”);
(3)
that any Note not properly tendered will remain outstanding and continue to accrue
interest;
(4)
that unless the Issuer defaults in the payment of the Change of Control Payment, all
Notes accepted for payment pursuant to the Change of Control Offer will cease to accrue interest on
the Change of Control Payment Date;
(5)
that Holders electing to have any Notes purchased pursuant to a Change of Control
Offer will be required to surrender such Notes, with such form as is provided therefor by the Issuer,
which may be the form entitled “Option of Holder to Elect Purchase” on the reverse of such Notes,
completed, to the paying agent specified in the notice at the address specified in the notice prior to
the close of business on the third Business Day preceding the Change of Control Payment Date;
(6)
that Holders will be entitled to withdraw their tendered Notes and their election to
require the Issuer to purchase such Notes, provided that the paying agent receives, not later than the
close of business on the fifth Business Day preceding the Change of Control Payment Date, such
communication as is specified therefor by the Issuer setting forth the name of the Holder of the
Notes, the principal amount of Notes tendered for purchase, and a statement that such Holder is
withdrawing its tendered Notes and its election to have such Notes purchased;
(7)
that the Holders whose Notes are being repurchased only in part will be issued new
Notes equal in principal amount to the unpurchased portion of the Notes surrendered. The
unpurchased portion of the Notes must be equal to a minimum of $2,000 or an integral multiple of
$1,000 in principal amount in excess thereof; and
(8)
the other instructions, as determined by the Issuer, consistent with the covenant
described hereunder, that a Holder must follow.
The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws or regulations are applicable in connection
with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture, the Issuer will comply with the
applicable securities laws and regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
On the Change of Control Payment Date, the Issuer will, to the extent permitted by law,
(1)
accept for payment all Notes or portions thereof properly tendered pursuant to the
Change of Control Offer,
(2)
deposit with the paying agent an amount equal to the aggregate Change of Control
Payment in respect of all Notes or portions thereof so tendered, and
(3)
deliver, or cause to be delivered, to the Trustee for cancellation the Notes so
accepted together with an Officer’s Certificate to the Trustee stating that such Notes or portions
thereof have been tendered to and purchased by the Issuer.
We will not be required to make a Change of Control Offer following a Change of Control if a third
party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer made by us and purchases all
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Notes validly tendered and not withdrawn under such Change of Control Offer. Notwithstanding anything to
the contrary herein, a Change of Control Offer may be made in advance of a Change of Control, conditional
upon such Change of Control, if a definitive agreement is in place for the Change of Control at the time of
making of the Change of Control Offer.
The definition of “Change of Control” includes a disposition of all or substantially all of the assets of
the Issuer and its Restricted Subsidiaries to any Person. Although there is a limited body of case law
interpreting the phrase “substantially all,” there is no precise established definition of the phrase under
applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a
particular transaction would involve a disposition of “all or substantially all” of the assets of the Issuer and its
Restricted Subsidiaries. As a result, it may be unclear as to whether a Change of Control has occurred and
whether a Holder of Notes may require the Issuer to make an offer to repurchase the Notes as described
above. The Trustee shall have no obligation to determine whether or not a change of control has occurred.
Asset Sales
The Indenture will provide that the Issuer will not, and will not permit any of its Restricted
Subsidiaries to, cause, make or suffer to exist an Asset Sale, unless:
(1)
the Issuer or such Restricted Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market value (as determined in good faith by
the Issuer) of the assets sold or otherwise disposed of;
(2)
with respect to sales or other dispositions of assets other than Non-Core Assets, at
least 75% of the consideration therefor received by the Issuer or such Restricted Subsidiary, as the
case may be, is in the form of cash or Cash Equivalents; provided that the amount of:
(a)
any liabilities (as shown on the Issuer’s or such Restricted Subsidiary’s
most recent balance sheet or in the footnotes thereto) of the Issuer or such Restricted
Subsidiary, other than liabilities that are by their terms subordinated to the Notes or that are
owed to the Issuer or a Restricted Subsidiary, that are assumed by the transferee of any such
assets and for which the Issuer and all of its Restricted Subsidiaries have been validly
released by all creditors in writing, and
(b)
any securities received by the Issuer or such Restricted Subsidiary from
such transferee that are converted by the Issuer or such Restricted Subsidiary into cash (to
the extent of the cash received) within 180 days following the closing of such Asset Sale,
shall be deemed to be cash for purposes of this provision and for no other purpose.
Within 365 days after the receipt of any Net Proceeds of any Asset Sale, the Issuer or such Restricted
Subsidiary, at its option, may apply the Net Proceeds from such Asset Sale,
(1)
to repay:
(a)
Obligations constituting Senior Credit Facilities Obligations or Fixed Rate
IRB Obligations (or Additional First Priority Lien Obligations which are IRBs) to the extent
required by the terms thereof;
(b)
Obligations constituting First Priority Lien Obligations (other than as
described in clause (a) above), provided that if the Issuer or any Guarantor shall so reduce
First Priority Lien Obligations, the Issuer shall equally and ratably redeem, purchase and/or
offer to purchase Notes as provided under “Optional Redemption,” through open-market
purchases or by making an offer (in accordance with the procedures set forth below for an
Asset Sale Offer (and after making such offer complying with the procedures set forth below,
the amount of Collateral Excess Proceeds and Excess Proceeds shall be reduced by the
amount of Net Proceeds so offered for purchase of Notes)) to all Holders of Notes to
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purchase a pro rata amount of their Notes at 100% of the principal amount thereof, plus
accrued but unpaid interest);
(c)
Indebtedness constituting Pari Passu Indebtedness so long as the Asset Sale
proceeds are with respect to non-Collateral (provided that if the Issuer shall so reduce Pari
Passu Indebtedness, the Issuer shall equally and ratably redeem, purchase and/or offer to
purchase Notes as provided under “Optional Redemption,” through open-market purchases or
by making an offer (in accordance with the procedures set forth below for an Asset Sale
Offer (and after making such offer complying with the procedures set forth below, the
amount of Collateral Excess Proceeds and Excess Proceeds shall be reduced by the amount
of Net Proceeds so offered for purchase of Notes)) to all Holders of Notes to purchase a pro
rata amount of their Notes at 100% of the principal amount thereof, plus accrued but unpaid
interest); and
(d)
Indebtedness of a Restricted Subsidiary that is not a Guarantor, other than
Indebtedness owed to the Issuer or another Restricted Subsidiary; or
(2)
to (a) make an Investment in any Person principally engaged in one or more Similar
Businesses, provided that such Investment results in such Person becoming a Guarantor, (b) acquire
properties, (c) make capital expenditures or (d) acquire other assets that, in the case of each of
clauses (b), (c) and (d), either (x) are used or useful in a Similar Business or (y) replace the
businesses, properties and/or assets that are the subject of such Asset Sale.
Pending the final application of any Net Proceeds pursuant to this covenant, the holder of such Net
Proceeds may apply such Net Proceeds temporarily to reduce Indebtedness outstanding under a revolving
credit facility or otherwise invest such Net Proceeds in any manner not prohibited by the Indenture.
The Issuer (or the applicable Restricted Subsidiary) will be deemed to have complied with the
provisions set forth in clause (2) of the preceding sentence if, within 365 days after the Asset Sale that
generated the Net Proceeds, the Issuer or any of its Restricted Subsidiaries has entered into and not abandoned
or rejected a binding agreement that upon consummation would satisfy such provisions and such agreement is
thereafter consummated within 180 days after the end of such 365 day period.
Any Net Proceeds from Asset Sales of Collateral, together with all Net Proceeds previously realized,
whether from Asset Sales of Collateral or of non-Collateral, that exceed the Net Proceeds received from the
sale or other disposition of Non-Core Assets and which are not invested or applied as provided and within the
time period set forth in the preceding paragraph will be deemed to constitute “Collateral Excess Proceeds.”
When the aggregate amount of Collateral Excess Proceeds exceeds $100.0 million, the Issuer shall make an
offer to all Holders of the Notes and, if required by the terms of any First Priority Lien Obligations, to the
holders of such other First Priority Lien Obligations (a “Collateral Asset Sale Offer”), to purchase the
maximum aggregate principal amount of the Notes and such First Priority Lien Obligations that is a minimum
of $2,000 or any integral multiple of $1,000 (in each case in aggregate principal amount) that may be
purchased out of the Collateral Excess Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof (or, in the event such First Priority Lien Obligations provide for the accretion of
original issue discount, 100% of the accreted value thereof) plus accrued and unpaid interest (or, in respect of
such First Priority Lien Obligations, such lesser price, if any, as may be provided for by the terms of such First
Priority Lien Obligations) to the date fixed for the closing of such offer, in accordance with the procedures set
forth in the Indenture. The Issuer will commence a Collateral Asset Sale Offer with respect to Collateral
Excess Proceeds within 30 days after the date that Collateral Excess Proceeds exceed $100.0 million by
mailing the notice required pursuant to the terms of the Indenture, with a copy to the Trustee.
To the extent that the aggregate principal amount of Notes and such other First Priority Lien
Obligations tendered pursuant to a Collateral Asset Sale Offer is less than the Collateral Excess Proceeds, the
Issuer may use any remaining Collateral Excess Proceeds for any purpose, subject to the other covenants
contained in the Indenture. If the aggregate principal amount of Notes and such other First Priority Lien
Obligations surrendered in a Collateral Asset Sale Offer exceeds the amount of Collateral Excess Proceeds, the
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Trustee shall select the Notes (in the manner described herein) and the Issuer or the agent for such other First
Priority Lien Obligations will select such other First Priority Lien Obligations to be purchased on a pro rata
basis with such adjustments as needed so that no Notes or First Priority Lien Obligations in an unauthorized
denomination is purchased in part based on the principal amount of the Notes and such other First Priority
Lien Obligations tendered. Upon completion of any such Collateral Asset Sale Offer, the amount of Collateral
Excess Proceeds shall be reset at zero.
Any Net Proceeds from Asset Sales of non-Collateral, together with all Net Proceeds previously
realized, whether from Asset Sales of Collateral or of non-Collateral, that exceed the Net Proceeds received
from the sale or other disposition of Non-Core Assets and which are not invested or applied as provided and
within the time period set forth in the first sentence of the third preceding paragraph will be deemed to
constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds exceeds $100.0 million, the
Issuer shall make an offer to all Holders of the Notes and, if required by the terms of any Indebtedness that is
pari passu in right of payment with the Notes (“Pari Passu Indebtedness”), to the holders of such Pari Passu
Indebtedness (an “Asset Sale Offer”), to purchase the maximum aggregate principal amount of the Notes and
such Pari Passu Indebtedness that is a minimum of $2,000 or an integral multiple of $1,000 in excess thereof
that may be purchased out of the Excess Proceeds at an offer price in cash in an amount equal to 100% of the
principal amount thereof (or, in the event such Pari Passu Indebtedness provided for the accretion of original
issue discount, 100% of the accreted value thereof) plus accrued and unpaid interest (or, in respect of such
Pari Passu Indebtedness, such lesser price, if any, as may be provided for by the terms of such Pari Passu
Indebtedness) to the date fixed for the closing of such offer, in accordance with the procedures set forth in the
Indenture. The Issuer will commence an Asset Sale Offer with respect to Excess Proceeds within 30 days after
the date that Excess Proceeds exceed $100.0 million by sending the notice to the Holders of the Notes
required pursuant to the terms of the Indenture, with a copy to the Trustee.
To the extent that the aggregate principal amount of Notes and such Pari Passu Indebtedness tendered
pursuant to an Asset Sale Offer is less than the Excess Proceeds, the Issuer may use any remaining Excess
Proceeds for any purpose, subject to the other covenants contained in the Indenture. If the aggregate principal
amount of Notes and the Pari Passu Indebtedness surrendered in an Asset Sale Offer exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes (in the manner described herein) and the Issuer or the
agent for such Pari Passu Indebtedness will select such other Pari Passu Indebtedness to be purchased on a pro
rata basis with such adjustments as needed so that no Notes or Pari Passu Indebtedness in an unauthorized
denomination is purchased in part based on the principal amount of the Notes and such Pari Passu
Indebtedness tendered. Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds shall be
reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws or regulations are applicable in connection
with the repurchase of the Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture, the Issuer will comply with the
applicable securities laws and regulations and shall not be deemed to have breached its obligations described
in the Indenture by virtue thereof.
Selection and Notice
If the Issuer is redeeming less than all of the Notes at any time, the Trustee will select the Notes of
such series to be redeemed (a) if the Notes are listed on any national securities exchange, in compliance with
the requirements of the principal national securities exchange on which the Notes are listed or (b) on a pro
rata basis to the extent practicable, or, if the pro rata basis is not practicable for any reason, by lot or by such
other method as the Trustee shall deem appropriate.
Notices of purchase or redemption shall be mailed by first-class mail, postage prepaid, at least 30 but
not more than 60 days before the purchase or redemption date to each Holder of Notes at such Holder’s
registered address, except that redemption notices may be mailed more than 60 days prior to a redemption date
if the notice is issued in connection with a defeasance of the Notes or a satisfaction and discharge of the
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Indenture. If any Note is to be purchased or redeemed in part only, any notice of purchase or redemption that
relates to such Note shall state the portion of the principal amount thereof that has been or is to be purchased
or redeemed.
The Issuer will issue a new Note in a principal amount equal to the unredeemed portion of the
original Note in the name of the Holder upon cancellation of the original Note. Notes called for redemption
become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on
Notes or portions of them called for redemption.
Certain Covenants
Suspended Covenants
During any period when the Issuer has an Investment Grade Rating and no Default has occurred and
is continuing under the Indenture (the “Covenant Suspension Period”), the Issuer and its Restricted
Subsidiaries will not be subject to the provisions of the Indenture described above under the caption
“Repurchase at the Option of Holders—Asset Sales” and under the following headings:
k
“—Limitation on Restricted Payments,”
k
“—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred
Stock,”
k
clause (4) of the covenant under “—Merger, Consolidation or Sale of All or Substantially All
Assets,”
k
“—Transactions with Affiliates,” and
k
“—Dividend and other Payment Restrictions Affecting Restricted Subsidiaries”
(collectively, the “Suspended Covenants”); provided that if the Issuer and the Restricted Subsidiaries
are not subject to the Suspended Covenants for any period of time as a result of the preceding portion of this
sentence and, subsequently, either of the Rating Agencies withdraws its ratings or downgrades the ratings
below the Investment Grade Ratings, or a Default (other than with respect to the Suspended Covenants) occurs
and is continuing, the Issuer and the Restricted Subsidiaries will thereafter again be subject to the Suspended
Covenants, subject to the terms, conditions and obligations set forth in the Indenture (each such date of
reinstatement being the “Reinstatement Date”). As a result, during any Covenant Suspension Period, the Notes
will be entitled to substantially reduced covenant protection. Compliance with the Suspended Covenants with
respect to Restricted Payments made after the Reinstatement Date will be calculated in accordance with the
terms of the covenant described under “—Limitation on Restricted Payments” as though such covenant had
been in effect during the entire period of time from which the Notes are issued. However, all Restricted
Payments made, Indebtedness incurred and other actions effected during any period in which covenants are
suspended will not cause a default under the Indenture on or after any Reinstatement Date.
The Issuer will provide the Trustee with prompt written notice upon the commencement of a
Covenant Suspension Period and of the occurrence of a Reinstatement Date. In addition, during any period
when the Suspended Covenants are suspended the Issuer will not be permitted to designate or redesignate any
of its Subsidiaries pursuant to the definition of “Unrestricted Subsidiary.”
Set forth below are summaries of certain covenants that will be contained in the Indenture.
Limitation on Restricted Payments
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly:
(1)
declare or pay any dividend or make any payment or distribution on account of the
Issuer’s or any Restricted Subsidiary’s Equity Interests, including any dividend or distribution payable
in connection with any merger or consolidation other than dividends or distributions payable solely in
Equity Interests (other than Disqualified Stock) of the Issuer;
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(2)
purchase, redeem, defease or otherwise acquire or retire for value any Equity
Interests of the Issuer or any direct or indirect parent of the Issuer, including in connection with any
merger or consolidation;
(3)
make any principal payment on, or redeem, repurchase, defease or otherwise acquire
or retire for value in each case, prior to any scheduled repayment, sinking fund payment or maturity,
any Subordinated Indebtedness other than:
(a)
Indebtedness permitted under clause (7) of the covenant described under
“—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock”; or
(b)
the purchase, repurchase or other acquisition of Subordinated Indebtedness
of the Issuer and its Restricted Subsidiaries purchased in anticipation of satisfying a sinking
fund obligation, principal installment or final maturity, in each case due within one year of
the date of purchase, repurchase or acquisition; or
(4)
make any Restricted Investment
(all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as
“Restricted Payments”), unless, at the time of such Restricted Payment:
(1)
no Default shall have occurred and be continuing or would occur as a consequence
thereof;
(2)
immediately after giving effect to such transaction on a pro forma basis, the Issuer’s
Fixed Charge Coverage Ratio for the Issuer’s most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on which such Restricted
Payment is to be made would have been at least 2.50 to 1.0;
(3)
such Restricted Payment, together with the aggregate amount of all other Restricted
Payments made by the Issuer and its Restricted Subsidiaries after the Issue Date (including Restricted
Payments permitted by clauses (1) and (4) of the next succeeding paragraph, but excluding all other
Restricted Payments permitted by the next succeeding paragraph), is less than the sum of (without
duplication):
(a)
an amount equal to (i) 100% of cumulative Consolidated Net Income of the
Issuer for the period (taken as one accounting period) from April 1, 2010 to the end of the
most recently ended fiscal quarter for which internal financial statements are available at the
time of such Restricted Payment (or if such Consolidated Net Income for such period is a
loss, 100% of such loss) less (ii) $325.0 million; plus
(b)
100% of the aggregate net cash proceeds and the fair market value, as
determined in good faith by the Issuer, of marketable securities or other property received by
the Issuer or a Restricted Subsidiary (without the issuance of additional Equity Interests in
such Restricted Subsidiary) since immediately after the Issue Date from the issue or sale of:
(i)
Equity Interests of the Issuer, including Treasury Capital Stock (as
defined below); and
(ii)
debt of the Issuer or any Restricted Subsidiary that has been
converted into or exchanged for such Equity Interests of the Issuer;
provided, however, that this clause (b) shall not include the proceeds from
(x) Refunding Capital Stock (as defined below), (y) Equity Interests or convertible debt
securities sold to the Issuer or a Restricted Subsidiary, as the case may be, or
(z) Disqualified Stock or debt securities that have been converted into Disqualified Stock;
plus
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(c)
100% of the aggregate amount of cash and the fair market value, as
determined in good faith by the Issuer, of marketable securities or other property contributed
to the capital of the Issuer following the Issue Date (other than by a Restricted Subsidiary);
plus
(d)
100% of the aggregate amount received in cash and the fair market value,
as determined in good faith by the Issuer, of marketable securities or other property received
by the Issuer or a Restricted Subsidiary from or by means of:
(i)
the sale or other disposition (other than to the Issuer or a
Restricted Subsidiary) of Restricted Investments made by the Issuer or its Restricted
Subsidiaries and repurchases and redemptions of such Restricted Investments from
the Issuer or its Restricted Subsidiaries and repayments of loans or advances, and
releases of guarantees, which constitute Restricted Investments by the Issuer or its
Restricted Subsidiaries, in each case after the Issue Date; or
(ii)
the sale or other disposition (other than to the Issuer or a
Restricted Subsidiary) of the stock of an Unrestricted Subsidiary (other than to the
extent the Investment in such Unrestricted Subsidiary constituted a Permitted
Investment) or a dividend or distribution from an Unrestricted Subsidiary after the
Issue Date; plus
(e)
in the case of the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary after the Issue Date, the fair market value of the Investment in such
Unrestricted Subsidiary, as determined by the Issuer in good faith at the time of the
redesignation of such Unrestricted Subsidiary as a Restricted Subsidiary, other than an
Unrestricted Subsidiary to the extent the Investment in such Unrestricted Subsidiary
constituted a Permitted Investment, provided that the amount included pursuant to this
clause (e) shall not exceed $100.0 million unless the-then fair market value thereof is
determined in writing by an Independent Financial Advisor; and
(f)
100% of the aggregate amount of the Net Proceeds from the sale or other
disposition of Non-Core Assets;
(4)
the Issuer shall have cash and/or Cash Equivalents and/or available borrowing
capacity under a revolving credit facility under one or more Credit Facilities in an aggregate amount
of not less than $500.0 million; and
(5)
the Issuer shall have a Capitalization Ratio greater than 0.55 to 1.00.
The foregoing provisions will not prohibit:
(1)
the payment of any dividend or similar distribution within 60 days after the date of
declaration thereof, if at the date of declaration such payment would have complied with the
provisions of the Indenture;
(2)
(a) the redemption, repurchase, retirement or other acquisition of any Equity
Interests (“Treasury Capital Stock”) of the Issuer or any Restricted Subsidiary or Subordinated
Indebtedness of the Issuer or any Guarantor, in exchange for, or out of the proceeds of the
substantially concurrent sale (other than to the Issuer or a Restricted Subsidiary) of, Equity Interest of
the Issuer (other than any Disqualified Stock) (“Refunding Capital Stock”) and (b) the declaration and
payment of dividends or similar distributions on the Treasury Capital Stock out of the proceeds of the
substantially concurrent sale (other than to the Issuer or a Restricted Subsidiary) of the Refunding
Capital Stock;
(3)
the redemption, repurchase or other acquisition or retirement of Subordinated
Indebtedness of the Issuer or a Guarantor in exchange for, or with the proceeds of the substantially
concurrent sale of, new Indebtedness of the Issuer or a Guarantor, as the case may be, which is
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incurred in compliance with “—Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock and Preferred Stock” so long as:
(a)
the principal amount (or accreted value, if applicable) of such new
Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus
any accrued and unpaid interest on, the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired for value, plus the amount of any premium required to be
paid under the terms of the instrument governing the Subordinated Indebtedness being so
redeemed, repurchased, acquired or retired and any fees and expenses incurred in connection
with the issuance of such new Indebtedness;
(b)
such new Indebtedness is subordinated to the Notes or the applicable
Guarantee at least to the same extent as such Subordinated Indebtedness so purchased,
exchanged, redeemed, repurchased, acquired or retired for value;
(c)
such new Indebtedness has a final scheduled maturity date equal to or later
than the final scheduled maturity date of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired; and
(d)
such new Indebtedness has a Weighted Average Life to Maturity equal to
or greater than the remaining Weighted Average Life to Maturity of the Subordinated
Indebtedness being so redeemed, repurchased, acquired or retired;
(4)
a Restricted Payment to pay for the repurchase, retirement or other acquisition or
retirement for value of Equity Interests (other than Disqualified Stock) of the Issuer held by any
future, present or former employee, director or consultant of the Issuer, or any of its Subsidiaries
pursuant to any management equity plan or stock option plan or any other management or employee
benefit plan or agreement; provided, however, that the aggregate Restricted Payments made pursuant
to the foregoing do not exceed $5.0 million in each calendar year, with unused amounts carried over
to subsequent years; provided that aggregate Restricted Payments, including such amounts carried
over, made pursuant to this clause (4) shall not exceed $15.0 million in each calendar year;
(5)
the declaration and payment of dividends or similar distributions to holders of any
class or series of Disqualified Stock of the Issuer or any of its Restricted Subsidiaries issued in
accordance with the covenant described under “—Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock”;
(6)
repurchases of Equity Interests deemed to occur upon exercise of stock options or
warrants if such Equity Interests represent a portion of the exercise price of such options or warrants;
(7)
the repurchase, redemption or other acquisition or retirement for value of any
Subordinated Indebtedness pursuant to the provisions similar to those described under the captions
“Repurchase at the Option of Holders—Change of Control” and “Repurchase at the Option of
Holders—Asset Sales”; provided that all Notes tendered by Holders in connection with a Change of
Control Offer or Asset Sale Offer, as applicable, have been repurchased, redeemed or acquired for
value;
(8)
the payment of any dividend or similar distribution by a Restricted Subsidiary of the
Issuer to the holders of such Restricted Subsidiary’s Equity Interests on a pro rata basis;
(9)
(10)
payments under key man life insurance policies; and
distributions or payments of Receivables Fees.
For purposes of determining compliance with this “Restricted Payments” covenant, in the event that a
Restricted Payment meets the criteria of more than one of the categories of Restricted Payments described in
the immediately preceding paragraph, or is entitled to be incurred pursuant to the first paragraph of this
covenant, the Issuer will be entitled to classify such Restricted Payment (or portion thereof) on the date of its
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payment or later reclassify such Restricted Payment (or portion thereof) in any manner that complies with this
covenant at any time.
As of the Issue Date, all of the Subsidiaries of the Issuer will be Restricted Subsidiaries. The Issuer
will not permit any Unrestricted Subsidiary to become a Restricted Subsidiary except pursuant to the
definition of “Unrestricted Subsidiary.” For purposes of designating any Restricted Subsidiary as an
Unrestricted Subsidiary, all outstanding Investments by the Issuer and its Restricted Subsidiaries (except to the
extent repaid) in the Subsidiary so designated will be deemed to be Restricted Payments in an amount
determined as set forth in the last sentence of the definition of “Investments.” Such designation will be
permitted only if a Restricted Payment in such amount would be permitted at such time and if such Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary. Unrestricted Subsidiaries will not be subject to
any of the restrictive covenants set forth in the Indenture.
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock
The Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly,
create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or
otherwise (collectively, “incur” and collectively, an “incurrence”) with respect to any Indebtedness (including
Acquired Indebtedness) and the Issuer and the Guarantors will not issue any shares of Disqualified Stock and
will not permit any Restricted Subsidiary that is not a Guarantor to issue any shares of Disqualified Stock or
Preferred Stock; provided, however, that the Issuer and the Guarantors may incur Indebtedness (including
Acquired Indebtedness) or issue shares of Disqualified Stock, if the Issuer’s Fixed Charge Coverage Ratio for
the Issuer’s most recently ended four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock
or Preferred Stock is issued would have been at least 2.25 to 1.0, determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock or Preferred Stock had been issued, as the case may be, and the application of proceeds
therefrom had occurred at the beginning of such four fiscal quarter period.
The foregoing limitations will not apply to:
(1)
the incurrence of Indebtedness under Credit Facilities by the Issuer or any of its
Restricted Subsidiaries and the issuance and creation of letters of credit and bankers’ acceptances
thereunder (with letters of credit and bankers’ acceptances being deemed to have a principal amount
equal to the face amount thereof), up to an aggregate principal amount of $1,200.0 million
outstanding at any one time;
(2)
the incurrence by the Issuer and any Guarantor of Indebtedness represented by the
Notes (including any Guarantee, but excluding any Additional Notes);
(3)
Indebtedness of the Issuer and its Restricted Subsidiaries in existence on the Issue
Date (other than Indebtedness described in clauses (1) and (2));
(4)
Indebtedness (including Capitalized Lease Obligations), Disqualified Stock and
Preferred Stock incurred by the Issuer or any of its Restricted Subsidiaries, to finance the purchase,
lease or improvement of property (real or personal) or equipment that is used or useful in a Similar
Business, whether through the direct purchase of assets or the Capital Stock of any Person owning
such assets in an aggregate principal amount, together with any Refinancing Indebtedness in respect
thereof and all other Indebtedness, Disqualified Stock and/or Preferred Stock incurred and
outstanding under this clause (4), not to exceed $100.0 million at any time outstanding;
(5)
Indebtedness incurred by the Issuer or any Restricted Subsidiary constituting
reimbursement obligations with respect to bankers’ acceptances and letters of credit issued in the
ordinary course of business, including letters of credit in respect of workers’ compensation claims, or
other Indebtedness with respect to reimbursement type obligations regarding workers’ compensation
claims; provided, however, that upon the drawing of such bankers’ acceptances and letters of credit or
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the incurrence of such Indebtedness, such obligations are reimbursed within 30 days following such
drawing or incurrence;
(6)
Indebtedness arising from agreements of the Issuer or a Restricted Subsidiary
providing for indemnification, adjustment of purchase price or similar obligations, in each case,
incurred or assumed in connection with the disposition of any business, assets or a Subsidiary, other
than guarantees of Indebtedness incurred by any Person acquiring all or any portion of such business,
assets or a Subsidiary for the purpose of financing such acquisition; provided, however, that such
Indebtedness is not reflected on the balance sheet (other than by application of FIN 45 as a result of
an amendment to an obligation in existence on the Issue Date) of the Issuer or any Restricted
Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise
reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes
of this clause (6));
(7)
Indebtedness of the Issuer to a Restricted Subsidiary or a Restricted Subsidiary to
the Issuer or another Restricted Subsidiary; provided that any such Indebtedness (other than pursuant
to intercompany cash management activities) owing by the Issuer or a Guarantor to a Restricted
Subsidiary that is not a Guarantor is expressly subordinated in right of payment to the Notes or the
Guarantee of the Notes, as the case may be; provided further that any subsequent issuance or transfer
of any Capital Stock or any other event which results in any Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any other subsequent transfer of any such Indebtedness (except to the Issuer
or another Restricted Subsidiary or any pledge of such Indebtedness constituting a Permitted Lien)
shall be deemed, in each case, to be an incurrence of such Indebtedness not permitted by this clause
(7);
(8)
shares of Preferred Stock of a Restricted Subsidiary issued to the Issuer or another
Restricted Subsidiary; provided that any subsequent issuance or transfer of any Capital Stock or any
other event which results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or
any other subsequent transfer of any such shares of Preferred Stock (except to the Issuer or a
Restricted Subsidiary) shall be deemed in each case to be an issuance of such shares of Preferred
Stock not permitted by this clause (8);
(9)
Hedging Obligations (excluding Hedging Obligations entered into for speculative
purposes) for the purpose of limiting interest rate risk with respect to any Indebtedness permitted to
be incurred pursuant to this covenant, exchange rate risk or commodity pricing risk;
(10)
obligations in respect of customs, stay, performance, bid, appeal and surety bonds
and completion guarantees and other obligations of a like nature provided by the Issuer or any of its
Restricted Subsidiaries in the ordinary course of business;
(11)
the incurrence by the Issuer or any Restricted Subsidiary of Indebtedness,
Disqualified Stock or Preferred Stock which serves to refund or refinance:
(a)
any Indebtedness, Disqualified Stock or Preferred Stock incurred as
permitted under the first paragraph of this covenant and clauses (2), (3) and (4), or
(b)
any Indebtedness, Disqualified Stock or Preferred Stock issued to so refund
or refinance the Indebtedness, Disqualified Stock or Preferred Stock described in clause (a)
above,
including, in each case, additional Indebtedness, Disqualified Stock or Preferred Stock
incurred to pay premiums (including tender premiums), defeasance costs and fees and expenses in
connection therewith (collectively, the “Refinancing Indebtedness”) prior to its respective maturity;
provided, however, that such Refinancing Indebtedness:
(A)
has a Weighted Average Life to Maturity at the time such Refinancing
Indebtedness is incurred which is not less than the remaining Weighted Average Life to
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Maturity of the Indebtedness, Disqualified Stock or Preferred Stock being refunded or
refinanced,
(B)
to the extent such Refinancing Indebtedness refinances (i) Indebtedness
subordinated or pari passu to the Notes or any Guarantee thereof, such Refinancing
Indebtedness is subordinated or pari passu to the Notes or the Guarantee at least to the same
extent as the Indebtedness being refinanced or refunded or (ii) Disqualified Stock or
Preferred Stock, such Refinancing Indebtedness must be Disqualified Stock or Preferred
Stock, respectively, and
(C)
shall not include:
(i)
Indebtedness, Disqualified Stock or Preferred Stock of a Restricted
Subsidiary that is not a Guarantor that refinances Indebtedness, Disqualified Stock
or Preferred Stock of the Issuer; or
(ii)
Indebtedness, Disqualified Stock or Preferred Stock of a
Restricted Subsidiary that is not a Guarantor that refinances Indebtedness,
Disqualified Stock or Preferred Stock of a Guarantor;
(12)
Indebtedness arising from the honoring by a bank or other financial institution of a
check, draft or similar instrument drawn against insufficient funds in the ordinary course of business,
provided that such Indebtedness is extinguished within two Business Days of its incurrence;
(13)
Indebtedness of the Issuer or any of its Restricted Subsidiaries supported by a
letter of credit issued pursuant to the Credit Facilities, in a principal amount not in excess of the
stated amount of such letter of credit;
(14)
(a) any guarantee by the Issuer or a Restricted Subsidiary of Indebtedness or other
obligations of any Restricted Subsidiary so long as the incurrence of such Indebtedness incurred by
such Restricted Subsidiary is permitted under the terms of the Indenture, or
(b) any guarantee by a Restricted Subsidiary of Indebtedness of the Issuer;
provided that such Restricted Subsidiary shall comply with the covenant described below
under “—Limitation on Guarantees of Indebtedness by Restricted Subsidiaries”;
(15)
Indebtedness created due to a change in generally accepted accounting principles
of the United States, as applied to the Issuer and the Restricted Subsidiaries, or international financial
reporting standards, should such standards become applicable to the Issuer and the Restricted
Subsidiaries;
(16)
Indebtedness of the Issuer or any of its Restricted Subsidiaries incurred in
connection with pollution control or industrial revenue bond financings (such Indebtedness, “IRBs”)
in an aggregate principal amount at any time outstanding not to exceed $400.0 million;
(17)
Indebtedness of the Issuer or any of its Restricted Subsidiaries incurred in
connection with any Inventory Financing in an aggregate principal amount not to exceed
$200.0 million at any one time outstanding;
(18)
Indebtedness under one or more letter of credit facilities with letters of credit not
to exceed an aggregate face amount of $300 million at any one time; and
(19)
other Indebtedness in an aggregate principal amount not to exceed $300.0 million
at any one time outstanding.
For purposes of determining compliance with this covenant:
(1)
in the event that an item of Indebtedness, Disqualified Stock or Preferred Stock (or
any portion thereof) meets the criteria of more than one of the categories of permitted Indebtedness,
Disqualified Stock or Preferred Stock described in clauses (1) through (19) above or is entitled to be
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incurred pursuant to the first paragraph of this covenant, the Issuer, in its sole discretion, may classify
or reclassify such item of Indebtedness, Disqualified Stock or Preferred Stock (or any portion thereof)
and will only be required to include the amount and type of such Indebtedness, Disqualified Stock or
Preferred Stock in one of the above clauses; provided that all Indebtedness outstanding under the
Senior Credit Facilities on the Issue Date will be treated as incurred on the Issue Date under
clause (1) of the preceding paragraph; and
(2)
at the time of incurrence or reclassification, the Issuer will be entitled to divide and
classify an item of Indebtedness in more than one of the types of Indebtedness described in the first
and second paragraphs above.
Accrual of interest and dividends, the accretion of accreted value, changes in Hedging Obligations as
a result of changes in mark-to-market values and the payment of interest or dividends in the form of
additional Indebtedness, Disqualified Stock or Preferred Stock, as applicable, will not be deemed to be an
incurrence of Indebtedness, Disqualified Stock or Preferred Stock for purposes of this covenant.
The Indenture will provide that the Issuer will not, and will not permit any Guarantor to, directly or
indirectly, incur any Indebtedness (including Acquired Indebtedness) that is subordinated or junior in right of
payment to any Indebtedness of the Issuer or such Guarantor, as the case may be, unless such Indebtedness is
expressly subordinated in right of payment to the Notes or such Guarantor’s Guarantee to the extent and in the
same manner as such Indebtedness is subordinated to other Indebtedness of the Issuer or such Guarantor, as
the case may be. The Indenture will not treat (1) unsecured Indebtedness as subordinated or junior to Secured
Indebtedness merely because it is unsecured or (2) senior Indebtedness as subordinated or junior to any other
senior Indebtedness merely because it has a junior priority with respect to the same collateral.
Liens
The Issuer will not, and will not permit any Guarantor to, directly or indirectly, create, incur, assume
or suffer to exist any Lien (except Permitted Liens) that secures obligations under any Indebtedness or any
related guarantee, on any asset or property of the Issuer or any Guarantor, or any income or profits therefrom,
or assign or convey any right to receive income therefrom.
The foregoing shall not apply to (a) Liens securing Indebtedness permitted to be incurred under
(i) Credit Facilities, including any letter of credit facility relating thereto, that was permitted by the terms of
the Indenture to be incurred pursuant to clause (1) of the second paragraph under “—Limitation on Incurrence
of Indebtedness and Issuance of Disqualified Stock and Preferred Stock,” (ii) IRBs, (iii) Hedging Obligations,
up to a maximum mark-to-market value of $200 million and (iv) the Issuer’s and its Subsidiaries’ cash
management facilities, and (b) Liens incurred to secure Obligations in respect of any Indebtedness permitted
to be incurred pursuant to the covenant described above under “—Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock and Preferred Stock”; provided that, with respect to Liens securing
Obligations permitted under this subclause (b), at the time of incurrence of such Obligations and after giving
pro forma effect thereto, the Consolidated Secured Debt Ratio would be no greater than 2.0 to 1.0; provided
that (i) with respect to Liens securing First Priority Lien Obligations incurred pursuant to subclause (a) above
or this subclause (b), the Notes are also secured by the assets subject to such Liens with the priority and
subject to intercreditor arrangements, in each case, no less favorable to the Holders of the Notes than those set
forth in the Intercreditor Agreement and (ii) with respect to Liens securing Obligations incurred pursuant to
subclause (a) above or this subclause (b) that are junior to the Liens securing the Notes, the Notes are secured
by the assets subject to such Liens on a first-priority basis and subject to an intercreditor agreement customary
for intercreditor arrangements between first-priority and second-priority lenders.
Merger, Consolidation or Sale of All or Substantially All Assets
The Issuer may not consolidate or merge with or into or wind up into (whether or not the Issuer is the
surviving corporation), and may not sell, assign, transfer, lease, convey or otherwise dispose of all or
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substantially all of the properties or assets of the Issuer and its Restricted Subsidiaries, taken as a whole, in
one or more related transactions, to any Person unless:
(1)
the Issuer is the surviving corporation or the Person formed by or surviving any
such consolidation or merger (if other than the Issuer) or the Person to whom such sale, assignment,
transfer, lease, conveyance or other disposition will have been made is organized or existing under the
laws of the United States, any state thereof, the District of Columbia, or any territory thereof (such
Person, as the case may be, being herein called the “Successor Company”); provided that in the case
where the Successor Company is not a corporation, a co-obligor of the Notes is a corporation;
(2)
the Successor Company, if other than the Issuer, expressly assumes all the
obligations of the Issuer under the Indenture, Notes and the Security Documents pursuant to a
supplemental indenture or other documents or instruments as set forth in the Indenture;
(3)
immediately after such transaction, no Default exists;
(4)
if the Issuer is not the Successor Company, immediately after giving pro forma
effect to such transaction and any related financing transactions, as if such transactions had occurred
at the beginning of the applicable four-quarter period,
(a)
the Successor Company would be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant described under “—Limitation on Incurrence of Indebtedness
and Issuance of Disqualified Stock and Preferred Stock,” or
(b)
the Fixed Charge Coverage Ratio would be equal to or greater than such
ratio immediately prior to such transaction;
(5)
each Guarantor, unless it is the other party to the transactions described above, in
which case clause (2) of the second succeeding paragraph shall apply, shall have by supplemental
indenture confirmed that its Guarantee shall apply to such Person’s obligations under the Indenture,
the Notes and the Security Documents; and
(6)
the Issuer shall have delivered to the Trustee an Officer’s Certificate and an Opinion
of Counsel, each stating that such consolidation, merger or transfer and such supplemental indentures,
if any, comply with the Indenture, the Notes and the Security Documents.
The Successor Company will succeed to, and be substituted for the Issuer under the Indenture and the
Notes. Notwithstanding the foregoing clauses (3) and (4),
(1)
the Issuer or a Restricted Subsidiary may consolidate with or merge into or transfer
all or part of its properties and assets to the Issuer or a Restricted Subsidiary; and
(2)
the Issuer may merge with an Affiliate of the Issuer solely for the purpose of
reorganizing the Issuer in a State of the United States so long as the amount of Indebtedness of the
Issuer and its Restricted Subsidiaries is not increased thereby.
Subject to certain limitations described in the Indenture governing release of a Guarantee upon the
sale, disposition or transfer of a Guarantor, no Guarantor will, and the Issuer will not permit any Guarantor to,
consolidate or merge with or into or wind up into (whether or not the Issuer or Guarantor is the surviving
corporation), or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to any Person unless:
(1)
such Guarantor is the surviving corporation or the Person formed by or surviving
any such consolidation or merger (if other than such Guarantor) or to which such sale, assignment,
transfer, lease, conveyance or other disposition will have been made is organized or existing under the
laws of the jurisdiction of organization of such Guarantor, as the case may be, or the laws of the
United States, any state thereof, the District of Columbia, or any territory thereof (such Guarantor or
such Person, as the case may be, being herein called the “Successor Person”);
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(2)
the Successor Person, if other than such Guarantor, expressly assumes all the
obligations of such Guarantor under the Indenture, such Guarantor’s related Guarantee and the
Security Documents pursuant to supplemental indentures or other documents or instruments in form
as set forth in the Indenture;
(3)
immediately after such transaction, no Default exists; and
(4)
of Counsel, each stating that such consolidation, merger or transfer and such supplemental indentures,
if any, comply with the Indenture.
The Successor Person will succeed to, and be substituted for, such Guarantor under the Indenture,
such Guarantor’s Guarantee and the Security Documents. Notwithstanding the foregoing, any Guarantor may
merge into or transfer all or part of its properties and assets to another Guarantor or the Issuer.
Transactions with Affiliates
The Issuer will not, and will not permit any of its Restricted Subsidiaries to, make any payment to, or
sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets
from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate of the Issuer (each of the foregoing, an “Affiliate
Transaction”), unless:
(1)
such Affiliate Transaction is on terms that are not materially less favorable to the
Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable
transaction by the Issuer or such Restricted Subsidiary with an unrelated Person on an arm’s-length
basis;
(2)
the Issuer delivers to the Trustee with respect to any Affiliate Transaction or series
of related Affiliate Transactions involving aggregate payments or consideration in excess of
$50.0 million, a resolution adopted by the majority of the members of the board of directors of the
Issuer approving such Affiliate Transaction and set forth in an Officer’s Certificate certifying that
such Affiliate Transaction complies with clause (1) above; and
(3)
with respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $100.0 million, an opinion as to the fairness to the
Issuer of such Affiliate Transaction from a financial point of view issued by an Independent Financial
Advisor.
The foregoing provisions will not apply to the following:
(1)
transactions between or among the Issuer and any of its Restricted Subsidiaries;
(2)
Restricted Payments permitted by the provisions of the Indenture described above
under the covenant “—Limitation on Restricted Payments” and Permitted Investments;
(3)
directors, officers or employees’ compensation, or the payment of reasonable and
customary fees paid to, and indemnities provided on behalf of, officers, directors, employees or
consultants of the Issuer or any of its Restricted Subsidiaries;
(4)
transactions in which the Issuer or any of its Restricted Subsidiaries, as the case
may be, delivers to the Trustee a letter from an Independent Financial Advisor stating that such
transaction is fair to the Issuer or such Restricted Subsidiary from a financial point of view or stating
that the terms are not materially less favorable to the Issuer or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by the Issuer or such Restricted
Subsidiary with an unrelated Person on an arm’s-length basis;
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(5)
any agreement as in effect as of the Issue Date, or any amendment thereto (so long
as any such amendment is not disadvantageous to the Holders when taken as a whole as compared to
the applicable agreement as in effect on the Issue Date);
(6)
transactions with customers, clients, suppliers, or purchasers or sellers of goods or
services, in each case in the ordinary course of business as would be conducted with a non-Affiliate
and otherwise in compliance with the terms of the Indenture, which are fair to the Issuer and its
Restricted Subsidiaries, in the reasonable determination of the board of directors of the Issuer or the
senior management thereof, or are on terms at least as favorable as might reasonably have been
obtained at such time from an unaffiliated party;
(7)
the issuance of Equity Interests (other than Disqualified Stock) by the Issuer or a
Restricted Subsidiary;
(8)
payments or loans (or cancellation of loans) to employees or consultants of the
Issuer or any of its Restricted Subsidiaries and employment agreements, severance arrangements,
stock option plans and other similar arrangements with such employees or consultants which, in each
case, are approved by a majority of the board of directors of the Issuer or a committee charged with
such matters in good faith if made or implemented other than in the ordinary course of business;
(9)
Affiliate Transactions involving the purchase, sale, storage, terminalling or
transportation of crude oil, natural gas and other hydrocarbons, and refined products therefrom, in the
ordinary course of business as would be conducted with a non-Affiliate, so long as such transactions
are priced in line with industry accepted benchmark prices and the pricing of such transactions is
equivalent to the pricing of comparable transactions with unrelated third parties or are no less
favorable to the Issuer and its Restricted Subsidiaries than if so priced;
(10)
the performance of any written agreement in effect on the Issue Date, as such
agreement may be amended, modified or supplemented from time to time; provided, however, that
any amendment, modification or supplement entered into after the Issue Date will be permitted only
to the extent that its terms do not adversely affect the rights of any Holders of the Notes (as
determined in good faith by an officer of the Issuer, and if such Affiliate Transaction, or related
series thereof, involves aggregate consideration in excess of $50.0 million, as determined in good
faith by the board of directors of the Issuer) as compared to the terms of the agreement in effect on
the Issue Date;
(11)
any PDVSA Agreement and any Tax Sharing Agreement; and
(12)
sales of accounts receivable, or participations therein, in connection with any
Receivables Facility.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Issuer will not, and will not permit any of its Restricted Subsidiaries that are not Guarantors to,
directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or consensual restriction on the ability of any such Restricted Subsidiary to:
(1)
(a) pay dividends or make any other distributions to the Issuer or any of its
Restricted Subsidiaries on its Capital Stock or with respect to any other interest or participation in, or
measured by, its profits, or
(b) pay any Indebtedness owed to the Issuer or any of its Restricted Subsidiaries;
(2)
make loans or advances to the Issuer or any of its Restricted Subsidiaries; or
(3)
sell, lease or transfer any of its properties or assets to the Issuer or any of its
Restricted Subsidiaries,
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except (in each case) for such encumbrances or restrictions existing under or by reason of:
(a)
contractual encumbrances or restrictions pursuant to the Senior Credit Facilities and
the related documentation and contractual encumbrances or restrictions in effect on the Issue Date;
(b)
the Indenture and the Notes;
(c)
purchase money obligations for property acquired in the ordinary course of business
that impose restrictions of the nature discussed in clause (3) above on the property so acquired;
(d)
applicable law or any applicable rule, regulation or order;
(e)
any agreement or other instrument of a Person acquired by the Issuer or any of its
Restricted Subsidiaries in existence at the time of such acquisition (but not created in contemplation
thereof), which encumbrance or restriction is not applicable to any Person, or the properties or assets
of any Person, other than the Person and its Subsidiaries, or the property or assets of the Person and
its Subsidiaries, so acquired;
(f)
contracts for the sale of assets, including customary restrictions with respect to a
Subsidiary of (i) the Issuer or (ii) a Restricted Subsidiary, pursuant to an agreement that has been
entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such
Subsidiary that impose restrictions on or with respect to the assets to be sold;
(g)
Secured Indebtedness otherwise permitted to be incurred pursuant to the covenants
described under “—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock” and “—Liens” that limit the right of the debtor to dispose of the assets securing
such Indebtedness;
(h)
restrictions on cash or other deposits or net worth imposed by customers or
suppliers under contracts entered into in the ordinary course of business;
(i)
customary provisions in joint venture agreements and other similar agreements
relating solely to such joint venture;
(j)
customary provisions contained in leases or licenses of intellectual property and
other agreements, in each case, entered into in the ordinary course of business;
(k)
any encumbrances or restrictions of the type referred to in clauses (1), (2) and
(3) above imposed by any amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings of the contracts, instruments or obligations referred to in
clauses (a) through (j) above; provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacements or refinancings are, in the good faith judgment of
the Issuer, no more restrictive with respect to such encumbrance and other restrictions taken as a
whole than those prior to such amendment, modification, restatement, renewal, increase, supplement,
refunding, replacement or refinancing or in the case of clauses (f), (i) or (j), are customary at the
time of such amendment, modification, restatement, renewal, increase, supplement, refunding,
replacement or refinancing; and
(l)
restrictions created in connection with any Receivables Facility that, in the good
faith determination of the Issuer, are necessary or advisable to effect such Receivables Facility.
Limitation on Guarantees of Indebtedness by Restricted Subsidiaries
The Issuer will not permit (1) any Restricted Subsidiary that is a Wholly-Owned Subsidiary of the
Issuer to guarantee the payment of any Indebtedness of the Issuer or any Guarantor or (2) any Restricted
Subsidiary, other than a Guarantor, to guarantee the payment of any Indebtedness represented by securities of
the Issuer or any Guarantor unless in the case of either (1) or (2):
(a)
such Restricted Subsidiary within 30 days executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee by such Restricted Subsidiary and a joinder to
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the Security Documents or new Security Documents and takes all actions required by the Security
Documents to perfect the Liens created thereunder, except that with respect to a guarantee of
Indebtedness of the Issuer or any Guarantor, if such Indebtedness is by its express terms subordinated
in right of payment to the Notes or such Guarantor’s Guarantee, any such guarantee by such
Restricted Subsidiary with respect to such Indebtedness shall be subordinated in right of payment to
such Guarantee substantially to the same extent as such Indebtedness is subordinated to the Notes or
such Guarantor’s Guarantee; and
(b)
such Restricted Subsidiary shall within 30 days deliver to the Trustee an Officer’s
Certificate and an Opinion of Counsel in the form set forth in the Indenture;
provided that this covenant shall not be applicable to any guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary.
Delivery of Collateral after the Issue Date
(a)
Issuer shall (or shall cause CRCCLP to) promptly exercise the Corpus Christi
Refinery Purchase Option.
