We are a direct wholly-owned operating subsidiary of PDV America, a
wholly-owned subsidiary of PDV Holding. Our ultimate parent is Petroleos de
Venezuela, S.A., the national oil company of the Bolivarian Republic of
Venezuela. We are engaged in the refining, marketing and transportation of
petroleum products including gasoline, diesel fuel, jet fuel, petrochemicals,
lubricants, asphalt and refined waxes, mainly within the continental United
States east of the Rocky Mountains. We operate as a single segment.
Our transportation fuel customers include CITGO branded wholesale
marketers, convenience stores and airlines located mainly east of the Rocky
Mountains. Asphalt is generally marketed to independent paving contractors on
the East and Gulf Coasts and 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. We also sell
lubricants, gasoline and distillates in various Latin American markets including
Puerto Rico, Brazil, Ecuador and Mexico.
COMPETITIVE NATURE OF THE PETROLEUM REFINING BUSINESS
The petroleum refining industry is cyclical and highly volatile,
reflecting capital intensity with high fixed and low variable costs. Petroleum
industry operations and profitability are influenced by a large number of
factors, over some of which individual petroleum refining and marketing
companies have little control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on how companies conduct their operations and formulate their
products. Demand for crude oil and its products is largely driven by the
condition of local and worldwide economies, although weather patterns and
taxation relative to other energy sources also play significant parts.
Generally, U.S. refiners compete for sales on the basis of price, brand image
and, in some areas, product quality.
REFINING
Our aggregate net interest in rated crude oil refining capacity is 865
thousand barrels per day ("MBPD"). The following table shows the capacity of
each refinery in which we hold an interest and our share of such capacity as of
September 30, 2004.
* A project to increase the crude oil distillation capacity of the Lake
Charles refinery by 105 MBPD is currently underway. This project is
expected to be completed in 2005.
** The Solomon Process Complexity Rating, which is produced by Solomon
Associates Inc., is an industry measure of a refinery's ability to produce
higher value products. A higher rating indicates a greater capability to
produce these products. The average for all U.S. refineries in the most
recently available survey was 14.0.
Our Lake Charles, Corpus Christi and Lemont refineries and the Houston
refinery each have the capability to process large volumes of heavy crude oil
into a flexible slate of refined products.
45
The following table shows our aggregate interest in refining capacity,
refinery input, and product yield for the three years ended December 31, 2003
and the nine months ended September 30, 2004.
(1) Includes 41.25% of the Houston refinery production.
We produce our light fuels and petrochemicals primarily through our Lake
Charles, Corpus Christi and Lemont refineries. Asphalt refining operations are
carried out through our Paulsboro and Savannah refineries. We purchase refined
products from LYONDELL-CITGO, our joint venture refinery in Houston.
Lake Charles, Louisiana Refinery. This refinery has a rated refining
capacity of 320 MBPD and is capable of processing large volumes of heavy crude
oil into a flexible slate of refined products, including significant quantities
of high-octane unleaded gasoline and reformulated gasoline.
46
The following table shows the rated refining capacity, refinery input and
product yield at the Lake Charles refinery for the three years ended December
31, 2003 and the nine months ended September 30, 2004.
A project to increase the crude oil distillation capacity of the Lake
Charles refinery by 105 MBPD is currently underway. This project is expected to
be completed in 2005.
The Lake Charles refinery's Gulf Coast location provides it with access to
crude oil deliveries from multiple sources; imported crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, while
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port and to
terminal facilities in the Houston area through which it can receive crude oil
deliveries. For delivery of refined products, the refinery is connected through
the Lake Charles Pipeline directly to the Colonial and Explorer Pipelines, which
are the major refined product pipelines supplying the northeast and midwest
regions of the United States, respectively. The refinery also uses adjacent
terminals and docks, which provide access for ocean tankers and barges to load
refined products for shipment.
The Lake Charles refinery's main petrochemical products are propylene,
benzene and mixed xylenes. Industrial products include sulfur, residual fuels
and petroleum coke.
Corpus Christi, Texas Refinery. The Corpus Christi refinery processes
heavy crude oil into a flexible slate of refined products. This refinery complex
consists of the East and West Plants, located within five miles of each other.
47
The following table shows rated refining capacity, refinery input and
product yield at the Corpus Christi refinery for the three years ended December
31, 2003 and the nine months ended September 30, 2004.
We operate the West Plant under a sublease agreement from Anadarko
Petroleum Corporation. The basic term of the sublease ended on January 1, 2004,
but we renewed the sublease for a two-year term, and we may continue to renew
the sublease for successive renewal terms through January 31, 2011. We have the
right to purchase the West Plant from Anadarko Petroleum Corporation at the end
of the basic term, the end of any renewal term, or on January 31, 2011 at a
nominal price. See our audited consolidated financial statements -- note 14,
which are included in this prospectus.
The Corpus Christi refinery's main petrochemical products include cumene,
cyclohexane, and aromatics (including benzene, toluene and xylene). These
products are used in the manufacture of plastic and building materials.
Lemont, Illinois Refinery. The Lemont refinery produces a flexible slate
of refined products from a crude slate which includes approximately 50% heavy
Canadian crude oil.
48
The following table shows the rated refining capacity, refinery input and
product yield at the Lemont refinery for the three years ended December 31, 2003
and the nine months ended September 30, 2004.
Petrochemical products at the Lemont refinery include benzene, toluene and
xylene, plus a range of ten different aliphatic solvents.
In August 2001, a fire occurred at the crude oil distillation unit of the
Lemont refinery. A new crude distillation unit was operational in May 2002. See
our audited consolidated financial statements -- note 16, which are included in
this prospectus.
LYONDELL-CITGO Refining LP. Subsidiaries of CITGO and Lyondell Chemical
Company ("Lyondell") are partners in LYONDELL-CITGO Refining LP
("LYONDELL-CITGO"), which owns and operates a 265 MBPD refinery previously owned
by Lyondell and located on the ship channel in Houston, Texas. At September 30,
2004, our investment in LYONDELL-CITGO was $393 million. In addition, at
September 30, 2004, we held a note receivable from LYONDELL-CITGO in the
approximate amount of $35 million. See our audited consolidated financial
statements -- note 3, which are included in this prospectus. A substantial
amount of the crude oil processed by this refinery is supplied by PDVSA under a
long-term crude oil supply agreement that expires in the year 2017. For the year
ended December 31, 2002, LYONDELL-CITGO constituted a significant investment for
us in a 50-percent-or-less-owned person under SEC regulations.
CRUDE OIL AND REFINED PRODUCT 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. Crude oil is our primary raw material. We buy and sell crude oil to
facilitate procurement and delivery of a desired type or grade of crude oil to a
desired location to supply our refineries, not as an independent business
activity to generate profit. We believe that reflecting the net result of this
activity in cost of sales is an appropriate reflection of the nature of these
transactions as efforts undertaken to acquire raw material. In addition, because
our refinery operations do not produce sufficient refined products to meet the
demands of our marketers, we purchase refined products, primarily gasoline, from
other refiners, including a number of affiliated companies.
49
Crude Oil Purchases. The following chart shows our net purchases of crude
oil for the three years ended December 31, 2003:
(1) Total crude oil purchases do not equal crude oil refinery inputs because
of changes in inventory.
(2) Includes total of contract volume and volume purchased on a spot basis.
Contract volumes for each refinery are shown in the Crude Oil Supply
Contracts with PDVSA table below. PDVSA works very closely with us to
assure total volume commitments are met.
Our largest single supplier of crude oil is PDVSA. We have entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of our Lake Charles, Corpus Christi, Paulsboro and
Savannah refineries. The following table shows the base and incremental volumes
of crude oil contracted for delivery and the volumes of crude oil actually
delivered under these contracts in the three years ended December 31, 2003.
CRUDE OIL SUPPLY CONTRACTS WITH PDVSA
VOLUMES OF
CRUDE OIL PURCHASED
CONTRACT CRUDE FOR THE YEAR ENDED CONTRACT
OIL VOLUME DECEMBER 31, EXPIRATION
-------------------- ------------------ ----------
BASE INCREMENTAL(1) 2003 2002 2001 DATE
---- -------------- ---- ---- ---- ----------
(MBPD) (MBPD) (YEAR)
LOCATION
Lake Charles, LA(2) ..... 120 70 123 109 117 2006
Corpus Christi, TX(2) ... 130 -- 134 114 126 2012
Paulsboro, NJ ........... 30 -- 29 27 26 2010
Savannah, GA ............ 12 -- 12 12 12 2013
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right
to sell to us incremental volumes up to the maximum amount specified in
the table, subject to certain restrictions relating to the type of crude
oil to be supplied, refining capacity and other operational considerations
at the refinery.
(2) Volumes purchased as shown on this table do not equal purchases from PDVSA
(shown in the previous table) as a result of transfers between refineries
of contract crude purchases included here and spot purchases from PDVSA
which are included in the previous table.
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to us for a fixed period. The
supply agreements differ somewhat for each refinery but generally incorporate
formula prices based on the market value of a slate of refined products deemed
to be produced from each particular grade of crude oil or feedstock, less:
- specified deemed refining costs;
- specified actual costs, including transportation charges, actual
cost of natural gas and electricity, import duties and taxes; and
- a deemed margin, which varies according to the grade of crude oil or
feedstock delivered.
50
Under each supply agreement, deemed margins and deemed costs are adjusted
periodically by a formula primarily based on the rate of inflation. Because
deemed operating costs and the slate of refined products deemed to be produced
for a given barrel of crude oil or other feedstock do not necessarily reflect
the actual costs and yields in any period, the actual refining margin we earn
under the various supply agreements will vary depending on, among other things,
the efficiency with which we conduct our operations during such period. These
crude supply agreements contain force majeure provisions which excuse the
performance by either party of its obligations under the agreement under
specified circumstances.
The price we pay for crude oil purchased under these crude oil supply
agreements is not directly related to the market price of any other crude oil.
However, the intention of the pricing mechanism in the crude supply agreements
was to reflect market pricing over long periods of time, but there may be
periods in which the price paid for crude oil purchased under those agreements
may be higher or lower than the price that might have been paid in the spot
market. Internal estimates indicate that the pricing mechanism is working as
intended to reflect market prices over long periods of time.
PDVSA and we have been evaluating possible changes to certain terms and
conditions of these supply agreements, including the pricing mechanisms, volumes
and term. If PDVSA and we determine to pursue those changes and are able to
successfully negotiate any related amendments to the supply agreements, the
effectiveness of those amendments may require the consent of some of the holders
of our outstanding debt. In addition, the notes offered hereby contain a
covenant requiring that transactions between us and our affiliates be on an
arm's-length basis and, in the case of transactions involving more than $20
million, that we obtain a written opinion from an independent qualified party to
the effect that either the transaction is fair, from a financial standpoint, to
us or is not less favorable to us than could reasonably be expected to be
obtained at the time in an arm's-length transaction with a person who is not our
affiliate. There is an exception for transactions between us and PDVSA or its
affiliates involving the purchase or sale of hydrocarbons, or refined products
therefrom, in the ordinary course of business, so long as the transactions are
priced based upon industry accepted benchmark prices and the pricing of such
transactions is no worse to us than the pricing of comparable transactions with
unrelated third parties. See "Description of the Notes -- Certain Covenants --
Limitation on Affiliate Transactions."
Refined product purchases. The marketing and sale of refined petroleum
products represents our revenue generating activity. The demand for those
products in our market areas exceeds the capacity of our refineries to produce
them so we purchase significant quantities of refined products from affiliated
and non-affiliated suppliers. We must have the right refined products in the
right locations and in the right quantities in order to satisfy customer supply
arrangements and market requirements. Thus, we purchase and sell refined
products of various grades in various locations acquired from other suppliers.
Sales of refined products are reported as revenue upon transfer of title to the
buyer. Purchases of refined product are treated as acquisitions, a component of
cost of sales, upon transfer of title to us.
The following table shows our purchases of refined products for the three
years ended December 31, 2003.
As of December 31, 2003, we purchased substantially all of the gasoline,
diesel/#2 fuel, and jet fuel produced at the LYONDELL-CITGO refinery under a
contract which extends through the year 2017. LYONDELL-CITGO was a major
supplier in 2003 providing us with 118 MBPD of gasoline, 85 MBPD of diesel/#2
fuel, and 19 MBPD of jet fuel. See " -- Refining -- LYONDELL-CITGO Refining LP."
51
In October 1998, PDVSA V.I., Inc., an affiliate of PDVSA, acquired a 50%
equity interest in HOVENSA, a joint venture that owns and operates a refinery in
St. Croix, U.S. Virgin Islands. Under the related product sales agreement, we
acquired approximately 149 MBPD of refined products from the refinery during
2003, approximately one-half of which was gasoline.
MARKETING
Our major products are light fuels (including gasoline, jet fuel, and
diesel fuel), industrial products and petrochemicals, asphalt, lubricants and
waxes. The following table shows revenues and volumes of each of these product
categories for the three years ended December 31, 2003.
Light Fuels. Gasoline sales accounted for 57% of our refined product sales
in 2003, 61% in 2002 and 58% in 2001. We supply CITGO branded gasoline to
approximately 14,000 independently owned and operated CITGO branded retail
outlets located throughout the United States, primarily east of the Rocky
Mountains. We purchase gasoline to supply our marketing network, as the gasoline
production from the Lake Charles, Corpus Christi and Lemont refineries was only
equivalent to approximately 57%, 54% and 55% of the volume of our branded
gasoline sold in 2003, 2002 and 2001, respectively. See " -- Crude Oil and
Refined Product Purchases -- Refined Product Purchases."
Our strategy is to enhance the value of the CITGO brand by delivering
quality products and services to the consumer through a large network of
independently owned and operated CITGO branded retail locations. This
enhancement is accomplished through a commitment to quality, dependability and
excellent customer service to our independent marketers, which constitute our
primary distribution channel.
Sales to independent branded marketers typically are made under contracts
that range from three to seven years. Sales to 7-Eleven((TM)) convenience stores
are made under a contract that extends through the year 2006. Under this
contract, we arrange all transportation and delivery of motor fuels and handle
all product ordering. We also act as processing agent for the purpose of
facilitating and implementing orders and purchases from third-party suppliers.
We receive a processing fee for such services.
We market jet fuel directly to airline customers at 25 airports, including
such major hub cities as Atlanta, Chicago, Dallas/Fort Worth and Miami.
Our delivery of light fuels to our customers is accomplished in part
through 52 refined product terminals located throughout our primary market
territory. Of these terminals, 42 are wholly-owned by us and 10 are jointly
owned. Eleven of our product terminals have waterborne docking facilities, which
greatly enhance the flexibility of our logistical system. Refined product
terminals owned or operated by us provide a total storage capacity of
approximately 21 million barrels. Also, we have active exchange relationships
with over 300 other refined product terminals, providing flexibility and timely
response capability to meet distribution needs.
52
Petrochemicals and Industrial Products. We sell benzene, cumene,
cyclohexane, propylene, toluene and xylene to a variety of U.S. manufacturers as
raw material for the production of plastic and building materials. Sulfur is
sold to the U.S. and international fertilizer industries; cycle oils are sold
for feedstock processing and blending; natural gas liquids are sold to the U.S.
fuel and petrochemical industry; petroleum coke is sold primarily in
international markets for use as kiln and boiler fuel; and residual fuel
blendstocks are sold to a variety of fuel oil blenders.
Asphalt. Our asphalt is generally marketed to independent paving
contractors on the East and Gulf Coasts and in the Midwest of the United States
for use in the construction and resurfacing of roadways. We deliver asphalt
through three wholly-owned terminals and twenty-three leased terminals. Demand
for asphalt is seasonal and peaks in the summer months.
Lubricants and Waxes. We market many different types, grades and container
sizes of lubricants and wax products, with the bulk of sales consisting of
automotive oil and lubricants and industrial lubricants. Other major lubricant
products include 2-cycle engine oil and automatic transmission fluid.
INTERNATIONAL OPERATIONS
We sell lubricants, gasoline and distillates in various Latin American
markets, including Puerto Rico, Brazil, Ecuador and Mexico.
PIPELINE OPERATIONS
We own and operate a crude oil pipeline and three products pipeline
systems. We also have equity interests in three crude oil pipeline companies and
six refined product pipeline companies. Our pipeline interests provide us with
access to substantial refinery feedstocks and reliable transportation to refined
product markets, as well as cash flows from dividends. One of the refined
product pipelines in which we have an interest, Colonial Pipeline, is the
largest refined product pipeline in the United States, transporting refined
products from the Gulf Coast to the mid-Atlantic and eastern seaboard states. We
have a 15.8 percent ownership interest in Colonial Pipeline.
EMPLOYEES
We and our subsidiaries have a total of approximately 4,000 employees,
approximately 1,500 of whom are covered by union contracts. Most of the union
employees are employed in refining operations. The remaining union employees are
located primarily at a lubricant plant and various refined product terminals.
All of our union contracts will expire by July 1, 2006.
ENVIRONMENT AND SAFETY
ENVIRONMENT
We are 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. We
are required to obtain permits under all of these programs and believe we are in
material compliance with the terms of these permits. We do not have any material
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
liability because the former owners of many of our 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, and alter significantly the U.S.
refining industry and the return realized on refinery investments.
In addition, we are subject to various other federal, state and local
environmental laws and regulations that may require us to take additional
compliance actions and also actions to remediate the effects on the environment
of prior disposal or release of petroleum, hazardous substances and other waste
and/or pay for natural resource damages. Maintaining compliance with
environmental laws and regulations could require significant capital
expenditures and additional operating costs. Also, numerous other factors affect
our plans with respect to environmental compliance and related expenditures.
53
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 and are
recorded without consideration of potential recoveries from third parties.
Subsequent adjustments to estimates, to the extent required, may be made as more
refined information becomes available. We believe the amounts provided in our
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 our consolidated results of
operations, financial condition and cash flows.
In 1992, we 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. The remediation commenced in December 1993.
We are complying with a June 2002 LDEQ administrative order about the
development and implementation of a corrective action or closure plan. Based on
currently available information and proposed remedial approach, we currently
anticipate closure and post-closure costs related to these surface impoundments
and related solid waste management units to range from $32 million to $37
million in addition to the approximately $49 million already expended. We 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.
Our Corpus Christi, Texas refinery is being investigated by state and
federal agencies for alleged criminal violations of federal environmental
statutes and regulations, including the CAA and the Migratory Bird Act. We are
cooperating with the investigation. We believe that we have defenses to any such
charges. At this time, we cannot predict the outcome of or the amount or range
of any potential loss that would ensue from any such charges.
In June 1999, we 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 the CERCLA. The U.S. 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
("RI/FS") under its CERCLA authority. While we disagreed with many of the U.S.
EPA's earlier allegations and conclusions, we 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. We will continue to
deal separately with the LDEQ on issues relative to our refinery operations on
another section of the Calcasieu Estuary. We still intend to contest this matter
if necessary.
In January and July 2001, we received notices of violation ("NOVs") from
the United States Environmental Protection Agency ("U.S. EPA") alleging
violations of the CAA. The NOVs were 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 admitting any violations, we reached a settlement with the United States
and the states of Louisiana, Illinois, New Jersey and Georgia. The settlement
has been memorialized in a Consent Decree lodged in the U.S. District Court for
the Southern District of Texas on October 6, 2004. The Consent Decree requires
implementation of control equipment at our refineries, and a supplemental
environmental project at the Corpus Christi, Texas refinery. We estimate that
the cost of the settlement could range up to $325 million, which includes a
civil penalty of $3.6 million, split between the U.S. EPA and the states. We
accrued for the civil penalty during 2003. The capital costs will be incurred
over a period of time, primarily between 2004 and 2009.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations covering
benzene emissions from wastewater treatment operations at our Lemont, Illinois
refinery. We are in settlement discussions with the U.S. EPA. This matter has
been consolidated with the matters described in the previous paragraph.
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air quality
regulations at the Lake Charles, Louisiana refinery during 2001. The majority of
the alleged violations related to the leak detection and repair program. We are
in settlement discussions with the LDEQ. This matter has been consolidated with
the matters described in the previous paragraph related to the U.S. EPA's
enforcement initiative.
In September 2004, a NOV was issued by the Texas Commission on
Environmental Quality alleging violations of the Clean Water Act pertaining to
the wastewater treatment operations at the East Plant of our Corpus Christi,
Texas refinery. We intend to appeal the issuance of the NOV.
54
In October 2004, the New Jersey Land Trust voted to reject the donation by
us of a conservation easement covering the 365 acre Petty's Island, which is
located in the Delaware River in Pennsauken, New Jersey and owned by us. Petty's
Island contains a CITGO closed petroleum terminal and other industrial
facilities, but it is also the habitat for endangered species like the bald
eagle. The City of Pennsauken through a private developer wants to condemn
Petty's Island through eminent domain and to redevelop Petty's Island into
residential and commercial uses. The granting of the conservation easement would
have mitigated the amount of remediation that we would have to perform on
Petty's Island. The ultimate outcome cannot be determined at this time.
At September 30, 2004, our balance sheet included an environmental accrual
of $65 million compared with $63 million at December 31, 2003. Results of
operations reflect an increase in the accrual during 2004 due primarily to a
revision of our estimated share of costs related to two sites indicating higher
costs offset in part, by spending on environmental projects. We estimate that an
additional loss of $36 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 our and our
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, we do not
believe that any such prior compliance audit or inspection or any resulting
proceeding will have a material adverse effect on our future business and
operating results, other than matters described above.
Conditions which require additional expenditures may exist with respect to
our various sites including, but not limited to, our operating refinery
complexes, former refinery sites, service stations and crude oil and petroleum
product storage terminals. Based on currently available information, we cannot
determine the amount of any such future expenditures.
Increasingly stringent environmental regulatory provisions and obligations
periodically require additional capital expenditures. During 2003, we spent
approximately $253 million for environmental and regulatory capital improvements
in our operations. Management currently estimates that we will spend
approximately $971 million for environmental and regulatory capital projects
over the five-year period 2004-2008 as follows:
(1) In February 2000, the EPA promulgated the Tier 2 Motor Vehicle Emission
Standards Final Rule for all passenger vehicles, establishing standards
for sulfur content in gasoline. These regulations mandate that the average
sulfur content of gasoline for highway use produced at any refinery not
exceed 30 parts per million during any calendar year by January 1, 2006,
with a phase-in beginning January 1, 2004. In order to comply with these
regulations, we are installing additional hydroprocessing facilities at
our refineries. (Hydroprocessing facilities remove sulfur from oil by
means of a chemical reaction which occurs when the oil is mixed with
hydrogen, heated and processed over a catalyst.)
(2) Spending on ULSD assumes ULSD for on-road diesel in 2006 and ULSD for
off-road diesel use in 2008. The ULSD program will require us to make
additional capital investments at our refineries. The estimates shown here
are based on the installation of traditional hydroprocessing facilities.
We continue to evaluate new technological innovations which may reduce the
required investment.
(3) Other environmental spending assumes approximately $308 million in
spending during the period shown in the table to comply with New Source
Review standards under the Clean Air Act. Aggregate spending to comply
with these standards is estimated to be $320 million.
These estimates may vary due to a variety of factors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Forward-Looking Statements."
55
SAFETY
Due to the nature of petroleum refining and distribution, we are subject
to stringent federal and state occupational health and safety laws and
regulations. We strive to achieve excellent safety and health performance. We
believe that safety is tied directly to productivity in our facilities and
financial results. We maintain comprehensive safety management systems including
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 in our facilities has a role in maintaining
safe work conditions and has the authority to stop unsafe acts or unsafe
conditions.
LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business are
pending against us. We record 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 us, and
in amounts greater than our accruals, then such determinations could have a
material adverse effect on our results of operations in a given reporting
period. The most significant lawsuits and claims are discussed below.
In September 2002, a Texas court ordered us to pay property owners and
their attorneys approximately $6 million based on an alleged settlement of class
action property damage claims as a result of alleged air, soil and groundwater
contamination from emissions released from our Corpus Christi, Texas refinery.
We have appealed the ruling to the Texas Court of Appeals.
We, along with most of the other major oil companies, 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 claim that MTBE renders the water not
potable. In addition to compensatory and punitive damages, plaintiffs seek
injunctive relief to abate the contamination. We intend to defend all of the
MTBE lawsuits vigorously. Our MTBE litigation can be divided into two categories
-- pre and post-September 30, 2003 litigation. In the six pre-September 30, 2003
cases, we were defending ourselves in Madison County, Illinois state court and
in two New York county state courts. In several of the New York cases, the judge
on March 26, 2004, granted our Motion for Summary Judgment. As of early October
2004, settlements in principle had been reached in both Madison County, Illinois
cases. There will be no effect on results of operations because the accrual for
these cases was adequate. The post-September 30, 2003 cases were filed after new
federal legislation was proposed that would have precluded plaintiffs from
filing lawsuits based on the theory that gasoline with MTBE is a defective
product. These approximately 60 cases, the majority of which were filed by
municipal authorities, were 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. The remaining New York state case has been removed to federal court
and consolidated with the MDL 1358 cases and the judge has denied plaintiffs'
motion to remand that case. It is not possible to estimate the loss or range of
loss, if any, related to these cases.
We have been named as a defendant in approximately 150 asbestos lawsuits
pending in state and federal courts. These cases, most of which involve multiple
defendants, are brought by former employees or contractor employees seeking
damages for asbestos 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. We do not believe that
the resolution of these cases will have a material adverse effect on our
financial condition or results of operations.
At September 30, 2004, our balance sheet included an accrual for lawsuits
and claims of $24 million compared with $27 million at December 31, 2003.
Unrelated to the reduction in the accrual, we estimate that an additional loss
of $17 million is reasonably possible in connection with such lawsuits and
claims.
See also " -- Environment and Safety" above for information regarding
various enforcement actions.
56
MANAGEMENT
The following table sets forth the names, ages (as of September 30, 2004)
and titles of our board of directors and executive officers:
NAME AGE POSITION
---- --- --------
Luis E. Marin................... 46 President, Chief Executive Officer and Director
Antonio J. Rivero............... 41 Executive Vice President
Jerry E. Thompson............... 54 Senior Vice President and Chief Operating Officer
Larry Krieg..................... 54 Vice President Finance
Hector Bivero................... 58 Vice President Legal Affairs and General Counsel
Frank Gygax..................... 55 Vice President, Refining
Robert J. Kostelnik............. 52 Vice President, Health, Safety, Security of Assets
and Environmental Protection
Paul Largess.................... 54 Controller
Fernando J. Garay............... 42 Corporate Secretary
Ivan Hernandez.................. 64 Chairman of the Board of Directors
Asdrubal Chavez................. 50 Director
Jesus Luongo.................... 44 Director
Nelson Martinez................. 53 Director
Luis Vierma..................... 51 Director
OUR EXECUTIVE OFFICERS
LUIS E. MARIN
PRESIDENT AND CHIEF EXECUTIVE OFFICER AND DIRECTOR
Luis Marin has served as our director since May 2003, and he is also a
member of the PDVSA board of directors. In August 2003, he became our President
and Chief Executive Officer. Mr. Marin graduated as a natural gas engineer from
the University of Oklahoma in 1980. He completed postgraduate studies in oil
management at Oxford Petroleum College in England in 1987, and in management at
the Massachusetts Institute of Technology (MIT) in 1997. He joined PDVSA in 1980
and has held several positions in Natural Gas Planning; General Engineering; Gas
Operations; Petroleum Engineering; Production, Trade and Supply Operations; and
Technical Management. He has been an advisor to the General Manager of
Production and a Coordinator of Exploration Projects.
In 2000, he became Manager of Drilling in Eastern Venezuela. Later, he
became Manager of the Ceuta-Tomoporo Development Project and in 2002 was
appointed Manager of Corporate Production Planning. Subsequently, he was
appointed Deputy Production Manager of the Eastern Venezuela Division.
ANTONIO J. RIVERO
EXECUTIVE VICE PRESIDENT
Antonio Rivero was named our Executive Vice President in August 2003. In
February 2003, he was named General Manager of PDVSA Services, Inc., located in
Houston, Texas. Prior to that time, he held several positions at our
headquarters, including Senior Derivatives Trader and Senior Financial
Consultant. He was also assigned by executive management to special projects,
including the PDVSA Commission for the International Investment Assessment and
the PDVSA Internationalization Study. Mr. Rivero graduated from the Military
Academy of Venezuela in 1983 with a bachelors degree in military sciences. He
served as a Venezuelan Army Officer until 1994. From 1994 to 1998, he was
President and CEO of R&C Electronic Corporation, a Venezuelan information,
technology and telecommunications company.
JERRY E. THOMPSON
SENIOR VICE PRESIDENT AND CHIEF OPERATING OFFICER
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Jerry Thompson joined us in 1971. He became our Vice President of Refining
in 1987, Vice President of Corporate Planning & Economics in 1994, Vice
President Supply and Logistics in 1995, Vice President, Development &
Technological Excellence in 1998, and in 1999 was named a Senior Vice President.
From January 2002 through March 2002 he served as Senior Vice President of
Supply and Distribution and in April 2003 he was named Chief Operating Officer.
He assumed the duties as our Chief Financial Officer on an interim basis in May
2004 through September 2004. He is responsible for the supply, refining, trading
and distribution of all crude, intermediate feedstocks and refined products for
the Asphalt, Light Oils, Lubes and Petrochemicals business units. In addition,
Mr. Thompson is responsible for our Centers of Excellence. He also chairs the
Short Term Operating Committee. He is a graduate of Colorado School of Mines
with a degree in chemical and petroleum refining engineering. He began his
career at the Lake Charles, Louisiana, refinery as a process engineer and
advanced through several technical and operations supervisory and management
positions.
LARRY KRIEG
VICE PRESIDENT FINANCE (CHIEF FINANCIAL OFFICER)
Larry Krieg joined us in 1984. He became Vice President Finance and our
chief financial officer in September 2004. Prior thereto, he had served as our
Controller and Chief Accounting Officer, a position he held since June 2001. In
that position, he was responsible for all corporate accounting functions
including business unit accounting support as well as internal and external
financial reporting. Mr. Krieg previously served as manager of accounting
functions in supply and logistics, Lake Charles refinery operations and
lubricant operations. He has also served as Manager, Internal Audit. Mr. Krieg
received his bachelor's degree in accounting from Oklahoma State University. He
is a Certified Public Accountant and Certified Internal Auditor.
HECTOR BIVERO
VICE PRESIDENT LEGAL AFFAIRS AND GENERAL COUNSEL
Hector Bivero joined us in March 2004. He has over 29 years of legal
experience in the oil industry, including extensive experience in international
law and commercial arbitration. Prior to joining us, he served as International
Legal Counsel for PDVSA. He began his PDVSA career at its Maraven affiliate,
where he provided legal advice for international, supply, transportation and
trade issues and served as Manager of Legal Affairs for the refinery and
domestic market divisions, Legal Manager for Negotiation and Projects, and
International Legal Manager for Projects and Special Negotiation. His
responsibilities have also included service as Head Legal Counsel for PDVSA
affiliates Bitor, PDV Marina and Interven, and service as PDVSA's Legal Manager
for International Affairs. He has earned a juris doctorate from the Catholic
University Andres Bello in Caracas, Venezuela, a doctorate in law from the
University of Paris in Paris, France, and has completed advanced studies in
international law, economics and finance, comparative law, comparative
jurisprudence, and international commercial arbitration. He is also a tenured
professor at the Central University of Venezuela, teaching both private and
public international law.
FRANK GYGAX
VICE PRESIDENT, REFINING
Frank Gygax joined us in January 2004. As Vice President of Refining, he
is responsible for integrating and optimizing PDVSA's and our refining systems.
He has over 30 years of experience in the refining industry. He began his career
in the oil and gas industry at Mobil Oil's El Palito refinery in Venezuela,
where he started as a Process Engineer and held various other positions,
including Engineering Manager, Refining and Distillation Operations Supervisor,
and Process Engineering Supervisor. He also served as General Manager of PDVSA's
Puerto La Cruz and El Palito refineries and has held positions in refining
administration, supply, and international marketing. He served as General
Manager of PDVSA's Paraguana refining complex. Prior to joining us, he served as
President of SINCOR, a joint venture between PDVSA, TotalFinaElf, and Statoil.
He holds a bachelor's degree in chemical engineering from Universidad del Zulia
in Maracaibo, Venezuela.
ROBERT J. KOSTELNIK
VICE PRESIDENT, HEALTH, SAFETY, SECURITY OF ASSETS AND ENVIRONMENTAL PROTECTION
Bob Kostelnik, joined us in 1992. Since October 2002, he has served as our
Vice President, Health, Safety, Security of Assets and Environmental Protection.
He is responsible for overseeing our health and safety activities as well as
asset security and environmental protection. Prior to being named to his current
position, Mr. Kostelnik was Vice President and General Manager of our Corpus
Christi refinery. He is a graduate of the University of Missouri at Rolla with a
bachelor of science degree in mechanical engineering.
58
He has served as General Manager Operations at the Lake Charles
Manufacturing Complex, with operations and maintenance responsibility for the
Lake Charles refinery and the lubricants and wax plant. He has ten years of
service with us and almost 30 years in the refining industry.
PAUL LARGESS
CONTROLLER
Paul Largess joined us in 1985. Prior to his appointment as Controller in
January 2005, he served as our Assistant Controller Financial Reporting. Prior
to August 2001, he served in various capacities in the Corporate Finance and
Corporate Audit departments. He is a graduate of Tulsa University and holds a
bachelor's degree in accounting. He is a Certified Public Accountant.
FERNANDO J. GARAY
CORPORATE SECRETARY
Fernando Garay came to us in February 2002 as the International Strategic
Communications Developer within Government & Public Affairs. Prior to joining
us, Mr. Garay served 8 years at the Secretariat of OPEC in Vienna, Austria,
where he was Editor of the OPEC News Agency and a spokesman for the
organization. While at OPEC, he also served as Press Director of the II Summit
of OPEC Heads of State and Government, held in Caracas in September 2000.
His experience includes a variety of positions with Reuters News Agency
and several Caracas-based publications, including El Nacional and The Daily
Journal newspapers. Mr. Garay graduated from the Central University of Venezuela
in 1987 with a bachelor's degree in communications. He also holds a master of
arts degree in law and diplomacy from Tufts University in Massachusetts.
OUR BOARD OF DIRECTORS
In addition to Mr. Marin, who is our President and Chief Executive
Officer, the following people serve on our board of directors:
IVAN HERNANDEZ
Ivan Hernandez has served as our director since November 2004 and is the
Chairman of our board of directors. He joined the Venezuelan oil industry in
1957 with Creole Petroleum Corporation, where he held several supervisory and
technical positions in areas such as Specialty Products, Fuels and Oil Movement
at the Amuay Refining-Pattern Upgrading Project, Venezuela. In 1986, he was
appointed Crude Conversion Superintendent, and later held the positions of
Process Manager and Supply Manager. In 1987, he was appointed Conversion Manager
at our Corpus Christi refinery. In 1989, he returned to Venezuela as General
Maintenance Manager. Later he held the positions of Operations Manager,
Assistant Manager and General Manager at the Amuay refinery. After the
Cardon-Amuay refineries integration in 1997, he was appointed Manager of the
Paraguana Refining Complex, a position he held until 1999 when he retired. In
December 2002, he was re-appointed General Manager of the Paraguana Refining
Complex, a position he held until March 2004 when he was appointed
Vice-President of PDVSA.
ASDRUBAL CHAVEZ
Asdrubal Chavez has served as our director since November 2004. He
graduated from Venezuela's Universidad de Los Andes in 1979 with a degree in
chemical engineering. He joined the oil industry in 1979 at PDVSA's El Palito
refinery as a startup Engineer for PAEX, the refinery's major expansion project.
He held various positions in areas such as Industrial Services, Distillation and
Specialties, Conversion and Treatment, Crude and Products Movement, Programming
and Economics, and Process Engineering. In 1989, he was assigned to UOP in the
United States for specialty training in Processes, and in 1990 he was named
leader of the project to expand El Palito's Crude and Vacuum Distillation units.
In 1993, he was appointed Process Engineering Superintendent, and in 1994 he led
the team responsible for the study of El Palito's organization. From 1995 to
1999, he held various supervisory and managerial positions, and in 2000,
PDVSA's Presidency seconded him on a temporary basis to the Ministry of
Production and Commerce to assist it in restructuring the Ministry and then in
the economic constituent process. In 2001, he was assigned to PDVSA's Bitumenes
del Orinoco (BITOR) subsidiary as Human Resources Manager, where he led the team
that worked on the restructuring part of the company's expansion project. In
2002, he was named Assistant to the BITOR Board of Directors, and in January
2003, he was appointed Manager of the El Palito Refinery. In August 2003, he was
named Executive Director for Human Resources at PDVSA, and in March of 2004, he
was appointed Executive Director for Trading and Supply.
59
JESUS LUONGO
Jesus Luongo has served as our director since November 2004. He is an
engineer and graduated from the Central University of Venezuela. In 1984, he
joined the Venezuelan oil industry as a Processes Engineer at the Amuay
refinery, one of the units comprising what is now the Paraguana Refining Center
in the State of Falcon, Venezuela. In 1987, he obtained a master's degree in
refining from the French Petroleum Institute in Paris. Upon his return to Amuay,
he rejoined the Processes department, working in the refining complex's various
units. He was also in charge of technical studies for a project aimed at
optimizing the refinery's heavy crudes processing, and took part in a project
designed to replace the vacuum systems equipment in the three main distillation
towers. From 1998 to 1999, he was Supply Manager and Intermediate Conversion
Manager and, in 2000, he was appointed Process Engineering Manager. Mr. Luongo
supervised key functions in the recovery of the refining business after December
2002, and his contribution to the coordination of key tasks in the safe startup
of this manufacturing complex won him promotion to Operations Manager. In
January 2004, he was named Assistant Manager of the refining center, and was
appointed General Manager in March 2004.
NELSON MARTINEZ
Nelson Martinez currently serves as a member of the PDVSA board of
directors and he became our director in August 2003. He is an award-winning
chemist with more than 20 international patents. He holds a bachelor's degree in
chemistry and a master's degree in physical chemistry from the University of
Poitiers in France. Mr. Martinez also received a master's degree in technology
management from the Massachusetts Institute of Technology and a doctorate in
chemistry from the University of Reading (United Kingdom). In 1994, he was
elected as a member of the New York Academy of Sciences for his contributions to
the study of catalysts in hydro treatment and catalytic cracking.
Mr. Martinez joined Intevep, PDVSA's research and development subsidiary,
in 1980. At Intevep, he gained significant experience in the development of
catalytic supports and process technology, including managing the processes
development department. In 1987, he was appointed head of the catalysis section
for Intevep. In 1995, Mr. Martinez was named leader of the technology management
corporate group and manager of the PDVSA-Intevep planning function. From March
2000 to December 2002, he held the position of Deputy Manager of the refining
and petrochemicals general division. During this time, he also served as team
manager of new business developments. Prior to his appointment as a PDVSA
director, Mr. Martinez served as Refining Managing Director of PDVSA Oriente.
LUIS VIERMA
Luis Vierma is a member of the PDVSA board of directors and has served as
Vice-Minister of Hydrocarbons at the Energy and Mines Ministry since 2002. He
holds a bachelor's degree in chemistry from the Central University of Venezuela
(1978) and a master's degree in geology from Indiana University (1984). He
joined PDVSA as an exploration chemist in 1978 and held that position until
1981, when he started his graduate studies at Indiana University. Upon his
return to Venezuela, he was named Director of the Geochemistry Laboratory of
PDVSA's Exploration Center, and Leader of Hydrocarbon Exploration Projects.
Subsequently, he was appointed director of the Inorganic Geochemistry Unit.
In 1993, he became Assistant Manager under an agreement between the
Venezuelan Energy and Mines Ministry and the U.S. Department of Energy for the
improved recovery of micro-organic crude. In 1995, he was appointed head of the
Geochemistry Section of the PDVSA Exploration Center. Two years later, he was
named head of the Geology Section, and the following year, he became Exploration
Business Manager. In 2000, he was appointed Director of the Policy and Planning
Office for Hydrocarbons at the Energy and Mines Ministry. He has been a member
of our board since May 2003 and served as Chairman during 2004.
60
RELATED PARTY TRANSACTIONS
We have entered into several transactions with PDVSA or affiliates of
PDVSA, including crude oil and feedstock supply agreements, agreements for the
purchase of refined products and transportation agreements. Under these
agreements, we purchased approximately $4.2 billion and $4.2 billion of crude
oil, feedstocks and refined products at market related prices from PDVSA in 2003
and the first nine months of 2004, respectively. At September 30, 2004, $532
million was included in our current payable to affiliates as a result of our
transactions with PDVSA.
Most of the crude oil and feedstocks purchased by us from PDVSA are
delivered on tankers owned by PDV Marina, S.A., a wholly-owned subsidiary of
PDVSA. In 2003 and the first nine months of 2004, 73% and 74%, respectively, of
the PDVSA contract crude oil delivered to the Lake Charles and Corpus Christi
refineries was delivered on tankers operated by this PDVSA subsidiary.
LYONDELL-CITGO owns and operates a 265 MBPD refinery in Houston, Texas.
LYONDELL-CITGO was formed in 1993 by subsidiaries of us and Lyondell (the
"Owners"). The heavy crude oil processed by the Houston refinery is supplied by
PDVSA under a long-term crude oil supply agreement through the year 2017. Under
this agreement, LYONDELL-CITGO purchased approximately $1.7 billion and $1.9
billion of crude oil and feedstocks at market related prices from PDVSA in 2003
and the first nine months of 2004, respectively. We purchase substantially all
of the gasoline, diesel and jet fuel produced at the Houston refinery under a
long-term contract. See our audited consolidated financial statements -- notes 3
and 4, which are included in this prospectus. Various disputes exist between
LYONDELL-CITGO and the partners and their affiliates concerning the
interpretation of these and other agreements between the Owners relating to the
operation of the refinery.
Our participation interest in LYONDELL-CITGO was approximately 41% at
September 30, 2004, in accordance with agreements between the Owners concerning
such interest. We held a note receivable from LYONDELL-CITGO of $35 million at
September 30, 2004. The note bears interest at market rates which were
approximately 1.8% at September 30, 2004. Principal and interest are due in
January 1, 2008. In addition, during 2003, we converted approximately $7 million
of accrued interest related to this note to investments in LYONDELL-CITGO.
We account for our investment in LYONDELL-CITGO using the equity method of
accounting and record our share of the net earnings of LYONDELL-CITGO based on
allocations of income agreed to by the Owners. Cash distributions are allocated
to the Owners based on participation interest.
In October 1998, PDVSA V.I., Inc., an affiliate of PDVSA, acquired a 50%
equity interest in HOVENSA and has the right under a product sales agreement to
assign periodically to us, 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 us 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 See our audited
consolidated financial statements -- notes 2 and 4, which are included in this
prospectus. Pursuant to the above arrangement, we acquired approximately 149
MBPD and 167 MBPD of refined products from the refinery during 2003 and the
first nine months of 2004, respectively, approximately one-half of which was
gasoline.
The refined product purchase agreements with LYONDELL-CITGO and HOVENSA
incorporate various formula prices based on published market prices and other
factors. Such purchases totaled $4.9 billion and $4.9 billion for 2003 and the
first nine months of 2004, respectively. At September 30, 2004, $180 million was
included in payables to affiliates as a result of these transactions.
We had refined product, feedstock, crude oil and other product sales of
$387 million and $307 million to affiliates, including LYONDELL-CITGO and Mount
Vernon Phenol Plant Partnership, in 2003 and the first nine months of 2004,
respectively. At September 30, 2004, $73 million was included in due from
affiliates as a result of these and related transactions.
We have guaranteed approximately $49 million of debt of certain
affiliates, including $11 million related to NISCO and $33 million related to
PDV Texas, Inc. See our audited consolidated financial statements -- note 13,
which are included in this prospectus.
61
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and termination value due under the lease of the
Corpus Christi Refinery West Plant facilities. See our audited consolidated
financial statements -- note 4, which are included in this prospectus.
In August 2002, three affiliates entered into agreements to advance excess
cash to us from time to time under demand notes for amounts of up to a maximum
of $10 million with PDV Texas, Inc., $30 million with PDV America and $10
million with PDV Holding. The notes bear interest at rates equivalent to 30-day
LIBOR plus 0.875% payable quarterly. There were zero amounts outstanding on
these notes at September 30, 2004.
We 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 us as its agent to handle the
payment of such liabilities on its behalf. As such, we calculate the taxes due,
allocate the payment among the members according to the agreement and bill each
member accordingly. Each member records its amounts due or payable to us in a
related party payable account. At September 30, 2004, we had net related party
receivables related to federal income taxes of $57 million.
62
THE EXCHANGE OFFER
The following is a summary of the exchange offer relating to the
outstanding notes. As a summary, it does not contain all of the information you
might find useful. For further information, you should read the registration
rights agreement and the form of letter of transmittal, copies of which have
been filed as exhibits to the registration statement. The exchange offer is
intended to satisfy certain of our obligations under the registration rights
agreement.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
EXCHANGE OFFER REGISTRATION STATEMENT. We sold the outstanding notes to
Lehman Brothers Inc., BNP Paribas Securities Corp., BNY Capital Markets, Inc.,
Citigroup Global Markets Inc., SG Americas Securities, LLC and WestLB AG, London
Branch, or the "initial purchasers," on October 22, 2004. The initial purchasers
have advised us that they subsequently resold the outstanding notes to
"qualified institutional buyers" in reliance on Rule 144A under the Securities
Act and to no-U.S. persons in reliance on Regulation S under the Securities Act.
As a condition to the offerings of the outstanding notes, we entered into a
registration rights agreement dated October 22, 2004, pursuant to which we
agreed, for the benefit of all holders of the outstanding notes, at our own
expense, to use our reasonable best efforts to consummate the exchange offer
within 330 days after the initial issue date of the outstanding notes.
Further, we agreed to keep the exchange offer open for acceptance for not
less than 30 nor more than 40 business days, such 40th day being the
"Consummation Deadline." For each outstanding note validly tendered pursuant to
the exchange offer and not withdrawn, the holder of that note will receive an
exchange note having a principal amount equal to that of the tendered
outstanding note. Interest on each exchange note will accrue from the last date
on which interest was paid on the tendered outstanding note in exchange therefor
or, if no interest was paid on that outstanding note, from the issue date.
TRANSFERABILITY. We issued the outstanding notes on October 22, 2004 in a
transaction exempt from the registration requirements of the Securities Act and
applicable state securities laws. Accordingly, the outstanding notes may not be
offered or sold in the United States unless registered or pursuant to an
applicable exemption under the Securities Act and applicable state securities
laws. Based on no-action letters issued by the staff of the SEC with respect to
similar transactions, we believe that the exchange notes issued pursuant to the
exchange offer in exchange for outstanding notes may be offered for resale,
resold and otherwise transferred by holders of notes who are not our affiliates
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that:
- any exchange notes to be received by the holder were acquired in the
ordinary course of the holder's business;
- at the time of the commencement of the exchange offer, the holder
has no arrangement or understanding with any person to participate
in the distribution, within the meaning of the Securities Act, of
the exchange notes;
- the holder is not an "affiliate" of ours, as defined in Rule 405
under the Securities Act; and
- the holder did not purchase the outstanding notes directly from us
to resell pursuant to 144A or another available exemption.
However, we have not sought a no-action letter with respect to the
exchange offer and we cannot assure you that the staff of the SEC would make a
similar determination with respect to the exchange offer. Any holder who tenders
its outstanding notes in the exchange offer with any intention of participating
in a distribution of exchange notes (1) cannot rely on the interpretation by the
staff of the SEC, (2) will not be able to validly tender outstanding notes in
the exchange offer and (3) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transactions.
Each broker-dealer that receives exchange notes for its own account in
exchange for outstanding notes, where those notes were acquired by such broker
dealer as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
those exchange notes. See "Plan of Distribution."
63
SHELF REGISTRATION STATEMENT. In the event that:
(1) applicable interpretations of the staff of the SEC do not permit us to
effect the exchange offer;
(2) for any other reason we do not consummate the exchange offer within
360 days after the date of original issue of the outstanding notes;
(3) an initial purchaser shall notify us following consummation of the
exchange offer that outstanding notes held by it are not eligible to be
exchanged for exchange notes in the exchange offer; or
(4) certain holders are prohibited by law or SEC policy from participating
in the exchange offer or may not resell the exchange notes acquired by them in
the exchange offer to the public without delivering a prospectus,
then, we will, subject to certain exceptions,
(1) promptly file a shelf registration statement with the SEC covering
resales of the outstanding notes or the exchange notes, as the case may be;
(2) (A) in the case of clause (1) above, use our reasonable best efforts
to cause the shelf registration statement to be declared effective under the
Securities Act on or prior to the 330th day after the date of original issue of
the outstanding notes and (B) in the case of clause (2), (3) or (4) above, use
our reasonable best efforts to cause the shelf registration statement to be
declared effective under the Securities Act on or prior to the 90th day after
the date on which the shelf registration statement is required to be filed; and
(3) use our reasonable best efforts to keep the shelf registration
statement effective until the earliest of (A) the time when the notes covered by
the shelf registration statement can be sold pursuant to Rule 144 without any
limitations under clauses (c), (e), (f) and (h) of Rule 144, (B) two years from
the date of original issue of the outstanding notes and (C) the date on which
all outstanding notes registered thereunder are disposed of in accordance
therewith.
We will, in the event a shelf registration statement is filed, among other
things, provide to each holder for whom the shelf registration statement was
filed copies of the prospectus that is a part of the shelf registration
statement, notify each such holder when the shelf registration statement has
become effective and take other actions as are required to permit unrestricted
resales of the outstanding notes or the exchange notes, as the case may be. A
holder selling outstanding notes or exchange notes pursuant to the shelf
registration statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to applicable civil liability provisions under the
Securities Act in connection with sales of that kind and will be bound by the
provisions of the registration rights agreement that are applicable to that
holder, including specified indemnification obligations. A holder will not be
permitted to sell notes pursuant to the shelf registration statement unless the
holder has returned to us a completed and signed notice electing to be included
and furnishing the holder's name and other information required to be included
in the related prospectus.
SPECIAL INTEREST.
We will pay additional cash interest on the outstanding notes and exchange
notes, subject to certain exceptions,
(1) if we fail to file an exchange offer registration statement with the
SEC on or prior to the 90th day after the date of original issue of the
outstanding notes,
(2) if the exchange offer registration statement is not declared effective
by the SEC on or prior to the 330th day after the date of original issue of the
outstanding notes or, if obligated to file a shelf registration statement
pursuant to clause 2(A) above, a shelf registration statement is not declared
effective by the SEC on or prior to the 180th day after the date of original
issue of the outstanding notes,
(3) if the exchange offer is not consummated on or before the 40th day
after the exchange offer registration statement is declared effective,
(4) if obligated to file the shelf registration statement pursuant to
clause 2(B) above, we fail to file the shelf registration statement with the SEC
on or prior to the 30th day, or the "shelf filing date," after the date on which
the obligation to file a shelf registration statement arises,
64
(5) if obligated to file a shelf registration statement pursuant to clause
2(B) above, the shelf registration statement is not declared effective on or
prior to the 90th day after the shelf filing date, or
(6) after the exchange offer registration statement or the shelf
registration statement, as the case may be, is declared effective, such
registration statement thereafter ceases to be effective or usable, subject to
certain exceptions.
The rate of additional interest will accrue on the principal amount of the
outstanding notes and the exchange notes, in addition to the stated interest on
the outstanding notes and the exchange notes, from and including the date on
which an event referred to in clauses (1) through (6) above shall occur, each
event being a "registration default," to but excluding the date on which all
such events have been cured or if earlier, the date on which the outstanding
notes may first be resold in reliance on Rule 144(k). The additional interest
will accrue at a rate of 0.25% per annum for the first 90 day period immediately
following the occurrence of such registration default and shall increase by an
additional 0.25% per annum with respect to each subsequent 90-day period until
all registration defaults have been cured up to a maximum additional interest
rate of 1.0%.
TERMS OF THE EXCHANGE OFFER
Upon satisfaction or waiver of all the conditions of the exchange offer,
we will accept any and all outstanding notes properly tendered and not validly
withdrawn prior to the expiration date and will promptly issue the exchange
notes. See " -- Conditions to the Exchange Offer" and " -- Procedures for
Tendering Outstanding Notes." We will issue $1,000 principal amount of exchange
notes in exchange for each $1,000 principal amount of outstanding notes accepted
in the exchange offer. As of the date of this prospectus, there are $250,000,000
aggregate principal amount of outstanding notes. Holders may tender some or all
of their outstanding notes pursuant to the exchange offer. However, outstanding
notes may be tendered only in integral multiples of $1,000.
The exchange notes are identical to the outstanding notes except for the
elimination of certain transfer restrictions and registration rights pertaining
to the outstanding notes. The exchange notes will evidence the same debt as the
outstanding notes and will be issued pursuant to, and entitled to the benefits
of, the indenture pursuant to which the outstanding notes were issued and will
be deemed one issue of notes, together with the outstanding notes.
This prospectus, together with the letter of transmittal, is being sent to
all registered holders and to others believed to have beneficial interests in
the outstanding notes. Holders of outstanding notes do not have any appraisal or
dissenters' rights under the indenture in connection with the exchange offer. We
intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the SEC promulgated thereunder.
For purposes of the exchange offer, we will be deemed to have accepted
validly tendered outstanding notes when, and if, we have given oral or written
notice thereof to the exchange agent. The exchange agent will act as our agent
for the purpose of distributing the appropriate exchange notes from us to the
tendering holders. If we do not accept any tendered outstanding notes because of
an invalid tender, the occurrence of certain other events set forth in this
prospectus or otherwise, we will return the unaccepted outstanding notes,
without expense, to the tendering holder thereof promptly after the expiration
date.
Holders who tender outstanding notes in the exchange offer will not be
required to pay brokerage commissions or fees or, except as set forth below
under " -- Transfer Taxes," transfer taxes with respect to the exchange of
outstanding notes pursuant to the exchange offer. We will pay all charges and
expenses, other than certain applicable taxes, in connection with the exchange
offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" shall mean 5:00 p.m., New York City time, on
____________, 200__, for the exchange offer unless we, in our sole discretion,
extend the exchange offer, in which case the term "expiration date" shall mean
the latest date and time to which the exchange offer is extended. In order to
extend the exchange offer, we will notify the exchange agent by oral or written
notice and each appropriate registered holder by means of press release or other
public announcement of any extension, in each case, prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date. We reserve the right, in our sole discretion,
- to delay accepting any outstanding notes,
- to extend the exchange offer,
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- to terminate the exchange offer and not accept any outstanding notes
if each condition set forth below under "-- Conditions to the
Exchange Offer" shall not have been satisfied or waived by us, or
- to amend the terms of the exchange offer in any manner.
We will notify the exchange agent of any delay, extension, termination or
amendment by oral or written notice. We will also notify each registered holder
of any amendment. We will give to the exchange agent written confirmation of any
oral notice.
EXCHANGE DATE
As soon as practicable after the close of the exchange offer, we will
accept for exchange all outstanding notes properly tendered and not validly
withdrawn prior to 5:00 p.m., New York City time, on the expiration date in
accordance with the terms of this prospectus and the letter of transmittal.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer or any
extension of the exchange offer, and subject to our obligations under the
registration rights agreement, we
- shall not be required to accept any outstanding notes for exchange,
- shall not be required to issue exchange notes in exchange for any
outstanding notes and
- may terminate or amend the exchange offer
if, at any time before the acceptance of outstanding notes for exchange, any of
the following events shall occur:
- any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair our ability to proceed with the exchange offer;
- any law, statute, rule or regulation is proposed, adopted or enacted
which, in our sole judgment, might materially impair our ability to
proceed with the exchange offer or materially impair the
contemplated benefits of the exchange offer to us;
- any governmental approval has not been obtained, which approval we
shall, in our sole discretion, deem necessary for the consummation
of the exchange offer as contemplated hereby; or
- the exchange offer will violate any applicable law or any applicable
interpretation of the staff of the SEC.
The foregoing conditions are for our sole benefit and may be asserted by
us regardless of the circumstances giving rise to any of those conditions or may
be waived by us in whole or in part at any time and from time to time in our
sole discretion. Our failure at any time to exercise any of the foregoing rights
shall not be deemed a waiver of any of those rights, and those rights shall be
deemed ongoing rights that may be asserted at any time and from time to time.
In addition, we will not accept for exchange any outstanding notes
tendered, and no exchange notes will be issued in exchange for any tendered
outstanding notes, if at such time any stop order shall be threatened by the SEC
or be in effect with respect to the registration statement of which this
prospectus is a part or the qualification of the indenture for the notes under
the Trust Indenture Act of 1939, as amended.
The exchange offer is not conditioned on any minimum aggregate principal
amount of outstanding notes being tendered for exchange.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any outstanding notes not tendered pursuant to the exchange offer will
remain outstanding and will continue to be entitled to the benefits of the
indenture and continue to accrue interest. The outstanding notes will remain
"restricted securities" within the meaning of the Securities Act. Accordingly,
prior to the date that is one year after
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the later of the issue date and the last date on which we or any of our
affiliates was the owner of the outstanding notes, the outstanding notes may be
resold only:
- to us;
- to a person who the seller reasonably believes is a "qualified
institutional buyer" purchasing for its own account or for the
account of another "qualified institutional buyer" in compliance
with the resale limitations of Rule 144A;
- pursuant to the limitations on resale provided by Rule 144 under the
Securities Act;
- pursuant to the resale provisions of Rule 904 of Regulation S under
the Securities Act;
- pursuant to an effective registration statement under the Securities
Act; or
- pursuant to any other available exemption from the registration
requirements of the Securities Act,
subject, in each of the foregoing cases, to compliance with applicable state
securities laws. As a result, the liquidity of the market for non-tendered
outstanding notes could be adversely affected upon completion of the exchange
offer.
FEES AND EXPENSES
We will not make any payments to brokers, dealers or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail; however, additional solicitations may be made in person or by telephone by
our officers and employees.
Expenses incurred in connection with the exchange offer will be paid by
us. Such expenses include, among others, the fees and expenses of the trustee
and the exchange agent, accounting and legal fees, printing costs and other
miscellaneous fees and expenses.
ACCOUNTING TREATMENT
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize the expenses of the
exchange offer as additional interest expense over the term of the exchange
notes.
PROCEDURES FOR TENDERING OUTSTANDING NOTES
The tender of outstanding notes pursuant to any of the procedures set
forth in this prospectus and in the letter of transmittal will constitute a
binding agreement between the tendering holder and us in accordance with the
terms and subject to the conditions set forth in this prospectus and in the
letter of transmittal. The tender of outstanding notes will constitute an
agreement to deliver good and marketable title to all tendered outstanding notes
prior to the expiration date free and clear of all liens, charges, claims,
encumbrances, interests and restrictions of any kind.
Except as provided in "-- Guaranteed Delivery Procedures," unless the
outstanding notes being tendered are deposited by you with the exchange agent
prior to the expiration date and are accompanied by a properly completed and
duly executed letter of transmittal, we may, at our option, reject the tender.
Issuance of exchange notes will be made only against deposit of tendered
outstanding notes and delivery of all other required documents. Notwithstanding
the foregoing, The Depository Trust Company, or "DTC," participants tendering
through its Automated Tender Offer Program, or "ATOP," will be deemed to have
made valid delivery where the exchange agent receives an agent's message, as
defined below, prior to the expiration date.
Accordingly, to properly tender outstanding notes, the following
procedures must be followed:
NOTES HELD THROUGH A CUSTODIAN. Each beneficial owner holding outstanding
notes through a DTC participant must instruct the DTC participant to cause its
outstanding notes to be tendered in accordance with the procedures set forth in
this prospectus.
NOTES HELD THROUGH DTC. Pursuant to an authorization given by DTC to the
DTC participants, each DTC participant holding outstanding notes through DTC
must
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- electronically transmit its acceptance through ATOP, and DTC will
then edit and verify the acceptance, execute a book-entry delivery
to the exchange agent's account at DTC and send an agent's message
to the exchange agent for its acceptance, or
- comply with the guaranteed delivery procedures set forth below and
in a notice of guaranteed delivery. See "-- Guaranteed Delivery
Procedures."
Promptly after the date of this prospectus, the exchange agent will
establish an account at DTC for purposes of the exchange offer with respect to
outstanding notes held through DTC. Any financial institution that is a DTC
participant may make book-entry delivery of interests in outstanding notes into
the exchange agent's account through ATOP. However, although delivery of
interests in the outstanding notes may be effected through book-entry transfer
into the exchange agent's account through ATOP, an agent's message in connection
with such book-entry transfer, and any other required documents, must be, in any
case, transmitted to and received by the exchange agent at its address set forth
under "-- Exchange Agent," or the guaranteed delivery procedures set forth
below must be complied with, in each case, prior to the expiration date.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The confirmation of a book-entry transfer into the exchange agent's account at
DTC as described above is referred to herein as a "Book-Entry Confirmation."
The term "agent's message" means a message transmitted by DTC to, and
received by, the exchange agent and forming a part of the book-entry
confirmation, which states that DTC has received an express acknowledgment from
each DTC participant tendering through ATOP that that DTC participant has
received a letter of transmittal and agrees to be bound by the terms of the
letter of transmittal and that we may enforce such agreement against such DTC
participants.
Cede & Co., as the holder of the global note, will tender a portion of the
global note equal to the aggregate principal amount due at the stated maturity
for which instructions to tender are given by DTC participants.
By tendering, each holder and each DTC participant will represent to us
that, among other things:
- it is not our affiliate;
- it is not a broker-dealer tendering outstanding notes acquired
directly from us for its own account;
- it is acquiring the exchange notes in its ordinary course of
business; and
- it is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the exchange notes.
Unless waived by us, we will not accept any alternative, conditional,
irregular or contingent tenders. By transmitting an acceptance through ATOP,
each tendering holder waives any right to receive any notice of the acceptance
for purchase of its outstanding notes.
We will resolve all questions as to the validity, form, eligibility
(including time of receipt) and acceptance of tendered outstanding notes, and
that determination will be final and binding. We reserve the absolute right to
reject any or all tenders that are not in proper form or the acceptance of which
may, in the opinion of our counsel, be unlawful. We also reserve the absolute
right to waive any condition to the exchange offer and any irregularities or
conditions of tender as to particular outstanding notes. Our interpretation of
the terms and conditions of the exchange offer (including the instructions in
the letter of transmittal) will be final and binding. Unless waived, any
irregularities in connection with tenders must be cured within such time as we
shall determine. We, along with the exchange agent, shall be under no duty to
give notification of defects in such tenders and shall not incur liabilities for
failure to give such notification. Tenders of outstanding notes will not be
deemed to have been made until those irregularities have been cured or waived.
Any outstanding notes received by the exchange agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned by the exchange agent to the tendering holder, unless otherwise
provided in the letter of transmittal, as soon as practicable following the
expiration date.
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LETTERS OF TRANSMITTAL AND OUTSTANDING NOTES MUST BE SENT ONLY TO THE EXCHANGE
AGENT. DO NOT SEND LETTERS OF TRANSMITTAL OR OUTSTANDING NOTES TO US OR DTC.
The method of delivery of outstanding notes, letters of transmittal, any
required signature guarantees and all other required documents, including
delivery through DTC and any acceptance through ATOP, is at the election and
risk of the persons tendering and delivering acceptances or letters of
transmittal and, except as otherwise provided in the letter of transmittal,
delivery will be deemed made only when actually received by the exchange agent.
If delivery is by mail, it is suggested that the holder use properly insured,
registered mail with return receipt requested, and that the mailing be made
sufficiently in advance of the expiration date to permit delivery to the
exchange agent prior to the expiration date.
GUARANTEED DELIVERY PROCEDURES
DTC participants holding outstanding notes through DTC who wish to cause
their outstanding notes to be tendered, but who cannot transmit their
acceptances through ATOP prior to the expiration date, may cause a tender to be
effected if:
- guaranteed delivery is made by or through a firm or other entity
identified in Rule 17Ad-15 under the Exchange Act, including the
following, which we call "eligible institutions":
- a bank;
- a broker, dealer, municipal securities dealer, municipal
securities broker, government securities dealer or government
securities broker;
- a credit union;
- a national securities exchange, registered securities
association or clearing agency; or
- a savings institution that is a participant in a Securities
Transfer Association recognized program;
- prior to the expiration date, the exchange agent receives from any
of the above institutions a properly completed and duly executed
notice of guaranteed delivery, by mail, hand delivery, facsimile
transmission or overnight courier, substantially in the form
provided with this prospectus; and
- book-entry confirmation and an agent's message in connection
therewith are received by the exchange agent within three New York
Stock Exchange trading days after the date of the execution of the
notice of guaranteed delivery.
WITHDRAWAL RIGHTS
You may withdraw tenders of outstanding notes, or any portion of your
outstanding notes, in integral multiples of $1,000 principal amount due at the
stated maturity, at any time prior to 5:00 p.m., New York City time, on the
expiration date. Any outstanding notes properly withdrawn will be deemed to be
not validly tendered for purposes of the exchange offer.
DTC participants holding outstanding notes who have transmitted their
acceptances through ATOP may, prior to 5:00 p.m., New York City time, on the
expiration date, withdraw the instruction given thereby by delivering to the
exchange agent, at its address set forth under "-- Exchange Agent," a written,
telegraphic or facsimile notice of withdrawal of such instruction. Such notice
of withdrawal must contain the name and number of the DTC participant, the
principal amount of outstanding notes to which such withdrawal relates and the
signature of the DTC participant. Receipt of such written notice of withdrawal
by the exchange agent effectuates a withdrawal.
A withdrawal of a tender of outstanding notes by a DTC participant or a
holder, as the case may be, may be rescinded only by a new transmission of an
acceptance through ATOP or execution and delivery of a new letter of
transmittal, as the case may be, in accordance with the procedures described
herein.
A withdrawal of an instruction must be executed by a DTC participant in
the same manner as the person's name appears on its transmission through ATOP to
which such withdrawal relates. If a notice of withdrawal is signed by a
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trustee, partner, executor, administrator, guardian, attorney-in-fact, agent,
officer of a corporation or other person acting in a fiduciary or representative
capacity, that person must so indicate when signing and must submit with the
revocation appropriate evidence of authority to execute the notice of
withdrawal. A DTC participant may withdraw an instruction only if that
withdrawal complies with the provisions of this prospectus.
EXCHANGE AGENT
J.P. Morgan Trust Company, National Association will act as exchange agent
for the exchange offer.
You should direct all executed letters of transmittal to the exchange
agent at one of the addresses set forth below. You should direct questions and
requests for assistance, requests for additional copies of this prospectus or of
the letter of transmittal and requests for copies of the notice of guaranteed
delivery to the exchange agent, addressed as follows:
By registered or certified mail:
J.P. Morgan Trust Company, National Association
2001 Bryan Street, Floor 10
Dallas, TX 75201
Attn: Frank Ivins
By hand/overnight courier:
J.P. Morgan Trust Company, National Association
2001 Bryan Street, Floor 10
Dallas, TX 75201
Attn: Frank Ivins
By facsimile (eligible institutions only):
(214) 468-6494
By telephone inquiries:
(214) 468-6464
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
TRANSFER TAXES
Holders of outstanding notes who tender their outstanding notes for
exchange notes will not be obligated to pay any transfer taxes in connection
therewith, except that holders who instruct us to register exchange notes in the
name of, or request that outstanding notes not tendered or not accepted in the
exchange offer be returned to, a person other than the registered tendering
holder will be responsible for the payment of any applicable transfer tax
thereon.
OTHER
Participation in the exchange offer is voluntary. You should carefully
consider whether to accept the exchange offer. You should consult your financial
and tax advisors in making your own decision on what action to take.
We may in the future seek to acquire untendered outstanding notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. We have no present plans to acquire any outstanding notes that are
not tendered in the exchange offer or to file a registration statement to permit
resales of any untendered outstanding notes.
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DESCRIPTION OF THE EXCHANGE NOTES
The Outstanding Notes were issued and the exchange notes, the "Exchange
Notes," will be issued under an Indenture (the "Indenture") dated as of October
22, 2004 between us and J.P. Morgan Trust Company, National Association, as
Trustee. We refer to the Outstanding Notes, the Exchange Notes and any other
notes issued under the Indenture as the "Notes." The terms of the Exchange Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act.
Certain terms used in this description are defined below under the
subheading "-- Certain Definitions." In this description, the terms "Company,"
"we" and "our" refer only to CITGO Petroleum Corporation and not to any of its
subsidiaries.
The following description is only a summary of the material provisions of
the Exchange Notes and the Indenture. We urge you to read the Indenture because
it, not this description, defines your rights as holders of the Exchange Notes.
You may request a copy of the Indenture at our address set forth under the
heading "Where You Can Find More Information."
The terms of the Exchange Notes are identical in all material respects to
the terms of the Outstanding Notes, except that the transfer restrictions and
registration rights relating to the Outstanding Notes do not apply to the
Exchange Notes. If we do not complete the exchange offer by __________, 200__,
holders of Outstanding Notes that have complied with their obligations under the
registration rights agreement will be entitled to additional interest in an
amount equal to a rate of 0.25% per annum for the first 90-day period
immediately following the occurrence of a registration default, and such rate
will increase by an additional 0.25% per annum with respect to each subsequent
90-day period until all registration defaults have been cured, up to a maximum
additional interest rate of 1.0% per annum. We will pay such additional interest
on regular interest payment dates. Such additional interest will be in addition
to any other interest payable from time to time with respect to the Outstanding
Notes.
BRIEF DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes:
- will be our general unsecured senior obligations;
- will be equal in right of payment with our existing and future
senior unsecured Indebtedness;
- will be senior in right of payment to any of our Subordinated
Obligations; and
- will be effectively subordinated to our existing and future secured
Indebtedness and to all existing and future indebtedness and other
liabilities, including trade payables, of our Subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
We will issue the Exchange Notes initially with a maximum aggregate
principal amount of $250 million. Subject to the covenant described below under
the caption "-- Certain Covenants -- Limitation on Indebtedness," we are
entitled to, without the consent of the Holders, issue additional Notes under
the Indenture on the same terms and conditions and with the same CUSIP numbers
as the Notes in an unlimited aggregate principal amount (the "Additional
Notes"). The Notes and the Additional Notes, if any, will be treated as a single
class for all purposes of the Indenture, including waivers, amendments and
offers to purchase. Unless the context otherwise requires, for all purposes of
the Indenture and this "Description of the Exchange Notes," references to the
Notes include any Additional Notes actually issued. We will issue the Exchange
Notes in denominations of $1,000 principal amount and any integral multiple of
$1,000.
The Exchange Notes will mature on October 15, 2011. Interest on the
Exchange Notes will accrue at a rate of 6% per annum and will be payable
semi-annually in arrears (to the Holders of record of the Exchange Notes on the
April 1 or October 1 immediately preceding the applicable interest payment date)
on each April 15 and October 15, of each year, beginning on April 15, 2005.
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Interest on the Exchange Notes will accrue from most recent interest
payment date to which interest has been paid on the Outstanding Notes or, if no
interest has been paid, October 22, 2004. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the Exchange
Notes prior to their stated maturity.
On and after October 15, 2008, we may, at our option, redeem all or a
portion of the Exchange Notes upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below, plus accrued and unpaid interest to the redemption date
(subject to the right of Holders on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period commencing on October 15 of the following years:
REDEMPTION
YEAR PRICE
---- ----------
2008..................................................................................... 103.000%
2009..................................................................................... 101.500%
2010 and thereafter...................................................................... 100.000%
Prior to October 15, 2007, we may, at our option, on one or more occasions
redeem the Notes (which includes Additional Notes, if any) in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of the
Notes (which includes Additional Notes, if any) issued under the Indenture at a
redemption price (expressed as a percentage of principal amount) of 106.000%
plus accrued and unpaid interest to the redemption date with the net cash
proceeds from one or more Equity Offerings subsequent to the Issue Date;
provided, however, that
(1) at least 65% of such aggregate principal amount of the Notes
(which includes Additional Notes, if any) remains outstanding immediately
after the occurrence of each such redemption (other than Notes held,
directly or indirectly, by us or our Affiliates); and
(2) each such redemption occurs within 120 days after the date of
the related Equity Offering.
Notice of any redemption upon an Equity Offering may be given prior to the
completion of the related Equity Offering, and any such redemption or notice may
at our discretion, be subject to one or more conditions precedent, including,
but not limited to completion of the related Equity Offering.
Prior to October 15, 2008, we may redeem, at our option, all or a portion
of the Notes at a redemption price equal to 100% of the principal amount of the
Notes plus the Applicable Premium as of, and accrued and unpaid interest to, the
redemption date (subject to the right of Holders on the relevant record date to
receive interest due on the relevant interest payment date). Notice of such
redemption must be mailed by first- class mail to each Holder's registered
address, not less than 30 nor more than 60 days prior to the redemption date.
"Adjusted Treasury Rate" means, with respect to any redemption date, (i)
the yield, under the heading which represents the average for the immediately
preceding week, appearing in the most recently published statistical release
designated "H.15(519)" or any successor publication which is published weekly by
the Board of Governors of the Federal Reserve System and which establishes
yields on actively traded United States Treasury securities adjusted to constant
maturity under the caption "Treasury Constant Maturities," for the maturity
corresponding to the Comparable Treasury Issue with respect to a Note, if no
maturity is within three months before or after October 15, 2008, yields for the
two published maturities most closely corresponding to the Comparable Treasury
Issue shall be determined and the Adjusted Treasury Rate shall be interpolated
or extrapolated from such yields on a straight line basis, rounding to the
nearest month) or (ii) if such release (or any successor release) is not
published during the week preceding the calculation date or does not contain
such yields, the rate per year equal to the semi-annual equivalent yield to
maturity of the Comparable Treasury Issue (expressed as a percentage of its
principal amount) equal to the Comparable Treasury Price for such redemption
date, in each case calculated on the third Business Day immediately preceding
the redemption date, plus in the case of each of clause (i) and (ii), 0.50%.
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"Applicable Premium" means at any redemption date, the excess of (A) the
present value at such redemption date of (1) the redemption price of such Note
on October 15, 2008 (such redemption price being described in the second
paragraph of this "-- Optional Redemption") plus (2) all required remaining
scheduled interest payments due on such Note through October 15, 2008 (excluding
accrued and unpaid interest), computed using a discount rate equal to the
Adjusted Treasury Rate, over (B) the principal amount of such Note on such
redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by the Quotation Agent as having a maturity comparable to the remaining
term from the redemption date to October 15, 2008, that would be utilized, at
the time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of a maturity most nearly equal
to October 15, 2008.
"Comparable Treasury Price" means, with respect to any redemption date of
such Note, if clause (ii) of the Adjusted Treasury Rate is applicable, the
average of three, or such lesser number as is obtained by the Trustee, Reference
Treasury Dealer Quotations for such redemption date.
"Quotation Agent" means the Reference Treasury Dealer selected by the
Trustee after consultation with us.
"Reference Treasury Dealer" means Lehman Brothers Inc. and its successors
and assigns, and two other nationally recognized investment banking firms
selected by the Company that are primary U.S. Government securities dealers.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue,
expressed in each case as a percentage of its principal amount, quoted in
writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m., New York
City Time, on the third Business Day immediately preceding such redemption date.
SELECTION AND NOTICE OF REDEMPTION
If we are redeeming less than all of the Notes at any time, then, in each
such case, the Trustee will select Notes on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate.
We will redeem Notes of $1,000 principal amount or less in whole and not
in part. We will cause notices of redemption to be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at its registered address. Any redemption and notice
thereof pursuant to the Indenture may, in our discretion, be subject to the
satisfaction of one or more conditions precedent.
If any Note is to be redeemed in part only, the notice of redemption that
relates to that Note will state the portion of the principal amount thereof to
be redeemed. We 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.
MANDATORY REDEMPTION; OFFERS TO PURCHASE; OPEN MARKET PURCHASES
We are not required to make any mandatory redemption or sinking fund
payments with respect to the Exchange Notes. However, under certain
circumstances, we may be required to offer to purchase the Exchange Notes as
described under the captions "-- Change of Control Triggering Event" and "--
Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock." We may
at any time and from time to time purchase the Exchange Notes in the open market
or otherwise.
RANKING
SENIOR INDEBTEDNESS VERSUS EXCHANGE NOTES
The indebtedness evidenced by these Exchange Notes will be unsecured and
will rank equally in right of payment to our Senior Indebtedness. As of
September 30, 2004, on a pro forma, as adjusted basis giving effect to
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this offering and the use of the net proceeds therefrom for the repurchase of
our 11-3/8% notes, we would have had $1,047.9 million of Senior Indebtedness
outstanding, including $49.7 million of secured indebtedness outstanding, all of
which are capital lease obligations. Our secured debt and other secured
obligations will be effectively senior to the Notes to the extent of the value
of the assets securing such debt or other obligations. See "Description of Other
Indebtedness." The Company will also be able to incur additional secured debt to
the extent permitted by the Indenture. See "-- Certain Covenants -- Limitation
on Liens" and "-- Certain Investment Grade Covenants -- Restrictions on Secured
Indebtedness."
LIABILITIES OF SUBSIDIARIES VERSUS EXCHANGE NOTES
A substantial portion of our operations are conducted through our
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors and creditors holding indebtedness or guarantees issued by such
subsidiaries, and claims of preferred stockholders of such subsidiaries
generally will have priority with respect to the assets and earnings of such
subsidiaries over the claims of our creditors, including Holders of the Exchange
Notes. Accordingly, the Exchange Notes will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders, if any, of our
subsidiaries.
At September 30, 2004, the total liabilities of our subsidiaries,
including trade payables but excluding intercompany liabilities, were
approximately $946 million. Although the Indenture limits the incurrence of
Indebtedness and the issuance of preferred stock by certain of our subsidiaries,
such limitations are subject to a number of significant qualifications.
Moreover, the Indenture does not impose any limitation on the incurrence by such
subsidiaries of liabilities that are not considered Indebtedness under the
Indenture. See "-- Certain Covenants -- Limitation on Indebtedness."
All of our subsidiaries on the Issue Date will be Restricted Subsidiaries
on the Issue Date.
BOOK-ENTRY, DELIVERY AND FORM
The Exchange Notes will be represented by one or more global notes in
registered form without interest coupons, or the "Global Exchange Notes." The
Global Exchange Notes will be deposited upon issuance with the Trustee as
custodian for DTC in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below. So long as DTC or its nominee is the
registered owner of a Global Exchange Note, DTC or such nominee will be
considered the sole record owner or "Holder" of the Notes represented by the
Global Exchange Note for all purposes under the Indenture and the Notes.
Each person owning a beneficial interest in a Global Exchange Note must
rely on the procedures of DTC and on the procedures of the DTC participants to
exercise any rights of a Holder of Notes.
Under current industry practice, in the event that we request any action
of Holders of Notes, or in the event that an owner of a beneficial interest in a
Global Exchange Note desires to take any action that DTC, as Holder of such
Global Exchange Note, is entitled to take, DTC would authorize the DTC
participants to take such action and the DTC participants would authorize
persons owning through such DTC participants to take that action or would
otherwise act upon the instruction of those persons. 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 Notes by DTC, or for maintaining, supervising
or reviewing any records of DTC relating to those Notes.
Except as set forth below, the Global Exchange Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. Beneficial interests in the Global Exchange Notes may not be
exchanged for Exchange Notes in certificated form except in the limited
circumstances described below. See "-- Exchange of Global Exchange Notes for
Certificated Exchange Notes". Except in the limited circumstances described
below, owners of beneficial interests in the Global Exchange Notes will not be
entitled to receive physical delivery of Exchange Notes in certificated form.
Transfers of beneficial interests in the Global Exchange Notes will be
subject to the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of the Euroclear System, or
"Euroclear," and Clearstream Banking, S.A., or "Clearstream," which may change
from time to time.
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DEPOSITORY PROCEDURES
The following description of the operations and procedures of DTC,
Euroclear and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. We take no responsibility
for these operations and procedures and urge investors to contact the system or
their participants directly to discuss these matters.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Exchange Notes, DTC will credit the
accounts of Participants designated by the Participants depositing the
Global Exchange Notes with portions of the principal amount of the Global
Exchange Notes; and
(2) ownership of these interests in the Global Exchange Notes will
be shown on, and the transfer of ownership of these interests will be
effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with
respect to other owners of beneficial interests in the Global Exchange
Notes).
Investors in the Global Exchange Notes who are Participants in DTC's
system may hold their interests therein directly through DTC. Investors in the
Global Exchange Notes who are not Participants may hold their interests therein
indirectly through organizations (including Euroclear and Clearstream) that are
Participants in such system. All interests in a Global Exchange Note, including
those held through Euroclear or Clearstream, may be subject to the procedures
and requirements of DTC. Those interests held through Euroclear or Clearstream
may also be subject to the procedures and requirements of such systems. The laws
of some states require that certain Persons take physical delivery in definitive
form of securities that they own. Consequently, the ability to transfer
beneficial interests in a Global Exchange Note to those Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Exchange Note to pledge such interests to
Persons that do not participate in the DTC system, or otherwise take actions in
respect of such interests, may be affected by the lack of a physical certificate
evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF AN INTEREST IN THE GLOBAL EXCHANGE
NOTES WILL NOT HAVE EXCHANGE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE
PHYSICAL DELIVERY OF THE EXCHANGE NOTES IN CERTIFICATED FORM AND WILL NOT BE
CONSIDERED THE REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR
ANY PURPOSE.
Payments in respect of the principal of, and interest and premium and
additional interest, if any, on a Global Exchange Note registered in the name of
DTC or its nominee will be payable to DTC in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, we and the Trustee
will treat the Persons in whose names the Notes, including the Global Exchange
Notes, are registered as the owners of the Exchange Notes for the purpose of
receiving payments and for all other purposes. Consequently, neither we nor the
Trustee or any agent of us or the Trustee has or will have any responsibility or
liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of
beneficial ownership interests in the Global Exchange Notes or for
maintaining, supervising or reviewing any of DTC's records or any
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in the Global Exchange Notes; or
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(2) any other matter relating to the actions and practices of DTC or
any of its Participants or Indirect Participants.
DTC has advised us that its current practice, upon receipt of any payment
in respect of securities such as the Exchange Notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not receive
payment on such payment date. Each relevant Participant is credited with an
amount proportionate to its beneficial ownership of an interest in the principal
amount of the relevant security as shown on the records of DTC. Payments by the
Participants and the Indirect Participants to the beneficial owners of Exchange
Notes will be governed by standing instructions and customary practices, will be
the responsibility of the Participants or the Indirect Participants and will not
be the responsibility of DTC, the Trustee or us. Neither we nor the Trustee will
be liable for any delay by DTC or any of its Participants in identifying the
beneficial owners of the Exchange Notes, and we and the Trustee may conclusively
rely on and will be protected in relying on instructions from DTC or its nominee
for all purposes.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
Cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counter-party in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, 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 of delivering or receiving interests in the relevant Global Exchange Note
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Euroclear participants and
Clearstream participants may not deliver instructions directly to the
depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a
Holder of Exchange Notes only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Exchange Notes and
only in respect of such portion of the aggregate principal amount of the
Exchange Notes as to which such Participant or Participants has or have given
such direction. However, if there is an Event of Default under the Exchange
Notes, DTC reserves the right to exchange the Global Exchange Notes for legended
Exchange Notes in certificated form, and to distribute such Exchange Notes to
its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Exchange Notes
among participants in DTC, Euroclear and Clearstream, they are under no
obligation to perform or to continue to perform such procedures, and may
discontinue such procedures at any time. Neither we nor the Trustee or any of
our or their respective agents will have any responsibility for the performance
by DTC, Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
EXCHANGE OF GLOBAL EXCHANGE NOTES FOR CERTIFICATED EXCHANGE NOTES
A Global Exchange Note is exchangeable for Certificated Exchange Notes if:
(1) DTC (a) notifies us that it is unwilling or unable to continue
as depositary for the Global Exchange Notes and DTC fails to appoint a
successor depositary or (b) has ceased to be a clearing agency registered
under the Exchange Act;
(2) we, at our option, notify the Trustee in writing that we elect
to cause the issuance of the Certificated Exchange Notes; or
(3) there has occurred and is continuing an Event of Default with
respect to the Exchange Notes.
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In addition, beneficial interests in a Global Exchange Note may be
exchanged for Certificated Exchange Notes under prior written notice given to
the Trustee by or on behalf of DTC in accordance with the Indenture. In all
cases, Certificated Exchange Notes delivered in exchange for any Global Exchange
Note or beneficial interests in Global Exchange Notes will be registered in the
names, and issued in any approved denominations, requested by or on behalf of
the depositary (in accordance with its customary procedures).
SAME DAY SETTLEMENT AND PAYMENT
We will make payments in respect of the Exchange Notes represented by the
Global Exchange Notes (including principal, premium, if any, interest and
additional interest, if any) by wire transfer of immediately available funds to
the accounts specified by the Global Exchange Note Holder. We will make all
payments of principal, interest and premium and additional interest, if any,
with respect to Certificated Exchange Notes by wire transfer of immediately
available funds to the accounts specified by the Holders of the Certificated
Exchange Notes or, if no such account is specified, by mailing a check to each
such Holder's registered address. The Exchange Notes represented by the Global
Exchange Notes are expected to be eligible to trade in the PORTAL(SM) Market and
to trade in DTC's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in those Exchange Notes will, therefore, be required by
DTC to be settled in immediately available funds. We expect that secondary
trading in any Certificated Exchange Notes will also be settled in immediately
available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Exchange Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
us that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Exchange Note by or through a Euroclear or Clearstream
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 cash account only as of the business day for Euroclear or
Clearstream following DTC's settlement date.
CHANGE OF CONTROL TRIGGERING EVENT
Upon the occurrence of a Change of Control Triggering Event, each Holder
shall have the right to require that we repurchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof on the date
of purchase plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date).
"Change of Control" means any of the following events:
(1) prior to the first public offering of common stock of the
Company, the Permitted Holder ceases to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of
the Voting Stock of the Company, whether as a result of issuance of
securities of the Company, any merger, consolidation, liquidation or
dissolution of the Company, or any direct or indirect transfer of
securities or otherwise (for purposes of this clause (1) and clause (2)
below, the Permitted Holder shall be deemed to beneficially own any Voting
Stock of a Person (the "specified person") held by any other Person (the
"parent entity") so long as the Permitted Holder beneficially owns (as so
defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent entity);
(2) after the first public offering of common stock of the Company,
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holder, is or becomes the
beneficial owner (as defined in clause (1) above, except that for purposes
of this clause (2) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total voting power
of the Voting Stock of the Company; provided, however, that the Permitted
Holder beneficially owns (as defined in clause (1) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of the Company than such other person and does not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors of the
Company (for the purposes of this clause (2), such other person shall be
deemed to beneficially own any
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Voting Stock of a specified person held by a parent entity, if such other
person is the beneficial owner (as defined in this clause (2)), directly
or indirectly, of more than 35% of the voting power of the Voting Stock of
such parent entity and the Permitted Holder beneficially owns (as defined
in clause (1) above), directly or indirectly, in the aggregate a lesser
percentage of the voting power of the Voting Stock of such parent entity
and does not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the board of
directors of such parent entity);
(3) individuals who on the Issue Date constituted the Board of
Directors of the Company (together with any new directors whose election
by such Board of Directors of the Company or whose nomination for election
by the shareholders of the Company, was (A) approved by a vote of a
majority of the directors of the Company then still in office who were
either directors on the Issue Date or whose election or nomination for
election was previously so approved or (B) approved by the Permitted
Holder at a time when the Permitted Holder held, directly or indirectly, a
majority in the aggregate of the total voting power of the Voting Stock of
the Company) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office;
(4) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
(5) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company (determined on
a consolidated basis) to another Person other than (i) a transaction in
which the survivor or transferee is a Person that is controlled by the
Permitted Holder or (ii) a transaction following which (A) in the case of
a merger or consolidation transaction, holders of securities that
represented 100% of the Voting Stock of the Company immediately prior to
such transaction (or other securities into which such securities are
converted as part of such merger or consolidation transaction) own
directly or indirectly at least a majority of the voting power of the
Voting Stock of the surviving Person in such merger or consolidation
transaction immediately after such transaction and in substantially the
same proportion as before the transaction and (B) in the case of a sale of
assets transaction, each transferee becomes an obligor in respect of the
Exchange Notes and a Subsidiary of the transferor of such assets.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline with respect to the Exchange Notes.
Within 30 days following any Change of Control Triggering Event, the
Company will mail a notice to each Holder with a copy to the Trustee (the
"Change of Control Offer") stating:
(1) that a Change of Control Triggering Event has occurred and that
such Holder has the right to require the Company to purchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase, plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest on the relevant interest payment
date);
(2) the circumstances and relevant facts regarding such Change of
Control Triggering Event;
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by the Company, consistent with
the covenant described hereunder, that a Holder must follow in order to
have its Notes purchased.
We will not be required to make a Change of Control Offer following a
Change of Control Triggering Event 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 Notes validly tendered and not withdrawn under such
Change of Control Offer.
A Change of Control Offer may be made in advance of a Change of Control
Triggering Event and conditioned upon the occurrence of such Change of Control
Triggering Event, if a definitive agreement is in place at the time of making
the Change of Control Offer.
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We will comply, to the extent applicable, with the requirements of Section
14(e) of the Exchange Act and any other securities laws or regulations in
connection with the repurchase of Notes as a result of a Change of Control
Triggering Event. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of the covenant described hereunder,
the Company will comply with the applicable securities laws and regulations and
shall not be deemed to have breached our obligations under the covenant
described hereunder by virtue of our compliance with such securities laws or
regulations.
The Change of Control Triggering Event purchase feature of the Notes may
in certain circumstances make more difficult or discourage a sale or takeover of
us and, thus, the removal of incumbent management. The Change of Control
Triggering Event purchase feature is a result of negotiations between the
Company and the Initial Purchasers. We have no present intention to engage in a
transaction involving a Change of Control, although it is possible that we could
decide to do so in the future. Subject to the limitations discussed below, we
could, in the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of indebtedness
outstanding at such time or otherwise affect our capital structure or credit
ratings. Restrictions on our ability to Incur additional Indebtedness are
contained in the covenants described under "-- Certain Covenants -- Limitation
on Indebtedness," and "-- Certain Covenants -- Limitation on Liens," each of
which is applicable only prior to an Investment Grade Rating Event, and in the
covenants described under "-- Certain Investment Grade Covenants --
Restrictions on Secured Indebtedness" and "-- Certain Investment Grade
Covenants -- Restrictions on Sale/Leaseback Transactions," each of which is
applicable following an Investment Grade Rating Event. Such restrictions can
only be waived with the consent of the Holders of a majority in principal amount
of the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford Holders of the Notes protection in the event of a highly
leveraged transaction.
Our credit agreements provide that the occurrence of certain change of
control events with respect to us would constitute a default thereunder, which
in turn could constitute an Event of Default under the Indenture. In the event a
Change of Control Triggering Event occurs at a time when we are prohibited by
our credit agreements or other agreements from purchasing Notes, we may seek the
consent of our lenders to the purchase of Notes or may attempt to refinance the
borrowings that contain such prohibition. If we do not obtain such a consent or
repay such borrowings, we will remain prohibited from purchasing Notes. In such
case, our failure to offer to purchase Notes would constitute an Event of
Default under the Indenture, which would, in turn, constitute a default under
our credit agreements.
Future indebtedness that we may incur may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require the repurchase of such indebtedness upon a Change of Control. Moreover,
the exercise by the Holders of their right to require us to repurchase the Notes
could cause a default under such indebtedness, even if the Change of Control
itself does not, due to the financial effect of such repurchase on us. Finally,
our ability to pay cash to the Holders of Notes following the occurrence of a
Change of Control Triggering Event may be limited by our then existing financial
resources. There can be no assurance that sufficient funds will be available
when necessary to make any required repurchases.
The definition of "Change of Control" includes a disposition of all or
substantially all of our the assets 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 our assets. As a result, it may be unclear as to whether a Change of Control
has occurred and whether a Holder of Notes may require us to make an offer to
repurchase the Notes as described above.
The provisions under the Indenture relative to our obligation to make an
offer to repurchase the Notes as a result of a Change of Control Triggering
Event may be waived or modified with the written consent of the Holders of a
majority in principal amount of the Notes.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, those summarized
below. Upon the occurrence of an Investment Grade Rating Event, each of the
covenants (except for clause (1) of "-- Merger and Consolidation" and "-- SEC
Reports") described below, as well as the provisions of "-- Change of Control
Triggering Event" above,
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will cease to apply to us and our Restricted Subsidiaries. Instead, each of the
covenants described under "-- Certain Investment Grade Covenants" will apply to
the Company after the occurrence of an Investment Grade Rating Event.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any Restricted Subsidiary
to, Incur, directly or indirectly, any Indebtedness; provided, however, that the
Company and the Subsidiary Guarantors, if any, will be entitled to Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto
on a pro forma basis, no Default has occurred and is continuing and the
Consolidated Coverage Ratio exceeds 2.0 to 1. The Company will cause each
Restricted Subsidiary that Incurs any Indebtedness pursuant to this paragraph
(a) or paragraphs (b) (10) or (b) (14) of this covenant, to execute and deliver
to the Trustee, no later than the date of such Incurrence, a supplemental
indenture to the Indenture pursuant to which such Restricted Subsidiary will
guarantee payment of the Exchange Notes on the same terms and conditions as
those set forth in the Indenture.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries will be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company or a Restricted Subsidiary
pursuant to the Credit Facilities; provided, however, that, immediately
after giving effect to any such Incurrence, the aggregate principal amount
of all Indebtedness Incurred under this clause (1) and then outstanding
does not exceed the greater of (A) $950 million and (B) 50% of the book
value of the inventory of the Company and its Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (A) any subsequent issuance or
transfer of any Capital Stock which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or a Restricted
Subsidiary) shall be deemed, in each case, to constitute the Incurrence of
such Indebtedness by the obligor thereon and (B) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly subordinated
to the prior payment in full in cash of all obligations with respect to
the Notes;
(3) the Notes and the Exchange Notes (other than any Additional
Notes);
(4) Indebtedness outstanding on the Issue Date;
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Subsidiary was acquired by the
Company; provided, however, that on the date of such acquisition and after
giving pro forma effect thereto, the Company would have been able to Incur
at least $1.00 of additional Indebtedness pursuant to paragraph (a) of
this covenant;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4) or (5) or this
clause (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a
Subsidiary Incurred pursuant to clause (5), such Refinancing Indebtedness
shall be Incurred only by such Subsidiary or the Company;
(7) Hedging Obligations entered into in the ordinary course of
business to purchase any raw material, hydrocarbon, refined product or
other commodity or to hedge risks with respect to the Company's or a
Restricted Subsidiary's interest rate, currency, hydrocarbon or refined
products therefrom or commodity exposure and not for speculative purposes;
(8) obligations in respect of tender, performance, government
contract, bid and surety or appeal bonds, standby letters of credit,
warranty or contractual services and completion guarantees provided by the
Company or any Restricted Subsidiary in the ordinary course of business;
(9) 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,
however, that such Indebtedness is extinguished within five Business Days
of its Incurrence;
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(10) Guarantees by Subsidiary Guarantors of Indebtedness of the
Company or any Restricted Subsidiary permitted to be Incurred under the
Indenture and Liens created by Subsidiary Guarantors that constitute
Indebtedness securing Indebtedness of the Company or any Restricted
Subsidiary permitted to be Incurred under the Indenture;
(11) Indebtedness of a Receivables Subsidiary Incurred pursuant to a
Qualified Receivables Transaction;
(12) Indebtedness of Restricted Subsidiaries in an aggregate
principal amount which, when taken together with all other Indebtedness of
Restricted Subsidiaries outstanding on the date of such Incurrence (other
than Indebtedness permitted by any other clause of this paragraph (b)),
does not exceed the greater of (A) $125 million and (B) 5% of Consolidated
Net Worth;
(13) Guarantees by the Company of Indebtedness of Restricted
Subsidiaries Incurred pursuant to clause (12) above; and
(14) Indebtedness of the Company or any Subsidiary Guarantor, if
any, (in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $100 million.
(c) Notwithstanding the foregoing, the Company will not, and will not
permit any Subsidiary Guarantor, if any, to, Incur any Indebtedness pursuant to
the foregoing paragraph (b) if the proceeds thereof are used, directly or
indirectly, to Refinance any Subordinated Obligations of the Company or such
Subsidiary Guarantor unless such Indebtedness shall be subordinated to the
Exchange Notes or the Subsidiary Guaranty of such Subsidiary Guarantor, as the
case may be, to at least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this covenant, in the
event that an item of proposed Indebtedness (or any portion thereof) meets the
criteria of more than one of the categories of Indebtedness described above as
of the date of incurrence thereof or is entitled to be incurred pursuant to the
first paragraph of this covenant as of the date of incurrence thereof, the
Company may, in its sole discretion, divide and classify such item of
Indebtedness on the date of incurrence, or later classify, reclassify or divide
all or a portion of such item of Indebtedness in any manner that complies with
this covenant. Any Indebtedness outstanding under the Credit Agreements on the
Issue Date shall be deemed to have been incurred under paragraph (a) of this
covenant.
LIMITATION ON RESTRICTED PAYMENTS
(a) The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to make a Restricted Payment if at the time the Company
or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness;" and
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter ending on
December 31, 2002, to the end of the most recent fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment (or, in case such Consolidated Net Income
shall be a deficit, minus 100% of such deficit); plus
(B) 100% of the aggregate net proceeds, including cash and the
fair market value of property other than cash (as determined in good
faith by the Board of Directors of the Company and evidenced by a
board resolution) received by the Company from the issuance or sale
of, or as a capital contribution in respect of, its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other
than an issuance or sale to, or contribution by, a Subsidiary of the
Company and other than an issuance or sale to, or
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contribution by, an employee stock ownership plan or a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); plus
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange
subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or
the fair value of any other property, distributed by the Company
upon such conversion or exchange); provided, however, that the
foregoing amount shall not exceed the Net Cash Proceeds received by
the Company or any Restricted Subsidiary from the sale of such
Indebtedness (excluding Net Cash Proceeds from sales to a Subsidiary
of the Company or to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company
or any Restricted Subsidiary in any Person resulting from
repurchases, repayments or redemptions of such Investments by such
Person, proceeds realized on the sale of such Investment and
proceeds representing the return of capital (excluding dividends and
distributions), in each case received by the Company or any
Restricted Subsidiary, and (y) to the extent such Person is an
Unrestricted Subsidiary, the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the
net assets of such Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the
case of any such Person or Unrestricted Subsidiary, the amount of
Investments (excluding Permitted Investments) previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
(b) The preceding provisions will not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock
of the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees) or a substantially
concurrent cash capital contribution received by the Company from or on
behalf of one or more of its shareholders; provided, however, that (A)
such Restricted Payment shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale or
such cash capital contribution (to the extent so used for such Restricted
Payment) shall be excluded from the calculation of amounts under clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or any Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Subordinated Obligations
of such Person which is permitted to be Incurred pursuant to the covenant
described under "-- Limitation on Indebtedness"; provided, however, that
such purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded from the calculation of the amount
of Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this covenant; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the Company
or any of its Subsidiaries from employees, former employees, directors or
former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of
Directors of the Company under which such individuals purchase or sell or
are granted the option to purchase or sell, shares of such Capital Stock;
provided, however, that the aggregate amount of such repurchases and other
acquisitions shall not exceed $5 million in any calendar year; provided
further, however, that such repurchases and other acquisitions shall be
excluded from the calculation of the amount of Restricted Payments;
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(5) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Company issued on or after the
Issue Date in accordance with paragraph (a) under the covenant "--
Limitation on Indebtedness" above; or
(6) other Restricted Payments in an aggregate amount not to exceed
$50 million; provided, however, that such Restricted Payments shall be
excluded from the calculation of the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (a)
pay dividends or make any other distributions on its Capital Stock to the
Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company,
(b) make any loans or advances to the Company or (c) transfer any of its
property or assets to the Company, except:
(1) with respect to clauses (a), (b) and (c),
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date, including the
Three-Year Credit Agreement;
(ii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to
the date on which such Restricted Subsidiary was acquired by the
Company (other than Indebtedness Incurred as consideration in, or to
provide all or any portion of the funds or credit support utilized
to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such
date;
(iii) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (ii) of clause (1) of this
covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of clause (1) of this
covenant or this clause (iii); provided, however, that the
encumbrances and restrictions with respect to such Restricted
Subsidiary contained in any such refinancing agreement or amendment
are no less favorable to the Exchange Noteholders than encumbrances
and restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements;
(iv) any encumbrance or restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all the Capital
Stock or assets of such Restricted Subsidiary pending the closing of
such sale or disposition;
(v) any encumbrance or restriction arising under any
applicable law, rule, regulation or order;
(vi) any encumbrance or restriction pursuant to any merger
agreement, stock purchase agreement, asset sale agreement or similar
agreement limiting the transfer of properties and assets subject to
such agreement or distributions of assets subject to such agreement
pending consummation of the transactions contemplated thereby;
(vii) any encumbrance or restriction applicable to a
Receivables Subsidiary;
(viii) any agreement or other instrument of a Person acquired
by the Company or any Restricted Subsidiary 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, or the
property or assets of the Person, so acquired, so long as the
agreement containing the restriction does not violate any other
provision of the Indenture;
(ix) any encumbrance or restriction related to Hedging
Obligations permitted under the Indenture from time to time;
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(x) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the ordinary
course of business; and
(xi) any agreement governing Indebtedness permitted to be
incurred pursuant to the covenant described under "-- Limitation on
Indebtedness;" provided that (a) the provisions relating to such
Indebtedness, taken as a whole, are not materially more restrictive
as determined by the board of directors of the Company than the
provisions contained in the Three-Year Credit Agreement or in the
Indenture as in effect on the Issue Date and (b) such encumbrance or
restriction is not reasonably expected to result in the Company
being unable to make principal or interest payments on the Exchange
Notes, as determined in good faith by the board of directors of the
Company.
(2) with respect to clause (c) only,
(A) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the
property leased thereunder; and
(B) any encumbrance or restriction contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restriction restricts
the transfer of the property subject to such security agreements or
mortgages.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK
(a) The Company will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration which shall
include without limitation any Person assuming responsibility for any
liabilities, other than contingent liabilities), as determined in good
faith by the Board of Directors of the Company, of the shares and assets
subject to such Asset Disposition;
(2) other than with respect to any assets contributed by the Company
or a Restricted Subsidiary to a joint venture formed by the Company or
such Restricted Subsidiary, respectively, at least 75% of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents; provided, however,
that the 75% limitation also will not apply to any disposition of assets
in exchange for assets used in a Related Business, or a combination of
such assets and cash or cash equivalents, in each case having a fair
market value comparable to the fair market value of the assets disposed of
by the Company or a Restricted Subsidiary; and
(3) an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be)
(A) first, to the extent the Company elects (or is required by
the terms of any Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness of the Company or Indebtedness (other than any
Disqualified Stock) of a Restricted Subsidiary (in each case other
than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available
Cash after application in accordance with clause (A), to the extent
the Company elects, to acquire Additional Assets within one year
from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to
make an offer to the Holders of the Exchange Notes (and to holders
of other Senior Indebtedness of the Company designated by the
Company) to purchase Exchange Notes (and such other Senior
Indebtedness of the Company) pursuant to and subject to the
conditions contained in the Indenture.
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Notwithstanding the foregoing provisions of this covenant, the Company and
the Restricted Subsidiaries will not be required to apply any Net Available Cash
in accordance with this covenant except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which is not applied in accordance
with this covenant exceeds $20 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Temporary Cash Investments or applied to temporarily reduce revolving credit
indebtedness.
For the purposes of this covenant, the following are deemed to be cash or
cash equivalents:
(1) the assumption of Indebtedness of the Company (other than
obligations in respect of Disqualified Stock of the Company) or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Disposition; and
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash, to the extent of cash received in that
conversion.
(b) In the event of an Asset Disposition that requires the purchase of
Exchange Notes (and other Senior Indebtedness of the Company) pursuant to clause
(a)(3)(C) above, the Company will purchase Exchange Notes tendered pursuant to
an offer by the Company for the Exchange Notes (and such other Senior
Indebtedness) at a purchase price of 100% of their principal amount (or, in the
event such other Senior Indebtedness of the Company was issued with significant
original issue discount, 100% of the accreted value thereof) without premium,
plus accrued but unpaid interest (or, in respect of such other Senior
Indebtedness of the Company, such lesser price, if any, as may be provided for
by the terms of such Senior Indebtedness) in accordance with the procedures
(including prorating in the event of oversubscription) set forth in the
Indenture. If the aggregate purchase price of the securities tendered exceeds
the Net Available Cash allotted to their purchase, the Company will select the
securities to be purchased on a pro rata basis but in round denominations, which
in the case of the Exchange Notes will be denominations of $1,000 principal
amount or multiples thereof. The Company shall not be required to make such an
offer to purchase Exchange Notes (and other Senior Indebtedness of the Company)
pursuant to this covenant if the Net Available Cash available therefor is less
than $20 million (which lesser amount shall be carried forward for purposes of
determining whether such an offer is required with respect to the Net Available
Cash from any subsequent Asset Disposition). Upon completion of such an offer to
purchase, Net Available Cash will be deemed to be reduced by the aggregate
amount of such offer.
(c) The Company will comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Exchange Notes pursuant to
this covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under this covenant by virtue of its compliance
with such securities laws or regulations.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) The Company will not, and will not permit any Restricted Subsidiary
to, enter into or permit to exist any transaction (including the purchase, sale,
lease or exchange of any property, employee compensation arrangements or the
rendering of any service) with, or for the benefit of, any Affiliate of the
Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could be
obtained at the time of the Affiliate Transaction in arm's-length dealings
with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of
$20 million, the terms of the Affiliate Transaction are set forth in
writing and a majority of the directors of the Company disinterested with
respect to such Affiliate Transaction have determined in good faith that
the criteria set forth in clause (1) are satisfied and have approved the
relevant Affiliate Transaction as evidenced by a resolution of the Board
of Directors; provided, however, that in the event that at the time such
Affiliate Transaction is entered into or permitted to exist no director of
the Company is disinterested with respect to such Affiliate Transaction,
the Board of
85
Directors of the Company shall have received with respect to such
Affiliate Transaction the opinion referred to in paragraph (3) below; and
(3) if such Affiliate Transaction involves an amount in excess of
$30 million, the Board of Directors of the Company shall also have
received a written opinion from an Independent Qualified Party to the
effect that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries or is not less
favorable to the Company and its Restricted Subsidiaries than could
reasonably be expected to be obtained at the time in an arm's-length
transaction with a Person who was not an Affiliate.
(b) The provisions of the preceding paragraph (a) will not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to the
covenant described under "-- Limitation on Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved
by the Board of Directors of the Company;
(3) loans or advances (other than advances described in clause (12)
below) to employees in the ordinary course of business in accordance with
the past practices of the Company or its Restricted Subsidiaries, but in
any event not to exceed $5 million in the aggregate outstanding at any one
time;
(4) the payment of reasonable fees to directors of the Company and
its Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(5) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in
or otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
(6) the issuance or sale of any Capital Stock (other than
Disqualified Stock) of the Company;
(7) any agreement in effect on the Issue Date and described in the
offering memorandum under which the Outstanding Notes were issued or in
any of the SEC filings of the Company incorporated by reference in the
offering memorandum under which the Outstanding Notes were issued or any
amendments, renewals, extensions or substitutions of any such agreement
(so long as such amendments, renewals, extensions or substitutions are not
less favorable to the Company or the Restricted Subsidiaries) and the
transactions evidenced thereby;
(8) any transactions with the Permitted Holder or any of its
Affiliates involving the purchase, sale or transportation of hydrocarbons,
or refined products therefrom, in the ordinary course of business, so long
as such transactions are priced based on industry accepted benchmark
prices and the pricing of such transactions is no worse to the Company or
any Restricted Subsidiary, as applicable, than the pricing of comparable
transactions with unrelated third parties;
(9) any Intercompany Trade Arrangements;
(10) any reasonable and customary directors' fees, indemnification
and similar arrangements, consulting fees, employee salaries, bonuses or
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the
Company or a Restricted Subsidiary entered into in the ordinary course of
business;
(11) any transactions between the Company and any Person, a director
of which is also a director of the Company; provided, however, that such
director abstains from voting as a director of the Company on the
transactions involving such other Person; and
(12) advances to employees for moving, relocation, entertainment and
travel expenses, drawing accounts and similar expenditures in the ordinary
course of business.
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LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, Incur or permit to exist any Lien (the "Initial Lien")
of any nature whatsoever on any of its properties (including Capital Stock of a
Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired,
securing any Indebtedness, other than Permitted Liens, without effectively
providing that the Exchange Notes shall be secured equally and ratably with (or
prior to) the obligations so secured for so long as such obligations are so
secured; provided, however, that the Company or any Restricted Subsidiary will
be entitled to Incur other Liens to secure Indebtedness as long as the amount of
outstanding Indebtedness secured by Liens Incurred pursuant to this proviso does
not exceed 5% of Consolidated Net Tangible Assets, as determined based on the
consolidated balance sheet of the Company as of the end of the most recent
fiscal quarter for which internal financial statements are available provided,
further, however, that the aggregate amount of outstanding Indebtedness secured
by Liens on assets of Restricted Subsidiaries pursuant to the foregoing proviso
shall in no event exceed the greater of (A) $125 million and (B) 5% of
Consolidated Net Worth. Any Lien created for the benefit of the Holders of the
Notes pursuant to the preceding sentence shall provide by its terms that such
Lien shall be automatically and unconditionally released and discharged upon the
release and discharge of the Initial Lien.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, directly or
indirectly, all or substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) shall expressly assume, by
an indenture supplemental thereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Exchange Notes and the Indenture;
(2) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing; and
(3) immediately after giving pro forma effect to such transaction or
series of transactions as if the transaction or series of transactions
occurred on the first day of the four-quarter period immediately prior to
the consummation of such transaction or series of transactions with the
appropriate adjustments with respect to the transaction or series of
transactions being included in such pro forma calculation, (a) the
Successor Company shall be able to incur at least $1.00 of additional
Indebtedness, pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness", (b) the Consolidated Coverage Ratio of
the Successor Company shall not be less than the Consolidated Coverage
Ratio of the Company and its Restricted Subsidiaries immediately prior to
such transaction or series of transactions or (c) the Successor Company
shall have a Consolidated Net Worth in an amount that is not less than the
Consolidated Net Worth of the Company immediately prior to such
transaction or series of transactions;
provided, however, that clause (3) will not be applicable to (A) a Restricted
Subsidiary consolidating with, merging into or transferring all or part of its
properties and assets to the Company or (B) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
For purposes of this covenant, the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties and
assets of one or more Subsidiaries of the Company, which properties and assets,
if held by the Company instead of such Subsidiaries, would constitute all or
substantially all of the properties and assets of the Company on a consolidated
basis, shall be deemed to be the transfer of all or substantially all of the
properties and assets of the Company.
The Successor Company will be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of
the Company under the Indenture, and the predecessor Company, except in the case
of a lease, shall be released from the obligation to pay the principal of and
interest on the Notes.
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LIMITATION ON ISSUANCE OF GUARANTEES OF INDEBTEDNESS
The Company will not permit any of its Restricted Subsidiaries, directly
or indirectly, to Guarantee or create any Lien to secure the payment of any
Indebtedness of the Company or any other Restricted Subsidiary unless such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for the Guarantee or security of the
payment of the Exchange Notes by such Restricted Subsidiary; provided, however,
that any Lien created by any Restricted Subsidiary to secure Indebtedness
Incurred pursuant to any Credit Facilities will not require a Restricted
Subsidiary to execute and deliver such a supplemental indenture. If the
Indebtedness to be Guaranteed or secured is subordinated to the Notes, the
Guarantee or security of such Indebtedness will be subordinated to the Guarantee
or security of the Notes to the same extent as the Indebtedness to be Guaranteed
or secured is subordinated to the Notes. Notwithstanding the foregoing, any such
Guarantee or security by a Restricted Subsidiary of the Notes will provide by
its terms that it will be automatically and unconditionally released and
discharged upon either:
(1) the release or discharge of such Guarantee or security of
payment of such other Indebtedness, except a discharge by or as a result
of payment under such Guarantee or security,
(2) any sale (including by way of merger or consolidation), exchange
or transfer, to any Person not an Affiliate of ours, of all of the Capital
Stock owned by the Company and its Restricted Subsidiaries of, or all or
substantially all the assets of, such Restricted Subsidiary, which sale,
exchange or transfer is made in compliance with the applicable provisions
of the Indenture, or
(3) the designation by the Company of such Restricted Subsidiary as
an Unrestricted Subsidiary in accordance with the terms of the Indenture.
SEC REPORTS
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company will file
with the SEC (to the extent the SEC will accept such filings) and provide the
Trustee and Exchange Noteholders with such annual reports and such information,
documents and other reports as are specified in Sections 13 and 15(d) of the
Exchange Act and applicable to a U.S. corporation subject to such Sections, such
information, documents and other reports to be so filed and provided at the
times specified for the filings of such information, documents and reports under
such Sections.
At any time that any of the Company's Subsidiaries are Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
CERTAIN INVESTMENT GRADE COVENANTS
If an Investment Grade Rating Event occurs, each of the covenants (except
for clause (1) of "-- Merger and Consolidation" and "-- SEC Reports")
described above under "-- Certain Covenants," as well as the provisions of "--
Change of Control Triggering Event" above, will cease to apply to the Company
and the Restricted Subsidiaries. Instead, the Indenture contains the following
covenants, each of which will apply to the Company only upon and after the
occurrence of an Investment Grade Rating Event.
RESTRICTIONS ON SECURED INDEBTEDNESS
If the Company or any Restricted Subsidiary Incurs any Indebtedness
secured by a Lien (other than a Permitted Lien) on any Principal Property or on
any share of stock or Indebtedness of a Restricted Subsidiary, the Company or
such Restricted Subsidiary will secure the Exchange Notes equally and ratably
with (or, at the Company's option, prior to) such secured Indebtedness so long
as such Indebtedness is so secured, unless the aggregate amount of all such
secured Indebtedness, together with all Attributable Debt of the Company and the
Restricted Subsidiaries with respect to any Sale/Leaseback Transactions
involving Principal Properties (with the exception of such transactions
88
which are excluded as described in clauses (1) through (5) under "--
Restrictions on Sale/Leaseback Transactions" below), would not exceed 15% of
Consolidated Net Tangible Assets.
RESTRICTIONS ON SALE/LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any Sale/Leaseback Transaction involving any Principal Property,
unless the aggregate amount of all Attributable Debt with respect to such
transaction plus all secured Indebtedness of the Company and the Restricted
Subsidiaries (with the exception of Indebtedness secured by Permitted Liens)
would not exceed 15% of Consolidated Net Tangible Assets. This restriction shall
not apply to, and there shall be excluded from Attributable Debt in any
computation under such restriction, any Sale/Leaseback Transaction if:
(1) the lease is for a period, including renewal rights, not in
excess of three years;
(2) the sale of the Principal Property is made within 270 days after
its acquisition, construction or improvements;
(3) the lease secures or relates to industrial revenue or pollution
control bonds;
(4) the transaction is between the Company and a Restricted
Subsidiary; or
(5) the Company, within 270 days after the sale is completed,
applies to the retirement of its Indebtedness or that of a Restricted
Subsidiary, or to the purchase of other property which will constitute a
Principal Property, an amount not less than the greater of:
(A) the net proceeds of the sale of the Principal Property
leased or
(B) the fair market value (as determined by the Company in
good faith) of the Principal Property leased.
The amount to be applied to the retirement of Indebtedness shall be
reduced by:
(i) the principal amount of any of the Company's debentures or notes
(including the Exchange Notes) or those of a Restricted Subsidiary
surrendered within 270 days after such sale to the applicable trustee for
retirement and cancellation;
(ii) the principal amount of Indebtedness, other than the items
referred to in the preceding clause (i), voluntarily retired by the
Company or a Restricted Subsidiary within 270 days after such sale; and
(iii) associated transaction expenses.
EVENTS OF DEFAULT
Each of the following is an Event of Default:
(1) a default in the payment of interest on the Notes when due,
continued for 30 days;
(2) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required purchase,
upon declaration of acceleration or otherwise;
(3) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above;
(4) the failure by the Company to comply for 30 days after notice
with any of its obligations, if then applicable, in the covenants
described above under "-- Change of Control Triggering Event" (other than
a failure to purchase Exchange Notes) or under "-- Certain Covenants"
under "-- Limitation on Indebtedness," "-- Limitation on Restricted
Payments," "-- Limitation on Restrictions on Distributions from
Restricted Subsidiaries," "-- Limitation on Sales of Assets and
Subsidiary Stock" (other than a failure to purchase Exchange Notes), "--
Limitation on Affiliate Transactions," "-- Limitation on Liens," "--
Limitation on
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Issuances of Guarantees of Indebtedness," or "-- SEC Reports" or under
"-- Certain Investment Grade Covenants";
(5) the failure by the Company or any Subsidiary Guarantor to comply
for 60 days after notice with its other agreements contained in the
Indenture;
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $35 million (the
"cross acceleration provision");
(7) certain events of bankruptcy, insolvency or reorganization of
the Company or any Significant Subsidiary (the "bankruptcy provisions");
(8) any judgment or decree for the payment of money in excess of $35
million is entered against the Company or any Significant Subsidiary,
remains outstanding for a period of 60 consecutive days following such
judgment and is not discharged, waived or stayed (the "judgment default
provision"); or
(9) any Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of the Indenture or such
Subsidiary Guaranty) or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty.
However, a default under clauses (4) and (5) will not constitute an Event
of Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Company in writing of the default and the Company
does not cure such default within the time specified after receipt of such
notice.
If an Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the outstanding Notes may declare
the principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal, of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holders of the Notes. Under certain
circumstances, the Holders of a majority in principal amount of the Notes may
rescind any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, 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
such Holders have offered to the Trustee reasonable indemnity or security
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) such Holder has previously given the Trustee notice that an
Event of Default is continuing;
(2) Holders of at least 25% in principal amount of the Notes have
made written requests to the Trustee to pursue the remedy;
(3) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(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 of the Notes have not
given the Trustee a direction inconsistent with such request within such
60-day period.
Subject to certain restrictions, the Holders of a majority in principal
amount of the 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
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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.