(b)
Promptly upon the exercise (it being understood that the term “exercise” as used in
relation to the Corpus Christi Refinery Purchase Option shall mean the date of closing of the
acquisition by CRCCLP of fee title to that portion of the Corpus Christi Refinery subject to the West
Plant Lease and West Plant Sublease) of the Corpus Christi Refinery Purchase Option (and, in any
event, not later than 120 days after the date thereof), the Issuer shall deliver (or cause CRCCLP to
deliver) to the Collateral Agent (or such later date as the Administrative Agent may agree in writing):
(i)
executed counterparts of a Mortgage on the Corpus Christi Refinery, in
form and substance reasonably acceptable to the Collateral Agent and the Administrative
Agent;
(ii)
proper financing statements, duly prepared for filing under the Uniform
Commercial Code of all jurisdictions that the Collateral Agent may deem necessary or
desirable in order to perfect the priority (except for any Liens permitted by the Mortgage or
by the West Plan Sublease) of the liens and security interests created under the Mortgage on
the Corpus Christi Refinery;
(iii)
a mortgagee policy of title insurance with respect to the Mortgage on the
Corpus Christi Refinery insuring such Mortgage as a first priority Lien on the Corpus Christi
Refinery in favor of the Collateral Agent, free of all Liens (other than any Liens permitted
by the Mortgage or by the West Plan Sublease, which includes the Permitted Encumbrances
as shall be defined in the Mortgage), which policy of title insurance shall be issued by a title
insurance company of recognized national standing which is acceptable to the Collateral
Agent in its sole discretion reflecting a coverage amount of $600 million, with such
endorsements and affirmative insurance, and in form and substance reasonably satisfactory to
the Collateral Agent, and which shall contain no exceptions to coverage other than matters
reasonably satisfactory to the Collateral Agent in its judgment reasonably exercised and
which title policy shall have been fully paid for by the Issuer and such affidavits and
indemnities that are required by such title company in order to issue the title policy;
(iv)
all affidavits, transfer and mortgage tax returns, if any, and certificates
required in connection with the recording of the Mortgage and the documents referenced in
this covenant;
(v)
a favorable opinion of Texas counsel to the Issuer, addressed to the
Collateral Agent for its benefit and the benefit of the Trustee and the Holders of the Notes,
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in form and substance reasonably satisfactory to the Collateral Agent and the Administrative
Agent; and
(vi)
certificates of insurance demonstrating that the Issuer or CRCCLP has
procured with responsible insurance companies insurance with respect to the Corpus Christi
Refinery (including business interruption insurance) against such casualties and
contingencies and of such types, in such amounts and with such deductibles as is required by
the Credit Agreement, each of which shall be endorsed or otherwise amended to include a
customary lender’s loss payable endorsement and to name the Collateral Agent as additional
insured to the extent required by the Credit Agreement.
Reports and Other Information
So long as any Notes are outstanding, the Issuer will furnish or cause to be furnished to the Holders
of Notes:
(1)
within 90 days after the end of each fiscal year (A) audited year-end consolidated
financial statements of the Issuer and its Subsidiaries (including balance sheets, statements of income
and statements of cash flow) prepared in accordance with generally accepted accounting principles in
the United States (or if the Issuer elects to apply IFRS to its financial statements as contemplated by
the definition of GAAP, IFRS) as in effect from time to time, (B) the information described in
Item 101 (Description of Business), Item 102 (Description of Property) and Item 103 (Legal
Proceedings) of Regulation S-K, each as in effect on the Issue Date, with respect to such period, to
the extent such information would be required to be filed in an Annual Report on Form 10-K (C) the
information described in Item 303 (Management’s Discussion and Analysis of Financial Condition
and Results of Operations) of Regulation S-K as in effect on the Issue Date with respect to such
period (and any applicable prior period), to the extent such information would be required to be filed
in an Annual Report on Form 10-K and (D) pro forma and historical financial information that would
be required in respect of any significant business combination or disposition (as determined in
accordance with Rule 11-01(b) of Regulation S-X as in effect on the Issue Date) consummated more
than 75 days prior to the date such information is furnished for the time periods, for which such
in formation would be required (if the Issuer were subject to the filing requirements of the Exchange
Act) in a filing on Form 8-K with the SEC at such time;
(2)
within 45 days after the end of each of the first three fiscal quarters of each fiscal
year (A) unaudited quarterly consolidated financial statements of the Issuer and its Subsidiaries
(including balance sheets, statements of income and statements of cash flow) prepared in accordance
with generally accepted accounting principles in the United States (or if the Issuer elects to apply
IFRS to its financial statements as contemplated by the definition of GAAP, IFRS) as in effect from
time to time, subject to normal year-end adjustments, (B) the information described in Item 303 of
Regulation S-K as in effect on the Issue Date (Management’s Discussion and Analysis of Financial
Condition and Results of Operations) with respect to such period, to the extent such information
would be required to be filed in a Quarterly Report on Form 10-Q, (C) pro forma and historical
financial information that would be required in respect of any significant business combination or
disposition (as determined in accordance with Rule 11-01(b) of Regulation S-X as in effect on the
Issue Date) consummated more than 75 days prior to the date such information is furnished, for the
time periods for which such information would be required (if the Issuer were subject to the filing
requirements of the Exchange Act) in a filing on Form 8-K with the SEC as in effect on the Issue
Date; and
(3)
within 5 Business Days following the occurrence of any of the following events, a
description in reasonable detail of such event: (i) any change in the executive officers (or the Issuer
becoming aware of any change in the directors) of the Issuer, (ii) any incurrence of any on-balance
sheet or off-balance sheet long-term debt obligation or capital lease obligations (each as defined in
Item 303 of Regulation S-K as in effect on the Issue Date) of or relating to the Issuer or any
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Restricted Subsidiary, in either case exceeding $50.0 million, (iii) the acceleration of any
Indebtedness of the Issuer or any Restricted Subsidiary exceeding $50.0 million, (iv) any issuance or
sale by the Issuer of equity interests of the Issuer pursuant to a registered public offering, (v) the
entry into any agreement by the Issuer or any Subsidiary relating to a transaction that if consummated
would result in a Change of Control, (vi) any resignation or termination of the independent
accountants of the Issuer or any engagement of any new independent accountants of the Issuer,
(vii) any determination by the Issuer or the receipt of advice or notice by the Issuer from its
independent accountants, in either case, relating to non-reliance on previously issued financial
statements, a related audit opinion or a completed interim review, (viii) the completion by the Issuer
or any Restricted Subsidiary of the acquisition or disposition of a significant amount of assets,
otherwise than in the ordinary course of business, in each case, to the extent such information would
be required in a Form 8-K as in effect on the Issue Date, and (ix) certain events of bankruptcy or
insolvency that constitute an Event of Default as described under “Events of Default.”
The Issuer will make all the information referred to above available Holders of the Notes, potential
investors in the Notes and securities analysts on a password protected website.
Within a reasonable period of time following the distribution of the financial information under the
second preceding paragraph above (but in any event within 10 Business Days thereof), the Issuer will make
members of its management available to discuss such financial information with Holders of the Notes and
securities analysts, and may satisfy this requirement by holding a conference call.
If the Issuer has designated any of its Subsidiaries as Unrestricted Subsidiaries, then the quarterly and
annual financial information required by the preceding paragraphs will include or be accompanied by a
reasonably detailed presentation of the financial condition and results of operations of the Issuer and its
Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted
Subsidiaries of the Issuer; provided that this requirement shall not apply if the Unrestricted Subsidiaries, taken
as a whole, are inactive or otherwise immaterial to the business of the Issuer and its Subsidiaries, taken as a
whole.
The Issuer will also furnish or cause to be furnished to the Holders, securities analysts and
prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act so long as the Notes are not freely transferable under the Securities Act.
Delivery of such reports, information and documents to the Trustee is for informational purposes only
and its receipt of such reports shall not constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Issuer’s or any other Person’s compliance with
any of its covenants under the Indenture or the Notes (as to which the Trustee is entitled to rely exclusively on
Officer’s Certificates).
The Trustee shall have no obligation to monitor or confirm, on a continuing basis or otherwise, the
Issuer’s or any other Person’s compliance with the covenants described above or with respect to any reports or
other documents delivered to it or filed under the Indenture provided, however, to the extent the Trustee
receives written notice from the Issuer of any events which would constitute certain Defaults, their status and
what action the Issuer is taking or proposing to take in respect thereof, the Trustee shall be obligated to
perform its obligations with respect thereto in accordance with the terms and conditions of the Indenture.
Events of Default and Remedies
The Indenture will provide that each of the following is an “Event of Default”:
(1)
default in payment when due and payable, upon redemption, acceleration or
otherwise, of principal of, or premium, if any, on the Notes;
(2)
to the Notes;
default for 30 days or more in the payment when due of interest on or with respect
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(3)
failure by the Issuer or any Guarantor for 30 days after receipt of written notice
given by the Trustee or the Holders of not less than 25% in principal amount of the Notes to comply
with any of its obligations, covenants or agreements (other than a default referred to in clauses (1)
and (2) above) contained in the Indenture, the Security Documents or the Notes;
(4)
default under any mortgage, indenture or instrument under which there is issued or
by which there is secured or evidenced any Indebtedness for money borrowed by the Issuer or any of
its Restricted Subsidiaries or the payment of which is guaranteed by the Issuer or any of its Restricted
Subsidiaries, other than Indebtedness owed to the Issuer or a Restricted Subsidiary, whether such
Indebtedness or guarantee now exists or is created after the issuance of the Notes, if both:
(a)
such default either results from the failure to pay any principal of such
Indebtedness at its stated final maturity (after giving effect to any applicable grace periods)
or relates to an obligation other than the obligation to pay principal of any such Indebtedness
at its stated final maturity and results in the holder or holders of such Indebtedness causing
such Indebtedness to become due prior to its stated maturity; and
(b)
the principal amount of such Indebtedness, together with the principal
amount of any other such Indebtedness in default for failure to pay principal at stated final
maturity (after giving effect to any applicable grace periods), or the maturity of which has
been so accelerated, aggregate $50.0 million or more at any one time outstanding;
(5)
failure by the Issuer or any Significant Party to pay final non-appealable judgments
aggregating in excess of $50.0 million, which final judgments remain unpaid, undischarged and
unstayed for a period of more than 60 days after such judgment becomes final, and in the event such
judgment is covered by insurance, an enforcement proceeding have been commenced by any creditor
upon such judgment or decree which is not promptly stayed;
(6)
a court having jurisdiction in the premises enters a decree or order for:
(A)
relief in respect of the Issuer or any Significant Party in an involuntary
case under any applicable bankruptcy, insolvency or other similar law now or hereafter in
effect;
(B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Issuer or any Significant Party or for all or substantially
all of the property and assets of the Issuer or any Significant Party; or
(C)
the winding up or liquidation of the affairs of the Issuer or any Significant
Party;
and, in each case, such decree or order shall remain unstayed and in effect for a period of 60
consecutive days;
(7)
the Issuer or any Significant Party
(A)
commences a voluntary case under any applicable bankruptcy, insolvency
or other similar law now or hereafter in effect, or consents to the entry of an order for relief
in an involuntary case under any such law;
(B)
consents to the appointment of or taking possession by a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of the Issuer or any
Significant Party or for all or substantially all of the property and assets of the Issuer or any
Significant Party; or
(C)
effects any general assignment for the benefit of creditors;
(8)
the Guarantee of any Significant Party shall for any reason cease to be in full force
and effect or be declared null and void or any responsible officer of any Guarantor that is a
Significant Party, as the case may be, denies that it has any further liability under its Guarantee or
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gives notice to such effect, other than by reason of the termination of the Indenture or the release of
any such Guarantee in accordance with the Indenture; or
(9)
with respect to any Collateral having a fair market value in excess of $50.0 million,
individually or in the aggregate, (a) the security interest granted pursuant to the Security Documents,
at any time, ceases to be in full force and effect for any reason other than in accordance with the
terms of the Indenture, the Security Documents and the Intercreditor Agreement, except to the extent
that any lack of perfection or priority results from any act or omission by the Collateral Agent (so
long as such act or omission does not result from the breach or non-compliance by the Issuer or any
Guarantor with the Indenture or the Security Documents), (b) any security interest created thereunder
or under the Indenture is declared invalid or unenforceable by a court of competent jurisdiction or
(c) the Issuer or any Guarantor asserts, in any pleading in any court of competent jurisdiction, that
any such security interest is invalid or unenforceable.
If any Event of Default (other than of a type specified in clauses (6) or (7) above) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in principal amount of the then
total outstanding Notes may declare the principal, premium, if any, interest and any other monetary obligations
on all the then outstanding Notes to be due and payable immediately. Upon the effectiveness of such
declaration, such principal and interest will be due and payable immediately. Notwithstanding the foregoing, in
the case of an Event of Default arising under clauses (6) or (7) of the first paragraph of this section, all
outstanding Notes will become due and payable without further action or notice. The Indenture will provide
that the Trustee may withhold from the Holders notice of any continuing Default, except a Default relating to
the payment of principal, premium, if any, or interest, if it determines that withholding notice is in their
interest.
The Indenture will provide that the Holders of a majority in aggregate principal amount of the then
outstanding Notes by written notice to the Trustee may on behalf of the Holders of all of the Notes waive any
existing Default and its consequences under the Indenture except a continuing Default in the payment of
interest on, premium, if any, or the principal of any Note held by a non-consenting Holder. In the event of any
Event of Default specified in clause (4) above, such Event of Default and all consequences thereof (excluding
any resulting payment default, other than as a result of acceleration of the Notes) shall be annulled, waived
and rescinded, automatically and without any action by the Trustee or the Holders, if within 30 days after such
Event of Default arose:
(1)
discharged; or
the Indebtedness or guarantee that is the basis for such Event of Default has been
(2)
holders thereof have rescinded or waived the acceleration, notice or action (as the
case may be) giving rise to such Event of Default; or
(3)
the default that is the basis for such Event of Default has been cured.
Subject to the provisions of the Indenture relating to the duties of the Trustee thereunder, in case an
Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the Holders of the Notes unless the Holders
have offered to the Trustee indemnity or security satisfactory to it against any loss, liability or expense. Except
to enforce the right to receive payment of principal, premium (if any) or interest when due, no Holder of a
Note may pursue any remedy with respect to the Indenture or the Notes unless:
(1)
continuing;
such Holder has previously given the Trustee notice that an Event of Default is
(2)
Holders of at least 25% in principal amount of the total outstanding Notes have
requested the Trustee to pursue the remedy;
(3)
Holders of the Notes have offered the Trustee security or indemnity satisfactory to it
against any loss, liability or expense;
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(4)
the Trustee has not complied with such request within 60 days after the receipt
thereof and the offer of security or indemnity; and
(5)
Holders of a majority in principal amount at maturity of the total outstanding Notes
have not given the Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, under the Indenture the Holders of a majority in principal amount of
the total outstanding Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the
Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other Holder of a Note or that would
involve the Trustee in personal liability.
The Indenture will provide that the Issuer is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Issuer is required, within five Business Days after becoming
aware of any Default, to deliver to the Trustee a statement specifying such Default and what action the Issuer
is taking or proposes to take with respect thereto. In the absence of any such notice of Default from the Issuer,
the Trustee shall not be deemed to have notice or be charged with any knowledge of Default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, incorporator or stockholder of the Issuer or any Guarantor shall have
any liability for any obligations of the Issuer or the Guarantors under the Notes, the Guarantees or the
Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each
Holder by accepting Notes waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to waive liabilities under the federal
securities laws and it is the view of the SEC that such a waiver is against public policy.
Legal Defeasance and Covenant Defeasance
The obligations of the Issuer and the Guarantors under the Indenture will terminate (other than certain
obligations) and will be released upon payment in full of all of the Notes. The Issuer may, at its option and at
any time, elect to have all of its obligations discharged with respect to the Notes and have the Issuer’s and
each Guarantor’s obligations discharged with respect to its Guarantee (“Legal Defeasance”) and cure all then
existing Events of Default except for:
(1)
the rights of Holders of Notes to receive payments in respect of the principal of,
premium, if any, and interest on the Notes when such payments are due solely out of the trust created
pursuant to the Indenture;
(2)
the Issuer’s obligations with respect to Notes concerning issuing temporary Notes,
registration of such Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office
or agency for payment and money for security payments held in trust;
(3)
the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer’s
obligations in connection therewith; and
(4)
the Legal Defeasance provisions of the Indenture.
In addition, the Issuer may, at its option and at any time, elect to have its obligations and those of
each Guarantor released with respect to substantially all of the restrictive covenants in the Indenture
(“Covenant Defeasance”) and thereafter any omission to comply with such obligations shall not constitute a
Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including
bankruptcy, receivership, rehabilitation and insolvency events pertaining to the Issuer) described under “Events
of Default and Remedies” will no longer constitute an Event of Default with respect to the Notes.
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In order to exercise either Legal Defeasance or Covenant Defeasance with respect to the Notes:
(1)
the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes cash in U.S. dollars, Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal amount of, premium, if any, and interest due on the Notes on the
stated maturity dates or on the redemption dates, as the case may be, of such principal amount,
premium, if any, or interest on such Notes and the Issuer must specify whether such Notes are being
defeased to maturity or to a particular redemption date;
(2)
in the case of Legal Defeasance, the Issuer shall have delivered to the Trustee an
Opinion of Counsel as set forth in The Indenture confirming that, subject to customary assumptions
and exclusions,
(a)
the Issuer has received from, or there has been published by, the United
States Internal Revenue Service a ruling, or
(b)
since the issuance of the Notes, there has been a change in the applicable
U.S. federal income tax law,
in either case to the effect that, and based thereon such Opinion of Counsel shall confirm that, subject
to customary assumptions and exclusions, the Holders of the Notes will not recognize income, gain or
loss for U.S. federal income tax purposes, as applicable, as a result of such Legal Defeasance and will
be subject to U.S. federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(3)
in the case of Covenant Defeasance, the Issuer shall have delivered to the Trustee
an Opinion of Counsel confirming that, subject to customary assumptions and exclusions, the Holders
of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result
of such Covenant Defeasance and will be subject to such tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant Defeasance had not
occurred;
(4)
no Default (other than that resulting from borrowing funds to be applied to make
such deposit and the granting of Liens in connection therewith) shall have occurred and be continuing
on the date of such deposit;
(5)
such Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Senior Credit Facilities, or any other material agreement
or instrument (other than the Indenture) to which, the Issuer or any Guarantor is a party or by which
the Issuer or any Guarantor is bound;
(6)
the Issuer shall have delivered to the Trustee an Officer’s Certificate stating that the
deposit was not made by the Issuer with the intent of defeating, hindering, delaying or defrauding any
creditors of the Issuer or any Guarantor or others; and
(7)
of Counsel (which Opinion of Counsel may be subject to customary assumptions and exclusions)
each stating that all conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect as to all Notes, when either:
(1)
all Notes theretofore authenticated and delivered, except lost, stolen or destroyed
Notes which have been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust, have been delivered to the Trustee for cancellation; or
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(2)
(a) all Notes not theretofore delivered to the Trustee for cancellation have become
due and payable by reason of the making of a notice of redemption or otherwise, will become due
and payable within one year or are to be called for redemption and redeemed within one year under
arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Issuer, and the Issuer or any Guarantor has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust solely for the benefit of the Holders of
the Notes cash in U.S. dollars, Government Securities, or a combination thereof in such amounts as
will be sufficient without consideration of any reinvestment of interest to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for cancellation for principal,
premium, if any, and accrued interest at such redemption date;
(b)
no default (other than that resulting from borrowing funds to be applied to
make such deposit) with respect to the Indenture or the Notes shall have occurred and be
continuing on the date of such deposit or shall occur as a result of such deposit and such
deposit will not result in a breach or violation of, or constitute a default under the Senior
Credit Facilities or any other material agreement or instrument governing Indebtedness (other
than the Indenture) to which the Issuer or any Guarantor is a party or by which the Issuer or
any Guarantor is bound;
(c)
Indenture; and
the Issuer has paid or caused to be paid all sums payable by it under the
(d)
the Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes at maturity or the redemption date, as the
case may be.
In addition, the Issuer must deliver an Officer’s Certificate and an Opinion of Counsel to the Trustee
stating that all conditions precedent to satisfaction and discharge have been satisfied.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the Indenture, any Guarantee, the Notes,
the Intercreditor Agreement or any Security Document may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Notes then outstanding voting as a single class,
including consents obtained in connection with a purchase of, or tender offer or exchange offer for Notes, and
any existing Default or compliance with any provision of the Indenture or the Notes issued thereunder may be
waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes voting
as a single class, other than Notes beneficially owned by the Issuer or its Affiliates (including consents
obtained in connection with a purchase of or tender offer or exchange offer for the Notes); provided, however,
that if any such amendment or waiver, by its terms, directly and disproportionately affects one series of Notes
then outstanding, such amendment or waiver shall require the consent (which may include consents obtained
in connection with a tender offer or exchange offer for Notes) of the holders of a majority in principal amount
of such series of Notes then outstanding, and if any such amendment or waiver only affects one series of
Notes, the holders of the other series of Notes shall not be required to consent thereto.
The Indenture will provide that, without the consent of each affected Holder of Notes, an amendment
or waiver may not, with respect to any Notes held by a non-consenting Holder:
(1)
reduce the principal amount of such Notes whose Holders must consent to an
amendment, supplement or waiver;
(2)
reduce the principal amount of or change the fixed final maturity of any such Note
or alter or waive the provisions with respect to the redemption of such Notes (other than provisions
relating to the covenants described above under the caption “Repurchase at the Option of Holders”);
(3)
reduce the rate of or change the time for payment of interest on any Note;
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(4)
waive a Default in the payment of principal of or premium, if any, or interest on the
Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in
aggregate principal amount of the Notes and a waiver of the payment default that resulted from such
acceleration) or in respect of a covenant or provision contained in the Indenture or any Guarantee
which cannot be amended or modified without the consent of all Holders;
(5)
make any Note payable in money other than that stated therein;
(6)
make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders to receive payments of principal of or premium, if any, or interest on
the Notes;
(7)
make any change in these amendment and waiver provisions;
(8)
impair the right of any Holder to receive payment of principal of, or interest on
such Holder’s Notes on or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder’s Notes;
(9)
make any change to the ranking in right of payment of the Notes that would
adversely affect the Holders; or
(10)
except as expressly permitted by the Indenture, modify the Guarantees of any
Significant Party in any manner adverse to the Holders of the Notes.
In addition, without the consent of at least two-thirds in aggregate principal amount of Notes then
outstanding, an amendment, supplement or waiver may not modify any Security Document or the provisions
of the Indenture dealing with the Security Documents or application of trust moneys in any manner, in each
case, that would subordinate the Lien of the Collateral Agent to the Liens securing any other Obligations
(other than as contemplated under clause (12) of the immediately succeeding paragraph) or otherwise release
all or substantially all of the Collateral, in each case other than in accordance with the Indenture, the Security
Documents and the Intercreditor Agreement.
Notwithstanding the foregoing, the Issuer, any Guarantor (with respect to a Guarantee, the Indenture,
the Intercreditor Agreement or the Security Documents to which it is a party) and the Trustee or Collateral
Agent may amend or supplement the Indenture or any Guarantee, Note, Security Document or the
Intercreditor Agreement without the consent of any Holder;
(1)
to cure any ambiguity, omission, mistake, defect or inconsistency;
(2)
to provide for uncertificated Notes of such series in addition to or in place of
certificated Notes;
(3)
to comply with the covenant relating to mergers, consolidations and sales of assets;
(4)
to provide for the assumption of the Issuer’s or any Guarantor’s obligations to the
Holders;
(5)
to make any change that would provide any additional rights or benefits to the
Holders or that does not adversely affect the legal rights under the Indenture, the Notes, the
Guarantee, the Security Documents or the Intercreditor Agreement of any such Holder;
(6)
to add covenants for the benefit of the Holders or to surrender any right or power
conferred upon the Issuer or any Guarantor;
(7)
to comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act;
(8)
to evidence and provide for the acceptance and appointment under the Indenture of
a successor Trustee thereunder pursuant to the requirements thereof;
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(9)
Agreement;
to add a Guarantor under the Indenture, the Security Documents or the Intercreditor
(10)
to conform the text of the Indenture, Guarantees or the Notes to any provision of
this “Description of the Notes” to the extent that such provision in this “Description of the Notes”
was intended to be a verbatim recitation of a provision of the Indenture, Guarantee or Notes;
(11)
to make any amendment to the provisions of the Indenture relating to the transfer
and legending of Notes as permitted by the Indenture, including, without limitation to facilitate the
issuance and administration of the Notes; provided, however, that (i) compliance with the Indenture as
so amended would not result in Notes being transferred in violation of the Securities Act or any
applicable securities law and (ii) such amendment does not materially and adversely affect the rights
of Holders to transfer Notes;
(12)
to add or release Collateral from, or subordinate, the Lien of the Indenture and the
Security Documents when permitted or required by the Security Documents, the Indenture or the
Intercreditor Agreement;
(13)
to mortgage, pledge, hypothecate or grant any other Lien in favor of the Trustee or
the Collateral Agent for the benefit of the Holders of the Notes, as additional security for the
payment and performance of all or any portion of the Obligations, on any property or assets,
including any which are required to be mortgaged, pledged or hypothecated, or on which a Lien is
required to be granted to or for the benefit of the Trustee or the Collateral Agent pursuant to the
Indenture, any of the Security Documents or otherwise; and
(14)
to add Additional First Lien Secured Parties to any Security Documents or the
Intercreditor Agreement.
The consent of the Holders is not necessary under the Indenture to approve the particular form of any
proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment.
Notices
Notices given by publication will be deemed given on the first date on which publication is made and
notices given by first-class mail, postage prepaid, will be deemed given five calendar days after mailing.
Concerning the Trustee
The Indenture will contain certain limitations on the rights of the Trustee thereunder, should it
become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within
90 days, apply to the SEC for permission to continue or resign. The Trustee and its affiliates may become a
creditor of the Issuer or its Subsidiaries and, in such case, the Indenture limits the Trustee’s right to obtain
payment of claims in certain cases, or to realize on certain property received in respect of any such claim as
security or otherwise.
The Indenture will provide that the Holders of a majority in principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any
remedy available to the Trustee, subject to certain exceptions. The Indenture will provide that in case an Event
of Default of which a Responsible Officer of the Trustee shall have actual knowledge shall occur (which shall
not be cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent
person in the conduct of such person’s own affairs. Subject to such provisions and the provisions set forth in
the Indenture, the Trustee will be under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of the Notes, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or expense.
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The Trustee or its Affiliates are each permitted to receive additional compensation that could be
deemed to be in the Trustee’s economic self-interest for (i) serving as investment adviser, administrator,
shareholder, servicing agent, custodian or subcustodian with respect to certain of the Permitted Investments,
(ii) using Affiliates to effect transactions in certain Permitted Investments and (iii) effecting transactions in
certain Permitted Investments.
Governing Law
The Indenture, the Notes and any Guarantee will be governed by and construed in accordance with
the laws of the State of New York.
Certain Definitions
Set forth below are certain defined terms used in the Indenture. For purposes of the Indenture, unless
otherwise specifically indicated, the term “consolidated” with respect to any Person refers to such Person
consolidated with the Issuer and its Restricted Subsidiaries, and excludes from such consolidation any
Unrestricted Subsidiary as if such Unrestricted Subsidiary were not an Affiliate of such Person.
“Acquired Indebtedness” means, with respect to any specified Person,
(1)
Indebtedness of any other Person existing at the time such other Person is merged
with or into or became a Restricted Subsidiary of such specified Person, including Indebtedness
incurred in connection with, or in contemplation of, such other Person merging with or into or
becoming a Restricted Subsidiary of such specified Person, and
(2)
Indebtedness secured by a Lien encumbering any asset acquired by such specified
Person.
“Additional First Lien Secured Party” means the holders of any Additional First Priority Lien
Obligations, including the Holders, including any Holder that holds Additional First Priority Lien Obligations,
and any Authorized Representative with respect thereto, including the Trustee, if applicable, and the Collateral
Agent.
“Additional First Priority Lien Obligations” means any Obligations that are incurred after the Issue
Date in accordance with the Indenture and secured by all or any part of the Collateral on a first-priority basis
as permitted by the Indenture.
“Affiliate” of any specified Person means any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such specified Person. For purposes of this
definition, “control” (including, with correlative meanings, the terms “controlling,” “controlled by” and “under
common control with”), as used with respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
“Applicable Authorized Representative” means, with respect to any Collateral, (i) until the earlier of
(x) the Discharge of Senior Credit Facilities Obligations and (y) the Non-Controlling Authorized
Representative Enforcement Date, the administrative agent and/or collateral agent under the Senior Credit
Facilities and (ii) from and after the earlier of (x) the Discharge of Senior Credit Facilities Obligations and
(y) the Non-Controlling Authorized Representative Enforcement Date, the Major Non-Controlling Authorized
Representative.
“Applicable Premium” means:
(i)
with respect to any 2017 Note on any Redemption Date, the greater of:
(a)
1.0% of the principal amount of such Note on such Redemption Date and
(b)
the excess, if any, of (i) the present value at such Redemption Date of
(A) the redemption price of such Note at
(such redemption price being set forth in
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the table appearing above with respect to the 2017 Notes under the caption “Optional
Redemption”), plus (B) all required interest payments due on such Note through
(excluding accrued but unpaid interest to the Redemption Date), computed using a discount
rate equal to the Treasury Rate as of such Redemption Date plus 50 basis points; over
(ii) the principal amount of such Note on such Redemption Date; and
(ii)
with respect to any 2020 Note on any Redemption Date, the greater of:
(a)
1.0% of the principal amount of such Note on such Redemption Date; and
(b)
the excess, if any, of (i) the present value at such Redemption Date of
(A) the redemption price of such Note at
(such redemption price being set forth in
the table appearing above with respect to the 2020 Notes under the caption “Optional
Redemption”), plus (B) all required interest payments due on such Note through (excluding
accrued but unpaid interest to the Redemption Date), computed using a discount rate equal
to the Treasury Rate as of such Redemption Date plus 50 basis points; over (ii) the principal
amount of such Note on such Redemption Date.
“Asset Sale” means:
(1)
the sale, conveyance, transfer or other disposition, whether in a single transaction or
a series of related transactions, of property or assets (including by way of a Sale and Lease-Back
Transaction) of the Issuer or any of its Restricted Subsidiaries (each referred to in this definition as a
“disposition”); or
(2)
the issuance or sale of Equity Interests of any Restricted Subsidiary, whether in a
single transaction or a series of related transactions;
in each case, other than:
(a)
any disposition of obsolete or worn out equipment or any disposition of inventory or
goods (or other assets) held for sale in the ordinary course of business;
(b)
the disposition of all or substantially all of the assets of the Issuer and its Restricted
Subsidiaries in a manner permitted pursuant to the provisions described above under “Certain
Covenants—Merger, Consolidation or Sale of All or Substantially All Assets”;
(c)
the making of any Restricted Payment or Permitted Investment that is permitted to
be made, and is made, under the covenant described above under “Certain Covenants—Limitation on
Restricted Payments”;
(d)
any disposition of assets or issuance or sale of Equity Interests of a Restricted
Subsidiary in any transaction or series of transactions with an aggregate fair market value of less than
$5.0 million;
(e)
any disposition of property or assets or issuance of securities by a Restricted
Subsidiary of the Issuer to the Issuer or by the Issuer or a Restricted Subsidiary of the Issuer to
another Restricted Subsidiary of the Issuer;
(f)
the sale, lease, assignment or sublease of any real or personal property in the
ordinary course of business;
(g)
any issuance or sale of Equity Interests in, or Indebtedness or other securities of, an
Unrestricted Subsidiary;
(h)
foreclosures on assets;
(i)
any financing transaction with respect to property built or acquired by the Issuer or
any Restricted Subsidiary after the Issue Date, including Sale and Lease-Back Transactions and asset
securitizations permitted by the Indenture;
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(k)
sales of accounts receivable in connection with the collection or compromise
thereof;
(l)
transfers of property subject to casualty or condemnation proceedings (including in
lieu thereof) upon the receipt of the net cash proceeds therefor; provided that if the aggregate amount
of such net cash proceeds exceeds $5.0 million, such net cash proceeds are deemed to be Net
Proceeds and are applied in accordance with the second paragraph under “Repurchase at the Option
of Holders—Asset Sales”;
(m)
the abandonment of intellectual property rights in the ordinary course of business,
which are not material to the conduct of the business of the Issuer and its Restricted Subsidiaries
taken as a whole;
(n)
voluntary terminations of Hedging Obligations;
(o)
any sale or other disposition of assets in consideration for a payment of cash or
crude oil made substantially contemporaneously with the purchase of such asset; provided the amount
of such payment shall be at least equal to the purchase price of such asset and, in the event such
payment is made in crude oil purchased from an Affiliate, the purchase arrangement relating thereto
was entered into otherwise in accordance with the Indenture;
(p)
any sale or other disposition of assets arising under any PDVSA Agreement;
(q)
sales of accounts receivable, or participants therein, in connection with any
Receivables Facility; and
(r)
sales of Unrestricted Inventory in connection with any Inventory Financing.
“Authorized Representative” means (i) in the case of any Senior Credit Facilities Obligations, the
“Secured Parties” (or similar term) as defined in the Senior Credit Facilities, the administrative agent and/or
collateral agent under the Senior Credit Facilities, (ii) in the case of the Notes Obligations or the Holders, the
Trustee (acting at the direction of the Holders of the Notes pursuant to the terms of the Indenture) and (iii) in
the case of any Series of Additional First Priority Lien Obligations or Additional First Lien Secured Parties
that become subject to the Intercreditor Agreement, the Authorized Representative named for such Series in
the applicable joinder agreement.
“Business Day” means each day which is not a Legal Holiday.
“Capital Stock” means:
(1)
in the case of a corporation, corporate stock;
(2)
in the case of an association or business entity, any and all shares, interests,
participations, rights or other equivalents (however designated) of corporate stock;
(3)
in the case of a partnership or limited liability company, partnership or membership
interests (whether general or limited); and
(4)
any other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing Person.
“Capitalization” means, as of any date of determination, an amount equal to the sum of:
(a)
Indebtedness as of such date of the Issuer and its Restricted Subsidiaries (excluding
any Indebtedness arising under unfunded surety bonds and Inventory Financing); minus
(b)
An amount equal to (a) the Indebtedness as of such date of each Restricted
Subsidiary that is not a Wholly-Owned Subsidiary and whose Indebtedness is not guaranteed by the
Issuer or any Restricted Subsidiary multiplied by (b) a fraction, the denominator of which is the
number of shares of outstanding capital stock or other equity interest of such Restricted Subsidiary
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and the numerator of which is the number of shares of capital stock or other equity interest of such
Restricted Subsidiary not held by the Issuer or another Restricted Subsidiary; plus
(c)
consolidated shareholder’s equity of the Issuer and its Restricted Subsidiaries as of
that date determined in accordance with GAAP.
“Capitalization Ratio” means, as of any date of determination, the ratio of Indebtedness of the Issuer
and its Restricted Subsidiaries (excluding any Indebtedness arising under unfunded surety bonds and Inventory
Financing) to Capitalization as of the end of the most recent fiscal quarter for which the Issuer has delivered
financial statements pursuant to “—Reports and Other Information;” provided, however, there shall be
excluded from Indebtedness an amount equal to (a) the Indebtedness of each Restricted Subsidiary that is not
a Wholly-Owned Subsidiary and whose Indebtedness is not guaranteed by the Issuer or any Restricted
Subsidiary multiplied by (b) a fraction, the denominator of which is the number of shares of outstanding
capital stock or other equity interest of such Restricted Subsidiary and the numerator of which is the number
of shares of capital stock or other equity interest of such Restricted Subsidiary not held by the Issuer or
another Restricted Subsidiary.
“Capitalized Lease Obligation” means, at the time any determination thereof is to be made, the
amount of the liability in respect of a capital lease that would at such time be required to be capitalized and
reflected as a liability on a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
“Cash Equivalents” means:
(1)
United States dollars;
(2)
(a)
EMU; or
euros, or any national currency of any participating member state of the
(b)
in the case of the Issuer or a Restricted Subsidiary, such local currencies
held by them from time to time in the ordinary course of business;
(3)
securities issued or directly and fully and unconditionally guaranteed or insured by
the U.S. government or any agency or instrumentality thereof the securities of which are
unconditionally guaranteed as a full faith and credit obligation of such government with maturities of
12 months or less from the date of acquisition;
(4)
certificates of deposit, time deposits and eurodollar time deposits with maturities of
one year or less from the date of acquisition, bankers’ acceptances with maturities not exceeding one
year and overnight bank deposits, in each case with any commercial bank having capital and surplus
of not less than $500.0 million;
(5)
repurchase obligations for underlying securities of the types described in clauses (3)
and (4) entered into with any financial institution meeting the qualifications specified in clause (4)
above;
(6)
commercial paper rated at least P-2 by Moody’s or at least A-2 by S&P and in each
case maturing within 24 months after the date of creation thereof;
(7)
marketable short-term money market and similar securities having a rating of at
least P-2 or A-2 from either Moody’s or S&P, respectively (or, if at any time neither Moody’s nor
S&P shall be rating such obligations, an equivalent rating from another Rating Agency) and in each
case maturing within 12 months after the date of creation thereof;
(8)
investment funds investing 95% of their assets in securities of the types described in
clauses (1) through (7) above and (9) below; and
(9)
readily marketable direct obligations issued by any state, commonwealth or territory
of the United States or any political subdivision or taxing authority thereof having an Investment
Grade Rating from either Moody’s or S&P with maturities of 12 months or less from the date of
acquisition;
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provided, however, that if S&P or Moody’s or both shall not make ratings of commercial paper of the
type referred to in clause (6) above or securities of the type referred to in clause (9) above publicly
available, the references in clause (6) or (9) or both, as the case may be, to S&P or Moody’s or both,
as the case may be, shall be to a nationally recognized U.S. rating agency or agencies, as the case
may be, selected by the Issuer, and the references to the ratings in categories in clause (6) or (9) or
both, as the case may be, shall be to the corresponding rating categories of such rating agency or
rating agencies, as the case may be.
“Change of Control” means the occurrence of any of the following:
(1)
the sale, lease or transfer, in one or a series of related transactions, of all or
substantially all of the assets of the Issuer and its Restricted Subsidiaries, taken as a whole, to any
Person other than a Permitted Holder; or
(2)
the Issuer becomes aware of (by way of a report or any other filing pursuant to
Section 13(d) of the Exchange Act, proxy, vote, written notice or otherwise) the acquisition by any
Person or group acting for the purpose of acquiring, holding or disposing of securities (within the
meaning of Rule 13d-5(b)(1) under the Exchange Act) but excluding any Permitted Holder, in a
single transaction or in a related series of transactions, by way of merger, consolidation or other
business combination or purchase, of “beneficial ownership” (within the meaning of Rule 13d-3
under the Exchange Act, or any successor provision) of Voting Stock of the Issuer or any of its direct
or indirect parent companies enabling such Person or group to elect a majority of the board of
directors of the Issuer or any of its direct or indirect parent companies.
“Collateral” shall mean the following (and shall exclude Excluded Property), subject to certain
exclusions and restrictions described in and documented by a security agreement and other instruments,
including those certain mortgages, deeds of trust or other instruments on the Lake Charles, Louisiana, Corpus
Christi, Texas and Lemont, Illinois refinery (the “Mortgages”), evidencing or creating, or purporting to create
a security interest and/or lien in favor of BNP Paribas, as Collateral Agent, (the “Collateral Agent”) for its
benefit and the benefit of the Trustee, the Holders of the Notes, and the other creditors referred to in the
Intercreditor Agreement:
(a)
the Mortgages on the Lake Charles, Louisiana refinery and the Lemont, Illinois
refinery, including, without limitation, all real and personal property comprising a part thereof, but
not including the CITGO Lubricants & Wax facility located at the Lake Charles, Louisiana refinery,
and certain exclusions relating to the hydrogen supply facilities and co-generation facilities at such
facilities,
(b)
all of the ownership interests held by the Issuer and/or CITGO Investment Company
in CITGO Refining and Chemicals Company L.P. and CITGO AR2008 Funding Company, LLC;
(c)
all inventory owned by the Issuer and each Guarantor,
(d)
all present and future Equity Interests held by the Issuer and any of its Subsidiaries
in each of the Guarantors (limited, in the case of the voting Equity Interests of a foreign subsidiary to
a pledge of 65% of the voting Equity Interests of each such foreign subsidiary.
(e)
all of the present and future accounts receivables of the Issuer, and
(f)
all proceeds and products of the property and assets described in (a)-(e) above.
“Collateral Agent” means BNP Paribas, in its capacity as collateral agent for First Priority Lien
Secured Parties, together with its successors and permitted assigns in such capacity under the Intercreditor
Agreement.
“Consolidated Depreciation and Amortization Expense” means, with respect to any Person, for any
period, the total amount of depreciation and amortization expense, including the amortization of deferred
financing fees and amortization of unrecognized prior service costs and actuarial gains and losses related to
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pensions and other post-employment benefits, of such Person and its Restricted Subsidiaries for such period on
a consolidated basis and otherwise determined in accordance with GAAP.
“Consolidated Interest Expense” means, with respect to any Person for any period, without
duplication, the sum of:
(1)
consolidated interest expense of such Person and its Restricted Subsidiaries for such
period, to the extent such expense was deducted (and not added back) in computing Consolidated Net
Income (including (a) amortization of original issue discount resulting from the issuance of
Indebtedness at less than par, (b) all commissions, discounts and other fees and charges owed with
respect to letters of credit or bankers acceptances, (c) non-cash interest expense (but excluding any
non-cash interest expense attributable to the movement in the mark to market valuation of Hedging
Obligations or other derivative instruments pursuant to GAAP), (d) the interest component of
Capitalized Lease Obligations, and (e) net payments, if any, pursuant to interest rate Hedging
Obligations with respect to Indebtedness, and excluding (v) amortization of deferred financing fees,
debt issuance costs, commissions, fees and expenses and any accelerated charges resulting from early
repayments of Indebtedness issued with original issue discount, (w) any expensing of bridge,
commitment and other financing fees and (x) commissions, discounts, yield and other fees and
charges (including any interest expense) related to any Receivables Facility, (y) commissions,
discounts, yield and other fees and charges (including any interest expense) related to any Inventory
Financing to the extent such Inventory Financing is permitted by clause (17) of the second paragraph
of the covenant described under “Certain Covenants—Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock”) and (z) any amounts that would be included as
interest expense under GAAP in respect of any other items or transactions excluded from the
definition of “Indebtedness” hereunder); plus
(2)
consolidated capitalized interest of such Person and its Restricted Subsidiaries for
such period, whether paid or accrued; less
(3)
interest income of such Person and its Restricted Subsidiaries for such period.
For purposes of this definition, interest on a Capitalized Lease Obligation shall be deemed to accrue
at an interest rate reasonably determined by the Issuer to be the rate of interest implicit in such Capitalized
Lease Obligation in accordance with GAAP.
“Consolidated Net Income” means, with respect to any Person, for any period, the aggregate of the
Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, after taxes,
for such period, as determined in accordance with GAAP adjusted, to the extent included in calculating such
Net Income, by excluding, without duplication
(i)
all extraordinary gains or losses (net of fees and expense relating to the transaction
giving rise thereto), income, expenses or charges, as determined in accordance with GAAP;
(ii)
gains or losses in respect of any Asset Sales by such Person or one of its Restricted
Subsidiaries (net of fees and expenses relating to the transaction giving rise thereto), on an after-tax
basis;
(iii)
the net income (loss) from any operations disposed of or discontinued and any net
gains or losses on such disposition or discontinuance, on an after-tax basis; and
(iv)
the cumulative effect of a change in accounting principles.
“Consolidated Net Tangible Assets” means, as of any date of determination, the consolidated total
assets of the Issuer and its Restricted Subsidiaries determined in accordance with GAAP as of the end of the
Issuer’s most recent fiscal quarter for which internal financial statements are available, less the sum of (1) all
current liabilities (excluding any (i) current liabilities that by their terms are unconditionally extendable or
renewable at the sole option of the obligor thereon to a time more than 12 months after the time as of which
the amount thereof is being computed and (ii) current maturities of long-term debt) and current liability items,
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and (2) all net amounts of goodwill, trade names, trademarks, patents, organization expense, unamortized debt
discount and expense and other similar intangibles properly classified as intangibles in accordance with GAAP.
“Consolidated Secured Debt Ratio” means, as of the date of determination, the ratio of (a) the
Consolidated Secured Indebtedness of the Issuer and its Restricted Subsidiaries on such date to (b) EBITDA
of the Issuer and its Restricted Subsidiaries for the most recently ended four fiscal quarters ending
immediately prior to such date for which internal financial statements are available.
In the event that the Issuer or any Restricted Subsidiary (i) incurs, assumes, guarantees, redeems,
retires or extinguishes any Indebtedness or (ii) issues or redeems Disqualified Stock or Preferred Stock
subsequent to the commencement of the period for which the Consolidated Secured Debt Ratio is being
calculated but prior to or simultaneously with the event for which the calculation of the Consolidated Secured
Debt Ratio is made (the “Consolidated Secured Debt Ratio Calculation Date”), then the Consolidated Secured
Debt Ratio shall be calculated giving pro forma effect to such incurrence, assumption, guarantee, redemption,
retirement or extinguishment of Indebtedness, or such issuance or redemption of Disqualified Stock or
Preferred Stock, as if the same had occurred at the beginning of the applicable four-quarter period.
For purposes of making the computation referred to above, Investments, acquisitions, dispositions,
mergers, amalgamations, consolidations and discontinued operations (as determined in accordance with
GAAP), in each case with respect to an operating unit of a business made (or committed to be made pursuant
to a definitive agreement) during the four-quarter reference period or subsequent to such reference period and
on or prior to or simultaneously with the Consolidated Secured Debt Ratio Calculation Date, and other
operational changes that the Issuer or any of its Restricted Subsidiaries has determined to make and/or made
during the four-quarter reference period or subsequent to such reference period and on or prior to or
simultaneously with the Consolidated Secured Debt Ratio Calculation Date shall be calculated on a pro forma
basis in accordance with GAAP assuming that all such Investments, acquisitions, dispositions, mergers,
amalgamations, consolidations, discontinued operations and other operational changes had occurred on the
first day of the four-quarter reference period. If since the beginning of such period any Person that
subsequently became a Restricted Subsidiary or was merged with or into the Issuer or any of its Restricted
Subsidiaries since the beginning of such period shall have made any Investment, acquisition, disposition,
merger, amalgamation, consolidation, discontinued operation or operational change, in each case with respect
to an operating unit of a business, that would have required adjustment pursuant to this definition, then the
Consolidated Secured Debt Ratio shall be calculated giving pro forma effect thereto for such period as if such
Investment, acquisition, disposition, merger, consolidation, discontinued operation or operational change had
occurred at the beginning of the applicable four-quarter period.
“Consolidated Secured Indebtedness” means, as of any date of determination, the sum, without
duplication, of (1) the total amount of Secured Indebtedness of the Issuer and its Restricted Subsidiaries, plus
(2) if secured by a Lien, the greater of the aggregate liquidation value and maximum fixed repurchase price
without regard to any change of control or redemption premiums of all Disqualified Stock of the Issuer and
the Restricted Subsidiaries and all Preferred Stock of its Restricted Subsidiaries that are not Guarantors, in
each case, determined on a consolidated basis in accordance with GAAP.
“Controlling Secured Parties” means, with respect to any Collateral, the holders of the Series of First
Priority Lien Obligations whose Authorized Representative is the Applicable Authorized Representative for
such Collateral.
“Corpus Christi Refinery” means CRCCLP’s refinery located at Corpus Christi, Texas, as further
defined in the Security Documents.
“Corpus Christi Refinery Purchase Option” means the purchase option in favor of CRCCLP with
respect to a portion of the Corpus Christi Refinery subject to the West Plant Lease and the West Plant
Sublease.
“CRCCLP” means CITGO Refining and Chemicals Company L.P., a Delaware limited partnership.
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“Credit Facilities” means, with respect to the Issuer or any of its Restricted Subsidiaries, one or more
debt facilities, including the Senior Credit Facilities, or other financing arrangements (including, without
limitation, commercial paper facilities or indentures) providing for revolving credit loans, term loans, letters of
credit or other long-term indebtedness, including any notes, mortgages, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and any amendments, supplements,
modifications, extensions, renewals, restatements or refundings thereof and any indentures or credit facilities
or commercial paper facilities that replace, refund or refinance any part of the loans, notes, other credit
facilities or commitments thereunder, including any such replacement, refunding or refinancing facility or
indenture that increases the amount permitted to be borrowed thereunder or alters the maturity thereof
(provided that such increase in borrowings is permitted under “Certain Covenants—Limitation on Incurrence
of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”) or adds Restricted Subsidiaries as
additional borrowers or guarantors thereunder and whether by the same or any other agent, lender or group of
lenders.
“Default” means any event that is, or with the passage of time or the giving of notice or both would
be, an Event of Default.
“Discharge of Senior Credit Facilities Obligations” means, with respect to any Collateral, the date on
which the Senior Credit Facilities Obligations are no longer secured by such Collateral; provided that the
Discharge of Senior Credit Facilities Obligations shall not be deemed to have occurred in connection with a
refinancing, refunding, replacement, renewal, extension, restatement, amendment, supplement or modification
of such Senior Credit Facilities Obligations with additional First Priority Lien Obligations secured by such
Collateral under an agreement relating to additional First Priority Lien Obligations which has been designated
in writing by the administrative agent under the Senior Credit Facilities so refinanced, refunded, replaced,
renewed, extended, restated, amended, supplemented or modified to the Collateral Agent and each other
Authorized Representative as the “Senior Credit Facilities” or similar term for purposes of the Intercreditor
Agreement.
“Disqualified Stock” means, with respect to any Person, any Capital Stock of such Person which, by
its terms, or by the terms of any security into which it is convertible or for which it is putable or
exchangeable, or upon the happening of any event, matures or is mandatorily redeemable (other than solely as
a result of a change of control or asset sale) pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof (other than solely as a result of a change of control or asset
sale), in whole or in part, in each case prior to the date 91 days after the earlier of the maturity date of the
Notes or the date the Notes are no longer outstanding.