In the event an Event of Default described in clause (6) above has
occurred and is continuing, such Event of Default shall be automatically
annulled if the payment default triggering such Event of Default pursuant to
clause (6) above shall be remedied or cured by the Company or a Significant
Subsidiary or waived by the holders of the relevant Indebtedness within 60 days
of its occurrence and all other Events of Default, if any, under the Indenture
have been cured and waived.
If a Default occurs, is continuing and is known to the Trustee, the
Trustee must mail to each Holder of the Notes notice of the Default within 90
days after it occurs, provided, however, that, if such Default constitutes a
failure to comply with the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments," the Trustee must mail to each Holder of the
Notes notice of such Default within 40 days after it occurs. Except in the case
of a Default in the payment of principal of or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust Officers
determines that withholding notice is not opposed to the interest of the Holders
of the Notes. In addition, the Company is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Company is required to deliver to the Trustee, within 30 days
after the occurrence thereof, written notice of any event which would constitute
certain Defaults, their status and what action the Company is taking or propose
to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the Holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
Holder of an outstanding Note affected thereby, an amendment or waiver may not,
among other things:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Note;
(3) reduce the principal of or change the Stated Maturity of any
Note;
(4) change the provisions applicable to the redemption of any Note
as described under "-- Optional Redemption" above;
(5) make any Note payable in money other than that stated in the
Note;
(6) impair the right of any Holder of the Notes to receive payment
of principal of and 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 Exchange Notes;
(7) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions;
(8) make any change in the ranking or priority of any Note that
would adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely
affect the Noteholders.
Notwithstanding the preceding, without the consent of any Holder of the
Notes, the Company, the Subsidiary Guarantors, if any, and the Trustee may amend
the Indenture:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to provide for the assumption by a successor Person of the
obligations of the Company;
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(3) to provide for uncertificated Notes in addition to or in place
of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code);
(4) to add Guarantees with respect to the Notes, including
Subsidiary Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or any Subsidiary
Guarantor for the benefit of the Holders of the Notes or to surrender any
right or power conferred upon the Company or any Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of
any Holder of the Notes; or
(7) to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the Holders of the Notes 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.
After an amendment under the Indenture becomes effective, the Company is
required to mail to Holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all Holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Exchange Notes will be issued in registered form and will be
transferable only upon the surrender of the Exchange Notes being transferred for
registration of transfer. The Company may require payment of a sum sufficient to
cover any tax, assessment or other governmental charge payable in connection
with certain transfers and exchanges.
DEFEASANCE
At any time, the Company may terminate all of its obligations under the
Exchange Notes and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the Exchange Notes, to replace mutilated,
destroyed, lost or stolen Exchange Notes and to maintain a registrar and paying
agent in respect of the Exchange Notes.
In addition, at any time the Company may terminate its obligations under
"-- Change of Control Triggering Event" and under the covenants described under
"-- Certain Covenants" (other than the covenant described under "-- Merger and
Consolidation") and "-- Certain Investment Grade Covenants," the operation of
the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment default provision described under "--
Events of Default" above and the limitations contained in clause (3) under "--
Certain Covenants -- Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Exchange Notes may not be accelerated
because of an Event of Default with respect thereto. If the Company exercises
its covenant defeasance option, payment of the Exchange Notes may not be
accelerated because of an Event of Default specified in clause (4), (6), (7)
(with respect only to Significant Subsidiaries) or (8) under "-- Defaults"
above or because of the failure of the Company to comply with clause (3) under
"-- Certain Covenants -- Merger and Consolidation" above.
In order to exercise either of its defeasance options, the Company must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Exchange Notes to redemption or maturity, as the case may be, and must comply
with certain other conditions, including delivery to the Trustee of an Opinion
of Counsel to the effect that Holders of the Exchange Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amounts and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
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CONCERNING THE TRUSTEE
J.P. Morgan Trust Company, National Association is to be the Trustee under
the Indenture. The Company has appointed J.P. Morgan Trust Company, National
Association as Registrar and Paying Agent with regard to the Exchange Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, 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; provided, however, if it acquires any conflicting interest it must
either eliminate such conflict within 90 days, apply to the SEC for permission
to continue or resign.
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. If an Event of Default occurs (and is not cured), the
Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent man in the conduct of his own affairs. Subject to such
provisions, 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 Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
will have any liability for any obligations of the Company under the Exchange
Notes or the Indenture or for any claim based on, in respect of, or by reason of
such obligations or their creation. Each Holder of the Exchange Notes by
accepting an Exchange Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Exchange Notes.
Such waiver and release may not be effective to waive liabilities under the U.S.
Federal securities laws, and it is the view of the SEC that such a waiver is
against public policy.
GOVERNING LAW
The Indenture and the Exchange Notes will be governed by, and construed in
accordance with, the laws of the State of New York without giving effect to
applicable principles of conflicts of law to the extent that the application of
the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Additional Assets" means:
(1) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the
Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in clause (2)
or (3) above is primarily engaged in a Related Business.
"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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other disposition
by the Company or any Restricted Subsidiary, including any disposition by means
of a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of:
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(1) any shares of Capital Stock, or other ownership interests, of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary);
(2) substantially all the assets of any division or line of business
of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary other than, in the case of clauses (1), (2) and (3)
above,
(A) a disposition by a Restricted Subsidiary to the Company or
by the Company to a Restricted Subsidiary;
(B) for purposes of the covenant described under "-- Certain
Covenants -- Limitation on Sales of Assets and Subsidiary Stock"
only, (x) a disposition that constitutes a Restricted Payment (or
would constitute a Restricted Payment but for the exclusions from
the definition thereof) and that is not prohibited by the covenant
described under "-- Certain Covenants -- Limitation on Restricted
Payments" and (y) a disposition of all or substantially all the
assets of the Company in accordance with the covenant described
under "-- Certain Covenants -- Merger and Consolidation";
(C) a disposition, whether in a single transaction or a series
of related transactions, of assets with a fair market value of less
than $10 million;
(D) sales pursuant to a Qualified Receivables Transaction of
accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" to a Receivables
Subsidiary (in the case of a sale by the Company or any of its
Restricted Subsidiaries) or any other Person (in the case of a sale
by a Receivables Subsidiary), in each case, for the fair market
value thereof, including cash in an amount at least equal to 90% of
the fair market value thereof as determined in accordance with GAAP;
(E) sales by the Company or any Restricted Subsidiary of
hydrocarbons or refined products therefrom that the Company or any
Restricted Subsidiary had previously acquired from the Permitted
Holder or any of its Subsidiaries pursuant to an arrangement between
the Company and the Permitted Holder providing for the resale by the
Company or any Restricted Subsidiary of the Permitted Holder's
products for a customary fee;
(F) sales by the Company or any Restricted Subsidiary of
inventory at fair market value for cash consideration to the extent
such cash consideration is applied by the Company or such Restricted
Subsidiary within 20 days of such sale to acquire hydrocarbons or
refined products;
(G) the surrender or waiver of contractual rights or the
settlement, release or surrender of contract, tort or other claims
of any kind;
(H) the exchange of assets held by the Company or a Restricted
Subsidiary for assets held by any Person or entity; provided that
(i) the assets received by the Company or such Restricted Subsidiary
in any such exchange will immediately constitute, be part of, or be
used by the Company or such Restricted Subsidiary; and (ii) any such
assets received are of comparable fair market value to the assets
exchanged as determined in good faith by the Company; and
(I) a disposition of cash or Temporary Cash Investments.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest rate
borne by the Exchange Notes, compounded annually) of the total obligations of
the lessee for rental payments during the remaining term of the lease included
in such Sale/Leaseback Transaction (including any period for which such lease
has been extended); provided, however, that if such Sale/Leaseback Transaction
results in a Capital Lease Obligation, the amount of Indebtedness represented
thereby with be determined in accordance with the definition of "Capital Lease
Obligation."
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"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing:
(1) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment
of such Indebtedness or redemption or similar payment with respect to such
Indebtedness multiplied by the amount of such payment by
(2) the sum of all such payments.
"Board of Directors" with respect to a Person means the Board of Directors
of such Person or any committee thereof duly authorized to act on behalf of such
Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty. For purposes of the covenant described under "-- Certain Covenants --
Limitations on Liens," a Capital Lease Obligation will be deemed to be secured
by a Lien on the property being leased.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Chalmette Refining" means Chalmette Refining LLC, a Delaware limited
liability company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity or raw material futures
contract, commodity or raw materials option, or any other agreement designed to
protect against or manage exposure to fluctuations in commodity or raw materials
prices, other than hydrocarbons.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters prior to the date of such determination for
which internal financial statements are available to (y) Consolidated Interest
Expense for such four fiscal quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding
or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness
as if such Indebtedness had been Incurred on the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used
to repay, repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased
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by an amount equal to EBITDA (if negative), directly attributable thereto
for such period and Consolidated Interest Expense for such period shall be
reduced by an amount equal to the Consolidated Interest Expense directly
attributable to any Indebtedness of the Company or any Restricted
Subsidiary repaid, repurchased, defeased or otherwise discharged with
respect to the Company and its continuing Restricted Subsidiaries in
connection with such Asset Disposition for such period (or, if the Capital
Stock of any Restricted Subsidiary is sold, the Consolidated Interest
Expense for such period directly attributable to the Indebtedness of such
Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after
such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made a Material
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness and any pro forma
expense and cost reductions that have occurred or are reasonably expected
to occur, in the reasonable judgment of the chief financial officer of the
Company (regardless of whether those cost savings or operating
improvements could then be reflected in pro forma financial statements in
accordance with Regulation S-X promulgated under the Securities Act or any
regulation or policy of the SEC related thereto) as if such Material
Investment or acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or
(4) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given
to an acquisition of assets, the amount of income or earnings relating thereto
and the amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication:
(1) interest component of Capital Lease Obligations;
(2) amortization of debt discount;
(3) capitalized interest;
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations arising from
Interest Rate Agreements or Currency Agreements;
96
(7) dividends accrued in respect of all Preferred Stock held by
Persons other than the Company or a Restricted Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the Company); and
(8) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets of)
the Company or any Restricted Subsidiary, other than pursuant to Ordinary
Course Guarantees.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (3) below,
the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (2) below) less, for purposes of the covenant
described under "-- Certain Covenants -- Limitation on Restricted
Payments" only, the aggregate amount of Investments in LCR made
pursuant to clause (13) of the definition of "Permitted
Investments"; and
(B) the Company's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net
Income;
(2) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (3) below,
the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed
by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this
clause); and
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(3) any gain (or loss) realized upon the sale or other disposition
of any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and
any gain (or loss) realized upon the sale or other disposition of any
Capital Stock of any Person;
(4) extraordinary gains or losses; and
(5) the cumulative effect of a change in accounting principles;
in each case, for such period. Notwithstanding the foregoing, for the purposes
of the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments" only, there shall be excluded from Consolidated Net Income
any repurchases, repayments or redemptions of Investments, proceeds realized on
the sale of Investments or return of capital to the Company or a Restricted
Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or
returns increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof. In addition, notwithstanding the
foregoing, for the purposes of the covenant described under "-- Certain
Covenants -- Limitations on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any nonrecurring charges relating to any premium or
penalty paid, write off of deferred finance costs or other charges in connection
with redeeming or retiring any Indebtedness prior to its stated maturity.
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"Consolidated Net Tangible Assets" as of any date of determination, means
the consolidated total assets of the Company and its Restricted Subsidiaries
determined in accordance with GAAP, less the sum of
(1) all current liabilities and current liability items; and
(2) all 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 Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital
Stock plus
(3) any retained earnings or earned surplus less (A) any accumulated
deficit and (B) any amounts attributable to Disqualified Stock.
"Credit Facilities" means one or more debt facilities (including, without
limitation, the Three-Year Credit Agreement), commercial paper facilities or
Debt Issuances, in each case with banks, investment banks, insurance companies,
mutual funds and/or other institutional lenders or institutional investors
providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from (or sell receivables to) such lenders against
such receivables), letters of credit or Debt Issuances, in each case, as
amended, extended, renewed, restated, Refinanced (including, Refinancing with
Debt Issuances), supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement designed to protect against or manage
exposure to fluctuations in currency values.
"Debt Issuances" means, with respect to the Company or any Guarantor, one
or more issuances after the Issue Date of Indebtedness evidenced by notes,
debentures, bonds or other similar securities or instruments.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable at the option of the holder) or upon the
happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only
for Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the
occurrence of certain events or otherwise, in whole or in part;
on or prior to the Stated Maturity of the Exchange Notes; provided, however,
that any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or
"change of control" occurring prior to the Stated Maturity of the Exchange Notes
shall not constitute Disqualified Stock if:
(1) the "asset sale" or "change of control" provisions applicable to
such Capital Stock are not more favorable to the holders of such Capital
Stock than the terms applicable to the Exchange Notes and described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary
Stock" and "-- Change of Control Triggering Event"; and
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(2) any such requirement only becomes operative after compliance
with such terms applicable to the Exchange Notes, including the purchase
of any Exchange Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price will be calculated in accordance with
the terms of such Disqualified Stock as if such Disqualified Stock were
redeemed, repaid or repurchased on any date on which the amount of such
Disqualified Stock is to be determined pursuant to the Indenture; provided,
however, that if such Disqualified Stock could not be required to be redeemed,
repaid or repurchased at the time of such determination, the redemption,
repayment or repurchase price will be the book value of such Disqualified Stock
as reflected in the most recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income, plus the
following to the extent deducted in calculating such Consolidated Net Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period but including amortization of prepaid turnaround costs);
and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income or loss of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Equity Offering" means (i) any primary public offering or private
placement to any Person of Capital Stock (other than Disqualified Stock) of the
Company or (ii) any cash capital contribution received by the Company from any
holder of Capital Stock of the Company and which is accounted for as additional
Capital Stock equity (other than Disqualified Stock).
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in:
(1) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board; and
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase
99
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business or any subordination of
claims. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement, Currency Agreement, Hydrocarbon
Agreement or Commodity Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Hydrocarbon Agreement" means any purchase or hedging agreement of
hydrocarbons or refined products therefrom, future contract or option, or any
other agreement designed to protect against or manage exposure to fluctuations
in the price of hydrocarbons or refined products therefrom.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun has a corresponding meaning. Solely for
purposes of determining compliance with " -- Certain Covenants -- Limitation on
Indebtedness":
(1) amortization of debt discount or the accretion of principal with
respect to a non-interest bearing or other discount security;
(2) the payment of regularly scheduled interest in the form of
additional Indebtedness of the same instrument or the payment of regularly
scheduled dividends on Capital Stock in the form of additional Capital
Stock of the same class and with the same terms; and
(3) the obligation to pay a premium in respect of Indebtedness
arising in connection with the issuance of a notice of redemption or
making of a mandatory offer to purchase such Indebtedness will not be
deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered into
by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations covered in clauses (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following payment on the letter of credit);
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(5) the amount of all obligations of such Person that arise prior to
the first anniversary of the Stated Maturity of the Exchange Notes with
respect to the redemption, repayment or other repurchase of any Capital
Stock of such Person or any Subsidiary of such Person or that are
determined by the value of such Capital Stock, the amount of such
obligations to be determined in accordance with the Indenture (but
excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through
(5) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(7) all obligations of the type referred to in clauses (1) through
(6) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by the
Company or any Restricted Subsidiary of any business, the term "Indebtedness"
will exclude post-closing payment adjustments to which the seller may become
entitled to the extent such payment is determined by a final closing balance
sheet or such payment depends on the performance of such business after the
closing; provided, however, that, at the time of closing, the amount of any such
payment is not determinable and, to the extent such payment thereafter becomes
fixed and determined, the amount is paid within 30 days thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date (but
excluding penalties, indemnities and costs); provided, however, that in the case
of Indebtedness sold at a discount, the amount of such Indebtedness at any time
will be the accreted value thereof at such time.
"Independent Qualified Party" means an investment banking firm, accounting
firm or appraisal firm of national standing in the United States of the
Company's choice; provided, however, that in each case such firm is not an
Affiliate of the Company.
"Intercompany Trade Arrangements" means transactions between the Company
and the Permitted Holder pursuant to which the Permitted Holder sells
hydrocarbons to the Company in the ordinary course of business and the Company
thereafter transfers the related trade payable to one or more of its
shareholders pending payment thereof and subsequently dividends or otherwise
transfers funds to such shareholder in an amount equal to such trade payable,
which amount is used by such shareholder to discharge such trade payable.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement (including caps,
swaps, floors, collars and similar arrangements) designed to protect against or
manage exposure to fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary," the
definition of "Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments":
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
101
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment"
in an Unrestricted Subsidiary in an amount (if positive) equal to (A) the
Company's "Investment" in such Subsidiary at the time of such
redesignation less (B) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; 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 Board of Directors of the
Company.
"Investment Grade Rating" means:
(1) a Moody's rating of Baa3 or higher and an S&P rating of at least
BB+ or
(2) a Moody's rating of Ba1 or higher and an S&P rating of at least
BBB--;
provided, however, that if (i) either Moody's or S&P changes its rating system,
such ratings will be the equivalent ratings after such changes or (ii) if S&P or
Moody's or both shall not make a rating of the Exchange Notes publicly
available, the references above 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 Company and the references to the ratings categories
above shall be to the corresponding rating categories of such rating agency or
rating agencies, as the case may be.
"Investment Grade Rating Event" means the first day on which the Exchange
Notes are assigned an Investment Grade Rating.
"Issue Date" means the date on which the Notes are originally issued.
"LCR" means Lyondell-CITGO Refining LP, a Delaware limited partnership.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lenders" has the meaning specified in the Three-Year Credit Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Material Investment" means an Investment which has, at the time such
Investment is made and without giving effect to subsequent changes in value, a
fair value in excess of $5 million.
"Merey Sweeny" means Merey Sweeny LP, a Delaware limited partnership.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
and proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be accrued as a liability under GAAP,
as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect
102
to such assets, or which must by its terms, or in order to obtain a
necessary consent to such Asset Disposition, or by applicable law, be
repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds" with respect to any issuance or sale of Capital Stock
or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
Incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Obligations" means, with respect to any Indebtedness, all obligations for
principal, premium, interest, penalties, fees, indemnifications, reimbursements,
and other amounts payable pursuant to the documentation governing such
Indebtedness.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Ordinary Course Guarantees" means Guarantees issued by the Company or any
Restricted Subsidiary in the ordinary course of business with respect to
Indebtedness of any distributor or customer of the Company's or any Restricted
Subsidiary's products in an amount which, when taken together with the amount of
all other outstanding Ordinary Course Guarantees, does not exceed $35 million.
"Outstanding Notes" means our 6% senior notes due 2011 issued on October
22, 2004.
"PDV America" means PDV America, Inc., a Delaware corporation.
"PDV Chalmette" means PDV Chalmette, Inc., a Delaware corporation.
"PDV Entity" means PDV America, PDV Chalmette, PDV Holding, PDV Sweeny,
PDV Texas, PDV USA and any other Subsidiary of PDV Holding that is not the
Company or a Subsidiary of the Company that is a party to a tax sharing or tax
allocation agreement or other similar tax sharing or tax allocation arrangement
that includes PDV Holding and the Company.
"PDV Holding" means PDV Holding, Inc., a Delaware corporation.
"PDV Sweeny" means PDV Sweeny, Inc., a Delaware corporation.
"PDV Texas" means PDV Texas, Inc., a Delaware corporation.
"PDV USA" means PDV USA, Inc., a Delaware corporation.
"Permitted Holder" means Petroleos de Venezuela, SA, a corporation
organized in Venezuela and its wholly owned Subsidiaries.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in:
(1) (w) the Company, (x) a Restricted Subsidiary, (y) a government
or any agency or political subdivision thereof holding Indebtedness of the
Company or a Restricted Subsidiary in a principal amount equal to, and
103
Incurred by the Company or such Restricted Subsidiary to provide credit
support for, such Person's issuance of industrial revenue or similar
tax-exempt or taxable bonds for the benefit of the Company or such
Restricted Subsidiary or (z) a Person that will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if, as a result of such Investment, such other
Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel, entertainment, relocation and similar advances
to cover matters that are expected at the time of such advances ultimately
to be treated as expenses for accounting purposes and that are made in the
ordinary course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as
permitted pursuant to the covenant described under "-- Certain Covenants
-- Limitation on Sales of Assets and Subsidiary Stock;"
(9) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other
Investment or accounts receivable held by the Company 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 Company 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;
(10) any Person to the extent such Investments consist of prepaid
expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits made in
the ordinary course of business by the Company or any Restricted
Subsidiary;
(11) any Person to the extent such Investments consist of Hedging
Obligations otherwise not prohibited under the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness;"
(12) any Person to the extent such Investments are in existence on
the Issue Date;
(13) LCR to the extent such Investments do not exceed, in the
aggregate, the aggregate amount of cash dividends distributed after the
Issue Date by LCR to the Company; provided, however, that such cash
dividends have not previously served as the basis for a Restricted Payment
made pursuant to the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments;"
(14) LCR to the extent such Investments do not exceed $25 million in
the aggregate outstanding at any time;
(15) any Specified Refinery Joint Venture to the extent such
Investments do not exceed, in the aggregate, the aggregate amount of cash
dividends distributed after the Issue Date by such Specified Refinery
Joint Venture to the Company and/or the applicable Restricted Subsidiary
or Restricted Subsidiaries; provided,
104
however, that such cash dividends have not previously served as the basis
for a Restricted Payment made pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Restricted Payments;"
(16) any Specified Refinery Joint Venture to the extent such
Investment, when taken together with all other Investments made in
Specified Refinery Joint Ventures pursuant to this clause (16) and then
outstanding, do not exceed $25 million;
(17) any obligation of a PDV Entity that results from the payment by
the Company on behalf of such PDV Entity of income taxes owed by such PDV
Entity pursuant to a tax sharing or tax allocation agreement or other
similar tax sharing or tax allocation arrangement; provided, however, that
such PDV Entity is obligated, by law or contract, to repay such obligation
within 24 months of the date of the incurrence of such obligation; and
provided further, however, that any such obligation that is not repaid
within 24 months of the date such obligation is first incurred shall be
considered a Restricted Payment and shall be included in the calculation
of the amount of Restricted Payments described under "-- Certain
Covenants -- Limitation on Restricted Payments;"
(18) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with,
customers and suppliers arising in the ordinary course of business;
(19) advances to employees for moving, relocation, travel and
entertainment, payroll advances and other similar advances to cover
matters that are expected at the time of such advances to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business; and
(20) Persons to the extent such Investments, when taken together
with all other Investments made pursuant to this clause (20) and then
outstanding, do not exceed the greater of (x $100 million and (y) 1.8% of
Consolidated Net Tangible Assets (determined as of the end of the most
recent fiscal quarter of the Company for which internal financial
statements are available).
"Permitted Liens" means, with respect to any Person:
(1) pledges or deposits by such Person under worker'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 United States 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,
materialmen's and mechanics' Liens, in each case for sums which are not
overdue by a period of more than 45 days or which are 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
and Liens arising solely by virtue of any statutory or common law
provision relating to banker's Liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided, however, that (A) such deposit
account is not a dedicated cash collateral account and is not subject to
restrictions against access by the Company in excess of those set forth by
regulations promulgated by the Federal Reserve Board and (B) such deposit
account is not intended by the Company or any Restricted Subsidiary to
provide collateral to the depository institution;
(3) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith by appropriate
proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in
the ordinary course of its business; provided, however, that such letters
of credit do not constitute Indebtedness;
105
(5) Liens incidental to the normal conduct of the business of such
Person or any of its Subsidiaries or the ownership of its properties or
the conduct of the ordinary course of its business, including (A) zoning
restrictions, easements, rights of way, reservations, restrictions on the
use of real property and other minor irregularities of title, (B) rights
of lessees under leases, (C) rights of collecting banks having rights of
setoff, revocation, refund or chargeback with respect to money or
instruments of such Person or any of its Subsidiaries on deposit with or
in the possession of such banks, (D) Liens to secure the performance of
statutory obligations, tenders, bids, leases, progress payments,
performance or return-of-money bonds, performance or other similar bonds
or other obligations of a similar nature incurred in the ordinary course
of business; (E) Liens required by any contract or statute in order to
permit such Person or any of its Subsidiaries to perform any contract or
subcontract made by it with or pursuant to the requirements of a
governmental entity, and (F) "first purchaser" Liens on crude oil, in each
case which are not incurred in connection with the Incurrence of
Indebtedness and which do not in the aggregate impair the use and
operation of the assets to which they relate in the conduct of the
business of such Person and its Subsidiaries taken as a whole;
(6) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions
to, property, plant or equipment of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or any
of its Restricted Subsidiaries at the time the Lien is Incurred (other
than assets and property affixed or appurtenant thereto), and the
Indebtedness (other than any interest thereon) secured by the Lien may not
be Incurred more than 180 days after the later of the acquisition,
completion of construction, repair, improvement, addition or commencement
of full operation of the property subject to the Lien;
(7) Liens to secure Indebtedness Incurred under the Credit
Facilities pursuant to the covenant described under "-- Certain Covenants
-- Limitation on Indebtedness";
(8) Liens incurred on deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(9) Liens existing on the Issue Date;
(10) Liens on property or shares of Capital Stock of another Person
at the time such other Person becomes a Subsidiary of such Person;
provided, however, that the Liens may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries (other than
assets and property affixed or appurtenant thereto);
(11) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of
a merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that the Liens may not extend to any other
property owned by such Person or any of its Restricted Subsidiaries (other
than assets and property affixed or appurtenant thereto);
(12) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a Restricted Subsidiary;
(13) Liens securing Hedging Obligations permitted to be Incurred
under the Indenture;
(14) customary Liens incurred by the Company or any Restricted
Subsidiary and resulting from a Qualified Receivables Transaction;
(15) Liens on properties securing all or part of the costs incurred
in the ordinary course of business of exploration, drilling, development
or operation thereof;
(16) Liens on pipeline or pipeline facilities which arise out of
operation of law;
(17) Liens reserved in oil and gas mineral leases for bonus or
rental payments and for compliance with the terms of such leases;
(18) Liens arising under partnership agreements, oil and gas leases,
farm-out agreements, division orders, contracts for the sale, purchase,
exchange, transportation or processing of oil, gas or other hydrocarbons,
106
unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and
other agreements which are customary in a Related Business; and
(19) Liens to secure any Refinancing (or successive Refinancings) as
a whole, or in part, of any Indebtedness secured by any Lien referred to
in the foregoing clause (6), (9) or (11); provided, however, that:
(A) such new Lien shall be limited to all or part of the same
property and assets that secured or, under the written agreements
pursuant to which the original Lien arose, could secure the original
Lien (plus improvements and accessions to, such property or proceeds
or distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (x) the outstanding
principal amount or, if greater, committed amount of the
Indebtedness described under clause (6), (9) or (11), at the time
the original Lien became a Permitted Lien and (y) an amount
necessary to pay any fees and expenses, including premiums, related
to such refinancing, refunding, extension, renewal or replacement.
Notwithstanding the foregoing, "Permitted Liens" will not include any Lien
described in clause (6), (9) or (11) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to the covenant described under " -- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock," For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of an Exchange Note means the principal of the Exchange Note
plus the premium, if any, payable on the Exchange Note which is due or overdue
or is to become due at the relevant time.
"Principal Property" means:
(1) any refinery and related pipelines, terminalling and processing
equipment or
(2) any other real property or marketing assets or related group of
the Company's assets having a fair market value in excess of $20 million.
"Qualified Receivables Transaction" means any transaction or series of
transactions entered into by the Company or any of its Restricted Subsidiaries
pursuant to which the Company or any of its Restricted Subsidiaries sells,
conveys or otherwise transfers to (i) a Receivables Subsidiary (in the case of a
transfer by the Company or any of its Restricted Subsidiaries) and (ii) any
other Person (in the case of a transfer by a Receivables Subsidiary), or grants
a security interest in, any accounts receivable (whether now existing or arising
in the future) of the Company or any of its Restricted Subsidiaries, and any
assets related thereto, including all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect of
such accounts receivable, proceeds of such accounts receivable and other assets
which are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable; provided, however, that the accounts receivable
of the Company or any of its Restricted Subsidiaries subject to all Qualified
Receivables Transactions and outstanding on the date any such accounts
receivable are transferred by the Company or a Restricted Subsidiary have,
together with the accounts receivable transferred on such date, a balance that
does not exceed in the aggregate the greater of (A) $400 million and (B) 5% of
net sales of the Company and its Restricted Subsidiaries during the four fiscal
quarter period ending on the last day of the most recent fiscal quarter for
which the Company has issued consolidated financial statements.
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"Rating Decline" means the occurrence of a decrease in the rating of the
Notes by one or more gradations by either Moody's or S&P (including gradations
within the rating categories, as well as between categories), within 90 days
before or after the earlier of (x) a Change of Control, (y) the date of public
notice of the occurrence of a Change of Control or (z) public notice of the
intention of the Company to effect a Change of Control (which 90-day period
shall be extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by either Moody's or S&P).
"Receivables Subsidiary" means a Subsidiary of the Company which engages
in no activities other than in connection with the financing of accounts
receivable and which is designated by the Board of Directors of the Company (as
provided below) as a Receivables Subsidiary (a) no portion of the Indebtedness
or any other Obligations (contingent or otherwise) of which (i) is Guaranteed by
the Company or any of its Restricted Subsidiaries (but excluding customary
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction), (ii) is recourse to or obligates the Company or any of its
Restricted Subsidiaries in any way other than pursuant to customary
representations, warranties, covenants and indemnities entered into in
connection with a Qualified Receivables Transaction or (iii) subjects any
property or asset of the Company or any of its Restricted Subsidiaries (other
than accounts receivable and interests therein and related assets as provided in
the definition of "Qualified Receivables Transaction"), directly or indirectly,
contingently or otherwise, to the satisfaction thereof, other than pursuant to
customary representations, warranties, covenants and indemnities entered into in
the ordinary course of business in connection with a Qualified Receivables
Transaction, (b) with which neither the Company nor any of its Restricted
Subsidiaries has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable and (c) with which
neither the Company nor any of its Restricted Subsidiaries has any obligation to
maintain or preserve such Subsidiary's financial condition or cause such
Subsidiary to achieve certain levels of operating results. Any such designation
by the Board of Directors of the Company will be evidenced to the Trustee by
filing with the Trustee a certified copy of the resolution of the Board of
Directors of the Company giving effect to such designation and an Officer's
Certificate certifying that such designation complied with the foregoing
conditions.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
(2) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium
and defeasance costs) under the Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Exchange Notes, such Refinancing Indebtedness is
subordinated in right of payment to the Exchange Notes at least to the
same extent as the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
108
"Related Business" means any business in which the Company was engaged on
the Issue Date and any business related, ancillary or complementary to any
business of the Company in which the Company was engaged on the Issue Date.
"Restricted Payment" with respect to any Person means:
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its
Capital Stock (other than dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock) and dividends or
distributions payable solely to the Company or a Restricted Subsidiary,
and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Restricted Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary that is
an entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including in connection with
any merger or consolidation and including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any Subordinated
Obligations of such Person (other than the purchase, repurchase or other
acquisition of Subordinated Obligations 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 such purchase,
repurchase or other acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
Notwithstanding the foregoing, Intercompany Trade Arrangements shall not
be included in the definition of "Restricted Payment."
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary. All of the Subsidiaries of the Company on the Issue
Date will be Restricted Subsidiaries on the Issue Date.
"Sale/Leaseback Transaction" means an arrangement relating to property
owned by the Company or a Restricted Subsidiary on the Issue Date or thereafter
acquired by the Company or a Restricted Subsidiary whereby the Company or a
Restricted Subsidiary transfers such property to a Person and the Company or a
Restricted Subsidiary leases it from such Person.
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc., and its successors.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue
Date or thereafter Incurred; and
(2) all other Obligations of such Person (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to such Person whether or not post-filing interest
is allowed in such proceeding) in respect of Indebtedness described in
clause (1) above,
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such Indebtedness or other obligations are subordinate in right of payment
to the Exchange Notes; provided, however, that Senior Indebtedness shall not
include:
109
(1) any obligation of such Person to the Company or any Subsidiary
of the Company;
(2) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof
or instruments evidencing such liabilities);
(4) any Indebtedness or other Obligation of such Person which is
subordinate or junior in any respect to any other Indebtedness or other
Obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Specified Refinery Joint Venture" means Chalmette Refining, Merey Sweeny
or Sweeny Coker, all of the partnership, membership or other equity interests of
which in each such case are owned (x) 50% by the Company and/or one or more
Restricted Subsidiaries and (y) 50% by a Person or Persons that are not
Affiliates of the Company.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the Holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Issue Date or thereafter
incurred) which is subordinate or junior in right of payment to the Exchange
Notes or a Subsidiary Guaranty of such person, as the case may be, pursuant to a
written agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by:
(1) such Person;
(2) such Person and one or more Subsidiaries of such Person; or
(3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means any Restricted Subsidiary of the Company if
and so long as such Restricted Subsidiary guarantees payment of the Exchange
Notes on the terms and conditions set forth in the Indenture. As of the Issue
Date there will be no Subsidiary Guarantors.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the
Company's obligations with respect to the Exchange Notes.
"Sweeney Coker" means Sweeny Coker LLC, a Delaware limited liability
company.
"Temporary Cash Investments" means any of the following:
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in demand and time deposit accounts, certificates of
deposit, eurodollar time deposits and money market deposits maturing
within 360 days of the date of acquisition thereof issued by a bank or
trust company which is organized under the laws of the United States of
America, any State thereof or any foreign
110
country recognized by the United States of America, and which bank or
trust company has capital, surplus and undivided profits aggregating in
excess of $50 million (or the foreign currency equivalent thereof) and has
outstanding debt which is rated "A" (or such similar equivalent rating) or
higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 360 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-2" (or higher) according to Moody's or "A-2" (or
higher) according to S&P; and
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A2" by Moody's;
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 (4) above or securities of
the type referred to in clause (5) above publicly available, the references in
clause (4) or (5) 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 Company and the references to the ratings
categories in clause (4) or (5) 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.
"Three-Year Credit Agreement" means the three-year credit agreement
entered into as of December 11, 2002, among the Company, the Lenders and Bank of
America, N.A. as Administrative Agent, together with the related documents
thereto (including the revolving loan facility, note purchase or placement
facility, letter of credit facility or other arrangement for the extension of
credit thereunder, any guarantees and security documents), as amended, extended,
renewed, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any Debt Issuances or agreement (and related
document) governing Indebtedness incurred to Refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be outstanding under
such credit agreement or a successor credit agreement, whether by the same or
any other lender or group of lenders.
"Trustee" means J.P. Morgan Trust Company, National Association until a
successor replaces it and, thereafter, means the successor.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
Section-77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or any
other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors
of the Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated or an Unrestricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or
111
(B) if such Subsidiary has assets greater than $1,000, such designation would be
permitted under the covenant described under "-- Certain Covenants --
Limitation on Restricted Payments."
The Board of Directors of the Company may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (A) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under "--
Certain Covenants -- Limitation on Indebtedness" and (B) no Default shall have
occurred and be continuing.
Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by promptly filing with the Trustee a copy of the
resolution of the Board of Directors of the Company giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
SUMMARY OF U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of the notes. It
deals only with purchasers that acquire and hold the notes as capital assets and
does not deal with special situations, such as those of dealers in securities or
currencies, real estate investment trusts, regulated investment companies, tax
exempt entities, financial institutions, insurance companies, persons holding
the notes as a part of a hedging or conversion transaction or a straddle, or
investors whose "functional currency" is not the U.S. dollar. This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code"),
administrative pronouncements, judicial decisions and Treasury Regulations,
changes to any of which subsequent to the date of this prospectus may affect the
tax consequences described herein, possibly with retroactive effect. Persons
considering the purchase of notes should consult their own tax advisors
concerning the federal income tax consequences of holding the notes in light of
their particular situations as well as any consequences arising under the laws
of any other taxing jurisdiction. The tax consequences of any Additional Notes
may differ from the tax consequences described herein.
As used herein, the term "U.S. Holder" means a beneficial owner of a note
who or which is, for U.S. federal income tax purposes, a citizen or resident of
the United States, a corporation created or organized in or under the laws of
the United States or any state thereof (including the District of Columbia), or
an estate or trust treated as a U.S. person under section 7701(a)(30) of the
Code. The term "Non-U.S. Holder" means any beneficial owner of a note that is
not a U.S. Holder. If an entity treated as a partnership for U.S. federal income
tax purposes holds notes, the tax treatment of such entity and each partner will
generally depend upon the status of the partner and the activities of the
partnership. Such entities and partners in such entities should consult their
tax advisors.
TREATMENT OF EXCHANGES UNDER EXCHANGE OFFER
The exchange of the outstanding notes for exchange notes will not be a
taxable event for United States federal income tax purposes. An exchange
noteholder will not recognize any taxable gain or loss as a result of exchanging
outstanding notes for exchange notes, and the holder will have the same tax
basis and holding period in the exchange notes as the holder had in the
outstanding notes immediately before exchange.
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.
112
AMORTIZABLE BOND PREMIUM
If a U.S. Holder purchases a note in a secondary market transaction for an
amount in excess of, in general, the note's principal amount, such U.S. Holder
will be considered to have purchased such note with "amortizable bond premium"
equal in amount to such excess. Generally, a U.S. Holder may elect to amortize
such premium as an offset to interest income, using a constant yield method. The
premium amortization is calculated assuming that we will exercise redemption
rights in a manner that maximizes the U.S. Holder's yield. A U.S. Holder that
elects to amortize bond premium must reduce its tax basis in the note by the
amount of the premium used to offset interest income as set forth above. An
election to amortize bond premium applies to all taxable debt obligations held
during or after the taxable year for which the election is made and may be
revoked only with the consent of the Internal Revenue Service (the "IRS").
MARKET DISCOUNT
If a U.S. Holder acquires a note in a secondary market transaction for an
amount that is less than, in general, the note's principal amount, the amount of
such difference is treated as "market discount" for federal income tax purposes,
unless such difference is considered to be de minimis as described in section
1278(a)(2)(C) of the Code. Under the market discount rules of the Code, a U.S.
Holder is required to treat any principal payment on, or any gain on the sale,
exchange, retirement or other disposition of, a note as ordinary income to the
extent of the accrued market discount that has not previously been included in
income. In general, the amount of market discount that has accrued is determined
on a ratable basis although in certain circumstances an election may be made to
accrue market discount on a constant interest basis. A U.S. Holder may not be
allowed to deduct immediately a portion of the interest expense on any
indebtedness incurred or continued to purchase or to carry notes with market
discount. A U.S. Holder may elect to include market discount in income currently
as it accrues, in which case the interest deferral rule set forth in the
preceding sentence will not apply. Such an election will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the first
taxable year to which such election applies and is irrevocable without the
consent of the IRS. A U.S. Holder's tax basis in a note will be increased by the
amount of market discount included in such U.S. Holder's income under such
election. U.S. Holders of notes with market discount are urged to consult their
tax advisors as to the tax consequences of ownership and disposition of the
notes.
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." Any amount attributable to
accrued market discount that has not previously been included in income will be
taxed in the manner described above under "-- U.S. Holders -- Market Discount."
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 (excluding any amount
attributable to accrued but unpaid interest) increased by the amount of market
discount previously included in the U.S. Holder's income with respect to the
note and reduced by any bond premium used to offset interest income as described
above under "-- U.S. Holders -- Amortizable Bond Premium."
Gain or loss realized on the sale, exchange or retirement of a note
generally will be capital gain or loss (subject to the market discount rules
described above under "-- U.S. Holders -- Market Discount"), 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
INTEREST AND DISPOSITION OF NOTES
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Subject to the discussion below concerning backup withholding, principal
and interest payments (including payments of additional interest, if any) made
on, and gains from the sale, exchange or other disposition of, a note will not
be subject to the withholding of United States federal income tax, provided
that, in the case of interest:
- 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 the issuer;
- the Non-U.S. Holder is not a controlled foreign corporation related,
directly or indirectly, to the issuer through stock ownership;
- the Non-U.S. Holder is not a bank receiving interest described in
section 881(c)(3)(A) of the Code; and
- 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:
- 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;
- 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
- 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 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
payments will not be subject to the withholding of federal income tax if the
Non-U.S. Holder certifies 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 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.
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 (except to the extent
that such gain is attributable to accrued but unpaid interest) 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
114
disposition and certain other conditions are met. The branch profits tax
described above may apply to gain 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 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 furnished to the IRS.
Non-U.S. Holders. Generally, backup withholding tax does not apply to
payments of interest 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 made on the notes. Information reporting will also apply to payments
made within the United States on the sale, exchange (other than an exchange of a
note for a registered note), 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 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 noteholder's federal income tax liability, provided that the
required information is furnished to the IRS.
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.
115
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of exchange notes received in
exchange for outstanding notes where such outstanding notes were acquired as a
result of market-making activities or other trading activities. We have agreed
that, for a period of 180 days after the expiration date, we will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until ____________, 200__, all
dealers effecting transactions in the exchange notes may be required to deliver
a prospectus.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account
pursuant to the exchange offer and any broker or dealer that participates in a
distribution of such exchange notes may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of exchange
notes and any commission or concessions received by any such persons may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
a prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the expiration date, we will promptly send
additional copies of this Prospectus and any amendment or supplement to this
Prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. We have agreed to pay all expenses incident to the exchange offer
(including the expenses of one counsel for the Holders of the Securities) other
than commissions or concessions of any broker or dealers and will indemnify the
Holders of the exchange notes (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the exchange notes
offered hereby will be passed upon for us by Sidley Austin Brown & Wood LLP,
Chicago, Illinois.
EXPERTS
The financial statements of CITGO Petroleum Corporation as of December 31,
2003 and for the year then ended, have been included herein in reliance upon the
reports of KPMG LLP, independent registered public accounting firm, and insofar
as they relate to LYONDELL-CITGO Refining LP, of PricewaterhouseCoopers LLP,
independent registered public accounting firm, appearing elsewhere herein, and
upon the authority of said firms as experts in accounting and auditing.
The financial statements of CITGO Petroleum Corporation as of December 31,
2002, and for the years ended December 31, 2002 and 2001, included in this
prospectus, have been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of LYONDELL-CITGO Refining L.P. as of December
31, 2003 and 2002 and for each of the three years in the period ended December
31, 2003, included in this prospectus, have been so included in reliance on the
report of PricewaterhouseCoopers LLP, independent registered public accounting
firm, given on the authority of such firm as experts in auditing and accounting.
116
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports and other information with
the SEC. These reports include as exhibits copies of material documents and
agreements described in this prospectus, including our supply agreements with
PDVSA. You may read and copy any document that we file with the SEC at the
Public Reference Room of the SEC at 450 Fifth Street, N.W. Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the
public over the Internet on the SEC's web site at http://www.sec.gov. You can
inspect reports and other information we file at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. You may also
obtain these reports at no cost by writing us at CITGO Petroleum Corporation,
1293 Eldridge Parkway, Houston, Texas 77077, Attention: Corporate Secretary
(telephone: (832) 486-1489).
117
Until , 200 , all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
118
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
-------
Audited Financial Statements of CITGO Petroleum Corporation
Report of Independent Registered Public Accounting Firm........................................................... F-2
Report of Independent Registered Public Accounting Firm........................................................... F-3
Consolidated Balance Sheets as of December 31, 2003 and 2002...................................................... F-4
Consolidated Statements of Income and Comprehensive Income -- Each of the Three Years in the
Period Ended December 31, 2003............................................................................... F-5
Consolidated Statements of Shareholder's Equity -- Each of the Three Years in the Period Ended
December 31, 2003............................................................................................ F-6
Consolidated Statements of Cash Flows -- Each of the Three Years in the Period Ended
December 31, 2003............................................................................................ F-7
Notes to Consolidated Financial Statements........................................................................ F-8
Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited).................. F-32
Condensed Consolidated Statements of Income and Comprehensive Income -- Nine Month Periods
Ended September 30, 2004 and 2003 (Unaudited)................................................................ F-33
Condensed Consolidated Statements of Shareholder's Equity -- Nine Month Periods Ended September 30,
2004 and 2003 (Unaudited).................................................................................... F-34
Condensed Consolidated Statements of Cash Flows -- Nine Month Periods Ended September 30, 2004
and 2003 (Unaudited)......................................................................................... F-35
Notes to Condensed Consolidated Financial Statements (Unaudited).................................................. F-36
Audited Financial Statements of LYONDELL-CITGO Refining LP
Report of Independent Auditors.................................................................................... F-46
Statements of Income for the Years Ended December 31, 2003, 2002 and 2001......................................... F-47
Balance Sheets as of December 31, 2003 and 2002................................................................... F-48
Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001..................................... F-49
Statements of Partners' Capital................................................................................... F-50
Notes to Financial Statements..................................................................................... F-51
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheet of CITGO
Petroleum Corporation and subsidiaries ("the Company") as of December 31, 2003,
and the related consolidated statements of income and comprehensive income,
shareholder's equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. We did not audit the financial statements of LYONDELL-CITGO Refining
LP ("LCR"), a 41.25 percent owned investee company. The Company's investment in
LCR at December 31, 2003 was $455 million, and its equity in earnings of LCR was
$84 million for the year then ended. The financial statements of LCR were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for LCR, is based solely
on the report of the other auditors.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit and the report of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of CITGO Petroleum Corporation and subsidiaries
as of December 31, 2003, and the results of their operations and their cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Tulsa, Oklahoma
March 11, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
We have audited the accompanying consolidated balance sheet of CITGO
Petroleum Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of income and comprehensive income, shareholder's equity
and cash flows for the years ended December 31, 2002 and 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CITGO Petroleum Corporation and
subsidiaries at December 31, 2002, and the results of their operations and their
cash flows for the years ended December 31, 2002 and 2001 in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Tulsa, Oklahoma
February 14, 2003
F-3
CITGO PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
------------------------------
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 202,008 $ 33,025
Accounts receivable, net ........................................... 1,060,333 905,178
Due from affiliates ................................................ 71,336 93,615
Inventories ........................................................ 1,017,613 1,090,915
Prepaid expenses and other ......................................... 28,003 64,767
------------- -------------
Total current assets ............................................. 2,379,293 2,187,500
PROPERTY, PLANT AND EQUIPMENT -- Net ............................... 3,907,203 3,750,166
RESTRICTED CASH .................................................... 6,886 23,486
INVESTMENTS IN AFFILIATES .......................................... 647,649 716,469
OTHER ASSETS ....................................................... 332,462 309,291
------------- -------------
$ 7,273,493 $ 6,986,912
============= =============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................... $ 766,331 $ 830,769
Payables to affiliates ............................................. 486,058 417,634
Taxes other than income ............................................ 173,932 229,072
Other .............................................................. 255,953 308,198
Current portion of long-term debt .................................. 31,364 190,664
Current portion of capital lease obligation ........................ 2,336 22,713
------------- -------------
Total current liabilities ........................................ 1,715,974 1,999,050
LONG-TERM DEBT ....................................................... 1,442,100 1,109,861
CAPITAL LEASE OBLIGATION ............................................. 25,969 24,251
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS .......................... 319,911 247,762
OTHER NONCURRENT LIABILITIES ......................................... 308,248 211,950
DEFERRED INCOME TAXES ................................................ 959,807 834,880
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDER'S EQUITY:
Common stock -- $1.00 par value, 1,000 shares authorized, issued and
outstanding ................................................... 1 1
Additional capital ................................................. 1,659,698 1,659,698
Retained earnings .................................................. 863,093 925,114
Accumulated other comprehensive loss ............................... (21,308) (25,655)
------------- -------------
Total shareholder's equity .................................... 2,501,484 2,559,158
------------- -------------
$ 7,273,493 $ 6,986,912
============= =============
See notes to consolidated financial statements.
F-4
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
2003 2002 2001
------------ ------------ ------------
REVENUES:
Net sales ..................................................... $ 24,829,305 $ 19,080,845 $ 19,343,263
Sales to affiliates ........................................... 387,055 277,477 257,905
------------ ------------ ------------
25,216,360 19,358,322 19,601,168
Equity in earnings of affiliates .............................. 118,268 101,326 108,915
Insurance recoveries .......................................... 146,165 406,570 52,868
Other income (expense), net ................................... 14,965 (19,735) (58,103)
------------ ------------ ------------
25,495,758 19,846,483 19,704,848
------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases of
$9,109,938, $6,779,798 and $6,558,203 from affiliates) ..... 24,390,943 19,211,316 18,734,652
Selling, general and administrative expenses .................. 295,597 284,871 292,127
Interest expense, excluding capital lease ..................... 119,737 67,394 69,164
Capital lease interest charge ................................. 5,271 7,017 9,128
Minority interest ............................................. -- -- 1,971
------------ ------------ ------------
24,811,548 19,570,598 19,107,042
------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ..................... 684,210 275,885 597,806
INCOME TAXES .................................................... 245,436 95,873 206,222
------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ....................................... 438,774 180,012 391,584
CUMULATIVE EFFECT, ACCOUNTING FOR
DERIVATIVES, NET OF RELATED INCOME TAXES OF
$7,977 ........................................................ -- -- 13,600
------------ ------------ ------------
NET INCOME ...................................................... 438,774 180,012 405,184
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives, net of
related income taxes of $(850) ........................... -- -- (1,450)
Less: reclassification adjustment for derivative losses
included in net income, net of related income taxes of
$172 in 2003, $182 in 2002 and $265 in 2001 .............. 304 310 469
------------ ------------ ------------
304 310 (981)
Foreign currency translation gain (loss), net of related income
taxes of $168 in 2003, and $(78) in 2002 .................... 302 (172) --
Minimum pension liability adjustment, net of deferred taxes
of $2,151 in 2003, $12,835 in 2002 and $69 in 2001 .......... 3,741 (22,328) (119)
------------ ------------ ------------
Total other comprehensive income (loss) .............. 4,347 (22,190) (1,100)
------------ ------------ ------------
COMPREHENSIVE INCOME ............................................ $ 443,121 $ 157,822 $ 404,084
============ ============ ============
See notes to consolidated financial statements.
F-5
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
-------------------------------------------
COMMON STOCK MINIMUM FOREIGN CASH TOTAL
-------------- ADDITIONAL RETAINED PENSION CURRENCY FLOW SHAREHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS LIABILITY TRANSLATION HEDGES TOTAL EQUITY
------ ------ ---------- --------- --------- ----------- ------ -------- -------------
BALANCE, JANUARY 1, 2001 ..... 1 $ 1 $1,659,698 $ 818,818 $ (2,365) $ -- $ -- $ (2,365) $ 2,476,152
Net income ................. -- -- -- 405,184 -- -- -- -- 405,184
Other comprehensive loss ... -- -- -- -- (119) -- (981) (1,100) (1,100)
Dividend paid to parent, PDV
America ................. -- -- -- (478,900) -- -- -- -- (478,900)
------ ------ ---------- --------- --------- ----------- ------ -------- -------------
BALANCE, DECEMBER 31, 2001 ... 1 1 1,659,698 745,102 (2,484) -- (981) (3,465) 2,401,336
Net income ................. -- -- -- 180,012 -- -- -- -- 180,012
Other comprehensive (loss)
income .................. -- -- -- -- (22,328) (172) 310 (22,190) (22,190)
------ ------ ---------- --------- --------- ----------- ------ -------- -------------
BALANCE, DECEMBER 31, 2002 ... 1 1 1,659,698 925,114 (24,812) (172) (671) (25,655) 2,559,158
Net income ................. -- -- -- 438,774 -- -- -- -- 438,774
Other comprehensive income.. -- -- -- -- 3,741 302 304 4,347 4,347
Dividends paid to parent,
PDV America ............. -- -- -- (500,795) -- -- -- -- (500,795)
------ ------ ---------- --------- --------- ----------- ------ -------- -------------
BALANCE, DECEMBER 31, 2003 ... 1 $ 1 $1,659,698 $ 863,093 $ (21,071) $ 130 $ (367) $(21,308) $ 2,501,484
====== ====== ========== ========= ========= =========== ====== ======== =============
See notes to consolidated financial statements.
F-6
CITGO PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
(DOLLARS IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................................... $ 438,774 $ 180,012 $ 405,184
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 333,626 298,686 288,882
Provision for losses on accounts receivable .................................. 15,066 17,458 6,239
Deferred income taxes ........................................................ 159,791 37,642 115,025
Distributions in excess of equity in earnings of affiliates .................. 100,071 22,313 44,521
Other adjustments ............................................................ 18,329 3,992 24,680
Changes in operating assets and liabilities:
Accounts receivable and due from affiliates ................................ (155,126) (40,009) 427,771
Inventories ................................................................ 73,302 18,431 42,960
Prepaid expenses and other current assets .................................. 6,478 62,465 (84,280)
Accounts payable and other current liabilities ............................. (68,508) 315,266 (625,313)
Other assets ............................................................... (98,568) (128,466) (90,984)
Other liabilities .......................................................... 171,794 30,483 29,802
--------- --------- ---------
Total adjustments ....................................................... 556,255 638,261 179,303
--------- --------- ---------
Net cash provided by operating activities ............................... 995,029 818,273 584,487
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................ (413,704) (711,834) (253,465)
Proceeds from sales of property, plant and equipment ............................ 4,015 919 3,866
Decrease (increase) in restricted cash .......................................... 16,600 (23,486) --
Investments in LYONDELL-CITGO Refining LP ....................................... (21,208) (32,000) (31,800)
Investments in and advances to other affiliates ................................. (3,800) (22,484) (11,435)
--------- --------- ---------
Net cash used in investing activities ................................... (418,097) (788,885) (292,834)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term bank loans ......................................... -- -- (37,500)
Net (repayments of) proceeds from revolving bank loans .......................... (279,300) (112,200) 391,500
Proceeds from senior notes due 2011 ............................................. 546,590 -- --
Proceeds from senior secured term loan .......................................... 200,000 -- --
Repurchase of senior notes due 2006 ............................................. (47,500) -- --
(Payments on) proceeds from loans from affiliates ............................... (39,000) 39,000 --
Payments on private placement senior notes ...................................... (11,364) (11,364) (39,935)
Payments of master shelf agreement notes ........................................ (50,000) (25,000) --
Payments on taxable bonds ....................................................... (90,000) (31,000) (28,000)
(Payments on) proceeds from issuance of tax-exempt bonds ........................ (93,400) 68,502 28,000
Payments of capital lease obligations ........................................... (23,601) (20,358) (26,649)
Repayments of other debt ........................................................ -- (8,305) (14,845)
Dividends paid to parent, PDV America ........................................... (500,795) -- (478,900)
Debt issuance costs ............................................................. (19,579) -- --
--------- --------- ---------
Net cash used in financing activities ................................... (407,949) (100,725) (206,329)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... $ 168,983 $ (71,337) $ 85,324
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................................... 33,025 104,362 19,038
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................................... $ 202,008 $ 33,025 $ 104,362
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized ......................................... $ 100,492 $ 72,970 $ 83,972
========= ========= =========
Income taxes, net of refunds of $45,794 in 2003 and $50,733 in 2002 .......... $ 110,965 $ (45,745) $ 296,979
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Investment in LYONDELL-CITGO Refining LP (Note 3) ............................... $ (6,840) $ -- $ --
========= ========= =========
See notes to consolidated financial statements.
F-7
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business -- CITGO Petroleum Corporation ("CITGO") is a
subsidiary of PDV America, Inc. ("PDV America"), an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Bolivarian Republic of Venezuela.
CITGO manufactures or refines and markets transportation fuels as well as
lubricants, refined waxes, petrochemicals, asphalt and other industrial
products. CITGO owns and operates three crude oil refineries (Lake Charles,
Louisiana, Corpus Christi, Texas, and Lemont, Illinois) and two asphalt
refineries (Paulsboro, New Jersey, and Savannah, Georgia) with a combined
aggregate rated crude oil refining capacity of 756 thousand barrels per day
("MBPD"). CITGO also owns a minority interest in LYONDELL-CITGO Refining LP, a
limited partnership that owns and operates a refinery in Houston, Texas, with a
rated crude oil refining capacity of 265 MBPD. CITGO's consolidated financial
statements also include accounts relating to a lubricant and wax plant,
pipelines, and equity interests in pipeline companies and petroleum storage
terminals.
CITGO's transportation fuel customers include CITGO branded wholesale
marketers, convenience stores and airlines located mainly east of the Rocky
Mountains. Asphalt is generally marketed to independent paving contractors on
the East and Gulf Coasts and the Midwest of the United States. Lubricants are
sold principally in the United States to independent marketers, mass marketers
and industrial customers. Petrochemical feedstocks and industrial products are
sold to various manufacturers and industrial companies throughout the United
States. Petroleum coke is sold primarily in international markets. CITGO also
sells lubricants, gasoline and distillates in various Latin American markets
including Puerto Rico, Brazil, Ecuador and Mexico.
Principles of Consolidation -- The consolidated financial statements
include the accounts of CITGO and its subsidiaries (collectively referred to as
the "Company"). All subsidiaries are wholly owned. 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 financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CITGO's operations can be influenced by domestic and international
political, legislative, regulatory and legal environments. In addition,
significant changes in the prices or availability of crude oil and refined
products could have a significant impact on CITGO's results of operations for
any particular year.
Impairment of Long-Lived Assets -- The Company periodically evaluates the
carrying value of long-lived assets to be held and used when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the separately identifiable anticipated undiscounted
net cash flow from such asset is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. Fair value is determined primarily using the
anticipated net cash flows discounted at a rate commensurate with the risk
involved. Losses on long-lived assets to be disposed of are determined in a
similar manner, except that fair values are reduced for disposal costs.
Revenue Recognition -- Revenue is generated from the sale of refined
petroleum products to bulk purchasers, wholesale purchasers and final consumers.
CITGO's transportation fuel customers include CITGO branded
F-8
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
wholesale marketers, convenience stores and airlines located mainly east of the
Rocky Mountains. Asphalt is generally marketed to independent paving contractors
on the East and Gulf Coasts and the Midwest of the United States. Lubricants are
sold principally in the United States to independent marketers, mass marketers
and industrial customers. Petrochemical feedstocks and industrial products are
sold to various manufacturers and industrial companies throughout the United
States. Petroleum coke is sold primarily in international markets. CITGO also
sells lubricants, gasoline and distillates in various Latin American markets
including Puerto Rico, Brazil, Ecuador and Mexico.
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. The net results of this activity
are recorded in cost of sales. The Company also engages in the buying and
selling of refined products to facilitate the marketing of its refined products.
The results of this activity are recorded in cost of sales and sales.
Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the Company's last-in, first-out ("LIFO") inventory method. Exchanges that are
settled through payment or receipt of cash are accounted for as purchases or
sales.
Excise Taxes -- The Company collects excise taxes on sales of gasoline and
other motor fuels. Excise taxes of approximately $3.5 billion, $3.2 billion, and
$3.3 billion were collected from customers and paid to various governmental
entities in 2003, 2002, and 2001, respectively. 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.
Inventories -- Crude oil and refined product inventories are stated at the
lower of cost or market and cost is determined using the LIFO method. Materials
and supplies are valued using the average cost method.
Property, Plant and Equipment -- Property, plant and equipment is reported
at cost, less accumulated depreciation. Depreciation is based upon the estimated
useful lives of the related assets using the straight-line method. Depreciable
lives are generally as follows: buildings and leaseholds -- 10 to 24 years;
machinery and equipment -- 5 to 24 years; and vehicles -- 3 to 10 years.
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 $9 million, $4 million, and $2
million, during 2003, 2002, and 2001, 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 2032. Funds are released solely for financing the qualified capital
expenditures as defined in the bond agreement.
Commodity and Interest Rate Derivatives -- The Company uses futures,
forwards, swaps and options primarily to reduce its exposure to market risk. The
Company also enters into various interest rate swap agreements to manage its
risk related to interest rate change on its debt.
F-9
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
on January 1, 2001. Certain of the derivative instruments identified at January
1, 2001 under the provisions of SFAS No. 133 had been previously designated in
hedging relationships that addressed the variable cash flow exposure of
forecasted transactions; under the transition provisions of SFAS No. 133, on
January 1, 2001 the Company recorded an after-tax, cumulative-effect-type
transition charge of $1.5 million to accumulated other comprehensive income
related to these derivatives. Certain of the derivative instruments identified
at January 1, 2001, under the provisions of SFAS No. 133 had been previously
designated in hedging relationships that addressed the fair value of certain
forward purchase and sale commitments; under the transition provisions of SFAS
No. 133, on January 1, 2001 the Company recorded fair value adjustments to the
subject derivatives and related commitments resulting in the recording of a net
after-tax, cumulative-effect-type transition charge of $0.2 million to net
income. The remaining derivatives identified at January 1, 2001 under the
provisions of SFAS No. 133, consisting of certain forward purchases and sales,
had not previously been considered derivatives under accounting principles
generally accepted in the United States of America; under the transition
provisions of SFAS No. 133, on January 1, 2001 the Company recorded an
after-tax, cumulative-effect-type benefit of $13.8 million to net income related
to these derivatives. The Company did not elect prospective hedge accounting for
derivatives existing at the date of adoption of SFAS No. 133.
Effective January 1, 2001, fair values of derivatives are recorded in
other current assets or other current liabilities, as applicable, and changes in
the fair value of derivatives not designated in hedging relationships are
recorded in income. Effective January 1, 2001, the Company's policy is to elect
hedge accounting only under limited circumstances involving derivatives with
initial terms of 90 days or greater and notional amounts of $25 million or
greater.
Refinery Maintenance -- Costs of major refinery turnaround maintenance are
charged to operations over the estimated period between turnarounds. Turnaround
periods range approximately from one to seven years. Unamortized costs are
included in other assets. Amortization of refinery turnaround costs is included
in depreciation and amortization expense. Amortization was $88 million, $75
million, and $69 million for 2003, 2002, and 2001, respectively. Ordinary
maintenance is expensed as incurred.
The American Institute of Certified Public Accountants ("AICPA") has
issued a Statement of Position ("SOP") exposure draft on cost capitalization
that is expected to require companies to expense the non-capital portion of
major maintenance costs as incurred. The statement is expected to require that
any existing unamortized deferred non-capital major maintenance costs be
expensed immediately. The exposure draft indicates that this change will be
required to be adopted for fiscal years beginning after June 15, 2003, and that
the effect of expensing existing unamortized deferred non-capital major
maintenance costs will be reported as a cumulative effect of an accounting
change in the consolidated statement of income. Currently, the AICPA is
re-deliberating its proposed SOP and expects to send a draft of the final SOP to
the Financial Accounting Standards Board ("FASB") in the second quarter of 2004
for its review. The final accounting requirements and timing of required
adoption are not known at this time. At December 31, 2003, the Company had
included turnaround costs of $169 million in other assets. Company management
has not determined the amount, if any, of these costs that could be capitalized
under the provisions of the exposure draft.
Environmental Expenditures -- Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
that do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments and/or cleanups are
probable and the costs can be reasonably estimated. Environmental liabilities
are not discounted to their present value and are recorded without consideration
of potential recoveries from third parties. Subsequent adjustments to estimates,
to the extent required, may be made as more refined information becomes
available.
Income Taxes -- The Company is included in the consolidated U.S. federal
income tax return filed by PDV Holding, Inc., the direct parent of PDV America.
The Company's current and deferred income tax expense has been computed on a
stand-alone basis using an asset and liability approach.
New Accounting Standards -- On January 1, 2003 the Company adopted
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143") which addresses financial
F-10
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. It applies
to legal obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and/or the normal
operation of a long-lived asset, except for certain obligations of lessees. The
Company has identified certain asset retirement obligations that are within the
scope of the standard, including obligations imposed by certain state laws
pertaining to closure and/or removal of storage tanks, contractual removal
obligations included in certain easement and right-of-way agreements associated
with the Company's pipeline operations, and contractual removal obligations
relating to a refinery processing unit located within a third-party entity's
facility. The Company cannot currently determine a reasonable estimate of the
fair value of its asset retirement obligations due to the fact that the related
assets have indeterminate useful lives which preclude development of assumptions
about the potential timing of settlement dates. Such obligations will be
recognized in the period in which sufficient information exists to estimate a
range of potential settlement dates. Accordingly, the adoption of SFAS No. 143
did not impact the Company's financial position or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46
defines variable interest entities and how an enterprise should assess its
interests in a variable interest entity to decide whether to consolidate that
entity. In December 2003, the FASB issued a revision of FIN 46 (FIN 46R),
primarily to clarify the required accounting for investments in variable
interest entities. This standard replaces FIN 46. For CITGO, which meets the
definition of a nonpublic enterprise for purposes of applying FIN 46R,
application is required immediately for variable interest entities created after
December 31, 2003 and for variable interest entities in which an interest is
acquired after that date, and to all entities that are subject to FIN 46R by
January 1, 2005. The interpretation requires certain minimum disclosures with
respect to variable interest entities in which an enterprise holds significant
variable interest but which it does not consolidate. FIN 46R may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. CITGO expects that the application of FIN 46R will not have a
material impact on its financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). The changes in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. Those changes will result in more consistent reporting
of contracts as either derivatives or hybrid instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except for
certain issues from SFAS No. 133 which have been effective for fiscal quarters
that began prior to June 15, 2003 and for hedging relationships designated after
June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied
prospectively. The changes in principle effective with the adoption of SFAS No.
149 did not have a material effect on the Company's statements of financial
position and results of operations.
The FASB's Emerging Issues Task Force Abstract No. 01-8, "Determining
Whether an Arrangement Contains a Lease" ("EITF 01-8") requires that when CITGO
makes an evaluation of whether an arrangement contains a lease within the scope
of Statement of Financial Accounting Standards No. 13, "Accounting for Leases",
such an assessment should be based on the substance of the arrangement and
should be made at inception of the arrangement based on all of the facts and
circumstances. A reassessment of whether the arrangement contains a lease after
the inception of the arrangement shall be made only if (a) there is a change in
the contractual terms, (b) a renewal option is exercised or an extension is
agreed to by the parties to the arrangement, (c) there is a change in the
determination as to whether or not fulfillment is dependent on specified
property, plant, or equipment, or (d) there is a substantial physical change to
the specified property, plant, or equipment. A reassessment of an arrangement
should be based on the facts and circumstances as of the date of reassessment,
including the remaining term of the arrangement. The consensus in EITF 01-8
should be applied to (a) arrangements agreed to or committed to, if earlier,
after the beginning of an entity's next reporting period beginning after May 28,
2003, (b) arrangements modified after the beginning of an entity's next
reporting period beginning after May 28, 2003, and (c) arrangements acquired in
business combinations initiated after the beginning of an entity's next
reporting period beginning after May 28, 2003. There was no material impact upon
adoption.
F-11
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003), which revises employers' disclosures about
pension plans and other postretirement benefit plans. It does not change the
measurement of those plans required by FASB Statements No. 87, "Employers'
Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". It retains the disclosure requirements contained in FASB Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which it replaces. It requires additional disclosures to those in the
original Statement No. 132 about assets, obligations, cash flows and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. (See Note 11).
2. REFINERY AGREEMENTS
An affiliate of PDVSA has a 50 percent equity interest in a joint venture
that owns and operates a refinery in St. Croix, U.S. Virgin Islands ("HOVENSA")
and has the right under a product sales agreement to assign periodically to
CITGO, or other related parties, its option to purchase 50 percent of the
refined products produced by HOVENSA (less a certain portion of such products
that HOVENSA will market directly in the local and Caribbean markets). In
addition, under the product sales agreement, the PDVSA affiliate has appointed
CITGO as its agent in designating which of its affiliates shall from time to
time take deliveries of the refined products available to it. The product sales
agreement will be in effect for the life of the joint venture, subject to
termination events based on default or mutual agreement (Note 4). Pursuant to
the above arrangement, CITGO acquired approximately 149 MBPD, 100 MBPD, and 106
MBPD of refined products from HOVENSA during 2003, 2002, and 2001, respectively,
approximately one-half of which was gasoline.
3. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%) and
Lyondell Chemical Company (58.75%) ("the Owners"). This refinery processes heavy
crude oil supplied by PDVSA under a long-term supply contract that expires in
2017. CITGO purchases substantially all of the gasoline, diesel and jet fuel
produced at the refinery under a long-term contract (Note 4).
As of December 31, 2003, CITGO has a note receivable from LYONDELL-CITGO
of $35 million. The note bears interest at market rates, which were
approximately 1.9 percent, 2.4 percent, and 2.2 percent at December 31, 2003,
2002 and 2001. Principal and interest are due in March 2005. Accordingly, the
note and related accrued interest is included in the balance sheet caption other
assets in the accompanying consolidated balance sheets. In addition, during
2003, CITGO converted $6.8 million of accrued interest related to this note to
investments in LYONDELL-CITGO.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of LYONDELL-CITGO
based on allocations of income agreed to by the Owners which differ from
participation interests. Cash distributions are allocated to the Owners based on
participation interest. Information on CITGO's investment in LYONDELL-CITGO
follows:
F-12
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(000S OMITTED)
Carrying value of investment ...................................... $ 454,679 $ 518,279 $ 507,940
Notes receivable .................................................. 35,278 35,278 35,278
Participation interest ............................................ 41% 41% 41%
Equity in net income .............................................. $ 83,503 $ 77,902 $ 73,983
Cash distributions received ....................................... 177,799 88,663 116,177
Summary of LYONDELL-CITGO's financial position:
Current assets ............................................... $ 316,000 $ 357,000 $ 227,000
Noncurrent assets ............................................ 1,321,000 1,400,000 1,434,000
Current liabilities:
Current portion of long-term debt ......................... -- -- 50,000
Distributions payable to partners ......................... 36,000 181,000 29,000
Other ..................................................... 350,000 333,000 298,000
Noncurrent liabilities (including debt of $450,000 at December
31, 2003, 2002 and 2001) ..................................... 828,000 840,000 776,000
Partners' capital ............................................ 423,000 403,000 508,000
Summary of operating results:
Revenue ...................................................... $4,162,000 $3,392,000 $3,284,000
Gross profit ................................................. 320,000 299,000 317,000
Net income ................................................... 228,000 213,000 203,000
LYONDELL-CITGO has a $450 million credit facility and a $70 million
working capital revolving credit facility, both of which expire in June 2004.
Management of LYONDELL-CITGO and the Owners are pursuing a refinancing of these
facilities and expect to complete the refinancing before they expire. On March
11, 2004, LYONDELL-CITGO entered into an agreement with a major financial
institution to refinance the facilities on a long-term basis, with interest of
LIBOR plus 3%, but in no event more than LIBOR plus 8%, and with other terms
substantially similar to the current facilities. The closing of the new facility
is subject to normal conditions of closing, as well as the maintenance of
certain financial and operating ratios. Based on this agreement, the $450
million term bank loan amount has been classified by LYONDELL-CITGO in its
balance sheet as long-term debt at December 31, 2003.
4. RELATED PARTY TRANSACTIONS
The Company purchases approximately one-half of the crude oil processed in
its refineries from subsidiaries of PDVSA under long-term supply agreements.
These supply agreements extend through the year 2006 for the Lake Charles
refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi refinery
and 2013 for the Savannah refinery. The Company purchased $4.2 billion, $3.3
billion, and $3.0 billion of crude oil, feedstocks and other products from
wholly owned subsidiaries of PDVSA in 2003, 2002, and 2001, respectively, under
these and other purchase agreements. At December 31, 2003 and 2002, $335 million
and $262 million, respectively, were included in payables to affiliates as a
result of these transactions.
These crude oil supply agreements require PDVSA to supply minimum
quantities of crude oil and other feedstocks to CITGO. The supply agreements
differ somewhat for each refinery but generally incorporate formula prices based
on the market value of a slate of refined products deemed to be produced from
each particular grade of crude oil or feedstock, less (i) 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, which varies according to the grade of crude oil or feedstock
delivered. Under each supply agreement, deemed margins and
F-13
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
deemed costs are adjusted periodically by a formula primarily based on the rate
of inflation. Because deemed operating costs and the slate of refined products
deemed to be produced for a given barrel of crude oil or other feedstock do not
necessarily reflect the actual costs and yields in any period, the actual
refining margin earned by CITGO under the various supply agreements will vary
depending on, among other things, the efficiency with which CITGO conducts its
operations during such period.
The price CITGO pays for crude oil purchased under these crude oil supply
agreements is not directly related to the market price of any other crude oil.
However, the intention of the pricing mechanism in the crude supply agreements
was to reflect market pricing over long periods of time, but there may be
periods in which the price paid for crude oil purchased under those agreements
may be higher or lower than the price that might have been paid in the spot
market. Internal estimates indicate that the pricing mechanism is working as
intended to reflect market prices over long periods of time.
The Company also purchases refined products from various other affiliates
including LYONDELL-CITGO and HOVENSA, under long-term contracts. These
agreements incorporate various formula prices based on published market prices
and other factors. Such purchases totaled $4.9 billion, $3.5 billion, and $3.4
billion for 2003, 2002, and 2001, respectively. At December 31, 2003 and 2002,
$148 million and $110 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 $387 million, $277 million,
and $248 million in 2003, 2002, and 2001, respectively. At December 31, 2003 and
2002, $71 million and $94 million, respectively, was included in due from
affiliates as a result of these and related transactions.
Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and terminating value due under the lease of the
Corpus Christi refinery facilities described in Note 14. The Company has also
guaranteed debt of certain affiliates (Note 13).
In August 2002, three affiliates entered into agreements to advance cash
to CITGO from time to time under demand notes for amounts of up to a maximum of
$10 million with PDV Texas, Inc. ("PDV Texas"), $30 million with PDV America and
$10 million with PDV Holding, Inc. ("PDV Holding"). The notes bear interest at
rates equivalent to 30-day LIBOR plus 0.875%, payable quarterly. There were no
amounts outstanding on these notes at December 31, 2003. Amounts outstanding on
these notes at December 31, 2002 were $5 million, $30 million and $4 million due
to PDV Texas, PDV America and PDV Holding, respectively and are included in
payables to affiliates in the accompanying 2002 consolidated balance sheet.
The Company and PDV Holding are parties to a tax allocation agreement that
is designed to provide PDV Holding with sufficient cash to pay its consolidated
income tax liabilities. PDV Holding appointed CITGO as its agent to handle the
payment of such liabilities on its behalf. As such, CITGO calculates the taxes
due, allocates the payments among the members according to the agreement and
bills each member accordingly. Each member records its amounts due from or
payable to CITGO in a related party payable account. At December 31, 2003 and
2002, CITGO had net related party receivables related to federal income taxes of
$35 million and $25 million, respectively.
Prior to the formation of PDV Holding as the common parent in the 1997 tax
year, the Company and PDV America were parties to a tax allocation agreement. In
1998, $8 million due from CITGO to PDV America under this agreement for the 1997
tax year was classified as a noncash contribution of capital. In 1999, $11
million due from PDV America to CITGO under this agreement for the 1998 tax year
was classified as a noncash dividend. Amendment No. 2 to the Tax Allocation
Agreement was executed during 2000; this amendment eliminated the provisions of
the agreement that provided for these noncash contribution and dividend
classifications effective with the 1997 tax year. Consequently, the
classifications made in the prior two years were reversed in 2000. In the event
that CITGO should cease to be part of the consolidated federal income tax group,
any amounts included in shareholder's equity under this agreement are required
to be settled between the parties in cash (net $2 million payable to PDV America
at December 31, 2003 and 2002).
F-14
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2003 and 2002, CITGO has federal income taxes payable of
$5 million and $20 million, respectively, included in other current liabilities.
Sales are made on account, based on pre-approved unsecured credit terms
established by CITGO management. The Company also has a proprietary credit card
program which allows commercial customers to purchase fuel at CITGO branded
outlets. Allowances for uncollectible accounts are established based on several
factors that include, but are not limited to, analysis of specific customers,
historical trends, current economic conditions and other information.
The Company has a limited purpose consolidated subsidiary, CITGO Funding
Corporation ("CITGO Funding"), which 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 (administered by CITGO) reduce previously sold
receivables. CITGO pays specified fees related to its sale of receivables under
the program. The amount sold to third-parties at any one time under the trade
accounts receivable sales agreement is limited to a maximum of $275 million
(increased from $200 million through an amendment in November 2003).
As of December 31, 2003 and 2002, $652 million and $765 million,
respectively, of CITGO's accounts receivable comprised the designated pool of
trade receivables owned by CITGO Funding. The pool of receivables had a weighted
average life of 4.7 and 5.0 days at December 31, 2003 and 2002, respectively. As
of December 31, 2003, none of the receivables in the designated pool had been
sold to the third party and the entire amount was retained by CITGO Funding. As
of December 31, 2002, $125 million of the receivables in the designated pool
were sold to the third party and the remaining amount was retained by CITGO
Funding. This retained interest, which is included in receivables, 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
receivables, the fair value of CITGO's retained interest approximates the total
amount of trade accounts receivable reduced by the amount of trade accounts
receivable sold to the third-party under the facility.
CITGO recorded no gains or losses associated with the sales in the years
ended December 31, 2003 and 2002 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 $6 million, $3 million and $8
million for the years ended December 31, 2003, 2002 and 2001, respectively. The
third party's interests in CITGO trade accounts receivables 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 CITGO 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.
F-15
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2003 and 2002, estimated net market values exceeded
historical cost by approximately $707 million and $572 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 $66
million and $29 million in 2003 and 2002, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
2003 2002
----------- -----------
(000S OMITTED)
Land ........................................ $ 137,010 $ 138,156
Buildings and leaseholds .................... 442,765 431,899
Machinery and equipment ..................... 4,985,068 4,532,889
Vehicles .................................... 35,209 24,597
Construction in process ..................... 300,361 384,869
----------- -----------
5,900,413 5,512,410
Accumulated depreciation and amortization ... (1,993,210) (1,762,244)
----------- -----------
$ 3,907,203 $ 3,750,166
=========== ===========
Depreciation expense for 2003, 2002, and 2001 was $237 million, $223
million, and $220 million, respectively.
Net losses on disposals and retirements of property, plant and equipment
were approximately $3 million, $5 million, and $24 million in 2003, 2002, and
2001, respectively.
8. INVESTMENTS IN AFFILIATES
In addition to LYONDELL-CITGO, the Company's investments in affiliates
consist of equity interests of 6.8 percent to 50 percent in joint interest
pipelines and terminals, including a 15.79 percent interest in Colonial Pipeline
Company; a 49.5 percent partnership interest in Nelson Industrial Steam Company
("NISCO"), which is a qualified cogeneration facility; a 49 percent partnership
interest in Mount Vernon Phenol Plant; and a 25 percent interest in The Needle
Coker Company. The carrying value of these investments exceeded the Company's
equity in the underlying net assets by approximately $125 million and $138
million at December 31, 2003 and 2002, respectively.
At December 31, 2003 and 2002, NISCO had a partnership deficit. CITGO's
share of this deficit, as a general partner, was $31 million and $34 million at
December 31, 2003 and 2002, respectively, which is included in other noncurrent
liabilities in the accompanying consolidated balance sheets.
F-16
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information on the Company's investments, including LYONDELL-CITGO,
follows:
DECEMBER 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
(000S OMITTED)
Company's investments in affiliates (excluding NISCO) ...... $647,649 $716,469 $700,701
Company's equity in net income of affiliates ............... 118,268 101,326 108,915
Dividends and distributions received from affiliates ....... 218,338 123,639 153,435
Selected financial information provided by the affiliates is summarized as
follows:
DECEMBER 31,
--------------------------------------------
2003 2002 2001
---------- ------------ ----------
(000S OMITTED)
Summary of financial position:
Current assets ................................................ $ 636,379 $ 740,019 $ 566,204
Noncurrent assets ............................................. 3,372,509 3,396,209 3,288,950
Current liabilities (including debt of $43,902, $52,417 and
$685,089 at December 31, 2003, 2002, and
2001, respectively) ......................................... 778,974 846,623 1,240,391
Noncurrent liabilities (including debt of $2,121,018,
$2,185,502 and $1,460,196 at December 31, 2003, 2002, and
2001, respectively) ......................................... 2,830,317 2,863,505 2,082,573
Summary of operating results:
Revenues ...................................................... $5,909,974 $4,906,397 $4,603,136
Gross profit .................................................. 918,327 879,907 781,630
Net income .................................................... 504,548 449,779 397,501
9. SHORT-TERM BANK LOANS
As of December 31, 2003, the Company had no short-term borrowing
facilities. As of December 31, 2002, the Company had established $90 million of
uncommitted, unsecured, short-term borrowing facilities with various banks.
Interest rates on these facilities were determined daily based upon the federal
funds' interest rates, and maturity options varied up to 30 days. The weighted
average interest rate actually incurred under these facilities in 2002 was 2.5
percent. The Company had no borrowings outstanding under these facilities at
December 31, 2002.
10. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
2003 2002
----------- -----------
(000S OMITTED)
Revolving bank loans ......................................................... $ -- $ 279,300
Senior Secured Term Loan, due 2006 with variable interest rate ............... 200,000 --
Senior Notes, $200 million face amount, due 2006 with interest rate of
7-7/8% ..................................................................... 149,946 199,898
Senior Notes, $550 million face amount, due 2011 with interest rate of
11-3/8% .................................................................... 546,949 --
F-17
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Private Placement Senior Notes, due 2004 to 2006 with an interest rate of
9.30% ........................................................................ 34,091 45,455
Master Shelf Agreement Senior Notes, due 2004 to 2009 with interest rates
from 7.17% to 8.94% .......................................................... 185,000 235,000
Tax-Exempt Bonds, due 2004 to 2033 with variable and fixed interest rates..... 332,478 425,872
Taxable Bonds, due 2026 to 2028 with variable interest rates ................. 25,000 115,000
----------- -----------
1,473,464 1,300,525
Current portion of long-term debt ............................................ (31,364) (190,664)
----------- -----------
$ 1,442,100 $ 1,109,861
=========== ===========
Revolving Bank Loans -- The Company has a $260 million, three-year,
unsecured revolving bank loan maturing in December 2005. There was no
outstanding balance under this credit agreement at December 31, 2003. The
Company also had a $260 million, 364-day, revolving bank facility at December
31, 2002. This bank facility matured in December 2003 and was not renewed.
Senior Secured Term Loan -- The Company has outstanding a senior secured
term loan under an agreement with a syndication of banks. The senior loan is
secured by our equity interest in two pipeline companies. Interest is paid
quarterly and is based on a floating rate which was 8.25% at December 31, 2003.
Principal is due and payable February 27, 2006.
Shelf Registration -- Senior Notes -- In February 2003, the Company issued
$550 million aggregate principal amount of 11-3/8% unsecured senior notes due
February 1, 2011. In connection with this debt issuance, CITGO redeemed $50
million principal amount of its 7-7/8% senior notes due 2006.
In April 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to the shelf registration of $600
million of debt securities. In May 1996, CITGO issued $200 million aggregate
principle amount of 7-7/8% unsecured senior notes due 2006. Due to CITGO's
credit ratings, the shelf registration is not presently available.
Private Placement -- At December 31, 2003, the Company has outstanding
approximately $34 million of privately placed, unsecured Senior Notes. Principal
amounts are payable in annual installments in November and interest is payable
semiannually in May and November.
Master Shelf Agreement -- At December 31, 2003, the Company has
outstanding $185 million of privately-placed senior notes under an unsecured
Master Shelf Agreement with an insurance company. The notes have various fixed
interest rates and maturities.
Covenants -- The various debt agreements above contain certain covenants
that, depending upon the level of the Company's capitalization and earnings,
could impose limitations on the Company's ability to pay dividends, incur
additional debt, place liens on property, and sell fixed assets. The Company's
debt instruments described above do not contain any covenants that trigger
prepayment or increased costs as a result of a change in its debt ratings. The
Company was in compliance with the debt covenants at December 31, 2003.
Tax-Exempt Bonds -- At December 31, 2003, through state entities, CITGO
has outstanding $42 million of industrial development bonds for certain Lake
Charles and Lemont port facilities and pollution control equipment and $290
million of environmental revenue bonds to finance a portion of the Company's
environmental facilities at its Lake Charles and Corpus Christi refineries and
at the LYONDELL-CITGO refinery. The bonds bear interest at various fixed and
floating rates, which ranged from 2.1 percent to 8.3 percent at December 31,
2003 and ranged from 2.1 percent to 8.0 percent at December 31, 2002. Additional
credit support for the variable rate bonds is provided through letters of
credit.
Taxable Bonds -- At December 31, 2003, through a state entity, the Company
has outstanding $25 million of taxable environmental revenue bonds to finance a
portion of the environmental facilities at the LYONDELL-CITGO refinery. Such
bonds are secured by letter of credit and have a floating interest rate (2.3
percent at December 31,
F-18
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2003 and 2.5 percent at December 31, 2002). At the option of the Company and
upon the occurrence of certain specified conditions, all or any portion of such
taxable bonds may be converted to tax-exempt bonds. During 2003, 2002 and 2001,
$-0-, $31 million and $28 million of originally issued taxable bonds were
converted to tax-exempt bonds.
Debt Maturities -- Future maturities of long-term debt as of December 31,
2003, are: 2004 -- $31.4 million, 2005 -- $11.3 million, 2006 -- $401.3 million,
2007 -- $50.0 million, 2008 -- $44.9 million and $934.6 million thereafter.
Interest Rate Swap Agreements -- The Company has entered into the following
interest rate swap agreements to reduce the impact of interest rate changes on
its variable interest rate debt:
NOTIONAL PRINCIPAL
AMOUNT
FIXED RATE ---------------------
VARIABLE RATE INDEX EXPIRATION DATE PAID 2003 2002
------------------- --------------- ---------- ------- -------
(000S OMITTED)
J.J. Kenny .... February 2005 5.30% $12,000 $12,000
J.J. Kenny .... February 2005 5.27% 15,000 15,000
J.J. Kenny .... February 2005 5.49% 15,000 15,000
------- -------
$42,000 $42,000
======= =======
Effective January 1, 2001, changes in the fair value of these agreements
are recorded in other income (expense). The fair value of these agreements at
December 31, 2003, based on the estimated amount that CITGO would receive or pay
to terminate the agreements as of that date and taking into account current
interest rates, was a loss of $2 million, the offset of which is recorded in the
balance sheet caption other current liabilities.
11. 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 $22 million, $23 million and $20 million
related to its contributions to these plans in 2003, 2002 and 2001,
respectively.
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 and 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 three nonqualified defined
benefit plans for certain eligible employees.
In 2003, CITGO offered an enhanced retirement program to eligible salaried
and hourly employees. Approximately $21 million of incremental pension benefits
were expensed under this program.
PDVMR sponsors a qualified and a nonqualified plan, frozen at their
current levels on April 30, 1997. The plans cover former employees of the
partnership who were participants in the plans as of April 30, 1997.
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-19
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Obligations and funded status -- December 31, 2003 is the measurement date
used to determine pension and other post retirement 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, 2003 and 2002, and the funded status of such plans
reconciled with amounts reported in the Company's consolidated balance sheets:
PENSION BENEFITS OTHER BENEFITS
-------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(000S OMITTED) (000S OMITTED)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year ............... $ 449,655 $ 390,507 $ 334,151 $ 260,696
Service cost .......................................... 19,901 17,171 8,800 7,191
Interest cost ......................................... 29,330 27,881 22,223 18,603
Amendments ............................................ (8,764) 30 (4,020) --
Actuarial liability loss .............................. 39,183 28,449 62,320 55,654
Plan merger/acquisitions .............................. 5,337 -- -- --
Benefits paid ......................................... (18,742) (14,383) (8,949) (7,993)
--------- --------- --------- ---------
Benefit obligation at end of year ..................... 515,900 449,655 414,525 334,151
--------- --------- --------- ---------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year ........ 290,594 324,241 1,182 1,115
Actual return on plan assets .......................... 59,519 (28,552) (9) 67
Plan merger/acquisitions .............................. 4,594 -- -- --
Employer contribution ................................. 23,747 9,288 8,949 7,993
Benefits paid ......................................... (18,742) (14,383) (8,949) (7,993)
Enhanced retirement program benefits paid ............. (16,371) -- -- --
--------- --------- --------- ---------
Fair value of plan assets at end of year .............. 343,341 290,594 1,173 1,182
--------- --------- --------- ---------
Funded status ......................................... (172,559) (159,061) (332,969)
(413,352)
Unrecognized net actuarial loss (gain) ................ 89,564 90,860 87,461 75,206
Unrecognized prior service cost ....................... (6,070) 1,973 (4,020) --
Unrecognized net obligation (asset) ................... (104) (207) -- --
--------- --------- --------- ---------
Net amount recognized ................................. $ (89,169) $ (66,435) $(329,911) $(257,763)
========= ========= ========= =========
Amounts recognized in the
Company's consolidated balance sheets consist of:
Accrued benefit liability ........................... $(114,250) $ (97,126) $(329,911) $(257,763)
Intangible asset .................................... 2,308 -- --
Accumulated other comprehensive income .............. 25,081 28,383 -- --
--------- --------- --------- ---------
Net amount recognized ................................. $ (89,169) $ (66,435) $(329,911) $(257,763)
========= ========= ========= =========
The accumulated benefit obligation for all defined benefit plans was $435
million and $368 million at December 31, 2003 and 2002, respectively.
F-20
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMPONENTS OF NET PERIODIC BENEFIT COST
PENSION BENEFITS OTHER BENEFITS
-------------------------------------- --------------------------------------
2003 2002 2001 2003 2002 2001
-------- -------- -------- -------- -------- --------
(000S OMITTED) (000S OMITTED)
Components of net periodic benefit cost:
Service cost ........................... $ 19,901 $ 17,171 $ 15,680 $ 8,800 $ 7,191 $ 5,754
Interest cost .......................... 29,330 27,880 25,732 22,223 18,603 15,708
Expected return on plan
assets ............................... (26,254) (30,293) (30,586) (71) (67) (63)
Amortization of prior service
cost ................................. (766) 350 351 -- -- --
Amortization of net gain at
date of adoption ..................... (152) (268) (268) -- -- --
Recognized net actuarial loss
(gain) ............................... 3,224 534 (3,018) 50,145 11,288
-------- -------- -------- -------- -------- --------
Net periodic benefit cost ................ $ 25,283 $ 15,374 $ 7,891 $ 81,097 $ 37,015 $ 21,399
======== ======== ======== ======== ======== ========
Actuarial gains (or losses) related to the postretirement benefit
obligation are recognized as a component of net postretirement benefit cost by
the amount the beginning of year unrecognized net gain (or loss) exceeds 7.5
percent of the accumulated postretirement benefit obligation.
ADDITIONAL INFORMATION
PENSION OTHER
BENEFITS BENEFITS
-------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE BENEFIT
OBLIGATIONS AT DECEMBER 31:
Discount rate ............................................ 6.25% 6.75% 6.25% 6.75%
Rate of compensation increase ............................ 4.46% 5.00% -- --
PENSION OTHER
BENEFITS BENEFITS
---------------- ----------------
2003 2002 2003 2002
---- ---- ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE NET PERIODIC
BENEFIT COSTS FOR THE YEARS ENDED DECEMBER 31:
Discount rate .............................................. 6.75% 7.25% 6.75% 7.25%
Expected long-term return on plan assets ................... 8.50% 9.00% 8.50% 9.00%
Rate of compensation increase .............................. 5.00% 5.00% -- --
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 weighted average return at December 31, 2003 on indices
representing CITGO's investment portfolio is 7.94% over the past 10 years and
8.84% over the past 15 years.
For measurement purposes, a 10 percent pre-65 and an 11 percent post-65
annual rate of increase in the per capita cost of covered health care benefits
was assumed for 2003. These rates are assumed to decrease 1 percent per year to
an ultimate level of 5 percent by 2009 for pre-65 and 2010 for post-65
participants, and to remain at that level thereafter.
F-21
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1-PERCENTAGE- 1-PERCENTAGE-
POINT INCREASE POINT DECREASE
-------------- --------------
(000S OMITTED)
Increase (decrease) in total of service and interest cost components ... $ 5,789 $ (4,578)
Increase (decrease) in postretirement benefit obligation ............... 69,283 (55,471)
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Act") was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D) as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. On January 12, 2004,
the FASB Staff issued FASB Staff Position No. FAS 106-1, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003". This Staff Position permits a sponsor of a
postretirement health care plan that provides a prescription drug benefit to
make a one-time election to defer accounting for the effects of the Act. The
Company has elected to defer accounting for the effects of the Act. As a result,
measures of the accumulated postretirement benefit cost and net periodic
postretirement benefit cost do not reflect the effects of the Act. Specific
authoritative guidance from the FASB on the accounting for the federal subsidy
is pending and that guidance, when issued, could require the Company to change
previously reported information.
PLAN ASSETS
The CITGO qualified plans' assets include:
PERCENTAGE OF PLAN
ASSETS AS OF
DECEMBER 31,
TARGET -------------------
ALLOCATION 2003 2002
---------- ------ ------
ASSET CATEGORY:
Domestic equity .......... 40% 40.10% 33.94%
International equity ..... 20% 20.10% 18.22%
Fixed income ............. 40% 39.20% 46.73%
Cash ..................... -- 0.60% 1.11%
--- ------ ------
Total .................. 100% 100.00% 100.00%
=== ====== ======
The PDVMR qualified plan's assets include:
PERCENTAGE OF PLAN
ASSETS AS OF
DECEMBER 31,
TARGET -------------------
ALLOCATION 2003 2002
---------- ------- ------
ASSET CATEGORY:
Domestic equity .................................... 60% 60.00% 49.48%
International equity ............................... 10% 12.30% 12.27%
Fixed income ....................................... 30% 27.20% 36.15%
Cash ............................................... -- 0.50% 2.10%
--- ------ ------
Total ............................................ 100% 100.00% 100.00%
=== ====== ======
F-22
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The investment return objective for these assets is to achieve returns
that meet or exceed the actuarial discount rate over time. This is to be
accomplished using a well-diversified portfolio structure. The Company
periodically reviews the asset allocation to determine whether it remains
appropriate for achieving the investment return objective.
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 $58 million to these
plans in 2004. The nonqualified plans are funded as necessary to pay retiree
benefits. The plan benefits for each of the qualified pension plans are
primarily based on an employee's years of plan service and compensation as
defined by each plan.
CITGO's policy is to fund its postretirement benefits other than pensions
obligation on a pay-as-you-go basis. CITGO estimates that it will contribute $10
million to these plans in 2004.
12. INCOME TAXES
The provisions for income taxes are comprised of the following:
The federal statutory tax rate differs from the effective tax rate due to the
following:
2003 2002 2001
------ ------ ------
Federal statutory tax rate ........... 35.0% 35.0% 35.0%
State taxes, net of federal benefit .. 1.3% 2.4% 0.9%
Dividend exclusions .................. (1.4)% (3.0)% (1.2)%
Other ................................ 1.0% 0.4% (0.2)%
---- ---- ----
Effective tax rate ................... 35.9% 34.8% 34.5%
==== ==== ====
F-23
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effects of (i) temporary
differences between the financial and tax bases of assets and liabilities, and
(ii) loss and tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred tax liability as of December 31, 2003 and
2002 are as follows:
2003 2002
---------- ----------
(000S OMITTED)
Deferred tax liabilities:
Property, plant and equipment ...................................... $ 779,481 $ 754,990
Inventories ........................................................ 95,495 81,912
Investments in affiliates .......................................... 192,458 173,603
Other .............................................................. 155,646 95,886
---------- ----------
1,223,080 1,106,391
---------- ----------
Deferred tax assets:
Postretirement benefit obligations ................................. 124,272 99,234
Employee benefit accruals .......................................... 58,345 58,002
Alternative minimum tax credit carryforwards ....................... 8,812 64,687
Net operating loss carryforwards ................................... 5,752 25,997
Marketing and promotional accruals ................................. 4,652 4,815
Other .............................................................. 56,065 48,275
---------- ----------
257,898 301,010
---------- ----------
Netdeferred tax liability (of which $5,375 is included in current
liabilities at December 31, 2003 and $29,499 is included in current
assets at December 31, 2002.) ..................................... $ 965,182 $ 805,381
========== ==========
The Company's alternative minimum tax credit carryforwards are available
to offset regular federal income taxes in future years without expiration,
subject to certain alternative minimum tax limitations.
13. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. The Company records
accruals for potential losses when, in management's opinion, such losses are
probable and reasonably estimable. If known lawsuits and claims were to be
determined in a manner adverse to the Company, and in amounts greater than the
Company's accruals, then such determinations could have a material adverse
effect on the Company's results of operations in a given reporting period. The
most significant lawsuits and claims are discussed below.
In September 2002, a Texas court ordered CITGO to pay property owners and
their attorneys approximately $6 million based on an alleged settlement of class
action property damage claims as a result of alleged air, soil and groundwater
contamination from emissions released from CITGO's Corpus Christi, Texas
refinery. CITGO has appealed the ruling to the Texas Court of Appeals.
MTBE LITIGATION
CITGO 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. The Company
intends to defend all of the MTBE lawsuits vigorously.
State Court Litigation
- New York: Four actions are currently pending against the Company and
others in New York state courts. Two have been filed by individual
property owners, one has been filed by a public water supplier, and
one is a purported class action on behalf of private well owners in
two New York communities. Dispositive
F-24
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
motions are pending in all except the public water supplier case.
The defendants' motion to dismiss has been denied and the parties
are negotiating a scheduling order in that case. Discovery has not
commenced and a trial date has not been set.
- Illinois: The Company is defending two actions pending in Illinois
state court (Madison County). One is a purported class action on
behalf of Illinois private well owners. The other case was filed by
the Village of East Alton alleging contamination of its public water
supplies. Both cases are scheduled for trial in the fall of 2004.
Federal Court Litigation
Fifty-two MTBE lawsuits have been filed in state courts in Illinois, New
York, New Hampshire, New Jersey, Connecticut, Massachusetts, Vermont, Florida,
Iowa, Indiana, Louisiana, Virginia, Pennsylvania, Kansas and California since
September 30, 2003. To date, CITGO has been served in approximately 32 of these
cases in California, Connecticut, New Hampshire, Illinois, Indiana,
Pennsylvania, Vermont and New York. Most of the lawsuits were filed on behalf of
public water suppliers and allege MTBE contamination of public drinking water
sources. The New Hampshire case was filed by the New Hampshire State Attorney
General to protect the state's water resources. The lawsuit seeks restoration
and remediation, monitoring and testing of all public and private water supplies
in the state, as well as compensatory and punitive damages and fines. All cases
are being removed to federal court, concurrent federal declaratory judgment
actions are being filed by certain of the defendants in those federal courts,
and Tag-Along Notices have been filed with the federal Judicial Panel on
Multidistrict Litigation ("JPML") requesting transfer and consolidation of all
of the cases to the Southern District of New York as part of MDL 1358, which was
created in October 2000 to coordinate similar litigation (now settled) and which
remains administratively open. On December 19, 2003, Judge Shira Scheindlin, to
whom MDL 1358 was previously assigned, entered an order requesting that all MTBE
cases, other than those pending before her, be stayed until a decision is made
by the JPML whether to transfer and consolidate the cases as part of MDL 1358.
Since that time, all other recently filed cases have been stayed or are expected
to be stayed. Plaintiffs have moved or will move to remand each of the removed
cases. Briefing of the remand motions filed in two of the cases pending before
Judge Scheindlin has been completed but no decision has been entered. Briefing
of the remand motions filed in the actions that have been stayed will not go
forward unless and until the stay orders are lifted. No discovery has commenced.
In August 1999, the U.S. Department of Commerce rejected a petition filed
by a group of independent oil producers to apply antidumping measures and
countervailing duties against imports of crude oil from Venezuela, Iraq, Mexico
and Saudi Arabia. The petitioners appealed this decision before the U.S. Court
of International Trade based in New York. On September 19, 2000, the Court of
International Trade remanded the case to the Department of Commerce with
instructions to reconsider its August 1999 decision. The Department of Commerce
was required to make a revised decision as to whether or not to initiate an
investigation within 60 days. The Department of Commerce appealed to the U.S.
Court of Appeals for the Federal Circuit, which dismissed the appeal as
premature on July 31, 2001. The Department of Commerce issued its revised
decision, which again rejected the petition, in August 2001. The revised
decision was affirmed by the Court of International Trade on December 17, 2002.
In February 2003, the independent oil producers appealed the decision of the
Court of International Trade. On January 30, 2004, the U.S. Court of Appeals for
the Federal Circuit affirmed the decision of the Court of International Trade.
CITGO has been named as a defendant in approximately 150 asbestos lawsuits
pending in state and federal courts, primarily in Louisiana, Texas and Illinois.
These cases, most of which involve multiple defendants, are brought by former
employees or contractor employees seeking damages for asbestos 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. In some cases, CITGO is indemnified by or has the right to
seek indemnification for losses and expenses that CITGO may incur from prior
owners of the refineries or employers of the claimants. In other cases, CITGO's
involvement arises not from having been sued directly but because prior owners
of the CITGO refineries have asserted indemnification rights against CITGO.
CITGO is a defendant in several cases involving employees and contractor
employees allegedly seriously injured at CITGO's refineries due to CITGO's
alleged negligence. CITGO is vigorously defending these cases.
F-25
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2003, CITGO's balance sheet included an accrual for
lawsuits and claims of $27 million compared with $23 million at December 31,
2002. The increase in the accrual is due primarily to a revision in the
estimated cost to CITGO in resolving various lawsuits and claims. In addition,
CITGO estimates that an additional loss of $5 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 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 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 sulphur gasoline and diesel fuel that required
additional capital and operating expenditures, and altered significantly the
U.S. refining industry and the return realized on refinery investments. Also,
regulatory interpretations by the United States Environmental Protection Agency
("U.S. EPA") regarding "modifications" to refinery equipment under the NSR
provisions of the CAA have created uncertainty about the extent to which
additional capital and operating expenditures will be required and
administrative penalties imposed.
In addition, CITGO is subject to various other federal, state and local
environmental laws and regulations which may require CITGO to take additional
compliance actions and also actions to remediate the effects on the environment
of prior disposal or release of petroleum, hazardous substances and other waste
and/or pay for natural resource damages. Maintaining compliance with
environmental laws and regulations could require significant capital
expenditures and additional operating costs. Also, numerous other factors affect
the Company's plans with respect to environmental compliance and related
expenditures.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. CITGO believes the amounts provided in its consolidated financial
statements, as prescribed by generally accepted accounting principles, are
adequate in light of probable and estimable liabilities and obligations.
However, there can be no assurance that the actual amounts required to discharge
alleged liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a material
adverse affect on its consolidated results of operations, financial condition
and cash flows.
In 1992, the Company reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface impoundments at
the Lake Charles refinery by 1994. A mutually acceptable closure plan was filed
with the LDEQ in 1993. The Company and 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. The remediation commenced in
December 1993. In 1997, the Company presented a proposal to the LDEQ revising
the 1993 closure plan. In 1998 and 2000, the Company submitted further revisions
as requested by the LDEQ. The LDEQ issued an administrative order in June 2002
that addressed the requirements and schedule for proceeding to develop and
implement the corrective action or closure plan for these surface impoundments
and related waste units. Compliance with the terms of the administrative order
has begun. CITGO has incurred remediation costs to date related to these surface
impoundments of approximately $45 million. Based on currently available
information and proposed remedial approach, CITGO currently anticipates closure
and post-closure costs related to these surface impoundments and related solid
waste management units to range from $36 million to $41 million.
The Company's Corpus Christi, Texas refinery is being investigated by
state and federal agencies for alleged criminal violations of federal
environment statutes and regulations, including the CAA and the Migratory Bird
Act. The Company is cooperating with the investigation by producing requested
documents and arranging for the interview of current and former employees. The
Company understands that the investigation may continue for
F-26
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
several months at which time the government will make a final decision as to
whether to seek authority to file any criminal charges. The Company believes
that it has defenses to any such charges. At this time, the Company cannot
predict the outcome of, or the amount or range of any potential loss that would
ensue from, any such charges. The Company has entered into a settlement with the
Texas Commission on Environmental Quality ("TCEQ"), which was approved by the
TCEQ on February 11, 2004, regarding civil charges under applicable laws
relating to a portion of these alleged violations and including all issues which
have been subject of prior, pending, and threatened enforcement proceedings by
the TCEQ. That settlement called for a $1.74 million payment by the Company, of
which $870,000 was paid in December 2003 and the balance was paid in March 2004.
Further, the settlement will require the capital expenditures by the Company
which will range up to an aggregate of $21 million to be incurred over a period
of years. In addition, the Company is in settlement discussions with the U.S.
EPA related to civil claims under the NSR and other provisions of the CAA,
which, if finalized, would also address a portion of the alleged violations of
federal law discussed in this paragraph. At this time, the Company cannot
predict the final outcome of these negotiations.
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 the 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 U.S.
EPA released the draft of the remedial investigation phase of the report in May
2003. CITGO and other PRPs may be potentially responsible for the costs of the
RI/FS, subsequent remedial actions and natural resource damages. Although CITGO
is still reviewing the recent remedial investigation phase of the report and its
implications, CITGO submitted initial comments on the report in July 2003. Also,
the EPA and the LDEQ issued a memorandum of understanding in June 2003 assigning
the primary areas of responsibility between the agencies related to the
Calcasieu Estuary. While the Company disagrees with many of the U.S. EPA's
earlier allegations and conclusions, the Company 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. The
Company 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 and electric utilities modified air emission sources
without obtaining permits or installing new control equipment under the NSR
provisions of the CAA. The NOVs followed inspections and formal information
requests regarding the Company's Lake Charles, Louisiana, Corpus Christi, Texas
and Lemont, Illinois refineries. Since mid-2002, CITGO has been engaged in
global settlement negotiations with the United States. The settlement
negotiations have focused on different levels of air pollutant emission
reductions and the merits of various types of control equipment to achieve those
reductions. No settlement agreement, or agreement in principal, has been
reached. Based primarily on the costs of control equipment reported by the
United States and other petroleum companies and the types and number of emission
control devices that have been agreed to in previous petroleum companies' NSR
settlements with the United States, CITGO estimates that the capital costs of a
settlement with the United States could be approximately $200 million. Any such
capital costs would be incurred over a period of years, anticipated to be from
2004 to 2008. Also, this cost estimate range, while based on current information
and judgment, is dependent on a number of subjective factors, including the
types of control devices installed, the emission limitations set for the units
the year the technology may be installed, and possible future operational
changes. CITGO also may be subject to possible penalties. If settlement
discussions fail, CITGO is prepared to contest the NOVs. If CITGO is found to
have violated the provisions cited in the NOVs, it estimates the capital
expenditures and penalties that might result could range up to $290 million, to
be incurred over a period of years.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations covering
benzene emissions from wastewater treatment operations at the Company's Lemont,
Illinois refinery. CITGO is in settlement discussions with the U.S. EPA. The
Company believes this matter will be consolidated with the matters described in
the previous paragraph.
F-27
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air quality
regulations at the CITGO's Lake Charles, Louisiana refinery during 2001. The
majority of the alleged violations related to the leak detection and repair
program. The Company is in settlement discussions with the LDEQ. The LDEQ
believes this matter will be consolidated with the matters described in the
previous paragraph related to the EPA's NSR enforcement initiative.
At December 31, 2003, CITGO's balance sheet included an environmental
accrual of $63 million. Results of operations reflect a decline in the accrual
of $5 million during 2003 due primarily to a revision of the Company's estimated
share of costs related to a site which is still under investigation by the U.S.
EPA. CITGO estimates that an additional loss of $20 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 of CITGO and its subsidiaries'
facilities and operations. Those audits have the potential to reveal matters
that those authorities believe represent non-compliance in one or more respects
with regulatory requirements and for which those authorities may seek corrective
actions and/or penalties in an administrative or judicial proceeding. Based upon
current information, CITGO is not aware that any such audits or their findings
have resulted in the filing of such a proceeding or is the subject of a
threatened filing with respect to such a proceeding, nor does CITGO believe that
any such audit or their findings will have a material adverse effect on its
future business and operating results, other than matters described above.
Conditions which require additional expenditures may exist with respect to
the Company's various sites including, but not limited to, its operating
refinery complexes, former refinery sites, service stations and crude oil and
petroleum product storage terminals. Based on currently available information,
CITGO cannot determine the amount of any such future expenditures.
Increasingly stringent environmental regulatory provisions and obligations
periodically require additional capital expenditures. During 2003, CITGO spent
approximately $253 million for environmental and regulatory capital improvements
in its operations. Management currently estimates that CITGO will spend
approximately $785 million for environmental and regulatory capital projects
over the five-year period 2004-2008. These estimates may vary due to a variety
of factors.
Supply Agreements -- The Company purchases the crude oil processed at its
refineries and also purchases refined products to supplement the production from
its refineries to meet marketing demands and resolve logistical issues. In
addition to supply agreements with various affiliates (Notes 2 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.
Throughput Agreements -- The Company has throughput agreements with
certain pipeline affiliates (Note 8). These throughput agreements may be used to
secure obligations of the pipeline affiliates. Under these agreements, the
Company may be required to provide its pipeline affiliates with additional funds
through advances against future charges for the shipping of petroleum products.
The Company currently ships on these pipelines and has not been required to
advance funds in the past. At December 31, 2003, the Company has no fixed and
determinable, unconditional purchase obligations under these agreements.
Commodity Derivative Activity -- As of December 31, 2003 the Company's
petroleum commodity derivatives included exchange traded futures contracts,
forward purchase and sale contracts, exchange traded and over-the-counter
options, and over-the-counter swaps. At December 31, 2003, the balance sheet
captions other current assets and other current liabilities include $16 million
and $6 million, respectively, related to the fair values of open commodity
derivatives.
Guarantees -- As of December 31, 2003, the Company has guaranteed the debt
of others in a variety of circumstances including letters of credit issued for
an affiliate, bank debt of an affiliate, bank debt of an equity investment, bank
debt of customers and customer debt related to the acquisition of marketing
equipment and financing debt incurred by an equity investment as shown in the
following table:
F-28
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXPIRATION
DATE
----------
(000S OMITTED)
Letters of credit ............. $ 32,981 2004-2005
Bank debt
Equity investment ............ 5,500 2004
Customers .................... 2,301 2005-2009
Financing debt of customers
Customer equipment acquisition 1001 2004-2007
Equipment acquisition -- NISCO 11,303 2008
---------
Total ......................... $ 53,086
=========
In each case, 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 these guarantees.
In the event of debtor default on the letters of credit, CITGO has been
indemnified by PDV Holding, Inc., the direct parent of PDV America. In the event
of debtor default on the equity investment bank debt, CITGO has no recourse. In
the event of debtor default on customer bank debt, CITGO generally has recourse
to personal guarantees from principals or liens on property. In the event of
debtor default on financing debt incurred by customers, CITGO would receive an
interest in the equipment being financed after making the guaranteed debt
payment. In the event of debtor default on financing debt incurred by an equity
investee, 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,
2003 -- The Company has outstanding letters of credit totaling approximately
$225 million, which includes $221 million related to CITGO's tax-exempt and
taxable revenue bonds (Note 10).
The Company has also acquired surety bonds totaling $72 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.
Neither the Company nor the counterparties are required to collateralize
their obligations under interest rate swaps or over-the-counter derivative
commodity agreements. The Company is exposed to credit loss in the event of
nonperformance by the counterparties to these agreements. The Company does not
anticipate nonperformance by the counterparties, which consist primarily of
major financial institutions.
Management considers the credit risk to the Company related to its
commodity and interest rate derivatives to be insignificant during the periods
presented.
14. 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 may continue to
renew the lease until January 31, 2011, the date of its option to purchase the
facilities for a nominal amount. A portion of an operating unit at the Corpus
Christi refinery is also considered a capital lease. The basic term of the lease
expires on February 1, 2009 at which time the Company may purchase the leased
unit for a nominal amount. Capitalized costs included in property, plant and
equipment related to the leased assets were approximately $215 million at
December 31, 2003 and $209 million at December 31, 2002. Accumulated
amortization related to the
F-29
CITGO PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leased assets was approximately $143 million and $134 million at December 31,
2003 and 2002, respectively. Amortization is included in depreciation expense.
The Company also has various noncancelable operating leases, primarily for
product storage facilities, office space, computer equipment, vessels and
vehicles. Rent expense on all operating leases totaled $116 million in 2003,
$102 million in 2002, and $77 million in 2001. Future minimum lease payments for
the capital lease and noncancelable operating leases are as follows:
The following estimated fair value amounts have been determined by the
Company, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.
The carrying amounts of cash equivalents approximate fair values. The
carrying amounts and estimated fair values of the Company's other financial
instruments are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Short-term bank loans and long-term debt -- The fair value of short-term
bank loans and long-term debt is based on interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities.
Interest rate swap agreements -- The fair value of these agreements is
based on the estimated amount that the Company would receive or pay to terminate
the agreements at the reporting dates, taking into account current interest
rates and the current creditworthiness of the counterparties.
Guarantees, letters of credit and surety bonds -- The estimated fair value
of contingent guarantees of third-party debt, letters of credit and surety bonds
is based on fees currently charged for similar one-year agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting dates.
The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
herein.
16. INSURANCE RECOVERIES
On August 14, 2001, a fire occurred at the crude oil distillation unit of
the Lemont refinery. A new crude unit was operational at the end of May 2002.
On September 21, 2001, a fire occurred at the hydrocracker unit of the
Lake Charles refinery. Operations at the hydrocracker resumed on November 22,
2001.
The Company recognizes property damage insurance recoveries in excess of
the amount of recorded losses and related expenses, and business interruption
insurance recoveries when such amounts are realized. During the years ended
December 31, 2003 and 2002, the Company recorded $146 million and $407 million,
respectively, of insurance recoveries primarily related to these fires. The
Company received cash proceeds of $146 million and $442 million during the years
ended December 31, 2003 and 2002, respectively. In July 2003, the Company
received the final payment related to the Lemont fire.
F-31
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31,
2004 2003
----------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 469,954 $ 202,008
Accounts receivable, net .......................................................... 1,440,053 1,060,333
Due from affiliates ............................................................... 109,532 71,336
Inventories ....................................................................... 1,001,353 1,017,613
Prepaid expenses and other ........................................................ 48,875 28,003
----------- -----------
Total current liabilities ....................................................... 3,069,767 2,379,293
PROPERTY, PLANT AND EQUIPMENT -- Net ................................................. 3,960,810 3,907,203
RESTRICTED CASH ...................................................................... 2,310 6,886
INVESTMENTS IN AFFILIATES ............................................................ 580,886 647,649
OTHER ASSETS ......................................................................... 356,874 332,462
----------- -----------
$ 7,970,647 $ 7,273,493
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 758,800 $ 766,331
Payables to affiliates ............................................................ 722,001 486,058
Taxes other than income ........................................................... 238,798 173,932
Other ............................................................................. 380,698 255,953
Current portion of long-term debt ................................................. 11,364 31,364
Current portion of capital lease obligation ....................................... 3,403 2,336
----------- -----------
Total current liabilities ....................................................... 2,115,064 1,715,974
LONG-TERM DEBT ....................................................................... 1,279,244 1,442,100
CAPITAL LEASE OBLIGATION ............................................................. 46,285 25,969
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS .......................................... 349,868 319,911
OTHER NONCURRENT LIABILITIES ......................................................... 315,730 308,248
DEFERRED INCOME TAXES ................................................................ 931,280 959,807
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock -- $1.00 par value, 1,000 shares authorized, issued and
outstanding .................................................................... 1 1
Additional capital ................................................................ 1,659,698 1,659,698
Retained earnings ................................................................. 1,293,403 863,093
Accumulated other comprehensive loss .............................................. (19,926) (21.308)
----------- -----------
Total shareholder's equity ...................................................... 2,933,176 2,501,484
----------- -----------
$ 7,970,647 $ 7,273,493
=========== ===========
See notes to condensed consolidated financial statements.
F-32
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Net sales ............................................................. $ 8,749,338 $ 6,430,568 $ 23,292,869 $ 18,595,453
Sales to affiliates ................................................... 129,952 71,763 306,832 303,627
------------ ------------ ------------ ------------
8,879,290 6,502,331 23,599,701 18,899,080
Equity in earnings of affiliates ...................................... 71,036 35,398 166,229 79,973
Insurance recoveries .................................................. -- 1,863 -- 146,165
Other income (expense) -- net ......................................... 1,560 1,208 2,135 16,899
------------ ------------ ------------ ------------
8,951,886 6,540,800 23,768,065 19,142,117
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases of
$3,554,449, $2,450,149, $9,201,366, and $6,680,122 from affiliates).. 8,532,015 6,267,004 22,792,607 18,284,027
Selling, general and administrative expenses .......................... 78,165 80,788 218,813 218,115
Interest expense, excluding capital lease ............................. 28,493 31,264 98,736 87,124
Capital lease interest charge ......................................... 955 1,011 2,481 3,806
------------ ------------ ------------ ------------
8,639,628 6,380,067 23,112,637 18,593,072
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ............................................... 312,258 160,733 655,428 549,045
INCOME TAXES ............................................................. 107,248 57,864 225,118 197,656
------------ ------------ ------------ ------------
NET INCOME ............................................................... 205,010 102,869 430,310 351,389
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME:
Cash flow hedges:
Reclassification adjustment for derivative losses included in net
income, net of related income taxes of $38, $39, $123 and $127 ... 79 70 236 225
Foreign currency translation (loss) gain, net of related income
taxes of $(5), $(83), $375 and $591 ................................. (11) (147) 718 1,050
Minimum pension liability adjustment, net of deferred taxes of $241 ... -- -- 428 --
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME ............................................... 68 (77) 1,382 1,275
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME ..................................................... $ 205,078 $ 102,792 $ 431,692 $ 352,664
============ ============ ============ ============
See notes to condensed consolidated financial statements.
F-33
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
COMMON STOCK OTHER
---------------------------- ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
----------- ----------- ----------- ----------- ------------- -----------
BALANCE, DECEMBER 31, 2003 ........ 1 $ 1 $ 1,659,698 $ 863,093 $ (21,308) $ 2,501,484
Net income ........................ -- -- -- 430,310 -- 430,310
Other comprehensive income (loss).. -- -- -- -- 1,382 1,382
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30, 2004 ....... 1 $ 1 $ 1,659,698 $ 1,293,403 $ (19,926) $ 2,933,176
=========== =========== =========== =========== =========== ===========
See notes to condensed consolidated financial statements.