“EBITDA” means, with respect to any Person for any period, the Consolidated Net Income of such
Person and its Restricted Subsidiaries for such period
(1)
increased (without duplication) by:
(a)
provision for taxes based on income or profits or capital, including, without
limitation, state, franchise and similar taxes, foreign withholding taxes and foreign
unreimbursed value added taxes of such Person and such Subsidiaries paid or accrued during
such period deducted (and not added back) in computing Consolidated Net Income; plus
(b)
Fixed Charges of such Person and such Subsidiaries for such period
(including (x) net losses on Hedging Obligations or other derivative instruments entered into
for the purpose of hedging interest rate risk, (y) fees payable in respect of letters of credit
and (z) costs of surety bonds in connection with financing activities, in each case, to the
extent included in Fixed Charges) to the extent the same were deducted (and not added back)
in calculating such Consolidated Net Income; plus
(c)
Consolidated Depreciation and Amortization Expense of such Person and
such Subsidiaries for such period to the extent the same was deducted (and not added back)
in computing Consolidated Net Income; plus
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(d)
any expenses or charges (other than depreciation or amortization expense)
related to any Equity Offering, Permitted Investment, acquisition, disposition, recapitalization
or the incurrence or repayment of Indebtedness permitted to be incurred by the Indenture
(including a refinancing thereof) (whether or not successful), including (i) such fees,
expenses, or charges related to the offering of the Notes, (ii) any amendment or other
modification of the Senior Credit Facilities and the Notes and (iii) commissions, discounts,
yield and other fees and charges (including any interest expense) related to any Receivables
Facility, and, in each case, deducted (and not added back) in computing Consolidated Net
Income; plus
(e)
any other non-cash charges, including any write-offs or write-downs,
reducing Consolidated Net Income for such period (provided that if any such non-cash
charges represent an accrual or reserve for contingent cash items in any future period, the
cash payment in respect thereof in such future period shall be subtracted from EBITDA in
such future period to the extent paid, and excluding amortization of a prepaid cash item that
was paid in a prior period); plus
(f)
the amount of any minority interest expense consisting of Subsidiary
income attributable to minority equity interests of third parties in any non-Wholly-Owned
Subsidiary deducted (and not added back) in such period in calculating Consolidated Net
Income; plus
(g)
the amount of loss on sale of receivables and related assets to the
Receivables Subsidiary in connection with a Receivables Facility deducted (and not added
back) in computing Consolidated Net Income;
(2)
decreased by (without duplication) non-cash gains increasing Consolidated Net
Income of such Person and such Subsidiaries for such period, excluding any non-cash gains to the
extent they represent the reversal of an accrual or reserve for a contingent cash item that reduced
EBITDA in any prior period; and
(3)
increased or decreased by (without duplication):
(a)
any net gain or loss resulting in such period from Hedging Obligations and
the application of Statement of Financial Accounting Standards No. 133 and International
Accounting Standards No. 39 and their respective related pronouncements and
interpretations; plus or minus, as applicable,
(b)
any net gain or loss resulting in such period from currency translation gains
or losses related to currency remeasurements of indebtedness (including any net loss or gain
resulting from hedge agreements for currency exchange risk).
“EMU” means economic and monetary union as contemplated in the Treaty on European Union.
“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital
Stock, but excluding any debt security that is convertible into, or exchangeable for, Capital Stock.
“Equity Offering” means any public or private sale of common stock or Preferred Stock of the Issuer
or of a direct or indirect parent of the Issuer (excluding Disqualified Stock), other than:
(1)
public offerings with respect to any such Person’s common stock registered on Form
(2)
issuances to the Issuer or any Subsidiary of the Issuer.
S-8; and
“euro” means the single currency of participating member states of the EMU.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC promulgated thereunder.
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“Excluded Property” means any and all of the following:
(a)
accounts owned by CITGO AR2008 Funding Company, LLC (and/or any other
subsidiary established directly or indirectly by the Issuer for the purpose of the financing of
receivables) in connection with a receivables financing transaction;
(b)
Unrestricted Inventory sold as part of any Inventory Financing;
(c)
any property or assets of the Issuer or any Guarantor to the extent that the Issuer or
such Guarantor is prohibited from granting a security interest in, pledge of, or charge, mortgage, or
lien upon any such property or assets by reason of (x) an existing and enforceable negative pledge
provision or (y) applicable law or regulation to which such Grantor is subject, except to the extent
such prohibition is ineffective under the UCC of any relevant jurisdiction, any other applicable law or
principles of equity;
(c)
all records pertaining to any of the foregoing;
(d)
outstanding voting Equity Interests of a foreign subsidiary to the extent in excess of
65% of the voting power of all classes of Equity Interests of such foreign subsidiary entitled to vote;
(e)
any and all additions, accessions and improvements to, all substitutions and
replacements for and all products of or derived from the foregoing;
(f)
all proceeds of the foregoing; and
(g)
any cash collateral held at any time pursuant to the Senior Credit Facilities or any
agreement to issue letters of credit, each as in effect on the Issue Date or (b) any amounts on deposit
or otherwise segregated as required pursuant to the terms of any Fixed Rate IRB Documents that
constitute security for the Fixed Rate IRB Obligations.
“First Priority Lien Documents” means the credit, guarantee and security documents governing the
First Priority Lien Obligations, including, without limitation, the Indenture, the Security Documents, the Credit
Agreement, the Fixed Rate IRB Documents and related security documents.
“First Priority Lien Obligations” means, collectively, (a) all Senior Credit Facilities Obligations,
(b) the Notes Obligations, (c) the Fixed Rate IRB Obligations and (d) any Series of Additional First Priority
Lien Obligations.
“First Priority Lien Secured Parties” means (a) the “Secured Parties” (or similar term), as defined in
the Senior Credit Facilities, (b) the Trustee and the Holders of Notes, (c) the holders of the Fixed Rate IRB
Obligations and (d) any other holders of any Series of Additional First Priority Lien Obligations.
“Fixed Charge Coverage Ratio” means, with respect to any Person for any period, the ratio of the
EBITDA of such Person for such period to the Fixed Charges of such Person for such period. In the event that
the Issuer or any of its Restricted Subsidiaries incurs, assumes, guarantees or redeems any Indebtedness (other
than revolving credit borrowings under any Credit Facility) or issues or redeems preferred stock subsequent to
the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but on or
prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the “Calculation Date”), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to
such incurrence, assumption, guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period.
For purposes of making the computation referred to above, Investments, acquisitions, dispositions,
mergers, amalgamations, consolidations and discontinued operations (as determined in accordance with
GAAP), in each case with respect to an operating unit of a business made (or committed to be made pursuant
to a definitive agreement) during the four-quarter reference period or subsequent to such reference period and
on or prior to or simultaneously with the Calculation Date, and other operational changes that the Issuer or
any of its Restricted Subsidiaries has determined to make and/or made during the four-quarter reference
period or subsequent to such reference period and on or prior to or simultaneously with the Calculation Date
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shall be calculated on a pro forma basis in accordance with GAAP assuming that all such Investments,
acquisitions, dispositions, mergers, amalgamations, consolidations, discontinued operations and other
operational changes had occurred on the first day of the four-quarter reference period. If since the beginning
of such period any Person that subsequently became a Restricted Subsidiary or was merged with or into the
Issuer or any of its Restricted Subsidiaries since the beginning of such period shall have made any Investment,
acquisition, disposition, merger, amalgamation, consolidation, discontinued operation or operational change, in
each case with respect to an operating unit of a business, that would have required adjustment pursuant to this
definition, then the Fixed Change Coverage Ratio shall be calculated giving pro forma effect thereto for such
period as if such Investment, acquisition, disposition, merger, consolidation, discontinued operation or
operational change had occurred at the beginning of the applicable four-quarter period.
“Fixed Charges” means, with respect to any Person for any period, the sum, without duplication, of
(1)
the Consolidated Interest Expense of such Person and its Restricted Subsidiaries for
such period; and
(2)
all dividend payments, whether or not in cash, on any series of preferred stock of
such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests
payable solely in Equity Interests of the Issuer (other than Disqualified Stock).
“Fixed Rate IRBs” means the bonds issued pursuant to (a) that certain Trust Indenture issued by Gulf
Coast Industrial Development Authority, dated as of April 1, 1995, with respect to the $50,000,000 Gulf Coast
Industrial Development Authority Solid Waste Disposal Revenue Bonds, (b) that certain Trust Indenture issued
by Gulf Coast Industrial Development Authority, dated as of April 1, 1998, with respect to the $25,000,000
Gulf Coast Industrial Development Authority Solid Waste Disposal Revenue Bonds, and (c) that certain
Trust Indenture issued by Illinois Development Finance Authority, dated as of June 1, 2002, with respect to
the $30,000,000 Illinois Development Finance Authority Environmental Facilities Revenue Bonds.
“Fixed Rate IRB Documents” means the indentures and the guarantee and security documents
governing the Fixed Rate IRB Obligations.
“Fixed Rate IRB Obligations” means Obligations in respect of the Fixed Rate IRBs, including, for the
avoidance of doubt, Obligations in respect of guarantees thereof.
“Fixed Rate IRB Trustee” means the trustee in respect of the Fixed Rate IRBs.
“GAAP” means generally accepted accounting principles in the United States which are in effect on
the Issue Date. At any time after the Issue Date, the Issuer may elect to apply IFRS accounting principles in
lieu of GAAP and, upon any such election, references herein to GAAP shall thereafter be construed to mean
IFRS (except as otherwise provided in the Indenture); provided that any such election, once made, shall be
irrevocable; provided, further, any calculation or determination in the Indenture that requires the application of
GAAP for periods that include fiscal quarters ended prior to the Issuer’s election to apply IFRS shall remain
as previously calculated or determined in accordance with GAAP. The Issuer shall give notice of any such
election made in accordance with this definition to the Trustee and the Holders of Notes.
“Government Securities” means securities that are:
(1)
direct obligations of the United States of America for the timely payment of which
its full faith and credit is pledged; or
(2)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of America, which, in either case,
are not callable or redeemable at the option of the issuer thereof, and shall also include a depository
receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act), as custodian with
respect to any such Government Securities or a specific payment of principal of or interest on any
such Government Securities held by such custodian for the account of the holder of such depository
receipt; provided that (except as required by law) such custodian is not authorized to make any
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deduction from the amount payable to the holder of such depository receipt from any amount
received by the custodian in respect of the Government Securities or the specific payment of principal
of or interest on the Government Securities evidenced by such depository receipt.
“guarantee” means a guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner (including letters of credit and
reimbursement agreements in respect thereof), of all or any part of any Indebtedness or other obligations.
“Guarantee” means the guarantee by any Guarantor of the Issuer’s Obligations under the Indenture.
“Guarantor” means, each Person that Guarantees the Notes in accordance with the terms of the
Indenture.
“Hedging Obligations” means, with respect to any Person, the obligations of such Person under any
interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, commodity swap
agreement, commodity cap agreement, commodity collar agreement, foreign exchange contract, currency swap
agreement or similar agreement providing for the transfer or mitigation of interest rate, commodity price or
currency risks either generally or under specific contingencies.
“Holder” means the Person in whose name a Note is registered on the registrar’s books.
“Hydrogen Supply Agreement” means a long-term agreement which for accounting purposes is
characterized as a capital lease in accordance with GAAP under which a third party supplies hydrogen to the
Issuer or any of its Subsidiaries to use in their business.
“IFRS” means the international accounting standards promulgated by the International Accounting
Standards Board and its predecessors as in effect from time to time.
“Indebtedness” means, with respect to any Person, without duplication:
(1)
contingent:
any indebtedness (including principal and premium) of such Person, whether or not
(a)
in respect of borrowed money;
(b)
evidenced by bonds, notes, debentures or similar instruments or letters of
credit or bankers’ acceptances (or, without duplication, reimbursement agreements in respect
thereof);
(c)
representing the balance deferred and unpaid of the purchase price of any
property (including Capitalized Lease Obligations), except (i) any such balance that
constitutes a trade payable or similar obligation to a trade creditor, in each case accrued in
the ordinary course of business or payable within 180 days of incurrence of such liability
and (ii) liabilities accrued in the ordinary course of business; or
(d)
representing any Hedging Obligations; provided that the amount of any net
obligation under any Swap Contract on any date shall be deemed to be the Swap Termination
Value thereof as of such date;
if and to the extent that any of the foregoing Indebtedness (other than letters of credit and Hedging
Obligations) would appear as a liability upon a balance sheet (excluding the footnotes thereto) of such
Person prepared in accordance with GAAP;
(2)
to the extent not otherwise included, any obligation by such Person to be liable for,
or to pay, as obligor, guarantor or otherwise, on the obligations of the type referred to in clause (1) of
a third Person (whether or not such items would appear upon the balance sheet of such obligor or
guarantor), other than by endorsement of negotiable instruments for collection in the ordinary course
of business; and
(3)
to the extent not otherwise included, the obligations of the type referred to in
clause (1) of a third Person secured by a Lien on any asset owned by such first Person, whether or
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not such Indebtedness is assumed by such first Person up to a maximum amount of the principal
amount of such third Person obligations or if less, the value of the asset pledged by the first Person;
provided, however, that notwithstanding the foregoing, Indebtedness, whether in the form of Capitalized Lease
Obligations or otherwise, shall be deemed not to include obligations under or in respect of (i) Receivables
Facilities, (ii) Hydrogen Supply Agreements, or (iii) Tax Sharing Agreements.
“Independent Financial Advisor” means an accounting, appraisal, investment banking firm or
consultant to Persons engaged in Similar Businesses of nationally recognized standing that is, in the good faith
judgment of the Issuer, qualified to perform the task for which it has been engaged.
“Intercreditor Agreement” means the Intercreditor Agreement among the Issuer, the other grantors
party thereto, BNP Paribas, as collateral agent for the First Priority Lien Secured Parties and as authorized
representative for the credit agreement secured parties, the Trustee, as the initial additional authorized
representative, and each additional authorized representative from time to time party thereto, dated as of the
Issue Date as the same may be amended, amended and restated, modified, renewed or replaced from time to
time.
“Inventory Financing” means a financing arrangement pursuant to which the Issuer or any Guarantor
sells Unrestricted Inventory to a bank or other institution (or a special purpose vehicle or partnership
incorporated or established by or on behalf of such bank or other institution or an Affiliate of such bank or
other institution).
“Investment Grade Rating” means, with respect to the Issuer, a corporate family rating of the Issuer
and its consolidated subsidiaries equal to or higher than Baa3 (or the equivalent) by Moody’s and BBB- (or
the equivalent) by S&P.
“Investments” means, with respect to any Person, all investments by such Person in other Persons
(including Affiliates) in the form of loans (including guarantees), advances or capital contributions (excluding
accounts receivable, trade credit, advances to customers, commission, travel and similar advances to directors,
officers, employees and consultants, in each case made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other securities issued by any other Person
and investments that are required by GAAP to be classified on the balance sheet (excluding the footnotes) of
such Person in the same manner as the other investments included in this definition to the extent such
transactions involve the transfer of cash or other property. For purposes of the definition of “Unrestricted
Subsidiary” and the covenant described under “Certain Covenants—Limitation on Restricted Payments”:
(1)
“Investments” shall include the portion (proportionate to the Issuer’s direct or
indirect equity interest in such Subsidiary) of the fair market value of the net assets of a Subsidiary of
the Issuer at the time that such Subsidiary is designated an Unrestricted Subsidiary; and
(2)
any property transferred to or from an Unrestricted Subsidiary shall be valued at its
fair market value at the time of such transfer, in each case as determined in good faith by the Issuer.
“Issue Date” means
, 2010.
“Issuer” has the meaning set forth in the first paragraph under “General.”
“Legal Holiday” means a Saturday, a Sunday or a day on which commercial banking institutions are
not required to be open in the State of New York or in the place of payment.
“Lien” means, with respect to any asset, any mortgage, lien (statutory or otherwise), pledge,
hypothecation, charge, security interest, preference, priority or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional
sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or
give a security interest in and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction; provided that in no event shall an operating lease
be deemed to constitute a Lien.
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“Major Non-Controlling Authorized Representative” means, after the Applicable Authorized Agent
Date, the Authorized Representative of the Series of First Priority Lien Obligations that constitutes the largest
outstanding principal amount of any then outstanding Series of First Priority Lien Obligations, other than the
Senior Credit Facilities Obligations, with respect to the Collateral.
“Moody’s” means Moody’s Investors Service, Inc. and any successor to its rating agency business.
“Net Income” means, with respect to any Person, the net income (loss) of such Person and its
Subsidiaries that are Restricted Subsidiaries, determined in accordance with GAAP and before any reduction
in respect of Preferred Stock dividends.
“Net Proceeds” means the aggregate cash proceeds (excluding any proceeds deemed as cash) received
by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale, including legal, accounting and
investment banking fees, and brokerage and sales commissions, any relocation expenses incurred as a result
thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to the repayment of principal,
premium, if any, and interest on Indebtedness (other than Subordinated Indebtedness) required (other than
required by clause (1) of the second paragraph of “Repurchase at the Option of Holders—Asset Sales”) to be
paid as a result of such transaction (or in the case of Asset Sales of Collateral, which Indebtedness (other than
Subordinated Indebtedness) shall be secured by a Lien on such Collateral that has priority over the Lien
securing the Notes Obligations) and any deduction of appropriate amounts to be provided by the Issuer or any
of its Restricted Subsidiaries as a reserve in accordance with GAAP against any liabilities associated with the
asset disposed of in such transaction and retained by the Issuer or any of its Restricted Subsidiaries after such
sale or other disposition thereof, including pension and other post-employment benefit liabilities and liabilities
related to environmental matters or against any indemnification obligations associated with such transaction.
“Non-Controlling Authorized Representative Enforcement Date” means the date that is 90 days
(throughout which 90-day period the applicable Authorized Representative of a Series of First Priority Lien
Obligations was the Major Non-Controlling Authorized Representative) after the occurrence of both (a) an
event of default, as defined in the Indenture or other governing agreement for that Series of First Priority Lien
Obligations, and (b) the Trustee’s and each other Authorized Representative’s receipt of written notice from
that Authorized Representative certifying that (i) such Authorized Representative is the Major Non-Controlling
Authorized Representative and that an event of default, as defined in the Indenture or other governing
agreement for that Series of First Priority Lien Obligations, has occurred and is continuing and (ii) the First
Priority Lien Obligations of that Series are currently due and payable in full (whether as a result of
acceleration thereof or otherwise) in accordance with the Indenture or other governing agreement for that
Series of First Priority Lien Obligations; provided that the Non-Controlling Authorized Representative
Enforcement Date shall be stayed and shall not occur and shall be deemed not to have occurred with respect
to any Collateral at any time the administrative agent under the Senior Credit Facilities or the Collateral Agent
has commenced and is diligently pursuing any enforcement action with respect to such Collateral.
“Non-Controlling Secured Parties” means, with respect to any Collateral, the First Lien Secured
Parties which are not Controlling Secured Parties with respect to such Collateral.
“Non-Core Assets” means assets of the Issuer and its Restricted Subsidiaries other than Collateral
and, in any case, other than their petroleum refineries in Lake Charles, Louisiana, Corpus Christi, Texas and
Lemont, Illinois; provided, that the aggregate amount of Net Proceeds received from the sale or other
disposition of the foregoing which shall constitute proceeds from the sale or other disposition of “Non-Core
Assets” shall not exceed $300.0 million.
“Notes” means the notes offered hereby and any Additional Notes subsequently issued under the
Indenture.
“Notes Obligations” means Obligations in respect of the Notes, including for the avoidance of doubt,
Obligations in respect of guarantees thereof.
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“Obligations” means any principal (including any accretion), interest (including any interest accruing
subsequent to the filing of a petition in bankruptcy, reorganization or similar proceeding at the rate provided
for in the documentation with respect thereto, whether or not such interest is an allowed claim under
applicable state, federal or foreign law), penalties, fees, indemnifications, reimbursements (including
reimbursement obligations with respect to letters of credit and banker’s acceptances), damages and other
liabilities, and guarantees of payment of such principal (including any accretion), interest, penalties, fees,
expenses, indemnifications, reimbursements, damages and other liabilities, payable under the documentation
governing any Indebtedness.
“Officer” means the Chairman of the Board, the Chief Executive Officer, the President, any Executive
Vice President, Senior Vice President or Vice President, the Treasurer, the Controller, the General Counsel or
the Secretary of the Issuer.
“Officer’s Certificate” means a certificate signed on behalf of the Issuer by an Officer of the Issuer,
that meets the requirements set forth in the Indenture.
“Opinion of Counsel” means a written opinion from legal counsel (not at the Trustee’s expense) who
is acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer.
“PDVSA Agreements” means collectively, (a)(i) that certain Crude Oil Sales Agreement, dated as of
December 1, 2008 by and between PDVSA Petróleo, S.A., a sociedad anónima organized and existing under
the laws of the Bolivarian Republic of Venezuela (“PDVSA”) and the Issuer, (ii) that certain Offset Agreement,
dated as of February 2, 2010, by and between PDVSA and the Issuer, (iii) that certain Corporate Services
Agreement, dated as of January 1, 2002, by and between PDVSA Services, Inc., a Delaware corporation and
the Issuer, as amended by the First Amendment to the Corporate Services Agreement dated January 1, 2005,
(iv) that certain promissory note made by PDVSA in favor of the Issuer on February 2, 2010, (v) that certain
Crude Oil and Feedstock Supply Agreement, dated March 31, 1987, between Champlin Refining Company (as
predecessor in interest to Issuer) and Petroleos de Venezuela, S.A., (vi) that certain Aircraft Procurement
Services Agreement, dated as of March 19, 2010, by and between Issuer and Petróleos de Venezuela, S.A. and
(vii) that certain Procurement Services Agreement, dated as of February 17, 2010, by and between Issuer and
Petróleos de Venezuela, S.A., in each case, including any amendment, modification, extension or replacement
thereof on terms no less favorable to the Issuer and its Subsidiaries immediately prior thereto; and (b) any
agreements entered into after the Issue Date pursuant to which the Issuer or a Restricted Subsidiary purchases
or manages or administers the purchase of assets or services from third parties on behalf of PDVSA or any of
its other Subsidiaries or Affiliates on terms consistent with procurement services agreements referred to in
clause (a)(vi) and a(vii) of this definition which may include provisions under which PDVSA pays directly, or
makes available to the Issuer or such Restricted Subsidiary (either in cash or Cash Equivalents, or through set
offs of amounts otherwise payable by the Issuer or any of its Restricted Subsidiaries to PDVSA or any of its
other Subsidiaries or Affiliates for crude oil or other feedstock or assets or services purchased by the Issuer or
a Restricted Subsidiary from any of PDVSA or any of its other Subsidiaries or Affiliates) the purchase price
for such assets or services prior to the Issuer and/or the relevant Restricted Subsidiary’s payment thereof to the
third party supplier of the assets or services.
“Permitted Holder” means Petróleos de Venezuela, S.A. and its Wholly-Owned Subsidiaries.
“Permitted Investments” means:
(1)
any Investment in the Issuer or any of its Restricted Subsidiaries;
(2)
any Investment in cash and Cash Equivalents;
(3)
any Investment by the Issuer or any of its Restricted Subsidiaries in a Person that is
engaged in a Similar Business if as a result of such Investment:
(a)
such Person becomes a Restricted Subsidiary; or
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(b)
such Person, in one transaction or a series of related transactions, is merged
or consolidated with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Issuer or a Restricted Subsidiary,
and, in each case, any Investment held by such Person; provided that such Investment was not
acquired by such Person in contemplation of such acquisition, merger, consolidation or transfer;
(4)
any Investment in securities or other assets received in connection with an Asset
Sale made pursuant to the provisions of “Repurchase at the Option of Holders—Asset Sales” or any
other disposition of assets not constituting an Asset Sale;
(5)
any Investment existing on the Issue Date or made pursuant to binding
commitments in effect on the Issue Date or an Investment consisting of any extension, modification
or renewal of any Investment existing on the Issue Date; provided that the amount of any such
Investment may be increased (x) as required by the terms of such Investment as in existence on the
Issue Date or (y) as otherwise permitted under this Indenture;
(6)
any Investment acquired by the Issuer or any of its Restricted Subsidiaries:
(a)
in exchange for any other Investment or accounts receivable held by the
Issuer or any such Restricted Subsidiary in connection with or as a result of a bankruptcy
workout, reorganization or recapitalization of the issuer of such other Investment or accounts
receivable; or
(b)
as a result of a foreclosure by the Issuer or any of its Restricted
Subsidiaries with respect to any secured Investment or other transfer of title with respect to
any secured Investment in default;
(7)
Hedging Obligations permitted under clause (9) of the covenant described in
“Certain Covenants—Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock
and Preferred Stock”;
(8)
Investments the payment for which consists of Equity Interests (exclusive of
Disqualified Stock) of the Issuer or any of its direct or indirect parent companies; provided, however,
that such Equity Interests will not increase the amount available for Restricted Payments under
clause (3) of the first paragraph under the covenant described in “Certain Covenants—Limitation on
Restricted Payments”;
(9)
or equipment;
Investments consisting of purchases and acquisitions of inventory, supplies, material
(10)
advances to, or guarantees of Indebtedness of, directors, employees, officers and
consultants not in excess of $5.0 million outstanding at any one time, in the aggregate;
(11)
loans and advances to officers, directors and employees for moving, travel and
entertainment expenses and other similar expenses, in each case incurred in the ordinary course of
business, for disaster relief, or to fund such Person’s purchase of Equity Interests of the Issuer or any
direct or indirect parent company thereof;
(12)
Investments in the ordinary course of business consisting of endorsements for
collection or deposit;
(13)
any Investment arising under any PDVSA Agreement and any obligation of an
Affiliate of the Issuer that results from the payment by the Issuer or any of its Restricted Subsidiaries
of income taxes owed by such Affiliate pursuant to a Tax Sharing Agreement;
(14)
an Investment by the Issuer contemporaneously with the making of a capital
contribution to or the issuance of Equity Interests (other than Disqualified Stock) of the Issuer, which
capital contribution or the proceeds of which issuance are in cash and are specified for the purpose of
the making of such Investment, and which Investment shall be no greater than the amount of such
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capital contribution, and provided that such capital contribution shall not be included in any basket
calculation provided in “Certain Covenants—Limitation on Restricted Payments”;
(15)
other acquisitions or Investments in joint ventures with Persons other than
Affiliates (net of any distributions to the Issuer or its Restricted Subsidiaries with respect to the
Equity Interest owned by the Issuer or such Restricted Subsidiary in such joint venture), that do not
exceed the greater of $50.0 million or 1.0% of Consolidated Net Tangible Assets of the Issuer and its
Subsidiaries as of the end of the most recent fiscal quarter for which the Issuer has delivered
financial statements pursuant to “—Reports and Other Information” in the aggregate outstanding at
any time since the Issue Date;
(16)
Investments in Persons made after the Issue Date to the extent such Investments do
not exceed the greater of $100.0 million or 2.0% of Consolidated Net Tangible Assets of the Issuer
and its Subsidiaries as of the end of the most recent fiscal quarter for which the Issuer has delivered
financial statements pursuant to “—Reports and Other Information” in the aggregate outstanding at
any time since the Issue Date; and
(17)
Investments in or relating to a Receivables Subsidiary that, in the good faith
determination of the Issuer, are necessary or advisable to effect any Receivables Facility.
“Permitted Liens” means, with respect to any Person:
(1)
pledges or deposits by such Person under workmen’s compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to which such Person is a
party, or deposits to secure public or statutory obligations of such Person or deposits of cash or
U.S. government bonds to secure surety or appeal bonds to which such Person is a party, or deposits
as security for contested taxes or import duties or for the payment of rent, in each case incurred in
the ordinary course of business;
(2)
Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens, in
each case for sums not yet overdue for a period of more than 45 days or being contested in good faith
by appropriate proceedings or other Liens arising out of judgments or awards against such Person
with respect to which such Person shall then be proceeding with an appeal or other proceedings for
review if adequate reserves with respect thereto are maintained on the books of such Person in
accordance with GAAP and such proceedings have the effect of preventing the forfeiture or sale of
the property subject to such Lien;
(3)
Liens for taxes, assessments or other governmental charges not yet overdue for a
period of more than 30 days or subject to penalties for nonpayment or which are being contested in
good faith by appropriate proceedings diligently conducted, if adequate reserves with respect thereto
are maintained on the books of such Person in accordance with GAAP and such proceedings have the
effect of preventing the forfeiture or sale of the property subject to such Lien;
(4)
Liens in favor of the issuer of stay, customs, appeal, performance and surety bonds
or bid bonds or with respect to other regulatory requirements or letters of credit issued pursuant to
the request of and for the account of such Person in the ordinary course of its business or Liens
required by any contract or statute in order to permit the Issuer or any Subsidiary of the Issuer to
perform any contract or subcontract with or pursuant to the requirements of a U.S. governmental
entity and Liens on pipeline or pipeline facilities which arise by operation of applicable law or “first
purchaser” Liens on crude oil;
(5)
minor survey exceptions, minor encumbrances, easements or reservations of, or
rights of others for, licenses, rights-of-way, sewers, electric lines, telegraph and telephone lines and
other similar purposes, or zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the ownership of its properties which
were not incurred in connection with Indebtedness and which (i) do not in the aggregate materially
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adversely affect the value of said properties or materially impair their use in the operation of the
business of such Person or (ii) are granted to suppliers of good and services;
(6)
Liens securing Obligations under Indebtedness permitted to be incurred pursuant to
clause (2) or (4) of the second paragraph under “Certain Covenants—Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock”; provided that Liens securing
Indebtedness permitted to be incurred pursuant to clause (4) are solely on the assets financed,
purchased, constructed, improved, acquired or assets of the acquired entity, as the case may be;
(7)
Liens existing on the Issue Date (other than Liens securing the Credit Facilities),
including Liens in the nature of letters of credit that support the Issuer’s obligations in respect of
outstanding variable rate IRBs;
(8)
Liens on property or shares of stock of a Person at the time such Person becomes a
Subsidiary; provided, however, such Liens are not created or incurred in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided, further, however, that
such Liens may not extend to any other property owned by the Issuer or any of its Restricted
Subsidiaries;
(9)
Liens on property at the time the Issuer or a Restricted Subsidiary acquired the
property, including any acquisition by means of a merger or consolidation with or into the Issuer or
any of its Restricted Subsidiaries; provided, however, that such Liens are not created or incurred in
connection with, or in contemplation of, such acquisition; provided, further, however, that the Liens
may not extend to any other property owned by the Issuer or any of its Restricted Subsidiaries;
(10)
Liens securing Hedging Obligations so long as, in the case of Hedging Obligations
related to interest, the related Indebtedness is permitted under the Indenture to be secured by a Lien
on the same property securing such Hedging Obligations;
(11)
Liens on specific items of inventory or other goods and proceeds of any Person
securing such Person’s obligations in respect of bankers’ acceptances issued or created for the account
of such Person to facilitate the purchase, shipment or storage of such inventory or other goods;
(12)
leases, subleases, licenses or sublicenses granted to others in the ordinary course of
business which do not materially interfere with the ordinary conduct of the business of the Issuer or
any of its Restricted Subsidiaries and do not secure any Indebtedness;
(13)
Liens arising from Uniform Commercial Code financing statement filings
regarding operating leases entered into by the Issuer and its Restricted Subsidiaries in the ordinary
course of business;
(14)
Liens in favor of the Issuer or any Guarantor;
(15)
Liens on equipment of the Issuer or any of its Restricted Subsidiaries granted in
the ordinary course of business to the Issuer’s or such Restricted Subsidiary’s client at which
equipment is located;
(16)
Liens to secure any refinancing, refunding, extension, renewal or replacement (or
successive refinancing, refunding, extensions, renewals or replacements) as a whole, or in part, of any
Indebtedness permitted to be incurred pursuant to “Certain Covenants—Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock” secured by any Lien referred to
in the foregoing clauses (6), (7), (8) and (9); provided, however, that (a) such new Lien shall be
limited to all or part of the same property that secured the original Lien (plus improvements on such
property), and (b) the Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (i) the outstanding principal amount or, if greater, committed amount of the
Indebtedness described under clauses (6), (7), (8), and (9) at the time the original Lien became a
Permitted Lien under the Indenture, and (ii) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, renewal or replacement;
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(17)
deposits made in the ordinary course of business to secure liability to insurance
carriers;
(18)
other Liens securing Indebtedness or other obligations not to exceed
$300.0 million at any one time outstanding; provided that to the extent such Liens are on Collateral,
such Liens shall rank junior to the Liens on the Collateral for the benefit of the Holders of Notes
subject to an intercreditor agreement customary for intercreditor arrangements between first-priority
and second-priority lenders;
(19)
Liens securing judgments for the payment of money not constituting an Event of
Default under clause (5) under the caption “Events of Default and Remedies” so long as such Liens
are adequately bonded and any appropriate legal proceedings that may have been duly initiated for the
review of such judgment have not been finally terminated or the period within which such
proceedings may be initiated has not expired;
(20)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods in the ordinary course
of business;
(21)
Liens (i) of a collection bank arising under Section 4-210 of the Uniform
Commercial Code on items in the course of collection, (ii) attaching to commodity trading accounts
or other commodity brokerage accounts incurred in the ordinary course of business, and (iii) in favor
of banking institutions arising as a matter of law encumbering deposits (including the right of set-off)
and which are within the general parameters customary in the banking industry;
(22)
Liens encumbering reasonable customary initial deposits and margin deposits and
similar Liens attaching to commodity trading accounts or other brokerage accounts incurred in the
ordinary course of business and not for speculative purposes;
(23)
Liens that are contractual rights of set-off (i) relating to the establishment of
depository relations with banks not given in connection with the issuance of Indebtedness, (ii) relating
to pooled deposit or sweep accounts of the Issuer or any of its Restricted Subsidiaries to permit
satisfaction of overdraft or similar obligations incurred in the ordinary course of business of the Issuer
and its Restricted Subsidiaries or (iii) relating to purchase orders and other agreements entered into
with customers of the Issuer or any of its Restricted Subsidiaries in the ordinary course of business;
(24)
Liens securing the obligations of the Issuer and its Subsidiaries under Hydrogen
Supply Agreements;
(25)
with IRBs;
Liens in the nature of letters of credit securing obligations incurred in connection
(26)
Liens on cash collateral securing obligations under the letter of credit facility
permitted under clause (18) of the second paragraph of “Certain Covenants—Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock,” in an amount
not to exceed the amount required to be so secured pursuant to the agreement governing such
facilities;
(27)
Liens on accounts receivable and related assets incurred in connection with a
Receivables Facility; and
(28)
Liens on Unrestricted Inventory incurred in connection with any Inventory
Financing to the extent such Inventory Financing is permitted by clause (17) of the second paragraph
of the covenant described under “Certain Covenants—Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock”).
For purposes of this definition, the term “Indebtedness” shall be deemed to include interest on and
the costs in respect of such Indebtedness.
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“Person” means any individual, corporation, limited liability company, partnership, joint venture,
association, joint stock company, trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
“Preferred Stock” means any Equity Interest with preferential rights of payment of dividends or upon
liquidation, dissolution, or winding up.
“Rating Agencies” means Moody’s and S&P or if Moody’s or S&P or both shall not make a rating on
the Notes publicly available, a nationally recognized statistical rating agency or agencies, as the case may be,
selected by the Issuer which shall be substituted for Moody’s or S&P or both, as the case may be.
“Receivables Facility” means any of one or more receivables financing facilities as amended,
supplemented, modified, extended, renewed, restated or refunded from time to time, the Obligations of which
are non-recourse (except for customary representations, warranties, covenants and indemnities made in
connection with such facilities) to the Issuer or any of its Restricted Subsidiaries (other than a Receivables
Subsidiary) pursuant to which the Issuer or any of its Restricted Subsidiaries sells its accounts receivable to
either (a) a Person that is not a Restricted Subsidiary or (b) a Receivables Subsidiary that in turn sells its
accounts receivable to a Person that is not a Restricted Subsidiary.
“Receivables Fees” means distributions or payments made directly or by means of discounts with
respect to any accounts receivable or participation interest therein issued or sold in connection with, and other
fees paid to a Person that is not a Restricted Subsidiary in connection with, any Receivables Facility.
“Receivables Subsidiary” means any Subsidiary formed for the purpose of, and that solely engages
only in one or more Receivables Facilities and other activities reasonably related thereto.
“Restricted Inventory” means inventory located within the battery limits of each of the refineries
other than inventory residing in assets of CITGO Products Pipeline Company or CITGO Pipeline Company.
“Responsible Officer” means any vice president, any assistant vice president, any assistant secretary,
any assistant treasurer, any trust officer, any assistant trust officer or any other officer associated with the
corporate trust department (or any successor group of the Trustee) of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and also means, with respect to a
particular corporate trust matter, any other officer to whom such matter is referred because of such person’s
knowledge of and familiarity with the particular subject, and who shall in each case have direct responsibility
for the administration of the Indenture.
“Restricted Investment” means an Investment other than a Permitted Investment.
“Restricted Subsidiary” means, at any time, each direct and indirect Subsidiary of the Issuer that is
not then an Unrestricted Subsidiary; provided, however, that upon the occurrence of an Unrestricted Subsidiary
ceasing to be an Unrestricted Subsidiary, such Subsidiary shall be included in the definition of “Restricted
Subsidiary.”
“S&P” means Standard & Poor’s, a division of The McGraw-Hill Companies, Inc., and any successor
to its rating agency business.
“Sale and Lease-Back Transaction” means any arrangement providing for the leasing by the Issuer or
any of its Restricted Subsidiaries of any real or tangible personal property, which property has been or is to be
sold or transferred by the Issuer or such Restricted Subsidiary to a third Person in contemplation of such
leasing.
“SEC” means the U.S. Securities and Exchange Commission.
“Secured Indebtedness” means any Indebtedness of the Issuer or any of its Restricted Subsidiaries
secured by a Lien.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the
SEC promulgated thereunder.
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“Security Documents” means, collectively, the security agreements, pledge agreements and other
agreements granting or creating a Lien on the Collateral in favor of the Collateral Agent and the Mortgages
and instruments filed and recorded in appropriate jurisdictions to preserve and protect such Liens on the
Collateral (including, without limitation, financing statements under the Uniform Commercial Code of the
relevant states), each as in effect on the Issue Date, or if entered into after the Issue Date, as in effect on such
later date, and as amended, amended and restated, modified, renewed or replaced from time to time.
“Senior Credit Facilities” means the Credit Facility under the Credit Agreement (the “Credit
Agreement”) dated the Issue Date by and among the Issuer, the Guarantors, the lenders party thereto in their
capacities as lenders thereunder and BNP Paribas, as Administrative Agent (the “Administrative Agent”),
including any guarantees, cash management agreements, collateral documents, instruments and agreements
executed in connection therewith, and any amendments, supplements, modifications, extensions, renewals,
restatements, refundings or refinancings thereof and any indentures or credit facilities or commercial paper
facilities with banks or other institutional lenders or investors that replace, refund or refinance any part of the
loans, notes, other credit facilities or commitments thereunder, including any such replacement, refunding or
refinancing facility or indenture that increases the amount borrowable thereunder or alters the maturity thereof
(provided that such increase in borrowings is permitted under “Certain Covenants—Limitation on Incurrence
of Indebtedness and Issuance of Disqualified Stock and Preferred Stock” above).
“Senior Credit Facilities Obligations” means Obligations in respect of the Senior Credit Facilities,
including, for the avoidance of doubt, Obligations in respect of guarantees thereof and Hedging Obligations
subject to guarantee and security agreements entered into in connection with the Senior Credit Facilities.
“Series” means (a) with respect to the First Priority Lien Secured Parties, each of (i) the “Secured
Parties” (or similar term), as defined in the Senior Credit Facilities (in their capacities as such), (ii) the
Holders and the Trustee (each in their capacity as such), (iii) the holders of the Fixed Rate IRB Obligations
under the Fixed Rate IRB Documents and (iv) each other group of Additional First Lien Secured Parties that
become subject to the Intercreditor Agreement after the date hereof that are represented by a common
Authorized Representative (in its capacity as such for such Additional First Lien Secured Parties) and (b) with
respect to any First Priority Lien Obligations, each of (i) the Senior Credit Facilities Obligations, (ii) the Notes
Obligations, (iii) the Fixed Rate IRB Obligations under the Fixed Rate IRB Documents and (iv) the Additional
First Priority Lien Obligations incurred pursuant to any applicable common agreement, which pursuant to any
joinder agreement, are to be represented under the Intercreditor Agreement by a common Authorized
Representative (in its capacity as such for such Additional First Priority Lien Obligations), it being understood
that holders of Fixed Rate IRB Obligations under each Fixed Rate IRB Document shall constitute a separate
Series of First Priority Lien Secured Parties under each Fixed Rate IRB Document and the Fixed Rate IRB
Obligations under each Fixed Rate IRB Document shall constitute a separate Series of First Priority Lien
Obligations.
“Significant Party” means any Restricted Subsidiary that would be, or any group of Restricted
Subsidiaries that taken together would constitute, a “significant subsidiary” as defined in Article 1, Rule 1-02
of Regulation S-X, promulgated pursuant to the Securities Act, as such regulation is in effect on the Issue
Date.
“Similar Business” means any business conducted or proposed to be conducted by the Issuer and its
Subsidiaries on the Issue Date or any business that is similar, reasonably related, incidental or ancillary thereto.
“Subordinated Indebtedness” means:
(1)
any Indebtedness of the Issuer which is by its terms subordinated in right of
payment to the Notes; and
(2)
any Indebtedness of any Guarantor which is by its terms subordinated in right of
payment to the Guarantee of such entity of the Notes.
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“Subsidiary” means, with respect to any Person:
(1)
any corporation, association, or other business entity (other than a partnership, joint
venture, limited liability company or similar entity) of which more than 50% of the total voting power
of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time of determination owned or
controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that
Person or a combination thereof; and
(2)
any partnership, joint venture, limited liability company or similar entity of which
(x)
more than 50% of the capital accounts, distribution rights, total equity and
voting interests or general or limited partnership interests, as applicable, are owned or
controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of
that Person or a combination thereof whether in the form of membership, general, special or
limited partnership or otherwise, and
(y)
such Person or any Restricted Subsidiary of such Person is a controlling
general partner or otherwise controls such entity.
“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative
transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts,
equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond
or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange
transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency
rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination
of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such
transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind,
and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of
master agreement published by the International Swaps and Derivatives Association, Inc., any International
Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together
with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any
Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into
account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on
or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance
therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s)
determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more midmarket or other readily available quotations provided by any recognized dealer in such Swap Contracts.
“Tax Sharing Agreement” means that certain Tax Allocation Agreement made as of June, 24, 1993 by
and between PDV America, Inc., a Delaware corporation, VPHI Midwest, Inc., a Delaware corporation, the
Issuer and PDV USA, Inc. a Delaware corporation, as amended by the First Amendment dated June 24, 1993,
the Second Amendment dated as of April 26, 2000 and the Restated Agency Agreement dated August 14,
2000, including any amendment, modification, extension or replacement thereof, in each case on terms no less
favorable to the Issuer and its Subsidiaries prior thereto.
“Treasury Rate” means, as of any Redemption Date, the yield to maturity as of such
Redemption Date of United States Treasury securities with a constant maturity (as compiled and published in
the most recent Federal Reserve Statistical Release H.15 (519) that has become publicly available at least two
Business Days prior to the Redemption Date (or, if such Statistical Release is no longer published, any
publicly available source of similar market data)) most nearly equal to the period from the Redemption Date to
, 2017, in the case of the 2017 Notes, or
, 2020, in the case of the 2020 Notes; provided,
however, that if the period from the Redemption Date to
, 2017, in the case of the 2017 Notes, or
, 2020, in the case of the 2020 Notes, is less than one year, the weekly average yield on actually
traded United States Treasury securities adjusted to a constant maturity of one year will be used.
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“Trust Indenture Act” means the Trust Indenture Act of 1939, as amended (15 U.S.C.
§§ 77aaa-77bbbb).
“UCC” means Articles 8 and 9 of the Uniform Commercial Code as in effect from time to time in
the State of New York or, where applicable as to specific items or types of Collateral any other relevant state.
“Unrestricted Inventory” means all inventory of the Issuer and its Subsidiaries other than Restricted
Inventory.
“Unrestricted Subsidiary” means:
(1)
any Subsidiary of the Issuer which at the time of determination is an Unrestricted
Subsidiary (as designated by the Issuer, as provided below); and
(2)
any Subsidiary of an Unrestricted Subsidiary.
The Issuer may designate any Subsidiary of the Issuer (including any existing Subsidiary and any
newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of
its Subsidiaries owns any Equity Interests or Indebtedness of, or owns or holds any Lien on, any property of,
the Issuer or any Restricted Subsidiary of the Issuer (other than solely any Unrestricted Subsidiary of the
Subsidiary to be so designated); provided that
(1)
any Unrestricted Subsidiary must be an entity of which the Equity Interests entitled
to cast at least a majority of the votes that may be cast by all Equity Interests having ordinary voting
power for the election of directors or Persons performing a similar function are owned, directly or
indirectly, by the Issuer;
(2)
such designation complies with the covenants described under “Certain Covenants—
Limitation on Restricted Payments”; and
(3)
each of:
(a)
the Subsidiary to be so designated; and
(b)
its Subsidiaries
has not at the time of designation, and does not thereafter, incur any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Issuer or any Restricted Subsidiary.
The Issuer may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that,
immediately after giving effect to such designation, no Default shall have occurred and be continuing and
either:
(1)
the Issuer could incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test described in the first paragraph under “Certain Covenants—Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred Stock”; or
(2)
the Fixed Charge Coverage Ratio for the Issuer and its Restricted Subsidiaries
would be greater than such ratio immediately prior to such designation,
in each case on a pro forma basis taking into account such designation.
Any such designation by the Issuer shall be notified by the Issuer to the Trustee by promptly filing
with the Trustee a copy of the resolution of the board of directors of the Issuer or any committee thereof
giving effect to such designation and an Officer’s Certificate certifying that such designation complied with
the foregoing provisions.
“Voting Stock” of any Person as of any date means the Capital Stock of such Person that is at the
time entitled to vote in the election of the board of directors of such Person.
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“Weighted Average Life to Maturity” means, when applied to any Indebtedness, Disqualified Stock or
Preferred Stock, as the case may be, at any date, the quotient obtained by dividing:
(1)
the sum of the products of the number of years from the date of determination to
the date of each successive scheduled principal payment of such Indebtedness or redemption or
similar payment with respect to such Disqualified Stock or Preferred Stock multiplied by the amount
of such payment; by
(2)
the sum of all such payments.
“West Plant Sublease” means that certain Sublease Agreement dated as of March 31, 1987 between
Anadarko Petroleum Corporation, as successor in interest to Champlin Petroleum Company, sublessor, and
CRCCLP, as successor in interest to Champlin Refining Company, sublesee, relating to a portion of the
Corpus Christi Refinery.
“West Plant Lease” means that certain Lease Agreement dated as of July 15, 1983, between United
States Trust Company of New York, lessor, and Anadarko E&P Company L.P., as successor in interest to
Champlin Petroleum Company, lessee, as amended by Lease Supplement No. 1, Lease Supplement No. 2 and
Lease Supplement No. 3 thereto and as the same may be further amended, modified or supplemented from
time to time, relating to a portion of the Corpus Christi Refinery.
“Wholly-Owned Subsidiary” of any Person means a Subsidiary of such Person, 100% of the
outstanding Equity Interests of which (other than directors’ qualifying shares) shall at the time be owned by
such Person or by one or more Wholly-Owned Subsidiaries of such Person.
Book-Entry, Delivery and Form
The notes are being offered and sold in connection with the initial offering thereof solely to
“qualified institutional buyers,” as defined in Rule 144A under the Securities Act (“QIBs”), pursuant to
Rule 144A under the Securities Act (“Rule 144A”) and in offshore transactions to persons other than
U.S. persons, as defined in Regulation S (“Regulation S”) under the Securities Act (“non-U.S. persons”) in
reliance on Regulation S. Following the initial offering of the notes, the notes may be sold to QIBs pursuant to
Rule 144A, non-U.S. persons in reliance on Regulation S and pursuant to other exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act, as described under “Notice to
Investors.”
Rule 144A Global Securities. Notes offered and sold to QIBs pursuant to Rule 144A will be issued in
the form of registered notes in global form, without interest coupons (the “Rule 144A global securities”). The
Rule 144A global securities will be deposited on the date of the closing of the sale of the notes (the “closing
date”) with, or on behalf of, a custodian for The Depository Trust Company (“DTC”) and registered in the
name of Cede & Co., as nominee of the DTC, or any successor nominee. Interests in the Rule 144A global
securities will be available for purchase only by QIBs.
Regulation S Global Securities. Notes offered and sold in offshore transactions to non-U.S. persons in
reliance on Regulation S will be issued in the form of registered notes in global form, without interest
coupons (the “Regulation S global securities”). The Regulation S global securities will be deposited on the
closing date with, or on behalf of, a custodian for DTC and registered in the name of Cede & Co., as nominee
of the DTC, or any successor nominee, for credit to the respective accounts of the purchasers (or to such other
accounts as they may direct) at Euroclear Bank S.A./NV, as operator of the Euroclear System (“Euroclear”), or
Clearstream Banking, societe anonyme, Luxembourg (“Clearstream Luxembourg”).
Investors may hold their interests in the Regulation S global securities directly through Euroclear or
Clearstream Luxembourg, if they are participants in such systems, or indirectly through organizations that are
participants in such systems. Investors may also hold such interests through organizations other than Euroclear
or Clearstream Luxembourg that are participants in the DTC system. Euroclear and Clearstream Luxembourg
will hold such interests in the Regulation S global securities on behalf of their participants through customers’
securities accounts in their respective names on the books of their respective depositaries. Such depositaries, in
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turn, will hold such interests in the Regulation S global securities in customers’ securities accounts in the
depositories’ names on the books of DTC.
Except as set forth below, the Rule 144A global securities and the Regulation S global securities
(collectively, the “global securities”) may be transferred, in whole and not in part, solely to DTC or another
nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global securities may not
be exchanged for certificated securities except in the limited circumstances described below.