F-34
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................................. $ 430,310 $ 351,389
Depreciation and amortization ............................................... 270,220 245,397
Other adjustments to reconcile net income to net cash provided
by operating activities.................................................... 88,872 180,203
Changes in operating assets and liabilities ................................. (92,425) 69,373
------------ ------------
Net cash provided by operating activities ................................. 696,977 846,362
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ........................................................ (226,549) (315,105)
Proceeds from sales of property, plant and equipment ........................ 539 3,845
Decrease (increase) in restricted cash ...................................... 4,576 (1,162)
Investments in LYONDELL-CITGO Refining LP. .................................. (19,511) (17,083)
Investments in and advances to other affiliates ............................. (1,554) (2,537)
------------ ------------
Net cash used in investing activities ..................................... (242,499) (332,042)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes due 2011 ......................................... -- 546,590
(Payment of) proceeds from senior secured term loan ......................... (200,000) 200,000
Net repayments of revolving bank loans ...................................... -- (279,300)
Repurchase of senior notes due 2006 ......................................... -- (47,500)
Payments on master shelf agreement senior notes ............................. (20,000) (50,000)
Proceeds from (payments on) tax-exempt bonds ................................ 61,800 (126,050)
Payments on taxable bonds ................................................... (25,000) (90,000)
Payments on loans from affiliates ........................................... -- (39,000)
Payments of capital lease obligations ....................................... (2,604) (11,860)
Dividend Paid ............................................................... -- (500,000)
Debt issuance costs ......................................................... (728) (19,136)
------------ ------------
Net cash (used in) provided by financing activities ....................... (186,532) (416,256)
------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS .......................................... 267,946 98,064
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................. 202,008 33,025
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ....................................... $ 469,954 $ 131,089
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized ...................................... $ 111,643 $ 66,578
============ ============
Income taxes (net of refunds of $231 in 2004 and $47,769 in 2003) ......... $ 137,554 $ 45,305
============ ============
See notes to condensed consolidated financial statements.
F-35
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NINE-MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
1. BASIS OF PRESENTATION
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,
lubricants, asphalt and refined waxes, 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 Petroleos de
Venezuela, S.A. ("PDVSA", which may also be used herein to refer to one or more
of its subsidiaries), the national oil company of the Bolivarian Republic of
Venezuela.
The financial information for CITGO subsequent to December 31, 2003 and
with respect to the interim three-month and nine-month periods ended September
30, 2004 and 2003 is unaudited. In management's opinion, such interim
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such periods.
The results of operations for the three-month and nine-month periods ended
September 30, 2004 and 2003 are not necessarily indicative of the results to be
expected for the full year. Reference is made to CITGO's Annual Report for the
fiscal year ended December 31, 2003 on Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 defines variable interest entities
and how an enterprise should assess its interests in a variable interest entity
to decide whether to consolidate that entity. In December 2003, the FASB issued
a revision of FIN 46 (FIN 46R), primarily to clarify the required accounting for
investments in variable interest entities. This standard replaces FIN 46. For
CITGO, which meets the definition of a nonpublic enterprise for purposes of
applying FIN 46R, application is required immediately for variable interest
entities created after December 31, 2003 and for variable interest entities in
which an interest is acquired after that date, and to all entities that are
subject to FIN 46R by January 1, 2005. The interpretation requires certain
minimum disclosures with respect to variable interest entities in which an
enterprise holds significant variable interest but which it does not
consolidate. FIN 46R may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. The
applicable provisions of FIN 46R had no impact on financial position or results
of operations for the nine-month period ended September 30, 2004 and CITGO
expects that the application of FIN 46R will not have a material impact on its
financial position or results of operations in the future.
3. ACCOUNTS RECEIVABLE
The Company has a limited purpose consolidated subsidiary, CITGO Funding
Corporation ("CITGO Funding"), which 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 (administered by CITGO) reduce previously sold
receivables. CITGO pays specified fees related to its sale of receivables under
the program. The amount sold to third-parties at any one time under the trade
accounts receivable sales agreement is limited to a maximum of $275 million.
As of September 30, 2004, none of the receivables in the designated pool
had been sold to the third party and the entire amount was retained by CITGO
Funding.
F-36
4. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
CITGO issued $30 million of tax-exempt environmental facilities revenue
bonds in June 2002 and $39 million in May 2003. The proceeds from these bonds
are being used for spending on qualified projects at the Lemont and Corpus
Christi refineries. Restricted cash of approximately $2 million at September 30,
2004 represents highly liquid investments held in trust accounts in accordance
with these bond agreements. Funds may be released solely to finance the
qualified capital expenditures as defined in the related bond agreements.
6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ------------
(000S OMITTED)
(UNAUDITED)
Senior Secured Term Loan, due 2006 with variable interest rate ............... $ -- $ 200,000
Senior Notes, $150 million face amount, due 2006 with interest rate of
7-7/8% .................................................................. 149,964 149,946
Senior Notes, $550 million face amount, due 2011 with interest rate of
11-3/8% ................................................................. 547,272 546,949
Private Placement Senior Notes, due 2004 to 2006 with an interest rate
of 9.30% ................................................................ 34,091 34,091
Master Shelf Agreement Senior Notes, due 2006 to 2009 with interest rates from
7.17% to 8.94 % ......................................................... 165,000 185,000
Tax-Exempt Bonds, due 2007 to 2031 with variable and fixed interest
rates ................................................................... 394,281 332,478
Taxable Bonds, due 2028 with variable interest rate .......................... -- 25,000
------------ ------------
1,290,608 1,473,464
Current portion of long-term debt ............................................ (11,364) (31,364)
------------ ------------
$ 1,279,244 $ 1,442,100
============ ============
F-37
CITGO has a $260 million unsecured revolving credit facility maturing in
December 2005. There was no outstanding balance under this credit facility at
September 30, 2004.
The Company had a senior secured term loan under an agreement with a
syndicate of various lenders. The senior loan was secured by CITGO's equity
interest in two pipeline companies. CITGO retired the senior loan on June 25,
2004. The costs to retire the senior loan prior to the maturity date of February
2006 included a prepayment charge of $4 million.
In February 2003, CITGO issued $550 million aggregate principal amount of
11 3/8% unsecured senior notes due February 1, 2011. In connection with this
debt issuance, CITGO repurchased $50 million principal amount of its 7 7/8%
senior notes due 2006.
In May 1996, CITGO issued $200 million aggregate principle amount of 7?%
unsecured senior notes due 2006. These notes were issued under a
shelf-registration statement covering $600 million of debt securities that was
filed with the Securities and Exchange Commission. Due to CITGO's credit
ratings, the shelf registration statement is not presently available.
Approximately $247 million of the outstanding tax-exempt bonds are
supported by letters of credit issued by various banks. In February 2004, CITGO
reissued $11.8 million of tax-exempt revenue bonds due 2007 which had been
repurchased by the Company during 2003 due to lack of letter of credit support.
In September 2004, Citgo reissued $25 million of tax-exempt revenue bonds due
2031 which had been repurchased by the Company during 2003 due to lack of letter
of credit support.
On May 3, 2004, CITGO issued $25 million of tax-exempt environmental
revenue bonds due 2032 through a governmental issuer that refunded $25 million
of taxable environmental revenue bonds due 2028 previously issued through that
issuer. The tax-exempt bonds are supported by a letter of credit issued by a
bank.
Our various debt instruments require maintenance of a specified minimum
net worth and impose restrictions on our ability to: incur additional debt
unless we meet specified interest coverage and debt to capitalization ratios;
place liens on our property, subject to specified exceptions; sell assets,
subject to specified exceptions; make restricted payments, including dividends,
repurchases of capital stock and specified investments; and merge, consolidate
or transfer assets. Various of our debt agreements, including the agreements
governing the Private Placement Senior Notes and the Master Shelf Agreement
Senior Notes and the reimbursement agreements relating to various letters of
credit that provide liquidity support for our tax-exempt bonds, contain
provisions requiring that we equally and ratably secure those instruments if we
issue secured debt other than as permitted by those instruments. CITGO is in
compliance with its covenants under its debt financing arrangements at September
30, 2004.
7. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265
thousand barrels per day refinery in Houston, Texas and is owned by subsidiaries
of CITGO (41.25%) and Lyondell Chemical Company (58.75%) ("the Owners"). This
refinery processes heavy crude oil supplied by PDVSA under a long-term supply
contract that expires in 2017. CITGO purchases substantially all of the
gasoline, diesel and jet fuel produced at the refinery under a long-term
contract.
As of September 30, 2004, CITGO has a note receivable from LYONDELL-CITGO
of $35 million. The note bears interest at market rates, which was approximately
1.8 percent at September 30, 2004. Principal and interest are due January 1,
2008. Accordingly, the note and related accrued interest are included in the
balance sheet caption other assets, noncurrent, in the accompanying consolidated
balance sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of LYONDELL-CITGO
based on allocations of income agreed to by the Owners which differ from
participation interests. Cash distributions are allocated to the Owners based on
participation interest. Information on CITGO's investment in LYONDELL-CITGO
follows:
F-38
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
(000S OMITTED)
(UNAUDITED)
Carrying value of investment ............................ $ 392,831 $ 454,679
Notes receivable ........................................ 35,278 35,278
Participation interest .................................. 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets ........................................ $ 409,000 $ 316,000
Non current assets .................................... 1,271,000 1,321,000
Current liabilities ................................... 662,000 386,000
Noncurrent liabilities ................................ 814,000 828,000
Partners' capital ..................................... 204,000 423,000
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2004 2003
---------- ----------
(UNAUDITED)
Equity in net income .................................... $ 133,910 $ 56,552
Cash distribution received .............................. 215,944 150,904
Summary of LYONDELL-CITGO's operating results:
Revenue ............................................... $4,038,659 $3,117,794
Gross profit .......................................... 409,970 224,145
Net income ............................................ 341,292 155,360
On May 21, 2004, LYONDELL-CITGO closed on a three-year, $550 million
credit facility to replace its expiring $520 million credit facility. The new
credit facility is comprised of a $450 million term loan and a $100 million
revolver, both with an interest rate of the London Interbank Offered Rate
("LIBOR") plus 2.5 percent. The facility is secured by substantially all of the
assets of LYONDELL-CITGO and contains covenants that require LYONDELL-CITGO to
maintain specified financial ratios. In September 2004, LYONDELL-CITGO obtained
an amendment to the new facility which reduces the interest rate to LIBOR plus 2
percent and eases certain financial covenants, including the debt to total
capitalization ratio. There was no outstanding balance under the working capital
revolving credit facility at September 30, 2004.
8. 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.
In September 2002, a Texas court ordered CITGO to pay property owners and
their attorneys approximately $6 million based on an alleged settlement of class
action property damage claims as a result of alleged air, soil and groundwater
contamination from emissions released from CITGO's Corpus Christi, Texas
refinery. CITGO has appealed the ruling to the Texas Court of Appeals.
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
F-39
compensatory and punitive damages, plaintiffs seek injunctive relief to abate
the contamination. CITGO intends to defend all of the MTBE lawsuits vigorously.
CITGO's MTBE litigation can be divided into two categories -- pre and
post-September 30, 2003 litigation. In the six pre-September 30, 2003 cases,
CITGO is defending itself in Madison County, Illinois state court and in two New
York county state courts. In several of the New York cases, the judge on March
26, 2004, granted CITGO's Motion for Summary Judgment. As of early October 2004,
settlements in principle had been reached in both Madison County, Illinois
cases. There will be no effect on results of operations because the accrual for
these cases was adequate. The post-September 30, 2003 cases were filed after new
federal legislation was proposed that would have precluded plaintiffs from
filing lawsuits based on the theory that gasoline with MTBE is a defective
product. These approximately 60 cases, the majority of which were filed by
municipal authorities, were 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. The remaining New York state case has been removed to federal court
and consolidated with the MDL 1358 cases and the judge has denied plaintiffs'
motion to remand that case. It is not possible to estimate the loss or range of
loss, if any, related to these cases.
CITGO has been named as a defendant in approximately 150 asbestos lawsuits
pending in state and federal courts. These cases, most of which involve multiple
defendants, are brought by former employees or contractor employees seeking
damages for asbestos 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 does not
believe that the resolution of these cases will have a material adverse effect
on its financial condition or results of operations.
At September 30, 2004, CITGO's balance sheet included an accrual for
lawsuits and claims of $24 million compared with $27 million at December 31,
2003. Unrelated to the reduction in the accrual, CITGO estimates that an
additional loss of $17 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 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 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 requires
additional capital and operating expenditures, and alters significantly the U.S.
refining industry and the return realized on refinery investments.
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 additional operating costs. Also, numerous other factors 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 not discounted to their present value
and are recorded without consideration of potential recoveries from third
parties. Subsequent adjustments to estimates, to the extent required, may be
made as more refined information becomes available. 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
F-40
regulations will not exceed amounts provided for or will not have a material
adverse affect on its consolidated results of operations, financial condition
and cash flows.
In 1992, 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. The remediation commenced in December 1993.
CITGO is complying with a June 2002 LDEQ administrative order about the
development and implementation of a corrective action or closure plan. Based on
currently available information and proposed remedial approach, CITGO currently
anticipates closure and post-closure costs related to these surface impoundments
and related solid waste management units to range from $32 million to $37
million in addition to the approximately $49 million already expended. 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.
CITGO's Corpus Christi, Texas refinery is being investigated by state and
federal agencies for alleged criminal violations of federal environment statutes
and regulations, including the CAA and the Migratory Bird Act. CITGO is
cooperating with the investigation. CITGO believes that it has defenses to any
such charges. At this time, CITGO cannot predict the outcome of or the amount or
range of any potential loss that would ensue from any such charges.
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. While
CITGO disagrees with many 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 admitting any violation CITGO reached a settlement
with the United States and the states of Louisiana, New Jersey, and Georgia. The
settlement has been memorialized in a Consent Decree lodged in the District
Court for the Southern District of Texas on October 6, 2004. The Consent Decree
requires the implementation of control equipment at CITGO's refineries and a
Supplemental Environmental Project at CITGO's Corpus Christi, Texas refinery.
CITGO estimates that the costs of the settlement could range up to $325 million
which includes a civil penalty of $3.6 million, split between the U.S. EPA and
the states. CITGO accrued for the civil penalty during 2003. The capital costs
will be incurred over a period of time, primarily between 2004 and 2009.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations covering
benzene emissions from wastewater treatment operations at CITGO's Lemont,
Illinois refinery. CITGO is in settlement discussions with the U.S. EPA. This
matter has been consolidated with the matters described in the previous
paragraph.
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air quality
regulations at CITGO's Lake Charles, Louisiana refinery during 2001. The
majority of the alleged violations related to the leak detection and repair
program. CITGO is in settlement discussions with the LDEQ. This matter has been
consolidated with the matters described in the previous paragraph related to the
U.S. EPA's enforcement initiative.
In October 2004, the New Jersey Land Trust voted to reject the donation by
us of a conservation easement covering the 365 acre Petty's Island, which is
located in the Delaware River in Pennsauken, New Jersey and owned by CITGO.
Petty's Island contains a CITGO closed petroleum terminal and other industrial
facilities, but it is also the habitat for endangered species like the bald
eagle. The City of Pennsauken through a private developer wants to condemn
Petty's Island through eminent domain and to redevelop Petty's Island into
residential and commercial uses. The granting of the conservation easement would
have mitigated the amount of remediation that we would have to perform on
Petty's Island. The ultimate outcome cannot be determined at this time.
F-41
At September 30, 2004, CITGO's balance sheet included an environmental
accrual of $65 million compared with $63 million at December 31, 2003. Results
of operations reflect an increase in the accrual during 2004 due primarily to a
revision of the Company's estimated share of costs related to two sites
indicating higher costs offset in part, by spending on environmental projects.
CITGO estimates that an additional loss of $36 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 audits have the potential to
reveal matters that those authorities believe represent non-compliance in one or
more respects with regulatory requirements and for which those authorities may
seek corrective actions and/or penalties in an administrative or judicial
proceeding. 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.
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, service stations and crude oil and petroleum
product storage terminals. Based on currently available information, CITGO
cannot determine the amount of any such future expenditures.
Derivative Commodity and Financial Instruments -- As of September 30,
2004, CITGO's petroleum commodity derivatives included exchange traded futures
contracts, forward purchase and sale contracts, exchange traded and
over-the-counter options and over-the-counter swaps. At September 30, 2004, the
balance sheet captions prepaid expenses and other current assets and other
current liabilities include $25 million and $22 million, respectively, related
to the fair values of open commodity derivatives.
CITGO has also entered into various interest rate swaps to manage the
Company's risk related to interest rate changes on its debt. The fair value of
the interest rate swap agreements in place at September 30, 2004, based on the
estimated amount that the Company would receive or pay to terminate the
agreements as of that date and taking into account current interest rates, was a
loss of $1 million, the offset of which is recorded in the balance sheet caption
other current liabilities. In connection with the determination of fair market
value, the Company considered the creditworthiness of the counterparties, but no
adjustment was determined to be necessary as a result.
Guarantees -- As of September 30, 2004, the Company has guaranteed the
debt of others in a variety of circumstances including letters of credit issued
for an affiliate, bank debt of an equity investment, bank debt of customers,
customer debt related to the acquisition of marketing equipment and financing
debt incurred by an equity investment as shown in the following table:
F-42
EXPIRATION
DATE
----------
(000S OMITTED)
Letters of credit.......................................................................... $ 32,981 2004-2005
Bank debt
Equity investment........................................................................ 5,500 none
Customers................................................................................ 1,729 2006
Financing debt of customers
Customer equipment acquisition........................................................... 389 2004-2007
Equipment acquisition -- NISCO........................................................... 10,047 2008
---------
Total.................................................................................... $ 50,646
=========
In each case, 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 these guarantees.
In the event of debtor default on the letters of credit, CITGO has been
indemnified by PDV Holding, Inc., the direct parent of PDV America, which is
CITGO's direct parent. In the event of debtor default on the equity investment
bank debt, CITGO has no recourse. In the event of debtor default on customer
bank debt, CITGO generally has recourse to personal guarantees from principals
or liens on property. In the event of debtor default on financing debt incurred
by customers, CITGO would receive an interest in the equipment being financed
after making the guaranteed debt payment. In the event of debtor default on
financing debt incurred by an equity investee, 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.
9. RELATED PARTY TRANSACTIONS
CITGO purchases approximately one-half of the crude oil processed in its
refineries from subsidiaries of PDVSA under long-term supply agreements. These
supply agreements extend through the year 2006 for the Lake Charles refinery,
2010 for the Paulsboro refinery, 2012 for the Corpus Christi refinery and 2013
for the Savannah refinery. CITGO and PDVSA are evaluating possible changes to
certain terms and conditions of these supply agreements, including the pricing
mechanisms, volumes and term. If PDVSA and CITGO determine to pursue these
changes and are able to successfully negotiate any related amendments to the
supply agreements, the effectiveness of these amendments may require the consent
of some of the holders of CITGO's outstanding debt.
These crude supply agreements contain force majeure provisions that excuse
the performance by either party of its obligations under the agreement under
specified circumstances.
Three affiliates entered into agreements to advance excess cash to the
Company from time to time under demand notes for amounts of up to a maximum of
$10 million with PDV Texas, Inc. ("PDV Texas"), $30 million with PDV America and
$10 million with PDV Holding. The notes bear interest at rates equivalent to
30-day LIBOR plus 0.875% payable quarterly. At September 30, 2004 and December
31, 2003, there was no outstanding balance on these notes.
F-43
10. EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
For the three months ended September 30:
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(000S OMITTED)
Service cost...................... $ 5,743 $ 4,975 $ 2,285 $ 2,200
Interest cost..................... 7,954 7,332 5,767 5,556
Expected return on plan assets.... (7,285) (6,563) (18) (18)
Amortization of Transition Asset.. (12) (38) -- --
Amortization of prior service cost (193) (192) (130) --
Amortization of net loss.......... 818 806 4,911 12,537
-------- -------- -------- --------
Net periodic benefit cost......... $ 7,025 $ 6,320 $ 12,815 $ 20,275
======== ======== ======== ========
For the nine months ended September 30:
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
2004 2003 2004 2003
-------- -------- -------- --------
(000S OMITTED)
Service cost...................... $ 17,229 $ 14,925 $ 6,855 $ 6,600
Interest cost..................... 23,862 21,996 17,301 16,668
Expected return on plan assets.... (21,855) (19,689) (54) (54)
Amortization of Transition
Obligation (Asset)............... (36) (114) -- --
Amortization of prior service cost (579) (576) (390) --
Amortization of net (gain) loss... 2,454 2,418 14,734 37,611
-------- -------- -------- --------
Net periodic benefit cost......... $ 21,075 $ 18,960 $ 38,446 $ 60,825
======== ======== ======== ========
EFFECT OF RECENT LEGISLATION ON OTHER BENEFITS COST
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 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 FASB Staff Position No. FAS 106-2,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." The Staff Position 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 has chosen to use the retrospective method to reflect
Medicare Reform as of January 1, 2004. The effect of this legislation at that
date was to reduce the benefit obligation by approximately $40 million. The
service cost and interest cost components of that reduction total approximately
$3 million. Under CITGO's accounting policy for recognizing actuarial gains, net
periodic benefit cost for the third quarter and nine months ended September 30,
2004 have been reduced by $10 million and $30 million, respectively, related to
this actuarial gain.
EMPLOYER CONTRIBUTIONS
CITGO previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $58 million to its pension
plan in 2004. Through October 15, 2004, CITGO has contributed approximately $41
million to its pension plan in 2004.
11. CORPORATE HEADQUARTERS RELOCATION
F-44
In April 2004, CITGO announced its strategic decision to move its
corporate headquarters from Tulsa, Oklahoma to Houston, Texas. The transfer of
approximately 700 positions from a total of approximately 1,000 positions in
Tulsa began in August 2004. At September 30, 2004, 106 positions have been
transferred. The relocation is expected to be complete in July 2005.
AMOUNT CUMULATIVE
EXPECTED TOTAL INCURRED AMOUNT
AMOUNT THIS QUARTER INCURRED
($ IN MILLIONS)
---------------
Relocation costs.............. $27 $ 7 $ 7
Severance and related costs... 21 3 3
Property and infrastructure
costs....................... 33 1 1
--- --- ---
Total....................... $81 $11 $11
=== === ===
Relocation costs and severance related costs are included in CITGO's
condensed consolidated statement of income and comprehensive income as a
component of the caption selling, general and administrative expense. An accrual
of $2 million related to relocation costs is included in CITGO's condensed
consolidated balance sheet as a component of the caption current liabilities
other. Costs related to property and infrastructure are included in CITGO's
condensed consolidated balance sheet as a component of the caption property,
plant and equipment.
CITGO expects to spend approximately $36 million in the fourth quarter of
2004 related to this relocation.
12. SUBSEQUENT EVENT
On October 22, 2004, CITGO issued $250 million of 6% unsecured senior
notes due October 15, 2011. In connection with this transaction, CITGO
repurchased approximately $540 million principal amount of its 11-3/8% senior
notes due 2011 as part of a tender offer for such notes. CITGO will record, as
charges to interest expense in the fourth quarter of 2004, a $121.9 million
tender premium, $10.6 million unamortized fees and $2.7 million unamortized
discounts. As a result of this transaction, CITGO's weighted average cost of
fixed rate borrowing was reduced from 8.8% to 6.7%.
F-45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Partnership Governance Committee
of LYONDELL-CITGO Refining LP:
In our opinion, the accompanying balance sheets and the related statements of
income, of partners' capital and of cash flows present fairly, in all material
respects, the financial position of LYONDELL-CITGO Refining LP (the
"Partnership") at December 31, 2003 and 2002, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 2, 2004, except for matters discussed in Note 2, as to
which the date is March 11, 2004
F-46
LYONDELL-CITGO REFINING LP
STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
MILLIONS OF DOLLARS 2003 2002 2001
------------------- ------- ------- -------
SALES AND OTHER OPERATING REVENUES $ 4,162 $ 3,392 $ 3,284
OPERATING COSTS AND EXPENSES:
Cost of sales:
Crude oil and feedstock 3,209 2,546 2,379
Operating and other expenses 633 547 588
Selling, general and administrative expenses 56 53 61
------- ------- -------
3,898 3,146 3,028
------- ------- -------
Operating income 264 246 256
Interest expense (37) (32) (52)
Interest income 1 --- 1
Other expense --- (1) (2)
------- ------- -------
NET INCOME $ 228 $ 213 $ 203
======= ======= =======
See Notes to Financial Statements.
F-47
LYONDELL-CITGO REFINING LP
BALANCE SHEETS
DECEMBER 31,
---------------------------
MILLIONS OF DOLLARS 2003 2002
------------------- ------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 43 $ 101
Accounts receivable:
Trade, net 51 47
Related parties 121 106
Inventories 98 93
Prepaid expenses and other current assets 3 10
------- -------
Total current assets 316 357
------- -------
Property, plant and equipment 2,495 2,392
Construction projects in progress 67 159
Accumulated depreciation and amortization (1,322) (1,239)
------- -------
1,240 1,312
Other assets, net 81 88
------- -------
Total assets $ 1,637 $ 1,757
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 71 $ 69
Related parties and affiliates 224 212
Distribution payable to Lyondell Partners 21 106
Distribution payable to CITGO Partners 15 75
Accrued liabilities 55 52
------- -------
Total current liabilities 386 514
------- -------
Long-term debt 450 450
Loan payable to Lyondell Partners 229 229
Loan payable to CITGO Partners 35 35
Other liabilities 114 126
------- -------
Total long-term liabilities 828 840
------- -------
Commitments and contingencies
Partners' capital:
Partners' accounts 442 432
Accumulated other comprehensive loss (19) (29)
------- -------
Total partners' capital 423 403
------- -------
Total liabilities and partners' capital $ 1,637 $ 1,757
======= =======
See Notes to Financial Statements.
F-48
LYONDELL-CITGO REFINING LP
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
MILLIONS OF DOLLARS 2003 2002 2001
------------------- ----- ----- -----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 228 $ 213 $ 203
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 113 116 108
Net loss (gain) on disposition of assets 27 1 (3)
Other --- 1 2
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (19) (59) 113
Inventories (5) 37 (40)
Accounts payable 14 70 (88)
Other assets and liabilities 16 (18) (15)
----- ----- -----
Cash provided by operating activities 374 361 280
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (46) (65) (109)
Proceeds from sale of property, plant and equipment --- 2 8
Other --- (3) 5
----- ----- -----
Cash used in investing activities (46) (66) (96)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Lyondell Partners (253) (126) (165)
Distributions to CITGO Partners (178) (89) (116)
Contributions from Lyondell Partners 30 46 45
Contributions from CITGO Partners 21 32 32
Net (repayment) borrowing under lines of credit --- (50) 30
Payment of debt issuance costs (6) (10) (8)
----- ----- -----
Cash used in financing activities (386) (197) (182)
----- ----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (58) 98 2
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 101 3 1
----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43 $ 101 $ 3
===== ===== =====
See Notes to Financial Statements.
F-49
LYONDELL-CITGO REFINING LP
STATEMENTS OF PARTNERS' CAPITAL
PARTNERS' ACCOUNTS ACCUMULATED
------------------------------------------ OTHER
LYONDELL CITGO COMPREHENSIVE COMPREHENSIVE
MILLIONS OF DOLLARS PARTNERS PARTNERS TOTAL INCOME (LOSS) INCOME (LOSS)
------------------- -------- -------- ----- ------------- -------------
BALANCE AT JANUARY 1, 2001 $ 3 $ 505 $ 508 $ ---
Net income 129 74 203 --- $ 203
Cash contributions 45 32 77 --- ---
Distributions to Partners (165) (116) (281) --- ---
Other comprehensive (loss)-
minimum pension liability (15) (15)
----- ----- ----- ----- -----
Comprehensive income $ 188
=====
BALANCE AT DECEMBER 31, 2001 12 495 507 (15)
Net income 135 78 213 --- $ 213
Cash contributions 46 32 78 --- ---
Distributions to Partners (215) (151) (366) --- ---
Other comprehensive (loss)-
minimum pension liability (14) (14)
----- ----- ----- ----- -----
Comprehensive income $ 199
=====
BALANCE AT DECEMBER 31, 2002 (22) 454 432 (29)
Net income 144 84 228 --- $ 228
Cash contributions 30 21 51 --- ---
Other contributions 10 7 17 --- ---
Distributions to Partners (168) (118) (286) --- ---
Other comprehensive income -
minimum pension liability 10 10
----- ----- ----- ----- -----
Comprehensive income $ 238
=====
BALANCE AT DECEMBER 31, 2003 $ (6) $ 448 $ 442 $ (19)
===== ===== ===== =====
See Notes to Financial Statements.
F-50
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS
1. THE PARTNERSHIP
LYONDELL-CITGO Refining LP ("LCR" or the "Partnership") was formed on July 1,
1993 by subsidiaries of Lyondell Chemical Company ("Lyondell") and CITGO
Petroleum Corporation ("CITGO") primarily in order to own and operate a refinery
("Refinery") located on the Houston Ship Channel in Houston, Texas.
Lyondell owns its interest in the Partnership through wholly owned subsidiaries,
Lyondell Refining Partners, LP ("Lyondell LP") and Lyondell Refining Company
("Lyondell GP"). Lyondell LP and Lyondell GP together are known as Lyondell
Partners. CITGO holds its interest through CITGO Refining Investment Company
("CITGO LP") and CITGO Gulf Coast Refining, Inc. ("CITGO GP"), both wholly owned
subsidiaries of CITGO. CITGO LP and CITGO GP together are known as CITGO
Partners. Lyondell Partners and CITGO Partners together are known as the
Partners. LCR will continue in existence until it is dissolved under the terms
of the Limited Partnership Agreement (the "Agreement").
The Partners have agreed to allocate cash distributions based on an ownership
interest that was determined by certain contributions instead of allocating such
amounts based on their capital account balances. Based upon these contributions,
Lyondell Partners and CITGO Partners had ownership interests of approximately
59% and 41%, respectively, as of December 31, 2003. Net income as shown on the
statements of partners' capital is made up of two components which are allocated
to the partners on different bases: depreciation expense, which is allocated to
each partner in proportion to contributed assets, and net income other than
depreciation expense, which is allocated to each partner based on ownership
interests.
2. SUBSEQUENT EVENT
At December 31, 2003, LCR had $450 million outstanding under an eighteen-month
term bank loan facility and a $70 million working capital revolving credit
facility (the "Facilities"), both of which expire in June 2004 (see Note 9).
Management of LCR, Lyondell and CITGO are pursuing a refinancing of the
Facilities and expect to complete the refinancing before the Facilities expire.
On March 11, 2004, LCR entered into an agreement with a major financial
institution to refinance the Facilities on a long-term basis, with interest of
LIBOR plus 3%, but in no event more than LIBOR plus 8%, and with other terms
substantially similar to the current Facilities. The closing of the new facility
is subject to normal conditions of closing, as well as the maintenance of
certain financial and operating ratios. Based on this agreement, the $450
million term bank loan amount has been classified in the balance sheet as
long-term debt at December 31, 2003.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition - Revenue from product sales is recognized as risk and title
to the product transfer to the customer, which usually occurs when shipment is
made. Under the terms of a long-term product sales agreement, CITGO buys all of
the gasoline, jet fuel, low sulfur diesel, heating oils, coke and sulfur
produced at the Refinery, which represents over 70% of LCR revenues, at
market-based prices.
Cash and Cash Equivalents -- Cash equivalents consist of highly liquid debt
instruments such as certificates of deposit, commercial paper and money market
accounts. Cash equivalents include instruments with maturities of three months
or less when acquired. Cash equivalents are stated at cost, which approximates
fair value. The Partnership's policy is to invest cash in conservative, highly
rated instruments and to limit the amount of credit exposure to any one
institution.
Accounts Receivable -- The Partnership sells its products primarily to CITGO and
to other industrial concerns in the petrochemical and refining industries. The
Partnership performs ongoing credit evaluations of its customers' financial
condition and in certain circumstances, requires letters of credit from them.
The Partnership's allowance
F-51
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
for doubtful accounts receivable, which is reflected in the Balance Sheets as a
reduction of accounts receivable-trade, totaled $25,000 at both December 31,
2003 and 2002.
Inventories -- Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method for substantially all
inventories, except for materials and supplies, which are valued using the
average cost method.
Inventory exchange transactions, which involve fungible commodities and do not
involve the payment or receipt of cash, are not accounted for as purchases and
sales. Any resulting volumetric exchange balances are accounted for as inventory
in accordance with the normal LIFO valuation policy.
Property, Plant and Equipment -- Property, plant and equipment are recorded at
cost. Depreciation is computed using the straight-line method over the estimated
useful asset lives, generally, 24 years for major manufacturing equipment, 24 to
30 years for buildings, 5 to 10 years for light equipment and instrumentation,
10 years for office furniture and 5 years for information system equipment. Upon
retirement or sale, LCR removes the cost of the asset and the related
accumulated depreciation from the accounts and reflects any resulting gain or
loss in the Statement of Income. LCR's policy is to capitalize interest cost
incurred on debt during the construction of major projects exceeding one year.
Long-Lived Asset Impairment -- LCR evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that a carrying amount of
an asset may not be recoverable. When it is probable that undiscounted future
cash flows will not be sufficient to recover an asset's carrying amount, the
asset is written down to its estimated fair value. Long-lived assets to be
disposed of are reported at the lower of carrying amount or estimated fair value
less costs to sell the assets.
Turnaround Maintenance and Repair Costs -- Costs of maintenance and repairs
exceeding $5 million incurred in connection with turnarounds of major units at
the Refinery are deferred and amortized using the straight-line method over the
period until the next planned turnaround, generally 4 to 6 years. These costs
are necessary to maintain, extend and improve the operating capacity and
efficiency rates of the production units.
Identifiable Intangible Assets -- Costs to purchase and to develop software for
internal use are deferred and amortized on a straight-line basis over periods of
3 to 10 years. Other intangible assets are carried at amortized cost and
primarily consist of deferred debt issuance costs. These assets are amortized
using the straight-line method over their estimated useful lives or the term of
the related agreement, if shorter.
Environmental Remediation Costs -- Anticipated expenditures related to
investigation and remediation of contaminated sites, which include operating
facilities and waste disposal sites, are accrued when it is probable a liability
has been incurred and the amount of the liability can reasonably be estimated.
Estimated expenditures have not been discounted to present value.
Income Taxes -- The Partnership is not subject to federal income taxes as income
is reportable directly by the individual partners; therefore, there is no
provision for federal income taxes in the accompanying financial statements.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting and Reporting Changes -- Effective January 1, 2003, LCR implemented
Statement of Financial Accounting Standards ("SFAS") No. 145, Rescission of FASB
Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. The primary impact of the statement on LCR is the classification of
gains or losses that result from the early extinguishment of debt as an element
of income before extraordinary items. Previously, such gains and losses were
classified as extraordinary items. The Income Statement reflects these
F-52
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
changes for all periods presented. LCR incurred losses on early extinguishment
of debt of $1 million and $2 million for the years ended December 31, 2002 and
2001, respectively.
Effective December 31, 2003, LCR adopted the disclosure requirements of SFAS No.
132 (Revised 2003), Employers' Disclosures about Pensions and Other
Postretirement Benefits, issued by the Financial Accounting Standards Board
("FASB") in December 2003, and requiring more details about pension plan assets,
benefit obligations, cash flows, benefit costs and related information (see note
12).
In January 2004, the FASB issued FASB Staff Position ("FSP") FAS 106-1,
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003. The FSP permits a sponsor of retiree
health benefit plan to make a one-time election to defer recognition of the
effects of the new Medicare legislation in accounting for its plans under SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions,
or in making disclosures related to its plans required by SFAS No. 132 (Revised
2003), Employers' Disclosures about Pensions and Other Postretirement Benefits,
until the FASB develops and issues authoritative guidance on accounting for
subsidies provided by the Act. Such FASB guidance could require a change in
currently reported information. LCR elected to make the one-time deferral and is
currently evaluating the effect of FSP FAS 106-1.
Effective January 1, 2003, LCR adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, which address obligations associated with retirement of
tangible long-lived assets, and SFAS No. 146, Accounting for Exit or Disposal
Activities, which address the recognition, measurement and recording of costs
associated with exit and disposal activities, including restructuring activities
and facility closings. LCR's adoption of the provisions of SFAS No. 143 and SFAS
No. 146 had no material impact on its financial statements.
In December 2003, the FASB issued FASB Interpretation No. 46 (Revised December
2003), Consolidation of Variable Interest Entities ("FIN 46R"), primarily to
clarify the required accounting for interests in variable interest entities
("VIEs"). This standard replaces FASB Financial Interpretation No. 46,
Consolidation of Variable Interest Entities, that was issued in January 2003 to
address certain situations in which a company should include in its financial
statements the assets, liabilities and activities of another entity. LCR's
application of FIN 46R, has no material impact on its financial statements.
Reclassifications -- Certain previously reported amounts have been reclassified
to conform to classifications adopted in 2003.
4. RELATED PARTY TRANSACTIONS
LCR is party to agreements with the following related parties:
- CITGO
- CITGO Partners
- Equistar Chemicals, LP ("Equistar"), in which Lyondell holds a 70.5%
interest
- Lyondell
- Lyondell Partners
- PDVSA
- PDVSA Oil
- Petrozuata Financial, Inc.
- TCP Petcoke Corporation
LCR buys a substantial portion of its crude oil supply at deemed product-based
prices, adjusted for certain indexed items (see Note 13), from PDVSA Oil under
the terms of a long-term crude oil supply agreement ("Crude Supply Agreement").
F-53
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Under the terms of a long-term product sales agreement, CITGO buys all of the
finished gasoline, jet fuel, low sulfur diesel, heating oils, coke and sulfur
produced at the Refinery at market-based prices.
LCR is party to a number of raw materials, product sales and administrative
service agreements with Lyondell, CITGO and Equistar. These include a hydrogen
take-or-pay contract with Equistar (see Note 13). In addition, a processing
agreement provides for the production of alkylate and methyl tertiary butyl
ether for the Partnership at Equistar's Channelview, Texas petrochemical
complex.
Under the terms of a lubricant facility operating agreement, CITGO operates the
lubricant blending and packaging facility in Birmingport, Alabama while the
Partnership retained ownership. During 2003, a decision was made to discontinue
the lubes blending and packaging operations at the facility in Birmingport,
Alabama and the facility was permanently shut down. Lubes blending and packaging
operations are now conducted at CITGO or other locations. Under the terms of the
lubricant sales agreements, CITGO buys paraffinic lubricants base oil,
naphthenic lubricants, white mineral oils and specialty oils from the
Partnership.
Related party transactions are summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
MILLIONS OF DOLLARS 2003 2002 2001
------------------- ------ ------ ------
LCR billed related parties for the following:
Sales of products:
CITGO $3,010 $2,488 $2,309
Equistar 227 217 203
Lyondell --- 1 ---
TCP Petcoke Corporation 33 17 40
Services and cost sharing arrangements:
Equistar --- 1 2
Lyondell 1 1 3
Related parties billed LCR for the following:
Purchase of products:
CITGO 201 78 80
Equistar 445 324 359
Lyondell 4 1 ---
PDVSA 1,742 1,259 1,474
Petrozuata --- 22 ---
Transportation charges:
CITGO 1 1 1
Equistar 4 3 3
PDVSA --- 3 3
Services and cost sharing arrangements:
CITGO 6 8 3
Equistar 21 17 19
Lyondell 2 3 3
See Note 9 for information regarding LCR master notes payable to Lyondell
Partners and CITGO Partners.
5. SUPPLEMENTAL CASH FLOW INFORMATION
At December 31, 2003, 2002 and 2001, construction in progress included
approximately $5 million, $6 million and $11 million, respectively, of non-cash
additions which related to accounts payable accruals.
F-54
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
During 2003, 2002 and 2001, LCR paid interest of $20 million, $26 million and
$38 million, respectively. No interest costs were capitalized in 2003, 2002 or
2001.
In June 2003, the Partners agreed to contribute part of the outstanding accrued
interest payable to the respective Partners' capital accounts based on their
relative ownership interests of approximately 59% for Lyondell Partners and 41%
for CITGO Partners. Accordingly, $10 million and $7 million of Lyondell Partners
and CITGO Partners accrued interest, respectively, was reclassified to the
respective Partners' capital accounts.
6. INVENTORIES
Inventories consisted of the following components at December 31:
MILLIONS OF DOLLARS 2003 2002
------------------- ---- ----
Finished goods $16 $29
Raw materials 69 51
Materials and supplies 13 13
--- ---
Total inventories $98 $93
=== ===
In 2003 and 2002, all inventory, excluding materials and supplies, were valued
using the LIFO method. The excess of replacement cost of inventories over the
carrying value was approximately $163 million at December 31, 2003.
7. OTHER ASSETS
The components of other assets, at cost, and the related accumulated
amortization were as follows at December 31:
Scheduled amortization of these intangible assets for the next five years is
estimated at $20 million in 2004, $15 million in 2005, $12 million in 2006, $3
million in 2007 and $3 million in 2008.
F-55
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Depreciation and amortization expense is summarized as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
MILLIONS OF DOLLARS 2003 2002 2001
------------------- ---- ---- ----
Property, plant and equipment $ 90 $ 89 $ 83
Turnaround costs 12 13 11
Software costs 5 5 6
Other 6 9 8
---- ---- ----
Total depreciation and amortization $113 $116 $108
==== ==== ====
In addition to the depreciation and amortization shown above, amortization of
debt issuance costs of $11 million, $5 million and $8 million in 2003, 2002 and
2001, respectively, is included in interest expense in the Statements of Income.
8. ACCRUED LIABILITIES
Accrued liabilities consisted of the following components at December 31:
MILLIONS OF DOLLARS 2003 2002
------------------- ---- ----
Payroll and benefits $25 $22
Taxes other than income 25 23
Interest 2 3
Other 3 4
--- ---
Total accrued liabilities $55 $52
=== ===
9. FINANCING ARRANGEMENTS
In December 2002, LCR completed a refinancing of its credit facilities with a
new $450 million term bank loan facility and a $70 million working capital
revolving credit facility that mature in June 2004. The December 2002
refinancing replaced an eighteen-month credit facility consisting of a $450
million term loan and a $70 million revolving credit facility with a group of
banks, that would have expired in January 2003. The facilities are secured by
substantially all of the assets of LCR. At December 31, 2003 and 2002, $450
million was outstanding under the bank term loan facility with weighted-average
interest rates of 4.1% and 4.5%, respectively. Interest for this facility was
determined by base rates or eurodollar rates at the Partnership's option. The
$70 million working capital revolving credit facility is utilized for general
business purposes and for letters of credit. At December 31, 2003, no amounts
were outstanding under this facility. At December 31, 2003, LCR had outstanding
letters of credit totaling $13 million.
Both facilities contain covenants that require LCR to maintain a minimum net
worth and maintain certain financial ratios defined in the agreements. The
facilities also contain other customary covenants which limit the Partnership's
ability to modify certain significant contracts, incur significant additional
debt or liens, dispose of assets, make restricted payments as defined in the
agreements or merge or consolidate with other entities. LCR was in compliance
with all such covenants at December 31, 2003.
Also during the December 2002 refinancing, the Partners and LCR agreed to renew
and extend a number of existing notes due to Lyondell Partners and CITGO
Partners with master notes to each Partner. The master notes extended the due
date from July 1, 2003 to December 7, 2004, and are subordinate to the two bank
credit facilities. At December 31, 2003 and 2002, Lyondell Partners and CITGO
Partners loans were $229 million and $35 million, respectively, and both loans
had weighted-average interest rates of 2.2%, which were based on eurodollar
rates.
F-56
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
Interest to both Partners was paid at the end of each calendar quarter through
June 30, 1999, but is now deferred in accordance with the restrictions included
in the $450 million term bank loan facility. Subsequent to December 31, 2003,
the due date of the master notes was extended to March 31, 2005. Accordingly,
these amounts have been reflected as long-term liabilities in the Balance Sheet
at December 31, 2003.
10. LEASE COMMITMENTS
LCR leases crude oil storage facilities, computer equipment, office equipment
and other items under noncancelable operating lease arrangements for varying
periods. As of December 31, 2003, future minimum lease payments for the next
five years and thereafter, relating to all noncancelable operating leases with
terms in excess of one year were as follows:
MILLIONS OF DOLLARS
-------------------
2004 $ 73
2005 37
2006 34
2007 28
2008 18
Thereafter 104
-----
Total minimum lease payments $ 294
=====
Operating lease net rental expenses for 2003, 2002 and 2001 were approximately
$63 million, $34 million and $32 million, respectively.
11. FINANCIAL INSTRUMENTS
The fair value of all financial instruments included in current assets and
current liabilities, including cash and cash equivalents, accounts receivable
and accounts payable, approximated their carrying value due to their short
maturity. The fair value of long-term loans payable approximated their carrying
value because of their variable interest rates.
12. PENSION AND OTHER POSTRETIREMENT BENEFITS
LCR has defined benefit pension plans, which cover full-time regular employees.
Retirement benefits are based on years of service and the employee's highest
three consecutive years of compensation during the last ten years of service.
LCR funds the plans through periodic contributions to pension trust funds as
required by applicable law. LCR also has one unfunded supplemental nonqualified
retirement plan, which provides pension benefits for certain employees in excess
of the tax-qualified plans' limit. In addition, LCR sponsors unfunded
postretirement benefit plans other than pensions, which provide medical and life
insurance benefits. The postretirement medical plan is contributory, while the
life insurance plan is noncontributory. The measurement date for LCR's pension
and other postretirement benefit plans is December 31, 2003.
F-57
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
The following table provides a reconciliation of benefit obligations, plan
assets and the funded status of the plans:
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
----------------------- -----------------------
MILLIONS OF DOLLARS 2003 2002 2003 2002
------------------- ----- ----- ----- -----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, January 1 $ 124 $ 97 $ 35 $ 31
Service cost 6 6 1 1
Interest cost 7 8 2 2
Plan amendments --- 1 --- ---
Actuarial (gain) loss (3) 15 3 3
Benefits paid (9) (3) (2) (2)
----- ----- ----- -----
Benefit obligation, December 31 125 124 39 35
----- ----- ----- -----
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 49 39
Actual return on plan assets 10 (5)
Partnership contributions 1 18
Benefits paid (9) (3)
----- -----
Fair value of plan assets, December 31 51 49
----- -----
Funded status (74) (75) (39) (35)
Unrecognized actuarial and investment loss 46 59 16 14
Unrecognized prior service cost (benefit) 2 3 (16) (19)
----- ----- ----- -----
Net amount recognized $ (26) $ (13) $ (39) $ (40)
===== ===== ===== =====
AMOUNTS RECOGNIZED IN THE
BALANCE SHEET CONSIST OF:
Accrued benefit liability $ (47) $ (45) $ (39) $ (40)
Intangible asset 2 3 --- ---
Accumulated other comprehensive income 19 29 --- ---
----- ----- ----- -----
Net amount recognized $ (26) $ (13) $ (39) $ (40)
===== ===== ===== =====
ADDITIONAL INFORMATION
Accumulated benefit obligation for defined
benefit plans, December 31 $ 98 $ 93
Increase (decrease) in minimum liability
included in other comprehensive income (10) 14
Pension plans with projected and accumulated benefit obligations and accumulated
benefit obligations in excess of the fair value of assets are summarized as
follows at December 31:
MILLIONS OF DOLLARS 2003 2002
------------------- ---- ----
Projected benefit obligations $125 $124
Accumulated benefit obligations 98 93
Fair value of assets 51 49
F-58
Net periodic pension and other postretirement benefit costs included the
following components:
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
OTHER POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------------ ------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
MILLIONS OF DOLLARS
COMPONENTS OF NET PERIODIC
BENEFIT COST:
Service cost $ 7 $ 6 $ 5 $ 1 $ 1 $ 1
Interest cost 7 8 6 2 2 2
Actual (gain) loss on plan assets (10) 5 3 --- --- ---
Less unrecognized gain (loss) 6 (9) (7) --- --- ---
---- ---- ---- ---- ---- ----
Recognized gain on plan assets (4) (4) (4) --- --- ---
Amortization of prior service costs --- --- --- (3) (3) (3)
Actuarial loss amortization 4 3 2 1 1 1
---- ---- ---- ---- ---- ----
Net periodic benefit cost $ 14 $ 13 $ 9 $ 1 $ 1 $ 1
==== ==== ==== ==== ==== ====
The weighted-average assumptions used in determining net benefit liabilities
were as follows at December 31:
Management's goal is to manage pension investments over the long term to achieve
optimal returns with an acceptable level of risk and volatility. Targeted assets
allocations of 55% U.S. equity securities, 15% non-U.S. equity securities and
30% fixed income securities were adopted in 2003 for the plans based on
recommendations by LCR's independent pension investment advisor. Investment
policies prohibit investments in securities issued by an affiliate, such as
Lyondell, or investment in speculative, derivative instruments. The investments
are marketable securities that provide sufficient liquidity to meet expected
benefit obligation payments.
Prior to 2003, LCR's expected long-term rate of return on plan assets of 9.5%
had been based on the average level or earnings that its independent pension
investment advisor had advised could be expected to be earned over time, using
the expected returns for the above-noted asset allocations that had been
recommended by the advisor, and had
F-59
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
been adopted for the plans. Over the three-year period ended December 31, 2003,
LCR's actual return on plan assets was averaging 2% per year. In 2003, LCR
reviewed its asset allocation and expected long-term rate of return assumptions
and obtained an updated asset allocation study from the independent pension
investment advisor, including updated expectations for long-term market earnings
rates for various classes of investments. Based on this review, LCR reduced its
expected long-term rate of return on plan assets to 8% and did not significantly
change its plan asset allocations.
LCR's pension plan weighted-average asset allocations by asset category were as
follows at December 31:
LCR expects to contribute approximately $7 million to its pension plans in 2004.
As of December 31, 2003, future expected benefit payments, which reflect
expected future service, as appropriate, were as follows:
PENSION OTHER
MILLIONS OF DOLLARS BENEFITS BENEFITS
------------------- -------- --------
2004 $ 6 $ 2
2005 6 2
2006 8 2
2007 9 3
2008 10 3
2009 through 2013 78 15
---- ---
Total $117 $27
==== ===
The assumed annual rate of increase in the per capita cost of covered health
care benefits as of December 31, 2003 was 10% for 2004, 7% for 2005 through 2007
and 5% thereafter. The health care cost trend rate assumption does not have a
significant effect on the amounts reported due to limits on LCR's maximum
contribution level to the medical plan. To illustrate, increasing or decreasing
the assumed health care cost trend rates by one percentage point in each year
would not change the accumulated postretirement benefit liability as of December
31, 2003 and would not have a material effect on the aggregate service and
interest cost components of the net periodic postretirement benefit cost for the
year then ended.
LCR also maintains voluntary defined contribution savings plans for eligible
employees. Contributions to the plans by LCR were $5 million in each of the
three years ended December 31, 2003.
13. COMMITMENTS AND CONTINGENCIES
Commitments -- LCR has various purchase commitments for materials, supplies and
services incident to the ordinary conduct of business, generally for quantities
required for LCR's business and at prevailing market prices. LCR is party to
various unconditional purchase obligation contracts as a purchaser for products
and services, principally take-or-pay contracts for hydrogen, electricity and
steam. At December 31, 2003, future minimum payments under
F-60
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
these contracts with noncancelable contract terms in excess of one year and
fixed minimum payments were as follows:
MILLIONS OF DOLLARS
-------------------
2004 $ 50
2005 53
2006 48
2007 46
2008 46
Thereafter through 2021 385
-------
Total minimum contract payments $ 628
=======
Total LCR purchases under these agreements were $107 million, $68 million and
$94 million during 2003, 2002 and 2001, respectively. A substantial portion of
the future minimum payments and purchases were related to a hydrogen take-or-pay
agreement with Equistar (see Note 4).
Crude Supply Agreement -- Under the Crude Supply Agreement ("CSA"), which will
expire on December 31, 2017, PDVSA Oil is required to sell, and LCR is required
to purchase 230,000 barrels per day of extra heavy Venezuelan crude oil, which
constitutes approximately 86% of the Refinery's refining capacity of 268,000
barrels per day of crude oil (see Note 4). Since April 1998, PDVSA Oil has, from
time to time, declared itself in a force majeure situation and subsequently
reduced deliveries of crude oil. Such reductions in deliveries were purportedly
based on announced OPEC production cuts. At such times, PDVSA Oil informed LCR
that the Venezuelan government, through the Ministry of Energy and Mines, had
instructed that production of certain grades of crude oil be reduced. In certain
circumstances, PDVSA Oil made payments under a different provision of the CSA in
partial compensation for such reductions.
In January 2002, PDVSA Oil again declared itself in a force majeure situation
and beginning in March 2002, reduced deliveries of crude oil to LCR. Although
deliveries increased to contract levels of 230,000 barrels per day during the
third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure
declaration during 2002. A national work stoppage in Venezuela began in early
December 2002 and disrupted deliveries of crude oil to LCR under the CSA. PDVSA
Oil again declared a force majeure and reduced deliveries of crude oil to LCR.
In March 2003, PDVSA Oil notified LCR that the force majeure had been lifted
with respect to CSA crude oil.
LCR has consistently contested the validity of the reductions in deliveries by
PDVSA Oil's and PDVSA under the CSA. The parties have different interpretations
of the provisions of the contracts concerning the delivery of crude oil. The
contracts do not contain dispute resolution procedures and the parties have been
unable to resolve their commercial dispute. As a result, in February 2002, LCR
filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure
declarations, which LCR is continuing to litigate.
From time to time, Lyondell and PDVSA have had discussions covering both a
restructuring of the CSA and a broader restructuring of the LCR partnership. LCR
is unable to predict whether changes in either arrangement will occur. There are
various possible outcomes associated with these matters. One possible outcome is
that they will be settled through the ongoing negotiations of the parties
involved, leading to agreements of mutual benefit. A negotiated settlement of
these issues between the parties may or may not include monetary payments.
Subject to the consent of the other partner and rights of first offer and first
refusal, the Partners each have a right to transfer their interest in LCR to
unaffiliated third parties in certain circumstances.
Depending on then-current market conditions, any breach or termination of the
CSA, or reduction in supply thereunder, would require LCR to purchase all or a
portion of its crude oil in the merchant market, could subject
F-61
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
LCR to significant volatility and price fluctuations and could adversely affect
the Partnership. There can be no assurance that alternative crude oil supplies
with similar margins would be available for purchase by LCR. Environmental
Remediation -- With respect to liabilities associated with the Refinery,
Lyondell generally has retained liability for events that occurred prior to July
1, 1993 and certain ongoing environmental projects at the Refinery under the
Contribution Agreement, retained liability section. LCR generally is responsible
for liabilities associated with events occurring after June 30, 1993 and ongoing
environmental compliance inherent to the operation of the Refinery.
LCR's policy is to be in compliance with all applicable environmental laws. LCR
is subject to extensive national, state and local environmental laws and
regulations concerning emissions to the air, discharges onto land or waters and
the generation, handling, storage, transportation, treatment and disposal of
waste materials. Many of these laws and regulations provide for substantial
fines and potential criminal sanctions for violations. Some of these laws and
regulations are subject to varying and conflicting interpretations. In addition,
the Partnership cannot accurately predict future developments, such as
increasingly strict environmental laws, inspection and enforcement policies, as
well as higher compliance costs therefrom, which might affect the handling,
manufacture, use, emission or disposal of products, other materials or hazardous
and non-hazardous waste. Some risk of environmental costs and liabilities is
inherent in particular operations and products of the Partnership, as it is with
other companies engaged in similar businesses, and there is no assurance that
material costs and liabilities will not be incurred. In general, however, with
respect to the capital expenditures and risks described above, the Partnership
does not expect that it will be affected differently than the rest of the
refining industry where LCR is located.
LCR estimates that it has a liability of approximately $1 million at December
31, 2003 related to future assessment and remediation costs. Lyondell has a
contractual obligation to reimburse LCR for approximately half of this
liability. Accordingly, LCR has reflected a current liability for the remaining
portion of this liability that will not be reimbursed by Lyondell. In the
opinion of management, there is currently no material estimable range of loss in
excess of the amount recorded. However, it is possible that new information
associated with this liability, new technology or future developments such as
involvement in investigations by regulatory agencies, could require LCR to
reassess its potential exposure related to environmental matters.
Clean Air Act -- The eight-county Houston/Galveston region has been designated a
severe non-attainment area for ozone by the U.S. Environmental Protection Agency
("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be
installed at the Refinery located in the Houston/Galveston region during the
next several years. Revised rules adopted by the regulatory agencies changed the
required NOx reduction levels from 90% to 80%. Under the revised 80% standard,
LCR estimates that incremental capital expenditures would range between $50
million and $55 million. However, this estimate could be affected by increased
costs for stricter proposed controls over highly reactive, volatile organic
compounds ("HRVOC"). LCR is still assessing the impact of the proposed HRVOC
revisions and there can be no guarantee as to the ultimate capital cost of
implementing any final plan developed to ensure ozone attainment by the 2007
deadline. The timing and amount of these expenditures are also subject to
regulatory and other uncertainties, as well as obtaining the necessary permits
and approvals.
The Clean Air Act also specified certain emissions standards for vehicles, and
in 1998, the EPA concluded that additional controls on gasoline and diesel fuel
were necessary. New standards for gasoline were finalized in 1999 and will
require refiners to produce a low sulfur gasoline by 2004, with final compliance
by 2006. A new "on-road" diesel standard was adopted in January 2001 and will
require refiners of on-road diesel fuel to produce 80% as ultra low sulfur
diesel ("ULSD") by June 2006 and 100% by the end of 2009, with less stringent
standards for "off-road" diesel fuel. To date, the "off-road" diesel fuel
standards have not been finalized. These gasoline and diesel fuel standards will
result in increased capital investment for LCR.
In 2003, LCR developed alternative approaches to complying with the low sulfur
gasoline standard and the new diesel fuel standard that will lead to an
approximate $300 million reduction in overall estimated capital expenditures for
these projects. As a result, LCR recognized impairment of value of $25 million
of project costs incurred to date. The revised estimated spending for these
projects, excluding the $25 million charge, totaled between $165 million and
$205 million. LCR significantly reduced the estimated costs for implementing the
new diesel standards as a result of its ability to retrofit current production
units. The revised estimated costs for implementing the new diesel
F-62
LYONDELL-CITGO REFINING LP
NOTES TO FINANCIAL STATEMENTS-(CONTINUED)
standards also reflects LCR's implementation strategy for producing and
marketing ULSD and "off-road" diesel. LCR has spent approximately $23 million,
excluding the $25 million charge, as of December 31, 2003 for both the gasoline
and diesel fuel standard projects. In addition, these standards could result in
higher operating costs for LCR.
General - LCR is involved in various lawsuits and proceedings. Subject to the
uncertainty inherent in all litigation, management believes the resolution of
these proceedings will not have a material adverse effect on the financial
position, liquidity or results of operations of LCR.
In the opinion of management, any liability arising from the matters discussed
in this note is not expected to have a material adverse effect on the financial
position or liquidity of LCR. However, the adverse resolution in any reporting
period of one or more of these matters discussed in this note could have a
material impact on LCR's results of operations for that period which may be
mitigated by contribution or indemnification obligations of others, or by any
insurance coverage that may be available.
F-63
[CITGO LOGO]
CITGO PETROLEUM CORPORATION
Exchange Offer for
$250,000,000
6% Senior Notes
due 2011
PROSPECTUS
__________, 200__
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant was organized under the laws of the State of Delaware and
is subject to the Delaware General Corporation Law (the "Code"). Section 145 of
the Code provides that officers and directors may receive indemnification from
their corporations for certain actual or threatened lawsuits. The Code sets out
the standard of conduct which the officers and directors must meet in order to
be indemnified, the parties who are to determine whether the standard has been
met and the types of expenditures which will be indemnified. The Code further
provides that a corporation may purchase indemnification insurance, with such
insurance providing indemnification for the officers or directors whether or not
the corporation would have the power to indemnify them against such liability
under the provisions of the Code.