The notes will be subject to restrictions on transfer and will bear a restrictive legend as set forth
under “Notice to Investors.”
All interests in the global securities, including those held through Euroclear or Clearstream
Luxembourg, may be subject to the procedures and requirements of DTC. Those interests held through
Euroclear or Clearstream Luxembourg may also be subject to the procedures and requirements of such
systems.
Exchanges Among the Global Securities
Prior to the 40th day after the later of the commencement of the offering of the notes and the closing
date (such period through and including such 40th day, the “distribution compliance period”), transfers by an
owner of a beneficial interest in a Regulation S global security to a transferee who takes delivery of such
interest through a Rule 144A global security of that series will be made only upon receipt by the trustee of a
written certification from the transferor of the beneficial interest to the effect that such transfer is being made
to a person whom the transferor reasonably believes is a QIB within the meaning of Rule 144A in a
transaction meeting the requirements of Rule 144A.
Transfers by an owner of a beneficial interest in a Rule 144A global security to a transferee who
takes delivery through the Regulation S global security of that series, whether before or after the expiration of
the distribution compliance period, will be made only upon receipt by the trustee of a certification from the
transferor to the effect that such transfer is being made in accordance with Regulation S or (if available)
Rule 144 under the Securities Act and that, if such transfer is being made prior to the expiration of the
restricted period, the interest transferred will be held immediately thereafter through Euroclear or Clearstream
Luxembourg.
The trustee will be entitled to receive such evidence as it may reasonably request to establish the
identity and/or signatures of any transferee or transferor.
Any beneficial interest in one of the global securities that is transferred to a person who takes
delivery in the form of a beneficial interest in another global security of that series will, upon transfer, cease
to be an interest in the initial global security of that series and will become an interest in the other global
security of that series and, accordingly, will thereafter be subject to all transfer restrictions, if any, and other
procedures applicable to beneficial interests in such other global security of that series for as long as it
remains such an interest.
Certain Book-Entry Procedures for the Global Securities
The operations and procedures of DTC, Euroclear and Clearstream Luxembourg are solely within the
control of the respective settlement systems and are subject to change by them from time to time. Investors are
urged to contact the relevant system or its participants directly to discuss these matters.
DTC has advised us that it is:
k
a limited-purpose trust company organized under the laws of the State of New York;
k
a “banking organization” within the meaning of the New York Banking Law;
k
a member of the Federal Reserve System;
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k
a “clearing corporation” within the meaning of the New York Uniform Commercial Code, as
amended; and
k
a “clearing agency” registered pursuant to Section 17A of the Exchange Act of 1934.
DTC was created to hold securities for its participants (collectively, the “participants”) and to
facilitate the clearance and settlement of securities transactions, such as transfers and pledges, between
participants through electronic book-entry changes to the accounts of its participants, thereby eliminating the
need for physical transfer and delivery of certificates. DTC’s participants include securities brokers and dealers
(including the initial purchasers), banks and trust companies, clearing corporations and certain other
organizations. DTC is a wholly owned subsidiary of the Depository Trust & Clearing Corporation, which is
owned by a number of direct participants of DTC and by the New York Stock Exchange, Inc., the American
Stock Exchange, LLC and the National Association of Securities Dealers, Inc. Indirect access to DTC’s system
is also available to other entities such as banks, brokers, dealers and trust companies (collectively, the “indirect
participants”) that clear through or maintain a custodial relationship with a participant, either directly or
indirectly. Investors who are not participants may beneficially own securities held by or on behalf of DTC only
through participants or indirect participants. The rules applicable to DTC and its participants are on file with
the SEC.
Purchases of securities under DTC’s system must be made by or through its direct participants. We
expect that, pursuant to procedures established by DTC:
k
upon deposit of each global security, DTC will credit, on its book-entry registration and transfer
system, the accounts of participants designated by the initial purchasers with an interest in that
global security, and
k
ownership of beneficial interests in the global securities will be shown on, and the transfer of
ownership interests in the global securities will be effected only through, records maintained by
DTC (with respect to the interests of participants) and by participants and indirect participants
(with respect to the interests of persons other than participants).
The laws of some jurisdictions may require that some purchasers of securities take physical delivery
of those securities in definitive form. Accordingly, the ability to transfer beneficial interests in notes
represented by a global security to those persons may be limited. In addition, because DTC can act only on
behalf of its participants, who in turn act on behalf of persons who hold interests through participants, the
ability of a person holding a beneficial interest in a global security to pledge or transfer that interest to
persons or entities that do not participate in DTC’s system, or to otherwise take actions in respect of that
interest, may be affected by the lack of a physical security in respect of that interest.
So long as DTC or its nominee is the registered owner of a global security, DTC or that nominee, as
the case may be, will be considered the sole legal owner or holder of the notes represented by that global
security for all purposes of the notes and the indenture. Except as provided below, owners of beneficial
interests in a global security will not be entitled to have the notes represented by that global security registered
in their names, will not receive or be entitled to receive physical delivery of certificated securities, and will
not be considered the owners or holders of the notes represented by that beneficial interest under the indenture
for any purpose, including with respect to the giving of any direction, instruction or approval to the trustee. To
facilitate subsequent transfers, all global securities that are deposited with, or on behalf of, DTC will be
registered in the name of DTC’s nominee, Cede & Co. The deposit of global securities with, or on behalf of,
DTC and their registration in the name of Cede & Co. effect no change in beneficial ownership. We
understand that DTC has no knowledge of the actual beneficial owners of the securities. Accordingly, each
holder owning a beneficial interest in a global security must rely on the procedures of DTC and, if that holder
is not a participant or an indirect participant, on the procedures of the participant through which that holder
owns its interest, to exercise any rights of a holder of notes under the indenture or that global security. We
understand that under existing industry practice, in the event that we request any action of holders of notes, or
a holder that is an owner of a beneficial interest in a global security desires to take any action that DTC, as
the holder of that global security, is entitled to take, DTC would authorize the participants to take that action
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and the participants would authorize holders owning through those participants to take that action or would
otherwise act upon the instruction of those holders.
Conveyance of notices and other communications by DTC to its direct participants, by its direct
participants to indirect participants and by its direct and indirect participants to beneficial owners will be
governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
Neither DTC nor Cede & Co. will consent or vote with respect to the global securities unless
authorized by a direct participant under DTC’s procedures. Under its usual procedures, DTC will mail an
omnibus proxy to us as soon as possible after the applicable record date. The omnibus proxy assigns Cede &
Co.’s consenting or voting rights to those direct participants of DTC to whose accounts the securities are
credited on the applicable record date, which are identified in a listing attached to the omnibus proxy.
Neither we nor the trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial interests in the global securities by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to those beneficial interests.
Payments with respect to the principal of and premium, if any, additional interest, if any, and interest
on a global security will be payable by the trustee or the paying agent to DTC or its nominee in its capacity as
the registered holder of the global security under the indenture. Under the terms of the indenture, we, the
trustee and any paying agent may treat the persons in whose names the notes, including the global securities,
are registered as the owners thereof for the purpose of receiving payment thereon and for any and all other
purposes whatsoever. Accordingly, neither we, the trustee nor any paying agent has or will have any
responsibility or liability for the payment of those amounts to owners of beneficial interests in a global
security. It is our understanding that DTC’s practice is to credit the direct participants’ accounts upon DTC’s
receipt of funds and corresponding detail information from us or the paying agent on the applicable payment
date in accordance with their respective holdings shown on DTC’s records. Payments by the participants and
the indirect participants to the owners of beneficial interests in a global security will be governed by standing
instructions and customary industry practice and will be the responsibility of the participants and indirect
participants and not of DTC, us, the trustee or the paying agent, subject to statutory or regulatory requirements
in effect at the time.
Transfers between participants in DTC will be effected in accordance with DTC’s procedures, and
will be settled in same-day funds. Transfers between participants in Euroclear or Clearstream Luxembourg will
be effected in the ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes, cross-market transfers
between the participants in DTC, on the one hand, and Euroclear or Clearstream Luxembourg participants, on
the other hand, will be effected through DTC in accordance with DTC’s rules on behalf of Euroclear or
Clearstream Luxembourg, as the case may be, by its respective depositary; however, those cross-market
transactions will require delivery of instructions to Euroclear or Clearstream Luxembourg, as the case may be,
by the counterparty in that system in accordance with the rules and procedures and within the established
deadlines (Brussels time) of that system. Euroclear or Clearstream Luxembourg, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in the relevant global securities in
DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement
applicable to DTC. Euroclear participants and Clearstream Luxembourg participants may not deliver
instructions directly to the depositaries for Euroclear or Clearstream Luxembourg.
Because of time zone differences, the securities account of a Euroclear or Clearstream Luxembourg
participant purchasing an interest in a global security from a participant in DTC will be credited, and any such
crediting will be reported to the relevant Euroclear or Clearstream Luxembourg participant, during the
securities settlement processing day (which must be a business day for Euroclear and Clearstream
Luxembourg) immediately following the settlement date of DTC. Cash received in Euroclear or Clearstream
Luxembourg as a result of sales of interests in a global security by or through a Euroclear or Clearstream
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Luxembourg participant to a participant in DTC will be received with value on the settlement date of DTC but
will be available in the relevant Euroclear or Clearstream Luxembourg cash account only as of the business
day for Euroclear or Clearstream Luxembourg following DTC’s settlement date.
Although we understand that DTC, Euroclear and Clearstream Luxembourg have agreed to the
foregoing procedures to facilitate transfers of interests in the global securities among participants in DTC,
Euroclear and Clearstream Luxembourg, they are under no obligation to perform or to continue to perform
those procedures, and those procedures may be discontinued at any time. Neither we nor the trustee will have
any responsibility for the performance by DTC, Euroclear or Clearstream Luxembourg or their respective
participants or indirect participants of their respective obligations under the rules and procedures governing
their operations.
DTC, Euroclear or Clearstream Luxembourg may discontinue providing its services as securities
depositary with respect to the global securities at any time by giving reasonable notice to us or the trustee.
Under such circumstances, if a successor securities depositary is not obtained, certificates for the securities are
required to be printed and delivered.
We may decide to discontinue use of the system of book-entry transfers through DTC or a successor
securities depositary. In that event, certificates for the securities will be printed and delivered.
We have provided the foregoing information with respect to DTC to the financial community for
information purposes only. Although we obtained the information in this section and elsewhere in this
offering memorandum concerning DTC, Euroclear and Clearstream Luxembourg and their respective
book-entry systems from sources that we believe are reliable, we take no responsibility for the accuracy
of such information.
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SUMMARY OF U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax consequences that may be
relevant to holders (as defined below) of the notes. This discussion does not purport to be tax advice and may
not be applicable depending upon a holder’s particular situation. Holders should consult their own tax advisors
with respect to the current and future federal, state, local and foreign tax consequences to them of the
ownership and disposition of the notes.
To ensure compliance with Internal Revenue Service Circular 230, holders of the notes are
hereby notified that: (a) any discussion of U.S. federal tax issues in this document is not intended or
written to be relied upon, and cannot be relied upon, by holders of the notes for the purpose of avoiding
penalties that may be imposed on holders of the notes under the Internal Revenue Code; (b) such
discussion is included herein in connection with the promotion or marketing (within the meaning of
Internal Revenue Service Circular 230) of the notes; and (c) holders of the notes should seek advice
based on their particular circumstances from an independent tax advisor.
As used herein, the term “U.S. Holder” means a beneficial owner of a note, who is, for U.S. federal
income tax purposes: (i) an individual citizen or resident of the United States; (ii) a domestic corporation;
(iii) an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a
trust if a U.S. court is able to exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the trust (or the trust made a valid
election under applicable Treasury Regulations to be treated as a U.S. trust). As used herein, the term
“Non-U.S. Holder” is any holder that is not a U.S. Holder or treated as a partnership for U.S federal income
tax purposes. U.S. Holders and Non-U.S. Holders are referred to collectively herein as “holders.” The tax
treatment of persons who hold their notes through a partnership (including an entity treated as a partnership
for U.S. federal income tax purposes) generally will depend upon the status of the partner and the activities of
the partnership. Partners in a partnership holding notes should consult their tax advisors.
This summary is directed solely at holders that hold their notes as capital assets and whose functional
currency is the U.S. dollar. This summary does not discuss all of the U.S. federal income tax consequences
that may be relevant to holders, particularly those that may be subject to special treatment under U.S. federal
income tax laws, such as partnerships, financial institutions, thrifts, real estate investment trusts, regulated
investment companies, insurance companies, dealers in securities or currencies, tax-exempt investors,
expatriates, former long-term U.S. residents, U.S. Holders that reside outside the United States, persons who
receive notes in return for services rendered or in connection with their employment, persons that own (or are
deemed to own for U.S. tax purposes) 10% or more of the voting stock of CITGO, or persons that hold their
notes as part of a hedge, straddle or other integrated transaction. This summary does not discuss any
alternative minimum tax consequences or the tax laws of any state, local or foreign government that may be
applicable to the holders of the notes.
This summary is based on the Internal Revenue Code of 1986, the Treasury Regulations promulgated
thereunder and administrative and judicial interpretations thereof, all as of the date hereof, and all of which
are subject to change, possibly with retroactive effect, or to different interpretations. No ruling has been
requested from the IRS in connection with the offering of the notes and no assurance can be given that the
treatment described herein will be accepted by the IRS or, if challenged, by a U.S. court.
U.S. Holders
Interest
Interest on the notes will be taxed to a U.S. Holder as ordinary interest income at the time it accrues
or is received, in accordance with the U.S. Holder’s regular method of accounting for federal income tax
purposes.
A U.S. Holder may elect to use the constant-yield method to include in its income all interest that
accrues on a note issued with OID or de minimis OID (rather than including only OID under the constantyield method, as described in “OID on the notes” below). For purposes of this election, interest includes all
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stated interest and OID or de minimis OID. In the case of a U.S. Holder that uses the cash method of
accounting, this election generally will result in such U.S. Holder including stated interest on the notes in
income earlier than would be the case if no such election were made. This election applies only to the note
with respect to which it is made and may not be revoked without the consent of the IRS. U.S Holders should
consult their tax advisors as to the desirability, the mechanics and the collateral consequences of making this
election with respect to the notes. The remainder of this discussion assumes a U.S. Holder has not made this
election.
OID on the Notes
A note will be treated as issued with OID for U.S. federal income tax purposes if, and in the amount
by which, the “stated redemption price at maturity” of the note exceeds its “issue price” unless the amount of
OID determined under this formula is less than “de minimis OID.” De minimis OID is equal to the product of
(i) 0.25%, (ii) the stated redemption price at maturity and (iii) the number of complete years from the issue
date to the maturity date of the note.
The issue price of a note will generally be the first price at which a substantial amount of the notes is
sold for cash, other than to bond houses, brokers or similar persons or organizations acting in the capacity of
underwriters, placement agents, or wholesalers. The stated redemption price at maturity of a note will equal
the total amount of all principal and interest payments to be made on the note, other than qualified stated
interest. Qualified stated interest is stated interest that is unconditionally payable in cash or in property (other
than our debt instruments) at least annually at a single fixed rate (or at certain floating rates that properly take
into account the length of the interval between stated interest payments) over the entire term of the note.
If the notes are issued with OID for U.S. federal income tax purposes, a U.S. Holder must accrue the
OID as ordinary income on a constant-yield method before the receipt of cash attributable to the income,
regardless of whether such U.S. Holder is a cash basis or accrual method taxpayer and generally will have to
include in income increasingly greater amounts of OID over the life of the notes. The amount of the OID
includible in income is the sum of the daily portions of OID with respect to a note for each day during the
taxable year or portion of the taxable year on which the U.S. Holder holds the note (“accrued OID”). The
daily portion is determined by allocating to each day in an “accrual period” a pro rata portion of the OID
allocable to that accrual period. Accrual periods with respect to a note may be of any length selected by the
U.S. Holder and may vary in length over the term of the note as long as (i) no accrual period is longer than
one year, and (ii) each scheduled payment of interest or principal on the note occurs on either the final or first
day of an accrual period. The amount of OID allocable to an accrual period equals the excess of (a) the
product of the note’s adjusted issue price at the beginning of the accrual period and the note’s yield to maturity
(determined on the basis of compounding at the close of each accrual period and properly adjusted for the
length of the accrual period) over (b) the sum of the payments of stated interest on the note allocable to the
accrual period. A note’s “yield to maturity” is the discount rate that, when used in computing the present value
of all principal and interest payments to be made on the note, produces an amount of equal to the note’s issue
price. The “adjusted issue price” of a note at the beginning of any accrual period is the issue price of the note
increased by the amount of accrued OID for each prior accrual period and decreased by the amount of any
payment (other than a payment of stated interest) previously made on the note.
Special Rules Applicable to High-Yield Notes Issued at Discount
In general, an applicable high yield discount obligation (“AHYDO”) is any debt instrument with
“significant original issue discount,” a maturity date that is more than five years from the issue date, and a
yield to maturity that is at least five percentage points higher than the applicable federal rate on its issue date.
If the notes are treated as AHYDOs, we may permanently be denied a deduction for a portion of the OID on
such notes and may claim an interest deduction as to the remainder of the OID only when such portion is paid
as cash. The tax consequences to holders generally will not be affected, except that for purposes of the
dividends received deduction, corporate holders of the notes may be required to treat the disallowed portion of
the OID as a dividend paid by us to the extent of our current and accumulated earnings and profits.
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Disposition of Notes
A U.S. Holder who disposes of a note by sale, exchange for other property or payment by us,
generally will recognize taxable gain or loss equal to the difference between the amount realized on the sale or
other disposition (not including any amount attributable to accrued but unpaid interest) and the U.S. Holder’s
adjusted tax basis in the note. Any amount attributable to accrued but unpaid interest will be treated as a
payment of interest and taxed in the manner described above under “– U.S. Holders – Interest.” In general, the
U.S. Holder’s adjusted tax basis in a note will be equal to the purchase price of the note paid by the
U.S. Holder increased by the amount of any OID previously included in income and decreased by the amount
of any payment (other than a payment of stated interest) previously made on the note.
Gain or loss realized on the sale, exchange or retirement of a note generally will be capital gain or
loss, and will be long-term capital gain or loss if at the time of sale, exchange or retirement the note has been
held for more than one year. For individuals, the excess of net long-term capital gains over net short-term
capital losses generally is taxed at a lower rate than ordinary income. The distinction between capital gain or
loss and ordinary income or loss is also relevant for purposes of, among other things, limitations on the
deductibility of capital losses.
Non-U.S. Holders
Subject to the discussion below concerning backup withholding, principal and interest payments
(including payments of OID, if any, as well as payments of additional interest, if any) made on, and gains from
the sale, exchange or other disposition of, a note, in each case, by a Non-U.S. Holder, will not be subject to
the withholding of United States federal income tax in certain circumstances.
Interest
Interest (including OID, if any) on the notes will not be subject to withholding provided:
k
the Non-U.S. Holder does not own, actually or constructively, 10% or more of the total combined
voting power of all classes of voting stock of CITGO;
k
the Non-U.S. Holder is not a controlled foreign corporation related, directly or indirectly, to the
CITGO through stock ownership;
k
the Non-U.S. Holder is not a bank receiving interest described in section 881(c)(3)(A) of the
Code; and
k
the certification requirements under section 871(h) or section 881(c) of the Code and the
Treasury Regulations thereunder, summarized below, are met.
Sections 871(h) and 881(c) of the Code and Treasury Regulations thereunder require that, in order to
obtain the exemption from withholding described above, either:
k
the beneficial owner of the note must certify, under penalties of perjury, to the withholding agent
that such owner is a Non-U.S. Holder and must provide such owner’s name, address and
U.S. taxpayer identification number, if any, and otherwise satisfy documentary evidence
requirements;
k
a financial institution that holds customers’ securities in the ordinary course of business and holds
a note must certify to the withholding agent that appropriate certification has been received from
the beneficial owner by it or by a financial institution between it and the beneficial owner and
generally furnish the withholding agent with a copy thereof; or
k
the Non-U.S. Holder must provide such certification to a “qualified intermediary” or a
“withholding foreign partnership” and certain other conditions must be met.
A Non-U.S. Holder may give the certification described above on IRS Form W-8BEN, which
generally is effective: (i) for the remainder of the year of signature plus three full calendar years, unless a
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change in circumstances makes any information on the form incorrect, if the Non-U.S. Holder’s taxpayer
identification number is not provided; or (ii) until a change in circumstances makes any information on the
form incorrect if the Non-U.S. Holder’s taxpayer identification number is provided. Special rules apply to
foreign partnerships. In general, a foreign non-withholding partnership will be required to provide a properly
executed IRS Form W-8IMY and attach thereto an appropriate certification from each partner. Partners in
foreign partnerships are urged to consult their tax advisors.
Even if a Non-U.S. Holder does not meet the above requirements, interest (including OID, if any)
payments will either not be subject to the withholding of federal income tax or will be subject to a reduced
rate of withholding if the Non-U.S. Holder appropriately certifies to the withholding agent that either (i) an
applicable tax treaty exempts, or provides for a reduction in, withholding or (ii) interest paid on a note is
effectively connected with the holder’s trade or business in the United States and therefore is not subject to
withholding (as described in greater detail below).
If a Non-U.S. Holder is engaged in a trade or business in the United States, and if interest (including
OID, if any) on a note is effectively connected with the conduct of such trade or business, the
Non-U.S. Holder, although exempt from withholding of federal income tax, will generally be subject to regular
federal income tax on such interest in the same manner as if such holder were a U.S. Holder. In lieu of
providing an IRS Form W-8BEN, such a Non-U.S. Holder will be required to provide the withholding agent
with a properly executed IRS Form W-8ECI in order to claim an exemption from withholding. In addition, if
such Non-U.S. Holder is a foreign corporation, it may be subject to branch profits tax equal to 30%, or such
lower rate as may be provided by an applicable treaty, of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments.
Disposition of Notes
A Non-U.S. Holder will not be subject to federal income tax on any gain realized on the sale,
exchange or disposition of a note unless the gain is effectively connected with such holder’s trade or business
in the United States or, if the holder is an individual, such holder is present in the United States for 183 days
or more in the taxable year of the sale, exchange or disposition and certain other conditions are met. Any
amount received on the sale, exchange or disposition of a note that is attributable to accrued but unpaid
interest (including OID, if any) will be treated as a payment of interest and taxed in the manner described
under “— Non-U.S. Holders – Interest.” The branch profits tax described above may apply to gains effectively
connected with a U.S. trade or business of a foreign corporation.
Backup Withholding and Information Reporting
U.S. Holders. Information reporting requirements apply to interest (including OID, if any) and
principal payments made to, and to the proceeds of sales before maturity by, certain non-corporate
U.S. Holders. In addition, backup withholding is required unless a U.S. Holder furnishes a correct taxpayer
identification number (which for an individual is the Social Security Number) and certifies, under penalties of
perjury, that he or she is not subject to backup withholding on an IRS Form W-9 and otherwise complies with
applicable requirements of the backup withholding rules. The current rate of backup withholding is 28% of the
amount paid. Backup withholding does not apply with respect to payments made to certain exempt recipients,
such as corporations and tax-exempt organizations. Any amounts withheld under the backup withholding rules
may be allowed as a credit against the U.S. Holder’s federal income tax liability, provided that the required
information is timely furnished to the IRS.
Non-U.S. Holders. Generally, backup withholding tax does not apply to payments of interest
(including OID, if any) and principal made to, and the proceeds of sales before maturity by, a Non-U.S. Holder
if such Non-U.S. Holder certifies (on Form IRS W-8BEN or other appropriate form) its Non-U.S. Holder
status. However, information reporting on IRS Form 1042-S will generally apply to payments of interest
(including OID, if any) made on the notes. Information reporting will also apply to payments made within the
United States on the sale, exchange, redemption, retirement or other disposition of a note. Information
reporting may apply to payments made outside the United States on the sale, exchange, redemption, retirement
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or other disposition of a note, if payment is made by a payor that is, for federal income tax purposes (i) a
U.S. person, (ii) a controlled foreign corporation, (iii) a U.S. branch of a foreign bank or foreign insurance
company, (iv) a foreign partnership controlled by U.S. persons or engaged in a U.S. trade or business or (v) a
foreign person, 50% or more of whose gross income is effectively connected with the conduct of a U.S. trade
or business for a specified three-year period, unless such payor has in its records documentary evidence that
the beneficial owner is not a U.S. Holder and certain other conditions are met or the beneficial owner
otherwise establishes an exemption. Any amounts withheld under the backup withholding rules may be
allowed as a credit against a Non-U.S. Holder’s federal income tax liability, provided that the required
information is timely furnished to the IRS.
Recent Legislation
President Obama recently signed into law the Hiring Incentives to Restore Employment (HIRE) Act
of 2010, which will impose certain increased certification and information reporting requirements. In the event
of noncompliance with the revised certification requirements, 30% withholding tax could be imposed on
payments to non-U.S. Holders of interest, dividends or sales proceeds. Such provisions will generally apply to
payments made after December 31, 2012, but not to any amount to be deducted or withheld from any payment
under any obligation outstanding on March 18, 2012. This legislation may be subject to further modification
or implementing regulations, which may result in additional substantive changes to the rules discussed herein.
Prospective investors should consult their own tax advisors regarding this new legislation.
The U.S. federal income tax discussion set forth above is included for general information only
and may not be applicable depending upon a holder’s particular situation. Prospective purchasers of the
notes should consult their own tax advisors with respect to the tax consequences to them of the
acquisition, ownership and disposition of the notes, including the tax consequences under state, local,
estate, foreign and other tax laws and the possible effects of changes in U.S. or other tax laws.
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CERTAIN ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the regulations
issued by the Department of Labor under ERISA, Section 4975 of the Code, and the regulations issued by the
Internal Revenue Service under Section 4975 of the Code impose certain restrictions on the following:
(1) “employee benefit plans” (as defined in Section 3(3) of ERISA) that are subject to Title I of ERISA;
(2) “plans” that are described in and subject to Section 4975 of the Code, including individual retirement
accounts and Keogh plans;
(3) entities whose underlying assets include “plan assets” within the meaning of U.S. Department of
Labor Regulation 29 C.F.R. Section 2510.3-101, as amended by Section 3(42) of ERISA, by reason
of a plan’s investment in such entities (each of (1), (2) and (3) is referred to as an “ERISA
Plan”); and
(4) persons who have certain specified relationships to Plans (“parties in interest” under ERISA and
“disqualified persons” under the Code) (collectively, “parties in interest”).
Both ERISA and Section 4975 of the Code prohibit certain transactions between an ERISA Plan and
parties in interest. ERISA also imposes certain duties on persons who are fiduciaries of an ERISA Plan that is
subject to Title I of ERISA.
ERISA and the Code prohibit various transactions involving the assets of an ERISA Plan and parties
in interest. If the notes are acquired or held by an ERISA Plan with respect to which we or the Initial
Purchasers are a party in interest, such acquisition or holding could be deemed to be a direct or indirect
prohibited transaction. A party in interest who has engaged in a non-exempt prohibited transaction may be
subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary
of the ERISA Plan who has engaged in such a non-exempt prohibited transaction may be subject to penalties
and liabilities under ERISA and the Code.
Such transactions may, however, be exempt from the otherwise applicable taxes and penalties by
reason of one or more statutory, class, individual or administrative exemptions. Such class exemptions may
include:
(1) Prohibited Transaction Class Exemption (PTE) 95-60 which exempts certain transactions involving
life insurance company general accounts;
(2) PTE 96-23 which exempts certain transactions directed by an in-house asset manager;
(3) PTE 90-1 which exempts certain transactions involving insurance company pooled separate accounts;
(4) PTE 91-38 which exempts certain transactions involving bank collective investment funds; and
(5) PTE 84-14 as amended, which exempts certain transactions entered into on behalf of an ERISA Plan
by an independent qualified professional asset manager.
In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provide limited relief
from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions,
provided that neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise
any discretionary authority or control or render any investment advice with respect to the assets of any ERISA
Plan involved in the transaction and provided further that the ERISA Plan receives no less, and pays no more,
than adequate consideration in connection with the transaction.
There can be no assurance that all of the conditions of any such exemptions will be satisfied.
Furthermore, Section 404 of ERISA sets forth standards of care for investment decisions made by a
fiduciary of an ERISA Plan that is subject to Title I of ERISA. In deciding whether to invest in the notes, a
fiduciary of an ERISA Plan must take the following into account, among other considerations:
(1) whether the fiduciary has the authority to make the investment;
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(2) whether the investment is made in accordance with the written documents that govern the ERISA
Plan;
(3) whether the investment constitutes a direct or indirect transaction with a party in interest;
(4) the composition of the ERISA Plan’s portfolio with respect to diversification by type of asset;
(5) the ERISA Plan’s funding objectives and investment policy statement;
(6) the tax effects of the investment; and
(7) whether under the general fiduciary standards of investment procedure and diversification an
investment in the notes is appropriate for the ERISA Plan, taking into account the overall investment policy of
the ERISA Plan, the composition of the ERISA Plan’s investment portfolio and all other appropriate factors.
Prior to making an investment in the notes, an ERISA Plan investor must determine whether we or an
initial purchaser are a party in interest or disqualified person with respect to such ERISA Plan and, if so,
whether such transaction is subject to one or more statutory or administrative exemptions, including those
described above. Prospective investors should consult with their legal and other advisors concerning the impact
of ERISA and the Code and the potential consequences of an investment in the notes based on their specific
circumstances.
Employee benefit plans that are non-U.S. plans (as described in Section 4(b)(4) of ERISA),
governmental plans (as defined in Section 3(32) of ERISA) and certain church plans (as defined in
Section 3(33) of ERISA) (collectively, “Non-ERISA Plans”) are not subject to the fiduciary responsibility or
prohibited transaction provisions of ERISA or the Code. As a result, assets in such Non-ERISA Plans may be
invested in the notes without regard to the ERISA and Code restrictions. However, such Non- ERISA Plans
may be subject to the provisions of other applicable federal, state, local, non-U.S. or other laws or regulations
that are similar to such provisions of ERISA or the Code (“Similar Laws”).
To address the above concerns, the notes may not be purchased by or transferred to any investor
unless such investor makes the representations contained in paragraph 10 under “Notice to Investors,” which
are designed to ensure that the acquisition of the notes will not constitute or result in a non-exempt prohibited
transaction under ERISA, the Code, or other applicable law.
The above is a summary of some of the material ERISA considerations applicable to prospective
ERISA Plan investors. It is not intended to be a complete discussion, nor is it to be construed as legal
advice or a legal opinion. Prospective ERISA Plan investors should consult their own counsel and tax
advisors on these matters.
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PLAN OF DISTRIBUTION
RBS Securities Inc., BNP Paribas Securities Corp., UBS Securities LLC and Credit Agricole
Securities (USA) Inc. are acting as representatives of each of the initial purchasers named in the purchase
agreement. Subject to the terms and conditions set forth in the purchase agreement among us, the guarantors
named therein and the initial purchasers, we have agreed to sell to the initial purchasers, and each of the initial
purchasers has agreed, severally and not jointly, to purchase from us, the respective principal amount of notes
set forth in the purchase agreement.
Subject to the terms and conditions set forth in the purchase agreement, the initial purchasers have
agreed, severally and not jointly, to purchase all of the notes sold under the purchase agreement if any of these
notes are purchased. If an initial purchaser defaults, the purchase agreement provides that the purchase
commitments of the nondefaulting initial purchasers may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the initial purchasers against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the initial purchasers may be required to make in
respect of those liabilities.
Commissions and Discounts
The representatives have advised us that the initial purchasers propose initially to offer the notes at
the offering price set forth on the cover page of this offering memorandum. After the initial offering, the
offering price or any other term of the offering may be changed by the initial purchasers without notice.
Notes Are Not Being Registered
The notes have not been registered under the Securities Act or any state securities laws. The initial
purchasers propose to offer the notes for resale in transactions not requiring registration under the Securities
Act or applicable state securities laws pursuant to Rule 144A and Regulation S. The initial purchasers will not
offer or sell the notes except to persons they reasonably believe to be QIBs or pursuant to offers and sales to
non-U.S. persons that occur outside of the United States within the meaning of Regulation S. In addition, until
40 days following the commencement of this offering, an offer or sale of notes within the United States by a
dealer (whether or not participating in the offering) may violate the registration requirements of the Securities
Act unless the dealer makes the offer or sale in compliance with Rule 144A or another exemption from
registration under the Securities Act. Each purchaser of the notes will be deemed to have made
acknowledgments, representations and agreements as described under “Notice to Investors.”
New Issue of Notes
The notes are a new issue of securities with no established trading market. We have applied to admit
the notes to listing on the Official List of the Luxembourg Stock Exchange and to trading on the Euro MTF
market, however, we cannot assure you that the notes will be approved for listing or that such listing will be
maintained.
We have been advised by the initial purchasers that they presently intend to make a market in the
notes after completion of the offering. However, they are under no obligation to do so and may discontinue
any market-making activities at any time without any notice.
We cannot assure the liquidity of the trading market for the notes. If an active trading market for the
notes does not develop, the market price and liquidity of the notes may be adversely affected. If the notes are
traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the
market for similar securities, our operating performance and financial condition, general economic conditions
and other factors.
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No Sales of Similar Securities
We have agreed that except for financing transactions expressly contemplated in this offering
memorandum, for a period of 90 days after the date of this offering memorandum, we will not without first
obtaining the prior written consent of RBS Securities Inc, directly or indirectly, issue, sell, offer to contract or
grant any option to sell, pledge, transfer or otherwise dispose of, any debt securities or securities exchangeable
for or convertible into debt securities, except for the notes sold to the initial purchasers pursuant to the
purchase agreement.
Short Positions
In connection with the offering, the initial purchasers may purchase and sell the notes in the open
market. These transactions may include short sales and purchases on the open market to cover positions
created by short sales. Short sales involve the sale by the initial purchasers of a greater principal amount of
notes than they are required to purchase in the offering. The initial purchasers must close out any short
position by purchasing notes in the open market. A short position is more likely to be created if the initial
purchasers are concerned that there may be downward pressure on the price of the notes’ in the open market
after pricing that could adversely affect investors who purchase in the offering.
Similar to other purchase transactions, the initial purchasers’ purchases to cover their short sales may
have the effect of raising or maintaining the market price of the notes or preventing or retarding a decline in
the market price of the notes. As a result, the price of the notes may be higher than the price that might
otherwise exist in the open market.
Neither we nor any of the initial purchasers make any representation or prediction as to the direction
or magnitude of any effect that the transactions described above may have on the price of the notes. In
addition, neither we nor any of the initial purchasers make any representation that the representatives will
engage in these transactions or that these transactions, once commenced, will not be discontinued without
notice.
Notice to Prospective Investors in the EEA
In relation to each Member State of the European Economic Area which has implemented the
Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any notes which are the
subject of the offering contemplated by this offering memorandum may not be made in that Relevant Member
State, except that an offer to the public in that Relevant Member State of any notes may be made at any time
under the following exemptions under the Prospectus Directive, if they have been implemented in that
Relevant Member State:
(a)
to legal entities which are authorized or regulated to operate in the financial markets or, if not
so authorized or regulated, whose corporate purpose is solely to invest in securities;
(b)
to any legal entity which has two or more of (1) an average of at least 250 employees during
the last financial year; (2) a total balance sheet of more than 43,000,000 and (3) an annual net
turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;
(c)
by the initial purchasers to fewer than 100 natural or legal persons (other than “qualified
investors” as defined in the Prospectus Directive) subject to obtaining the prior consent of the
representatives for any such offer; or
(d)
in any other circumstances falling within Article 3(2) of the Prospectus Directive;
provided that no such offer of notes shall result in a requirement for the publication by us or any
representative of a prospectus pursuant to Article 3 of the Prospectus Directive.
Any person making or intending to make any offer of notes within the EEA should only do so in
circumstances in which no obligation arises for us or any of the initial purchasers to produce a prospectus for
such offer. Neither we nor the initial purchasers have authorized, nor do we or they authorize, the making of
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any offer of notes through any financial intermediary, other than offers made by the initial purchasers which
constitute the final offering of notes contemplated in this offering memorandum.
For the purposes of this provision, and your representation below, the expression an “offer to the
public” in relation to any notes in any Relevant Member State means the communication in any form and by
any means of sufficient information on the terms of the offer and any notes to be offered so as to enable an
investor to decide to purchase any notes, as the same may be varied in that Relevant Member State by any
measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus
Directive” means Directive 2003/71 /EC and includes any relevant implementing measure in each Relevant
Member State.
Each person in a Relevant Member State who receives any communication in respect of, or who
acquires any notes under, the offer of notes contemplated by this offering memorandum will be deemed to
have represented, warranted and agreed to and with us and each initial purchaser that:
(a)
it is a “qualified investor” within the meaning of the law in that Relevant Member State
implementing Article 2(1)(e) of the Prospectus Directive; and
(b)
in the case of any notes acquired by it as a financial intermediary, as that term is used in
Article 3(2) of the Prospectus Directive, (i) the notes acquired by it in the offering have not
been acquired on behalf of, nor have they been acquired with a view to their offer or resale to,
persons in any Relevant Member State other than “qualified investors” (as defined in the
Prospectus Directive), or in circumstances in which the prior consent of the representatives has
been given to the offer or resale; or (ii) where notes have been acquired by it on behalf of
persons in any Relevant Member State other than qualified investors, the offer of those notes to
it is not treated under the Prospectus Directive as having been made to such persons.
Other Relationships
The initial purchasers and their affiliates from time to time have provided other investment banking,
commercial banking and financial advisory services to us and our affiliates in the ordinary course of business
with us, for which they have received and will receive customary fees and commissions, and they may provide
these services to us in the future, for which they expect to receive customary fees and commissions. Affiliates
of certain of the initial purchasers are expected to be lenders under our New Senior Credit Facility. An
affiliate of RBS Securities Inc. serves as a lender and served as co-documentation agent under our existing
revolving credit facility and Term Loan B. An affiliate of UBS Securities LLC serves as a lender under our
existing revolving credit facility. BNP Paribas currently serves as administrative agent and a lender under our
existing revolving credit facility and Term Loan B and also as collateral agent and paying agent under our
Existing Senior Credit Facility. BNP Paribas also served as joint lead arranger, joint bookrunner and cosyndication agent under our existing revolving credit facility and Term Loan B. In addition, BNP Paribas
serves as program administrator, one of the purchaser agents and related alternate purchaser under our
accounts receivable sales facility. An affiliate of Credit Agricole Securities (USA) Inc. serves as a lender
under our existing revolving credit facility. An affiliate of DNB NOR Markets, Inc. serves as a lender under
our existing revolving credit facility and Term Loan A. An affiliate of Natixis Bleichroeder LLC serves as a
lender under our existing revolving credit facility and Term Loan A. An affiliate of UniCredit Capital
Markets, Inc. serves as a lender under our existing revolving credit facility, Term Loan A and Term Loan B.
We expect to use the net proceeds of this offering, together with a portion of the proceeds of our New Senior
Credit Facility, to repay all amounts outstanding under our Existing Senior Credit Facility. See “Use of
Proceeds.”
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NOTICE TO INVESTORS
The notes have not been registered under the Securities Act or any other applicable securities law and
may not be offered or sold within the United States or to, or for the account or benefit of, U.S. Persons (as
such terms are defined under the Securities Act) except pursuant to an exemption from, or in a transaction not
subject to the registration requirements of the Securities Act and such other securities laws. Accordingly, the
notes are being offered by this offering memorandum only (a) to qualified institutional buyers, or “QIBs,” in
reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A and
(b) outside the United States to persons other than U.S. persons in reliance upon Regulation S under the
Securities Act.
Each purchaser of the notes, by its acceptance thereof, will be deemed to have acknowledged,
represented to, and agreed with us, the guarantors and the initial purchasers as follows:
(1)
The purchaser understands and acknowledges that the notes have not been registered under
the Securities Act or any other applicable securities law, the notes are being offered for resale
in transactions not requiring registration under the Securities Act or any other securities laws,
including sales pursuant to Rule 144A under the Securities Act, and none of the notes may
be offered, sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act or any other applicable securities law, pursuant to an
exemption from such laws or in a transaction not subject to such laws, and in each case, in
compliance with the conditions for transfer set forth in paragraph (4) below.
(2)
The purchaser is either:
(a)
a QIB and is aware that any sale of the notes to it will be made in reliance on
Rule 144A and such acquisition will be for its own account or for the account of
another QIB; or
(b)
not a U.S. person (and was not purchasing for the account or benefit of a
U.S. person) within the meaning of Regulation S under the Securities Act.
(3)
The purchaser acknowledges that we, the guarantors, the trustee and the initial purchasers or
any person representing us, the guarantors, the trustee or the initial purchasers have not made
any representation to it with respect to us, the guarantors or the offering or sale of any notes,
other than the information contained in this offering memorandum, which offering
memorandum has been delivered to it. Accordingly, it acknowledges that no representation or
warranty is made by the initial purchasers as to the accuracy or completeness of such
materials. The purchaser has had access to such financial and other information as it has
deemed necessary in connection with its decision to purchase any of the notes, including an
opportunity to ask questions of and request information from us, the guarantors and the
initial purchasers, and it has received and reviewed all information that it requested.
(4)
The purchaser is purchasing the notes for its own account, or for one or more investor
accounts for which it is acting as a fiduciary or agent, in each case for investment, and not
with a view to, or for offer or sale in connection with, any distribution of the notes in
violation of the Securities Act, subject to any requirement of law that the disposition of its
property or the property of such investor account or accounts be, at all times, within its or
their control and subject to its or their ability to resell such notes pursuant to Rule 144A,
Regulation S or any other exemption from registration available under the Securities Act. The
purchaser agrees on its own behalf and on behalf of any investor account for which it is
purchasing the notes and each subsequent holder of the notes, by its acceptance of the notes,
will agree to offer, sell or otherwise transfer such notes prior to the date, which is one year
after the later of the date of the original issue of the notes and the last date on which we or
any of our affiliates was the owner of such notes (the “Resale Restriction Termination Date”)
only (a) to us or any subsidiary thereof, (b) pursuant to a registration statement which has
been declared effective under the Securities Act, (c) for so long as the notes are eligible for
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resale pursuant to Rule 144A to a person it reasonably believes is a QIB that purchases for
its own account or for the account of a QIB, to whom notice is given that the transfer is
being made in reliance on Rule 144A, (d) pursuant to offers and sales to non-U.S. persons
that occur outside the United States within the meaning of Regulation S under the Securities
Act or (e) pursuant to any other available exemption from the registration requirements of the
Securities Act, subject in each of the foregoing cases to any requirement of law that the
disposition of its property or the property of such investor account or accounts be at all times
within its or their control and to compliance with any applicable state securities laws. The
foregoing restrictions on resale will not apply subsequent to the Resale Restriction
Termination Date. Each purchaser acknowledges that we and the trustee under the indenture
reserve the right prior to any offer, sale or other transfer (including, but not limited to,
pursuant to clause (d) prior to the end of the 40-day distribution compliance period within
the meaning of Regulation S under the Securities Act or pursuant to clause (e) prior to the
Resale Restriction Termination Date of the notes) to require the delivery of an opinion of
counsel, certifications and/or other information satisfactory to us and the trustee as set forth
in the indenture.
The purchaser understands that if it is a foreign person outside of the United States, the
notes will be represented by the Regulation S global note and that transfers of such note are
restricted as described in this section and in the section entitled “Description of the Notes –
Book-Entry, Delivery and Form” or, if it is a QIB, the notes it purchases will be represented
by a Rule 144A global note.
Each purchaser acknowledges that each certificate representing a note will contain a legend
substantially to the following effect:
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5
OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH
PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED
THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE
PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES
ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR
WHICH IT HOLDS THE SECURITY, FOR THE BENEFIT OF THE ISSUER, THAT
(A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED,
ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT) PURCHASING FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A UNDER THE
SECURITIES ACT, (b) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF
REGULATION S UNDER THE SECURITIES ACT, (c) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY
RULE 144 THEREUNDER (IF APPLICABLE) OR (d) IN ACCORDANCE WITH
ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL ACCEPTABLE TO
THE ISSUER IF THE ISSUER SO REQUESTS), (2) TO THE ISSUER OR (3) PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF
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THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE
HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY
ANY PURCHASER OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN CLAUSE (A) ABOVE. NO REPRESENTATION CAN
BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE
144 FOR RESALE OF THE SECURITY EVIDENCED HEREBY.
(5)
If it is (a) a purchaser in a sale that occurs outside the United States within the meaning of
Regulation S under the Securities Act, or (b) a “distributor,” “dealer” or person “receiving a
selling concession fee or other remuneration” in respect of notes sold prior to the expiration
of the applicable “distribution compliance period” (as defined below), it acknowledges that
until the expiration of such “distribution compliance period” any offer or sale of the notes
shall not be made by it to a U.S. person or for the account or benefit of a U.S. person within
the meaning of Rule 902(k) of Regulation S under the Securities Act. The “distribution
compliance period” means the 40-day period following the issue date for the notes.
(6)
If it is an initial foreign purchaser pursuant to Regulation S, it acknowledges that, until the
expiration of the “distribution compliance period” described above, it may not, directly or
indirectly, refer, resell, pledge or otherwise transfer a note or any interest in a note except to
a person who certifies in writing to the applicable transfer agent that such transfer satisfies,
as applicable, the requirements of the legends described above and that the notes will not be
accepted for registration of any transfer prior to the end of the applicable “distribution
compliance period” unless the transferee has first complied with the certification
requirements described in this paragraph.
(7)
It acknowledges that the trustee for the notes will not be required to accept for registration of
transfer any notes acquired by it, except upon presentation of evidence satisfactory to us and
the trustee (as set forth in the indenture) that the restrictions set forth herein have been
complied with.
(8)
It agrees that it will deliver to each person, to whom it transfers notes, notice of any
restrictions on the transfer of such securities.
(9)
It acknowledges that we, the guarantors, the initial purchasers, the trustee and others will rely
upon the truth and accuracy of the foregoing acknowledgments, representations, warranties
and agreements and agrees that if any of the acknowledgments, representations, warranties
and agreements deemed to have been made by its purchase of the notes are no longer
accurate, it shall promptly notify us and the initial purchasers. If it is acquiring any notes as
a fiduciary or agent for one or more investor accounts, it represents that it has sole
investment discretion with respect to each such investor account and that it has full power to
make the foregoing acknowledgments, representations and agreements on behalf of each such
investor account.
(10)
The notes may not be sold or transferred to, and each purchaser, by its purchase of the notes
shall be deemed to have represented and covenanted that it is not acquiring the notes for or
on behalf of, and will not transfer the notes to, any pension or welfare plan (as defined in
Section 3 of the Employee Retirement Income Security Act of 1974, as amended
(“ERISA”)), plan (as defined in Section 4975 of the Internal Revenue Code of 1986, as
amended (“Code”)), or any entity whose assets include assets of such an employee benefit
plan or plan pursuant to 29 C.F.R. Section 2510.3-101 (as modified by Section 3(42) of
ERISA (collectively, a “Plan”), except that such a purchase for or on behalf of a Plan will be
permitted:
(a)
to the extent the purchase is made by or on behalf of a bank collective investment
fund maintained by the purchaser in which no Plan (together with any other Plans
maintained by the same employer or employee organization) has an interest in
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excess of 10% of the total assets in such collective investment fund, and the
conditions of Section III of Prohibited Transaction Class Exemption 91-38 issued by
the Department of Labor are satisfied and such purchase does not involve a
transaction described in Sections 406(b)(1) or (3) of ERISA or
Section 4975(c)(1)(E) or (F) of the Code;
(b)
to the extent the purchase is made by or on behalf of an insurance company pooled
separate account maintained by the purchaser in which, at any time while the notes
are outstanding, no Plan (together with any other Plans maintained by the same
employer or employee organization) has an interest in excess of 10% of the total
assets in such pooled separate account, and the conditions of Section III of
Prohibited Transaction Class Exemption 90-1 issued by the Department of Labor are
satisfied and such purchase does not involve a transaction described in
Sections 406(b)(1) or (3) of ERISA or Section 4975(c)(1)(E) or (F) of the Code;
(c)
to the extent such purchase is made by or on behalf of an insurance company with
assets in its insurance company general account, if no Plan (together with any other
Plans maintained by the same employer or employee organization) has an interest in
the general account the amount of reserves and liabilities for which exceed 10% of
the total reserves and liabilities of the general account plus surplus, determined as
set forth in Prohibited Transaction Class Exemption 95-60 issued by the Department
of Labor, and the conditions of Sections I and IV of such exemption are otherwise
satisfied and the purchase does not involve a transaction described in
Sections 406(b)(1) or (3) of ERISA or Section 4975(c)(1)(E) or (F) of the Code;
(d)
to the extent the purchase is made on behalf of a Plan by (i) an investment advisor
registered under the Investment Advisers Act of 1940, as amended, that had as of
the last day of its most recent fiscal year total client assets under its management
and control in excess of $85,000,000 and had stockholders’ or partners’ equity in
excess of $1,000,000, as shown in its most recent balance sheet prepared in
accordance with generally accepted accounting principles, or (ii) a bank as defined
in Section 202(a)(2) of the Investment Advisers Act of 1940, as amended, that has
the power to manage, acquire or dispose of assets of a Plan, with equity capital in
excess of $1,000,000 as of the last day of its most recent fiscal year, or (iii) an
insurance company, which is qualified under the laws of more than one state to
manage, acquire or dispose of any assets of a Plan, which insurance company has as
of the last day of its most recent fiscal year, net worth in excess of $1,000,000 and
which is subject to supervision and examination by a state authority having
supervision over insurance companies and, in any case, such investment adviser,
bank or insurance company is otherwise a “qualified professional asset manager,” as
such term is used in Prohibited Transaction Class Exemption 84-14 issued by the
Department of Labor, with respect to such Plan, and the assets of such Plan
managed by such investment advisor, bank or insurance company, when combined
with the assets of other Plans established or maintained by the same employer (or
affiliate of such employer) or employee organization and managed by such
investment adviser, bank or insurance company, do not represent more than 20% of
the total client assets managed by such investment adviser, bank or insurance
company, and the conditions of Part I of such exemption are otherwise satisfied and
such purchase does not involve a transaction described in Sections 406(b)(1) or
(3) of ERISA or Section 4975(c)(1)(E) or (F) of the Code;
(e)
to the extent such Plan is a governmental plan (as defined in Section 3(32) of
ERISA) which is not subject to the provisions of Title I of ERISA or Section 4975
of the Code and the purchase of the notes by such governmental plan is not
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otherwise prohibited by applicable law, including any law or regulation similar to
Section 406 of ERISA or Section 4975 of the Code;
(f)
to the extent such purchase is made on behalf of a Plan by an “in-house asset
manager” (the “INHAM”) as defined in Part IV of Prohibited Transaction Class
Exemption 96-23 issued by the Department of Labor, Plans maintained by affiliates
of the INHAM and/or the INHAM have aggregate assets in excess of $250 million,
the conditions of Part I of such exemption are otherwise satisfied and the purchase
does not involve a transaction described in Sections 406(b)(1) or (3) of ERISA or
Section 4975(c)(1)(E) or (F) of the Code; or
(g)
to the extent such purchase is exempt from prohibited transaction provisions of
Section 406 of ERISA and Section 4975 of the Code pursuant to Section 409(b)(17)
of ERISA and Section 4975(d)(20) of the Code.
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LEGAL MATTERS
Certain legal matters with respect to the validity of the notes offered hereby will be passed upon for
us by Curtis, Mallet-Prevost, Colt & Mosle LLP, New York, New York. The initial purchasers have been
represented by Cahill Gordon & Reindel LLP, New York, New York.
INDEPENDENT AUDITORS
The financial statements of CITGO Petroleum Corporation as of December 31, 2009 and 2008 and
for the years ended December 31, 2009, 2008 and 2007, included in this offering memorandum, have been
audited by KPMG LLP, independent auditors, as stated in their report appearing herein.
LISTING AND GENERAL INFORMATION
1.
The notes sold pursuant to Rule 144A under the Securities Act and the notes sold pursuant to
Regulation S under the Securities Act have been accepted for clearance through the Depository
Trust Company, Euroclear and Clearstream, Luxembourg. With respect to the notes represented by the
Rule 144A Global Note, the CUSIP number is
, the Common Code number is
and the
International Securities Identification Number (ISIN) is
. With respect to the notes represented by the
Regulation S Global Note, the CUSIP number is
, the Common Code number is
and the ISIN
is
.
2.
Resolutions relating to the issue, sale and listing of the notes on the Euro MTF Market of the
Luxembourg Stock Exchange were adopted by our Board of Directors on May 6, 2010.
3.
Except as disclosed in this offering memorandum, there has been no material adverse change
in our financial position since March 31, 2010, which is material in the context of the issue of the notes.
4.
Application has been made to admit the notes to listing on the Official Listing of the
Luxembourg Stock Exchange and to trading on the Euro MTF market. Copies of the following documents
will, for so long as any notes are admitted to trading on the Euro MTF market, be available for inspection
during usual business hours at the specified office of the Luxembourg Paying Agent, Deutsche Bank
Luxembourg S.A., in Luxembourg:
k
This offering memorandum;
k
Our and the guarantors’ articles of incorporation;
k
The indenture (which includes the forms of notes as exhibits thereto); and
k
Our latest audited annual consolidated financial statements.
We do not prepare unconsolidated financial statements. None of the guarantors prepares
unconsolidated or consolidated financial statements.
5.
Deutsche Bank Luxembourg S.A. has been appointed as the Luxembourg Paying Agent and
Transfer Agent. The Luxembourg Paying Agent will act as intermediary between the holders of the notes
listed on the Euro MTF market of the Luxembourg Stock Exchange and us. For so long as any of the notes
are listed on the Euro MTF market of the Luxembourg Stock Exchange and the rules thereof so require, we
will maintain a paying and transfer agent in Luxembourg. We reserve the right to vary such appointment and
shall publish notice of such change of appointment in a newspaper having general circulation in Luxembourg
(which is expected to be the
) or on the Luxembourg Stock Exchange’s website, www.bourse.lu.
6.
Except as disclosed in this offering memorandum, so far as we are aware, no legal or
arbitration proceedings relating to claims or amounts that are material in the context of this offering are
pending, nor is any such litigation or arbitration threatened.
-173-
7.
The issuer
CITGO Petroleum Corporation is a Delaware corporation. Its registered office is at 1209 Orange
Street, Wilmington, Delaware 19801, United States of America. CITGO has issued 1,000 shares of common
stock, all of which are held by PDV America, Inc., an indirect wholly owned subsidiary of Petróleos de
Venezuela, S.A. The members of the board of directors of CITGO Petroleum Corporation are Alejandro
Granado, Eudomario Carruyo, Asdrúbal Chávez and Eulogio Del Pino.
8.
The guarantors
CITGO Refining and Chemicals Company L.P. is a Delaware limited liability partnership. Its
registered office is at 1209 Orange Street, Wilmington, Delaware 19801, United States of America. It is 99%
owned by CITGO Investment Company, which is wholly owned by the issuer, and 1% owned by the issuer.
The issuer is the general partner of CITGO Refining and Chemicals Company L.P.
CITGO Investment Company is a Delaware corporation. Its registered office is at 1209 Orange Street,
Wilmington, Delaware 19801, United States of America. It is a wholly owned holding company subsidiary of
the issuer. The members of the board of directors of CITGO Investment Company are Eduardo Assef,
Marshall G. Buzan, Jr. and Daniel Cortéz.
CITGO Pipeline Company is a Delaware corporation. Its registered office is at 1209 Orange Street,
Wilmington, Delaware 19801, United States of America. It is a wholly owned subsidiary of the issuer. The
members of the board of directors of CITGO Pipeline Company are Curtis A. Rowe, Simón A. Suárez and
Gustavo J. Velásquez.
VPHI Midwest, Inc. is a Delaware corporation. Its registered office is at 1209 Orange Street,
Wilmington, Delaware 19801, United States of America. It is a wholly owned holding company subsidiary of
the issuer. The members of the board of directors of VPHI Midwest, Inc. are Alejandro Granado, Jesús
Luongo and Amilkar Mata.
PDV Midwest Refining, L.L.C. is a Delaware limited liability company. Its registered office is at
1209 Orange Street, Wilmington, Delaware 19801, United States of America. Its sole member is VPHI
Midwest, Inc. The members of the management committee of PDV Midwest Refining, L.L.C. are Alejandro
Granado, James Cristman and Robert E. Kent, Jr.
9.
CITGO Petroleum Corporation and the guarantors referenced above, on a consolidated basis,
represented in excess of 75% of our consolidated revenues for the year ended December 31, 2009, and in
excess of 75% of our consolidated total assets as of December 31, 2009, and March 31, 2010, respectively.
-174-
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors’ Report to the Board of Directors and Shareholder of CITGO Petroleum
Corporation for the fiscal years ended December 31, 2009, 2008 and 2007.
F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008
F-4
Consolidated Statements of Income (Loss) and Comprehensive Income for the fiscal years ended
December 31, 2009, 2008 and 2007
F-5
Consolidated Statements of Shareholder’s Equity for the fiscal years ended December 31, 2009, 2008
and 2007
F-6
Consolidated Statements of Cash Flows for the fiscal years ended December 31, 2009, 2008 and 2007
F-7
Notes to Consolidated Financial Statements
F-9
Unaudited Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
F-52
Unaudited Condensed Consolidated Statements of Income (Loss) and Comprehensive Loss for the three
months ended March 31, 2010 and 2009
F-53
Unaudited Condensed Consolidated Statements of Shareholder’s Equity for the three months ended
March 31, 2010
F-54
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31,
2010 and 2009
F-55
Notes to Unaudited Condensed Consolidated Financial Statements
F-56
F-1
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 (“the Company”) as of December 31, 2009 and 2008, and the related consolidated statements
of income (loss) and comprehensive income, shareholder’s equity, and cash flows for each of the three
years ended December 31, 2009. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of CITGO Petroleum Corporation and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the three years ended
December 31, 2009, in conformity with accounting principles generally accepted in the United States of
America.
As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, included
in Accounting Standards Codification (“ASC”) Subtopic 715-20, Compensation – Retirement Benefits –
Defined Benefit Plans - General, as of December 31, 2007.
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, included in ASC Subtopic 74010, Income Taxes – Overall, effective as of January 1, 2007.
F-2
FASB SFAS No. 157, Fair Value Measurements and Disclosures, included in ASC Topic 820, Fair
Value Measurements and Disclosures, for fair value measurements of financial assets and financial
liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis as
of January 1, 2008. The Company adopted the provisions of this standard for fair value measurements of
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis as of January 1, 2009.
/s/ KPMG LLP
March 31, 2010
Houston, Texas
F-3
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
2009
2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Accounts receivable, net
Due from affiliates
Notes receivable from ultimate parent, PDVSA
Inventories
Current income tax receivable
Prepaid expenses and other
Assets held for sale
Total current assets
PROPERTY, PLANT AND EQUIPMENT - Net
RESTRICTED CASH
INVESTMENTS IN AFFILIATES
$
NOTE RECEIVABLE FROM ULTIMATE PARENT, PDVSA
OTHER ASSETS
352,705
737,967
97,233
611,195
594,949
190,293
185,085
1,468
2,770,895
4,313,454
25,190
78,126
$
65,205
276,453
23,925
791,474
165,187
1,000,000
675,597
15,033
454,560
96,864
3,222,640
4,241,365
56,008
72,157
325,336
$
7,529,323
$
7,917,506
$
863,328
690,011
158,177
1,313
144,257
13,249
175,762
406,357
6,746
-
$
752,858
359,949
170,493
111,753
73,798
154,761
285,572
6,357
5,439
27,018
LIABILITIES AND SHAREHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable
Payables to affiliates
Taxes other than income
Current income tax payable
Current deferred income taxes
Derivative liabilities
Other current liabilities
Current portion of long-term debt
Current portion of capital lease obligation
Dividends payable to parent, PDV America
Total current liabilities
LONG-TERM DEBT
CAPITAL LEASE OBLIGATION
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
OTHER NONCURRENT LIABILITIES
DEFERRED INCOME TAXES
COMMITMENTS AND CONTINGENCIES (Note 14)
SHAREHOLDER’S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized, issued and outstanding
Additional capital
Retained earnings
Accumulated other comprehensive loss
Total shareholder’s equity
$
See notes to consolidated financial statements.
F-4
2,459,200
1,771,586
17,643
535,682
453,800
572,655
1,947,998
2,191,649
24,317
491,498
561,943
744,057
1
1,659,698
210,940
(151,882)
1,718,757
1
1,659,698
511,893
(215,548)
1,956,044
7,529,323
$
7,917,506
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2009
2009
REVENUES:
Net sales
Sales to affiliates
2008
2007
$ 24,531,976
399,745
24,931,721
$ 40,734,259
545,477
41,279,736
$ 37,471,414
543,564
38,014,978
13,906
20,580
24,966,207
36,136
53,334
33,862
404,301
41,807,369
35,387
53,972
29,079
207,019
640,724
38,981,159
24,938,396
373,297
49,349
2,150
(47,923)
25,315,269
40,135,078
352,968
108,711
2,718
(37,625)
40,561,850
35,950,382
503,381
77,460
3,280
(17,271)
36,517,232
Equity in earnings of affiliates
Other income (expense), net
Insurance recoveries
Gain on sale of assets
Gain on sale of investments in affiliates
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including impairments of $52,341, -0- and -0and purchases from affiliates of $9,563,585,
$15,465,007 and $14,573,007 from affiliates)
Selling, general and administrative expenses
Interest expense, excluding capital lease
Capital lease interest charge
(LOSS) INCOME BEFORE INCOME TAXES (BENEFIT)
(349,062)
1,245,519
2,463,927
INCOME TAXES (BENEFIT)
(147,619)
444,075
877,741
NET (LOSS) INCOME
(201,443)
801,444
1,586,186
-
-
Unrealized change in investment security,
net of related tax expense (benefit) of
$-0- in 2009, $261 in 2008 and ($261) in 2007
-
451
Pension and postretirement adjustments,
net of tax expense (benefit) of $36,436 in 2009,
($113,698) in 2008 and $4,139 in 2007
63,666
(196,105)
7,139
63,666
(195,654)
6,723
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation gain
Total other comprehensive income (loss)
COMPREHENSIVE (LOSS) INCOME
$
F-5
(137,777)
$
605,790
35
(451)
$ 1,592,909
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Dollars and Shares in Thousands)
Common Stock
Shares Amount
$
1
Additional
Capital
Retained
Earnings
$1,659,698
$ 734,328
Accumulated Other
Comprehensive Income (Loss)
Pension &
Foreign Change in
Postretirement Currency Investment
Liability
Translation Securities
BALANCE, DECEMBER 31, 2006
1
Net income
-
-
-
-
-
-
-
-
-
-
-
-
(1,151,000)
-
-
-
-
(1,151,000)
-
-
-
(15,147)
-
-
-
-
(15,147)
1
1
(421)
(451)
Net income
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(196,105)
-
451
-
-
-
(1,330,000)
-
-
-
-
(1,330,000)
-
-
-
(105,000)
-
-
-
-
(105,000)
1
1
511,893
(215,127)
(421)
-
(215,548)
Net loss
-
-
-
(201,443)
-
-
-
-
(201,443)
Other comprehensive income
-
-
-
-
63,666
-
-
63,666
63,666
Indirect non-cash dividend to
parent, PDV America
-
-
-
(99,510)
-
-
-
-
(99,510)
1
1,586,186
$ (18,388)
$ (456)
$
-
Total
$ (18,844)
Total
Shareholder’s
Equity
-
-
-
-
-
-
-
-
-
(451)
$ 2,375,183
1,586,186
Adjustment to initially apply
ASC 740-10
(7,252)
(7,252)
ASC 715-20, net of tax
Other comprehensive income (loss)
-
(7,773)
7,139
35
(7,773)
6,723
(7,773)
6,723
Dividends paid to
parent, PDV America
parent, PDV America
1,659,698
1,147,115
801,444
(19,022)
(19,894)
2,786,920
801,444
ASC 715-60, net of tax
Other comprehensive income (loss)
(1,666)
-
(195,654)
(1,666)
(195,654)
Dividends paid to
parent, PDV America
parent, PDV America
$
1
1,659,698
$1,659,698
$ 210,940
F-6
$ (151,461)
$ (421)
$ -
$ (151,882)
1,956,044
$ 1,718,757
CONSOLIDATED STATEMENTS OF CASH FLOWS
2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision for losses on accounts receivable
Property impairments
Deferred income taxes
Dividends and distributions in excess of
(less than) equity in earnings of affiliates
Gain on sale of investments in affiliates
Other adjustments
Changes in operating assets and liabilities:
Accounts receivable and due from affiliates
Proceeds from sale of accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable and other current liabilities
Other noncurrent assets
Other noncurrent liabilities
Net cash provided by operating activities
$ (201,443)
446,006
8,679
52,341
(137,982)
2008
$
801,444
2007
1,586,186
458,970
4,844
134,396
453,845
4,869
(100,398)
3,047
(404,301)
5,322
(11,481)
(207,019)
(640,724)
10,190
(220,666)
186,757
86,586
91,138
649,121
(92,076)
(14,880)
860,580
889,106
39,513
68,475
258,013
(1,044,059)
(121,562)
76,257
1,169,465
(28,513)
172,750
(360,382)
(42,019)
(197,768)
45,997
685,533
(524,204)
21
30,818
(8,500)
-
(485,360)
(2)
815,163
(12,841)
13,287
-
(360,663)
(9,458)
248,056
(33,171)
756,000
(14,000)
(4,250)
(1,000,000)
21,525
Net cash (used in) provided by investing activities
(501,865)
330,247
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from revolving credit facilities
Payments on senior secured term loan
Proceeds from senior secured term loan
Payments on loans from affiliates
(Payment on) proceeds from bridge term loan
Payments on tax-exempt bonds
Proceeds from tax-exempt bonds
Payments of capital lease obligations
Dividends paid to parent, PDV America
Debt issuance costs
(13,711)
(6,357)
(25,000)
25,000
(5,367)
(4,500)
333,711
(19,986)
515,000
(1,000,000)
(19,850)
50,000
(6,547)
(1,330,000)
(7,186)
59,000
(6,496)
(35,000)
1,000,000
(11,800)
45,000
(8,434)
(1,339,000)
(22,205)
(29,935)
(1,484,858)
(318,935)
2,612
4,387
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, including interest capitalized
Leasehold improvements
Proceeds from sale of assets
Decrease (increase) in restricted cash
Proceeds from sales of investments in affiliates
Proceeds from sale of (investment in) available for sale securities
Investments in and advances to other affiliates
Loan to ultimate parent, PDVSA
Issuance costs on loan to ultimate parent, PDVSA
Net cash used in financing activities
(395,961)
(Continued)
F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
2009
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
$
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
328,780
2008
$
23,925
14,854
2007
$
9,071
(29,363)
38,434
CASH AND CASH EQUIVALENTS, END OF YEAR
$
352,705
$
23,925
$
9,071
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized
$
49,734
$
82,918
$
78,027
$
226,405
$
157,891
$
(19,559)
$
36,872
$
-
$
-
$
384
Income taxes for PDV Holding and subsidiaries, net of refunds of
$11,452 in 2009, $10,574 in 2008, and $899 in 2007 (Note 1 and 4)
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Capital expenditures
Capital leases (Note 15)
$
Indirect non-cash dividends (Note 4)
$
(99,510)
$ (105,000)
$
(15,147)
Crude payable offsets against note receivable from ultimate
parent, PDVSA (Note 4)
$
393,115
$
-
$
-
Crude payable / product receivable offsets with affiliates (Note 4)
$
116,912
$
-
$
-
Interest income on note receivable from ultimate parent, PDVSA (Note 4)
$
2,371
$
-
$
-
239
$ 1,210,149
(Concluded)
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Petróleos de Venezuela, S.A. (“PDVSA” or
“ultimate parent”), the national oil company of the Bolivarian Republic of Venezuela.
CITGO manufactures or refines and markets transportation fuels as well as lubricants, petrochemicals and
other industrial products. CITGO owns and operates three crude oil refineries (Lake Charles, Louisiana,
Corpus Christi, Texas, and Lemont, Illinois) with a combined aggregate rated crude oil refining capacity of
749 thousand barrels per day (“MBPD”) (unaudited). CITGO owned two asphalt refineries (Paulsboro,
New Jersey, and Savannah, Georgia), also known as CITGO Asphalt Refining Company (“CARCO”), with
an aggregate rated crude oil refining capacity of 112 MBPD. CITGO sold these two asphalt refineries to
NuStar Energy L.P. in March 2008. CITGO’s consolidated financial statements also include accounts
relating to a lubricant and wax plant, pipelines, and equity interests in pipeline companies and petroleum
storage terminals.
CITGO’s transportation fuel customers include CITGO branded wholesale marketers and other light oil
suppliers located in the United States mainly east of the Rocky Mountains. Asphalt was generally marketed
to independent paving contractors on the East and Gulf Coasts and in the Midwest of the United States.
Lubricants are sold principally in the United States to independent marketers, mass marketers and industrial
customers. Petrochemical feedstocks and industrial products are sold to various manufacturers and
industrial companies throughout the United States. Petroleum coke is sold primarily in international
markets. The Company operates as a single business and geographical segment.
Principles of Consolidation – The consolidated financial statements include the accounts of CITGO and its
subsidiaries (collectively referred to as the “Company”). All consolidated subsidiaries are wholly owned.
All material intercompany transactions and accounts have been eliminated.
The Company’s investments in less than majority-owned affiliates are accounted for by the equity method.
The excess of the carrying value of the investments over the equity in the underlying net assets of the
affiliates is amortized on a straight-line basis over 40 years, which is based upon the estimated useful lives
of the affiliates’ assets.
Estimates, Risks and Uncertainties - The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
CITGO’s operations can be influenced by domestic and international political, legislative, regulatory and
legal environments. In addition, significant changes in the prices or availability of crude oil and refined
products could have a significant impact on CITGO’s results of operations and cash flows for any particular
year.
Impairment of Long-Lived Assets - The Company periodically evaluates the carrying value of long-lived
assets or asset groups to be held and used when events or changes in circumstances indicate that the
F-9
carrying amount of an asset may not be recoverable, in accordance with FASB ASC Subtopic 360-10,
“Property, Plant and Equipment – Overall”. The carrying value of a long-lived asset or asset group is
considered impaired when the separately identifiable anticipated undiscounted net cash flow from such
asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset or asset group. Fair value is determined
primarily using the anticipated net cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are
reduced for disposal costs (Note 8).
Revenue Recognition - Revenue is generated from the sale of refined petroleum products to bulk
purchasers, wholesale purchasers and final consumers. Revenue recognition occurs at the point that title to
the refined petroleum product is transferred to the customer. That transfer is determined from the delivery
terms of the customer’s contract. In the case of bulk purchasers, delivery and title transfer may occur while
the refined petroleum products are in transit, if agreed by the purchaser; or may occur when the
hydrocarbons are transferred into a storage facility at the direction of the purchaser. In the case of
wholesale purchasers, delivery and title transfer generally occurs when the refined petroleum products are
transferred from a storage facility to the transport truck. Direct sales to the final consumer make up an
immaterial portion of revenue recognized by CITGO.
Supply and Marketing Activities - The Company engages in the buying and selling of crude oil to supply
its refineries. In order to obtain crude oil of a specific grade and quantity in a certain location, the Company
may enter a contract to sell a different grade and quantity at a different location. In the event that the
Company does not have the specified crude oil to satisfy its counterparty’s needs, it must purchase that
crude oil from a third party and sell it to the counterparty. 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. In a typical refined product buy/sell transaction, the Company enters into a contract to
buy a particular type of refined product at a specified location and date from a particular counterparty and
agrees to sell a particular type of refined product at a different location on the same or another specified
date. The value of the purchased volume may not equal the value of the sold volume due to grade or quality
differentials, location differentials or timing differences.
These refined product buy/sell transactions are monetary in nature and thus outside the scope of guidance
that would pertain to nonmonetary transactions. Additionally, the Company has evaluated the applicable
accounting guidance and recorded these transactions on a gross basis. The results of this activity are
recorded in cost of sales and sales, except for those buy/sell transactions made with the same counterparty
and in contemplation of each other, which are recorded on a net basis in accordance with “Accounting for
Purchases and Sales of Inventory with the Same Counterparty” guidance.
The characteristics of the refined product buy/sell transactions include gross invoicing between the
Company and its counterparties and cash settlement of the transactions. Nonperformance by one party to
deliver does not relieve the other party of its obligation to perform. Both transactions require physical
delivery of the product. The risks and rewards of ownership are evidenced by title transfer, assumption of
risk of loss and credit risk.
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.
F-10
Excise Taxes - The Company collects excise taxes on sales of gasoline and other motor fuels. Excise taxes
are collected from customers and paid to various governmental entities. Excise taxes are not included in
sales revenue.
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. Cash equivalents were $101 million and
$15 million at December 31, 2009 and 2008, respectively.
Inventories - Crude oil and refined product inventories are stated at the lower of cost or market. Cost is
determined using the LIFO method. Materials and supplies are valued using the average cost method.
Property, Plant and Equipment - Property, plant and equipment is reported at cost, less accumulated
depreciation. Depreciation is based upon the estimated useful lives of the related assets using the straightline method. Depreciable lives are generally as follows: buildings and leaseholds – 10 to 24 years;
machinery and equipment – 5 to 25 years; and vehicles – 3 to 10 years.
Upon disposal or retirement of property, plant and equipment, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is recognized.
The Company capitalizes interest on projects when construction entails major expenditures over extended
time periods. Such interest is allocated to property, plant and equipment and amortized over the estimated
useful lives of the related assets. Interest capitalized totaled $6 million and $10 million during 2009 and
2008, respectively.
Restricted Cash – The Company has restricted cash consisting of highly liquid investments held in trust
accounts in accordance with tax exempt revenue bonds due 2031 and 2043. Funds are released solely for
financing the qualified capital expenditures as defined in the bond agreement.
Securities Available for Sale – Securities classified as available for sale are carried at fair value.
Unrealized gains and losses are excluded from earnings and reported as accumulated comprehensive
income or loss, net of tax, until realized. Declines in the fair value of individual securities below cost that
are determined to be other-than-temporary would result in writedowns, as a realized loss, of the individual
securities to their fair value. Interest earned on these assets is included in interest income. The Company
sold its $14 million investment in a mutual fund in November 2008. Cash proceeds of $9 million were
received and losses of $5 million were recorded as realized losses in the consolidated statement of income
(loss) and comprehensive income. Unrealized losses of $451 thousand previously included in accumulated
other comprehensive income were reclassified out of equity.
On December 31, 2008, the Company reclassified a $22 million investment from cash and cash equivalents
to securities available for sale. At December 31, 2008, this investment was fully reserved. On October 31,
2008, an introducing broker failed to remit approximately $22 million that was reportedly invested in a
money market fund account. The broker was an introducing broker for a financial institution with whom
CITGO and its parent company had custodial brokerage accounts. After an investigation, CITGO and its
parent company learned that contrary to the instructions given to the broker, the broker had been investing
CITGO’s and its parent company’s surplus cash in certain bonds. The Company has cooperated with an
informal investigation into the broker by the U.S. Securities and Exchange Commission (“SEC”), and
continues to cooperate with the SEC, which subsequently filed an action against the broker and related
entities on May 20, 2009. Through its outside counsel, the Company had been negotiating with the broker
so that the broker could remit the $22 million to the Company. After the cessation of negotiations, CITGO
filed suit against the broker and related entities, including its principals, regarding this matter. The matter is
currently pending in an arbitration administered by Financial Industry Regulatory Authority, Inc. filed on
F-11
May 18, 2009. During the second quarter of 2009, the Company recovered $0.9 million from the financial
institution and subsequently reduced the reserved amount to $21 million.
Concentration of Credit Risk –The Company’s financial instruments that are exposed to concentrations of
credit risk consist principally of its cash equivalents, derivative financial instruments, notes and accounts
receivable and pension plan assets held in trust. The Company’s cash equivalents are in high-quality
securities placed with a wide array of institutions. Similar standards of creditworthiness and diversity are
applied to the Company’s counterparties to derivative instruments. Accounts receivable balances are
dispersed among a broad customer base and the Company routinely assesses the financial position of its
customers. The Company’s credit risk is dependent on numerous additional factors including the price of
crude oil and refined products, as well as the demand for and the production of crude oil and refined
products. The carrying amount of financial assets represents the maximum credit exposure.
Commodity Derivatives – The Company balances its crude oil and petroleum product supply/demand and
manages a portion of its price risk by entering into petroleum commodity derivatives. The Company uses
futures, forwards, swaps and options primarily to reduce its exposure to market risk. To manage these
exposures, management has defined certain benchmarks consistent with its preferred risk profile for the
environment in which the Company operates and finances its assets. CITGO does not attempt to manage
the price risk related to all of its inventories of crude oil and refined products.
In accordance with FASB ASC Topic 815, “Derivatives and Hedging”, fair values of derivatives are
recorded in other current assets or other current liabilities, as applicable, and changes in the fair value of
derivatives not designated in hedging relationships are recorded in cost of sales. The Company’s policy is to
elect hedge accounting only under limited circumstances involving derivatives with initial terms of 90 days
or greater and notional amounts of $50 million or greater. Hedge accounting was not used during the three
years ended December 31, 2009 (Note 16).
Refinery Maintenance - Costs of major refinery turnaround maintenance are capitalized and charged to
operations over the estimated period between turnarounds. Turnaround periods range from approximately
one to seven years. Unamortized costs are included in other current and noncurrent assets. Amortization of
refinery turnaround costs is included in depreciation and amortization expense. Amortization was
$141 million, $149 million, and $161 million for 2009, 2008, and 2007, 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 that do not contribute to current or future revenue generation are expensed. Liabilities are
recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably
estimated. Environmental liabilities are recorded at their undiscounted current value and without
consideration of potential recoveries from third parties which are recorded in other noncurrent assets.
Subsequent adjustments to estimates, to the extent required, may be made as more refined information
becomes available.
Income Taxes - The Company is included in the consolidated U.S. federal income tax return filed by PDV
Holding, Inc. (“PDV Holding”), the direct parent of PDV America. The Company’s current and deferred
income tax expense has been computed on a stand-alone basis using an asset and liability approach. Under
this approach, deferred income taxes reflect the net tax effects of temporary differences between the
financial and tax basis of assets and liabilities, and loss and tax credit carryforwards. Deferred amounts are
measured using enacted tax rates expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. Under the requirements for nonpublic entities, the
Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, included in
FASB ASC Subtopic 740-10 – “Income Taxes – Overall”, in 2009, but has shown the adoption as of
F-12
January 1, 2007 as was required for public entities. With the adoption of this new accounting principle the
Company recognizes the effect of income tax positions only if those positions are more likely than not of
being sustained. Recognized income tax positions are measured at the largest amount that is greater than
50% likely of being realized. Changes in recognition or measurement are reflected in the period in which
the change in judgment occurs. Prior to the adoption of Interpretation 48, the Company recognized the
effect of income tax positions only if such positions were probable of not being sustained. The Company
records interest related to unrecognized tax benefits in interest expense and penalties in selling, general and
administrative expenses.
New Accounting Standards – In June 2009, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB
Statement No. 162” (the “Codification”). The Codification modifies the nongovernmental generally
accepted accounting principles (“GAAP”) hierarchy into authoritative standards and guidance that is
nonauthoritative. All other non-grandfathered, non-Securities and Exchange Commission (“SEC”)
accounting literature not included in the Codification will become nonauthoritative. On the effective date
of the Codification, the ASC became the single source of U.S. GAAP used by nongovernmental entities in
the preparation of financial statements, except for rules and interpretive releases of the SEC under authority
of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The
Codification became effective during 2009. The adoption of the Codification has only modified the
Company’s reference to GAAP literature in the notes to the Company’s consolidated financial statements.
In December 2007, the FASB issued an accounting standard, “Business Combination – a replacement of
FASB No. 141”, subsequently amended in April 2009, which was codified into ASC 805-20-25. ASC 80520-25 requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at fair value on the acquisition date. ASC 805-20-25 also requires the Company to
recognize at fair value an asset acquired or a liability assumed in a business combination that arises from a
contingency if the fair value of that asset or liability can be determined at the acquisition date. This standard
replaces the cost-allocation process and applies to all business entities, including mutual entities and
combinations by contract alone. ASC 805-20-25 became effective for the Company on January 1, 2009.
The Company will comply with this statement prospectively in future acquisitions.
Also in December 2007, the FASB issued an accounting standard, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51”, which was codified into ASC 810-1065-1. ASC 810-10-65-1 establishes accounting and reporting standards for noncontrolling interests by
requiring noncontrolling interests be treated as a separate component of equity, not as a liability or other
item outside of equity. It also requires disclosure of the amounts attributable to the parent and to the
noncontrolling interest on the consolidated statement of income. ASC 810-10-65-1 became effective for
the Company on January 1, 2009; earlier adoption was prohibited. The provisions in this accounting
principle must be applied on a retrospective basis. The adoption of this standard had no impact on the
Company’s financial position and results of operations.
In February 2008, the FASB issued an accounting standard, “Fair Value Measurements and Disclosures Effective Date of FASB Statement No. 157”, which delayed the effective date for disclosing all nonfinancial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value
on a recurring basis to fiscal years beginning after November 15, 2008. The standard was codified into
ASC 820-10. ASC 820-10 applies to impaired property, plant and equipment and the initial recognition of
the fair value of asset retirement obligations. ASC 820-10 became effective for the Company on January 1,
2009. The adoption of this standard had no material impact on the Company’s financial position and results
of operations (Note 17).
F-13
In March 2008, the FASB issued an accounting standard, “Derivatives and Hedging”, which was codified
into ASC 815-10-65. ASC 815-10-65 requires enhanced disclosures about an entity’s derivative and
hedging activities and was effective for the Company on January 1, 2009. Except for the required
presentation and disclosure, the adoption of this standard had no impact on the Company’s financial
position and results of operations (Note 16).
In November 2008, the FASB issued an accounting standard, “Equity Method Investment Accounting
Considerations”, which was codified into ASC 323-10. ASC 323-10 requires entities to measure equitymethod investments initially at cost and to recognize other than temporary impairment of equity-method
investments in accordance with ASC 323-10-15, “The Equity Method of Accounting for Investments in
Common Stock”. An equity-method investor shall not separately test an investee’s underlying assets for
impairment but should recognize its share of any impairment charge recorded by an investee in accordance
with ASC 323-10-15. An equity investor shall account for a share issuance by an investee as if the investor
had sold a proportionate share of its investment. Any gain or loss to the investor resulting from an
investee’s share should be recognized in earnings. This standard became effective for the Company on
January 1, 2009. The adoption of this standard had no impact on the Company’s financial position and
In December 2008, the FASB issued an accounting standard, “Employers’ Disclosures about Pensions and
Other Postretirement Benefits”, which was codified into ASC 715-20-65. ASC 715-20-65 requires
employers to make additional disclosures about its plan assets for defined benefit pension or other
postretirement plans. The additional disclosures are to help users of financial statements understand (i) how
investment allocation decision are made, (ii) the major categories of plan assets, (iii) the inputs and
valuation techniques used to measure the fair value of plan assets, (iv) the effect of fair-value measurements
using significant unobservable inputs on changes in plan assets for the period, and (v) significant
concentrations of risk within plan assets. This standard also includes a technical amendment that requires a
nonpublic entity to disclose net periodic benefit cost for the period. The requirement applies to employers
that are subject to the disclosure requirements under Topic ASC 715-20-50. This standard became effective
for the Company on December 31, 2009. Except for the required presentation and disclosure, the adoption
of this standard had no impact on the Company’s financial position and results of operations. (Note 12).
In April 2009, the FASB issued an accounting standard, “Subsequent Events”, which was codified into
Topic 855. ASC 855 establishes accounting and reporting standard for events that occur after the balance
sheet date but before the issuance of the financial statements. This standard became effective for the
Company for interim and annual periods ending after June 15, 2009. This standard requires the entity to
recognize in the financial statements the effects of all subsequent events that provide additional evidence
about conditions that existed at the date of the balance sheet, including the estimates inherent in the process
of preparing financial statements. An entity is also required to disclose the date through which subsequent
events have been evaluated. The adoption of this standard had no material impact on the Company’s
financial position and results of operations (Note 19).
In August 2009, the FASB issued Accounting Standard Update (“ASU”) 2009-05, “Fair Value
Measurements and Disclosures – Measuring Liabilities at Fair Value”, which was codified into Topic 820.
ASU 2009-05 provides clarification that in the circumstance when a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value by using one of the
following techniques: (i) a valuation technique that uses the quoted price of the identical liability or quoted
price of similar liabilities when traded as assets, or (ii) a present value technique or based on the amount a
reporting entity would pay to transfer the identical liability or would receive to enter into the identical
liability. The update also clarifies that when measuring the fair value of liabilities, a reporting entity is not
required to adjust inputs relating to the existence of a restriction that prevents the transfer of the liability.
The update is effective for interim and annual periods beginning after its issuance. The adoption of this
standard had no material impact on the Company’s financial position and results of operations.
F-14
In September 2009, the FASB issued ASU 2009-06, “Income Taxes – Implementation Guidance on
Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities”. ASU
2009-06 amends disclosure requirements for nonpublic entities for unrecognized tax benefits. The guidance
is not intended to change practice but to provide implementation guidance on accounting for uncertainty in
income taxes in accordance with ASC 740, “Income Taxes”. ASC 740 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. If a tax position is more likely than not to be sustained upon
examination, then an enterprise would be required to recognize in its financial statements the largest amount
of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company deferred
the application of accounting guidance on income tax uncertainties pursuant to the guidance in ASC
paragraph 740-10-65-1(e). ASU 2009-06 becomes effective upon adoption of that guidance. The Company
adopted this standard in 2009. The impact of the adoption of this standard is recorded in the Company’s
financial statements (Note 2 and 13).
In September 2009, the FASB issued ASU 2009-12, “Fair Value Measurements and Disclosures –
Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”. ASU 200912 permits investors to use net asset value (“NAV”) as a practical expedient when measuring the fair values
of an investment that does not have a readily determinable fair value. ASU 2009-12 requires disclosures, by
major category of investment, about the attributes of those investments such as (i) the nature of any
restrictions on the investor’s ability to redeem its investments at the measurement date, (ii) any unfunded
commitments, and (iii) the investment strategies of the investees. ASU 2009-12 became effective for the
Company at December 31, 2009. The adoption of this standard had no material impact on the Company’s
financial position and results of operations.
In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing - Accounting for Transfer of
Financial Assets”. ASU 2009-16 amends the ASC on Topic 860-10 for the issuance of SFAS No. 166,
“Accounting for Transfers of Financial Assets - an amendment of FASB Statement No. 140”, in June 2009.
ASU 2009-16 is to improve the relevance and comparability of the information that a reporting entity
provides in its financial statements about (i) a transfer of financial assets (ii) the effects of the transferred
financial assets on the entity’s financial statements and (iii) a transferor’s continuing involvement in
transferred assets. SFAS No. 166 eliminates the concept of a qualifying special-purpose entity. The
statement limits circumstances in which a transferor derecognizes a financial asset. It clarifies the
requirement that a transferred financial asset be legally isolated from the transferor. ASU 2009-16 requires
enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing
involvement in transferred financial assets. The guidance is effective for annual reporting periods that begin
after November 15, 2009, for interim periods within the first annual reporting period, and for interim and
annual reporting periods thereafter, with early adoption prohibited. The Company will adopt this standard
effective January 1, 2010. The adoption of this standard is not expected to have a material impact on the
In December 2009, the FASB issued ASU 2009-17, “Consolidation – Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities”. ASU 2009-17 amends the ASC on Topic 810-10
for the issuance of SFAS No. 167, “Amendments to FASB Interpretation FASB No. 46(R)”, in June 2009.
The amendment requires a company to perform an analysis to determine whether a variable interest gives
the entity a controlling financial interest in a variable interest entity. The primary beneficiary of a variable
interest entity is the company that has (a) the power over the significant activities of the variable interest
entity and (b) an obligation to absorb losses or the right to receive benefits that could potentially be
significant to the variable interest entity. The revised guidance requires ongoing reassessments of whether a
company is the primary beneficiary and eliminates the quantitative approach previously required for
determining the primary beneficiary. The guidance is effective for annual reporting periods that begin after
November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual
reporting periods thereafter, with early adoption prohibited. The Company will adopt this standard effective
F-15
January 1, 2010. The Company is currently evaluating the impact, if any, of ASU 2009-17 on its financial
position and results of operations.
2.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted several new accounting standards in 2009, none of which had a material impact on
the Company’s financial position or results of operations, except the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes”, included in ASC Subtopic 740-10, “Income Taxes –
Overall” and ASU 2009-06, “Income Taxes – Implementation Guidance on Accounting for Uncertainty in
Income Taxes and Disclosure Amendments for Nonpublic Entities”. The Company adopted these new
standards in 2009 effective as of January 1, 2007 and revised prior years’ financial statements as if adopted
based on the requirements for public entities. ASC 740 established the minimum threshold for recognizing
and measuring the benefits of tax return positions in financial statements. The adoption of this
interpretation resulted in a decrease to retained earnings of $7 million in 2007, the year the adoption was
effective and an additional $3 million decrease in net income in 2008. For the year ended December 31,
2009, the Company recognized approximately $0.5 million of interest expense related to uncertain tax
position. The Company recognized interest related to unrecognized tax benefits as operating expense in the
statement of operations. At December 31, 2009, the Company had accrued interest liability of $4 million.
The Company does not expect its unrecognized tax benefit to change significantly over the next twelve
months.
3.
REFINERY AGREEMENTS
An affiliate of PDVSA has a 50% equity interest in a joint venture that owns and operates a refinery in St.
Croix, U.S. Virgin Islands (“HOVENSA”) and has the right under a product sales agreement to assign
periodically to CITGO, or other related parties, its option to purchase 50% of the refined products produced
by HOVENSA (less a certain portion of such products that HOVENSA will market directly in the local and
Caribbean markets). In addition, under the product sales agreement, the PDVSA affiliate has appointed
CITGO as its agent in designating which of its affiliates shall from time to time take deliveries of the
refined products available to it. The product sales agreement will be in effect for the life of the joint
venture, subject to termination events based on default or mutual agreement (Note 4). Pursuant to the
above arrangement, CITGO acquired approximately (unaudited) 134 MBPD, 142 MBPD, and 156 MBPD
of refined products from HOVENSA during 2009, 2008, and 2007, respectively, approximately one-half of
which was gasoline, for which $3.3 billion, $5.7 billion and $4.9 billion is included in purchases from
affiliates for 2009, 2008 and 2007, respectively.
4.
The Company purchases approximately 40% of the crude oil processed in its refineries from subsidiaries of
PDVSA under long-term supply agreements and spot purchases. On December 1, 2008, the Company
entered into an agreement with PDVSA which combines all crude oil purchases for the Lake Charles
refinery and Corpus Christi refinery in a single agreement, which extends through March 31, 2012 and can
be extended further under the terms of the agreement. Either party may provide notice of cancellation of
their current crude oil supply agreement at the end of the term or any renewal term at least one year prior to
the expiration date. The Company’s crude oil purchase commitment under the agreement is approximately
250 MBPD.
The long-term crude oil supply agreement requires PDVSA to supply minimum quantities of crude oil to
CITGO. The crude oil supply agreement pertaining to the Lake Charles and Corpus Christi refineries
incorporates formulas based on the spot market values of widely traded crudes and other hydrocarbons plus
an adjustment for market change.
F-16
The feedstock supply agreement (“FSA”) for the supply of naphtha, which remains in effect for the Corpus
Christi refinery through 2012, incorporates a formula price based on the market value of a slate of refined
products deemed to be produced from each particular grade of feedstock, less (i) specified deemed refining
costs; (ii) specified actual costs, including transportation charges, actual cost of natural gas and electricity,
import duties and taxes; and (iii) a deemed margin. Under the FSA, 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 feedstock do not necessarily
reflect the actual costs and yields in any period, the actual refining margin earned by CITGO under the FSA
will vary depending on, among other things, the efficiency with which CITGO conducts its operations
during such period.
The Company purchased $6.2 billion, $9.6 billion, and $9.5 billion of crude oil, feedstocks, and other
products from wholly-owned subsidiaries of PDVSA in 2009, 2008, and 2007, respectively, under these and
other purchase agreements. At December 31, 2009 and 2008, $459 million and $263 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 HOVENSA (see Note
3) and Mount Vernon Phenol Plant Partnership, under long-term contracts. These agreements incorporate
various formula prices based on published market prices and other factors. Such purchases totaled $3.4
billion, $5.8 billion, and $5.1 billion for 2009, 2008, and 2007, respectively. Any portion of the
HOVENSA purchases that were donated are reflected in the statement of income (loss) as selling, general
and administrative expense. At December 31, 2009 and 2008, $150 million and $33 million, respectively,
were included in payables to affiliates as a result of these transactions.
The Company had refined product, feedstock, and other product sales to affiliates, primarily at
market-related prices, of $400 million, $545 million, and $544 million in 2009, 2008, and 2007,
respectively. At December 31, 2009 and 2008, $61 million and $85 million, respectively, were included in
due from affiliates as a result of these and related transactions.
During 2009, the Company sold $117 million of refined products to a PDVSA affiliate. The receivable
related to this transaction was offset by reducing the payable to PDVSA for crude oil purchases.
In December 2007, CITGO entered into a one-year, $1 billion note receivable from PDVSA. The original
note bore interest at 3.82% per annum paid quarterly. The note was extended in December 2008 with a
maturity date of December 17, 2009 and bore interest at 1.36% per annum paid quarterly. The Company
and PDVSA entered into a letter of intent in October 2009 to extend the note past the December 17, 2009
maturity date and agreed to the terms of the amortization of the balance of the note. The definitive
agreement including an offset payment agreement and the new promissory note was executed on February
2, 2010. The note will be amortized by offset of two designated cargoes of crude oil delivered by PDVSA
each month commencing in August 2009 and continuing until the note is paid in full. The remaining
outstanding balance would become due no later than December 31, 2010 if the offset arrangement were to
be terminated for any reason. Under the definitive agreement, the note will continue to bear interest at
1.36% per annum. At December 31, 2009 and 2008, the outstanding principal balance of the note was $607
million and $1 billion, respectively. The Company recorded interest income of approximately $12 million,
$58 million, and $2 million related to the note in the consolidated statement of income (loss) for the years
ended December 31, 2009, 2008, and 2007, respectively.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment of rent, stipulated loss
value and terminating value due under the lease of the Corpus Christi refinery facilities described in
Note 15. The Company has also guaranteed debt of certain affiliates (Note 14).
F-17
The Company and PDV Holding are parties to a tax allocation agreement that is designed to provide PDV
Holding with sufficient cash to pay its consolidated income tax liabilities. PDV Holding appointed CITGO
as its agent to handle the payment of such liabilities on its behalf. As such, CITGO calculates the taxes due,
allocates the payments among the members according to the agreement and bills each member accordingly.
Each member records its amounts due from or payable to CITGO in a related party payable account. At
December 31, 2009, CITGO had net related party payables related to federal income taxes of $31 million
included in payables to affiliates. At December 31, 2008 CITGO had a $16 million net related party
receivable related to federal income taxes included in due from affiliates.
At December 31, 2009, the Company has federal income tax receivables of $181 million included in current
assets. At December 31, 2008, CITGO had federal income taxes payables of $105 million included in other
current liabilities.
At December 31, 2009, the Company has $14 million in payables to affiliates relating to insurance policies
obtained through a subsidiary of its ultimate parent. There was no outstanding balance at December 31,
2008.
CITGO, from time to time, provides services for and makes payments on behalf of its ultimate parent
company for various items such as medical expenses, travel and accommodations, advertising and
transportation. In addition, the Company transferred certain non-operating assets to its ultimate parent
during 2008 and 2009. In order to settle these payments, indirect non-cash dividends of approximately
$100 million and $105 million were declared in 2009 and 2008, respectively.
The Company also sold certain non-operating assets and related spare parts to its ultimate parent in
November 2009 for $69 million. No gain or loss was recorded by the Company as a result of this
transaction. At December 31, 2009, $4 million of current notes receivable and $65 million of noncurrent
notes receivable are included on the consolidated balance sheet related to this transaction. The receivable
related to this transaction is scheduled to be paid to the Company as the shareholder receives payments on
certain bonds they hold. Payments will be received each April and October through April 2017.
5.
ACCOUNTS RECEIVABLE
2009
2008
(000s omitted)
Trade
Credit card
Other
Allowance for uncollectible accounts
$ 623,861
47,664
85,248
756,773
(18,806)
$ 668,361
64,974
79,142
812,477
(21,003)
$ 737,967
$ 791,474
Sales are made on account, based on pre-approved unsecured credit terms established by CITGO
management. Allowances for uncollectible accounts are established based on several factors that include,
but are not limited to, analysis of specific customers, historical trends and other information.
The Company has a limited purpose consolidated subsidiary, CITGO AR2008 Funding Company, LLC
(“AR Funding”), which in June 2008 established a non-recourse agreement to sell an undivided interest in
specified trade accounts receivables (“pool”) to independent third parties. Under the terms of the
agreement, new receivables are added to the pool as collections (administrated by CITGO) reduce
previously sold receivables. CITGO pays specified fees related to its sale of receivables under the program.
F-18
The outstanding invested amount of the interest sold to third parties at any one time under the trade
accounts receivable sales agreement is limited to a maximum of $450 million. The duration of this facility
is 364 days. The Company renewed this facility in June 2009 for another year.
As of December 31, 2009 and 2008, $887 million and $631 million, respectively, of CITGO’s accounts
receivable comprised the designated pool of trade receivables owned by AR Funding. As of December 31,
2009 and 2008, a $226 million and $39 million investment in the receivables in the designated pool had
been sold to the third parties and the remainder of the receivables was retained by AR Funding. This
retained interest which is included in accounts receivable, net in the consolidated balance sheets, is recorded
at fair value. Due to (i) a short average collection cycle for such trade receivables, (ii) CITGO’s positive
collection history, and (iii) the characteristics of such trade accounts receivable, the fair value of CITGO’s
retained interest approximates the total amount of trade accounts receivable reduced by the outstanding
invested amount of the third parties in the trade accounts receivable in which interests are sold to the third
parties under the facility.
CITGO recorded no gains or losses associated with the sales in the year ended December 31, 2009 and
2008 other than the fees incurred by CITGO related to this facility, which were included in other income
(expense), net in the consolidated statements of income. Such fees were $8 million for both years ended
December 31, 2009 and 2008. The third party’s outstanding investments in CITGO trade accounts
receivable were never in excess of the sales facility limits at any time under this program.
CITGO is responsible for servicing the transferred receivables for which it receives a monthly servicing fee
equal to 1% per annum times the average outstanding amount of receivables in the program for the prior
month. Because the servicing fee is an intercompany obligation from AR Funding to CITGO, CITGO does
not believe that it incurs incremental costs associated with the activity. CITGO has not, on a consolidated
basis, recorded any servicing assets or liabilities related to this servicing activity.
6.
INVENTORIES
2009
2008
(000s omitted)
Refined product
Crude oil
Materials and supplies
$
328,386
173,736
92,827
$
435,491
154,590
85,516
$
594,949
$
675,597
At December 31, 2009 and 2008, estimated net market values exceeded historical cost by approximately $1.5
billion and $883 million, respectively.
The reduction of hydrocarbon LIFO inventory quantities resulted in a liquidation of prior years’ LIFO layers
and decreased cost of goods sold by $287 million, $116 million, and $240 million in 2009, 2008, and 2007,
respectively. The liquidation of prior year’s LIFO layers increased the gain on sale of assets by $98 million
in 2008.
F-19
7. ASSETS HELD FOR SALE
CITGO Lubes and Wax Plant (“CLAW”) is a wholly-owned lubricant refinery of CITGO located in Lake
Charles, Louisiana. In August 2008, CITGO engaged an investment banker to market CLAW’s fixed assets.