The Registrant's Restated Certificate of Incorporation provides that the
Registrant may indemnify all persons whom it may indemnify pursuant to the Code
to the full extent permitted by Section 145. In addition, the Registrant's
Restated Certificate of Incorporation provides, as permitted by the Code, that
directors shall not be personally liable for monetary damages for breach of
fiduciary duty as a director, except (i) for breaches of their duty of loyalty
to the Registrant or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Code, or (iv) for any transaction from which a
director derived an improper personal benefit.
The Registrant maintains liability insurance policies which indemnify the
Registrant's directors and officers and the directors and officers of
subsidiaries of the Registrant against loss arising from claims by reason of
their legal liability for acts as such directors, officers or trustees, subject
to limitations and conditions as set forth in the policies.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS INDEX.
(a) Exhibits: Certain of the following exhibits are incorporated herein by
reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as
amended. Certain other instruments which would otherwise be required to be
listed below have not been so listed because such instruments do not authorize
securities in an amount which exceeds 10% of the total assets of the applicable
registrant and its subsidiaries on a consolidated basis and the relevant
registrant agrees to furnish a copy of any such instrument to the Commission
upon request.
Exhibits No. Description
------------ -----------
1.1* Purchase Agreement, dated as of October 15, 2004, among the
Company and the Initial Purchasers.
3.1 Restated Certificate of Incorporation of CITGO Petroleum
Corporation, incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form 10 of the Registrant (File No.
333-3226) filed with the SEC on April 4, 1996.
3.2 Bylaws of CITGO Petroleum Corporation, incorporated by
reference to Exhibit 3.1(i) to the Registrant's Form 10-K
(File No. 1-14380) filed with the SEC on March 24, 2003.
4.1* Indenture dated October 22, 2004 between CITGO Petroleum
Corporation and J.P. Morgan Trust Company, National
Association.
4.2* Registration Rights Agreement dated October 22, 2004 among
CITGO and the representatives of the Initial Purchasers.
4.3* Form of Exchange Note (attached as Exhibit II to the Indenture
filed as Exhibit 4.1 hereto).
5.1* Opinion of Sidley Austin Brown & Wood LLP.
8.1* Opinion of Sidley Austin Brown & Wood LLP.
10.1 Crude Supply Agreement between CITGO Petroleum Corporation and
Petroleos de Venezuela, S.A., dated as of September 30, 1986
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.1 filed
with the Commission on June 2, 1993).
10.2 Supplemental Crude Supply Agreement dated as of September 30,
1986 between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.2 filed with the Commission on June 2, 1993).
10.3 Crude Oil and Feedstock Supply Agreement dated as of March 31,
1987 between Champlin Refining Company and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.3 filed with the Commission on June 2, 1993).
10.4 Supplemental Crude Oil and Feedstock Supply Agreement dated as
of March 31, 1987 between Champlin Refining Company and
Petroleos de Venezuela, S.A. (incorporated by reference to PDV
America, Inc.'s Registration Statement on Form F-1, File No.
33-63742, Exhibit 10.4 filed with the Commission on June 2,
1993).
10.5 Contract for the Purchase/Sale of Boscan Crude Oil dated as of
June 2, 1993 between Tradecal, S.A. and CITGO Asphalt Refining
Company (incorporated by reference to PDV America, Inc.'s
Registration Statement on Form F-1, File No. 33-63742, Exhibit
10.1 filed with the Commission on June 2, 1993).
10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil dated December 28, 1990 among Maraven, S.A.,
Lagoven, S.A. and Seaview Oil Company (incorporated by
reference to PDV America, Inc.'s Registration Statement on
Form F-1, File No. 33-63742, Exhibit 10.6 filed with the
Commission on June 2, 1993).
10.7 Sublease Agreement dated as of March 31, 1987 between Champlin
Petroleum Company, Sublessor, and Champlin Refining Company,
Sublessee (incorporated by reference to PDV America, Inc.'s
Registration Statement on Form F-1, File No. 33-63742, Exhibit
10.7 filed with the Commission on June 2, 1993).
10.8 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd., dated July 1, 1993
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.9 filed
with the Commission on June 2, 1993).
10.9 Contribution Agreement among Lyondell Petrochemical Company
and LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.10 filed with the Commission on June 2, 1993).
10.10 Crude Oil Supply Agreement between LYONDELL-CITGO Refining
Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.11 filed
with the Commission on June 2, 1993).
10.11 Supplemental Supply Agreement dated as of May 5, 1993 between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.12 filed with the Commission on June 2, 1993).
10.12 Tax Allocation Agreement dated as of June 24, 1993 among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., as amended (incorporated by reference to
PDV America, Inc.'s Registration Statement on Form F-1, File
No. 33-63742, Exhibit 10.13 filed with the Commission on June
2, 1993).
10.13 Second Amendment to the Tax Allocation Agreement among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., dated as of January 1, 1997 (incorporated
by reference to Registrant's 2001 Form 10-K, File No. 1-14380,
Exhibit 10.13(i) filed with the Commission on March 28, 2002).
II - 2
10.14 Master Shelf Agreement (1994) by and between Prudential
Insurance Company of America and CITGO Petroleum Corporation
($100,000,000), dated March 4, 1994 (incorporated by reference
to the Registrant's Registration Statement on Form 10, File
No. 333-3226, Exhibit 10.16 filed with the Commission on April
4, 1996).
10.15 Letter Agreement by and between the Company and Prudential
Insurance Company of America, dated March 4, 1994
(incorporated by reference to the Registrant's Registration
Statement on Form 10, File No. 333-3226, Exhibit 10.17(i)
filed with the Commission on April 4, 1996).
10.16 Letter Amendment No. 1 to Master Shelf Agreement with
Prudential Insurance Company of America, dated November 14,
1994 (incorporated by reference to the Registrant's
Registration Statement on Form 10, File No. 333-3226, Exhibit
10.17(ii) filed with the Commission on April 4, 1996).
10.17 CITGO Senior Debt Securities (1991) Agreement (incorporated by
reference to PDV America, Inc.'s Registration Statement on
Form F-1, File No. 33-63742, Exhibit 10.18 filed with the
Commission on June 2, 1993).
10.18 Selling Agency Agreement dated as of October 28, 1997 among
CITGO Petroleum Corporation, Salomon Brothers Inc. and Chase
Securities Inc. (incorporated by reference to Registrant's
Report on Form 8-K, Exhibit 99.1 filed with the Commission on
November 18, 1997).
10.19 Limited Partnership Agreement of LYONDELL-CITGO Refining LP,
dated December 31, 1998 (incorporated by reference to the
Registrant's 1998 Form 10-K, File No. 1-14380, Exhibit 10.24
filed with the Commission on March 17, 1999).
10.20 $260,000,000 Three-Year Credit Agreement dated as of December
11, 2002 among CITGO Petroleum Corporation, Bank of America,
N.A., as Administrative Agent, JP Morgan Chase Bank, as
Syndication Agent, Societe Generale, as Documentation Agent
and the other lenders party thereto (incorporated by reference
to the Registrant's 2002 Form 10-K, File No. 1-14380, Exhibit
10.22 filed with the Commission on March 24, 2003).
10.21 First Amendment to Three-Year Credit Agreement entered into
January 29, 2003, but effective as of December 11, 2002, among
CITGO Petroleum Corporation, Bank of America, N.A., as
Administrative Agent and the other lenders party thereto
(incorporated by reference to the Registrant's 2002 Form 10-K,
File No. 1-14380, Exhibit 10.23 filed with the Commission on
March 24, 2003).
10.22 Purchase and Sale Agreement dated as of February 28, 2003
between CITGO Petroleum Corporation and CITGO Funding Company,
L.L.C. (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 10.23 filed with the
Commission on March 30, 2004).
10.23 Amendment No. 1 dated as of November 26, 2003 to Purchase and
Sale Agreement dated as of February 28, 2003 (incorporated by
reference to the Registrant's 2003 Form 10-K, File No.
1-14380, Exhibit 10.24 filed with the Commission on March 30,
2004).
10.24 Receivables Purchase Agreement dated as of February 28, 2003
among CITGO Funding Company, L.L.C., CITGO Petroleum
Corporation, Asset One Securitization, LLC and Societe
Generale (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 10.25 filed with the
Commission on March 30, 2004).
10.25 Amendment No. 1 dated as of November 26, 2003 to Receivables
Purchase Agreement dated as of February 28, 2003 (incorporated
by reference to the Registrant's 2003 Form 10-K, File No.
1-14380, Exhibit 10.26 filed with the Commission on March 30,
2004).
12.1 Statement regarding computation of ratio of earnings to fixed
charges (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 12.1 filed with the
Commission on March 30, 2004).
16.1 Letter regarding change in certifying accountant (incorporated
by reference to the Registrant's June 25, 2003 Form 8-K, File
No. 1-14380, Exhibit 16 filed with the Commission on June 30,
2003).
II - 3
21.1 Subsidiaries of the Registrant (incorporated by reference to
the Registrant's 2003 Form 10-K, File No. 1-14380, Exhibit
12.1 filed with the Commission on March 30, 2004).
23.1* Consent of KPMG LLP.
23.2* Consent of Deloitte & Touche LLP.
23.3* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney.
25.1* Statement regarding eligibility of Trustee on Form T-1 of J.P.
Morgan Trust Company, National Association.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of our Client's Letter.
99.4* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
* Filed herewith.
(b) Financial Schedules:
None
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II - 4
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) That insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
II - 5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Houston, State of Texas,
on the 17th day of January, 2005.
CITGO PETROLEUM CORPORATION
By: /s/ Larry E. Krieg
----------------------
Name: Larry E. Krieg
Title: Vice President Finance
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
-------------------------- ------------------------------------ ---------------------------
* President, Chief Executive Officer and January 17, 2005
-------------------------- Director (principal executive officer)
Luis E. Marin
* Vice President Finance January 17, 2005
-------------------------- (principal financial officer)
Larry E. Krieg
* Controller (principal accounting January 17, 2005
-------------------------- officer)
Paul Largess
* Director and Chairman January 17, 2005
--------------------------
Ivan Hernandez
* Director January 17, 2005
--------------------------
Asdrubal Chavez
* Director January 17, 2005
--------------------------
Jesus Luongo
* Director January 17, 2005
--------------------------
Nelson Martinez
* Director January 17, 2005
--------------------------
Luis Vierma
*By: /s/ Larry E. Krieg
----------------------
Larry E. Krieg
Pursuant to power of attorney
dated January 14, 2005
II - 6
INDEX TO EXHIBITS
Exhibits No. Description
------------ -----------
1.1* Purchase Agreement, dated as of October 15, 2004, among the
Company and the Initial Purchasers.
3.1 Restated Certificate of Incorporation of CITGO Petroleum
Corporation, incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form 10 of the Registrant (File No.
333-3226) filed with the SEC on April 4, 1996.
3.2 Bylaws of CITGO Petroleum Corporation, incorporated by
reference to Exhibit 3.1(i) to the Registrant's Form 10-K
(File No. 1-14380) filed with the SEC on March 24, 2003.
4.1* Indenture dated October 22, 2004 between CITGO Petroleum
Corporation and J.P. Morgan Trust Company, National
Association.
4.2* Registration Rights Agreement dated October 22, 2004 among
CITGO and the representatives of the Initial Purchasers.
4.3* Form of Exchange Note (attached as Exhibit II to the Indenture
filed as Exhibit 4.1 hereto).
5.1* Opinion of Sidley Austin Brown & Wood LLP.
8.1* Opinion of Sidley Austin Brown & Wood LLP.
10.1 Crude Supply Agreement between CITGO Petroleum Corporation and
Petroleos de Venezuela, S.A., dated as of September 30, 1986
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.1 filed
with the Commission on June 2, 1993).
10.2 Supplemental Crude Supply Agreement dated as of September 30,
1986 between CITGO Petroleum Corporation and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.2 filed with the Commission on June 2, 1993).
10.3 Crude Oil and Feedstock Supply Agreement dated as of March 31,
1987 between Champlin Refining Company and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.3 filed with the Commission on June 2, 1993).
10.4 Supplemental Crude Oil and Feedstock Supply Agreement dated as
of March 31, 1987 between Champlin Refining Company and
Petroleos de Venezuela, S.A. (incorporated by reference to PDV
America, Inc.'s Registration Statement on Form F-1, File No.
33-63742, Exhibit 10.4 filed with the Commission on June 2,
1993).
10.5 Contract for the Purchase/Sale of Boscan Crude Oil dated as of
June 2, 1993 between Tradecal, S.A. and CITGO Asphalt Refining
Company (incorporated by reference to PDV America, Inc.'s
Registration Statement on Form F-1, File No. 33-63742, Exhibit
10.1 filed with the Commission on June 2, 1993).
10.6 Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
Crude Oil dated December 28, 1990 among Maraven, S.A.,
Lagoven, S.A. and Seaview Oil Company (incorporated by
reference to PDV America, Inc.'s Registration Statement on
Form F-1, File No. 33-63742, Exhibit 10.6 filed with the
Commission on June 2, 1993).
10.7 Sublease Agreement dated as of March 31, 1987 between Champlin
Petroleum Company, Sublessor, and Champlin Refining Company,
Sublessee (incorporated by reference to PDV America, Inc.'s
Registration Statement on Form F-1, File No. 33-63742, Exhibit
10.7 filed with the Commission on June 2, 1993).
10.8 Amended and Restated Limited Liability Company Regulations of
LYONDELL-CITGO Refining Company, Ltd., dated July 1, 1993
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.9 filed
with the Commission on June 2, 1993).
10.9 Contribution Agreement among Lyondell Petrochemical Company
and LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.10 filed with the Commission on June 2, 1993).
10.10 Crude Oil Supply Agreement between LYONDELL-CITGO Refining
Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993
(incorporated by reference to PDV America, Inc.'s Registration
Statement on Form F-1, File No. 33-63742, Exhibit 10.11 filed
with the Commission on June 2, 1993).
10.11 Supplemental Supply Agreement dated as of May 5, 1993 between
LYONDELL-CITGO Refining Company, Ltd. and Petroleos de
Venezuela, S.A (incorporated by reference to PDV America,
Inc.'s Registration Statement on Form F-1, File No. 33-63742,
Exhibit 10.12 filed with the Commission on June 2, 1993).
10.12 Tax Allocation Agreement dated as of June 24, 1993 among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., as amended (incorporated by reference to
PDV America, Inc.'s Registration Statement on Form F-1, File
No. 33-63742, Exhibit 10.13 filed with the Commission on June
2, 1993).
10.13 Second Amendment to the Tax Allocation Agreement among PDV
America, Inc., VPHI Midwest, Inc., CITGO Petroleum Corporation
and PDV USA, Inc., dated as of January 1, 1997 (incorporated
by reference to Registrant's 2001 Form 10-K, File No. 1-14380,
Exhibit 10.13(i) filed with the Commission on March 28, 2002).
10.14 Master Shelf Agreement (1994) by and between Prudential
Insurance Company of America and CITGO Petroleum Corporation
($100,000,000), dated March 4, 1994 (incorporated by reference
to the Registrant's Registration Statement on Form 10, File
No. 333-3226, Exhibit 10.16 filed with the Commission on April
4, 1996).
10.15 Letter Agreement by and between the Company and Prudential
Insurance Company of America, dated March 4, 1994
(incorporated by reference to the Registrant's Registration
Statement on Form 10, File No. 333-3226, Exhibit 10.17(i)
filed with the Commission on April 4, 1996).
10.16 Letter Amendment No. 1 to Master Shelf Agreement with
Prudential Insurance Company of America, dated November 14,
1994 (incorporated by reference to the Registrant's
Registration Statement on Form 10, File No. 333-3226, Exhibit
10.17(ii) filed with the Commission on April 4, 1996).
10.17 CITGO Senior Debt Securities (1991) Agreement (incorporated by
reference to PDV America, Inc.'s Registration Statement on
Form F-1, File No. 33-63742, Exhibit 10.18 filed with the
Commission on June 2, 1993).
10.18 Selling Agency Agreement dated as of October 28, 1997 among
CITGO Petroleum Corporation, Salomon Brothers Inc. and Chase
Securities Inc. (incorporated by reference to Registrant's
Report on Form 8-K, Exhibit 99.1 filed with the Commission on
November 18, 1997).
10.19 Limited Partnership Agreement of LYONDELL-CITGO Refining LP,
dated December 31, 1998 (incorporated by reference to the
Registrant's 1998 Form 10-K, File No. 1-14380, Exhibit 10.24
filed with the Commission on March 17, 1999).
10.20 $260,000,000 Three-Year Credit Agreement dated as of December
11, 2002 among CITGO Petroleum Corporation, Bank of America,
N.A., as Administrative Agent, JP Morgan Chase Bank, as
Syndication Agent, Societe Generale, as Documentation Agent
and the other lenders party thereto (incorporated by reference
to the Registrant's 2002 Form 10-K, File No. 1-14380, Exhibit
10.22 filed with the Commission on March 24, 2003).
II - 2
10.21 First Amendment to Three-Year Credit Agreement entered into
January 29, 2003, but effective as of December 11, 2002, among
CITGO Petroleum Corporation, Bank of America, N.A., as
Administrative Agent and the other lenders party thereto
(incorporated by reference to the Registrant's 2002 Form 10-K,
File No. 1-14380, Exhibit 10.23 filed with the Commission on
March 24, 2003).
10.22 Purchase and Sale Agreement dated as of February 28, 2003
between CITGO Petroleum Corporation and CITGO Funding Company,
L.L.C. (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 10.23 filed with the
Commission on March 30, 2004).
10.23 Amendment No. 1 dated as of November 26, 2003 to Purchase and
Sale Agreement dated as of February 28, 2003 (incorporated by
reference to the Registrant's 2003 Form 10-K, File No.
1-14380, Exhibit 10.24 filed with the Commission on March 30,
2004).
10.24 Receivables Purchase Agreement dated as of February 28, 2003
among CITGO Funding Company, L.L.C., CITGO Petroleum
Corporation, Asset One Securitization, LLC and Societe
Generale (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 10.25 filed with the
Commission on March 30, 2004).
10.25 Amendment No. 1 dated as of November 26, 2003 to Receivables
Purchase Agreement dated as of February 28, 2003 (incorporated
by reference to the Registrant's 2003 Form 10-K, File No.
1-14380, Exhibit 10.26 filed with the Commission on March 30,
2004).
12.1 Statement regarding computation of ratio of earnings to fixed
charges (incorporated by reference to the Registrant's 2003
Form 10-K, File No. 1-14380, Exhibit 12.1 filed with the
Commission on March 30, 2004).
16.1 Letter regarding change in certifying accountant (incorporated
by reference to the Registrant's June 25, 2003 Form 8-K, File
No. 1-14380, Exhibit 16 filed with the Commission on June 30,
2003).
21.1* Subsidiaries of the Registrant.
23.1* Consent of KPMG LLP.
23.2* Consent of Deloitte & Touche LLP.
23.3* Consent of PricewaterhouseCoopers LLP.
24.1* Power of Attorney.
25.1* Statement regarding eligibility of Trustee on Form T-1 of J.P.
Morgan Trust Company, National Association.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of our Client's Letter.
99.4* Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees.
* Filed herewith.
II - 3
Exhibit 1.1
EXECUTION COPY
$250,000,000
CITGO PETROLEUM CORPORATION
6% SENIOR NOTES DUE 2011
PURCHASE AGREEMENT
October 15, 2004
Lehman Brothers Inc.
BNP Paribas Securities Corp.
BNY Capital Markets, Inc.
Citigroup Global Markets Inc.
SG Americas Securities, LLC
WestLB AG, London Branch
c/o Lehman Brothers Inc.
745 Seventh Avenue, Third Floor
New York, New York 10019
Dear Sirs:
CITGO Petroleum Corporation, a Delaware corporation (the "Company"),
proposes, upon the terms and considerations set forth herein, to issue and sell
to Lehman Brothers Inc. ("Lehman Brothers"), BNP Paribas Securities Corp., BNY
Capital Markets, Inc., Citigroup Global Markets Inc., SG Americas Securities,
LLC and WestLB AG, London Branch (collectively with Lehman Brothers, the
"Initial Purchasers"), $250,000,000 aggregate principal amount of 6% Senior
Notes due 2011 (the "Notes"). The Notes will have terms and provisions which are
summarized in the Offering Memorandum (as defined below). The Notes are to be
issued pursuant to an indenture (the "Indenture") to be dated as of October 22,
2004 (the "Closing Date"), between the Company and J.P. Morgan Trust Company,
National Association, as trustee (the "Trustee"). The Company has commenced a
tender offer (together with any amendments and extensions thereof, the "Tender
Offer") to purchase all of its outstanding 11-3/8% Senior Notes Due 2011 (the
"11-3/8% Notes") and a related solicitation of consents (together with
any amendments and extensions thereof, the "Consent Solicitation") of the
holders of the 11-3/8% Notes to certain amendments to the indenture (the
"11-3/8% Note Indenture") dated as of February 27, 2003 between the Company and
The Bank of New York, as trustee.
In connection with the Tender Offer and Consent Solicitation, the Company
has entered into a Dealer-Manger and Solicitation Agent Agreement dated as of
October 8, 2004, between the Company and Lehman Brothers (the "Dealer-Manager
Agreement"). In order to consummate the Tender Offer and Consent Solicitation,
the Company has prepared and distributed to holders of the 11-3/8% Notes an
Offer to Purchase and Consent Solicitation Statement dated as of October 8, 2004
(together with any other documents relating to the Tender Offer or Consent
Solicitation, collectively referred to as, the "Tender Offer and Consent
Solicitation Materials"). The amendments to the 11-3/8% Note Indenture will be
effected pursuant to a supplemental indenture (the "First Supplemental
Indenture") to be dated as of October 20, 2004, between the Company and The Bank
of New York, as trustee. This Agreement, the Indenture, the First Supplemental
Indenture, the Notes, the Exchange Notes (as defined below), the Private
Exchange Notes (as defined below), the Registration Rights Agreement (as defined
below) and the Tender Offer and Consent Solicitation Materials are referred to
in this Agreement collectively as the "Operative Documents." All references
herein to the Company's Subsidiaries, as defined below, will include all direct
and indirect Subsidiaries of the Company.
This is to confirm the agreement concerning the purchase of the Notes from
the Company by the Initial Purchasers.
1. Preliminary Offering Memorandum and Offering Memorandum. The Notes will
be offered and sold to the Initial Purchasers without registration under the
U.S. Securities Act of 1933, as amended (the "Act"), in reliance on an exemption
pursuant to Section 4(2) under the Act. The Company has prepared a preliminary
offering memorandum, dated October 8, 2004 (together with all documents
incorporated by reference therein, the "Preliminary Offering Memorandum"), and
an offering memorandum, dated October 15, 2004 (together with all documents
incorporated by reference therein, the "Offering Memorandum"), setting forth
information regarding the Company, the Indenture, the Notes, the Exchange Notes,
the Private Exchange Notes and the Registration Rights Agreement. The Company
hereby confirms that it has authorized the use of the Preliminary Offering
Memorandum and the Offering Memorandum in connection with the offering and
resale of the Notes by the Initial Purchasers.
It is understood and acknowledged that upon original issuance thereof, and
until such time as the same is no longer required under the applicable
requirements of the Act, the Notes (and all securities issued in exchange
therefor or in substitution thereof) will bear the following legend (along with
such other legends as required by the Indenture):
"THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED
STATES SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD,
PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A) (1) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A UNDER THE ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR
THE ACCOUNT OF A QUALIFIED
2
INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE
144A, (2) IN AN OFFSHORE TRANSACTION COMPLYING WITH RULE 903 OR RULE 904
OF REGULATION S UNDER THE ACT, (3) PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE),
(4) TO AN INSTITUTIONAL ACCREDITED INVESTOR IN A TRANSACTION EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT, (5) IN ACCORDANCE WITH ANOTHER
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT (BASED UPON AN
OPINION OF COUNSEL IF THE COMPANY SO REQUESTS) OR (6) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND (B) IN ACCORDANCE WITH
ALL APPLICABLE BLUE SKY LAWS OF THE STATES OF THE UNITED STATES."
You have advised the Company that you will make offers (the "Exempt
Resales") of the Notes purchased by you hereunder on the terms set forth in the
Offering Memorandum, solely to (i) persons whom you reasonably believe to be
"qualified institutional buyers" as defined in Rule 144A under the Act ("QIBs")
and (ii) outside the United States to certain persons in offshore transactions
in reliance on Regulation S under the Act. Those persons specified in clauses
(i) and (ii) are referred to herein as the "Eligible Purchasers". You will offer
the Notes to Eligible Purchasers initially at a price equal to 99.300% of the
principal amount thereof. Such price may be changed at any time without notice.
Holders (including subsequent transferees) of the Notes will have the
registration rights set forth in the registration rights agreement in the form
of Exhibit A hereto (the "Registration Rights Agreement"), between the Company
and the Initial Purchasers, to be dated as of the Closing Date, for so long as
such Notes constitute Transfer Restricted Securities (as defined in the
Registration Rights Agreement). Pursuant to the Registration Rights Agreement,
the Company will agree to file with the U.S. Securities and Exchange Commission
(the "Commission") under the circumstances set forth therein (i) a registration
statement under the Act (the "Exchange Offer Registration Statement") relating
to the Company's Notes (the "Exchange Notes") to be offered in exchange for the
Notes (such offer to exchange being referred to as the "Exchange Offer") and
(ii) a shelf registration statement pursuant to Rule 415 under the Act (the
"Shelf Registration Statement" together with the Exchange Offer Registration
Statement, the "Registration Statements") relating to the resale by certain
holders of the Notes and to use their reasonable best efforts to cause such
Registration Statements to be declared effective. The Company will also agree
pursuant to the Registration Rights Agreement, under the circumstances set forth
therein, to issue private exchange notes (the "Private Exchange Notes") in a
private exchange offer (the "Private Exchange").
2. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Initial Purchasers that:
(a) On the date of this Agreement, the Preliminary Offering
Memorandum and the Offering Memorandum do not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The preceding sentence does not
3
apply to statements in or omissions from the Preliminary Offering Memorandum or
the Offering Memorandum based upon written information furnished to the Company
by any Initial Purchaser through Lehman Brothers specifically for use therein,
it being understood and agreed that the only such information is that described
as such in Section 8(e) hereof. Except as disclosed in the Offering Memorandum,
on the date of this Agreement, the Company's Annual Report on Form 10-K most
recently filed with the Commission and all subsequent reports (collectively, the
"Exchange Act Reports") which have been filed by the Company with the Commission
or sent to shareholders pursuant to the Securities Exchange Act of 1934 (the
"Exchange Act") do not include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading. Such
documents, when they were filed with the Commission, conformed in all material
respects to the requirements of the Exchange Act and the rules and regulations
of the Commission thereunder.
(b) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Offering Memorandum; and the Company is duly
qualified to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct of its
business requires such qualification except where the failure to be so qualified
or in good standing would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or other), business, properties or
results of operations of the Company and its Subsidiaries taken as a whole (a
"Material Adverse Effect").
(c) The entities listed on Schedule II hereto are the only
Subsidiaries (as such term is defined in Rule 1-02(x) of Regulation S-X of the
Commission), direct or indirect, of the Company.
(d) Each Subsidiary of the Company has been duly incorporated or
otherwise organized and is an existing corporation or other entity in good
standing under the laws of the jurisdiction of its organization, with power and
authority to own its properties and conduct its business as described in the
Offering Memorandum, except where the failure to be so duly incorporated or
formed or to so exist in good standing would not, individually or in the
aggregate, result in a Material Adverse Effect; and each Subsidiary of the
Company is duly qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification except where the
failure to be so qualified or in good standing would not, individually or in the
aggregate, have a Material Adverse Effect; all of the issued and outstanding
capital stock of each Subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the capital stock or
other interests of each Subsidiary owned by the Company, directly or through
Subsidiaries, is owned, except as disclosed in the Offering Memorandum, free
from liens, encumbrances and defects.
(e) On the Closing Date, each of the Indenture and the 11-3/8% Note
Indenture (as supplemented by the First Supplemental Indenture) will conform in
all material respects to the requirements of the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"),
4
and the rules and regulations of the Commission applicable to an indenture which
is qualified thereunder.
(f) The Indenture has been duly authorized; the Notes have been duly
authorized; and when the Notes are delivered and paid for pursuant to this
Agreement on the Closing Date, the Indenture will have been duly executed and
delivered, such Notes will have been duly executed, authenticated, issued and
delivered and will conform to the description thereof contained in the Offering
Memorandum and the Indenture and such Notes will constitute valid and legally
binding obligations of the Company, enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(g) The First Supplemental Indenture has been duly authorized and
when the First Supplemental Indenture has been duly executed and delivered, such
First Supplemental Indenture will constitute a valid and legally binding
obligation of the Company, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors' rights
and to general equity principals.
(h) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation of the transactions contemplated by this Agreement, the
Registration Rights Agreement or any of the other Operative Documents in
connection with the issuance and sale of the Notes by the Company and the Tender
Offer and Consent Solicitation, except (i) as may be required by the securities
or Blue Sky laws of any state of the United States in connection with the sale
of the Notes and (ii) the order of the Commission declaring the Exchange Offer
Registration Statement or the Shelf Registration Statement effective.
(i) The execution, delivery and performance of the Operative
Documents, the issuance and sale of the Notes, the issuance of the Exchange
Notes and the Private Exchange Notes and compliance with the terms and
provisions thereof will not result in a breach or violation of any of the terms
and provisions of, or constitute a default under, (i) any statute, any rule,
regulation or order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any Subsidiary of the Company
or any of their properties, (ii) any agreement or instrument to which the
Company or any such Subsidiary is a party or by which the Company or any such
Subsidiary is bound or to which any of the properties of the Company or any such
Subsidiary, is subject, or (iii) the charter, bylaws or other similar
organizational document of the Company or any such Subsidiary, except, in the
case of clauses (i) and (ii), where any such breach, violation or default would
not, individually or in the aggregate, materially impair the Company's ability
to meet its obligations under the Notes, the Exchange Notes, the Private
Exchange Notes or any of the other Operative Documents, or result in a Material
Adverse Effect, and the Company has full power and authority to authorize, issue
and sell the Notes as contemplated by this Agreement.
(j) This Agreement has been duly authorized, executed and delivered
by the Company and the Registration Rights Agreement has been duly authorized by
the Company and,
5
on the Closing Date, will have been duly executed and delivered by the Company.
(k) Except as disclosed in the Offering Memorandum, the Company and
its Subsidiaries have good and marketable title to all real properties and all
other properties and assets owned by them, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or to be made thereof by them; and except
as disclosed in the Offering Memorandum, the Company and its Subsidiaries hold
any leased real or personal property under valid and enforceable leases with no
exceptions that would materially interfere with the use made or to be made
thereof by them.
(l) The Company and its Subsidiaries possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by them and have not received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that could reasonably be expected, individually
or in the aggregate, to have a Material Adverse Effect.
(m) No labor dispute with the employees of the Company or any
Subsidiary exists or, to the knowledge of the Company, is imminent that would
have a Material Adverse Effect.
(n) The Company and its Subsidiaries own, possess or can acquire on
reasonable terms, adequate trademarks, trade names and other rights to
inventions, know-how, patents, copyrights, confidential information and other
intellectual property (collectively, "intellectual property rights") necessary
to conduct the business now operated by them, or presently employed by them, and
have not received any notice of infringement of or conflict with asserted rights
of others with respect to any intellectual property rights that could reasonably
be expected, individually or in the aggregate, to have a Material Adverse
Effect.
(o) Except as disclosed in the Offering Memorandum, neither the
Company nor any of its Subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any court,
domestic or foreign, relating to the use, disposal or release of hazardous or
toxic substances or relating to the protection or restoration of the environment
or human exposure to hazardous or toxic substances (collectively, "environmental
laws"), owns or operates any real property contaminated with any substance that
is subject to any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any claim
relating to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a Material Adverse Effect; and
the Company is not aware of any pending investigation which might lead to such a
claim.
(p) Except as disclosed in the Offering Memorandum, there are no
pending actions, suits or proceedings against or affecting the Company, any of
its Subsidiaries or any of their respective properties that could reasonably be
expected to individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to perform its
obligations under any of the Operative Documents, or which are otherwise
material in the context of the sale of the Notes, the Exchange Notes or the
Private Exchange Notes; and no such actions, suits or proceedings are, to the
Company's knowledge,
6
threatened or contemplated.
(q) The financial statements included in the Preliminary Offering
Memorandum and the Offering Memorandum present fairly the financial position of
the Company and its consolidated Subsidiaries as of the dates shown and their
results of operations and cash flows for the periods shown, such financial
statements have been prepared in conformity with the generally accepted
accounting principles in the United States applied, except as described in the
notes thereto, on a consistent basis.
(r) Except as disclosed in the Offering Memorandum, since the date
of the latest audited financial statements included in the Offering Memorandum,
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and its
Subsidiaries taken as a whole, and, except as disclosed in or contemplated by
the Offering Memorandum, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(s) The Company is subject to the reporting requirements of either
Section 13 or Section 15(d) of the Exchange Act and files reports with the
Commission on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
system.
(t) The Company is not and, after giving effect to the offering and
sale of the Notes and the application of the proceeds thereof as described in
the Offering Memorandum, will not be an "investment company" as defined in the
Investment Company Act of 1940, as amended.
(u) No securities of the same class (within the meaning of Rule
144A(d)(3) under the Act) as the Notes are listed on any national securities
exchange registered under Section 6 of the Exchange Act or quoted in a U.S.
automated inter-dealer quotation system.
(v) Assuming the accuracy of the Initial Purchasers' representations
set forth in Section 3, the offer and sale of the Notes by the Company to the
Initial Purchasers in the manner contemplated by this Agreement will be exempt
from the registration requirements of the Act by reason of Section 4(2) thereof
and Regulation S; and it is not necessary to qualify an indenture in respect of
the Notes under the Trust Indenture Act, except as may be necessary for the
Company's compliance with the Registration Rights Agreement.
(w) Neither the Company, nor any of its affiliates, nor any person
acting on its or their behalf (i) has, within the six-month period prior to the
date hereof, offered or sold in the United States or to any U.S. person (as such
terms are defined in Regulation S under the Act) the Notes or any security of
the same class or series as the Notes or (ii) has offered or will offer or sell
the Notes (A) in the United States by means of any form of general solicitation
or general advertising within the meaning of Rule 502(c) under the Act or (B)
with respect to any Notes sold in reliance on Rule 903 of Regulation S, by means
of any directed selling efforts within the meaning of Rule 902(c) of Regulation
S. The Company has not entered and will not enter into any contractual
arrangement with respect to the distribution of the Notes except for this
Agreement.
7
(x) On the Closing Date, the Exchange Notes and the Private Exchange
Notes will have been duly authorized by the Company; and when the Exchange Notes
and the Private Exchange Notes are issued, executed and authenticated in
accordance with the terms of the Exchange Offer or the Private Exchange, as the
case may be, and the Indenture, the Exchange Notes and the Private Exchange
Notes will be entitled to the benefits of the Indenture and will be the valid
and legally binding obligations of the Company, enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability relating to
or affecting creditors' rights and to general equity principles.
(y) When the Registration Rights Agreement has been duly executed
and delivered, the Registration Rights Agreement will be a valid and binding
agreement of the Company, enforceable against the Company in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles and as to the indemnification
provisions thereof, principles of public policy. On the Closing Date, the
Registration Rights Agreement will conform in all material respects to the
statements relating thereto contained in the Offering Memorandum.
(z) Neither the Company nor any of its Subsidiaries is in violation
of its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its Subsidiaries, taken as a whole, to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or their respective property is bound.
(aa) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the Company
to file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Notes,
the Exchange Notes or the Private Exchange Notes registered pursuant to any
Registration Statement.
(bb) Neither the Company nor any of its Subsidiaries nor any agent
thereof acting on the behalf of them has taken, and none of them will take, any
action that might cause this Agreement or the issuance or sale of the Notes to
violate Regulation T, Regulation U or Regulation X of the Board of Governors of
the Federal Reserve System.
(cc) Except as described in the Offering Memorandum, no "nationally
recognized statistical rating organization" as such term is defined for purposes
of Rule 436(g)(2) under the Act (i) has imposed (or has informed the Company
that it is considering imposing) any condition (financial or otherwise) on the
Company's retaining any rating assigned to the Company or any securities of the
Company or (ii) has indicated to the Company that it is considering (a) the
downgrading, suspension, or withdrawal of, or any review for a possible change
that does not indicate the direction of the possible change in, any rating so
assigned or (b) any change in the outlook for any rating of the Company or any
securities of the Company.
(dd) No form of general solicitation or general advertising (as
defined in
8
Regulation D under the Act) was used by the Company or any of its respective
representatives (other than the Initial Purchasers, as to whom the Company makes
no representation) in connection with the offer and sale of the Notes
contemplated hereby, including, but not limited to, articles, notices or other
communications published in any newspaper, magazine, or similar medium or
broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising.
(ee) The sale of the Notes pursuant to Regulation S is not part of a
plan or scheme to evade the registration provisions of the Act.
3. Purchase of the Notes by the Initial Purchasers; Agreements to Sell,
Purchase and Resell. (a) The Company hereby agrees, on the basis of the
representations, warranties and agreements of the Initial Purchasers contained
herein and subject to all the terms and conditions set forth herein, to issue
and sell to the Initial Purchasers and, upon the basis of the representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions set forth herein, each Initial Purchaser agrees, severally
and not jointly, to purchase from the Company, at a purchase price of 97.550% of
the principal amount thereof, the principal amount of the Notes set forth
opposite the name of such Initial Purchaser in Schedule I hereto. The Company
will not be obligated to deliver any of the Notes to be delivered hereunder
except upon payment for all of the Notes to be purchased as provided herein. The
Company and Lehman Brothers hereby acknowledge that pursuant to the Introducing
Agent Agreement, to be entered into on or prior to the Closing Date (the
"Introducing Agent Agreement"), by and between Lehman Brothers and Seton
Securities Group, Inc. (the "Introducing Agent"), Lehman Brothers has agreed, in
exchange for the referral of the Company to Lehman Brothers in February 2004, to
pay to the Introducing Agent, the fees set forth in the Introducing Agent
Agreement. The Company hereby consents to the payment of, and acknowledges, that
the fees payable pursuant to the Introducing Agent Agreement will be paid
following the consummation of the Tender Offer and Consent Solicitation and the
issuance of the Notes in accordance with the terms of the Introducing Agent
Agreement.
(b) Each of the Initial Purchasers, severally and not jointly,
hereby represents and warrants to the Company that it will offer the Notes for
sale upon the terms and conditions set forth in this Agreement and in the
Offering Memorandum. Each of the Initial Purchasers hereby represents and
warrants to, and agrees with, the Company that such Initial Purchaser (i) is a
QIB with such knowledge and experience in financial and business matters as are
necessary in order to evaluate the merits and risks of an investment in the
Notes; (ii) is purchasing the Notes pursuant to a private sale exempt from
registration under the Act; (iii) in connection with the Exempt Resales, will
solicit offers to buy the Notes only from, and will offer to sell the Notes only
to, Eligible Purchasers in accordance with this Agreement and on the terms
contemplated by the Offering Memorandum; and (iv) will not offer or sell the
Notes, nor has it offered or sold the Notes by, or otherwise engaged in, any
form of general solicitation or general advertising (within the meaning of
Regulation D, including, but not limited to, advertisements, articles, notices
or other communications published in any newspaper, magazine or similar medium
or broadcast over television or radio, or any seminar or meeting whose attendees
have been invited by any general solicitation or general advertising) and, with
respect to Notes sold outside the United States to non-U.S. purchasers in
reliance on Regulation S under the Act, will not engage
9
in any directed selling efforts, within the meaning of Rule 902 under the Act in
connection with the offering of the Notes. The Initial Purchasers have advised
the Company that they will offer the Notes to Eligible Purchasers at a price
initially equal to 99.300% of the principal amount thereof, plus accrued
interest, if any, from the date of issuance of the Notes. Such price may be
changed by the Initial Purchasers at any time thereafter without notice.
(c) Each of the Initial Purchasers, severally and not jointly,
represents, warrants and agrees with the Company that (i) it has not offered or
sold and, prior to the date six months after the date of issuance of the Notes,
will not offer or sell any of the Notes to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the U.K. Public Offers of Securities Regulations of 1995 (as amended); (ii) it
has complied and will comply with all applicable provisions of the Financial
Services and Markets Act 2000 (the "FSMA") with respect to anything done by it
in relation to the Notes in, from or otherwise involving the United Kingdom; and
(iii) it has only communicated or caused to be communicated and will only
communicate or cause to be communicated any invitation or inducement to engage
in investment activity (within the meaning of Section 21 of the FSMA) received
by it in connection with the issue or sale of any of the Notes in circumstances
in which Section 21(1) of the FSMA would not apply to the Company.
(d) Each of the Initial Purchasers understands that the Company and,
for purposes of the opinions to be delivered to the Initial Purchasers pursuant
to Sections 7(b) and 7(c) hereof, counsel to the Company and counsel to the
Initial Purchasers, will rely upon the accuracy and truth of the foregoing
representations, warranties and agreements and the Initial Purchasers hereby
consent to such reliance.
4. Delivery of the Notes and Payment Therefor. Delivery to the Initial
Purchasers of and payment for the Notes will be made at the office of Milbank,
Tweed, Hadley & McCloy LLP at One Chase Manhattan Plaza, New York, New York
10005, at 9:00 A.M., New York City time, on the Closing Date. The place of
closing for the Notes and the Closing Date may be varied by agreement between
the Initial Purchasers and the Company.
The Notes will be delivered to the Initial Purchasers or the Trustee as
custodian for The Depository Trust Company ("DTC") against payment by or on
behalf of the Initial Purchasers of the purchase price therefore, by wire
transfer in immediately available funds to such account or accounts as the
Company shall specify to Lehman Brothers prior to the Closing Date, by causing
DTC to credit the Notes to the account of the Initial Purchasers at DTC. The
Notes will be evidenced by one or more global securities in definitive form (the
"Global Notes") and/or by additional definitive securities, and will be
registered, in the case of the Global Notes, in the name of Cede & Co. as
nominee of DTC, and in the other cases, in such names and in such denominations
as the Initial Purchasers shall request prior to 9:30 A.M., New York City time,
on the second Business Day preceding the Closing Date. The Notes to be delivered
to the Initial Purchasers will be made available to the Initial Purchasers in
New York City for inspection and
10
packaging not later than 9:30 A.M., New York City time, on the Business Day
preceding the Closing Date or as otherwise agreed upon between the Company and
the Initial Purchasers.
5. Agreements of the Company. The Company agrees with each Initial
Purchaser as follows:
(a) Until the earlier of (i) the consummation of the Exchange Offer,
(ii) the effective date of the Shelf Registration Statement, (iii) the date on
which none of the Initial Purchasers or any of their respective affiliates holds
any of the Notes as part of the initial distribution or (iv) the date upon which
none Initial Purchasers or any of their respective affiliates continue to hold
any Exchange Notes or Private Exchange Notes, the Company will furnish to the
Initial Purchasers, without charge, such number of copies of the Preliminary
Offering Memorandum and the Offering Memorandum and any amendments or
supplements thereto as they may reasonably request.
(b) The Company will not make any amendment or supplement to the
Preliminary Offering Memorandum or to the Offering Memorandum without the prior
consent of the Initial Purchasers, which consent will not be unreasonably
withheld.
(c) The Company consents to the use, in accordance with the
securities or Blue Sky laws of the jurisdictions in which the Notes are offered
by the Initial Purchasers and by dealers, prior to the date of the Offering
Memorandum, of each Preliminary Offering Memorandum so furnished by the Company.
The Company consents to the use of the Offering Memorandum in accordance with
the securities or Blue Sky laws of the jurisdictions in which the Notes are
offered by the Initial Purchasers and by all dealers to whom Notes may be sold,
in connection with the offering and sale of the Notes.
(d) If, at any time prior to completion of the distribution of the
Notes by the Initial Purchasers to Eligible Purchasers, any event occurs that in
the judgment of the Company or in the reasonable opinion of counsel for the
Initial Purchasers should be set forth in the Offering Memorandum so that the
Offering Memorandum does not include any untrue statement of material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
if it is necessary to supplement or amend the Offering Memorandum in order to
comply with any law, the Company will prepare an appropriate supplement or
amendment thereto, and will expeditiously furnish to the Initial Purchasers and
dealers a reasonable number of copies thereof.
(e) The Company will cooperate with the Initial Purchasers and with
their counsel in connection with the qualification of the Notes for offering and
sale by the Initial Purchasers and by dealers under the securities or Blue Sky
laws of such jurisdictions as the Initial Purchasers may designate and will file
such consents to service of process or other documents necessary or appropriate
in order to effect such qualification; provided that (i) the Company shall in no
event be required to continue in effect any such qualification for a period of
more than 180 days after the Closing Date, (ii) the Company will not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any such state and (iii) the Company will not be required to subject
itself to taxation (other than any nominal amount) in any such jurisdiction if
not otherwise so subject.
11
(f) For a period of 180 days from the date of the Offering
Memorandum, the Company and each of its Subsidiaries agrees not to, directly or
indirectly, sell, contract to sell, grant any option to purchase, issue any
instrument convertible into or exchangeable for, or otherwise transfer or
dispose of, any debt securities issued or guaranteed by the Company and having a
maturity more than one year from the Closing Date, except (i) in exchange for
the Exchange Notes in connection with the Exchange Offer, (ii) in exchange for
the Private Exchange Notes in connection with the Private Exchange, (iii) letter
of credit reimbursement agreements issued by the Company in connection with the
remarketing of outstanding industrial revenue bonds, (iv) notes issued to banks
and other financial institutions participating in the Company's revolving credit
agreements, (v) renewals, extensions, increases or refinancings of the Company's
accounts receivable sale facility with one or more substantially similar
accounts receivable financing facilities or (vi) with the prior consent of
Lehman Brothers, which consent shall not be unreasonably withheld.
(g) So long as any of the Notes are outstanding, the Company will
furnish to the Initial Purchasers (i) as soon as available, a copy of each
report of the Company mailed to stockholders generally or filed with any stock
exchange or regulatory body, other than such reports that are publicly available
on the Commission's EDGAR system, and (ii) from time to time such other public
information concerning the Company and its Subsidiaries as the Initial
Purchasers may reasonably request.
(h) If this Agreement terminates or is terminated after execution
and delivery pursuant to any provisions hereof or if this Agreement is
terminated by the Initial Purchasers because of any failure or refusal on the
part of the Company to comply with the terms or fulfill any of the conditions of
this Agreement, the Company agrees to reimburse the Initial Purchasers for all
out-of-pocket expenses (including reasonable fees and expenses of their counsel)
reasonably incurred by them in connection herewith, but without any further
obligation on the part of the Company for loss of profits or otherwise.
Notwithstanding the foregoing, the Company shall not be required to reimburse
the Initial Purchasers if this Agreement is terminated as a result of the
conditions in Section 7(m) hereof not being satisfied.
(i) The Company will apply the net proceeds from the sale of the
Notes substantially in accordance with the description set forth in the Offering
Memorandum under the caption "Use of Proceeds".
(j) Except as stated in this Agreement and in the Preliminary
Offering Memorandum and the Offering Memorandum, neither the Company nor any of
its Subsidiaries has taken, nor will any of them take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Notes to facilitate the
sale or resale of the Notes. Except as permitted by the Act, neither the Company
nor any of its Subsidiaries will distribute any offering material in connection
with the Exempt Resales.
(k) The Company will use its reasonable best efforts to permit the
Notes to be designated Portal Market(SM) ("PORTAL") securities in accordance
with the rules and regulations adopted by the National Association of Securities
Dealers, Inc. relating to trading in PORTAL and to permit the Notes to be
eligible for clearance and settlement through DTC.
12
(l) From and after the Closing Date, so long as any of the Notes are
outstanding and are "restricted securities" within the meaning of Rule 144(a)(3)
under the Act, the Company will furnish to holders of the Notes and prospective
purchasers of Notes designated by such holders, upon request of such holders or
such prospective purchasers, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Act to permit compliance with Rule 144A in
connection with resale of the Notes.
(m) During the period of two years after the Closing Date or until
such earlier time when all the Notes are registered under the Act, the Company
will not, and will not permit any of its "affiliates" (as defined in Rule 144
under the Act) to, resell any of the Notes that constitute "restricted
securities" under Rule 144 that have been reacquired by any of them.
(n) The Company and each of its Subsidiaries agrees not to sell,
offer for sale or solicit offers to buy or otherwise negotiate in respect of any
security (as defined in the Act) that would be integrated with the sale of the
Notes in a manner that would require the registration under the Act of the sale
to the Initial Purchasers or the Eligible Purchasers of the Notes.
(o) In connection with the offering of the Notes, until the Initial
Purchasers shall have notified the Company of the completion of the resale of
the Notes, to not, and to use its reasonable best efforts to cause its
controlled affiliates not to, either alone or with one or more other persons,
offer or sell the Notes in the United States (i) by means of any form of general
solicitation or general advertising within the meaning of Rule 502(c) under the
Act or (ii) with respect to any such securities sold in reliance on Rule 903
under the Act, by means of any directed selling effort within the meaning of
Rule 902 or otherwise in violation of the offering restriction requirements of
Regulation S under the Act.
(p) The Company will do and perform all things required or necessary
to be done and performed under this Agreement by it prior to the Closing Date,
and to satisfy all conditions precedent to the Initial Purchasers' obligations
hereunder to purchase the Notes.
(q) During the period of two years following the Closing Date, the
Company will not be or become an "investment company" or a company "controlled"
by an "investment company" within the meaning of the 1940 Act.
(r) On the Closing Date, the Company will deliver to the Initial
Purchasers secretary's certificates reasonably satisfactory to the Initial
Purchasers which will include the following documents with respect to the
Company: (i) charter, (ii) by-laws, (iii) resolutions and (iv) certificates of
good standing and/or qualification to do business as a foreign corporation in
such jurisdiction as the Initial Purchasers, through counsel, may reasonably
request.
(s) On the Closing Date, the Company will cause the Initial
Purchasers, to receive the Registration Rights Agreement executed and delivered
by a duly authorized officer of the Company.
6. Expenses. The Company agrees to pay all costs, expenses, fees and taxes
incident to and in connection with the offering of the Notes, including (i) the
preparation, printing, filing and distribution of the Preliminary Offering
Memorandum and the Offering Memorandum
13
(including, without limitation, financial statements and exhibits) and all
amendments and supplements thereto (including the fees, disbursements and
expenses of the Company's accountants and counsel but excluding legal fees and
expenses of the Initial Purchasers' counsel incurred in connection therewith);
(ii) the preparation, printing (including, without limitation, word processing
and duplication costs) and delivery of the Operative Documents, all Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection therewith and with the Exempt
Resales (but excluding legal fees and expenses of the Initial Purchasers'
counsel incurred in connection with any of the foregoing other than fees of such
counsel plus reasonable disbursements incurred in connection with the
preparation, printing and delivery of such Blue Sky Memoranda); (iii) the
issuance and delivery by the Company of the Notes and any transfer or similar
taxes payable in connection therewith; (iv) the qualification of the Notes, the
Exchange Notes and the Private Exchange Notes for offer and sale under the
securities or Blue Sky laws of the several states (including, without
limitation, the reasonable fees and disbursements of the Initial Purchasers'
counsel relating to such registration or qualification); (v) the furnishing of
such copies of the Preliminary Offering Memorandum and the Offering Memorandum,
and all amendments and supplements thereto, as may be reasonably requested by
the Initial Purchasers for use in connection with the Exempt Resales; (vi) the
preparation of certificates for the Notes (including, without limitation,
printing and engraving thereof); (vii) the application for quotation of the
Notes in PORTAL; (viii) the approval of the Notes by DTC for "book-entry"
transfer (including the fees and expenses of the Company's counsel); (ix) the
obligations of the Trustee, any agent of the Trustee and counsel for the Trustee
in connection with the Indenture, the Notes, the Exchange Notes and the Private
Exchange Notes; (x) all reasonable expenses of the Initial Purchasers and the
Company's officers and employees in connection with meeting prospective
investors and any other "road show" expenses (including the costs of any
airplanes); and (xi) the performance by the Company of its other obligations
under this Agreement.
7. Conditions to Initial Purchasers' Obligations. The respective
obligations of the Initial Purchasers hereunder are subject to the accuracy,
when made and on the Closing Date, of the representations and warranties of the
Company contained herein, to the performance by the Company of its obligations
hereunder and to each of the following additional terms and conditions:
(a) The Initial Purchasers shall have received an opinion, dated the
Closing Date, of Dr. Hector Bivero, Vice President and General Counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Offering Memorandum;
and the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in which its
ownership or lease of property or the conduct of its business
requires such qualification except where the failure to be so
qualified or in good standing would not, individually or in the
aggregate, have a Material Adverse Effect;
14
(ii) Each majority-owned Subsidiary of the Company has been
duly incorporated or formed and is an existing corporation or other
entity in good standing under the laws of the jurisdiction of its
incorporation or formation, with power and authority (corporate and
other) to own its properties and conduct its business as described
in the Offering Memorandum, except for such Subsidiaries that are
incorporated or formed in such jurisdiction where the failure to be
so duly incorporated or formed or to so exist in good standing would
not, individually or in the aggregate, have a Material Adverse
Effect; and each majority-owned Subsidiary of the Company is duly
qualified to do business as a foreign corporation or other entity in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification except where the failure to be so qualified or in good
standing would not, individually or in the aggregate, have a
Material Adverse Effect; all of the issued and outstanding capital
stock of each majority-owned Subsidiary of the Company has been duly
authorized and validly issued and is fully paid and nonassessable;
and the capital stock of each majority-owned Subsidiary owned by the
Company, directly or through Subsidiaries, is owned free from liens,
encumbrances and defects;
(iii) The Indenture and the First Supplemental Indenture have
been duly authorized, executed and delivered by the Company; and the
Notes have been duly authorized, executed, authenticated, issued and
delivered and conform in all material respects to the description
thereof contained in the Offering Memorandum.
(iv) No consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is
required for the consummation by the Company of the transactions
contemplated by this Agreement, the Registration Rights Agreement or
any of the other Operative Documents in connection with the issuance
or sale of the Notes by the Company, the Tender Offer or the Consent
Solicitation, except such as may be required under state securities
laws and except for the order of the Commission declaring the
Exchange Offer Registration Statement or the Shelf Registration
Statement effective;
(v) Except as disclosed in the Offering Memorandum, there are
no pending actions, suits or proceedings against or affecting the
Company, any of its majority-owned Subsidiaries or any of their
respective properties that could reasonably be expected,
individually or in the aggregate, to have a Material Adverse Effect,
or would materially and adversely affect the ability of the Company
to perform its obligations under the Indenture, the First
Supplemental Indenture, this Agreement, the Registration Rights
Agreement or any of the other Operative Documents, or which are
otherwise material in the context of the sale of the Notes; and no
such actions, suits or proceedings are overtly threatened or, to
such counsel's knowledge, contemplated;
15
(vi) The execution, delivery and performance by the Company of
the Indenture, the First Supplemental Indenture, this Agreement, the
Registration Rights Agreement and the other Operative Documents, the
issuance and sale of the Notes and compliance by the Company with
the terms and provisions thereof, will not result in a breach or
violation of any of the terms and provisions of, or constitute a
default under, (i) any statute, any rule, regulation or order of any
governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any majority-owned
Subsidiary of the Company or any of their properties, (ii) any
agreement or instrument to which the Company or any such
majority-owned Subsidiary is a party or by which the Company is
bound or to which any of the properties of the Company or any such
majority-owned Subsidiary, is subject, or (iii) the charter, bylaws
or other similar organizational document of the Company or any such
majority-owned Subsidiary, except, in the case of clauses (i) and
(ii), where any such breach, violation or default would not,
individually or in the aggregate, materially impair the Company's
ability to meet its obligations under the Indenture, the First
Supplemental Indenture, this Agreement, the Registration Rights
Agreement, the Notes or any of the other Operative Documents or
result in a Material Adverse Effect, and the Company has full power
and authority to authorize, issue and sell the Notes as contemplated
by this Agreement.
(vii) Such counsel has no reason to believe that the Offering
Memorandum, or any amendment or supplement thereto, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein in light of the circumstances under which they
were made, not misleading; the descriptions in the Offering
Memorandum of statutes, legal and governmental proceedings and
contracts and other documents fairly present in all material
respects the information summarized therein; it being understood
that such counsel need express no opinion as to the financial
statements or other financial or statistical data contained in the
Offering Memorandum;
(viii) This Agreement and the Registration Rights Agreement
each have been duly authorized, executed and delivered by the
Company;
(ix) The Exchange Notes and the Private Exchange Notes have
been duly authorized by the Company;
(x) To such counsel's knowledge, neither the Company nor any
of its majority-owned Subsidiaries is in violation of its respective
charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any
indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its Subsidiaries,
taken as a whole, to which the Company or any of its majority-owned
Subsidiaries is a party or by which the Company or any of its
majority-owned Subsidiaries or their respective property is bound;
and
16
(xi) To such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities
of the Company or to require the Company to include such securities
with the Notes registered pursuant to any Registration Statement.
(b) The Initial Purchasers shall have received an opinion, dated the
Closing Date, of Sidley Austin Brown & Wood LLP, special counsel for the
Company, to the effect that:
(i) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own its properties
and conduct its business as described in the Offering Memorandum;
(ii) The Indenture and the First Supplemental Indenture have
been duly authorized, executed and delivered by the Company; the
Notes have been duly authorized, executed, authenticated, issued and
delivered and conform in all material respects to the description
thereof contained in the Offering Memorandum; the Indenture, the
First Supplemental Indenture and the Notes constitute valid and
legally binding obligations of the Company enforceable in accordance
with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to
general equity principles;
(iii) The Company is not and, after giving effect to the
offering and sale of the Notes and the application of the proceeds
thereof as described in the Offering Memorandum, will not be an
"investment company" as defined in the Investment Company Act of
1940;
(iv) Such counsel has no reason to believe that the Offering
Memorandum, or any amendment or supplement thereto, contained any
untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; the descriptions in the Offering
Memorandum of statutes, legal and governmental proceedings and
contracts and other documents fairly present in all material
respects the information summarized therein; it being understood
that such counsel need express no opinion as to the financial
statements or other financial or statistical data contained in the
Offering Memorandum;
(v) This Agreement and the Registration Rights Agreement each
have been duly authorized, executed and delivered by the Company;
(vi) The Indenture and the 11-3/8% Note Indenture as
supplemented by the First Supplemental Indenture conform in all
material respects to the requirements of the Trust Indenture Act,
and the rules and regulations of the Commission applicable to an
indenture that is qualified thereunder;
17
(vii) It is not necessary in connection with (i) the offer,
sale and delivery of the Notes by the Company to the Initial
Purchasers pursuant to this Agreement or (ii) the initial resales of
the Notes by the Initial Purchasers in the manner contemplated
hereby to register the Notes under the Act or to qualify an
indenture in respect thereof under the Trust Indenture Act;
(viii) The Exchange Notes and the Private Exchange Notes have
been duly authorized by the Company; and when the Exchange Notes and
any Private Exchange Notes are issued, executed and authenticated in
accordance with the terms of the Exchange Offer or any Private
Exchange, as the case may be, and the Indenture, the Exchange Notes
and any Private Exchange Notes will be entitled to the benefits of
the Indenture and will be the valid and legally binding obligations
of the Company, enforceable against the Company in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; and
(ix) The Registration Rights Agreement is a valid and binding
agreement of the Company, enforceable against the Company in
accordance with its terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and
to general equity principles and as to the indemnification
provisions thereof, principles of public policy.