The assets were reclassified as assets held for sale in the accompanying consolidated balance sheet. At
December 31, 2008, marketing of the assets was still in progress. As of December 31, 2008, the aggregate
carrying value of CLAW’s net property, plant and equipment, prepaid major refinery turnaround
maintenance, and warehouse materials and supplies inventory included in assets held for sale was $96
million.
Due to the current market conditions, the timing of the disposal of CLAW is uncertain and disposal was
unlikely to happen in 2009. As a result, these assets were no longer classified as held for sale in September
2009. The depreciation expense and turnaround amortization of approximately $9 million and $6 million,
respectively, which were not recognized during the held for sale period, were recognized at the date the
related assets were reclassified from assets held for sale back to property, plant and equipment and current
and noncurrent other assets. The remaining balance of $6 million was reclassified back to materials and
supplies inventory. See Note 8.
The Company and Shell Oil Products U.S. have entered into an agreement for the sale of their jointly-owned
Louisville, Kentucky terminal. As of December 31, 2009 and 2008, the carrying value of the terminal
included in assets held for sale was $1 million. No impairment was recognized at the time of reclassification
of the assets to assets held for sale.
In October 2009, CITGO decided to market its South Louisiana Gathering System (“SLGS”) and reclassified
it to assets held for sale. In connection with the sales plan, a loss of less than $1 million was recorded, which
represents the excess of the carrying value over the estimated selling price.
The following presents the detail of assets held for sale as of December 31, 2009 and 2008:
2009
2008
(000s omitted)
Property, plant and equipment and prepaid
major refinery turnaround maintenance
Accumulated depreciation
Net property, plant and equipment
Inventories
Total assets held for sale
F-20
$
6,347
(4,879)
1,468
-
$
1,468
$ 259,284
(168,358)
90,926
5,938
$
96,864
8. PROPERTY, PLANT AND EQUIPMENT
2009
2008
(000s omitted)
Land
Buildings and leaseholds
Machinery and equipment
Vehicles
Construction in process
$
Accumulated depreciation and amortization
117,971
683,636
6,275,021
35,624
567,091
7,679,343
(3,365,889)
$ 4,313,454
$
117,966
660,291
6,114,016
31,169
391,463
7,314,905
(3,073,540)
$ 4,241,365
Depreciation expense for 2009, 2008, and 2007 was $298 million, $285 million, and $286 million,
respectively.
Net losses on disposals, impairments and retirements of property, plant and equipment were approximately
$31 million, $4 million, and $9 million in 2009, 2008, and 2007, respectively.
At December 31, 2009, management evaluated several options for the utilization of the CLAW facility. The
most probable option was a blend of projects utilizing specific groupings of the assets in the facility. This
option required the Company to categorize assets into separate asset groups for the purpose of this analysis.
Based on the most probable option and in adherence with ASC 360-10-05-4 guidance, the Company
recorded an impairment of certain CLAW assets. The carrying value of the CLAW assets that would no
longer be utilized for the most probable option is included in the impairment amount. On December 31,
2009, the Company recorded an impairment of $52 million, of which $27 million was related to property,
plant and equipment. The remaining $25 million of impairment was related to prepaid major refinery
turnaround maintenance associated with those operating units which were written off and is recorded in
other current and noncurrent assets. This impairment was recorded in cost of sales in the consolidated
statement of income (loss).
F-21
9.
The Company’s investments in affiliates consist primarily of equity interests of 9.5% to 50% in joint
interest pipelines and terminals; a 49.5% partnership interest in Nelson Industrial Steam Company
(“NISCO”), which is a qualified cogeneration facility; and a 49% partnership interest in Mount Vernon
Phenol Plant. The carrying value of these investments exceeded the Company’s equity in the underlying
net assets by approximately $11 million at December 31, 2009 and approximately $12 million at December
31, 2008, which is being amortized over the estimated life of the investments.
Information on the Company’s investments follows:
Company’s investments in affiliates
Company’s equity in earnings of affiliates
Dividends and distributions received from affiliates
$
2009
2008
(000s omitted)
78,126
13,906
16,518
$
72,157
36,136
39,183
2007
$
76,355
35,387
23,906
Selected (unaudited) financial information provided by the affiliates is summarized as follows:
2009
Summary of financial position:
Current assets
Noncurrent assets
Current liabilities (including debt of $7,914,
$7,914, and $147,643 at December 31, 2009,
2008, and 2007, respectively)
Noncurrent liabilities (including debt of $67,877,
$82,791, and $83,705 at December 31, 2009,
2008, and 2007, respectively)
Summary of operating results:
Revenues
Gross profit
Net income
F-22
$
192,419
279,441
2008
(000s omitted)
$
233,338
289,927
2007
$
291,288
340,423
177,992
183,746
376,176
116,082
132,742
138,630
$ 1,076,318
181,512
73,433
$ 1,902,934
162,593
100,708
$ 1,611,802
169,582
79,438
10. ASSET RETIREMENT OBLIGATIONS
The Company accounts for asset retirement obligations in accordance with ASC 410-20, “Accounting for
Asset Retirement Obligations” and adopted the provision of “Accounting for Conditional Asset Retirement
Obligations" effective December 31, 2005. This interpretation clarifies that an entity is required to
recognize a liability for all legal obligations, including conditional obligations, to perform asset retirement
activities if the fair value of the obligation can be reasonably estimated. The Company has asset retirement
obligations with respect to asbestos abatement on certain of its refinery assets. Application of ASC 410-2025 increased property, plant and equipment, net, by $9.2 million and established an asset retirement
obligation of $23.7 million in the year of adoption. The asset retirement costs are capitalized as part of the
carrying amount of property, plant and equipment, net, and depreciated over the period that the asset is
expected to contribute directly or indirectly to future cash flows. After the initial measurement of the asset
retirement obligation, the liability is adjusted at the end of each reporting period to reflect changes in the
estimates and accretion of the liability.
Changes in asset retirement obligations, which are included in other noncurrent liabilities in the
accompanying consolidated balance sheets, are as follows:
2009
2008
(000s omitted)
Balance, January 1
Accretion expense
Spending on existing obligation
Balance, December 31
$
$
F-23
23,052
1,441
(859)
23,634
$
$
22,806
1,784
(1,538)
23,052
11. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
2009
2008
(000s omitted)
Secured Revolving Credit Facility with variable interest rate
$
400,000
$
413,711
Senior Secured Term Loan B, due 2012 with variable interest rate
610,286
616,643
Senior Secured Term Loan A, due 2012 with variable interest rate
515,000
515,000
Tax-Exempt Bonds, due 2023 to 2043 with variable
and fixed interest rates
592,657
592,652
Taxable Bonds, due 2026 with variable interest rates
60,000
60,000
2,177,943
2,198,006
(406,357)
Total long-term debt
$ 1,771,586
(6,357)
$ 2,191,649
Senior Secured Credit Facility -- On November 15, 2005, the Company entered into an agreement for a
$1.85 billion senior secured credit facility, which consists of the five-year secured revolving credit facility
in the amount of up to $1.15 billion and the seven-year senior secured term loan B of $700 million. This
agreement was amended in 2007 to provide for a $1 billion bridge term loan. The bridge term loan was
replaced in June 2008 with a senior secured term loan A of $515 million and a non-recourse agreement to
sell an undivided interest of up to $450 million in specified accounts receivable (Note 5). These agreements
are collectively referred to as the “senior secured credit facility”. The credit facility is secured by CITGO’s
interests in its Lake Charles, Louisiana and Corpus Christi, Texas refineries, its trade accounts receivable
and its inventories and is subject to covenants typical for senior secured financings.
Secured Revolving Credit Facility – The $1.15 billion, five-year, secured revolving credit facility matures
in November 2010. The interest rate on the secured revolving credit facility was 1.49% and 3.25% at
December 31, 2009 and 2008, respectively. At December 31, 2009 and 2008, $400 million and $414
million, respectively, were outstanding under this secured revolving credit facility. The unused portion of
the secured revolving credit facility (less letters of credit issued under the facility) is subject to a quarterly
commitment fee ranging from 15 to 50 basis points or 20.0 basis points at December 31, 2009 (Note 14).
The Company’s plan for 2010 is to refinance the secured revolving credit facility and restructure its debt
portfolio. The Company has begun discussions with existing lenders and other banks and expects to
refinance the secured revolving credit facility and restructure its debt portfolio during the second quarter of
2010. In the event the Company is unable to refinance its current secured revolving credit facility, the
Company would consider optimizing working capital, monetizing non-strategic assets and working with its
ultimate parent to ensure payments of its obligations.
Senior Secured Term Loan B – The Company entered into a $700 million senior secured term loan
agreement in November 2005. The proceeds from the loan were used to redeem certain senior notes. The
senior secured term loan B due in 2012 has a variable interest rate based on the senior secured debt rating.
The interest rate at December 31, 2009 was LIBOR plus 150.0 basis points or 1.72%.
Senior Secured Term Loan A – The Company entered into a $515 million senior secured term loan
agreement in June 2008. The senior secured term loan A due in 2012 has a variable interest rate based on
F-24
the senior secured debt rating. The Company had a principal balance of $515 million outstanding as of
December 31, 2009. The interest rate at December 31, 2009 was LIBOR plus 212.5 basis points or 2.35%.
The ratings on the senior secured credit facility, as currently assessed by the three major debt rating
agencies, are as follows:
Secured
Standard & Poor's Ratings Group
Moody's Investors Service
Fitch Investors Services, Inc.
BB+
Ba1
BBB-
In the event of a downgrade in the ratings on the senior secured credit facility, the interest rate on the
facility would increase by 25 basis points for both term loans and the revolver.
Covenants - The Company executed an amendment and waiver to the senior secured credit facility on
February 4, 2010. The amendment:
permits the Company to refinance existing indebtedness in whole or in part;
modifies certain covenants under the existing credit agreement;
permits the Company to issue up to $400 million of secured indebtedness in connection with
industrial revenue bond financings;
restricts the Company from declaring and paying dividends so long as the covenant waivers remain
in effect and thereafter the payment of dividends will be subject to a minimum liquidity
requirement of $500 million, after giving effect to such dividends, and to a maximum capitalization
of 0.55 to 1. A declaration or payment of dividends during the waiver period would, in effect,
terminate the covenant waivers. In addition, the dividend calculation was revised to include 100%
of net income arising after January 1, 2009;
waives the interest coverage ratio through September 30, 2010 and revises it to 1.5 to 1 at
December 31, 2010. The interest coverage ratio requirement will increase each quarter until it
returns to 3 to 1 at December 31, 2011;
waives the capitalization ratio for December 31, 2009 and revises it to 0.60 to 1 thereafter;
includes a minimum liquidity requirement of $300 million at March 31, 2010, increasing to $400
million at June 30, 2010, which will remain in effect through September 30, 2011;
revises the security to include the Company’s interest in the Lemont, Illinois refinery.
The various credit agreements under the senior secured credit facility described above reflect the same
covenants based on the senior secured credit facility agreement originally executed in 2005, as amended in
2007, as supplemented in 2008 and as further amended in 2010 as discussed above. Material covenant
provisions include:
aggregate proceeds of a disposition of assets cannot exceed $4 billion other than certain permitted
exceptions including inventory in the normal course of business;
F-25
other indebtedness not otherwise expressly permitted by the senior secured credit facility cannot
exceed an aggregate principal amount of $200 million or 10% of net worth;
the Company may declare and pay cash dividends out of the sum of 100% of net income arising
after January 1, 2005, plus an additional amount of up to $4 billion of net cash proceeds, net of
taxes and certain other transaction costs received from permitted sales of assets (amended as stated
above for the waiver period);
the Company must maintain a capitalization ratio to be more than 0.55 to 1 (amended as stated
the Company must maintain a ratio of EBITDA to interest expense to be less than 3 to 1 (amended
as stated above for the waiver period);
indebtedness owed by the Company to, and guarantees by the Company of any obligations of an
affiliate cannot exceed an aggregate principal amount of $75 million; and
permitted indebtedness, in the combined principal amount of receivables financing indebtedness
and additional indebtedness, cannot at any time exceed in the aggregate amount equal to $1 billion.
The Company’s debt instruments described above do not contain any covenants that trigger prepayment as
a result of a change in its debt ratings and do not contain any covenants that restrict amendment to or
termination of its long-term crude supply agreements. The Company covenants that all transactions with
affiliates will be structured as arms-length transactions. The Company was in compliance with the debt
covenants at December 31, 2009.
Tax-Exempt Bonds - At December 31, 2009, through state entities, CITGO has outstanding $453 million of
industrial development bonds for certain Lake Charles, Corpus Christi and Lemont port facilities and
pollution control equipment and $139 million of environmental revenue bonds to finance a portion of the
Company’s environmental facilities at its Lake Charles, Corpus Christi and Lemont refineries. The bonds
bear interest at various fixed and floating rates, which ranged from 1.0% to 8.0% at December 31, 2009 and
ranged from 2.0% to 8.0% at December 31, 2008. Additional credit support for the variable rate bonds is
provided through letters of credit issued under the Company’s secured revolving credit facility.
Included above is a $50 million floating rate tax-exempt industrial revenue bond that the Company issued
on April 22, 2008. This bond bears interest at the rate of 1.4% at December 31, 2009 and is due in 2043.
The proceeds from the bond are being used for qualified projects at the Corpus Christi refinery.
Taxable Bonds - At December 31, 2009, through a state entity, the Company has outstanding $60 million
of taxable environmental revenue bonds to finance a portion of the environmental facilities at the Lake
Charles refinery. Such bonds are secured by letter of credit issued under the Company’s secured revolving
credit facility and have a floating interest rate (weighted average 1.6% and 3.1% at December 31, 2009 and
December 31, 2008, 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. There
were no taxable bonds converted to tax-exempt bonds during 2009 or 2008.
Debt Maturities – Future maturities of long-term debt as of December 31, 2009, are: 2010 - $406 million,
2011 - $206 million, 2012 - $913 million, 2013 - $-0-, 2014 - $-0-, and $653 million thereafter.
F-26
12. EMPLOYEE BENEFIT PLANS
Employee Savings - CITGO sponsors three qualified defined contribution retirement and savings plans
covering substantially all eligible salaried and hourly employees. Participants make voluntary contributions
to the plans and CITGO makes contributions, including matching of employee contributions, based on plan
provisions. CITGO expensed $25 million related to its contributions to these plans in both 2009 and 2008.
PDV Midwest Refining, L.L.C. (“PDVMR”) is a subsidiary of CITGO. It sponsors a defined contribution
plan. This plan was frozen as of May 1, 1997 and no further contributions to the plan could be made after
that date. There will be no new participants in the plan.
Pension Benefits - CITGO sponsors three qualified noncontributory defined benefit pension plans, two
covering eligible hourly employees and one covering eligible salaried employees. CITGO also sponsors
two nonqualified defined benefit plans for certain eligible employees.
PDVMR sponsors a qualified and a nonqualified plan, frozen at their then current levels on April 30, 1997.
The plans cover former employees of the partnership who were participants in the plans as of April 30,
1997.
Postretirement Benefits Other Than Pensions - In addition to pension benefits, CITGO also provides
certain health care and life insurance benefits for eligible salaried and hourly employees at retirement.
These benefits are subject to deductibles, copayment provisions and other limitations and are primarily
funded on a pay-as-you-go basis. CITGO reserves the right to change or to terminate the benefits at any
time.
F-27
Obligations and funded status - December 31 is the measurement date used to determine pension and other
postretirement benefit measurements for the plans. The following sets forth the changes in benefit
obligations and plan assets for the CITGO and PDVMR pension and the CITGO postretirement plans for
the years ended December 31, 2009 and 2008, and the funded status of such plans reconciled with amounts
reported in the Company’s consolidated balance sheets:
Pension Benefits
2009
2008
Other Benefits
2009
2008
(000s omitted)
(000s omitted)
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Amendments
Actuarial (gain) loss
Plan settlements
Benefits paid
Medicare subsidies received
Net transfer in
$ 761,394
24,709
43,569
(12,730)
(55,227)
(28,663)
-
$ 692,646
22,654
44,290
32,258
(4,975)
(25,479)
-
$ 508,045
11,817
30,149
21,063
(5,015)
(14,663)
927
2,607
$ 422,574
9,927
27,007
61,409
(13,744)
872
-
Benefit obligation at end of year
$ 733,052
$ 761,394
$ 554,930
$ 508,045
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Plan settlements
Employer contribution
$ 428,496
109,282
(55,227)
81,355
$ 577,325
(171,229)
(4,975)
52,854
$
$
(28,663)
-
(25,479)
-
Benefits paid
Adjustments
1,447
30
14,663
(14,663)
(1,477)
1,389
58
13,744
(13,744)
-
Fair value of plan assets at end of year
$ 535,243
$ 428,496
-
$
1,447
Reconciliation of funded status:
Fair value of plan assets
Benefit obligations
$ 535,243
733,052
$ 428,496
761,394
$
0
554,930
$
1,447
508,045
Funded status
$ (197,809)
$ (332,898)
$ (554,930)
$ (506,598)
Non-current liabilities
(4,113)
(193,696)
(53,178)
(279,720)
(19,248)
(535,682)
(15,100)
(491,498)
Net amount recognized
$ (197,809)
$ (332,898)
$ (554,930)
$ (506,598)
Amounts recognized in the Company's
consolidated balance sheets consist of:
Current liabilities
Reconciliation of amounts recognized in Company's
consolidated balance sheets:
Initial net asset
Prior service (cost) credit
Net loss
Accumulated contributions in excess of net periodic
benefit cost
$
Net amount recognized
F-28
(10,563)
(182,712)
$
8
(10,950)
(300,511)
$
(20,215)
(26,260)
$
1,342
(29,741)
(193,275)
(311,453)
(46,475)
(28,399)
(4,534)
(21,445)
(508,455)
(478,199)
$ (197,809)
$ (332,898)
$ (554,930)
$ (506,598)
The accumulated benefit obligation for all defined benefit plans was $660 million and $672 million at
December 31, 2009 and 2008, respectively.
Information for Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets
December 31,
2009
2008
(000s omitted)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$ 733,052
660,498
535,243
$ 761,394
672,206
428,496
Components of Net Periodic Benefit Cost
2009
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net gain at date
of adoption
Amortization of net loss (gain)
Settlement loss recognized
Net periodic benefit cost
Pension Benefits
2008
2007
(000s omitted)
2009
$ 24,709
43,569
(34,797)
387
$ 22,654
44,290
(45,694)
387
$ 22,550
39,130
(40,745)
11,581
$ 11,818
30,149
(87)
(494)
(8)
22,646
7,938
(8)
1,649
3,018
(8)
4,432
17,832
(351)
-
$ 64,444
$ 26,296
$ 54,772
$ 41,035
Other Benefits
2008
(000s omitted)
$
9,927
27,007
(83)
(494)
(3,740)
-
$ 32,617
2007
$ 11,297
25,887
(80)
(494)
$ 36,610
Actuarial gains (or losses) related to the postretirement benefit obligation are recognized as a component of
net postretirement benefit cost by the amount the beginning of year unrecognized net gain (or loss) exceeds
7.5% of the accumulated postretirement benefit obligation.
F-29
Changes Recognized in Other Comprehensive Income (Loss)
Pension Benefits
2008
(000s omitted)
2009
2007
2009
Other Benefits
2008
(000s omitted)
2007
Change due to minimum liability and
intangible asset recognition prior to
adoption of ASC 715
Decrease in additional minimum liability
Increase in intangible asset
NA
NA
NA
NA
$ (11,186)
(93)
NA
NA
NA
NA
Other comprehensive income
NA
NA
(11,279)
NA
NA
-
$ (87,215)
$ 249,181
$ 61,434
-
$
-
Changes in plan assets and benefit
obligations recognized in other
comprehensive income
Net (gain) loss arising during the year
New prior service cost
-
NA
$
-
(3,832)
21,063
-
NA
-
-
-
Amounts recognized as a component of
net periodic benefit cost
Amortization, settlement or curtailment
recognition of net transition asset
Amortization or curtailment recognition of
prior service (cost) credit
8
8
(387)
(387)
NA
494
494
-
Amortization or settlement recognition of
net (loss) gain
(30,584)
(4,667)
NA
351
3,740
-
Total recognized in other comprehensive
(income) loss
$ (118,178)
$ 244,135
$
11,279
$
Total recognized in net periodic benefit
cost and other comprehensive loss
$ (53,734)
$ 270,431
$
43,493
$ 59,111
18,076
$
65,668
$ 98,285
$
$ 36,610
The amounts included in accumulated other comprehensive income as of December 31, 2009 expected to be
recognized as components of net periodic benefit costs during the year ending December 31, 2010 were as
follows:
Pension
Benefits
Other
Benefits
(000s omitted)
Estimated 2010 amortization from accumulated other
comprehensive income:
Amortization of loss
Amortization of prior service costs
Decrease in postretirement benefit obligation
F-30
$ (11,390)
(831)
$
(79)
(1,671)
$ (12,221)
$ (1,750)
-
Additional Information
The discount rate used to determine the pension plan and other postretirement plan obligations as of
December 31, 2009 was determined using a matched bond portfolio. This approach constructs a
hypothetical bond portfolio whose coupon and principal cash flows settle the projected benefit cash flows.
The yield on the chosen portfolio determined the discount rate. Prior to 2009, the discount rate was
determined using a spot rate yield curve based on the universe of qualified bonds.
Pension Benefits
Other Benefits
2009
2008
2009
2008
6.30 %
4.42 %
6.25 %
4.48 %
6.37 %
4.48 %
6.00 %
4.48 %
Weighted-average assumptions used to
determine benefit obligations at December 31:
Discount rate
Rate of compensation increase
Pension Benefits
Other Benefits
2009
2008
2009
2008
6.25 %
7.95 %
4.48 %
6.50 %
8.00 %
4.48 %
6.00 %
6.00 %
4.48 %
6.50 %
6.00 %
4.48 %
Weighted-average assumptions used
to determine net periodic benefit costs
for the years ended December 31:
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
CITGO’s expected long-term rate of return on plan assets is intended to generally reflect the historical
returns of the assets in its investment portfolio. The expected long-term rates of return used were
determined based on the Company’s target asset allocations and long-term expected returns on capital
market indices, reduced for investment and administrative expenses. The weighted average return at
December 31, 2009 on indices representing CITGO’s investment portfolio is 2.87% over the past 10 years
and 6.88% over the past 15 years.
For measurement purposes, an 8.50% for both pre-65 and post-65 annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2010. These rates are assumed to decrease to 8.10%
in 2011 for both pre-65 and post-65 and then to decrease to an ultimate level of 5% by 2019, and to remain
at that level thereafter.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care
plans. A one-percentage-point change in assumed health care cost trend rates would have the following
effects:
Point Increase
Point Decrease
(000s omitted)
Increase (decrease) in total of service and interest cost
components
$ 8,148
$ (6,379)
Increase (decrease) in postretirement benefit obligation
$ 84,555
$ (68,626)
F-31
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(“Medicare Reform”) was signed into law. Medicare Reform introduces a prescription drug benefit under
Medicare (Medicare Part D) as well as a non-taxable federal subsidy to sponsors of retiree health care
benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004,
the FASB Staff issued accounting guidance, “Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003”. The guidance permits a
sponsor to report the effects of Medicare Reform prospectively in the third quarter of 2004 or
retrospectively to the measurement date following enactment of the legislation. CITGO chose to use the
retrospective method to reflect Medicare Reform as of January 1, 2004. The net periodic benefit cost for
the year ended December 31, 2009 was reduced $6.5 million for the effect of the subsidy. Under CITGO’s
accounting policy for the postretirement welfare plan, actuarial (gains) and losses outside of the 7.5%
corridor are recognized immediately. Due to the immediate recognition of an actuarial loss, the net periodic
benefit cost for the year ended December 31, 2008 was increased $11.7 million for the effect of the subsidy.
Cash Flows
Pension Benefits
Other Benefits
(000s omitted)
Expected employer contributions
for the year ended December 31, 2010
$ 27,302
$ 19,248
Gross Benefit
Expected benefit payments for the
years ended December 31:
2010
2011
2012
2013
2014
Five years thereafter
$ 34,195
$ 36,043
$ 39,136
$ 42,820
$ 46,307
$ 278,583
Implied Medicare
Payments
Subsidy
$
$
$
$
$
$
$
$
$
$
$
$
20,695
23,233
25,537
28,175
30,991
196,386
1,447
1,680
1,988
2,297
2,616
18,887
Plan Assets
CITGO's pension plan investment strategy is to achieve a rate of return that meets or exceeds the expected
future benefit payments of the plans. As of December 31, 2009, the plan expects to achieve these returns
and to mitigate concentration of investment risk by employing a diversified investment strategy of 30%
U.S. large cap equities, 9% U.S. small cap equities, 20% non-U.S. developed market equities and 41% fixed
income securities, which include corporate bonds of companies from diversified industries, mortgage
securities and U.S. Treasuries.
F-32
The qualified plans’ assets include:
Target
Asset Category:
Equity
Fixed income
Other
Percentage of Plan Assets
as of December 31,
Allocation
2009
54% - 64%
36% - 46%
0% - 5%
59.84
39.80
0.36
100.00
2008
%
%
%
%
54.15
45.66
0.19
100.00
%
%
%
%
The equity fund includes large cap and small cap, as well as international equities. The fixed income fund
includes bonds, cash and short-term investments. The Company periodically reviews the asset allocation to
determine whether it remains appropriate for achieving the investment return objectives. At December 31,
2009, the investment allocations were consistent with the Company’s investment allocation policy.
The following is a description of the valuation methodologies for assets measured at fair value. The various
inputs that may be used to determine the value of each fund, defined as Level 1, Level 2, and Level 3, are
summarized in Note 17.
Money market funds - The money market funds are valued at the closing NAV as quoted in an active
market and are classified within level 1 of the valuation hierarchy.
Common/collective trust funds -These investments are valued at the NAV as reported by the issuer as a
practical expedient for fair value and are classified within level 2 of the valuation hierarchy.
The following table presents the assets measured at fair value on a recurring basis as of December 31, 2009.
No assets are classified within level 3 of the valuation hierarchy.
Fair Value Measurement at December 31, 2009 Using
Quoted Prices in
Significant
Significant
Active Markets for
Observable
Unobservable
Total
Identical Assets
Inputs
Inputs
Fair
(Level 1)
(Level 2)
(Level 3)
Value
(000s omitted)
Money market funds
Common/collective trust funds
Total
$
1,935
-
$
533,308
$
-
$
1,935
533,308
$
1,935
$
533,308
$
-
$ 535,243
Contributions - CITGO’s policy is to fund the qualified pension plans in accordance with applicable laws
and regulations and not to exceed the tax deductible limits. CITGO estimates that it will contribute
approximately $23 million to these plans in 2010. The nonqualified plans are funded as necessary to pay
retiree benefits. The Company estimates that it may contribute approximately $4 million to the
nonqualified plans in 2010 due to the change in payment type from annual payments to lump sum
distributions for the nonqualified plans. 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.
CITGO’s policy is to fund its postretirement benefits other than pension obligation on a pay-as-you-go
basis. CITGO estimates that it will contribute approximately $19 million to these plans in 2010.
F-33
13. INCOME TAXES
The provisions for income taxes are comprised of the following:
2009
Current:
Federal
State
Foreign
Deferred:
Federal
State
2008
(000s omitted)
$ (15,273)
4,381
1,255
(9,637)
$ 308,700
979
309,679
(127,089)
(10,893)
(137,982)
124,674
9,722
134,396
$ (147,619)
$ 444,075
2007
$ 924,316
53,743
80
978,139
(103,601)
3,203
(100,398)
$ 877,741
The federal statutory tax rate differs from the effective tax rate due to the following:
2009
2008
2007
Federal statutory tax rate
State taxes, net of federal benefit
Dividend exclusions
Medicare subsidy
Manufacturing deduction
Contributions
State net operating loss
Other, net
35.0 %
(0.4)%
1.2 %
0.6 %
1.7 %
1.6 %
2.6 %
35.0 %
0.4 %
(0.4)%
0.4 %
(1.2)%
1.4 %
35.0 %
1.2 %
(0.1)%
(0.1)%
(1.2)%
(0.2)%
1.0 %
Effective tax rate
42.3 %
35.6 %
35.6 %
F-34
Deferred income taxes reflect the net tax effects of (i) temporary differences between the financial and tax
basis 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, 2009 and 2008 are as follows:
2009
2008
(000s omitted)
Deferred tax liabilities:
Property, plant and equipment
Inventories
Investments in affiliates
Turnaround adjustments
Other
$ 853,972
73,829
1,042
130,406
32,685
1,091,934
Deferred tax assets:
Postretirement benefit obligations
Employee benefit accruals
Net operating loss carryforwards
Other
233,206
50,123
37,480
75,411
396,220
(21,198)
375,022
Valuation allowance
Net deferred tax liability (of which $144,257 and
$73,798 is included in current liabilities at
December 31, 2009 and 2008, respectively)
$ 716,912
$ 857,593
75,725
698
139,243
120,413
1,193,672
213,622
78,509
33,627
72,862
398,620
(22,803)
375,817
$ 817,855
December 31, 2009, CITGO had net related party payables related to federal income taxes of $31 million
included in payables to affiliates. At December 31, 2008, CITGO had net related party receivables related
to federal income taxes of $16 million included in due from affiliates.
At December 31, 2009, the Company has federal income tax receivable of $181 million included in current
assets. At December 31, 2008, CITGO has federal income tax liability of $105 million included in current
income taxes payable.
The Company’s tax years through 2000 are closed to adjustments by the Internal Revenue Service (“IRS”).
During 2009, the IRS completed the examination phase of the audit of the Company’s federal income tax
return for the years 2001 through 2005, and issued Revenue Agents Reports (“RAR”). Included in these
RARs were proposed adjustments to disallow research and experimental expenses as well as depreciation
expense. The Company filed protests of these adjustments with the Appeals office of the IRS and does not
expect the ultimate disposition of these audits will result in a material change to its financial position or
results of operations. The Company’s federal income tax return for the years 2006 and 2007 remain under
examination by the IRS.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of temporary
differences in making this assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods in which the deferred tax assets are deductible, management
F-35
believes it is more likely than not that the Company will realize the benefits of these deductible differences,
net of the existing valuation allowances at December 31, 2009.
The Company has approximately $819 million of state and approximately $6 million of foreign net
operating loss carryforwards that will expire between the years 2011 and 2029 and 2010 and 2014,
respectively, if not utilized. Based on management’s assessment of the various state and foreign net
operating losses, it was determined that it is more likely than not that the Company will not be able to
realize tax benefits on a portion of the state losses and all of the foreign losses. The valuation allowance at
December 31, 2009 and 2008 is attributable to the deferred tax asset related to these state and foreign net
operating losses.
The Company follows the guidance of ASC 740, “Income Taxes - Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109”. ASC 740 defines the criteria an individual tax
position must meet for any part of the benefit of that position to be recognized in the financial statements.
ASC 740 also provides guidance, among other things, on the measurement of the income tax benefit
associated with uncertain tax positions, de-recognition, classification, interest and penalties and financial
statement disclosures.
The adoption of this interpretation resulted in a decrease to retained earnings of approximately $7 million as
of January 1, 2007 and a decrease of $3 million to net income in 2008. In addition, certain amounts
previously reported in deferred income taxes were reclassified to other noncurrent liabilities in the
consolidated balance sheets.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
2009
Balance at January 1,
Increase related to prior year tax position
Increase related to current year tax position
Decrease related to current year tax position
Settlements
Balance at December 31,
$
$
32,253
(603)
(927)
30,723
2008
(000s omitted)
2007
$ 10,860
15,653
6,028
(288)
$ 32,253
$ 11,320
854
(1,314)
$ 10,860
At December 31, 2009, unrecognized tax benefits of $31 million included $11 million in tax benefits, which
if recognized, would reduce the Company’s annual effective tax rate. The Company does not expect its
unrecognized tax benefits to change significantly over the next twelve months. The Company has elected to
classify any interest expense and penalties, if any, related to unrecognized tax benefits as operating expense.
As of December 31, 2009, the Company recognized approximately $0.5 million of interest expense related
to uncertain tax positions and had accrued interest liability of $4 million.
The Worker, Homeownership and Business Assistance Act of 2009 provides for an extended carryback of
2008 or 2009 net operating losses for five years, instead of the general two year carryback. The Company
is evaluating its 2009 carryback opportunities. The Company has taxable income available to offset the
2009 net operating losses in the extended carryback years, as well as in 2007 and 2008.
F-36
14. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims – Various lawsuits and claims arising in the ordinary course of business are
pending against CITGO. CITGO records accruals for potential losses when, in management's opinion, such
losses are probable and reasonably estimable. If known lawsuits and claims were to be determined in a
manner adverse to CITGO, and in amounts greater than CITGO's accruals, then such determinations could
have a material adverse effect on CITGO's results of operations in a given reporting period. The most
significant lawsuits and claims are discussed below.
CITGO, along with most of the other major oil companies, is a defendant in a number of federal and state
lawsuits alleging contamination of private and public water supplies by methyl tertiary butyl ether
(“MTBE”), a gasoline additive. In general, the plaintiffs claim that MTBE renders the water not potable.
In addition to compensatory and punitive damages, plaintiffs seek injunctive relief to abate the
contamination. As of December 31, 2009, there were approximately 30 cases, the majority of which were
filed by municipal authorities. Numerous cases were originally removed to federal court and at the
defendants’ request consolidated in Multi-District Litigation (“MDL”) 1358. On March 16, 2004, the judge
in MDL 1358 denied the plaintiffs’ motion to remand the cases to state court. Two plaintiffs appealed the
denial of the remand to state court to the U.S. Court of Appeals for the Second Circuit. On May 24, 2007,
the Court of Appeals reversed the trial judge’s decision to permit the removal from state court of MTBE
cases filed by states (California and New Hampshire) to federal court. The appellate court held that the
cases were improperly removed because none of the bases for removal (such as, federal officer, bankruptcy,
pre-emption or federal question) was valid. As of July 12, 2009, a settlement agreement was executed
between the defendants and New York City to resolve the City’s MTBE contamination claims for
approximately $13.8 million of which CITGO’ share is approximately $1 million. Further, the defendants
will be contingently liable for the clean-up of certain wells in the future if those wells would become
contaminated. CITGO will continue to vigorously defend the remaining cases. CITGO management does
not believe that the resolution of these matters will have a material adverse effect on its financial condition,
but may have a significant effect on its financial results for a given period.
Claims have been made against CITGO in a number of asbestos, silica and benzene lawsuits pending in
state and federal courts. Most of these cases involve multiple defendants and are brought by former
employees or contractor employees seeking damages for asbestos, silica and benzene related illnesses
allegedly caused, at least in part, from exposure at refineries owned or operated by CITGO in Lake Charles,
Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these cases, the plaintiffs’ alleged
exposure occurred over a period of years extending back to a time before CITGO owned or operated the
premises at issue. CITGO shall continue to vigorously defend these cases. CITGO does not believe that
the resolution of any of these cases will, either individually or on an aggregate basis, have a material
adverse effect on its financial condition or results of operations.
In 2007, CITGO and the former environmental manager at the Corpus Christi refinery were criminally tried
for five violations of the Clean Air Act for having uncovered water equalization tanks and incorrectly
computing benzene emission amounts and exceeding benzene permitted levels in waste water streams and
five violations under the Migratory Bird Treaty Act for killing migratory birds. CITGO was found not
guilty regarding whether CITGO had excessive benzene in uncontrolled water waste streams, guilty
regarding the uncovered water equalization tanks and the count pertaining to the computation of benzene
amounts in waste water streams was dismissed. At the trial for the five misdemeanor counts under the
Migratory Bird Treaty Act against CITGO and the former environmental manager, the court granted
directed verdicts of not guilty on two counts pertaining to 25 birds, found CITGO guilty on three counts
involving 10 birds and found the former environmental manager not guilty. CITGO shall appeal the felony
convictions once a sentence is pronounced. CITGO filed a motion for a not guilty verdict notwithstanding
the jury verdict for the felony conviction based on a subsequent U.S. Supreme Court decision. Sentencing
F-37
for CITGO has not yet been scheduled. CITGO does not believe that the resolution of this matter will have
a material adverse effect on its financial condition or results of operations.
On November 26, 2004, the Athos I, a merchant tanker, struck a submerged anchor in the public channel of
the Delaware River near Paulsboro, New Jersey and released crude oil owned by CARCO, a former
subsidiary of CITGO. In a maritime limitation of liability action in federal court in Philadelphia,
Pennsylvania, the owner of the Athos I counterclaimed against CARCO for over $125 million in oil spill
recovery and clean up costs. On June 24, 2008, CITGO was sued in federal court in Philadelphia by the
U.S. Government to recover $87 million that the National Oil Spill Fund paid to Frescati Shipping for its
response costs to the crude oil released from the Athos I. The U.S. Government is alleging the same
theories of liability as Frescati Shipping has alleged. The cost of the entire clean-up and damages was
approximately $268 million. On December 17, 2008, CITGO accepted the U.S. Government’s proposal that
in exchange for CITGO releasing the U.S. Government from liability, the U.S. Government capped
CITGO’s potential liability at $123.5 million. On January 2, 2009, Lexington Insurance Company issued a
reservation of rights pertaining to CITGO’s decision to accept the U.S. Government’s proposal. CITGO
does not believe that CARCO has any liability and will vigorously defend itself.
Mr. and Mrs. Siegel, on behalf of gasoline purchasers throughout Illinois and the United States, filed suit
against CITGO, Shell, BP, Marathon and ExxonMobil in December 2005. They are seeking damages for
the increased gasoline prices in the wake of Hurricane Katrina and defendants’ alleged excessive profits.
The complaint alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. It
also alleged national consumer fraud and deceptive business practices, unjust enrichment and civil
conspiracy. CITGO has filed a motion to dismiss. On March 26, 2007, the Court granted the motion in
part and denied it in part. The court allowed the plaintiffs to proceed with their unjust enrichment claim and
their claims of violations of the Illinois Consumer Fraud Act. On September 23, 2008, the court denied
class certification. On February 23, 2009, the judge denied class certification for Illinois residents and
granted CITGO’s Motion for summary judgment on September 4, 2009. The plaintiffs have filed a notice
of appeal to the U.S. Court of Appeals for the 7th Circuit.
Spectrum Stores, Inc., as a purported class action representative of purchasers of refined petroleum products
from CITGO, sued CITGO in federal court in Houston on November 13, 2006. The lawsuit alleged CITGO
violated the antitrust laws by conspiring with and aiding and abetting PDVSA and OPEC to fix crude prices
and hence refined petroleum products prices. In January 2007, CITGO filed motions to dismiss based on
failure to state a claim and on the act of state doctrine. In December 2007 the Multi-District Litigation
(“MDL”) Panel assigned the federal court in Houston to handle the OPEC MDL cases, including Spectrum
Stores, Fast Break Foods, LLC v. Saudi Aramco Corporation, Green Oil Co. v. Saudi Arabian Oil
Company, Countywide Petroleum v. CITGO, and S-Mart Petroleum v. Petróleos de Venezuela, S.A. On
March 21, 2008, S-Mart Petroleum voluntarily dismissed its complaint. On January 9, 2009, the federal
court in Houston granted the defendants’ motion to dismiss the OPEC cases. The plaintiffs appealed this
decision, and the defendants have filed their briefs.
On June 19, 2006 torrential rain fell at CITGO’s Lake Charles, Louisiana refinery, and oil overflowed from
two stormwater holding tanks and entered the Calcasieu River and Indian Marais. Further, in connection
with the same event, hydrogen sulfide and sulfur dioxide were released to the air. CITGO entered a guilty
plea to one misdemeanor violation of the Clean Water Act for the negligent discharge of oil, paying a $13
million fine, and entering into an Environmental Compliance Program. CITGO has settled many claims in
connection with this event. Many other claims related to bodily injury, property damage, business
interruption, and demurrage remain to be resolved. In addition 228 lawsuits, representing 1,815 plaintiffs
and three class actions, were filed by June 19, 2007. CITGO has settled with hundreds of plaintiffs for
amounts up to $2.6 thousand per plaintiff. In two federal property damage cases, the juries did not award
any damages. On July 28, 2009, a state trial judge in Lake Charles entered a judgment of less than $1
million against CITGO in the Arabie trial. The plaintiffs were 14 individuals who claimed to have suffered
F-38
personal injuries from air emissions from the oil spill and the sulfur dioxide release. Most of the judgment,
$420 thousand, represents an award of punitive damages against CITGO. A plaintiff cannot recover
punitive damages under Louisiana law, but the judge found that either Texas or Oklahoma law and not
Louisiana law applied to this issue. This decision will be appealed. In December 2009, CITGO settled all
of the Calcasieu Refining claims for $2 million. CITGO does not believe that the resolution of these
remaining matters will have a material adverse effect on its financial condition or results of operations.
In 1973 predecessors to CARCO entered into a Terminal Service Agreement with Atlantic City Electricity
(“ACE”). It was amended in 1986 by CARCO’s immediate predecessor. In 1997 CARCO began using a
tank identified in the terminaling agreement to store sour water and reduced the monthly terminaling fee. In
the spring of 2007, RC Cape May Holding purchased the ACE power plant and told CARCO it was opting
to use a tank identified in the terminaling agreement for trading purposes. CARCO refused this request,
and in June 2007, RC Cape May invoked arbitration. On July 1, 2009, the arbitrator issued his interim
decision. He held that RC Cape May’s predecessor had transferred its right to one tank to CARCO and that
under New Jersey law RC Cape May is not entitled to any damages from the loss of use of the optional 268
thousand barrel tank because it is a start-up business and therefore any lost profits would be speculative.
However, he did order CARCO to provide an alternative 268 thousand barrel No. 6 fuel oil tank in the
Philadelphia area for RC Cape May’s use until 2015 under the disputed Terminal Service Agreement and
gave the parties 90 days to work out the details of such tank. RC Cape May is interested in a proposal by
CITGO to lease tank capacity at CITGO’s Linden, New Jersey terminal in resolution of this matter. On
October 15, 2009, the arbitrator affirmed his interim decision. On November 2, 2009, RC Cape May filed a
petition in state court in New York City for the court to confirm the arbitrator’s award. CARCO filed a
response opposing the confirmation on the basis that the arbitrator exceeded his authority in making the
award. CITGO does not believe that the resolution of this matter will have a material adverse effect on its
financial condition or result of operations.
On September 28, 2007, CITGO was advised that Immigration and Customs Enforcement was issuing an
administrative subpoena for documents pertaining to the importation of Canadian crude and non-NAFTA
condensate since June 1, 2006. When CITGO investigated the issue of imports of Canadian crude, CITGO
discovered that CITGO’s customs broker had not filed import reports with U.S. Customs for over a period
of many months and many of the reports that were filed contained mistakes. A “prior disclosure” filing
with U.S. Customs was made on January 4, 2008 to minimize any penalties for violations that were not
subject to the subpoena inquiry. CITGO has paid approximately $3 million in duties. CITGO may owe
approximately $2 million in unpaid merchandise processing fees and interest and estimates $6 million will
be owed in liquidated damages. CITGO does not believe that the resolution of this matter will have a
material adverse effect on its financial condition or results of operations.
In January 2007, CITGO was named one of several defendants in at least nineteen cases in California,
Missouri, Kansas, Oklahoma, Kentucky, Maryland, Virginia, Alabama, Mississippi, North Carolina,
Nevada, New Mexico, Florida, Puerto Rico, and Tennessee. The complaints allege that the defendants sold
gasoline to the plaintiffs when the temperature was greater than 60o Fahrenheit. The plaintiffs claim that
they received less gasoline at the retail pump because the gasoline was not temperature corrected to 60o and
that the defendants prohibited dealers from temperature correcting the gasoline at the retail pump. CITGO
has filed a motion to dismiss. A California commission has found that consumers would not benefit from
requiring temperature corrected gasoline at the retail pump. CITGO will continue to vigorously defend
itself. CITGO does not believe that the resolution of this matter will have a material adverse effect on its
financial condition or results of operations.
On June 30, 2008, Stephenson Oil Company, as a purported class action representative on behalf of all
CITGO branded distributors, sued CITGO in U.S. District Court in Oklahoma for allegedly breaching the
implied covenant of good faith and fair dealing in the distributor agreements through differential pricing of
gasoline sold to distributors in the same market. On October 2, 2009, the judge denied CITGO’s motion to
F-39
dismiss. In late October 2009, Stephenson filed a brief for class certification. CITGO will continue to
vigorously defend itself in this case. CITGO does not believe that the resolution of this matter will have a
In Eres NV v. CARCO and NuStar on August 14, 2008, Eres filed under seal a maritime lawsuit against
CARCO, CITGO, and NuStar for alleged breach of the contract of affreightment (“COA”) assigned by
CARCO to NuStar for the transportation of asphalt. Eres alleges a $78 million value for the COA. Eres has
demanded maritime arbitration for the alleged breach of the COA against NuStar, CITGO, and CARCO.
CITGO has demanded indemnity from NuStar which NuStar denied. On November 5, 2008, Eres asked the
federal court in New York to compel NuStar to appoint an arbitrator in the maritime arbitration case. On
November 11, 2008, CITGO sued NuStar in Texas state court for a declaratory judgment that the COA was
assigned to NuStar and NuStar must indemnify CITGO under the assignment and assumption. NuStar
removed the state court action to federal court in Houston. On December 22, 2009, the parties filed
opposing motions for summary judgment. CITGO will vigorously defend itself in this case. CITGO does
not believe that the resolution of this matter will have a material adverse effect on its financial condition or
On July 19, 2009, a serious fire occurred at the alkylation unit at the Corpus Christi refinery. An employee
was seriously burned. Based on monitoring data, there appears to be no impact from hydrofluoric acid
vapors on the surrounding areas. The U.S. Chemical Safety Board, Occupational Safety and Health
Administration, Environmental Protection Agency, Coast Guard, and the Texas Commission on
Environmental Quality (“TCEQ”) have investigated the incident. CITGO will vigorously defend itself in
this case, and does not believe that the resolution of this matter will have a material adverse effect on its
In a letter dated, July 28, 2009, Explorer Pipeline Company filed a claim totaling over $11.2 million for
indemnification under the sale and purchase agreement for the purchase of the Eagle Pipeline and related
terminals from CITGO in 2007 for alleged breaches of warranties pertaining to encroachments to and
failure to clear rights of way, the condition of the pipe, and condition of a tank. CITGO is investigating the
allegations made in this claim. CITGO does not believe that the resolution of this matter will have a
On February 10, 2008, a power outage occurred at the Lake Charles refinery. As the result of the power
outage, six lawsuits with 368 claimants have been filed alleging that these claimants were exposed to sulfur
dioxide and hydrogen sulfide. On June 25, 2008 another power outage occurred at the Lake Charles
refinery. As the result of the second power outage, 26 lawsuits with 918 claimants have been filed alleging
that these claimants were exposed to hydrogen dioxide and hydrogen sulfide. The plaintiffs are limiting
their damages to a maximum of $75 thousand each so that CITGO is not entitled to a jury trial. CITGO is
vigorously defending itself, and does not believe that the resolution of this matter will have a material
On August 5, 2009, a former CITGO Vice President filed a complaint with the U.S. Equal Employment
Opportunity Commission (“EEOC”) in which he claims he was the alleged victim of national origin
discrimination and retaliation. A supplemental denial was filed on December 2, 2009. CITGO is vigorously
defending itself, and does not believe that the resolution of this matter will have a material adverse effect on
its financial condition or results of operations. On September 30, 2009, a second former CITGO Vice
President filed a complaint with the EEOC in which he claims he was the alleged victim of national origin
discrimination. CITGO will vigorously defend itself in this case, and does not believe that the resolution of
this matter will have a material adverse effect on its financial condition or results of operations.
F-40
At December 31, 2009, CITGO’s noncurrent liabilities included an accrual for lawsuits and claims of $69
million compared with $66 million at December 31, 2008. CITGO estimates that an additional loss of $52
million is reasonably possible in connection with such lawsuits and claims.
Environmental Compliance and Remediation – CITGO is subject to the federal Clean Air Act (“CAA”),
which includes the New Source Review (“NSR”) program as well as the Title V air permitting program; the
federal Clean Water Act, which includes the National Pollutant Discharge Elimination System program; the
Toxic Substances Control Act; and the federal Resource Conservation and Recovery Act and their
equivalent state programs. CITGO believes it is in material compliance with the requirements of all of
these environmental regulatory programs.
CITGO does not have any material Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”) liability because the former
owners of many of CITGO’s assets have by explicit contractual language assumed all or the material
portion of CERCLA obligations related to those assets. This includes the Lake Charles refinery and the
Lemont refinery.
The U.S. refining industry is required to comply with increasingly stringent product specifications under the
1990 Clean Air Act Amendments for reformulated gasoline and low sulfur gasoline and diesel fuel that
require additional capital and operating expenditures.
In addition, CITGO is subject to various other federal, state and local environmental laws and regulations
that may require CITGO to take additional compliance actions and also actions to remediate the effects on
the environment of prior disposal or release of petroleum, hazardous substances and other waste and/or pay
for natural resource damages. Maintaining compliance with environmental laws and regulations could
require significant capital expenditures and result in additional operating costs. Also, numerous other
factors, such as pending federal climate change legislation, could affect CITGO’s plans with respect to
environmental compliance and related expenditures.
CITGO's accounting policy establishes environmental reserves as probable site restoration and remediation
obligations become reasonably capable of estimation. Environmental liabilities are recorded at their
undiscounted current value and without consideration of potential recoveries from third parties which are
recorded in other noncurrent assets. Subsequent adjustments to estimates, to the extent required, are made
as more refined information becomes available. CITGO believes the amounts provided in its consolidated
financial statements, as prescribed by generally accepted accounting principles, are adequate in light of
probable and estimable liabilities and obligations. However, there can be no assurance that the actual
amounts required to discharge alleged liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a material adverse affect on CITGO’s
consolidated results of operations, financial condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of Environmental Quality (“LDEQ”)
to cease usage of certain surface impoundments at the Lake Charles refinery by 1994. A mutually
CITGO is complying with a June 2002 LDEQ administrative order about the development and
implementation of a corrective action or closure plan. CITGO and the former owner of the refinery are
participating in the closure and sharing the related costs based on estimated contributions of waste and
ownership periods.