(c) The Initial Purchasers shall have received from Milbank, Tweed,
Hadley & McCloy LLP, counsel for the Initial Purchasers, such opinion or
opinions, dated the Closing Date, with respect to the issuance and sale of the
Notes, the Offering Memorandum and other related matters as the Initial
Purchasers may reasonably require, and the Company shall have furnished to such
counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) At the time of execution of this Agreement, the Initial
Purchasers shall have received from each of KPMG LLP and Deloitte & Touche LLP
(collectively, the "Accountants") letters, in form and substance satisfactory to
the Initial Purchasers, addressed to the Initial Purchasers and dated the date
hereof (i) confirming that they are independent public accountants within the
meaning of the Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation S-X
of the Commission and (ii) in the case of the letter received from KPMG LLP,
stating, as of the date hereof (or, with respect to matters involving changes or
developments since the respective dates as of which specified financial
information is given in the Offering Memorandum, as of a date not more than five
days prior to the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily covered by
accountants' "comfort letters" to initial purchasers in connection with
registered public offerings.
(e) With respect to the of KPMG LLP referred to in the preceding
paragraph and delivered to the Initial Purchasers concurrently with the
execution of this Agreement (the "Initial Letter"), KPMG LLP shall have
furnished to the Initial Purchasers a
18
letter (the "Bring-Down Letter"), addressed to the Initial Purchasers and dated
the Closing Date, (i) confirming that they are independent public accountants
within the meaning of the Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the Closing Date (or, with
respect to matters involving changes or developments since the respective dates
as of which specified financial information is given in the Offering Memorandum,
as of a date not more than five days prior to the date of the Bring-Down
Letter), the conclusions and findings of such firm with respect to the financial
information and other matters covered by its Initial Letter and (iii) confirming
in all material respects the conclusions and findings set forth in such Initial
Letter.
(f) The Initial Purchasers shall have received a certificate, dated
the Closing Date, of the President or any Vice President and a principal
financial or accounting officer of the Company in which such officers, to the
best of their knowledge after reasonable investigation, shall state that the
representations and warranties of the Company in this Agreement are true and
correct, that the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or prior to the
Closing Date, and that, subsequent to the respective dates of the most recent
financial statements in the Offering Memorandum, there has been no material
adverse change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business, properties or
results of operations of the Company and its Subsidiaries taken as a whole
except as set forth in or contemplated by the Offering Memorandum or as
described in such certificate.
(g) Subsequent to the execution and delivery of this Agreement, (i)
no downgrading shall have occurred in the rating accorded the Company's debt
securities by any "nationally recognized statistical rating organization," as
that term is defined by the Commission for purposes of Rule 436(g)(2) of the
Rules and Regulations, and (ii) no such organization shall have publicly
announced that it has under surveillance or review, with possible negative
implications, its rating of any of the Company's debt securities.
(h) The Notes shall have been designated for trading on PORTAL.
(i) The Company shall have executed the Registration Rights
Agreement and the Initial Purchasers shall have received executed copies
thereof, duly executed by the Company.
(j) The Company and the Trustee shall have executed the Indenture
and the Company and The Bank of New York shall have executed the First
Supplemental Indenture; and the Initial Purchasers shall have received executed
copies thereof.
(k) There shall exist at and as of the Closing Date no condition
that would constitute a default (or an event that with notice or lapse of time,
or both, would constitute a default) under any Operative Document as in effect
at the Closing Date.
(l) (i) Neither the Company nor any of its Subsidiaries has
sustained, since the date of the latest audited financial statements included in
the Offering Memorandum, any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
19
otherwise than as set forth or contemplated in the Offering Memorandum
(exclusive of any amendments or supplements thereto subsequent to the date of
this Agreement) or that would, individually or in the aggregate, result in a
Material Adverse Effect and (ii) since such date, there has not been any
material decrease in the capital stock or material increase in the long-term
debt of the Company or any of its Subsidiaries or any material adverse change,
or any development involving a prospective material adverse change, in or
affecting the condition, financial or otherwise, stockholder's equity, results
of operations or business of the Company or any of its Subsidiaries, otherwise
than as set forth or contemplated in the Offering Memorandum.
(m) Subsequent to the execution and delivery of this Agreement,
there shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange, the Nasdaq National Market or the
American Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter market, has
been suspended or minimum prices have been established on any such exchange or
such market by the Commission, by such exchange or by any other regulatory body
or governmental authority having jurisdiction (it being understood that the
expected delisting of the Company's 7-7/8% Senior Notes due 2006 from the New
York Stock Exchange solely as a result of the Company's failure to meet the
requirements of Section 301 of the Sarbanes-Oxley Act of 2002 shall not be
deemed a breach of this condition); (ii) a material disruption in securities
settlement, payment or clearance services in the United States; (iii) a banking
moratorium has been declared by Federal or state authorities; (iv) any attack
on, outbreak or escalation of hostilities or act of terrorism involving the
United States, any declaration of war by Congress or any other national or
international calamity, crisis or emergency if, in the judgment of the Initial
Purchasers, the effect of any such attack, outbreak, escalation, act,
declaration, calamity, crisis or emergency makes it impractical or inadvisable
to proceed with completion of the offering or sale of and payment for the Notes;
or (v) the occurrence of any other calamity, crisis (including without
limitation as a result of terrorist activities), or material adverse change in
general economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States shall be
such) as to make it, in the judgment of the Initial Purchasers, impracticable or
inadvisable to proceed with the offering or delivery of the Notes being
delivered on the Closing Date or that, in the judgment of the Initial
Purchasers, would materially and adversely affect the financial markets or the
markets for the Notes and other debt securities.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the Initial Purchasers.
8. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Initial
Purchaser, its directors, officers and employees and each person, if any, who
controls any Initial Purchaser within the meaning of the Act, from and against
any loss, claim, damage or liability, joint or several, or any action in respect
thereof (including, but not limited to, any loss, claim, damage, liability or
action relating to purchases and sales of Notes), to which that Initial
Purchaser, director, officer, employee or controlling person may become subject,
under the Act or
20
otherwise, insofar as such loss, claim, damage, liability or action arises out
of, or is based upon, (i) any untrue statement or alleged untrue statement of a
material fact contained (A) in any Preliminary Offering Memorandum or the
Offering Memorandum or in any amendment or supplement thereto or (B) in any Blue
Sky application or other document prepared or executed by the Company (or based
upon any written information furnished by the Company) specifically for the
purpose of qualifying any or all of the Notes under the securities laws of any
state or other jurisdiction (any such application, document or information being
hereinafter called a "Blue Sky Application"), (ii) the omission or alleged
omission to state in the Preliminary Offering Memorandum or the Offering
Memorandum, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any Initial Purchaser in connection with, or
relating in any manner to, the Notes or the offering contemplated hereby, and
which is included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by clause (i)
or (ii) above (provided that the Company will not be liable under this clause
(iii) to the extent that it is determined in a final judgment by a court of
competent jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or omitted to
be taken by such Initial Purchaser through its gross negligence or willful
misconduct), and will reimburse each Initial Purchaser and each such director,
officer, employee or controlling person promptly upon demand for any legal or
other expenses reasonably incurred by that Initial Purchaser, director, officer,
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that (I) the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in the Preliminary
Offering Memorandum or the Offering Memorandum, or in any such amendment or
supplement thereto, or in any Blue Sky Application, in reliance upon and in
conformity with written information concerning such Initial Purchaser furnished
to the Company by or on behalf of any Initial Purchaser specifically for
inclusion therein and (II) with respect to any untrue statement or alleged
untrue statement in, or omission or alleged omission from, the Preliminary
Offering Memorandum, the foregoing indemnity agreement with respect to the
Preliminary Offering Memorandum shall not inure to the benefit of an Initial
Purchaser (or its directors, officers and employees and each person, if any,
which controls such Initial Purchaser within the meaning of the Act) from whom
the person asserting any such losses, claims, damages or liabilities purchased
Notes in the initial resale of the Notes if (A) other than as a result of
noncompliance by the Company with Section 5(a) hereof, a copy of the Offering
Memorandum was not sent or given by or on behalf of such Initial Purchaser to
such person at or prior to the written confirmation of the sale of the Notes to
such person and (B) the Offering Memorandum would have cured the defect giving
rise to such losses, claims, damages or liabilities. The foregoing indemnity
agreement is in addition to any liability which the Company may otherwise have
to any Initial Purchaser or to any director, officer, employee or controlling
person of that Initial Purchaser.
(b) Each Initial Purchaser, severally and not jointly, will
indemnify and hold harmless the Company and its directors, officers and
employees and each person, if any, who
21
controls the Company within the meaning of the Act, from and against any loss,
claim, damage or liability, joint or several, or any action in respect thereof,
to which the Company or such director, officer, employee or controlling person
may become subject, under the Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Offering Memorandum or the Offering Memorandum, or in any amendment
or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission
or alleged omission to state in any Preliminary Offering Memorandum or the
Offering Memorandum, or in any amendment or supplement thereto, or in any Blue
Sky Application any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such Initial Purchaser furnished to the Company by or on behalf of that Initial
Purchaser specifically for inclusion therein, and will reimburse the Company and
any such director, officer, employee or controlling person for any legal or
other expenses reasonably incurred by the Company or any such director, officer,
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred. The foregoing indemnity agreement is in addition to
any liability which any Initial Purchaser may otherwise have to the Company or
any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party will not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided, further, that the
failure to notify the indemnifying party will not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action is brought against an indemnified party, and it
notifies the indemnifying party thereof, the indemnifying party will be entitled
to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party will not be liable to
the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Initial Purchasers will have the right to employ counsel to represent
jointly the Initial Purchasers and those Initial Purchasers and their respective
directors, officers, employees and controlling persons who may be subject to
liability arising out of any claim in respect of which indemnity may be sought
by the Initial Purchasers against the Company under this Section 8 if, in the
reasonable judgment of the Initial Purchasers, it is advisable for the Initial
Purchasers and those directors, officers, employees and controlling persons to
be jointly represented by separate counsel, and in that event the fees and
expenses of such separate counsel will be paid by the Company. No indemnifying
party will (i) without the prior written consent of the
22
indemnified parties (which consent will not be unreasonably withheld), settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action),
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent will not be unreasonably
withheld), but if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 is for any
reason unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability,
or any action in respect thereof, referred to therein, then each indemnifying
party will, in lieu of indemnifying such indemnified party, contribute to the
amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Initial Purchasers on the other from the offering of the
Notes or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above, but also the relative fault
of the Company on the one hand and the Initial Purchasers on the other with
respect to the statements or omissions which resulted in such loss, claim,
damage or liability, or action in respect thereof, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the Initial Purchasers on the other with respect to such offering
will be deemed to be in the same proportion as the total net proceeds from the
offering of the Notes purchased under this Agreement (before deducting expenses)
received by the Company, on the one hand, and the total discounts and
commissions received by the Initial Purchasers with respect to the Notes
purchased under this Agreement, on the other hand, bear to the total gross
proceeds from the offering of the Notes under this Agreement as set forth on the
cover page of the Offering Memorandum. The relative fault will be determined by
reference to whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or the Initial Purchasers, the intent of the parties and
their relative knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Initial Purchasers agree
that it would not be just and equitable if contributions pursuant to this
Section 8 were to be determined by pro rata allocation (even if the Initial
Purchasers were treated as one entity for such purpose) or by any other method
of allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 8 will be deemed to include, for purposes of
this Section 8(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 8(d), no Initial
Purchaser will be required to contribute any amount in excess of the amount by
which the total discounts and commissions received by it exceeds the amount of
any damages which such Initial Purchaser has
23
otherwise paid or become liable to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Initial Purchasers' obligations to contribute as provided
in this Section 8(d) are several in proportion to their respective obligations
and not joint.
(e) The Initial Purchasers severally confirm and the Company
acknowledges that the statements with respect to the offering of the Notes by
the Initial Purchasers set forth in the third, seventh, eighth, thirteenth and
fourteenth paragraphs under the caption "Plan of Distribution" in the Offering
Memorandum are correct and constitute the only information concerning such
Initial Purchasers furnished in writing to the Company by or on behalf of the
Initial Purchasers specifically for inclusion in the Offering Memorandum.
9. Defaulting Initial Purchasers.
If, on the Closing Date, any Initial Purchaser defaults in the
performance of its obligations under this Agreement, the remaining
non-defaulting Initial Purchasers will be obligated to purchase the Notes that
the defaulting Initial Purchaser agreed but failed to purchase on the Closing
Date in the respective proportions that the number of Notes set forth opposite
the name of each remaining non-defaulting Initial Purchaser in Schedule I hereto
bears to the total number of Notes set forth opposite the names of all the
remaining non-defaulting Initial Purchasers in Schedule I hereto; provided,
however, that the remaining non-defaulting Initial Purchasers will not be
obligated to purchase any of the Notes on the Closing Date if the total number
of Notes that the defaulting Initial Purchaser or Initial Purchasers agreed but
failed to purchase on such date exceeds 9.09% of the total amount of Notes to be
purchased on the Closing Date, and any remaining non-defaulting Initial
Purchasers will not be obligated to purchase more than 110% of the amount of
Notes that it agreed to purchase on the Closing Date pursuant to the terms of
Section 3. If the foregoing maximums are exceeded, the remaining non-defaulting
Initial Purchasers, or those other initial purchasers satisfactory to the
Initial Purchasers who so agree, will have the right, but will not be obligated,
to purchase, in such proportion as may be agreed upon among them, all the Notes
to be purchased on the Closing Date. If the remaining Initial Purchasers or
other initial purchasers satisfactory to the Initial Purchasers do not elect to
purchase the Notes that the defaulting Initial Purchaser or Initial Purchasers
agreed but failed to purchase on the Closing Date, this Agreement will terminate
without liability on the part of any non-defaulting Initial Purchasers or the
Company or any of its Subsidiaries, except that the Company will continue to be
liable for the payment of expenses to the extent set forth in Sections 6 and 11
hereof.
Nothing contained herein will relieve a defaulting Initial Purchaser
of any liability it may have to the Company for damages caused by its default.
If other Initial Purchasers are obligated or agree to purchase the Notes of a
defaulting or withdrawing Initial Purchaser, the Company may postpone the
Closing Date for up to seven full Business Days in order to effect any changes
that in the opinion of counsel for the Company or counsel for the Initial
Purchasers may be necessary in the Offering Memorandum or in any other document
or arrangement.
24
10. Termination. The obligations of the Initial Purchasers hereunder may
be terminated by the Initial Purchasers by notice given to and received by the
Company prior to delivery of and payment for the Notes if, prior to that time,
any of the events described in Section 7(g), (l) or (m) has occurred or if the
Initial Purchasers decline to purchase the Notes for any reason permitted under
this Agreement.
11. Reimbursement of Initial Purchasers' Expenses. If the Company fails to
tender the Notes for delivery to the Initial Purchasers by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
obligations hereunder required to be fulfilled by the Company or any of its
Subsidiaries is not fulfilled, the Company will reimburse the Initial Purchasers
for all reasonable out-of-pocket expenses (including reasonable fees and
disbursements of counsel) incurred by the Initial Purchasers in connection with
this Agreement and the proposed purchase of the Notes, and upon demand the
Company will pay the full amount thereof to the Initial Purchasers. If this
Agreement is terminated pursuant to Section 9 by reason of the default of one or
more Initial Purchasers, the Company will not be obligated to reimburse any
defaulting Initial Purchaser on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder will be in writing, and:
(a) if to any Initial Purchaser, will be delivered or sent by hand
or overnight delivery, mail, telex or facsimile transmission to Lehman Brothers
Inc., 745 Seventh Avenue, New York, New York 10019, Attention: Syndicate
Department (Fax: (212) 526-0943), with a copy to Milbank, Tweed, Hadley & McCloy
LLP, One Chase Manhattan Plaza, New York, New York 10005, Attention: Arnold B.
Peinado, III (Fax: (212) 822-5546), and with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., 399 Park Avenue, New York, New York 10022; and
(b) if to the Company, will be delivered or sent by hand or
overnight delivery, mail or facsimile transmission to 1293 Eldridge Parkway,
Houston, Texas 77077, Attention: General Counsel (Fax: (832) 486-5501), with a
copy to Sidley Austin Brown & Wood LLP, 10 South Dearborn Street, Chicago,
Illinois 60603, Attention: Richard W. Astle (Fax: (312) 853-7036);
provided, however, that any notice to an Initial Purchaser pursuant to Section
8(c) will be delivered or sent by hand or overnight delivery, mail, telex or
facsimile transmission to such Initial Purchaser at its address set forth in its
acceptance telex to Lehman Brothers, which address will be supplied to any other
party hereto by Lehman Brothers upon request. Any such statements, requests,
notices or agreements will take effect at the time of receipt thereof. The
Company will be entitled to act and rely upon any request, consent, notice or
agreement given or made on behalf of the Initial Purchasers by Lehman Brothers.
13. Persons Entitled to Benefit of Agreement. This Agreement will inure to
the benefit of and be binding upon the Initial Purchasers, the Company and their
respective successors. This Agreement and the terms and provisions hereof are
for the sole benefit of only those persons, except that (i) the representations,
warranties, indemnities and agreements of the
25
Company contained in this Agreement will also be deemed to be for the benefit of
the person or persons, if any, who control any Initial Purchaser within the
meaning of Section 15 of the Act and (ii) the indemnity agreement of the Initial
Purchasers contained in Section 8(b) of this Agreement will be deemed to be for
the benefit of directors of the Company, officers of the Company and any person
controlling the Company within the meaning of Section 15 of the Act. Nothing in
this Agreement is intended or will be construed to give any person, other than
the persons referred to in this Section 13, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
14. Survival. The respective indemnities, representations, warranties and
agreements of the Company and the Initial Purchasers contained in this Agreement
or made by or on behalf of any of them, respectively, pursuant to this
Agreement, will survive the delivery of and payment for the Notes and will
remain in full force and effect, regardless of any investigation made by or on
behalf of any of them or any person controlling any of them.
15. Definition of the Term "Business Day". For purposes of this Agreement,
"Business Day" means any day on which the New York Stock Exchange, Inc. is open
for trading.
16. Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts will each be deemed to be an original but all such counterparts
will together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
[The remainder of this page is intentionally left blank.]
26
If the foregoing correctly sets forth the agreement among the Company and
the Initial Purchasers, please indicate your acceptance in the space provided
for that purpose below.
Very truly yours,
CITGO PETROLEUM CORPORATION
By: /s/ Philip J. Reedy
-------------------------
Name: Philip J. Reedy
Title: Treasurer
Accepted:
LEHMAN BROTHERS INC.
BNP PARIBAS SECURITIES CORP.
BNY CAPITAL MARKETS, INC.
CITIGROUP GLOBAL MARKETS INC.
SG AMERICAS SECURITIES, LLC
WESTLB AG, LONDON BRANCH
By LEHMAN BROTHERS INC.
AS AUTHORIZED REPRESENTATIVE
By: _____________________
Name:
Title:
SCHEDULE I
PRINCIPAL AMOUNT OF
NOTES TO BE
INITIAL PURCHASERS PURCHASED
------------------ ---------
Lehman Brothers Inc. .............. $207,140,000
BNP Paribas Securities Corp. ...... $ 8,572,000
BNY Capital Markets, Inc. ......... $ 8,572,000
Citigroup Global Markets Inc. ..... $ 8,572,000
SG Americas Securities, LLC ....... $ 8,572,000
WestLB AG, London Branch .......... $ 8,572,000
Total .......................... $250,000,000
============
I-1
SCHEDULE II
LIST OF SUBSIDIARIES
II-1
EXHIBIT A
FORM OF REGISTRATION RIGHTS AGREEMENT
Exhibit 4.1
EXECUTION COPY
CITGO PETROLEUM CORPORATION
Issuer
6% Senior Notes due 2011
INDENTURE
Dated as of October 22, 2004
J.P. MORGAN TRUST COMPANY, NATIONAL ASSOCIATION
Trustee
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be
part of the Indenture.
TABLE OF CONTENTS
Page
----
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.01. Definitions...................................................................... 1
Section 1.02. Other Definitions................................................................ 29
Section 1.03. Incorporation by Reference of Trust Indenture Act................................ 29
Section 1.04. Rules of Construction............................................................ 29
ARTICLE 2 THE NOTES
Section 2.01. Form and Dating.................................................................. 30
Section 2.02. Execution and Authentication..................................................... 30
Section 2.03. Registrar and Paying Agent....................................................... 31
Section 2.04. Paying Agent To Hold Money in Trust.............................................. 31
Section 2.05. Noteholder Lists................................................................. 31
Section 2.06. Transfer and Exchange............................................................ 32
Section 2.07. Replacement Notes................................................................ 32
Section 2.08. Outstanding Notes................................................................ 32
Section 2.09. Temporary Notes.................................................................. 32
Section 2.10. Cancellation..................................................................... 33
Section 2.11. Defaulted Interest............................................................... 33
Section 2.12. CUSIP Numbers.................................................................... 33
Section 2.13. Issuance of Additional Notes..................................................... 33
ARTICLE 3 REDEMPTION
Section 3.01. Notices to Trustee............................................................... 34
Section 3.02. Selection of Notes To Be Redeemed................................................ 34
Section 3.03. Notice of Redemption............................................................. 34
Section 3.04. Effect of Notice of Redemption................................................... 35
Section 3.05. Deposit of Redemption Price...................................................... 35
Section 3.06. Notes Redeemed in Part........................................................... 35
ARTICLE 4 COVENANTS
Section 4.01. Payment of Notes................................................................. 35
Section 4.02. SEC Reports...................................................................... 35
Section 4.03. Limitation on Indebtedness....................................................... 36
Section 4.04. Limitation on Restricted Payments................................................ 38
Section 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries......... 40
Section 4.06. Limitation on Sales of Assets and Subsidiary Stock............................... 42
Section 4.07. Limitation on Affiliate Transactions............................................. 44
Section 4.08. Limitation on Issuance of Guarantees of Indebtedness............................. 46
Section 4.09. Change of Control Triggering Event............................................... 47
Section 4.10. Limitation on Liens.............................................................. 48
Section 4.11. Compliance Certificate........................................................... 48
Section 4.12. Further Instruments and Acts..................................................... 48
Section 4.13. Investment Grade Covenants....................................................... 48
ARTICLE 5 SUCCESSOR COMPANY
Section 5.01. When Company May Merge or Transfer Assets........................................ 50
Section 5.02. When Subsidiary Guarantor May Merge or Transfer Assets........................... 51
ARTICLE 6 DEFAULTS AND REMEDIES
Section 6.01. Events of Default................................................................ 52
Section 6.02. Acceleration..................................................................... 53
Section 6.03. Other Remedies................................................................... 54
Section 6.04. Waiver of Past Defaults.......................................................... 54
Section 6.05. Control by Majority.............................................................. 54
Section 6.06. Limitation on Suits.............................................................. 54
Section 6.07. Rights of Holders to Receive Payment............................................. 55
Section 6.08. Collection Suit by Trustee....................................................... 55
Section 6.09. Trustee May File Proofs of Claim................................................. 55
Section 6.10. Priorities....................................................................... 55
Section 6.11. Undertaking for Costs............................................................ 56
Section 6.12. Waiver of Stay or Extension Laws................................................. 56
ARTICLE 7 TRUSTEE
Section 7.01. Duties of Trustee................................................................ 56
Section 7.02. Rights of Trustee................................................................ 57
Section 7.03. Individual Rights of Trustee..................................................... 58
Section 7.04. Trustee's Disclaimer............................................................. 58
Section 7.05. Notice of Defaults............................................................... 58
Section 7.06. Reports by Trustee to Holders.................................................... 59
Section 7.07. Compensation and Indemnity....................................................... 59
Section 7.08. Replacement of Trustee........................................................... 60
Section 7.09. Successor Trustee by Merger...................................................... 60
Section 7.10. Eligibility; Disqualification.................................................... 61
Section 7.11. Preferential Collection of Claims Against Company................................ 61
ARTICLE 8 DISCHARGE OF INDENTURE; DEFEASANCE
Section 8.01. Discharge of Liability on Notes; Defeasance...................................... 61
Section 8.02. Conditions to Defeasance......................................................... 62
Section 8.03. Application of Trust Money....................................................... 63
Section 8.04. Repayment to Company............................................................. 63
Section 8.05. Indemnity for Government Obligations............................................. 64
ii
Section 8.06. Reinstatement.................................................................... 64
ARTICLE 9 AMENDMENTS
Section 9.01. Without Consent of Holders....................................................... 64
Section 9.02. With Consent of Holders.......................................................... 65
Section 9.03. Compliance with Trust Indenture Act.............................................. 65
Section 9.04. Revocation and Effect of Consents and Waivers.................................... 66
Section 9.05. Notation on or Exchange of Notes................................................. 66
Section 9.06. Trustee To Sign Amendments....................................................... 66
Section 9.07. Payment for Consent.............................................................. 66
ARTICLE 10 SUBSIDIARY GUARANTIES
Section 10.01. Guaranties....................................................................... 67
Section 10.02. Limitation on Liability.......................................................... 68
Section 10.03. Successors and Assigns........................................................... 68
Section 10.04. No Waiver........................................................................ 69
Section 10.05. Modification..................................................................... 69
Section 10.06. Release of Subsidiary Guarantor.................................................. 69
Section 10.07. Form of Supplemental Indenture................................................... 69
ARTICLE 11 MISCELLANEOUS
Section 11.01. Trust Indenture Act Controls..................................................... 69
Section 11.02. Notices.......................................................................... 69
Section 11.03. Communication by Holders with Other Holders...................................... 70
Section 11.04. Certificate and Opinion as to Conditions Precedent............................... 71
Section 11.05. Statements Required in Certificate or Opinion.................................... 71
Section 11.06. When Notes Disregarded........................................................... 71
Section 11.07. Rules by Trustee, Paying Agent and Registrar..................................... 71
Section 11.08. Legal Holidays................................................................... 71
Section 11.09. Governing Law.................................................................... 72
Section 11.10. No Recourse Against Others....................................................... 72
Section 11.11. Successors....................................................................... 72
Section 11.12. Multiple Originals............................................................... 72
Section 11.13. Table of Contents; Headings...................................................... 72
iii
Exhibit I - Form of Supplemental Indenture to be Delivered By Subsidiary
Guarantors
Appendix - Rule 144A/Regulation S Appendix
Exhibit A (to Appendix) - Form of Initial Note
Exhibit II - Form of Exchange Note
iv
INDENTURE dated as of October 22, 2004, between CITGO PETROLEUM
CORPORATION, a Delaware corporation (the "Company"), and J.P. MORGAN TRUST
COMPANY, NATIONAL ASSOCIATION, a national banking association (the "Trustee").
Each party agrees as follows for the benefit of the other party and
for the equal and ratable benefit of the Holders of the Notes.
ARTICLE 1
Definitions and Incorporation by Reference
Section 1.01. Definitions.
"Additional Assets" means:
(1) any property, plant or equipment used in a Related Business;
(2) the Capital Stock of a Person that becomes a Restricted
Subsidiary as a result of the acquisition of such Capital Stock by the
Company or another Restricted Subsidiary; or
(3) Capital Stock constituting a minority interest in any Person
that at such time is a Restricted Subsidiary;
provided, however, that any such Restricted Subsidiary described in
clause (2) or (3) above is primarily engaged in a Related Business.
"Additional Notes" means, subject to the Company's compliance with
Section 4.03, 6% Senior Notes due 2011 issued from time to time after the Issue
Date under the terms of this Indenture (other than pursuant to Section 2.06,
2.07, 2.09 or 3.06 of this Indenture and other than Exchange Notes or Private
Exchange Notes issued pursuant to an exchange offer for other Notes outstanding
under this 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 the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any sale, lease, transfer or other
disposition by the Company or any Restricted Subsidiary, including any
disposition by means of a merger, consolidation or similar transaction (each
referred to for the purposes of this definition as a "disposition"), of:
(1) any shares of Capital Stock, or other ownership interests, of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary);
(2) substantially all the assets of any division or line of business
of the Company or any Restricted Subsidiary; or
(3) any other assets of the Company or any Restricted Subsidiary
outside of the ordinary course of business of the Company or such
Restricted Subsidiary
other than, in the case of clauses (1), (2) and (3) above, (A) a disposition by
a Restricted Subsidiary to the Company or by the Company to a Restricted
Subsidiary, (B) for purposes of Section 4.06 only, (x) a disposition that
constitutes a Restricted Payment (or would constitute a Restricted Payment but
for the exclusions from the definition thereof) and that is not prohibited by
Section 4.04, and (y) a disposition of all or substantially all the assets of
the Company in accordance with Section 5.01, (C) a disposition, whether in a
single transaction or a series of related transactions, of assets with a fair
market value of less than $10,000,000), (D) sales pursuant to a Qualified
Receivables Transaction of accounts receivable and related assets of the type
specified in the definition of "Qualified Receivables Transaction" to a
Receivables Subsidiary (in the case of a sale by the Company or any of its
Restricted Subsidiaries) or any other Person (in the case of a sale by a
Receivables Subsidiary), in each case, for the fair market value thereof,
including cash in an amount at least equal to 90% of the fair market value
thereof as determined in accordance with GAAP, (E) sales by the Company or any
Restricted Subsidiary of hydrocarbons or refined products therefrom that the
Company or any Restricted Subsidiary had previously acquired from the Permitted
Holder or any of its Subsidiaries pursuant to an arrangement between the Company
and the Permitted Holder providing for the resale by the Company or any
Restricted Subsidiary of the Permitted Holder's products for a customary fee,
(F) sales by the Company or any Restricted Subsidiary of inventory at fair
market value for cash consideration to the extent such cash consideration is
applied by the Company or such Restricted Subsidiary within 20 days of such sale
to acquire hydrocarbons or refined products, (G) the surrender or waiver of
contractual rights or the settlement, release or surrender of contract, tort or
other claims of any kind, (H) the exchange of assets held by the Company or a
Restricted Subsidiary for assets held by any Person or entity; provided that (i)
the assets received by the Company or such Restricted Subsidiary in any such
exchange will immediately constitute, be part of, or be used by the Company or
such Restricted Subsidiary; and (ii) any such assets received are of comparable
fair market value to the assets exchanged as determined in good faith by the
Company, and (I) a disposition of cash or Temporary Cash Investments.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended); provided, however, that if such Sale/Leaseback
Transaction results in a Capital Lease Obligation, the amount of Indebtedness
represented thereby will be determined in accordance with the definition of
"Capital Lease Obligation".
2
"Average Life" means, as of the date of determination, with respect
to any Indebtedness, the quotient obtained by dividing (1) the sum of the
products of the numbers of years from the date of determination to the dates of
each successive scheduled principal payment of such Indebtedness or redemption
or similar payment with respect to such Indebtedness multiplied by the amount of
such payment by (2) the sum of all such payments.
"Board of Directors" with respect to a Person means the Board of
Directors of such Person or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligation" means an obligation that is required to
be classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty. For purposes of Section 4.10, a Capital Lease Obligation shall be
deemed to be secured by a Lien on the property being leased.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means any of the following events:
(1) prior to the first public offering of common stock of the
Company, the Permitted Holder ceases to be the "beneficial owner" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of a majority in the aggregate of the total voting power of
the Voting Stock of the Company, whether as a result of issuance of
securities of the Company, any merger, consolidation, liquidation or
dissolution of the Company, or any direct or indirect transfer of
securities or otherwise (for purposes of this clause (1) and clause (2)
below, the Permitted Holder shall be deemed to beneficially own any Voting
Stock of a Person (the "specified person") held by any other Person (the
"parent entity") so long as the Permitted Holder beneficially owns (as so
defined), directly or indirectly, in the aggregate a majority of the
voting power of the Voting Stock of the parent entity);
(2) after the first public offering of common stock of the Company,
any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than the Permitted Holder, is or becomes the
beneficial owner (as defined in clause (1) above, except that for purposes
of this clause (2) such person shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total voting power
of the Voting Stock of the Company; provided, however, that the Permitted
3
Holder beneficially owns (as defined in clause (1) above), directly or
indirectly, in the aggregate a lesser percentage of the total voting power
of the Voting Stock of the Company than such other person and does not
have the right or ability by voting power, contract or otherwise to elect
or designate for election a majority of the Board of Directors of the
Company (for the purposes of this clause (2), such other person shall be
deemed to beneficially own any Voting Stock of a specified person held by
a parent entity, if such other person is the beneficial owner (as defined
in this clause (2)), directly or indirectly, of more than 35% of the
voting power of the Voting Stock of such parent entity and the Permitted
Holder beneficially owns (as defined in clause (1) above), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the Voting Stock of such parent entity and does not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent entity);
(3) individuals who on the Issue Date constituted the Board of
Directors of the Company (together with any new directors whose election
by such Board of Directors of the Company, or whose nomination for
election by the shareholders of the Company, was (A) approved by a vote of
a majority of the directors of the Company then still in office who were
either directors on the Issue Date or whose election or nomination for
election was previously so approved or (B) approved by the Permitted
Holder at a time when the Permitted Holder held, directly or indirectly, a
majority in the aggregate of the total voting power of the Voting Stock of
the Company) cease for any reason to constitute a majority of the Board of
Directors of the Company then in office;
(4) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
(5) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company (determined on
a consolidated basis) to another Person other than (i) a transaction in
which the survivor or transferee is a Person that is controlled by the
Permitted Holder or (ii) a transaction following which (A) in the case of
a merger or consolidation transaction, holders of securities that
represented 100% of the Voting Stock of the Company immediately prior to
such transaction (or other securities into which such securities are
converted as part of such merger or consolidation transaction) own
directly or indirectly at least a majority of the voting power of the
Voting Stock of the surviving Person in such merger or consolidation
transaction immediately after such transaction and in substantially the
same proportion as before the transaction and (B) in the case of a sale of
assets transaction, each transferee becomes an obligor in respect of the
Notes and a Subsidiary of the transferor of such assets.
"Change of Control Triggering Event" means the occurrence of both a
Change of Control and a Rating Decline with respect to the Notes.
"Chalmette Refining" means Chalmette Refining LLC, a Delaware
limited liability company.
4
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodity Agreement" means any commodity or raw material futures
contract, commodity or raw materials option, or any other agreement designed to
protect against or manage exposure to fluctuations in commodity or raw materials
prices, other than hydrocarbons.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.
"Consolidated Coverage Ratio" as of any date of determination means
the ratio of (x) the aggregate amount of EBITDA for the period of the most
recent four consecutive fiscal quarters prior to the date of such determination
for which internal financial statements are available to (y) Consolidated
Interest Expense for such four fiscal quarters; provided, however, that:
(1) if the Company or any Restricted Subsidiary has Incurred any
Indebtedness since the beginning of such period that remains outstanding
or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving effect on a pro forma basis to such Indebtedness
as if such Indebtedness had been Incurred on the first day of such period;
(2) if the Company or any Restricted Subsidiary has repaid,
repurchased, defeased or otherwise discharged any Indebtedness since the
beginning of such period or if any Indebtedness is to be repaid,
repurchased, defeased or otherwise discharged (in each case other than
Indebtedness Incurred under any revolving credit facility unless such
Indebtedness has been permanently repaid and has not been replaced) on the
date of the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio, EBITDA and Consolidated Interest Expense for
such period shall be calculated on a pro forma basis as if such discharge
had occurred on the first day of such period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used
to repay, repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, EBITDA for
such period shall be reduced by an amount equal to EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to
the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company
and its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the Capital Stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to
5
the Indebtedness of such Restricted Subsidiary to the extent the Company
and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale);
(4) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made a Material
Investment in any Restricted Subsidiary (or any person which becomes a
Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring
a calculation to be made hereunder, which constitutes all or substantially
all of an operating unit of a business, EBITDA and Consolidated Interest
Expense for such period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness and any pro forma
expense and cost reductions that have occurred or are reasonably expected
to occur, in the reasonable judgment of the chief financial officer of the
Company (regardless of whether those cost savings or operating
improvements could then be reflected in pro forma financial statements in
accordance with Regulation S-X promulgated under the Securities Act or any
regulation or policy of the SEC related thereto)) as if such Material
Investment or acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period)
shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or
(4) above if made by the Company or a Restricted Subsidiary during such
period, EBITDA and Consolidated Interest Expense for such period shall be
calculated after giving pro forma effect thereto as if such Asset
Disposition, Investment or acquisition occurred on the first day of such
period.
For purposes of this definition, whenever pro forma effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the pro forma calculations shall be determined
in good faith by a responsible financial or accounting Officer of the Company.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest on such Indebtedness shall be calculated as if the
rate in effect on the date of determination had been the applicable rate for the
entire period (taking into account any Interest Rate Agreement applicable to
such Indebtedness if such Interest Rate Agreement has a remaining term in excess
of 12 months).
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted Subsidiaries,
plus, to the extent not included in such total interest expense, and to the
extent incurred by the Company or its Restricted Subsidiaries, without
duplication:
(1) interest component of Capital Lease Obligations;
(2) amortization of debt discount;
(3) capitalized interest;
6
(4) non-cash interest expense;
(5) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(6) net payments pursuant to Hedging Obligations arising from
Interest Rate Agreements or Currency Agreements;
(7) dividends accrued in respect of all Preferred Stock held by
Persons other than the Company or a Restricted Subsidiary (other than
dividends payable solely in Capital Stock (other than Disqualified Stock)
of the Company); and
(8) interest accruing on any Indebtedness of any other Person to the
extent such Indebtedness is Guaranteed by (or secured by the assets of)
the Company or any Restricted Subsidiary, other than pursuant to Ordinary
Course Guarantees.
"Consolidated Net Income" means, for any period, the net income of
the Company and its consolidated Subsidiaries; provided, however, that there
shall not be included in such Consolidated Net Income:
(1) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that:
(A) subject to the exclusion contained in clause (3) below,
the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during
such period to the Company or a Restricted Subsidiary as a dividend
or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations
contained in clause (2) below) less, for purpose of Section 4.04
only, the aggregate amount of Investments in LCR made pursuant to
clause (13) of the definition of "Permitted Investments"; and
(B) the Company's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net
Income;
(2) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that:
(A) subject to the exclusion contained in clause (3) below,
the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed
by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to
another Restricted Subsidiary, to the limitation contained in this
clause); and
7
(B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(3) any gain (or loss) realized upon the sale or other disposition
of any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and
any gain (or loss) realized upon the sale or other disposition of any
Capital Stock of any Person;
(4) extraordinary gains or losses; and
(5) the cumulative effect of a change in accounting principles;
in each case, for such period. Notwithstanding the foregoing, for the purpose of
Section 4.04 only, there shall be excluded from Consolidated Net Income any
repurchases, repayments or redemptions of Investments, proceeds realized on the
sale of Investments or return of capital to the Company or a Restricted
Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or
returns increase the amount of Restricted Payments permitted under such Section
pursuant to clause (a)(3)(D) thereof. In addition, notwithstanding the
foregoing, for the purposes of Section 4.04 only, there shall be excluded from
Consolidated Net Income any nonrecurring charges relating to any premium or
penalty paid, write off of deferred finance costs or other charges in connection
with redeeming or retiring any Indebtedness prior to its stated maturity.
"Consolidated Net Tangible Assets" as of any date of determination,
means the consolidated total assets of the Company and its Restricted
Subsidiaries determined in accordance with GAAP, less the sum of
(1) all current liabilities and current liability items; and
(2) all 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 Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company for which internal financial statements are
available prior to the taking of any action for the purpose of which the
determination is being made, as the sum of:
(1) the par or stated value of all outstanding Capital Stock of the
Company plus
(2) paid-in capital or capital surplus relating to such Capital
Stock plus
(3) any retained earnings or earned surplus;
less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
8
"Credit Facilities" means one or more debt facilities (including,
without limitation, the Three-Year Credit Agreement), commercial paper
facilities or Debt Issuances, in each case with banks, investment banks,
insurance companies, mutual funds and/or other institutional lenders or
institutional investors providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such lenders
or to special purpose entities formed to borrow from (or sell receivables to)
such lenders against such receivables), letters of credit or Debt Issuances, in
each case, as amended, extended, renewed, restated, Refinanced (including,
Refinancing with Debt Issuances), supplemented or otherwise modified (in whole
or in part, and without limitation as to amount, terms, conditions, covenants
and other provisions) from time to time.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement or other similar agreement designed to protect against or manage
exposure to fluctuations in currency values.
"Debt Issuances" means, with respect to the Company or any
Guarantor, one or more issuances after the Issue Date of Indebtedness evidenced
by notes, debentures, bonds or other similar securities or instruments.
"Default" means any event which is, or after notice or passage of
time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder) or upon
the happening of any event:
(1) matures or is mandatorily redeemable (other than redeemable only
for Capital Stock of such Person which is not itself Disqualified Stock)
pursuant to a sinking fund obligation or otherwise;
(2) is convertible or exchangeable at the option of the holder for
Indebtedness or Disqualified Stock; or
(3) is mandatorily redeemable or must be purchased upon the
occurrence of certain events or otherwise, in whole or in part;
on or prior to the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to purchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Disqualified Stock if: (1) the "asset sale" or "change of control"
provisions applicable to such Capital Stock are not more favorable to the
holders of such Capital Stock than the terms applicable to the Notes in Sections
4.06 and 4.09 of this Indenture and (2) any such requirement only becomes
operative after compliance with such terms applicable to the Notes, including
the purchase of any Notes tendered pursuant thereto.
The amount of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price shall be calculated in accordance with
the terms of such Disqualified Stock as if such Disqualified Stock were
redeemed, repaid or
9
repurchased on any date on which the amount of such Disqualified Stock is to be
determined pursuant to the Indenture; provided, however, that if such
Disqualified Stock could not be required to be redeemed, repaid or repurchased
at the time of such determination, the redemption, repayment or repurchase price
shall be the book value of such Disqualified Stock as reflected in the most
recent financial statements of such Person.
"EBITDA" for any period means the sum of Consolidated Net Income,
plus the following to the extent deducted in calculating such Consolidated Net
Income:
(1) all income tax expense of the Company and its consolidated
Restricted Subsidiaries;
(2) Consolidated Interest Expense;
(3) depreciation and amortization expense of the Company and its
consolidated Restricted Subsidiaries (excluding amortization expense
attributable to a prepaid operating activity item that was paid in cash in
a prior period but including amortization of prepaid turnaround costs);
and
(4) all other non-cash charges of the Company and its consolidated
Restricted Subsidiaries (excluding any such non-cash charge to the extent
that it represents an accrual of or reserve for cash expenditures in any
future period);
in each case for such period. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated
Net Income to compute EBITDA only to the extent (and in the same proportion,
including by reason of minority interests) that the net income or loss of such
Restricted Subsidiary was included in calculating Consolidated Net Income and
only if a corresponding amount would be permitted at the date of determination
to be dividended to the Company by such Restricted Subsidiary without prior
approval (that has not been obtained), pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to such Restricted Subsidiary or its
stockholders.
"Equity Offering" means (i) any primary public offering or private
placement to any Person of Capital Stock (other than Disqualified Stock) of the
Company or (ii) any cash capital contribution received by the Company from any
holder of Capital Stock of the Company and which is accounted for as additional
Capital Stock equity (other than Disqualified Stock).
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as
amended.
"Exchange Notes" means the debt securities of the Company issued
pursuant to the Indenture in exchange for, and in an aggregate principal amount
equal to up to the aggregate principal amount of the Notes, in compliance with
the terms of the Registration Rights Agreement.
10
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in:
(1) the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants;
(2) statements and pronouncements of the Financial Accounting
Standards Board; and
(3) such other statements by such other entity as approved by a
significant segment of the accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any Person and
any obligation, direct or indirect, contingent or otherwise, of such Person:
(1) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay or to maintain
financial statement conditions or otherwise); or
(2) entered into for the purpose of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business or any subordination of
claims. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement, Currency Agreement, Hydrocarbon
Agreement or Commodity Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Hydrocarbon Agreement" means any purchase or hedging agreement of
hydrocarbons or refined products therefrom, future contract or option, or any
other agreement designed to protect against or manage exposure to fluctuations
in the price of hydrocarbons or refined products therefrom.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Restricted Subsidiary (whether
by merger, consolidation, acquisition or otherwise) shall be deemed to be
Incurred by such Person at the time it becomes a Restricted Subsidiary. The term
"Incurrence" when used as a noun shall have a corresponding meaning. Solely for
purposes of determining compliance with Section 4.03:
11
(1) amortization of debt discount or the accretion of principal with
respect to a non-interest bearing or other discount security;
(2) the payment of regularly scheduled interest in the form of
additional Indebtedness of the same instrument or the payment of regularly
scheduled dividends on Capital Stock in the form of additional Capital
Stock of the same class and with the same terms; and
(3) the obligation to pay a premium in respect of Indebtedness
arising in connection with the issuance of a notice of redemption or
making of a mandatory offer to purchase such Indebtedness
shall not be deemed to be the Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(1) the principal in respect of (A) indebtedness of such Person for
money borrowed and (B) indebtedness evidenced by notes, debentures, bonds
or other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(2) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered into
by such Person;
(3) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
Person and all obligations of such Person under any title retention
agreement (but excluding trade accounts payable arising in the ordinary
course of business);
(4) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, bankers' acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations covered in clauses (1)
through (3) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
tenth Business Day following payment on the letter of credit);
(5) the amount of all obligations of such Person that arise prior to
the first anniversary of the Stated Maturity of the Notes with respect to
the redemption, repayment or other repurchase of any Capital Stock of such
Person or any Subsidiary of such Person or that are determined by the
value of such Capital Stock, the amount of such obligations to be
determined in accordance with the Indenture (but excluding, in each case,
any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through
(5) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
12
(7) all obligations of the type referred to in clauses (1) through
(6) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets and the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
Notwithstanding the foregoing, in connection with the purchase by
the Company or any Restricted Subsidiary of any business, the term
"Indebtedness" shall exclude post-closing payment adjustments to which the
seller may become entitled to the extent such payment is determined by a final
closing balance sheet or such payment depends on the performance of such
business after the closing; provided, however, that, at the time of closing, the
amount of any such payment is not determinable and, to the extent such payment
thereafter becomes fixed and determined, the amount is paid within 30 days
thereafter.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date (but
excluding penalties, indemnities and costs), provided, however, that in the case
of Indebtedness sold at a discount, the amount of such Indebtedness at any time
will be the accreted value thereof at such time.
"Indenture" means this Indenture as amended or supplemented from
time to time.
"Independent Qualified Party" means an investment banking firm,
accounting firm or appraisal firm of national standing in the United States of
the Company's choice; provided, however, that in each case such firm is not an
Affiliate of the Company.
"Initial Notes" means (1) $250,000,000 aggregate principal amount of
6% Senior Notes due 2011 issued on the Issue Date, and (2) Additional Notes, if
any, issued in a transaction exempt from the registration requirements of the
Securities Act.
"Initial Purchasers" means (1) with respect to the Initial Notes
issued on the Issue Date, Lehman Brothers Inc., BNP Paribas Securities Corp.,
BNY Capital Markets, Inc., Citigroup Global Markets Inc., SG Americas
Securities, LLC and WestLB AG, London Branch, and (2) with respect to each
issuance of Additional Notes, the Persons purchasing or underwriting such
Additional Notes under the related Purchase Agreement.
"Intercompany Trade Arrangements" means transactions between the
Company and the Permitted Holder pursuant to which the Permitted Holder sells
hydrocarbons to the Company in the ordinary course of business and the Company
thereafter transfers the related trade payable to one or more of its
shareholders pending payment thereof and subsequently dividends or otherwise
transfers funds to such
13
shareholder in an amount equal to such trade payable, which amount is used by
such shareholder to discharge such trade payable.
"Interest Rate Agreement" means any interest rate swap agreement,
interest rate cap agreement or other financial agreement or arrangement
(including caps, swaps, floors, collars and similar arrangements) designed to
protect against or manage exposure to fluctuations in interest rates.
"Investment" in any Person means any direct or indirect advance,
loan (other than advances to customers in the ordinary course of business that
are recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. Except as otherwise provided for
herein, the amount of an Investment shall be its fair value at the time the
Investment is made and without giving effect to subsequent changes in value.
For purposes of the definition of "Unrestricted Subsidiary", the
definition of "Restricted Payment" and Section 4.04,
(1) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Company shall be deemed to continue to have a permanent "Investment"
in an Unrestricted Subsidiary in an amount (if positive) equal to (x) the
Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of
such Subsidiary at the time of such redesignation; 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 Board of Directors of the
Company.
"Investment Grade Rating" means:
(1) A Moody's rating of Baa3 or higher and an S&P rating of at least
BB+ or
(2) A Moody's rating of Ba1 or higher and an S&P rating of at least
BBB-;
provided, however, that if (i) either Moody's or S&P changes its rating system,
such ratings will be the equivalent ratings after such changes or (ii) if S&P or
Moody's or both shall not make a rating of the Notes publicly available, the
references above 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 Company, and the references to
14
the ratings categories above shall be to the corresponding rating categories of
such rating agency or rating agencies, as the case may be.
"Investment Grade Rating Event" means the first day on which the
Notes are assigned an Investment Grade Rating.
"Issue Date" means October 22, 2004.
"LCR" means Lyondell-CITGO Refining LP, a Delaware limited
partnership.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions are not required to be open in the State of New York.
"Lenders" has the meaning specified in the Three-Year Credit
Agreement.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind (including any conditional sale or other title
retention agreement or lease in the nature thereof).
"Material Investment" means an Investment which has, at the time
such Investment is made and without giving effect to subsequent changes in
value, a fair value in excess of $5,000,000.
"Merey Sweeny" means Merey Sweeny LP, a Delaware limited
partnership.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
and proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or assets or
received in any other non-cash form), in each case net of:
(1) all legal, title and recording tax expenses, commissions and
other fees and expenses incurred, and all Federal, state, provincial,
foreign and local taxes required to be accrued as a liability under GAAP,
as a consequence of such Asset Disposition;
(2) all payments made on any Indebtedness which is secured by any
assets subject to such Asset Disposition, in accordance with the terms of
any Lien upon or other security agreement of any kind with respect to such
assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of
the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to
minority interest holders in Restricted Subsidiaries as a result of such
Asset Disposition; and
15
(4) the deduction of appropriate amounts provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and
retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock or Indebtedness, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
Incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Notes" means the Notes issued under this Indenture, including the
Initial Notes, the Exchange Notes and the Private Exchange Notes.
"Obligations" means, with respect to any Indebtedness, all
obligations for principal, premium, interest, penalties, fees, indemnifications,
reimbursements, and other amounts payable pursuant to the documentation
governing such Indebtedness.
"Offering Memorandum" means the Confidential Offering Memorandum
dated October 15, 2004 relating to the Initial Notes.
"Officer" means the Chairman of the Board, the President, any Vice
President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who
is acceptable to the Trustee. The counsel may be an employee of or counsel to
the Company or the Trustee.
"Ordinary Course Guarantees" means Guarantees issued by the Company
or any Restricted Subsidiary in the ordinary course of business with respect to
Indebtedness of any distributor or customer of the Company's or any Restricted
Subsidiary's products in an amount which, when taken together with the amount of
all other outstanding Ordinary Course Guarantees, does not exceed $35,000,000.
"PDV America" means PDV America, Inc., a Delaware corporation.
"PDV Chalmette" means PDV Chalmette, Inc., a Delaware corporation.
"PDV Entity" means PDV America, PDV Chalmette, PDV Holding, PDV
Sweeny, PDV Texas, PDV USA and any other Subsidiary of PDV Holding that is not
the Company or a Subsidiary of the Company that is a party to a tax sharing or
tax allocation agreement or other similar tax sharing or tax allocation
arrangement that includes PDV Holding and the Company.
"PDV Holding" means PDV Holding, Inc., a Delaware corporation.
"PDV Sweeny" means PDV Sweeny, Inc., a Delaware corporation.
"PDV Texas" means PDV Texas, Inc., a Delaware corporation.
16
"PDV USA" means PDV USA, Inc., a Delaware corporation.
"Permitted Holder" means Petroleos de Venezuela, SA, a corporation
organized in Venezuela, and its wholly owned Subsidiaries.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in:
(1) (w) the Company, (x) a Restricted Subsidiary, (y) a government
or any agency or political subdivision thereof holding Indebtedness of the
Company or a Restricted Subsidiary in a principal amount equal to, and
Incurred by the Company or such Restricted Subsidiary to provide credit
support for, such Person's issuance of industrial revenue or similar
tax-exempt or taxable bonds for the benefit of the Company or such
Restricted Subsidiary or (z) a Person that will, upon the making of such
Investment, become a Restricted Subsidiary; provided, however, that the
primary business of such Restricted Subsidiary is a Related Business;
(2) another Person if, as a result of such Investment, such other
Person is merged or consolidated with or into, or transfers or conveys all
or substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is a
Related Business;
(3) cash and Temporary Cash Investments;
(4) receivables owing to the Company or any Restricted Subsidiary if
created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however,
that such trade terms may include such concessionary trade terms as the
Company or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) payroll, travel, entertainment, relocation and similar advances
to cover matters that are expected at the time of such advances ultimately
to be treated as expenses for accounting purposes and that are made in the
ordinary course of business;
(6) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary;
(7) stock, obligations or securities received in settlement of debts
created in the ordinary course of business and owing to the Company or any
Restricted Subsidiary or in satisfaction of judgments;
(8) any Person to the extent such Investment represents the non-cash
portion of the consideration received for an Asset Disposition as
permitted pursuant to Section 4.06;
(9) any Person where such Investment was acquired by the Company or
any of its Restricted Subsidiaries (a) in exchange for any other
Investment or accounts receivable held by the Company or any such
Restricted Subsidiary in
17
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 Company 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;
(10) any Person to the extent such Investments consist of prepaid
expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits made in
the ordinary course of business by the Company or any Restricted
Subsidiary;
(11) any Person to the extent such Investments consist of Hedging
Obligations otherwise not prohibited under Section 4.03;
(12) any Person to the extent such Investments are in existence on
the Issue Date;
(13) LCR to the extent such Investments do not exceed, in the
aggregate, the aggregate amount of cash dividends distributed after the
Issue Date by LCR to the Company; provided, however, that such cash
dividends have not previously served as the basis for a Restricted Payment
made pursuant to Section 4.04;
(14) LCR to the extent such Investments do not exceed $25,000,000 in
the aggregate outstanding at any time;
(15) any Specified Refinery Joint Venture to the extent such
Investments do not exceed, in the aggregate, the aggregate amount of cash
dividends distributed after the Issue Date by such Specified Refinery
Joint Venture to the Company and/or the applicable Restricted Subsidiary
or Restricted Subsidiaries; provided, however, that such cash dividends
have not previously served as the basis for a Restricted Payment made
pursuant to Section 4.04;
(16) any Specified Refinery Joint Venture to the extent such
Investment, when taken together with all other Investments made in
Specified Refinery Joint Ventures pursuant to this clause (16) and then
outstanding, do not exceed $25,000,000;
(17) any obligation of a PDV Entity that results from the payment by
the Company on behalf of such PDV Entity of income taxes owed by such PDV
Entity pursuant to a tax sharing or tax allocation agreement or other
similar tax sharing or tax allocation arrangement; provided, however, that
such PDV Entity is obligated, by law or contract, to repay such obligation
within 24 months of the date of the incurrence of such obligation; and
provided further, that any such obligation that is not repaid within 24
months of the date such obligation is first incurred shall be considered a
Restricted Payment and shall be included in the calculation of the amount
of Restricted Payments described in Section 4.04;
(18) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of suppliers and customers and in
settlement of delinquent obligations of, and other disputes with,
customers and suppliers arising in the ordinary course of business;
18
(19) advances to employees for moving, relocation, travel and
entertainment, payroll advances and other similar advances to cover
matters that are expected at the time of such advances to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business; and
(20) Persons to the extent such Investments, when taken together
with all other Investments made pursuant to this clause (20) and then
outstanding, do not exceed the greater of (x) $100,000,000 and (y) 1.8% of
Consolidated Net Tangible Assets (determined as of the end of the most
recent fiscal quarter of the Company for which internal financial
statements are available).
"Permitted Liens" means, with respect to any Person,
(1) pledges or deposits by such Person under worker'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 United States 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,
materialmen's and mechanics' Liens, in each case for sums which are not
overdue by a period of more than 45 days or which are 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
and Liens arising solely by virtue of any statutory or common law
provision relating to banker's Liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; provided, however, that (A) such deposit
account is not a dedicated cash collateral account and is not subject to
restrictions against access by the Company in excess of those set forth by
regulations promulgated by the Federal Reserve Board and (B) such deposit
account is not intended by the Company or any Restricted Subsidiary to
provide collateral to the depository institution;
(3) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith by appropriate
proceedings;
(4) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in
the ordinary course of its business; provided, however, that such letters
of credit do not constitute Indebtedness;
(5) Liens incidental to the normal conduct of the business of such
Person or any of its Subsidiaries or the ownership of its properties or
the conduct of the ordinary course of its business, including (A) zoning
restrictions, easements, rights of way, reservations, restrictions on the
use of real property and other minor irregularities of title, (B) rights
of lessees under leases, (C) rights of collecting banks having rights of
setoff, revocation, refund or chargeback with respect to
19
money or instruments of such Person or any of its Subsidiaries on deposit
with or in the possession of such banks, (D) Liens to secure the
performance of statutory obligations, tenders, bids, leases, progress
payments, performance or return-of-money bonds, performance or other
similar bonds or other obligations of a similar nature incurred in the
ordinary course of business; (E) Liens required by any contract or statute
in order to permit such Person or any of its Subsidiaries to perform any
contract or subcontract made by it with or pursuant to the requirements of
a governmental entity, and (F) "first purchaser" Liens on crude oil, in
each case which are not incurred in connection with the Incurrence of
Indebtedness and which do not in the aggregate impair the use and
operation of the assets to which they relate in the conduct of the
business of such Person and its Subsidiaries taken as a whole;
(6) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions
to, property, plant or equipment of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or any
of its Restricted Subsidiaries at the time the Lien is Incurred (other
than assets and property affixed or appurtenant thereto), and the
Indebtedness (other than any interest thereon) secured by the Lien may not
be Incurred more than 180 days after the later of the acquisition,
completion of construction, repair, improvement, addition or commencement
of full operation of the property subject to the Lien;
(7) Liens to secure Indebtedness Incurred under the Credit
Facilities pursuant to Section 4.03;
(8) Liens incurred on deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security;
(9) Liens existing on the Issue Date;
(10) Liens on property or shares of Capital Stock of another Person
at the time such other Person becomes a Subsidiary of such Person;
provided, however, that the Liens may not extend to any other property
owned by such Person or any of its Restricted Subsidiaries (other than
assets and property affixed or appurtenant thereto);
(11) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of
a merger or consolidation with or into such Person or a Subsidiary of such
Person; provided, however, that the Liens may not extend to any other
property owned by such Person or any of its Restricted Subsidiaries (other
than assets and property affixed or appurtenant thereto);
(12) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a Restricted Subsidiary;
(13) Liens securing Hedging Obligations permitted to be Incurred
under the Indenture;
20
14) customary Liens incurred by the Company or any Restricted
Subsidiary and resulting from a Qualified Receivables Transaction;
(15) Liens on properties securing all or part of the costs incurred
in the ordinary course of business of exploration, drilling, development
or operation thereof;
(16) Liens on pipeline or pipeline facilities which arise out of
operation of law;
(17) Liens reserved in oil and gas mineral leases for bonus or
rental payments and for compliance with the terms of such leases;
(18) Liens arising under partnership agreements, oil and gas leases,
farm-out agreements, division orders, contracts for the sale, purchase,
exchange, transportation or processing of oil, gas or other hydrocarbons,
unitization and pooling declarations and agreements, development
agreements, operating agreements, area of mutual interest agreements, and
other agreements which are customary in a Related Business; and
(19) Liens to secure any Refinancing (or successive Refinancings) as
a whole, or in part, of any Indebtedness secured by any Lien referred to
in the foregoing clause (6), (9) or (11); provided, however, that:
(A) such new Lien shall be limited to all or part of the same
property and assets that secured or, under the written agreements
pursuant to which the original Lien arose, could secure the original
Lien (plus improvements and accessions to, such property or proceeds
or distributions thereof); and
(B) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (x) the outstanding
principal amount or, if greater, committed amount of the
Indebtedness described under clause (6), (9) or (11), at the time
the original Lien became a Permitted Lien and (y) an amount
necessary to pay any fees and expenses, including premiums, related
to such refinancing, refunding, extension, renewal or replacement.