In June 1999, CITGO and numerous other industrial companies received notice from the United States
Environmental Protection Agency (“U.S. EPA”) that the U.S. EPA believes these companies have
contributed to contamination in the Calcasieu Estuary, near Lake Charles, Louisiana and are potentially
responsible parties ("PRPs") under CERCLA. The U.S. EPA made a demand for payment of its past
investigation costs from CITGO and other PRPs and since 1999 has been conducting a remedial
investigation/feasibility study ("RI/FS") under its CERCLA authority. While CITGO disagrees with many
F-41
of the U.S. EPA’s earlier allegations and conclusions, CITGO and other industrial companies signed in
December 2003, a Cooperative Agreement with the LDEQ on issues relative to the Bayou D’Inde tributary
section of the Calcasieu Estuary, and the companies are proceeding with a Feasibility Study Work Plan.
CITGO will continue to deal separately with the LDEQ on issues relative to its refinery operations on
another section of the Calcasieu Estuary. The Company still intends to contest this matter if necessary.
In January and July 2001, CITGO received notices of violation (“NOVs”) from the U.S. EPA alleging
violations of the CAA. The NOVs are an outgrowth of an industry-wide and multi-industry U.S. EPA
enforcement initiative alleging that many refineries, electric utilities and other industrial sources modified
air emission sources without proper limits. Without admitting any violation CITGO executed a Consent
Decree with the United States and the states of Louisiana, Illinois, New Jersey, and Georgia. The Consent
Decree requires the implementation of control equipment at CITGO’s refineries and a Supplemental
Environment Project at CITGO’s Corpus Christi, Texas refinery. Approximately $427 million in capital
costs were incurred over a period of time, primarily between 2006 and 2008. An additional $33 million in
capital costs is expected to be incurred through the end of 2011.
CITGO has granted to the New Jersey Natural Lands Trust a conservation easement covering the 592 acre
Petty’s Island, which is located in the Delaware River in Pennsauken, New Jersey and owned by CITGO.
Petty’s Island contains a closed CITGO petroleum terminal and other industrial facilities, but it is also the
habitat for the bald eagle and other wildlife. The granting of the conservation easement will mitigate the
amount of remediation that CITGO would have to perform on Petty’s Island. On April 22, 2009, CITGO
entered into, with the New Jersey Department of Environment Protection, an Agreed Consent Order to
remediate the hydrocarbon contamination on Petty’s Island and a release to CITGO from natural resource
damages for all of CITGO’s former and current facilities in New Jersey. Further, CITGO granted a
conservation easement encumbering Petty’s Island to the New Jersey Natural Lands Trust which prevents
development of Petty’s Island. Additionally, in November 2009 CITGO transferred a small parcel of land
on the mainland to Pennsauken Township, entered into a tax agreement with the Township in December
2009 to continue to pay real estate taxes at the current levels until 2017 when the rent from the Crowley
Marine lease expires, and granted an easement to the Township for a guard shack at the bridge between the
mainland and Petty’s Island.
On June 19, 2006, as the result of torrential rainfall, multiple sulfur dioxide and hydrogen sulfide releases
occurred and two stormwater storage tanks at CITGO’s Lake Charles refinery overflowed to the tanks'
secondary containment area that was under construction. Due to a failure in the integrity of the
containment, approximately 53 thousand barrels of oil in stormwater were discharged into the Indian Marais
and Calcasieu River. The U.S. EPA and the LDEQ commenced enforcement actions. The Natural Resource
Damage Assessment (“NRDA”) studies have been completed and submitted to the state and federal trustees
for review. On April 9, 2007, the LDEQ issued a Consolidated Compliance Order & Notice of Potential
Penalty to CITGO with regards to the June 19, 2006 event and several other alleged violations over a fiveyear period. Currently, the estimate of the high end of the penalty sought by LDEQ is approximately $155
thousand. On May 14, 2007, CITGO filed an appeal of this order. On November 5, 2007 the federal
government proposed a partial NDRA assessment for loss of recreational use of the Calcasieu and
Intercoastal Waterway of $486 thousand which was later reduced to $316 thousand. CITGO has accepted
that assessment; however payment is deferred until completion of the entire NDRA process. On June 24,
2008, the U.S. EPA and the LDEQ sued CITGO for the release of 53 thousand barrels of slop oil into
the Indian Marais and Calcasieu River. The U.S. EPA can seek penalties up to $1,100 per barrel released
for ordinary negligence and up $4,300 per barrel for gross negligence. Further, the LDEQ is seeking
reimbursement for its response costs. The U.S. EPA wants injunctive relief to prevent a recurrence of this
release. In connection with the NRDA, the National Oceanic and Atmospheric Administration (“NOAA”)
in February 2009 submitted a reimbursement request for $901 thousand for their investigative costs up
through December 2007. The U.S. EPA has been granted a motion for partial summary judgment based on
CITGO’s admission of liability in the criminal case. CITGO filed an opposing motion. CITGO shall
F-42
continue to vigorously defend these matters. CITGO does not believe that the resolution of these matters
will have a material adverse effect on its financial condition, but may have a significant effect on its
financial results for a given period.
CITGO self-reported that it shipped 83 thousand barrels of off-specification fuel on March 17, 2007, from
the Lake Charles refinery, and the U.S. EPA followed up by issuing an NOV dated January 27, 2009. On
October 7, 2009, the U.S. EPA agreed to a proposed civil penalty of $70 thousand.
On April 16 and September 3, 2009, representatives from the Lemont refinery met with representatives
from the U.S. EPA about flaring technology and flaring operations at the Lemont refinery. According to
the U.S. EPA, the NOV issued to the Lemont refinery in February 2009 is the beginning of a nationwide
effort by the U.S. EPA to improve flaring operations in the industry (three other refineries in the Midwest
have since received similar NOVs) by requiring continuous monitoring and control equipment that will
record steam-to-waste gas ratios during flaring events. The U.S. EPA contends that only through
conducting such monitoring can refineries determine whether the flares are maintained in conformance with
their design and conform to good air pollution control practices. The purported goal is to control these
ratios in an automated fashion as well as create a new body of operations and monitoring records. The U.S.
EPA envisions refining companies entering into agreements similar to the NSR consent decrees. CITGO
has informed the U.S. EPA that its proposed remedy is neither required nor necessary and has provided
records that the operations conform to the design for these flares.
On July 19, 2009, a serious fire occurred at the alkylation unit at the Corpus Christi refinery. Based on
monitoring data, there appears to be no impact from hydrofluoric acid vapors on the surrounding areas.
Because all appropriate storage areas, including dike areas, at the refinery were used on an emergency basis
to store fire water, the refinery was compelled to release fire water that exceeded some of the permit limits
of the refinery’s discharge permit to the ship channel. The U.S. Chemical Safety Board, Occupational
Safety and Health Administration (“OSHA”), Environmental Protection Agency, Coast Guard, and the
TCEQ are investigating the incident. On December 18, 2009, the TCEQ issued a notice of enforcement for
the alleged water discharges following the July 19, 2009 fire at the unit. The TCEQ is demanding an
administrative civil penalty of $963 thousand for alleged exceedances to the Texas Pollution Discharge
Elimination System limitations for fluoride, discharge of industrial waste into waters of the state,
unauthorized discharge of contact fire water and vapor suppression water from outfalls as well as the
discharge of process wastewater from tanks to the unlined containment berm area surrounding those tanks.
In February 2010, the civil penalty was increased to $1 million to include the alleged violations discovered
during an air investigation. On January 15, 2010, OSHA cited CITGO for 15 alleged serious, two alleged
willful, and one alleged repeat violations of OSHA’s regulations arising from OSHA’s inspections of the
Corpus Christi refinery after the July 19, 2009 fire. The total amount of the citation is $237 thousand.
CITGO will vigorously defend itself, and does not believe that the resolution of this matter will have a
At December 31, 2009, CITGO’s noncurrent liabilities included an environmental accrual of $83 million
compared with $81 million at December 31, 2008. CITGO estimates that an additional loss of $24 million
is reasonably possible in connection with environmental matters.
Various regulatory authorities have the right to conduct, and from time to time do conduct, environmental
compliance audits or inspections of CITGO and its subsidiaries’ facilities and operations. Those
compliance audits or inspections have the potential to reveal matters that those authorities believe represent
non-compliance in one or more respects with regulatory requirements and for which those authorities may
seek corrective actions and/or penalties in an administrative or judicial proceeding. Based upon current
information, CITGO does not believe that any such prior compliance audit or inspection or any resulting
proceeding will have a material adverse effect on its future business and operating results, other than
matters described above.
F-43
Conditions which require additional expenditures may exist with respect to CITGO’s various sites
including, but not limited to, its operating refinery complexes, former refinery sites and crude oil and
petroleum product storage terminals. Based on currently available information, CITGO cannot determine
the amount of any such future expenditures.
Supply and Other Agreements – The Company purchases the crude oil processed at its refineries and also
purchases refined products to supplement the production from its refineries to meet marketing demands and
resolve logistical issues. In addition to supply agreements with various affiliates (Notes 3 and 4), 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. The Company has other agreements for
utilities and other hydrocarbon products used in the refinery process with various entities and terms.
Commodity Derivative Activity – The Company has certain binding agreements associated with its
commodity derivative contracts (Note 16).
Guarantees - As of December 31, 2009, the Company has guaranteed the debt of others including bank
debt of an equity investment as shown in the following table:
Expiration
Date
(000s omitted)
Bank debt
Equity investment
$
5,500
2012
If the debtor fails to meet its obligation, CITGO could be obligated to make the required payment. The
Company has not recorded any amounts on the Company’s balance sheet relating to this guarantee. In the
event of debtor default on the equity investment bank debt, CITGO has no recourse.
CITGO has granted indemnities to the buyers in connection with past sales of product terminal facilities.
These indemnities provide that CITGO will accept responsibility for claims arising from the period in
which CITGO owned the facilities. Due to the uncertainties in this situation, the Company is not able to
estimate a liability relating to these indemnities.
The Company has not recorded a liability on its balance sheet relating to product warranties because
historically, product warranty claims have not been significant.
Other Credit and Off-Balance Sheet Risk Information as of December 31, 2009 - The Company has
outstanding letters of credit totaling approximately $612 million issued against the Company’s secured
revolving credit facility, which includes $513 million related to CITGO’s tax-exempt and taxable revenue
bonds (Note 11).
The Company has also acquired surety bonds totaling $104 million primarily due to requirements of various
government entities. The Company does not expect liabilities to be incurred related to such letters of credit
or surety bonds.
F-44
15. LEASES
The Company leases certain of its Corpus Christi refinery facilities under a capital lease. The basic term of
the lease expired on January 1, 2004; however, the Company renewed the lease for a two-year term and will
continue to renew the lease until January 31, 2011, the date of its option to purchase the facilities for a
nominal amount. The Company gave notice during 2009 of its intention to exercise this option. A portion
of an operating unit at the Corpus Christi refinery is also considered a capital lease. The basic term of the
lease was set to expire on February 1, 2009 at which time the Company could have purchased the leased
unit for a nominal amount; however, under a new agreement on April 1, 2008, the ownership of the plant
facilities was transferred to the Company. As the new agreement superseded all prior existing agreements,
the remaining lease payments prior to the expiration date were forgone. A pipeline at the Corpus Christi
refinery is considered a capital lease. The lease expires on December 31, 2011. A portion of the Lemont
refinery’s assets are under two separate capital leases. One lease expired on July 1, 2008 and the other will
expire on August 1, 2023. When the lease expired in July 2008, the Company took the ownership of the
asset. Vehicles at various company locations are considered capital leases. The leases expire at various
dates from February 2010 to May 2013. The Company has a master lease agreement for the use of terminal
automation systems at multiple locations with various start dates which expire on December 31, 2014.
In 2007, CITGO entered into two separate hydrogen supply agreements with BOC Americas (PGS), Inc
(“BOC”) and MarkWest Blackhawk, L.P. (“MarkWest”). Linde Gas North America, LLC, the successor to
BOC, and MarkWest were to construct two new hydrogen production plants to produce high purity
hydrogen and high pressure steam for use by the Lemont and Corpus Christi refineries. The agreements
will be recorded as capital leases in March 2010. The hydrogen supply agreements at each plant are for a
twenty-year period.
Capitalized costs included in property, plant and equipment related to the leased assets were approximately
$236 million and $237 million at December 31, 2009 and 2008, respectively. Accumulated amortization
related to the leased assets was approximately $202 million and $192 million at December 31, 2009 and
2008, respectively.
The Company also has various noncancelable operating leases, primarily for product storage facilities,
office space, marine vessels, computer equipment and various facilities and equipment used to store and
transport feedstocks and refined products.. Operating lease expense totaled $171 million, $266 million and
$261 million in 2009, 2008, and 2007, respectively. Future minimum lease payments for the capital leases
and noncancelable operating leases are as follows:
Capital
Lease
Year
2010
2011
2012
2013
2014
Thereafter
$
Total minimum lease payments
Amount representing interest
Present value of minimum lease payments
Current portion
Total
8,395
2,352
2,143
2,001
1,930
17,052
$ 120,180
36,616
12,796
10,929
8,311
20,263
$ 128,575
38,968
14,939
12,930
10,241
37,315
33,873
(9,484)
24,389
(6,746)
$ 209,095
$ 242,968
$ 17,643
F-45
Operating
Leases
(000s omitted)
16. DERIVATIVE INSTRUMENTS
The Company has exposure to price fluctuations of crude oil and refined products and changes in interest
rate associated with its variable rate debt. The fluctuations in future prices create risk to the Company as its
activities involve commitments to pay or receive fixed prices in the future. To manage and reduce
exposures in connection with the commodity price, management enters into certain derivative instruments.
The Company’s petroleum commodity derivatives, comprised of physical and financial derivatives, include
exchange-traded futures contracts, forward purchase and sale contracts, exchange-traded and
over-the-counter (“OTC”) options, and OTC swaps. The Company does not utilize any derivative
instruments to manage its interest rate risk.
The Company has risk management policies in place to identify and analyze the risks faced by the
Company. The Company does not attempt to manage the price risk related to all of its inventories of crude
oil and refined products. As a result, at December 31, 2009, the Company was exposed to the risk of broad
market price volatility with respect to a substantial portion of its crude oil and refined product inventories.
As of December 31, 2009, the Company’s total crude and refined products inventory was 26 million
barrels. Aggregate commodity derivative positions entered into for price risk management purposes at that
date totaled 4 million barrels.
Fair values of derivatives are recorded in other current assets or other current liabilities, as applicable, and
changes in the fair value of derivatives not designated in hedging relationships are recorded in cost of sales
on the statement of income (loss). The Company does not designate any of its derivative instruments as
hedges as these derivative instruments are designed to hedge risk associated with the market price
fluctuations or for trading purposes. At December 31, 2009 and 2008, amounts included in other current
assets and other current liabilities related to the fair values of open commodity derivatives are as follows:
2009
Balance Sheet Location
2008
(000s omitted)
Prepaid expense and other current asset
$ 10,995
13,248
$138,609
154,761
At December 31, 2009, gains or losses from commodity derivatives held for trading, whether realized or
unrealized, were recorded in cost of sales on the statement of income (loss) as indicated in the following
table:
Amount of (Gain)/Loss
Recognized in
Net Income on Derivatives
Statement of Income (Loss) Location
(000s omitted)
Cost of sales (includes realized losses of $162 million)
$ 148,134
The trading activities expose the Company to certain credit risks. The credit risk associated with futures
contracts is negligible as they are traded on the New York Mercantile Exchange (“NYMEX”). Exchangetraded futures contracts settled through broker margin accounts at NYMEX generally require a cash
deposit, which are subject to change based on market price movement. When a particular market participant
goes bankrupt, the NYMEX will cover any potential losses with no effect on the Company’s trades. OTC
derivative contracts, on the other hand, expose the Company to counterparty credit-related losses in the
event of nonperformance by counterparties. Neither the Company nor the counterparties are required to
F-46
collateralize their obligations under OTC derivative commodity agreements. None of the Company’s
derivatives agreements contain contingent features provisions.
To manage the counterparty risk, the Company monitors the creditworthiness of its counterparties through
formal credit policies. Additionally, the Company has a master netting agreement which permits net
settlement with its counterparties. As of December 31, 2009, the fair value of derivative instruments in a
net receivable position due from counterparties was immaterial. The Company does not anticipate
nonperformance by the counterparties, which consists primarily of major financial institutions.
Management considers the credit risk to the Company related to its commodity derivatives to be immaterial
during the periods presented.
17. FAIR VALUE INFORMATION
The Company measured some of its financial assets and liabilities at fair value on a recurring basis. To
estimate fair value, the Company utilizes observable market data when available, or models that utilize
observable market data in the absence of identical assets or liabilities. In addition to market information,
the Company incorporates transaction-specific details that, in management's judgment, market participants
would utilize in a fair value measurement.
In accordance to ASC 820, “Fair Value Measurements and Disclosures”, disclosure is required surrounding
the various inputs that are used in determining the fair value of the Company’s assets and liabilities and the
degree to which they are observable. These inputs are summarized into a hierarchy of three broad levels
listed below.
Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 inputs include derivative
assets and liabilities. In forming fair value estimates, the Company utilizes the most observable inputs
available for the valuation. The fair value of the Company’s certain commodity futures and options
contracts are based on quoted prices in active markets for identical assets or liabilities from the NYMEX.
Level 2: Other significant observable inputs. Level 2 inputs include quoted prices for similar assets and
liabilities in active markets. The Company’s OTC swaps use both Level 1 and Level 2 inputs. Valuation
for OTC swaps are based on NYMEX pricing, a Level 1 input, and pricing obtained from Platts, where the
values are based on similar assets or liabilities that were recently traded or transferred between external
entities, a Level 2 input. If a fair value measurement reflects inputs of different levels within the hierarchy,
the measurement is categorized based upon the lowest level of input that is significant to the fair value
measurement. The valuation of physical delivery purchase and sale agreements, over-the-counter financial
swaps, three-way collars and deferred compensation arrangements are based on similar transactions
observable in active markets or industry standard models that primarily rely on market observable inputs.
Substantially all of the assumptions for industry standard models are observable in active markets
throughout the full term of the instrument. The Company categorizes these measurements as Level 2.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the
fair value measurement and less observable from objective sources. The Company’s valuation models for
derivative contracts are based on internally developed market and third-party pricing assumptions. Level 3
instruments primarily include commodity derivative instruments such as forward purchases and sales of
refined products. Although third party broker quotes are utilized to assess the reasonableness of our prices
and valuation techniques, we do not have sufficient corroborating market evidence to support classifying
these assets and liabilities as Level 2.
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
F-47
interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
The following table summarizes the valuation of the Company’s financial instruments measured at fair
value on a recurring basis as of December 31, 2009:
Fair Value Measurement at December 31, 2009 Using
Quoted Prices in
Significant
Significant
Active Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
Total
Fair
Value
(000s omitted)
ASSETS:
Derivatives
Pensions plan
Total
LIABILITIES:
Derivatives
$
9,124
1,935
$
2,547
533,308
$
1,341
-
$ 13,012
535,243
$
11,059
$
535,855
$
1,341
$ 548,255
$
246
$
5,481
$
9,539
$ 15,266
The table below presents a reconciliation of changes in the fair value of the net derivative assets (liabilities)
classified as level 3 in the fair value hierarchy and summarizes gains and losses due to changes in fair value.
2009
(000s omitted)
Beginning balances as of January 1,
Total gains (losses), realized and unrealized
included in cost of sales
Purchases, issuances and settlements
Transfers in and/or out of level 3
$
Ending balance as of December 31,
$
118,554
(126,752)
(8,198)
Nonfinancial assets are measured at fair value on a nonrecurring basis. Fair value is used to measure
nonfinancial assets such as impaired property, plant and equipment when implementing lower of cost or
market accounting or when adjusting carrying values. Fair value is determined primarily using the
anticipated net cash flows discounted at a rate commensurate with the risk involved. The carrying value of
a long-lived asset or asset group is considered impaired when the separately identifiable anticipated
undiscounted net cash flow from such asset is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the long-lived asset or asset
group. The Company’s nonfinancial liability related to asset retirement obligations approximates fair value.
The Company has the option to report certain financial assets and liabilities at fair value. The Company has
reviewed the eligible items and determined not to elect the fair value option for any of these assets and
liabilities.
F-48
The following table presents the Company’s other financial instruments that are not measured on a
recurring basis. The carrying amounts and estimated fair values are as follows:
2009
Carrying
Fair
Amount
Value
(000s omitted)
LIABILITIES:
Short-term bank loan
Long-term debt
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS UNREALIZED LOSSES:
Guarantees of debt
Letters of credit
Surety bonds
$
406,357
1,771,586
-
$
368,357
1,731,856
2008
Carrying
Fair
Amount
Value
(000s omitted)
$
(227)
(8,981)
(763)
6,357
2,191,649
-
$
6,357
2,179,870
(926)
(39,206)
(227)
Financial assets and liabilities for which the carrying value approximates fair value were not presented in
the above summary. For financial assets, these include cash and cash equivalents, due from affiliates,
accounts receivable, and notes receivable from ultimate parent. For financial liabilities, these include
accounts payable and payables to affiliates. For nonfinancial liabilities, this includes asset retirement
obligations.
The following assets and liabilities were analyzed for fair value measurement:
Short-term bank loans – The carrying amounts of the short-term bank loans, excluding the revolving credit
facility, approximate fair value due to the short maturities of the financial instruments. The fair value of the
revolving credit facility is based on prices obtained from a third party for an amount the Company would
pay to transfer the liability to a market participant in an orderly transaction at the measurement date.
Long-term debt - The fair value of long-term debt is based on prices obtained from a third party for an
amount the Company would pay to transfer the liability to a market participant in an orderly transaction at
the measurement date.
Derivatives – The fair value of the Company’s derivative and other financial instruments are measured
using an in-exchange valuation premise and using a market approach to the valuation technique.
Pensions and Post-retirement benefit – The carrying value of the Company’s pension plan assets is based
on information reviewed and approved by management and prepared by the plan asset administrator. The
carrying value of the plan assets approximate fair value. Pension plan liabilities are a present value
discounted measure of the Company’s estimated future pension costs. Since these liabilities are valued at a
present value discounted measure, which approximates fair value, no additional fair value measurement is
required. Post-retirement benefits are also reported as a present-value discounted estimate of the
Company’s future post-retirement benefit obligations.
Guarantees, letters of credit and surety bonds - The estimated fair value of contingent guarantees of thirdparty debt, letters of credit and surety bonds is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or to transfer the liabilities to a market participant in an orderly
transaction at the measurement date.
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
F-49
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.
18.
INSURANCE RECOVERIES
On July 19, 2009, a fire occurred at an alkylation unit at the Corpus Christi refinery. The alkylation unit
which makes high-octane blending components for gasoline was shut down following the fire. The cost of
repairs and claims related to the incident have not been completely determined, but it is expected that a
substantial portion of the cost, net of deductible, will be covered by insurance recoveries.
On June 19, 2006, the Lake Charles refinery experienced an environmental incident due to torrential rainfall
in the area.
On July 22, 2005, a fire occurred at a coker unit at the Lake Charles refinery.
The Company recognizes property damage insurance recoveries under existing insurance coverage up to the
amount of recorded losses and related expenses, as management believes it is probable such amounts will
be recovered from insurance carriers. The property damage insurance recoveries are recorded as an offset
to cost of sales. Business interruption insurance recoveries are recorded in revenues when such amounts are
realized. During the years ended December 31, 2009, 2008, and 2007, the Company recorded $48 million,
$71 million, and $46 million, respectively, of insurance recoveries. There was no insurance recovery
received for business interruption in 2009. In 2008, insurance recoveries of $71 million included $34
million insurance proceeds related to business interruption from Hurricane Rita damage at the Lake Charles
refinery. Included in the insurance recoveries in 2007 is $29 million received from Houston Refining LP
for insurance proceeds related to business interruption from Hurricane Rita damage at the LYONDELLCITGO refinery in 2005, an equity investment which was subsequently sold in 2006. These business
interruption insurance recoveries were classified separately in revenues on the consolidated statements of
income. The Company also received $1 million and $16 million for the years ended December 31, 2009
and 2008, respectively, reimbursed by one of its excess insurance carriers to recover MTBE litigation
settlement costs as describe in Note 14 above.
During the years ended December 31, 2009, 2008, and 2007, the Company recorded $49 million, $27
million, and $15 million, respectively, of losses related to the alkylation unit fire at the Corpus Christi
refinery, and the rainfall event and Hurricane Rita damage at the Lake Charles refinery. The Company
received $72 million and $9 million in cash proceeds during the years ended December 31, 2009 and 2008,
respectively, associated with these three events. At December 31, 2009 and 2008, total receivables related
to insurance recoveries of $23 million and $31 million, respectively, were recorded in current assets and $2
million and $20 million, respectively, were recorded in other non-current assets.
F-50
19. SUBSEQUENT EVENTS
On February 2, 2010, the Company restructured its note receivable from its ultimate parent, PDVSA,
originally in the amount of $1 billion, to provide for the amortization of the remaining outstanding amount
of the note during 2010 through continued offset of amounts payable by the Company for crude oil to be
delivered by PDVSA under the crude supply agreement. In connection with the restructuring, the existing
note was replaced with a new note evidencing the outstanding principal amount of the note at February 2,
2010 of $529 million, which will mature on the date all outstanding amounts of the note are paid in full
through the offset mechanism. The remaining outstanding balance would become due no later than
December 31, 2010 if the offset arrangement were to be terminated for any reason (Note 4).
On February 4, 2010, CITGO entered into a third amendment, waiver and consent to the credit agreement
associated with its $1.85 billion senior secured credit facility (Note 11).
The Company is in the process of drafting a Procurement Services Agreement (“the agreement”) in order to
manage and administer the procurement and delivery of specified equipment to its ultimate parent, PDVSA.
The Company’s relationship with PDVSA under this agreement is one of independent contractor and not
that of partner, agent, employee, joint venture partner or otherwise. The agreement states that the Company
will provide payment of all or any portion of the purchase price of specified equipment and all other costs
and expenses incurred in connection with the services when they are due. Prior to the processing of any
such payments, PDVSA will have provided sufficient funds to the Company by offset of amounts otherwise
payable by the Company to a PDVSA affiliate under the long-term crude oil supply agreement (Note 4).
PDVSA will also pay a fee to the Company for the services performed under this agreement.
The Company has evaluated subsequent events through March 31, 2010, the date the financials statements
were available to be issued.
******
F-51
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
2010
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Current restricted cash
Accounts receivable, net
Due from affiliates
Note receivable from ultimate parent, PDVSA
Inventories
Current income tax receivable
Prepaid expenses and other
$
Total current assets
3,247
23,208
1,047,415
114,636
388,442
964,478
233,773
181,678
December 31,
2009
$
352,705
737,967
97,233
611,195
594,949
190,293
186,553
2,956,877
2,770,895
4,609,747
4,313,454
RESTRICTED CASH
25,183
25,190
83,381
78,126
NOTE RECEIVABLE FROM ULTIMATE PARENT, PDVSA
65,205
65,205
258,631
276,453
PROPERTY, PLANT AND EQUIPMENT - Net
OTHER ASSETS
LIABILITIES AND SHAREHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable
Payables to affiliates
Taxes other than income
Current income tax payable
Current deferred income taxes
Derivative liabilities
Note payable - product financing arrangement
Secured financing arrangement
Current portion of capital lease obligation
$
7,999,024
$
7,529,323
$
1,312,590
647,939
145,427
1,130
126,886
5,780
172,768
41,000
277,605
206,357
8,840
$
863,328
690,011
158,177
1,313
144,257
13,249
175,762
406,357
6,746
Total current liabilities
LONG-TERM DEBT
CAPITAL LEASE OBLIGATION
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
OTHER NONCURRENT LIABILITIES
DEFERRED INCOME TAXES
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER’S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized, issued and outstanding
Additional capital
Retained earnings
Total shareholder’s equity
$
See notes to condensed consolidated financial statements.
F-52
2,946,322
2,459,200
1,569,998
1,771,586
298,447
545,032
455,268
592,865
17,643
535,682
453,800
572,655
1
1,659,698
83,275
(151,882)
1
1,659,698
210,940
(151,882)
1,591,092
1,718,757
7,999,024
$
7,529,323
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE LOSS (Unaudited)
Three Months
Ended March 31,
2009
2010
REVENUES:
Net sales
Sales to affiliates
$ 7,181,060
110,015
$ 4,778,660
58,226
7,291,075
8,263
33,254
4,836,886
3,296
16,441
7,332,592
4,856,623
7,365,982
113,537
22,224
1,170
(3,777)
7,499,136
4,743,895
135,409
12,557
593
(1,499)
4,890,955
(166,544)
(34,332)
(38,879)
(13,677)
(127,665)
(20,655)
-
-
Equity in earnings of affiliates
Other (expense) income - net
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases from
affiliates of $2,590,197 in 2010 and $2,012,924 in 2009)
Selling, general and administrative expenses
Interest expense, excluding capital lease
Capital lease interest charge
LOSS BEFORE INCOME TAXES BENEFIT
INCOME TAXES BENEFIT
NET LOSS
OTHER COMPREHENSIVE INCOME
COMPREHENSIVE LOSS
$
F-53
(127,665)
$
(20,655)
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (Unaudited)
(Dollars and Shares in Thousands)
Common Stock
Shares Amount
1
Net loss
-
BALANCE, MARCH 31, 2010
1
$
1
Additional
Capital
Retained
Earnings
$ 1,659,698
$ 210,940
$
1
-
$ 1,659,698
F-54
Accumulated
Other
Comprehensive
Loss
$
(127,665)
$ 83,275
(151,882)
-
$
(151,882)
Total
$ 1,718,757
(127,665)
$ 1,591,092
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months
Ended March 31,
2009
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Depreciation and amortization
Other adjustments to reconcile net income (loss) to net cash
provided by operating activities
Changes in operating assets and liabilities
$
(127,665) $
112,704
(31,263)
(20,655)
107,713
-
(1,088)
141,124
2,105
98,249
93,812
187,412
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets
Decrease (increase) in restricted cash
Investments in and advances to affiliates
Net cash used in investing activities
(120,735)
9
7
(120,719)
(221,331)
4
(121)
(4,500)
(225,948)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Payments on) proceeds from revolving credit facilities
Proceeds from secured financing arrangement
Payments on senior secured term loan
Payments on capital lease obligations
Financing fees and debt issuance costs
Proceeds from product financing arrangement
Net cash (used in) provided by financing activities
(400,000)
51,335
(1,589)
(608)
(12,689)
41,000
(322,551)
24,488
(1,589)
(584)
22,315
DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
(349,458)
352,705
(16,221)
23,925
Net cash provided by operating activities
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
3,247
$
7,704
Interest, net of amounts capitalized
$
14,764
$
12,190
Income taxes (net of refunds of $3,014 in 2010 and $2,959 in 2009)
$
(2,352) $
184,526
$
(25,265) $
(55,581)
Capital leases
$
283,506
Indirect non-cash dividends
$
Crude payable offsets against note receivable from ultimate
parent, PDVSA
$
Crude payable offsets against procurement services receivable
from ultimate parent, PDVSA
Interest income on note receivable from ultimate parent, PDVSA
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
SUPPLEMENTAL DISCLOSURE OF NONCASH FLOW INFORMATION:
F-55
$
-
$
(39,677)
222,752
$
-
$
149,872
$
-
$
1,900
$
-
-
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTHS ENDED MARCH 31, 2010 AND 2009
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
CITGO Petroleum Corporation (“CITGO” or the “Company”) and its subsidiaries are engaged in the
refining, marketing and transportation of petroleum products including gasoline, diesel fuel, jet fuel,
petrochemicals and lubricants, mainly within the continental United States east of the Rocky Mountains.
The Company does not own any crude oil reserves or crude oil exploration or production facilities. It
operates as a single segment. It is an indirect wholly-owned subsidiary of Petróleos de Venezuela, S.A.
(“PDVSA,” which may also be used herein to refer to one or more of its subsidiaries), the national oil
company of the Bolivarian Republic of Venezuela.
The unaudited condensed consolidated financial statements include the accounts of CITGO and its
subsidiaries. All consolidated subsidiaries are wholly owned. All material intercompany transactions and
accounts have been eliminated. The Company’s investments in less than majority-owned affiliates are
primarily accounted for by the equity method.
The unaudited condensed consolidated financial statements have been prepared by management in
accordance with United States generally accepted accounting principles (“GAAP”) for interim financial
information. Accordingly, they do not include all of the information and notes required by GAAP for
complete consolidated financial statements. However, management believes that the disclosures presented
herein are adequate to make the information not misleading. The condensed consolidated balance sheet as
of December 31, 2009 has been derived from the audited financial statements as of that date. The
accompanying condensed consolidated financial statements and notes should be read in conjunction with
the audited consolidated financial statements for the year ended December 31, 2009.
The financial information for CITGO subsequent to December 31, 2009 and with respect to the interim
three months ended March 31, 2010 and 2009 is unaudited. In management’s opinion, such interim
information contains all adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
2.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard
Update (“ASU”) 2009-16, “Transfers and Servicing - Accounting for Transfer of Financial Assets”. ASU
2009-16 amends Accounting Standards Codification (“ASC”) 860-10 for the issuance of Statement of
Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets - an
amendment of FASB Statement No. 140”, in June 2009. ASU 2009-16 is to improve the relevance and
comparability of the information that a reporting entity provides in its financial statements about (i) a
transfer of financial assets, (ii) the effects of the transferred financial assets on the entity’s financial
statements, and (iii) a transferor’s continuing involvement in transferred assets. SFAS No. 166 eliminates
the concept of a qualifying special-purpose entity. The statement limits circumstances in which a transferor
derecognizes a financial asset. It clarifies the requirement that a transferred financial asset be legally
F-56
isolated from the transferor. ASU 2009-16 requires enhanced disclosures about the risks that a transferor
continues to be exposed to because of its continuing involvement in transferred financial assets. The
guidance is effective for annual reporting periods that begin after November 15, 2009, for interim periods
within the first annual reporting period, and for interim and annual reporting periods thereafter, with early
adoption prohibited. The Company adopted this standard effective January 1, 2010. The adoption of this
standard had a material impact on the Company’s financial position. (Note 3)
In December 2009, the FASB issued ASU 2009-17, “Consolidation – Improvements to Financial Reporting
by Enterprises Involved with Variable Interest Entities”. ASU 2009-17 amends ASC 810-10 for the
issuance of SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, in June 2009. The amendment
requires a company to perform an analysis to determine whether a variable interest gives the entity a
controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest
entity is the company that has (a) the power over the significant activities of the variable interest entity and
(b) an obligation to absorb losses or the right to receive benefits that could potentially be significant to the
variable interest entity. The revised guidance requires ongoing reassessments of whether a company is the
primary beneficiary and eliminates the quantitative approach previously required for determining the
primary beneficiary. The guidance is effective for annual reporting periods that begin after November 15,
2009, for interim periods within the first annual reporting period, and for interim and annual reporting
periods thereafter, with early adoption prohibited. The Company adopted this standard effective January 1,
2010. The adoption of this standard had no material impact on the Company’s financial position and results
of operations.
In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820) –
Improving Disclosures about Fair Value Measurements”. ASU 2010-06 amended ASC 820-10 with new
disclosure requirements that companies should disclose separately the amounts of and reasons for
significant transfers in and out of Level 1 and Level 2 fair value measurements. In the reconciliation for the
Level 3 fair value measurements, companies should present separately information about purchases, sales,
issuances, and settlements on a gross basis. The amendments also require companies to disclose each class
of assets and liabilities measured at fair value, the inputs used and the valuation techniques. ASU 2010-06
is effective for interim and annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3.
Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. The Company adopted this standard effective January 1, 2010. Except for the
required presentation and disclosure, the adoption of this standard had no material impact on the
F-57
3.
ACCOUNTS RECEIVABLE
Sales are made on account, based on pre-approved unsecured credit terms established by CITGO
management. Allowances for uncollectible accounts are established based on several factors that include,
but are not limited to, analysis of specific customers, historical trends and other information. The carrying
value of accounts receivable approximates fair value due to (i) a short average collection cycle for such
trade receivables, (ii) CITGO’s positive collection history, and (iii) the characteristics of such trade
accounts receivables
March 31,
December 31,
2010
2009
(Unaudited)
(000s omitted)
Trade
Credit card
Other
$
Allowance for uncollectible accounts
922,236
48,561
98,194
1,068,991
(21,576)
$ 1,047,415
$
623,861
47,664
85,248
756,773
(18,806)
$
737,967
The Company has a limited purpose consolidated subsidiary, CITGO AR2008 Funding Company, LLC
(“AR Funding”), which in June 2008 established a non-recourse agreement to transfer an undivided interest
in specified trade accounts receivables (the “pool”) to independent third parties. The 364-day agreement
was renewed in June 2009. Under the terms of the agreement, new receivables are added to the pool as
collections (administered by CITGO) reduce previously transferred receivables. CITGO pays specified fees
related to its transfer of receivables under the program. The maximum interest that may be held by third
parties at any one time under the trade accounts receivable transfer agreement cannot exceed $450 million.
The Company intends to renew this facility again upon its expiration in June 2010. In the event this facility
is not renewed, management believes that the Company has sufficient other sources of liquidity to maintain
ongoing operations.
As of March 31, 2010 and December 31, 2009, $946 million and $887 million, respectively, of CITGO’s
accounts receivable comprised the designated pool of trade receivables owned by AR Funding. Effective
January 1, 2010, with the adoption of ASU 2009-16, the Company’s transactions with AR Funding do not
qualify for sale treatment and are considered a secured financing arrangement. As of March 31, 2010, $278
million of receivables in the designated pool that were held by third parties are included in accounts
receivable, net with an offset in secured financing arrangement in the condensed consolidated balance sheet.
As of December 31, 2009, prior to the adoption of ASU 2009-16, $226 million of undivided interests in the
receivables in the designated pool were held by third parties and the remainder of the pool was retained by
AR Funding.
CITGO recorded no gains or losses associated with the transfers other than the fees incurred by CITGO
related to this facility. For the three-month period ended March 31, 2010, such fees were $4 million and, as
a result of adopting ASU 2009-16, included in interest expense in the condensed consolidated statement of
income (loss). Such fees were $1 million for the three-month period ended March 31, 2009 and included in
other income (expense), net in the condensed consolidated statement of income (loss), prior to the adoption
of ASU 2009-16. The undivided interests held by third parties in CITGO trade accounts receivable were
never in excess of the sales facility limits at any time under this program.
F-58
CITGO is responsible for servicing the transferred receivables, for which it receives a monthly servicing fee
equal to 1% per annum times the average outstanding amount of receivables in the program for the prior
month. The servicing fee is an intercompany obligation from AR Funding to CITGO. CITGO does not
believe that it incurs incremental costs associated with the activity and has not, on a consolidated basis,
recorded any servicing assets or liabilities related to this servicing activity.
4.
INVENTORIES
March 31,
December 31,
2010
2009
(Unaudited)
(000s omitted)
Refined product
Crude oil
Materials and supplies
$
562,633
308,785
93,060
$
328,386
173,736
92,827
$
964,478
$
594,949
At March 31, 2010 and December 31, 2009, estimated net market values exceeded historical LIFO
inventory cost by approximately $1.8 billion and $1.5 billion, respectively.
5.
PROPERTY, PLANT AND EQUIPMENT
March 31,
December 31,
2009
2009
(Unaudited)
(000s omitted)
Land
Buildings and leaseholds
Machinery and equipment
Vehicles
Construction in process
$
Accumulated depreciation and amortization
117,971
684,141
6,574,375
35,602
635,064
8,047,153
(3,437,406)
$ 4,609,747
$
117,971
683,636
6,275,021
35,624
567,091
7,679,343
(3,365,889)
$ 4,313,454
Depreciation expense for each of the three months ended March 31, 2010 and 2009 was $72 million.
In March 2010, the Company sold platinum, utilized as catalyst in refinery units, with a net book value of
$11 million for approximately $42 million, which is included in accounts receivable at March 31, 2010.
The Company has leased back the platinum from the purchaser under operating lease agreements with
terms from nine to twenty-one months. The Company has recorded the leaseback under the treatment for a
minor leaseback and accordingly has recorded the entire net gain realized on the sale as other income in the
statement of income (loss).
F-59
6.
LONG-TERM DEBT AND FINANCING ARRANGEMENTS
March 31,
December 31,
2010
2009
(Unaudited)
(000s omitted)
Secured Revolving Credit Facility with variable interest rate
$
-
$
400,000
Senior Secured Term Loan B, due 2012 with variable interest rate
608,697
610,286
Senior Secured Term Loan A, due 2012 with variable interest rate
515,000
515,000
Tax-Exempt Bonds, due 2023 to 2043 with variable
and fixed interest rates
592,658
592,657
Taxable Bonds, due 2026 with variable interest rates
60,000
60,000
1,776,355
2,177,943
(206,357)
Total long-term debt
$ 1,569,998
(406,357)
$ 1,771,586
Senior Secured Credit Facility – On November 15, 2005, the Company entered into an agreement for a
$1.85 billion senior secured credit facility, which consists of the five-year secured revolving credit facility
in the amount of up to $1.15 billion and the seven-year senior secured term loan B of $700 million. This
agreement was amended in 2007 to provide for a $1 billion bridge term loan. The bridge term loan was
replaced in June 2008 with a senior secured term loan A of $515 million and a non-recourse agreement to
sell an undivided interest of up to $450 million in specified accounts receivable (Note 3). These agreements
are collectively referred to as the “senior secured credit facility”. The credit facility is secured by CITGO’s
interests in its Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois refineries, its trade
accounts receivable and its inventories and is subject to covenants typical for senior secured financings.
Effective with the execution of an amendment to the senior secured credit facility on February 4, 2010, the
revolver credit facility will bear interest at LIBOR plus the applicable margin. The interest rate for the term
loans is the higher of LIBOR or 2.00%, plus the applicable margin. The applicable margin, currently set at
325 basis points, is determined based upon the Company’s senior secured debt rating at the effective date of
the amendment and is subject to changes in the Company’s senior secured debt rating.
Secured Revolving Credit Facility – The $1.15 billion, five-year secured revolving credit facility matures
in November 2010. There was no amount outstanding under this secured revolving credit facility at March
31, 2010, compared to $400 million outstanding at December 31, 2009. The interest rate on the secured
revolving credit facility was LIBOR plus 125 basis points, or 1.49% at December 31, 2009. The unused
portion of the secured revolving credit facility, less letters of credit issued under the facility (Note 7), is
subject to a quarterly commitment fee ranging from 50 to 125 basis points, or 62.5 basis points at March 31,
2010. The Company’s plan is to refinance the secured revolving credit facility and restructure its debt
portfolio in 2010. The Company has begun discussions with existing lenders and other banks and expects
to refinance the secured revolving credit facility and restructure its debt portfolio during the second quarter
of 2010. In the event the Company is unable to refinance its current secured revolving credit facility, the
Company would consider optimizing working capital, monetizing non-strategic assets and working with its
ultimate parent to ensure payments of its obligations.
F-60
Senior Secured Term Loan B – The Company entered into a seven-year $700 million senior secured term
loan agreement in November 2005. The proceeds from the loan were used to redeem certain senior notes.
The senior secured term loan B matures in November 2012 and has a variable interest rate based on the
Company’s senior secured debt rating. The interest rate at March 31, 2010 was 2.00% LIBOR floor plus
325.0 basis points, or 5.25%.
Senior Secured Term Loan A – The Company entered into a $515 million senior secured term loan
agreement in June 2008. The senior secured term loan A amortizes in scheduled amounts of $200 million
in February 2011 and $100 million in February 2012 and has a final maturity date of November 15, 2012.
The senior secured term loan A has a variable interest rate based on the Company’s senior secured debt
rating. The senior secured term loan A had a principal balance of $515 million outstanding as of March 31,
2010. The interest rate at March 31, 2010 was 2.00% LIBOR floor plus 325.0 basis points, or 5.25%.
The ratings on the senior secured credit facility, as currently assessed by the three major debt rating
agencies, are as follows:
Secured
Standard & Poor's Ratings Group
Moody's Investors Service
Fitch Investors Services, Inc.
BB+
Ba1
BBB-
In the event of a downgrade in the ratings on the senior secured credit facility, the interest rate on the
facility would increase by 25 basis points for both term loans and the revolving credit facility.
Covenants – The Company executed an amendment and waiver to the senior secured credit facility on
February 4, 2010. The amendment:
permits the Company to refinance existing indebtedness in whole or in part;
modifies certain covenants under the existing credit agreement;
permits the Company to issue up to $400 million of secured indebtedness in connection with
industrial revenue bond financings;
restricts the Company from declaring and paying dividends so long as the covenant waivers remain
in effect and thereafter the payment of dividends will be subject to a minimum liquidity
requirement of $500 million, after giving effect to such dividends, and to a maximum debt to
capitalization ratio of 0.55 to 1. A declaration or payment of dividends during the waiver period
would, in effect, terminate the covenant waivers. In addition, the dividend calculation was revised
to include 100% of net income arising after January 1, 2009;
waives the interest coverage ratio through September 30, 2010 and revises it to 1.5 to 1 at
December 31, 2010. The interest coverage ratio requirement will increase each quarter until it
returns to 3 to 1 at December 31, 2011;
waives the capitalization ratio for December 31, 2009 and revises it to 0.60 to 1 thereafter;
includes a minimum liquidity requirement of $300 million at March 31, 2010, increasing to $400
million at June 30, 2010, which will remain in effect through September 30, 2011; and
revises the security to include the Company’s interest in the Lemont, Illinois refinery.
F-61
The various credit agreements under the senior secured credit facility described above reflect the same
covenants based on the senior secured credit facility agreement originally executed in 2005, as amended in
2007, as supplemented in 2008 and as further amended in 2010 as discussed above. Material covenant
provisions include:
aggregate proceeds of a disposition of assets cannot exceed $4 billion other than certain permitted
exceptions, including inventory in the normal course of business;
other indebtedness not otherwise expressly permitted by the senior secured credit facility cannot
exceed an aggregate principal amount of $200 million or 10% of net worth;
the Company may declare and pay cash dividends out of the sum of 100% of net income arising
after January 1, 2009, plus an additional amount of up to $4 billion dollars of net cash proceeds,
net of taxes and certain other transaction costs received from permitted sales of assets (amended as
stated above for the waiver period);
the Company must maintain a capitalization ratio to be more than 0.55 to 1 (amended as stated
the Company must maintain a ratio of EBITDA to interest expense of less than 3 to 1 (amended as
stated above for the waiver period);
indebtedness owed by the Company to, and guarantees by the Company of, any obligations of an
affiliate cannot exceed an aggregate principal amount of $75 million; and
permitted indebtedness, in the combined principal amount of receivables financing indebtedness
and additional indebtedness, cannot at any time exceed $1 billion in aggregate.
The Company’s debt instruments described above do not contain any covenants that trigger prepayment as
a result of a change in its debt ratings and do not contain any covenants that restrict amendment to or
termination of its long-term crude supply agreements. The Company covenants that all transactions with
affiliates will be structured as arms-length transactions. The Company was in compliance with the debt
covenants at March 31, 2010, except for the interest coverage ratio requirement, which was waived under
the amendment and waiver dated February 4, 2010 as noted above.
Tax-Exempt Bonds - At March 31, 2010, through state entities, CITGO has outstanding $454 million of
industrial development revenue bonds for certain Lake Charles, Corpus Christi and Lemont port facilities
and pollution control equipment and $139 million of environmental revenue bonds to finance a portion of
the Company’s environmental facilities at its Lake Charles, Corpus Christi and Lemont refineries. The
bonds bear interest at various fixed and floating rates, which ranged from 1.1% to 8.0% at March 31, 2010
and ranged from 1.0% to 8.0% at December 31, 2009. Additional credit support for the variable rate bonds
is provided through letters of credit issued under the Company’s secured revolving credit facility.
Taxable Bonds - At March 31, 2010, through a state entity, the Company has outstanding $60 million of
taxable environmental revenue bonds to finance a portion of the environmental facilities at the Lake Charles
refinery. Such bonds are secured by letters of credit issued under the Company’s secured revolving credit
facility and have a floating interest rate (weighted average 1.4% and 1.6% at March 31, 2010 and December
31, 2009, 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. There were no
taxable bonds converted to tax-exempt bonds during 2010 or 2009.
Debt Maturities – Future maturities of long-term debt as of March 31, 2010 are: 2010- $5 million, 2011$206 million, 2012- $913 million, 2013 - $-0-, 2014 - $-0-, and $652 million thereafter.
F-62
7.
COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims – Various lawsuits and claims arising in the ordinary course of business are
pending against CITGO. CITGO records accruals for potential losses when, in management’s opinion,
such losses are probable and reasonably estimable. If known lawsuits and claims were to be determined in
a manner adverse to CITGO, and in amounts greater than CITGO’s accruals, then such determinations
could have a material adverse effect on CITGO’s results of operations in a given reporting period. The
most significant lawsuits and claims are discussed below.
CITGO, along with most of the other major oil companies in the United States, is a defendant in a number
of federal and state lawsuits alleging contamination of private and public water supplies by methyl tertiary
butyl ether (“MTBE”), a gasoline additive. In general, the plaintiffs, which include individuals and
businesses as well as state and local governments and governmental authorities, claim that MTBE renders
the water not potable. In addition to compensatory and punitive damages, plaintiffs seek injunctive relief to
abate the contamination. The first MTBE cases were file in 2001. CITGO and some of the other
defendants previously settled 60 of the MTBE cases, with CITGO’s share of the settlement being $34
million ($16 million of which CITGO recovered from its insurance carriers). In addition, the defendants are
responsible for any future claims for cleanup costs for any new MTBE-contamination in certain wells, with
CITGO’s share being 5.76% of any such costs. As of July 12, 2009, a settlement agreement was executed
with the City of New York City to resolve the City’s MTBE claims for approximately $14 million, of which
CITGO’s share is approximately $1 million. CITGO and the other defendants are also contingently liable
for the future cleanup of certain wells if those wells become contaminated. On April 15, 2010, CITGO
and most of the other MTBE defendants entered into a settlement agreement with 47 plaintiffs in New York
and Florida. The total settlement is for $35 million, of which CITGO’s share is approximately $2 million.
As of March 31, 2010, there were approximately 30 cases pending, the majority of which were filed by
municipal authorities. Many of the remaining cases are pending in federal court and are consolidated for
pre-trial proceedings in the U.S. District Court for the Southern District of New York in Multi-District
Litigation (“MDL”) No. 1358. Six cases are also pending against CITGO in state courts in New York, New
Hampshire, New Jersey, California and the Commonwealth of Puerto Rico. While CITGO’s management
does not believe that the resolution of these matters will have a material adverse effect on its financial
condition, a significant adverse effect on its financial results for a given period is possible.
Claims have been made against CITGO in a number of asbestos, silica and benzene lawsuits pending in
state and federal courts. Most of these cases involve multiple defendants and are brought by former
employees or contractor employees seeking damages for asbestos, silica and benzene related illnesses
allegedly caused, at least in part, from exposure at refineries owned or operated by CITGO in Lake Charles,
Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these cases, the plaintiffs’ alleged
exposure occurred over a period of years extending back to a time before CITGO owned or operated the
premises at issue. CITGO will continue to vigorously defend these cases. CITGO does not believe that the
resolution of any of these cases will, either individually or on an aggregate basis, have a material adverse
effect on its financial condition or results of operations.
In 2007, CITGO was tried in the U.S. District Court for the Southern District of Texas for five criminal
violations of the Clean Air Act for having uncovered water equalization tanks and incorrectly computing
benzene emission amounts and exceeding benzene permitted levels in waste water streams and CITGO and
the former environmental manager at its Corpus Christi refinery were tried for five criminal violations
under the Migratory Bird Treaty Act for killing migratory birds. CITGO was found guilty under the Clean
Air Act on felony charges regarding the uncovered water equalization tanks, the charges pertaining to the
computation of benzene emission levels were dismissed and CITGO was found not guilty on the charges
relating to the benzene level in waste water streams. With respect to the five misdemeanor counts under the
Migratory Bird Treaty Act, the court granted directed verdicts of not guilty for CITGO on two counts
pertaining to 25 birds, found CITGO guilty on three counts involving 10 birds and found CITGO’s former
environmental manager not guilty. CITGO intends to appeal the felony convictions once a sentence is
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pronounced. CITGO filed a motion for a not guilty verdict notwithstanding the jury verdict for the felony
conviction based on a subsequent U.S. Supreme Court decision. Sentencing for the 2007 convictions has
not yet been scheduled. CITGO does not believe that the resolution of this matter will have a material
In November 2004, the Athos I, a merchant tanker, struck a submerged anchor in the public channel of the
Delaware River near Paulsboro, New Jersey and released crude oil owned by CITGO Asphalt Refining
Company (“CARCO”), a former wholly-owned subsidiary of CITGO. Frescati Shipping Company Ltd.
(“Frescati”), the owner of the Athos I, filed suit against CARCO in the U.S. District Court for the Eastern
District of Pennsylvania for over $125 million in oil spill recovery and cleanup costs. In 2008, CITGO was
also sued in the same court by the federal government, which is seeking to recover $87 million it paid out of
the Oil Spill Liability Trust Fund to Frescati for its costs in responding to the oil spill. The cost of the entire
cleanup and damages was approximately $268 million. CITGO does not believe CARCO has any liability
for the oil spill; however, it has entered into an agreement with the government to cap CITGO’s potential
damages at $124 million if it were to lose the Frescati lawsuit. CITGO will vigorously defend itself in a trial
scheduled for the fall of 2010.
Mr. and Mrs. Siegel, on behalf of gasoline purchasers throughout Illinois and the United States, filed suit
against CITGO, Shell, BP, Marathon and ExxonMobil in December 2005. They are seeking damages for
the increased gasoline prices in the wake of Hurricane Katrina and defendants’ alleged excessive profits.
The complaint alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. It
also alleged national consumer fraud and deceptive business practices, unjust enrichment and civil
conspiracy. CITGO has filed a motion to dismiss. On March 26, 2007, the Court granted the motion in part
and denied it in part. The court allowed the plaintiffs to proceed with their unjust enrichment claim and
their claims of violations of the Illinois Consumer Fraud Act. On September 23, 2008, the court denied
class certification. On February 23, 2009, the judge denied class certification for Illinois residents and
granted CITGO’s motion for summary judgment on September 4, 2009. The plaintiffs have filed a notice
of appeal to the U.S. Court of Appeals for the 7th Circuit.
Spectrum Stores, Inc., as a purported class action representative of purchasers of refined petroleum products
from CITGO, sued CITGO in the U.S. District Court for the South District of Texas on November 13,
2006. The lawsuit alleged CITGO violated the antitrust laws by conspiring with and aiding and abetting
PDVSA and OPEC to fix crude prices and hence refined petroleum products prices. In January 2007,
CITGO filed motions to dismiss based on failure to state a claim and on the act of state doctrine. In
December 2007 the Multi-District Litigation (“MDL”) Panel assigned the U.S. District Court for the South
District of Texas to handle the OPEC MDL cases, including Spectrum Stores, Fast Break Foods, LLC v.
Saudi Aramco Corporation, Green Oil Co. v. Saudi Arabian Oil Company, Countywide Petroleum v.
CITGO, and S-Mart Petroleum v. Petróleos de Venezuela, S.A. On March 21, 2008, S-Mart Petroleum
voluntarily dismissed its complaint. On January 9, 2009, the U.S. District Court for the South District of
Texas granted the defendants’ motion to dismiss the OPEC cases. The plaintiffs appealed this decision to
the U.S. Fifth Circuit Court of Appeals, which heard the appeal in March 2010, and the parties are awaiting
a decision.
On June 19, 2006 torrential rain fell at CITGO’s Lake Charles, Louisiana refinery, and oil overflowed from
two stormwater holding tanks and entered the Calcasieu River and Indian Marais. Further, in connection
with the same event, hydrogen sulfide and sulfur dioxide were released to the air. CITGO entered a guilty
plea to one misdemeanor violation of the Clean Water Act for the negligent discharge of oil, paying a $13
million fine, and entering into an Environmental Compliance Program. CITGO has settled many claims in
connection with this event. Many other claims related to bodily injury, property damage, business
interruption, and demurrage remain to be resolved. In addition 228 lawsuits, representing 1,815 plaintiffs
and three class actions, were filed by June 19, 2007. CITGO has settled with hundreds of plaintiffs for
amounts up to $2,600 per plaintiff. In two federal property damage cases, the juries did not award any
damages. On July 28, 2009, a state trial judge in Lake Charles entered a judgment of approximately
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$560,000 against CITGO in the Arabie trial. The plaintiffs were 14 individuals who claimed to have
suffered personal injuries from air emissions from the oil spill and the sulfur dioxide release. Most of the
judgment, $420,000, represents an award of punitive damages against CITGO. A plaintiff cannot recover
punitive damages under Louisiana law, but the judge found that either Texas or Oklahoma law and not
Louisiana law applied to this issue. This decision will be appealed. CITGO does not believe that the
resolution of these remaining matters will have a material adverse effect on its financial condition or results
of operations.
In 1973 predecessors to CARCO entered into a Terminal Service Agreement with Atlantic City Electricity
(“ACE”). It was amended in 1986 by CARCO’s immediate predecessor. In 1997 CARCO began using a
tank identified in the terminaling agreement to store sour water and reduced the monthly terminaling fee. In
the spring of 2007, RC Cape May Holding purchased the ACE power plant and told CARCO it was opting
to use a tank identified in the terminaling agreement for trading purposes. CARCO refused this request,
and in June 2007, RC Cape May invoked arbitration. On July 1, 2009, the arbitrator issued his interim
decision. He held that RC Cape May’s predecessor had transferred its right to one tank to CARCO and that
under New Jersey law RC Cape May is not entitled to any damages from the loss of use of the optional
268,000 barrel tank because it is a start-up business and therefore any lost profits would be speculative.
However, he did order CARCO to provide an alternative 268,000 barrel No. 6 fuel oil tank in the
Philadelphia area for RC Cape May’s use until 2015 under the disputed Terminal Service Agreement and
gave the parties 90 days to work out the details of such tank. RC Cape May is interested in a proposal by
CITGO to lease tank capacity at CITGO’s Linden, New Jersey terminal in resolution of this matter. On
October 15, 2009, the arbitrator affirmed his interim decision. On November 2, 2009, RC Cape May filed a
petition in state court in New York City for the court to confirm the arbitrator’s award. CARCO filed a
response opposing the confirmation on the basis that the arbitrator exceeded his authority in making the
award. CITGO does not believe that the resolution of this matter will have a material adverse effect on its
financial condition or result of operations.
On September 28, 2007, CITGO was advised that Immigration and Customs Enforcement was issuing an
administrative subpoena for documents pertaining to the importation of Canadian crude and non-NAFTA
condensate since June 1, 2006. When CITGO investigated the issue of imports of Canadian crude, CITGO
discovered that CITGO’s customs broker had not filed import reports with U.S. Customs for over a period
of many months and many of the reports that were filed contained mistakes. A “prior disclosure” filing
with U.S. Customs was made on January 4, 2008 to minimize any penalties for violations that were not
subject to the subpoena inquiry. CITGO has paid approximately $3 million in duties. CITGO may owe
approximately $2 million in unpaid merchandise processing fees and interest and estimates $6 million will
be owed in liquidated damages. CITGO does not believe that the resolution of this matter will have a
In January 2007, CITGO was named one of several defendants in at least nineteen cases in California,
Missouri, Kansas, Oklahoma, Kentucky, Maryland, Virginia, Alabama, Mississippi, North Carolina,
Nevada, New Mexico, Florida, Puerto Rico, and Tennessee. The complaints allege that the defendants sold
gasoline to the plaintiffs when the temperature was greater than 60o Fahrenheit. The plaintiffs claim that
they received less gasoline at the retail pump because the gasoline was not temperature corrected to 60o and
that the defendants prohibited dealers from temperature correcting the gasoline at the retail pump. CITGO
has filed a motion to dismiss. A California commission has found that consumers would not benefit from
requiring temperature corrected gasoline at the retail pump. CITGO will continue to vigorously defend
itself. CITGO does not believe that the resolution of this matter will have a material adverse effect on its
On June 30, 2008, Stephenson Oil Company, as a purported class action representative on behalf of all
CITGO branded distributors, sued CITGO in U.S. District Court in Oklahoma for allegedly breaching the
implied covenant of good faith and fair dealing in the distributor agreements through differential pricing of
gasoline sold to distributors in the same market. On October 2, 2009, the judge denied CITGO’s motion to
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dismiss. In late October 2009, Stephenson filed a brief for class certification which CITGO opposed.
CITGO will continue to vigorously defend itself in this case. CITGO does not believe that the resolution of
In Eres NV v. CARCO and NuStar on August 14, 2008, Eres filed under seal a maritime lawsuit against
CARCO, CITGO, and NuStar for alleged breach of the contract of affreightment (“COA”) assigned by
CARCO to NuStar for the transportation of asphalt. Eres alleges a $78 million value for the COA. Eres has
demanded maritime arbitration for the alleged breach of the COA against NuStar, CITGO, and CARCO.
CITGO has demanded indemnity from NuStar which NuStar denied. On November 5, 2008, Eres asked the
U.S. District Court for the Southern District of New York to compel NuStar to appoint an arbitrator in the
maritime arbitration case. On November 11, 2008, CITGO sued NuStar in Texas state court for a
declaratory judgment that the COA was assigned to NuStar and NuStar must indemnify CITGO under the
assignment and assumption. NuStar removed the state court action to the U.S. District Court for the
Southern District of Texas. On December 22, 2009, the parties filed opposing motions for summary
judgment. CITGO will vigorously defend itself in this case. CITGO does not believe that the resolution of
On July 19, 2009, a serious fire occurred at the alkylation unit at the Corpus Christi refinery. An employee
was seriously burned. Based on monitoring data, there appears to be no impact from hydrofluoric acid
vapors on the surrounding areas. The U.S. Chemical Safety Board, Occupational Safety and Health
Administration (“OSHA”), U.S. Environmental Protection Agency (“U.S. EPA”), U.S. Coast Guard, and
the Texas Commission on Environmental Quality (“TCEQ”) have investigated the incident. CITGO will
vigorously defend itself in this case, and does not believe that the resolution of this matter will have a
In a letter dated July 28, 2009, Explorer Pipeline Company filed a claim totaling over $11.2 million for
indemnification under the sale and purchase agreement for the purchase of the Eagle Pipeline and related
terminals from CITGO in 2007 for alleged breaches of warranties pertaining to encroachments to and
failure to clear rights of way, the condition of the pipe, and condition of a tank. CITGO is investigating the
allegations made in this claim. CITGO does not believe that the resolution of this matter will have a
On February 10, 2008, a power outage occurred at the Lake Charles refinery. As a result of the power
outage, six lawsuits with 368 claimants have been filed alleging that these claimants were exposed to sulfur
dioxide and hydrogen sulfide. On June 25, 2008 another power outage occurred at the Lake Charles
refinery. As a result of the second power outage, 26 lawsuits with 918 claimants have been filed alleging
that these claimants were exposed to sulfur dioxide and hydrogen sulfide. The plaintiffs are limiting their
damages to a maximum of $75,000 each so that CITGO is not entitled to a jury trial. CITGO is vigorously
defending itself, and does not believe that the resolution of this matter will have a material adverse effect on
its financial condition or results of operations.
On August 5, 2009, a former CITGO Vice President filed a complaint with the U.S. Equal Employment
Opportunity Commission (“EEOC”) in which he claims he was the alleged victim of national origin
discrimination and retaliation. A supplemental denial was filed on December 2, 2009. On September 30,
2009, a second former CITGO Vice President filed a complaint with the EEOC in which he claims he was
the alleged victim of national origin discrimination. CITGO will vigorously defend itself in these cases,
and does not believe that the resolution of these matters will have a material adverse effect on its financial
condition or results of operations.
On or about October 2, 2006, Messrs. Bland, Houser, and McPartlan were employed operating cranes at the
Lemont refinery and allegedly suffered injuries by inhaling toxic hydrofluoric acid. The plaintiffs sued
CITGO and other defendants and claimed that the defendants failed to ensure a pipeline was properly
maintained by inspecting the pipeline’s valves, joints, and flanges, and to block the flow of liquefied
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petroleum gas containing hydrofluoric acid. In July 2009 a judge granted Bland’s motion for partial
summary judgment on the liability issue. CITGO will vigorously defend itself in these cases and does not
believe that the resolution of these matters will have a material adverse effect on its financial condition or
At both March 31, 2010 and December 31, 2009, CITGO’s noncurrent liabilities included an accrual for
lawsuits and claims of $69 million. CITGO estimates that an additional loss of $52 million as of March 31,
2010, is reasonably possible in connection with such lawsuits and claims.
Environmental Compliance and Remediation – CITGO is subject to the federal Clean Air Act (“CAA”),
which includes the New Source Review (“NSR”) program as well as the Title V Air Permitting Program;
the federal Clean Water Act, which includes the National Pollution Discharge Elimination System program;
the Toxic Substances Control Act; and the federal Resource Conservation and Recovery Act and their
equivalent state programs. CITGO is required to obtain permits under all of these programs and believes it
is in material compliance with the terms of these permits. CITGO is subject to liability under the
Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) for remediation of
contamination at its refineries. Such liability is potentially limited because the former owners of many of
CITGO’s assets have assumed all or the material portion of the CERCLA obligations related to those assets.
CITGO is currently incurring costs to remediate certain sites under CERCLA. CITGO does not expect
these costs to be material if indemnifying parties continue to indemnify CITGO for a significant portion of
these costs. However, CITGO could incur significant costs if the former owners are unwilling or unable to
pay their shares.
The U.S. refining industry is required to comply with increasingly stringent product specifications under the
1990 Clean Air Act Amendments for reformulated gasoline and low sulfur gasoline and diesel fuel that
require additional capital and operating expenditures.
In addition, CITGO is subject to various other federal, state and local environmental laws and regulations
that may require CITGO to take additional compliance actions and also actions to remediate the effects on
the environment of prior disposal or release of petroleum, hazardous substances and other waste and/or pay
for natural resource damages. Maintaining compliance with environmental laws and regulations could
require significant capital expenditures and result in additional operating costs. Also, numerous other
factors, such as pending federal climate change legislation, could affect CITGO’s plans with respect to
environmental compliance and related expenditures.
CITGO’s accounting policy establishes environmental reserves as probable site restoration and remediation
obligations become reasonably capable of estimation. Environmental liabilities are recorded at their
undiscounted current value and without consideration of potential recoveries from third parties which are
recorded in other noncurrent assets. Subsequent adjustments to estimates, to the extent required, are made
as more refined information becomes available. CITGO believes the amounts provided in its consolidated
financial statements, as prescribed by generally accepted accounting principles, are adequate in light of
probable and estimable liabilities and obligations. However, there can be no assurance that the actual
amounts required to discharge alleged liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a material adverse affect on CITGO’s
consolidated results of operations, financial condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of Environmental Quality (“LDEQ”)
to cease usage of certain surface impoundments at the Lake Charles refinery by 1994. A mutually
CITGO is implementing the plan pursuant to a June 2002 LDEQ administrative order. CITGO and the
former owner of the refinery are sharing the related closure costs based on estimated contributions of waste
and ownership periods.
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In June 1999, CITGO and numerous other industrial companies received notice from the U.S. EPA that the
U.S. EPA believes these companies have contributed to contamination in the Calcasieu Estuary, near Lake
Charles, Louisiana and are potentially responsible parties (“PRPs”) under CERCLA. The U.S. EPA made a
demand for payment of its past investigation costs from CITGO and other PRPs and since 1999 has been
conducting a remedial investigation/feasibility study (“RI/FS”) under its CERCLA authority. The LDEQ
has also made similar allegations against CITGO and other industrial companies. While CITGO disagrees
with many of the U.S. EPA’s and LDEQ’s earlier allegations and conclusions, CITGO and other industrial
companies signed in December 2003 a Cooperative Agreement with the LDEQ on issues relative to the
Bayou D’Inde tributary section of the Calcasieu Estuary, and the companies are proceeding with a
Feasibility Study Work Plan. CITGO will continue to deal separately with the LDEQ on issues relative to
its refinery operations on another section of the Calcasieu Estuary. The Company still intends to contest
this matter if necessary.
In January and July 2001, CITGO received notices of violation (“NOVs”) from the U.S. EPA alleging
violations of the CAA. The NOVs are an outgrowth of an industry-wide and multi-industry U.S. EPA
enforcement initiative alleging that many refineries, electric utilities and other industrial sources modified
air emission sources without complying with the new source review provisions of the CAA. Without
admitting any violations, CITGO executed a Consent Decree with the United States and the states of
Louisiana, Illinois, New Jersey, and Georgia. The Consent Decree requires the implementation of pollution
control equipment at CITGO’s refineries and a Supplemental Environment Project at CITGO’s Corpus
Christi refinery. CITGO has incurred approximately $434 million in capital costs related to the Consent
Decree, primarily between 2006 and 2008. CITGO expects to incur an additional $26 million in related
capital costs through the end of 2011.
CITGO has granted to the New Jersey Natural Lands Trust a conservation easement covering the 592 acre
Petty’s Island, which is located in the Delaware River in Pennsauken, New Jersey and owned by CITGO.
Petty’s Island contains a closed CITGO petroleum terminal and other industrial facilities, but it is also the
habitat for the bald eagle and other wildlife. The granting of the conservation easement will mitigate the
amount of remediation that CITGO would have to perform on Petty’s Island. On April 22, 2009, CITGO
entered into, with the New Jersey Department of Environment Protection, an Agreed Consent Order to
remediate the hydrocarbon contamination on Petty’s Island and a release of CITGO from natural resource
damages for all of CITGO’s former and current facilities in New Jersey.
On June 19, 2006, as the result of torrential rainfall, multiple sulfur dioxide and hydrogen sulfide releases
occurred and two stormwater storage tanks at CITGO’s Lake Charles refinery overflowed to the tanks’
secondary containment area that was under construction. Due to a failure in the integrity of the
containment, approximately 53,000 barrels of oil in stormwater were discharged into the Indian Marais
and Calcasieu River. The U.S. EPA and the LDEQ commenced enforcement actions. The Natural
Resource Damage Assessment (“NRDA”) studies have been completed and submitted to the state and
federal trustees for review. On April 9, 2007, the LDEQ issued a Consolidated Compliance Order & Notice
of Potential Penalty to CITGO with regards to the June 19, 2006 event and several other alleged violations
over a five-year period. Currently, the estimate of the high end of the penalty sought by LDEQ is
approximately $155,000. On May 14, 2007, CITGO filed an appeal of this order. On November 5, 2007
the federal government proposed a partial NRDA assessment for loss of recreational use of the Calcasieu
and Intercoastal Waterway of $486,000 which was later reduced to $316,000. CITGO has accepted that
assessment; however payment is deferred until completion of the entire NRDA process. On June 24, 2008,
the U.S. EPA and the LDEQ sued CITGO for the release of 53,000 barrels of slop oil into the Indian Marais
and Calcasieu River. The U.S. EPA can seek penalties up to $1,100 per barrel released for ordinary
negligence and up $4,300 per barrel for gross negligence or willful misconduct. Further, the LDEQ is
seeking reimbursement for its response costs. The U.S. EPA wants injunctive relief to prevent a recurrence
of this release. In connection with the NRDA, the National Oceanic and Atmospheric Administration
(“NOAA”) in February 2009 submitted a reimbursement request for $901,000 for their investigative
costs up through December 2007. The U.S. EPA has been granted a motion for partial summary judgment
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based on CITGO’s admission of liability in the criminal case. CITGO will continue to vigorously defend
these matters. CITGO does not believe that the resolution of these matters will have a material adverse
effect on its financial condition, but may have a significant effect on its financial results for a given period.
In February 2009, the U.S. EPA issued an NOV to CITGO’s Lemont refinery for alleged violations of the
CAA resulting from the combusting of pollutants in its refinery flares. According to the U. S. EPA, the
Lemont NOV was the beginning of a nationwide effort to improve flaring operations in the industry by
requiring continuous monitoring and control equipment that will record steam-to-waste gas ratios during
flaring events. The U.S. EPA contends that only through conducting such monitoring can refineries
determine whether the flares are maintained in conformance with their design and conform to good air
pollution control practices. The purported goal is to control these ratios in an automated fashion as well as
create a new body of operations and monitoring records. The U.S. EPA envisions refining companies
entering into agreements with the U.S. EPA similar to the NSR Consent Decree CITGO executed
concerning alleged modifications of air emission sources. CITGO has informed the U.S. EPA that its
proposed program is neither required nor necessary and has provided it with the records indicating that
CITGO’s flare operations conform to recommended design standards.
On July 19, 2009, a serious fire occurred at the alkylation unit at CITGO’s Corpus Christi refinery. Based
on monitoring data, there appears to be no impact from hydrofluoric acid vapors on the surrounding areas.
Because all appropriate storage areas, including dike areas, at the refinery were used on an emergency basis
to store fire water, the refinery was compelled to release fire water that exceeded some of the permit limits
of the refinery’s discharge permit to the ship channel. The U.S. Chemical Safety Board, OSHA, U.S. EPA,
U.S. Coast Guard, and the TCEQ have investigated the incident. On December 18, 2009, the TCEQ issued
a notice of enforcement for the alleged water discharges following the July 19, 2009 fire at the unit. The
TCEQ is demanding an administrative civil penalty of $963,000 for alleged exceedances to the Texas
Pollution Discharge Elimination System limitations for fluoride, discharge of industrial waste into waters of
the state, unauthorized discharge of contact fire water and vapor suppression water from outfalls as well as
the discharge of process wastewater from tanks to the unlined containment berm area surrounding those
tanks. In February 2010, the TCEQ increased the amount of its civil penalty to $1 million to include
additional alleged violations discovered during an air investigation. On April 19, 2010, CITGO and the
TCEQ reached a tentative settlement agreement. The terms include CITGO’s payment of a $300,000 civil
penalty and potential commitment to install an enhanced vapor recovery system on six storage tanks that
store benzene or benzene contaminated wastewater; if the system is installed, the penalty may be reduced
by another 25 to 30%. On January 15, 2010, OSHA cited CITGO for 15 alleged serious, two alleged
willful, and one alleged repeat violations of OSHA’s regulations arising from OSHA’s inspections of the
Corpus Christi refinery after the July 19, 2009 fire. The total amount of the citation is $237,000.
Mandatory settlement discussions have been scheduled for the end of June 2010 at which CITGO will
vigorously defend itself. CITGO does not believe that the resolution of this matter will have a material
At March 31, 2010, CITGO’s noncurrent liabilities included an environmental accrual of $81 million
compared with $83 million at December 31, 2009. CITGO estimates that an additional loss of $23 million
as of March 31, 2010, is reasonably possible in connection with environmental matters.
Various regulatory authorities have the right to conduct, and from time to time do conduct, environmental
compliance audits or inspections of CITGO and its subsidiaries’ facilities and operations. Those compliance
audits or inspections have the potential to reveal matters that those authorities believe represent noncompliance in one or more respects with regulatory requirements and for which those authorities may seek
corrective actions and/or penalties in an administrative or judicial proceeding. Based upon current
information, CITGO does not believe that any such prior compliance audit or inspection or any resulting
proceeding will have a material adverse effect on its future business and operating results, other than
matters described above.
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Conditions which require additional expenditures may exist with respect to CITGO’s various sites
including, but not limited to, its operating refinery complexes, former refinery sites and crude oil and
petroleum product storage terminals. Based on currently available information, CITGO cannot determine
the amount of any such future expenditures.
Supply and Other Agreements – The Company purchases the crude oil processed at its refineries and also
purchases refined products to supplement the production from its refineries to meet marketing demands and
resolve logistical issues. In addition to supply agreements with various affiliates (Note 8), 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. The Company has other agreements for utilities and other
hydrocarbon products used in the refinery process with various entities and terms.
Commodity Derivative Activity – The Company has certain binding agreements associated with its
commodity derivative contracts (Note 11).
Guarantees - As of March 31, 2010, the Company has guaranteed the debt of others including bank debt of
an equity investment as shown in the following table:
Expiration
Date
(000s omitted)
Bank debt
Equity Investment
$
5,500
2012
If the debtor fails to meet its obligation, CITGO could be obligated to make the required payment. The
Company has not recorded any amounts on the Company’s balance sheet relating to this guarantee. In the
event of debtor default on the equity investment bank debt, CITGO has no recourse.
CITGO has granted indemnities to the buyers in connection with past sales of product terminal facilities.
These indemnities provide that CITGO will accept responsibility for claims arising from the period in
which CITGO owned the facilities. Due to the uncertainties in this situation, the Company is not able to
estimate a liability relating to these indemnities.
The Company has not recorded a liability on its balance sheet relating to product warranties because
historically, product warranty claims have not been significant.
Other Credit and Off-Balance Sheet Risk Information as of March 31, 2010 - The Company has
outstanding letters of credit totaling approximately $537 million issued against the Company’s secured
revolving credit facility, which includes $513 million related to CITGO’s tax-exempt and taxable revenue
bonds (Note 6).
The Company has also acquired surety bonds totaling $102 million primarily due to requirements of various
government entities. The Company does not expect liabilities to be incurred related to such letters of credit
or surety bonds.
8.
During the three months ended March 31, 2010 and 2009, the Company purchased approximately 37% and
53%, respectively, of the crude oil processed in its refineries from PDVSA under long-term supply
agreements and spot purchases. On December 1, 2008, the Company entered into an agreement with
PDVSA which combines all crude oil purchases for the Lake Charles refinery and Corpus Christi refinery
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in a single agreement that extends through March 31, 2012 and can be extended further under the terms of
the agreement. Either party may provide notice of cancellation of their current crude oil supply agreement
at the end of the term or any renewal term at least one year prior to the expiration date. The Company’s
crude oil purchase commitment under the agreement is approximately 250 MBPD.
The long-term crude oil supply agreement requires PDVSA to supply minimum quantities of crude oil to
CITGO. The crude oil supply agreement pertaining to the Lake Charles and Corpus Christi refineries
incorporates formulas based on the spot market values of widely traded crudes and other hydrocarbons plus
an adjustment for market change.
The feedstock supply agreement (“FSA”) for the supply of naphtha, which remains in effect for the Corpus
Christi refinery through 2012, incorporates a formula price based on the market value of a slate of refined
products deemed to be produced from each particular grade of feedstock, less (i) specified deemed refining
costs; (ii) specified actual costs, including transportation charges, actual cost of natural gas and electricity,
import duties and taxes; and (iii) a deemed margin. Under the FSA, 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 feedstock do not necessarily
reflect the actual costs and yields in any period, the actual refining margin earned by CITGO under the FSA
will vary depending on, among other things, the efficiency with which CITGO conducts its operations
during such period.
The Company purchased $1.7 billion and $1.3 billion of crude oil, feedstocks, and other products from
PDVSA and its wholly-owned subsidiaries during the three months ended March 31, 2010 and 2009,
respectively, under these and other purchase agreements. At March 31, 2010 and December 31, 2009, $428
million and $459 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 HOVENSA and
Mount Vernon Phenol Plant Partnership, under long-term contracts. These agreements incorporate various
formula prices based on published market prices and other factors. Such purchases totaled $919 million
and $722 million for the three month periods ended March 31, 2010 and 2009, respectively. Any portion of
the HOVENSA purchases that were donated are reflected in the statement of income (loss) as selling,
general and administrative expense. At March 31, 2010 and December 31, 2009, $136 million and $150
million, respectively, were included in payables to affiliates as a result of these and related transactions.
The Company had refined product, feedstock, and other product sales to affiliates, primarily at
market-related prices, of $110 million and $58 million during the three months ended March 31, 2010 and
2009, respectively. At March 31, 2010 and December 31, 2009, $77 million and $61 million, respectively,
were included in due from affiliates as a result of these and related transactions.
In December 2007, CITGO entered into a one-year, $1 billion note receivable from PDVSA. The original
note bore interest at 3.82% per annum paid quarterly. The note was extended in December 2008 to a
maturity date of December 17, 2009 and bore interest at 1.36% per annum paid quarterly. The Company
and PDVSA entered into a letter of intent in October 2009 to extend the note past the December 17, 2009
maturity date and agreed to the terms of the amortization of the balance of the note. The definitive
agreement, including an offset payment agreement and the new promissory note, was executed on February
2, 2010. The note will be amortized by offset of two designated cargoes of crude oil delivered to CITGO
by PDVSA each month commencing in August 2009 and continuing until the note is paid in full. The
remaining outstanding balance would become due no later than December 31, 2010 if the offset
arrangement were to be terminated for any reason. Under the definitive agreement, the note will continue
to bear interest at 1.36% per annum. At March 31, 2010 and December 31, 2009, the outstanding principal
balance of the note was $384 million and $607 million, respectively. The Company recorded interest
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income of approximately $2 million and $3 million related to the note in the condensed consolidated
statements of income (loss) for the three month periods ended March 31, 2010 and 2009, respectively.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment of rent, stipulated loss
value and terminating value due under the lease of the Corpus Christi refinery facilities. The Company has
also guaranteed debt of certain affiliates (Note 7).
March 31, 2010 and December 31, 2009, CITGO had net related party payable related to federal income
taxes of $35 million and $31 million, respectively, which is included in payable to affiliates.
At March 31, 2010 and December 31, 2009, CITGO has federal income taxes prepayments of $227 million
and $181 million, respectively, included in current income tax receivable.
The Company has $14 million in payables to affiliates relating to insurance policies obtained through a
subsidiary of its ultimate parent at both March 31, 2010 and December 31, 2009.
CITGO, from time to time, provides services for and makes payments on behalf of its ultimate parent
company for various items such as medical expenses, travel and accommodations, advertising and
transportation. In addition, the Company transferred certain non-operating assets to its ultimate parent
during 2009. In order to settle these payments, indirect non-cash dividends of approximately $100 million
were declared in 2009.
In November 2009, we sold certain non-operating assets and related spare parts to PDVSA for an aggregate
price of $69 million, which is payable to us on a deferred basis. No gain or loss was recorded by the
Company as a result of this transaction. Interest income of $1 million for the three months ended March 31,
2010 was recorded in the condensed consolidated statement of income (loss). As of March 31, 2010 and
December 31, 2009, $4 million of current notes receivable and $65 million of noncurrent notes receivable
are included in the condensed consolidated balance sheets related to this transaction. Interest receivable of
$2 million and $1 million due from affiliates was recorded in the condensed consolidated balance sheets at
March 31, 2010 and December 31, 2009, respectively.
During the period ended March 31, 2010, the Company entered into agreements with PDVSA under which
it manages and administers the procurement of equipment and other goods and services on PDVSA’s
behalf. Under these agreements, the Company provides all services required for the procurement and
delivery to PDVSA or its affiliate of the specified equipment, goods or services. The Company arranges
payment for all or any portion of the purchase price or service fee to the vendor and all other costs and
expenses incurred in connection with the procurement as and when they become due. Before the Company
processes any such payments, PDVSA is required to provide the Company with the requisite funds by
offsetting amounts otherwise payable by the Company under the long-term crude oil supply agreement.
Under the agreements, PDVSA is required to indemnify the Company for any liabilities, costs or expenses
incurred in connection with the agreements and the provision of services thereunder and to pay the
Company a fee for its services, which is intended to cover the Company’s internal costs incurred in
providing the services and provide additional compensation to the Company. At March 31, 2010, total
payments of $150 million related to the specified equipment purchased under the agreements were offset
against the Company’s crude purchases from PDVSA. As of March 31, 2010, the Company has $379,000
for services fees in due from affiliates in connection with these agreements.
F-72
9.
EMPLOYEE BENEFIT PLANS
The following table presents the components of the net periodic benefit cost with respect to pension and
other postretirement benefits:
Pension Benefits
Other Benefits
2010
2009
2010
2009
(Unaudited)
(000s omitted)
Service cost
Interest cost
Expected return on plan assets
Amortization of Transition Obligation (Asset)
Amortization of prior service cost
Amortization of net loss
Settlement loss
$ 5,738
11,277
(10,659)
208
2,847
-
$ 6,177
10,892
(8,699)
(2)
97
5,661
1,767
$ 2,958
8,684
418
20
-
$ 2,954
7,537
(21)
(123)
(88)
-
Net periodic benefit cost
$ 9,411
$ 15,893
$ 12,080
$ 10,259
The Company has contributed $5 million to the qualified pension plans through March 31, 2010 in
accordance with applicable laws and regulations. The Company estimates that it will contribute
approximately $15 million to these plans over the remainder of 2010. This includes an estimate of the
amount the Company will contribute in September 2010 as a final contribution for the 2009 plan year. The
nonqualified plans are funded as needed to pay retiree benefits. The Company has contributed $1 million to
the nonqualified plans through March 31, 2010. The company estimates that it will contribute
approximately $3 million to the nonqualified plans over the remainder of 2010.
The Company’s policy is to fund its postretirement benefits other than pension obligation on a pay-as-yougo basis. The Company has contributed $4 million to these plans as of March 31, 2010. The Company
estimates that it will contribute approximately $15 million to these plans over the remainder of 2010.
During March 2010, Congress passed and the President signed new healthcare legislation. While the new
law may impact certain of the Company’s healthcare plans, the Company currently believes this impact will
not be material. The Company will continue to review the impact of the new law as governmental agencies
issue interpretations regarding its meaning and scope. The Company recorded an adjustment to income
taxes as a result of the new healthcare legislation. (Note 10)
F-73
10. INCOME TAXES
The federal statutory tax rate differs from the effective tax rate due to the following:
March 31,
2010
Federal statutory tax rate
State taxes, net of federal benefit
Dividend exclusions
Medicare subsidy
Manufacturing deduction
Deferred state rate (law enactments)
Other
Effective tax rate
March 31,
2009
35.0 %
0.8 %
3.1 %
(15.4)%
(0.2)%
35.0 %
1.2 %
(0.4)%
(0.5)%
(1.0)%
5.5 %
-
23.3 %
39.8 %
The effective tax rates were 23.3% and 39.8% for the three months ended March 31, 2010 and 2009,
respectively. The decrease in the effective tax rate as compared with the prior year was primarily due to an
income tax charge of $28 million recorded during the three months ended March 31, 2010 as a result of the
Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act
(“the Health Care Acts”). The Health Care Acts, enacted by Congress in March 2010, included a provision
to reduce the amount of retiree medical costs that will be deductible after December 31, 2012. The deferred
tax asset associated with the tax treatment of these retiree medical costs was reduced as a result of this
legislation. Beginning in 2013, the Company will no longer be able to claim an income tax deduction
related to prescription drug benefits provided to retirees and reimbursed under the Medicare Part D retiree
drug subsidy.
In 2010 the Company expects there will be no benefit for the manufacturing deduction due to an anticipated
net operating loss for 2010.
11. DERIVATIVE INSTRUMENTS
The Company has exposure to price fluctuations of crude oil and refined products and changes in interest
rate associated with its variable rate debt. The fluctuations in future prices create risk to the Company as its
activities involve commitments to pay or receive fixed prices in the future. To manage and reduce
exposures in connection with the commodity price, management enters into certain derivative instruments.
The Company’s petroleum commodity derivatives, comprised of physical and financial derivatives, include
exchange-traded futures contracts, forward purchase and sale contracts, exchange-traded and
over-the-counter (“OTC”) options, and OTC swaps. The Company does not utilize any derivative
instruments to manage its interest rate risk.
The Company has risk management policies in place to identify and analyze the risks faced by the
Company. The Company does not attempt to manage the price risk related to all of its inventories of crude
oil and refined products. As a result, at March 31, 2010, the Company was exposed to the risk of broad
market price volatility with respect to a substantial portion of its crude oil and refined product inventories.
As of March 31, 2010, the Company’s total crude and refined products inventory was 30 million barrels.
Aggregate commodity derivative positions entered into for price risk management purposes at that date
totaled 5 million barrels.
Fair values of derivatives are recorded in other current assets or other current liabilities, as applicable, and
changes in the fair value of derivatives not designated in hedging relationships are recorded in cost of sales
in the condensed consolidated statement of income (loss). The Company does not designate any of its
F-74
derivative instruments as hedges as these derivative instruments are designed to hedge risk associated with
the market price fluctuations or for trading purposes. At March 31, 2010 and December 31, 2009, amounts
included in other current assets and other current liabilities related to the fair values of open commodity
derivatives are as follows:
March 31,
2010
(Unaudited)
December 31,
2009
(000s omitted)
Balance Sheet Location
Prepaid expense and other
$
6,373
5,780
$
10,995
13,248
For the three month periods ended March 31, 2010 and 2009, gains or losses from commodity derivatives
held for trading, whether realized or unrealized, were recorded in cost of sales in the condensed
consolidated statement of income (loss) as indicated in the following table:
Amount of (Gain)/Loss Recognized in
Net Loss on Derivatives for the
2010
2009
(Unaudited)
Statement of Income (Loss) Location
(000s omitted)
Cost of sales (includes realized (gains) losses of
$(1) million and $109 million, respectively)
$
(3,798)
$ 91,093
The trading activities expose the Company to certain credit risks. The credit risk associated with futures
contracts is negligible as they are traded on the New York Mercantile Exchange (“NYMEX”). Exchangetraded futures contracts settled through broker margin accounts at NYMEX generally require a cash
deposit, which are subject to change based on market price movement. When a particular market participant
goes bankrupt, the NYMEX will cover any potential losses with no effect on the Company’s trades. OTC
derivative contracts, on the other hand, expose the Company to counterparty credit-related losses in the
event of nonperformance by counterparties. Neither the Company nor the counterparties are required to
collateralize their obligations under OTC derivative commodity agreements. None of the Company’s
derivatives agreements contain contingent features provisions.
To manage the counterparty risk, the Company monitors the creditworthiness of its counterparties through
formal credit policies. Additionally, the Company has a master netting agreement which permits net
settlement with its counterparties. As of March 31, 2010, the fair value of derivative instruments in a net
receivable position due from counterparties was immaterial. The Company does not anticipate
nonperformance by the counterparties, which consists primarily of major financial institutions.
Management considers the credit risk to the Company related to its commodity derivatives to be immaterial
during the periods presented.
F-75
12. FAIR VALUE INFORMATION
The Company measured some of its financial assets and liabilities at fair value on a recurring basis. To
estimate fair value, the Company utilizes observable market data when available, or models that utilize
observable market data in the absence of identical assets or liabilities. In addition to market information,
the Company incorporates transaction-specific details that, in management’s judgment, market participants
would utilize in a fair value measurement.
In accordance to ASC 820, “Fair Value Measurements and Disclosures”, disclosure is required surrounding
the various inputs that are used in determining the fair value of the Company’s assets and liabilities and the
degree to which they are observable. These inputs are summarized into a hierarchy of three broad levels
listed below.
Level 1: Quoted prices in active markets for identical assets or liabilities. Level 1 inputs include derivative
assets and liabilities. In forming fair value estimates, the Company utilizes the most observable inputs
available for the valuation. The fair value of the Company’s certain commodity futures and options
contracts are based on quoted prices in active markets for identical assets or liabilities from the NYMEX.
Level 2: Other significant observable inputs. Level 2 inputs include quoted prices for similar assets and
liabilities in active markets. The Company’s OTC swaps use both Level 1 and Level 2 inputs. Valuation
for OTC swaps are based on NYMEX pricing, a Level 1 input, and pricing obtained from Platts, where the
values are based on similar assets or liabilities that were recently traded or transferred between external
entities, a Level 2 input. If a fair value measurement reflects inputs of different levels within the hierarchy,
the measurement is categorized based upon the lowest level of input that is significant to the fair value
measurement. The valuation of physical delivery purchase and sale agreements, OTC financial swaps,
three-way collars and deferred compensation arrangements are based on similar transactions observable in
active markets or industry standard models that primarily rely on market observable inputs. Substantially
all of the assumptions for industry standard models are observable in active markets throughout the full
term of the instrument. The Company categorizes these measurements as Level 2.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the
fair value measurement and less observable from objective sources. The Company valuation models for
derivative contracts are based on internally developed market and third-party pricing assumptions. Level 3
instruments primarily include commodity derivative instruments such as forwards purchases and sales of
refined products. Although third party broker quotes are utilized to assess the reasonableness of our prices
and valuation techniques, we do not have sufficient corroborating market evidence to support classifying
these assets and liabilities as Level 2.
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.
F-76
The following table summarizes the valuation of the Company’s financial instruments measured at fair
value on a recurring basis as of March 31, 2010:
Fair Value Measurement at March 31, 2010 Using
Quoted Prices in
Significant
Significant
Active Markets for
Observable
Unobservable
Identical Assets
Inputs
Inputs
(Level 1)
(Level 2)
(Level 3)
(Unaudited)
(000s omitted)
ASSETS:
Derivatives
Pensions plan
Money Market funds
Common/collective trust funds
$
Total pensions plan
5,185
$
2,528
$
Total
Fair
Value
168
$
7,881
3,215
-
548,095
-
3,215
548,095
3,215
548,095
-
551,310
$ 559,191
Total Assets
$
8,400
$
550,623
$
168
LIABILITIES:
Derivatives
$
1,606
$
2,976
$
2,705
$
7,287
There were no significant transfers between Levels 1 and 2 for the three month period ended March 31,
2010.
The table below presents a reconciliation of changes in the fair value of the net derivative assets (liabilities)
classified as level 3 in the fair value hierarchy and summarizes gains and losses due to changes in fair value.
2010
(Unaudited)
(000s omitted)
Beginning balances as of January 1,
Total gains, realized and unrealized
included in Cost of sales
Purchases, issuances and settlements
Transfers in and/or out of level 3
$
Ending balance as of March 31,
$
(8,198)
5,661
(2,537)
Nonfinancial assets are measured at fair value on a nonrecurring basis. Fair value is used to measure
nonfinancial assets such as impaired property, plant and equipment when implementing lower of cost or
market accounting or when adjusting carrying values. Fair value is determined primarily using the
anticipated net cash flows discounted at a rate commensurate with the risk involved. The carrying value of
a long-lived asset or asset group is considered impaired when the separately identifiable anticipated
undiscounted net cash flow from such asset is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair value of the long-lived asset or asset
group. The Company’s nonfinancial liability related to asset retirement obligations approximates fair value.
F-77
The Company has the option to report certain financial assets and liabilities at fair value. The Company has
reviewed the eligible items and determined not to elect the fair value option for any of these assets and
liabilities
The following table presents the Company’s other financial instruments that are not measured on a
recurring basis. The carrying amounts and estimated fair values are as follows:
March 31, 2010
(Unaudited)
Carrying
Fair
Amount
Value
(000s omitted)
LIABILITIES:
Long-term debt
OFF-BALANCE SHEET
FINANCIAL INSTRUMENTS UNREALIZED LOSSES:
Guarantees of debt
Letters of credit
Surety bonds
$
206,357
1,569,998
-
$
206,357
1,569,300
December 31, 2009
Carrying
Fair
Amount
Value
(000s omitted)
$
(579)
(22,856)
(776)
406,357
1,771,586
-
$
368,357
1,731,856
(227)
(8,981)
(763)
Financial assets and liabilities for which the carrying value approximates fair value were not presented in
the above summary. For financial assets, these include cash and cash equivalents, due from affiliates,
accounts receivable (including receivables sold at December 31, 2009), and notes receivable from ultimate
parent. For financial liabilities, these include accounts payable, payables to affiliates, note payable due
under product financing arrangement, and amounts under the secured financing arrangement at March 31,
2010. For nonfinancial liabilities, this includes asset retirement obligations.
The following assets and liabilities were analyzed for fair value measurement:
Current portion of long-term debt – The carrying amounts of the current portion of long-term debt,
excluding the revolving credit facility, approximate fair value due to the short maturities of the financial
instruments. The fair value of the revolving credit facility is based on prices obtained from a third party for
an amount the Company would pay to transfer the liability to a market participant in an orderly transaction
at the measurement date.
Long-term debt – The fair value of long-term debt is based on prices obtained from a third party for an
amount the Company would pay to transfer the liability to a market participant in an orderly transaction at
the measurement date.
Derivatives – The fair value of the Company’s derivative and other financial instruments are measured
using an in-exchange valuation premise and using a market approach to the valuation technique.
Pensions and Post-retirement benefit – The carrying value of the Company’s pension plan assets is based
on information reviewed and approved by management and prepared by the plan asset administrator. The
carrying value of the plan assets approximate fair value. Pension plan liabilities are a present value
discounted measure of the Company’s estimated future pension costs. Since these liabilities are valued at a
present value discounted measure, which approximates fair value, no additional fair value measurement is
required. Post-retirement benefits are also reported as a present-value discounted estimate of the Company’s
future post-retirement benefit obligations.
F-78
Guarantees, letters of credit and surety bonds - The estimated fair value of contingent guarantees of thirdparty debt, letters of credit and surety bonds is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or to transfer the liabilities to a market participant in an orderly
transaction at the measurement date.
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.
13. OTHER INFORMATION
In 2007, CITGO entered into two separate hydrogen supply agreements with BOC Americas (PGS), Inc.
(“BOC”) and MarkWest Blackhawk, L.P. (“MarkWest”). Linde Gas North America, LLC, the successor to
BOC, and MarkWest were to construct two new hydrogen production plants to produce high purity
hydrogen and high pressure steam for use by the Lemont and Corpus Christi refineries. These hydrogen
supply agreements are treated as capital leases. As a result, the Company recorded assets, and
corresponding capital lease obligations, of $284 million in March 2010 under these agreements. The
agreements include a minimum monthly charge for the commitment of the facilities, services, and the
availability of hydrogen and any corresponding steam production in accordance with the terms of the
agreements. The current minimum monthly charge is $3.5 million. The hydrogen supply agreements at
each plant are for a twenty-year period and will expire in 2030.
In March 2010, the Company entered into a product financing arrangement in which the Company sold
product to a third party and agreed to repurchase the same quantity of product from that third party at the
same price with an adjustment for risk-based interest. The product was not delivered to the purchaser and
no sale or inventory reduction was recorded in accordance with ASC 470-40. Cash received as a result of
this transaction and prior to payment for the repurchased product from that third party of $41 million was
recorded as a liability at March 31, 2010.
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through May 12, 2010, the date the financial statements
were available to be issued. Any material subsequent events that occurred during this time have been
properly recognized or disclosed in the Company’s financial statements.
******
F-79
ISSUER
1293 Eldridge Parkway
Houston, TX 77077
United States
JOINT BOOKRUNNING MANAGERS
RBS Securities Inc.
600 Washington Blvd.
Stamford, CT 06901
United States
UBS Investment Bank
299 Park Avenue
New York, NY 10171
United States
BNP Paribas
Securities Corp.
787 Seventh Avenue
New York, NY 10019
United States
Credit Agricole
Securities (USA) Inc.
1301 Avenue of the
Americas
New York, NY 10019
United States
AUDITORS OF THE ISSUER
KPMG LLP
700 Louisiana, Suite 3100
Houston, TX 77002
United States
TRUSTEE, REGISTRAR, PAYING AGENT
Wilmington Trust FSB
50 South Sixth Street, Suite 1290
Minneapolis, MN 55402-1544
United States
LUXEMBOURG LISTING AGENT, PAYING AGENT AND TRANSFER AGENT
Deutsche Bank Luxembourg S.A.
IB Operations
2, Boulevard Konrad Adenauer
L-1115 Luxembourg
Luxembourg
LEGAL ADVISORS
To the Issuer as to United States Law
To the Initial Purchasers as to United States Law
Curtis, Mallet-Prevost, Colt & Mosle LLP
101 Park Avenue
New York, NY 10178-0061
United States
Cahill Gordon & Reindel LLP
Eighty Pine Street
New York, NY 10005-1702
United States
(This page intentionally left blank)
(This page intentionally left blank)
$1,500,000,000
OFFERING MEMORANDUM
RBS
UBS Investment Bank
BNP PARIBAS
Credit Agricole CIB
DnB NOR Markets
Natixis Bleichroeder LLC
UniCredit Capital Markets
, 2010

CITGO Petroleum Corporation

Transcription

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