Notwithstanding the foregoing, "Permitted Liens" shall not include any Lien
described in clauses (6), (9) or (11) above to the extent such Lien applies to
any Additional Assets acquired directly or indirectly from Net Available Cash
pursuant to Section 4.06. For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedne
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the
21
payment of dividends or distributions, or as to the distribution of assets upon
any voluntary or involuntary liquidation or dissolution of such Person, over
shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become due
at the relevant time.
"Principal Property" means:
(1) any refinery and related pipelines, terminalling and processing
equipment; or
(2) any other real property or marketing assets or related group of
the Company's assets having a fair market value in excess of $20,000,000.
"Private Exchange" means the offer by the Company, pursuant to the
Registration Rights Agreement, to the Initial Purchasers to issue and deliver to
each Initial Purchaser, in exchange for the Initial Notes held by the Initial
Purchaser as part of its initial distribution, a like aggregate principal amount
of Private Exchange Notes.
"Private Exchange Notes" means any 6% Senior Notes due 2011 issued
in connection with a Private Exchange.
"Purchase Agreement" means with (1) respect to the Initial Notes
issued on the Issue Date, the Purchase Agreement dated October 15, 2004, among
the Company and the Initial Purchasers, and (2) with respect to each issuance of
Additional Notes, the purchase agreement or underwriting agreement among the
Company and the Persons purchasing or underwriting such Additional Notes.
"Qualified Receivables Transaction" means any transaction or series
of transactions entered into by the Company or any of its Restricted
Subsidiaries pursuant to which the Company or any of its Restricted Subsidiaries
sells, conveys or otherwise transfers to (i) a Receivables Subsidiary (in the
case of a transfer by the Company or any of its Restricted Subsidiaries) and
(ii) any other Person (in the case of a transfer by a Receivables Subsidiary),
or grants a security interest in, any accounts receivable (whether now existing
or arising in the future) of the Company or any of its Restricted Subsidiaries,
and any assets related thereto, including all collateral securing such accounts
receivable, all contracts and all guarantees or other obligations in respect of
such accounts receivable, proceeds of such accounts receivable and other assets
which are customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable; provided, however, that the accounts receivable
of the Company or any of its Restricted Subsidiaries subject to all Qualified
Receivables Transactions and outstanding on the date any such accounts
receivable are transferred by the Company or a Restricted Subsidiary have,
together with the accounts receivable transferred on such date, a balance that
does not exceed in the aggregate the greater of (A) $400,000,000 and (B) 5% of
net sales of the Company and its Restricted Subsidiaries during the four fiscal
quarter period ending on the last day of the most recent fiscal quarter for
which the Company has issued consolidated financial statements.
22
"Rating Decline" means the occurrence of a decrease in the rating of
the Notes by one or more gradations by either Moody's or S&P (including
gradations within the rating categories, as well as between categories), within
90 days before or after the earlier of (x) a Change of Control, (y) the date of
public notice of the occurrence of a Change of Control or (z) public notice of
the intention of the Company to effect a Change of Control (which 90-day period
shall be extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by either Moody's or S&P).
"Receivables Subsidiary" means a Subsidiary of the Company which
engages in no activities other than in connection with the financing of accounts
receivable and which is designated by the Board of Directors of the Company (as
provided below) as a Receivables Subsidiary (a) no portion of the Indebtedness
or any other Obligations (contingent or otherwise) of which (i) is Guaranteed by
the Company or any of its Restricted Subsidiaries (but excluding customary
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction), (ii) is recourse to or obligates the Company or any of its
Restricted Subsidiaries in any way other than pursuant to customary
representations, warranties, covenants and indemnities entered into in
connection with a Qualified Receivables Transaction or (iii) subjects any
property or asset of the Company or any of its Restricted Subsidiaries (other
than accounts receivable and interests therein and related assets as provided in
the definition of "Qualified Receivables Transaction"), directly or indirectly,
contingently or otherwise, to the satisfaction thereof, other than pursuant to
customary representations, warranties, covenants and indemnities entered into in
the ordinary course of business in connection with a Qualified Receivables
Transaction, (b) with which neither the Company nor any of its Restricted
Subsidiaries has any material contract, agreement, arrangement or understanding
other than on terms no less favorable to the Company or such Restricted
Subsidiary than those that might be obtained at the time from Persons who are
not Affiliates of the Company, other than fees payable in the ordinary course of
business in connection with servicing accounts receivable and (c) with which
neither the Company nor any of its Restricted Subsidiaries has any obligation to
maintain or preserve such Subsidiary's financial condition or cause such
Subsidiary to achieve certain levels of operating results. Any such designation
by the Board of Directors of the Company will be evidenced to the Trustee by
filing with the Trustee a certified copy of the resolution of the Board of
Directors of the Company giving effect to such designation and an Officer's
Certificate certifying that such designation complied with the foregoing
conditions.
"Refinance" means, in respect of any Indebtedness, to refinance,
extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue
other Indebtedness in exchange or replacement for, such Indebtedness.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with this Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that:
(1) such Refinancing Indebtedness has a Stated Maturity no earlier
than the Stated Maturity of the Indebtedness being Refinanced;
23
(2) such Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than
the Average Life of the Indebtedness being Refinanced;
(3) such Refinancing Indebtedness has an aggregate principal amount
(or if Incurred with original issue discount, an aggregate issue price)
that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium
and defeasance costs) under the Indebtedness being Refinanced; and
(4) if the Indebtedness being Refinanced is subordinated in right of
payment to the Notes, such Refinancing Indebtedness is subordinated in
right of payment to the Notes at least to the same extent as the
Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include (A)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Registration Rights Agreement" means the Registration Rights
Agreement to be dated the Issue Date, among the Company and the initial
purchasers.
"Related Business" means any business in which the Company was
engaged on the Issue Date and any business related, ancillary or complementary
to any business of the Company in which the Company was engaged on the Issue
Date.
"Restricted Payment" with respect to any Person means
(1) the declaration or payment of any dividends or any other
distributions of any sort in respect of its Capital Stock (including any
payment in connection with any merger or consolidation involving such
Person) or similar payment to the direct or indirect holders of its
Capital Stock (other than dividends or distributions payable solely in its
Capital Stock (other than Disqualified Stock) and dividends or
distributions payable solely to the Company or a Restricted Subsidiary,
and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Restricted Subsidiary to minority stockholders
(or owners of an equivalent interest in the case of a Subsidiary that is
an entity other than a corporation));
(2) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company held by any Person or of any
Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including in connection with
any merger or consolidation and including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the Company
that is not Disqualified Stock);
(3) the purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment of any Subordinated
Obligations of such Person
24
(other than the purchase, repurchase or other acquisition of Subordinated
Obligations 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 such purchase, repurchase or other
acquisition); or
(4) the making of any Investment (other than a Permitted Investment)
in any Person.
Notwithstanding the foregoing, Intercompany Trade Arrangements shall not be
included in the definition of "Restricted Payment."
"Restricted Subsidiary" means any Subsidiary of the Company that is
not an Unrestricted Subsidiary. All of the Subsidiaries of the Company on the
Issue Date will be Restricted Subsidiaries on the Issue Date.
"Sale/Leaseback Transaction" means an arrangement relating to
property owned by the Company or a Restricted Subsidiary on the Issue Date or
thereafter acquired by the Company or a Restricted Subsidiary whereby the
Company or a Restricted Subsidiary transfers such property to a Person and the
Company or a Restricted Subsidiary leases it from such Person.
"S&P" means Standard & Poor's Ratings Group, a division of The
McGraw-Hill Companies, Inc., and its successors.
"SEC" means the U.S. Securities and Exchange Commission.
"Securities Act" means the U.S. Securities Act of 1933, as amended.
"Senior Indebtedness" means with respect to any Person:
(1) Indebtedness of such Person, whether outstanding on the Issue
Date or thereafter Incurred; and
(2) all other Obligations of such Person (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to such Person whether or not post-filing interest
is allowed in such proceeding) in respect of Indebtedness described in
clause (1) above,
unless, in the case of clauses (1) and (2), in the instrument creating or
evidencing the same or pursuant to which the same is outstanding, it is provided
that such Indebtedness or other obligations are subordinate in right of payment
to the Notes; provided, however, that Senior Indebtedness shall not include:
(1) any obligation of such Person to the Company or any Subsidiary
of the Company;
(2) any liability for Federal, state, local or other taxes owed or
owing by such Person;
(3) any accounts payable or other liability to trade creditors
arising in the ordinary course of business (including guarantees thereof
or instruments evidencing such liabilities);
25
(4) any Indebtedness or other Obligation of such Person which is
subordinate or junior in any respect to any other Indebtedness or other
Obligation of such Person; or
(5) that portion of any Indebtedness which at the time of Incurrence
is Incurred in violation of this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would
be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02
under Regulation S-X promulgated by the SEC.
"Specified Refinery Joint Venture" means Chalmette Refining, Merey
Sweeny or Sweeny Coker, all of the partnership, membership or other equity
interests of which in each such case are owned (x) 50% by the Company and/or one
or more Restricted Subsidiaries and (y) 50% by a Person or Persons that are not
Affiliates of the Company.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the Holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means, with respect to any Person, any
Indebtedness of such Person (whether outstanding on the Issue Date or thereafter
incurred) which is subordinate or junior in right of payment to the Notes or a
Subsidiary Guaranty of such person, as the case may be, pursuant to a written
agreement to that effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Voting Stock is at the time owned or controlled,
directly or indirectly, by: (1) such Person; (2) such Person and one or more
Subsidiaries of such Person; or (3) one or more Subsidiaries of such Person.
"Subsidiary Guarantor" means any Restricted Subsidiary of the
Company if and so long as such Restricted Subsidiary guarantees payment of the
Notes on the terms and conditions set forth in the Indenture. As of the Issue
Date there are no Subsidiary Guarantors.
"Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of
the Company's obligations with respect to the Notes.
"Sweeny Coker" means Sweeny Coker LLC, a Delaware limited liability
company.
"Temporary Cash Investments" means any of the following:
26
(1) any investment in direct obligations of the United States of
America or any agency thereof or obligations guaranteed by the United
States of America or any agency thereof;
(2) investments in demand and time deposit accounts, certificates of
deposit, eurodollar time deposits and money market deposits maturing
within 360 days of the date of acquisition thereof issued by a bank or
trust company which is organized under the laws of the United States of
America, any State thereof or any foreign country recognized by the United
States of America, and which bank or trust company has capital, surplus
and undivided profits aggregating in excess of $50,000,000 (or the foreign
currency equivalent thereof) and has outstanding debt that is rated "A"
(or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under
the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor;
(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2) above;
(4) investments in commercial paper, maturing not more than 360 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-2" (or higher) according to Moody's or "A-2" (or
higher) according to S&P; and
(5) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by S&P or "A2" by Moody's;
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 (4) above or securities of
the type referred to in clause (5) above publicly available, the references in
clause (4) or (5) 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 Company, and the references to the ratings
categories in clause (4) or (5) 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.
"Three-Year Credit Agreement" means the three-year credit agreement
entered into as of December 11, 2002, among the Company, the Lenders and Bank of
America, N.A. as Administrative Agent, together with the related documents
thereto (including the revolving loan facility, note purchase or placement
facility, letter of credit facility or other arrangement for the extension of
credit thereunder, any guarantees and security documents), as amended, extended,
renewed, restated, supplemented or otherwise modified (in whole or in part, and
without limitation as to amount, terms, conditions, covenants and other
provisions) from time to time, and any Debt Issuances or agreement (and related
document) governing Indebtedness incurred to Refinance, in whole or in part, the
borrowings and commitments then outstanding or permitted to be
27
outstanding under such credit agreement or a successor credit agreement, whether
by the same or any other lender or group of lenders.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
(15 U.S.C. Section-77aaa-77bbbb) as in effect on the Issue Date.
"Trust Officer" means the Chairman of the Board, the President or
any other officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Trustee" means J.P. Morgan Trust Company, National Association
until a successor replaces it and, thereafter, means the successor.
"Uniform Commercial Code" means the New York Uniform Commercial Code
as in effect from time to time.
"Unrestricted Subsidiary" means:
(1) any Subsidiary of the Company that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors
of the Company in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Company may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated or an Unrestricted Subsidiary; provided, however,
that either (A) the Subsidiary to be so designated has total assets of $1,000 or
less or (B) if such Subsidiary has assets greater than $1,000, such designation
would be permitted under Section 4.04. The Board of Directors of the Company may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided,
however, that immediately after giving effect to such designation (A) the
Company could Incur $1.00 of additional Indebtedness under Section 4.03(a) and
(B) no Default shall have occurred and be continuing. Any such designation by
the Board of Directors of the Company shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors of the Company giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or
other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
28
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares) is owned by the
Company or one or more Wholly Owned Subsidiaries.
Section 1.02 Other Definitions.
Defined in
Term Section
---- -------
"Affiliate Transaction".................................. 4.07
"Bankruptcy Law"......................................... 6.01
"Custodian".............................................. 6.01
"Event of Default"....................................... 6.01
"Paying Agent"........................................... 2.03
"Registrar".............................................. 2.03
"Successor Company"...................................... 5.01(1)
Section 1.03. Incorporation by Reference of Trust Indenture Act.
This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:"Commission" means the SEC; -
"indenture securities" means the Notes;
"indenture security holder" means a Noteholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
and
"obligor" on the indenture securities means the Company and any
other obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
Section 1.04. Rules of Construction. Unless the context otherwise
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
29
(5) words in the singular include the plural and words in the plural
include the singular;
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof that
would be shown on a balance sheet of the issuer dated such date prepared
in accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater; and
(9) all references to the date the Initial Notes were originally
issued shall refer to the Issue Date.
ARTICLE 2
The Notes
Section 2.01. Form and Dating. Provisions relating to the Initial
Notes, the Private Exchange Notes and the Exchange Notes are set forth in the
Rule 144A/Regulation S Appendix attached hereto (the "Appendix") which is hereby
incorporated in and expressly made part of this Indenture. The Initial Notes and
the Trustee's certificate of authentication shall be substantially in the form
of Exhibit A to the Appendix which is hereby incorporated in and expressly made
a part of this Indenture. The Exchange Notes, the Private Exchange Notes and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit II, which is hereby incorporated in and expressly made a part of this
Indenture. The Notes may have notations, legends or endorsements required by
law, stock exchange rule, agreements to which the Company is subject, if any, or
usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Note shall be dated the date of its
authentication. The terms of the Notes set forth in the Appendix and Exhibit II
are part of the terms of this Indenture.Section 2.02. Execution and
Authentication. Two Officers shall sign the Notes for the Company by manual or
facsimile signature. If an Officer whose signature is on a Note no longer holds
that office at the time the Trustee authenticates the Note, the Note shall be
valid nevertheless.A Note shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Note. The
signature shall be conclusive evidence that the Note has been authenticated
under this Indenture.
On the Issue Date, the Trustee shall authenticate and deliver
$250,000,000 of 6% Senior Notes due 2011 and, at any time and from time to time
thereafter, the Trustee shall authenticate and deliver Notes for original issue
in an aggregate principal amount specified in such order, in each case upon a
written order of the Company signed by two Officers or by an Officer and either
an Assistant Treasurer or an Assistant Secretary of the Company. Such order
shall specify the amount of the Notes to be
30
authenticated and the date on which the original issue of Notes is to be
authenticated and, in the case of an issuance of Additional Notes pursuant to
Section 2.13 after the Issue Date, shall certify that such issuance is in
compliance with Section 4.03.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Notes. Unless limited by the terms
of such appointment, an authenticating agent may authenticate Notes whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as any Registrar, Paying Agent or agent for service of notices and
demands.
Section 2.03. Registrar and Paying Agent. The Company shall maintain
an office or agency where Notes may be presented for registration of transfer or
for exchange (the "Registrar") and an office or agency where Notes may be
presented for payment (the "Paying Agent"). The Registrar shall keep a register
of the Notes and of their registration of transfer and exchange. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with
any Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agency agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee in writing of the name and address of any such agent. If the Company
fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and
shall be entitled to appropriate compensation therefor pursuant to Section 7.07.
The Company or any Wholly Owned Subsidiary incorporated or organized within The
United States of America may act as Paying Agent, Registrar, co-registrar or
transfer agent.
The Company initially appoints the Trustee as Registrar and Paying
Agent in connection with the Notes. The Registrar and Paying Agent shall be
entitled to the rights and immunities of the Trustee hereunder.
Section 2.04. Paying Agent To Hold Money in Trust. Prior to 11:00
a.m., New York time, on or prior to each due date of the principal and interest
on any Note, the Company shall deposit with the Paying Agent a sum sufficient to
pay such principal and interest when so becoming due. The Company shall require
each Paying Agent (other than the Trustee) to agree in writing that the Paying
Agent shall hold in trust for the benefit of Noteholders or the Trustee all
money held by the Paying Agent for the payment of principal of or interest on
the Notes and shall notify the Trustee in writing of any default by the Company
in making any such payment. If the Company or a Subsidiary acts as Paying Agent,
it shall segregate the money held by it as Paying Agent and hold it as a
separate trust fund. The Company at any time may require a Paying Agent to pay
all money held by it to the Trustee and to account for any funds disbursed by
the Paying Agent. Upon complying with this Section, the Paying Agent shall have
no further liability for the money delivered to the Trustee.
Section 2.05. Noteholder Lists. The Trustee shall preserve in as
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Noteholders and shall otherwise comply with TIA
Section 312(a). If the Trustee is
31
not the Registrar, the Company shall furnish to the Trustee, in writing at least
five Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of Noteholders.
Section 2.06. Transfer and Exchange. The Notes shall be issued in
registered form and shall be transferable only upon the surrender of a Note
being transferred for registration of transfer. When a Note is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of this Indenture
and Section 8-401(a) of the Uniform Commercial Code are met. When Notes are
presented to the Registrar or a co-registrar with a request to exchange them for
an equal principal amount of Notes of other denominations, the Registrar shall
make the exchange as requested if the same requirements are met. No service
charge shall be made for any registration of transfer or exchange or redemption
of the Notes, but the Company may require payment of a sum sufficient to cover
any transfer tax or similar governmental charge payable in connection therewith
(other than any such transfer taxes or other similar governmental charge payable
upon exchange pursuant to Section 2.09 or 9.05).
Section 2.07. Replacement Notes. If a mutilated Note is surrendered
to the Registrar or if the Holder of a Note claims that the Note has been lost,
destroyed or wrongfully taken, the Company shall issue and the Trustee shall
authenticate a replacement Note if the requirements of Section 8-405 of the
Uniform Commercial Code are met and the Holder satisfies any other reasonable
requirements of the Trustee. If required by the Trustee or the Company, such
Holder shall furnish an indemnity bond sufficient in the judgment of the Company
and the Trustee to protect the Company, the Trustee, the Paying Agent, the
Registrar and any co-registrar from any loss which any of them may suffer if a
Note is replaced. The Company and the Trustee may charge the Holder for their
expenses in replacing a Note.
Section 2.08. Outstanding Notes. Notes outstanding at any time are
all Notes authenticated by the Trustee except for those canceled by it, those
delivered to it for cancellation and those described in this Section as not
outstanding. A Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note.
If a Note is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance
with this Indenture, on a redemption date or maturity date money sufficient to
pay all principal and interest payable on that date with respect to the Notes
(or portions thereof) to be redeemed or maturing, as the case may be, then on
and after that date such Notes (or portions thereof) cease to be outstanding and
interest on them ceases to accrue.
Section 2.09. Temporary Notes. Until definitive Notes are ready for
delivery, the Company may prepare and the Trustee shall authenticate temporary
Notes. Temporary Notes shall be substantially in the form of definitive Notes
but may have variations that the Company considers appropriate for temporary
Notes. Without
32
unreasonable delay, the Company shall prepare and the Trustee shall authenticate
definitive Notes and deliver them in exchange for temporary Notes.
Section 2.10. Cancellation. The Company at any time may deliver
Notes to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel and
destroy (subject to the record retention requirements of the Exchange Act) all
Notes surrendered for registration of transfer, exchange, payment or
cancellation and deliver a certificate of such destruction to the Company unless
the Company directs the Trustee in writing to deliver canceled Notes to the
Company. The Company may not issue new Notes to replace Notes it has redeemed,
paid or delivered to the Trustee for cancellation.
Section 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Notes, the Company shall pay defaulted interest (plus
interest on such defaulted interest to the extent lawful) in any lawful manner.
The Company may pay the defaulted interest to the persons who are Noteholders on
a subsequent special record date. The Company shall fix or cause to be fixed any
such special record date and payment date to the reasonable satisfaction of the
Trustee and shall promptly mail to each Noteholder a notice that states the
special record date, the payment date and the amount of defaulted interest to be
paid.
Section 2.12. CUSIP Numbers. The Company in issuing the Notes may
use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use
"CUSIP" numbers in notices of redemption or repurchase as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Notes or as contained in any notice of a redemption and that reliance may
be placed only on the other identification numbers printed on the Notes, and any
such redemption shall not be affected by any defect in or omission of such
numbers.
Section 2.13. Issuance of Additional Notes. The Company shall be
entitled without the consent of the Holders, subject to its compliance with
Section 4.03, to issue Additional Notes under this Indenture which shall have
identical terms as the Initial Notes issued on the Issue Date, other than with
respect to the date of issuance and issue price. The Initial Notes issued on the
Issue Date, any Additional Notes and all Exchange Notes or Private Exchange
Notes issued in exchange therefor shall be treated as a single class for all
purposes under this Indenture.
With respect to any Additional Notes, the Company shall set forth in
a resolution of the Board of Directors and an Officers' Certificate, a copy of
each which shall be delivered to the Trustee, the following information:
(1) the aggregate principal amount of such Additional Notes to be
authenticated and delivered pursuant to this Indenture;
(2) the issue price, the issue date and the CUSIP number, if
different than the CUSIP number of the Initial Notes, of such Additional
Notes; provided, however, that no Additional Notes may be issued at a
price that would cause such Additional Notes to have "original issue
discount" within the meaning of Section 1273 of the Code; and
33
(3) whether such Additional Notes shall be Transfer Restricted Notes
and issued in the form of Initial Notes as set forth in the Appendix to
this Indenture or shall be issued in the form of Exchange Notes as set
forth in Exhibit II.
ARTICLE 3
Redemption
Section 3.01. Notices to Trustee. If the Company elects to redeem
Notes pursuant to paragraph 5 of the Notes, it shall notify the Trustee in
writing of the redemption date, the principal amount of Notes to be redeemed and
the paragraph of the Notes pursuant to which the redemption will occur.
The Company shall give each notice to the Trustee provided for in
this Section not less than 45 nor more than 60 days before the redemption date
unless the Trustee consents to a different period. Such notice may, at the
Company's discretion, be subject to one or more conditions precedent. Such
notice shall be accompanied by an Officers' Certificate and an Opinion of
Counsel from the Company to the effect that such redemption will comply with the
conditions herein.
Section 3.02. Selection of Notes To Be Redeemed. If fewer than all
the Notes are to be redeemed, the Trustee shall select the Notes to be redeemed
pro rata or by lot or by a method that complies with applicable legal and
securities exchange requirements, if any, and that the Trustee in its sole
discretion shall deem to be fair and appropriate and in accordance with methods
generally used at the time of selection by fiduciaries in similar circumstances.
The Trustee shall make the selection from outstanding Notes not previously
called for redemption. The Trustee may select for redemption portions of the
principal of Notes that have denominations larger than $1,000. Notes and
portions of them the Trustee selects shall be in principal amounts of $1,000 or
a whole multiple of $1,000. Provisions of this Indenture that apply to Notes
called for redemption also apply to portions of Notes called for redemption. The
Trustee shall notify the Company promptly of the Notes or portions of Notes to
be redeemed.
Section 3.03. Notice of Redemption. At least 30 days but not more
than 60 days before a date for redemption of Notes, the Company shall mail a
notice of redemption by first-class mail to each Holder of Notes to be redeemed
at such Holder's registered address.
The notice shall identify the Notes to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
34
(6) that, unless the Company defaults in making such redemption
payment, interest on Notes (or portion thereof) called for redemption
ceases to accrue on and after the redemption date; and
(7) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
Section 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Notes called for redemption become due and payable on the
redemption date and at the redemption price stated in the notice. Upon surrender
to the Paying Agent, such Notes shall be paid at the redemption price stated in
the notice, plus accrued interest to the redemption date (subject to the right
of Holders of record on the relevant record date to receive interest due on the
related interest payment date). Failure to give notice or any defect in the
notice to any Holder shall not affect the validity of the notice to any other
Holder. A notice of redemption may, at the Company's discretion, be subject to
one or more conditions precedent.
Section 3.05. Deposit of Redemption Price. Prior to the redemption
date, the Company shall deposit with the Paying Agent (or, if the Company or a
Subsidiary is the Paying Agent, shall segregate and hold in trust) money
sufficient to pay the redemption price of and accrued interest on all Notes to
be redeemed on that date other than Notes or portions of Notes called for
redemption which have been delivered by the Company to the Trustee for
cancellation.
Section 3.06. Notes Redeemed in Part. Upon surrender of a Note that
is redeemed in part, the Company shall execute and the Trustee shall
authenticate for the Holder (at the Company's expense) a new Note equal in
principal amount to the unredeemed portion of the Note surrendered.
ARTICLE 4
Covenants
Section 4.01. Payment of Notes. The Company shall promptly pay the
principal of and interest on the Notes on the dates and in the manner provided
in the Notes and in this Indenture. Principal of and interest on the Notes shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all such
principal and interest then due.
The Company shall pay interest on overdue principal at the rate
specified therefor in the Notes, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
Section 4.02. SEC Reports. Notwithstanding that the Company may not
be subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC (to the extent the SEC will accept such
filings) and
35
provide the Trustee and Noteholders with such annual reports and such
information, documents and other reports as are specified in Sections 13 and
15(d) of the Exchange Act and applicable to a U.S. corporation subject to such
Sections, such information, documents and other reports to be so filed and
provided at the times specified for the filing of such information, documents
and reports under such Sections.
At any time that any of the Company's Subsidiaries are Unrestricted
Subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph will include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", of the financial condition and results of operations of the Company
and its Restricted Subsidiaries separate from the financial condition and
results of operations of the Unrestricted Subsidiaries of the Company.
In addition, the Company shall furnish to the Holders of the Notes
and to prospective investors, upon the requests of such Holders, any 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. The
Company shall be deemed to have furnished such reports to the Trustee and the
Holders of Notes if it has filed such reports with the SEC via the EDGAR filing
system and such reports are publicly available.
The Company also shall comply with other provisions of TIA Section
314(a).
Section 4.03. Limitation on Indebtedness.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided,
however, that the Company and the Subsidiary Guarantors, if any, shall be
entitled to Incur Indebtedness if, on the date of such Incurrence and after
giving effect thereto on a pro forma basis, no Default has occurred and is
continuing and the Consolidated Coverage Ratio exceeds 2.0 to 1. The Company
shall cause each Restricted Subsidiary that Incurs any Indebtedness pursuant to
this paragraph (a) or clauses (10) or (14) of paragraph (b) of this Section
4.03, to execute and deliver to the Trustee, no later than the date of such
Incurrence, a supplemental indenture to this Indenture pursuant to which such
Restricted Subsidiary guarantees payment of the Notes on the same terms and
conditions as those set forth in this Indenture.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries shall be entitled to Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred by the Company or a Restricted Subsidiary
pursuant to the Credit Facilities; provided, however, that, immediately
after giving effect to any such Incurrence, the aggregate principal amount
of all Indebtedness Incurred under this clause (1) and then outstanding
does not exceed the greater of (A) $950,000,000 and (B) 50% of the book
value of the inventory of the Company and its Restricted Subsidiaries;
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (A) any subsequent issuance or
transfer of any Capital Stock which results in any such Restricted
Subsidiary ceasing to be a
36
Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to the Company or a Restricted Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the
obligor thereon and (B) if the Company is the obligor on such
Indebtedness, such Indebtedness is expressly subordinated to the prior
payment in full in cash of all obligations with respect to the Notes;
(3) the Notes and the Exchange Notes (other than any Additional
Notes);
(4) Indebtedness outstanding on the Issue Date;
(5) Indebtedness of a Restricted Subsidiary Incurred and outstanding
on or prior to the date on which such Subsidiary was acquired by the
Company; provided, however, that on the date of such acquisition and after
giving pro forma effect thereto, the Company would have been able to Incur
at least $1.00 of additional Indebtedness pursuant to paragraph (a) of
this Section 4.03;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4) or (5) or this
clause (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness of a
Subsidiary Incurred pursuant to clause (5), such Refinancing Indebtedness
shall be Incurred only by such Subsidiary or the Company;
(7) Hedging Obligations entered into in the ordinary course of
business to purchase any raw material, hydrocarbon, refined product or
other commodity or to hedge risks with respect to the Company's or a
Restricted Subsidiary's interest rate, currency, hydrocarbon or refined
products therefrom or commodity exposure and not for speculative purposes;
(8) obligations in respect of tender, performance, government
contract, bid and surety or appeal bonds, standby letters of credit,
warranty or contractual services and completion guarantees provided by the
Company or any Restricted Subsidiary in the ordinary course of business;
(9) 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,
however, that such Indebtedness is extinguished within five Business Days
of its Incurrence;
(10) Guarantees by Subsidiary Guarantors of Indebtedness of the
Company or any Restricted Subsidiary permitted to be Incurred under this
Indenture and Liens created by Subsidiary Guarantors that constitute
Indebtedness securing Indebtedness of the Company or any Restricted
Subsidiary permitted to be Incurred under this Indenture;
(11) Indebtedness of a Receivables Subsidiary Incurred pursuant to a
Qualified Receivables Transaction;
(12) Indebtedness of Restricted Subsidiaries in an aggregate
principal amount which, when taken together with all other Indebtedness of
Restricted
37
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by any other clause of this paragraph (b)), does
not exceed the greater of (A) $125,000,000 and (B) 5% of Consolidated Net
Worth;
(13) Guarantees by the Company of Indebtedness of Restricted
Subsidiaries Incurred pursuant to clause (12) above; and
(14) Indebtedness of the Company or any Subsidiary Guarantor, if
any, (in addition to Indebtedness permitted by any other clause of this
paragraph) in an aggregate principal amount at any time outstanding not to
exceed $100,000,000.
(c) Notwithstanding the foregoing, the Company shall not, and shall
not permit any Subsidiary Guarantor, if any, to, Incur any Indebtedness pursuant
to Section 4.03(b) if the proceeds thereof are used, directly or indirectly, to
Refinance any Subordinated Obligations of the Company or such Subsidiary
Guarantor unless such Indebtedness shall be subordinated to the Notes or the
Subsidiary Guaranty of such Subsidiary Guarantor, as the case may be, to at
least the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section 4.03,
in the event that an item of proposed Indebtedness (or any portion thereof)
meets the criteria of more than one of the categories of Indebtedness described
above as of the date of incurrence thereof or is entitled to be incurred
pursuant to Section 4.03(a) as of the date of incurrence thereof, the Company
shall, in its sole discretion, divide and classify such item of Indebtedness on
the date of incurrence, or later classify, reclassify or divide all or a portion
of such item of Indebtedness in any manner that complies with this Section 4.03.
Any Indebtedness outstanding under the Credit Agreements on the Issue Date shall
be deemed to have been incurred under Section 4.03(a).
Section 4.04. Limitation on Restricted Payments.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary, directly or indirectly, to make a Restricted Payment if at the time
the Company or such Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company is not entitled to Incur an additional $1.00 of
Indebtedness under Section 4.03(a); or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the Issue Date would exceed the sum of (without
duplication):
(A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter ending on
December 31, 2002, to the end of the most recent fiscal quarter for
which internal financial statements are available at the time of
such Restricted Payment
38
(or, in case such Consolidated Net Income shall be a deficit, minus
100% of such deficit); plus
(B) 100% of the aggregate net proceeds, including cash and the
fair market value of property other than cash (as determined in good
faith by the Board of Directors of the Company and evidenced by a
board resolution) received by the Company from the issuance or sale
of, or as a capital contribution in respect of, its Capital Stock
(other than Disqualified Stock) subsequent to the Issue Date (other
than an issuance or sale to, or contribution by, a Subsidiary of the
Company and other than an issuance or sale to, or contribution by,
an employee stock ownership plan or a trust established by the
Company or any of its Subsidiaries for the benefit of their
employees); plus
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange
subsequent to the Issue Date of any Indebtedness of the Company
convertible or exchangeable for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or
the fair value of any other property, distributed by the Company
upon such conversion or exchange); provided, however, that the
foregoing amount shall not exceed the Net Cash Proceeds received by
the Company or any Restricted Subsidiary from the sale of such
Indebtedness (excluding Net Cash Proceeds from sales to a Subsidiary
of the Company or to an employee stock ownership plan or to a trust
established by the Company or any of its Subsidiaries for the
benefit of their employees); plus
(D) an amount equal to the sum of (x) the net reduction in the
Investments (other than Permitted Investments) made by the Company
or any Restricted Subsidiary in any Person resulting from
repurchases, repayments or redemptions of such Investments by such
Person, proceeds realized on the sale of such Investment and
proceeds representing the return of capital (excluding dividends and
distributions), in each case received by the Company or any
Restricted Subsidiary and (y) to the extent such Person is an
Unrestricted Subsidiary, the portion (proportionate to the Company's
equity interest in such Subsidiary) of the fair market value of the
net assets of such Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the
case of any such Person or Unrestricted Subsidiary, the amount of
Investments (excluding Permitted Investments) previously made (and
treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Person or Unrestricted Subsidiary.
(b) The provisions of Section 4.04(a) shall not prohibit:
(1) any Restricted Payment made out of the Net Cash Proceeds of the
substantially concurrent sale of, or made by exchange for, Capital Stock
of the Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their
39
employees) or a substantially concurrent cash capital contribution
received by the Company from or on behalf of one or more of its
shareholders; provided, however, that (A) such Restricted Payment shall be
excluded in the calculation of the amount of Restricted Payments and (B)
the Net Cash Proceeds from such sale or such cash capital contribution (to
the extent so used for such Restricted Payment) shall be excluded from the
calculation of amounts under Section 4.04(a)(3)(B);
(2) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations of the
Company or any Restricted Subsidiary made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Subordinated Obligations
of such Person which is permitted to be Incurred pursuant to Section 4.03;
provided, however, that such purchase, repurchase, redemption, defeasance
or other acquisition or retirement for value shall be excluded from the
calculation of the amount of Restricted Payments;
(3) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with this Section 4.04; provided, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments;
(4) so long as no Default has occurred and is continuing, the
repurchase or other acquisition of shares of Capital Stock of the Company
or any of its Subsidiaries from employees, former employees, directors or
former directors of the Company or any of its Subsidiaries (or permitted
transferees of such employees, former employees, directors or former
directors), pursuant to the terms of the agreements (including employment
agreements) or plans (or amendments thereto) approved by the Board of
Directors of the Company under which such individuals purchase or sell or
are granted the option to purchase or sell, shares of such Capital Stock;
provided, however, that the aggregate amount of such repurchases and other
acquisitions shall not exceed $5,000,000 in any calendar year; provided
further, however, that such repurchases and other acquisitions shall be
excluded from the calculation of the amount of Restricted Payments;
(5) the declaration and payment of dividends to holders of any class
or series of Disqualified Stock of the Company issued on or after the
Issue Date in accordance with Section 4.03(a); or
(6) other Restricted Payments in an aggregate amount not to exceed
$50,000,000; provided, however, that such Restricted Payments shall be
excluded from the calculation of the amount of Restricted Payments.
Section 4.05. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the Company, (b) make any loans
40
or advances to the Company or (c) transfer any of its property or assets to the
Company, except:
(1) with respect to clauses (a),(b) and (c),
(i) any encumbrance or restriction pursuant to an
agreement in effect at or entered into on the Issue Date,
including the Three-Year Credit Agreement;
(ii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or
prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the
funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to
which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to an
agreement effecting a Refinancing of Indebtedness Incurred
pursuant to an agreement referred to in clause (i) or (ii) of
clause (1) of this Section 4.05 or this clause (iii) or
contained in any amendment to an agreement referred to in
clause (i) or (ii) of clause (1) of this Section 4.05 or this
clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary
contained in any such refinancing agreement or amendment are
no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary
contained in such predecessor agreements;
(iv) any encumbrance or restriction with respect to a
Restricted Subsidiary imposed pursuant to an agreement entered
into for the sale or disposition of all or substantially all
the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition;
(v) any encumbrance or restriction arising under any
applicable law, rule, regulation or order;
(vi) any encumbrance or restriction pursuant to any
merger agreement, stock purchase agreement, asset sale
agreement or similar agreement limiting the transfer of
properties and assets subject to such agreement or
distributions of assets subject to such agreement pending
consummation of the transactions contemplated thereby;
(vii) any encumbrance or restriction applicable to a
Receivables Subsidiary;
41
(viii) any agreement or other instrument of a Person
acquired by the Company or any Restricted Subsidiary 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, or the property or assets of
the Person, so acquired, so long as the agreement containing
the restriction does not violate any other provision of this
Indenture;
(ix) any encumbrance or restriction related to Hedging
Obligations permitted under this Indenture from time to time;
(x) restrictions on cash or other deposits or net worth
imposed by customers under contracts entered into in the
ordinary course of business; and
(xi) any agreement governing Indebtedness permitted to
be incurred pursuant to Section 4.03; provided that (a) the
provisions relating to such Indebtedness, taken as a whole,
are not materially more restrictive as determined by the board
of directors of the Company than the provisions contained in
the Three-Year Credit Agreement or in this Indenture as in
effect on the Issue Date and (b) such encumbrance or
restriction is not reasonably expected to result in the
Company being unable to make principal or interest payments on
the Notes, as determined in good faith by the board of
directors of the Company.
(2) with respect to clause (c) only,
(A) any encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to
the extent such provisions restrict the transfer of the lease or the
property leased thereunder; and
(B) any encumbrance or restriction contained in security
agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such encumbrance or restriction restricts
the transfer of the property subject to such security agreements or
mortgages.
Section 4.06. Limitation on Sales of Assets and Subsidiary Stock.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, directly or indirectly, consummate any Asset Disposition unless:
(1) the Company or such Restricted Subsidiary receives consideration
at the time of such Asset Disposition at least equal to the fair market
value (including as to the value of all non-cash consideration which shall
include without limitation any Person assuming responsibility for any
liabilities, other than contingent liabilities), as determined in good
faith by the Board of Directors of the Company, of the shares and assets
subject to such Asset Disposition;
42
(2) Other than with respect to any assets contributed by the
Company or a Restricted Subsidiary to a joint venture formed by the
Company or such Restricted Subsidiary, respectively, at least 75% of the
consideration thereof received by the Company or such Restricted
Subsidiary is in the form of cash or cash equivalents; provided, however,
that the 75% limitation also will not apply to any disposition of assets
in exchange for assets used in a Related Business, or a combination of
such assets and cash or cash equivalents, in each case having a fair
market value comparable to the fair market value of the assets disposed of
by the Company or a Restricted Subsidiary; and
(3) an amount equal to 100% of the Net Available Cash from such
Asset Disposition is applied by the Company (or such Restricted
Subsidiary, as the case may be)
(A) first, to the extent the Company elects (or is required by
the terms of any Indebtedness), to prepay, repay, redeem or purchase
Senior Indebtedness of the Company or Indebtedness (other than any
Disqualified Stock) of a Restricted Subsidiary (in each case other
than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset
Disposition or the receipt of such Net Available Cash;
(B) second, to the extent of the balance of such Net Available
Cash after application in accordance with clause (A), to the extent
the Company elects, to acquire Additional Assets within one year
from the later of the date of such Asset Disposition or the receipt
of such Net Available Cash; and
(C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to
make an offer to the Holders of the Notes (and to holders of other
Senior Indebtedness of the Company designated by the Company) to
purchase Notes (and such other Senior Indebtedness of the Company)
pursuant to and subject to the conditions of this Indenture.
Notwithstanding the foregoing provisions of this Section 4.06, the
Company and the Restricted Subsidiaries shall not be required to apply any Net
Available Cash in accordance with this Section 4.06 except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which is not
applied in accordance with this Section 4.06 exceeds $20,000,000. Pending
application of Net Available Cash pursuant to this Section 4.06, such Net
Available Cash shall be invested in Temporary Cash Investments or applied to
temporarily reduce revolving credit indebtedness.
For the purposes of this Section 4.06, the following are deemed to
be cash or cash equivalents:
(1) the assumption of Indebtedness of the Company (other than
obligations in respect of Disqualified Stock of the Company) or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Disposition; and
43
(2) securities received by the Company or any Restricted Subsidiary
from the transferee that are promptly converted by the Company or such
Restricted Subsidiary into cash, to the extent of cash received in that
conversion.
(b) In the event of an Asset Disposition that requires the purchase
of Notes (and other Senior Indebtedness of the Company) pursuant to Section
4.06(a)(3)(C), the Company shall purchase Notes tendered pursuant to an offer by
the Company for the Notes (and such other Senior Indebtedness) at a purchase
price of 100% of their principal amount (or, in the event such other Senior
Indebtedness of the Company was issued with significant original issue discount,
100% of the accreted value thereof) without premium, plus accrued but unpaid
interest (or, in respect of such other Senior Indebtedness of the Company, such
lesser price, if any, as may be provided for by the terms of such Senior
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in this Indenture. If the aggregate
purchase price of the securities tendered exceeds the Net Available Cash
allotted to their purchase, the Company shall select the securities to be
purchased on a pro rata basis but in round denominations, which in the case of
the Notes will be denominations of $1,000 principal amount or multiples thereof.
The Company shall not be required to make such an offer to purchase Notes (and
other Senior Indebtedness of the Company) pursuant to this Section 4.06 if the
Net Available Cash available therefor is less than $20,000,000 (which lesser
amount shall be carried forward for purposes of determining whether such an
offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition). Upon completion of such an offer to purchase, Net Available
Cash shall be deemed to be reduced by the aggregate amount of such offer.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section 4.06, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue of its compliance with
such securities laws or regulations.
Section 4.07. Limitation on Affiliate Transactions.
(a) The Company shall not, and shall not permit any Restricted
Subsidiary to, enter into or permit to exist any transaction (including the
purchase, sale, lease or exchange of any property, employee compensation
arrangements or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (an "Affiliate Transaction") unless:
(1) the terms of the Affiliate Transaction are no less favorable to
the Company or such Restricted Subsidiary than those that could be
obtained at the time of the Affiliate Transaction in arm's-length dealings
with a Person who is not an Affiliate;
(2) if such Affiliate Transaction involves an amount in excess of
$20,000,000, the terms of the Affiliate Transaction are set forth in
writing and a majority of the directors of the Company disinterested with
respect to such Affiliate Transaction have determined in good faith that
the criteria set forth in clause (1) are satisfied and have approved the
relevant Affiliate Transaction as
44
evidenced by a resolution of the Board of Directors; provided, however,
that in the event that at the time such Affiliate Transaction is entered
into or permitted to exist no director of the Company is disinterested
with respect to such Affiliate Transaction, the Board of Directors of the
Company shall have received with respect to such Affiliate Transaction the
opinion referred to in paragraph (3) below; and
(3) if such Affiliate Transaction involves an amount in excess of
$30,000,000, the Board of Directors of the Company shall also have
received a written opinion from an Independent Qualified Party to the
effect that such Affiliate Transaction is fair, from a financial
standpoint, to the Company and its Restricted Subsidiaries or is not less
favorable to the Company and its Restricted Subsidiaries than could
reasonably be expected to be obtained at the time in an arm's-length
transaction with a Person who was not an Affiliate.
(b) The provisions of Section 4.07(a) shall not prohibit:
(1) any Investment (other than a Permitted Investment) or other
Restricted Payment, in each case permitted to be made pursuant to Section
4.04;
(2) any issuance of securities, or other payments, awards or grants
in cash, securities or otherwise pursuant to, or the funding of,
employment arrangements, stock options and stock ownership plans approved
by the Board of Directors of the Company;
(3) loans or advances (other than advances described in clause (12)
below) to employees in the ordinary course of business in accordance with
the past practices of the Company or its Restricted Subsidiaries, but in
any event not to exceed $5,000,000 in the aggregate outstanding at any one
time;
(4) the payment of reasonable fees to directors of the Company and
its Restricted Subsidiaries who are not employees of the Company or its
Restricted Subsidiaries;
(5) any transaction with a Restricted Subsidiary or joint venture or
similar entity which would constitute an Affiliate Transaction solely
because the Company or a Restricted Subsidiary owns an equity interest in
or otherwise controls such Restricted Subsidiary, joint venture or similar
entity;
(6) the issuance or sale of any Capital Stock (other than
Disqualified Stock) of the Company;
(7) any agreement in effect on the Issue Date and described in the
Offering Memorandum or in any of the SEC filings of the Company
incorporated by reference in the Offering Memorandum or any amendments,
renewals, extensions or substitutions of any such agreement (so long as
such amendments, renewals, extensions or substitutions are not less
favorable to the Company or the Restricted Subsidiaries) and the
transactions evidenced thereby;
(8) any transactions with the Permitted Holder or any of its
Affiliates involving the purchase, sale or transportation of hydrocarbons,
or refined products
45
therefrom, in the ordinary course of business, so long as such
transactions are priced based on industry accepted benchmark prices and
the pricing of such transactions is no worse to the Company or any
Restricted Subsidiary, as applicable, than the pricing of comparable
transactions with unrelated third parties;
(9) any Intercompany Trade Arrangements;
(10) any reasonable and customary directors' fees, indemnification
and similar arrangements, consulting fees, employee salaries, bonuses or
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the
Company or a Restricted Subsidiary entered into in the ordinary course of
business;
(11) any transactions between the Company and any Person, a director
of which is also a director of the Company; provided, however, that such
director abstains from voting as a director of the Company on the
transactions involving such other Person; and
(12) advances to employees for moving, relocation, entertainment and
travel expenses, drawing accounts and similar expenditures in the ordinary
course of business.
Section 4.08. Limitation on Issuance of Guarantees of Indebtedness.
The Company shall not permit any of its Restricted Subsidiaries, directly or
indirectly, to Guarantee or create any Lien to secure the payment of any
Indebtedness of the Company or any other Restricted Subsidiary unless such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to this Indenture providing for the Guarantee or security of the
payment of the Notes by such Restricted Subsidiary; provided, however, that any
Lien created by any Restricted Subsidiary to secure Indebtedness Incurred
pursuant to any Credit Facilities shall not require a Restricted Subsidiary to
execute and deliver such a supplemental indenture. If the Indebtedness to be
Guaranteed or secured is subordinated to the Notes, the Guarantee or security of
such Indebtedness shall be subordinated to the Guarantee or security of the
Notes to the same extent as the Indebtedness to be Guaranteed or secured is
subordinated to the Notes. Notwithstanding the foregoing, any such Guarantee or
security by a Restricted Subsidiary of the Notes shall provide by its terms that
it shall be automatically and unconditionally released and discharged upon
either:
(1) the release or discharge of such Guarantee or security of
payment of such other Indebtedness, except a discharge by or as a result
of payment under such Guarantee or security;
(2) any sale (including by way of merger or consolidation), exchange
or transfer, to any Person not an Affiliate of the Company, of all of the
Capital Stock owned by the Company and its Restricted Subsidiaries of, or
all or substantially all the assets of, such Restricted Subsidiary, which
sale, exchange or transfer is made in compliance with the applicable
provisions of this Indenture; or
(3) the designation by the Company of such Restricted Subsidiary as
an Unrestricted Subsidiary in accordance with the terms of this Indenture.
46
Section 4.09. Change of Control Triggering Event.
(a) Upon the occurrence of a Change of Control Triggering Event,
each Holder shall have the right to require that the Company repurchase such
Holder's Notes at a purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of Holders 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 Triggering Event, the
Company shall mail a notice to each Holder with a copy to the Trustee (the
"Change of Control Offer") stating:
(1) that a Change of Control Triggering Event has occurred and that
such Holder has the right to require the Company to purchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount
thereof on the date of purchase, plus accrued and unpaid interest, if any,
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest on the relevant interest payment
date);
(2) the circumstances and relevant facts regarding such Change of
Control Triggering Event;
(3) the purchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions, as determined by the Company, consistent with
this Section, that a Holder must follow in order to have its Notes
purchased.
(b) Holders electing to have a Note purchased will be required to
surrender the Note, with an appropriate form duly completed, to the Company at
the address specified in the notice at least three Business Days prior to the
purchase date. Holders will be entitled to withdraw their election if the
Trustee or the Company receives not later than one Business Day prior to the
purchase date, a facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Note which was delivered for purchase by the
Holder and a statement that such Holder is withdrawing his election to have such
Note purchased.
(c) On the purchase date, all Notes purchased by the Company under
this Section shall be delivered by the Company to the Trustee for cancellation,
and the Company shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.
(d) A Change of Control Offer may be made in advance of a Change of
Control Triggering Event and conditioned upon the occurrence of such Change of
Control Triggering Event, if a definitive agreement is in place at the time of
making the Change of Control Offer. Notwithstanding the foregoing provisions of
this Section, the Company shall not be required to make a Change of Control
Offer following a Change of Control Triggering Event 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 this Section 4.09 applicable to a Change of
Control Offer made by the Company and
47
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes as a result of a
Change of Control Triggering Event. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this Section 4.09,
the Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this Section 4.09 by
virtue of its compliance with such securities laws or regulations.
Section 4.10. Limitation on Liens. The Company shall not, and shall
not permit any Restricted Subsidiary to, directly or indirectly, Incur or permit
to exist any Lien (the "Initial Lien") of any nature whatsoever on any of its
properties (including Capital Stock of a Restricted Subsidiary), whether owned
at the Issue Date or thereafter acquired, securing any Indebtedness, other than
Permitted Liens, without effectively providing that the Notes shall be secured
equally and ratably with (or prior to) the obligations so secured for so long as
such obligations are so secured; provided, however, that the Company or any
Restricted Subsidiary shall be entitled to Incur other Liens to secure
Indebtedness as long as the amount of outstanding Indebtedness secured by Liens
Incurred pursuant to this proviso does not exceed 5% of Consolidated Net
Tangible Assets, as determined based on the consolidated balance sheet of the
Company as of the end of the most recent fiscal quarter for which internal
financial statements are available provided, further, however, that the
aggregate amount of outstanding Indebtedness secured by Liens on assets of
Restricted Subsidiaries pursuant to the foregoing proviso shall in no event
exceed the greater of (A) $125,000,000 and (B) 5% of Consolidated Net Worth. Any
Lien created for the benefit of the Holders of the Notes pursuant to the
preceding sentence shall provide by its terms that such Lien shall be
automatically and unconditionally released and discharged upon the release and
discharge of the Initial Lien.
Section 4.11. Compliance Certificate. The Company shall deliver to
the Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA Section. 314(a)(4).
Section 4.12. Further Instruments and Acts. Upon request of the
Trustee, the Company shall execute and deliver such further instruments and do
such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
Section 4.13. Investment Grade Covenants. Upon the occurrence of an
Investment Grade Rating Event, the Company and its Restricted Subsidiaries shall
no longer be subject to the provisions of Sections 4.03, 4.04, 4.05, 4.06, 4.07,
4.08, 4.09 and 4.10 and clauses (2) and (3) of Section 5.01 and clause (2) of
Section 5.02. Instead, the
48
provisions of the following clauses (1) and (2) of this Section 4.13 shall apply
to the Company only upon and after the occurrence of an Investment Grade Rating
Event:
(1) Restrictions on Secured Indebtedness. If the Company or any
Restricted Subsidiary Incurs any Indebtedness secured by a Lien (other than a
Permitted Lien) on any Principal Property or on any share of stock or
Indebtedness of a Restricted Subsidiary, the Company or such Restricted
Subsidiary shall secure the Notes equally and ratably with (or, at the Company's
option, prior to) such secured Indebtedness so long as such Indebtedness is so
secured, unless the aggregate amount of all such secured Indebtedness, together
with all Attributable Debt of the Company and the Restricted Subsidiaries with
respect to any Sale/Leaseback Transactions involving Principal Properties (with
the exception of such transactions which are excluded as described in clauses
(i) through (v) of Section 4.13(2), would not exceed 15% of Consolidated Net
Tangible Assets.
(2) Restrictions on Sale/Leaseback Transactions. The Company shall
not, and shall not permit any Restricted Subsidiary to, enter into any
Sale/Leaseback Transaction involving any Principal Property, unless the
aggregate amount of all Attributable Debt with respect to such transaction plus
all secured Indebtedness of the Company and the Restricted Subsidiaries (with
the exception of Indebtedness secured by Permitted Liens) would not exceed 15%
of Consolidated Net Tangible Assets. This restriction shall not apply to, and
there shall be excluded from Attributable Debt in any computation under such
restriction, any Sale/Leaseback Transaction if:
(i) the lease is for a period, including renewal rights, not in
excess of three years;
(ii) the sale of the Principal Property is made within 270 days
after its acquisition, construction or improvements;
(iii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iv) the transaction is between the Company and a Restricted
Subsidiary; or
(v) the Company, within 270 days after the sale is completed,
applies to the retirement of its Indebtedness or that of a Restricted
Subsidiary, or to the purchase of other property which will constitute a
Principal Property, an amount not less than the greater of:
(A) the net proceeds of the sale of the Principal Property
leased; or
(B) the fair market value (as determined by the Company in
good faith) of the Principal Property leased.
49
The amount to be applied to the retirement of Indebtedness shall be
reduced by:
(a) the principal amount of any of the Company's debentures or notes
(including the Notes) or those of a Restricted Subsidiary surrendered
within 270 days after such sale to the applicable trustee for retirement
and cancelation;
(b) the principal amount of Indebtedness, other than the items
referred to in the preceding clause (i), voluntarily retired by the
Company or a Restricted Subsidiary within 270 days after such sale; and
(c) associated transaction expenses.
ARTICLE 5
Successor Company
Section 5.01. When Company May Merge or Transfer Assets. The Company
shall not consolidate with or merge with or into, or convey, transfer or lease,
in one transaction or a series of transactions, directly or indirectly, all or
substantially all its assets to, any Person, unless:
(1) the resulting, surviving or transferee Person (the "Successor
Company") shall be a Person organized and existing under the laws of the
United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company
under the Notes and this Indenture;
(2) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing; and
(3) immediately after giving pro forma effect to such transaction or
series of transactions as if the transaction or series of transactions
occurred on the first day of the four-quarter period immediately prior to
the consummation of such transaction or series of transactions with the
appropriate adjustments with respect to the transaction or series of
transactions being included in such pro forma calculation, (a) the
Successor Company shall be able to incur at least $1.00 of additional
Indebtedness, pursuant to Section 4.03(a), (b) the Consolidated Coverage
Ratio of the Successor Company shall not be less than the Consolidated
Coverage Ratio of the Company and its Restricted Subsidiaries immediately
prior to such transaction or series of transactions or (c) the Successor
Company shall have a Consolidated Net Worth in an amount that is not less
than the Consolidated Net Worth of the Company immediately prior to such
transaction or series of transactions;
50
provided, however, that clause (3) will not be applicable to (A) a Restricted
Subsidiary consolidating with, merging into or transferring all or part of its
properties and assets to the Company or (B) the Company merging with an
Affiliate of the Company solely for the purpose and with the sole effect of
reincorporating the Company in another jurisdiction.
For purposes of this covenant, the sale, lease, conveyance,
assignment, transfer or other disposition of all or substantially all of the
properties and assets of one or more Subsidiaries of the Company, which
properties and assets, if held by the Company instead of such Subsidiaries,
would constitute all or substantially all of the properties and assets of the
Company on a consolidated basis, shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
The Successor Company shall be the successor to the Company and
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under this Indenture, and the predecessor Company, except in the
case of a lease, shall be released from the obligation to pay the principal of
and interest on the Notes.
Section 5.02. When Subsidiary Guarantor May Merge or Transfer
Assets. The Company shall not permit any Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
series of transactions, all or substantially all of its assets to any Person
unless:
(1) the resulting, surviving or transferee Person (if not such
Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws
of the United States of America, or any State hereof or the District of
Columbia, and such Person shall expressly assume, by an amendment or
supplemental indenture to this Indenture, in a form acceptable to the
Trustee, all the obligations of such Subsidiary, if any, under its
Subsidiary Guaranty; provided, however, that the provisions of this
Section 5.02(1) shall not apply in the case of a Subsidiary Guarantor that
has been disposed of in its entirety to another Person (other than to the
Company or an Affiliate of the Company), whether through a merger,
consolidation or sale of Capital Stock or assets, if in connection
therewith the Company provides an Officers' Certificate to the Trustee to
the effect that the Company will comply with its obligations under Section
4.06, if then applicable, in respect of such disposition;
(2) immediately after giving effect to such transaction or
transactions on a pro forma basis (and treating any Indebtedness which
becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been issued by such Person at the
time of such transaction), no Default shall have occurred and be
continuing; and
(3) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that such consolidation, merger or
transfer and such amendment or supplemental indenture, if any, complies
with this Indenture.
51
ARTICLE 6
Defaults and Remedies
Section 6.01. Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any Note when
the same becomes due and payable, and such default continues for a period
of 30 days;
(2) the Company defaults in the payment of the principal of any Note
when the same becomes due and payable at its Stated Maturity, upon
optional redemption, upon required purchase, upon declaration of
acceleration or otherwise;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with its obligations, if then
applicable, in Section 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09,
4.10 or 4.13 (other than a failure to purchase Notes when required under
Section 4.06 or 4.09) and such failure continues for 30 days after the
notice specified below;
(5) the Company or any Subsidiary Guarantor fails to comply with any
of its other agreements in this Indenture and such failure continues for
60 days after the notice specified below;
(6) Indebtedness of the Company or any Significant Subsidiary is not
paid within any applicable grace period after final maturity or is
accelerated by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $35,000,000;
(7) the Company or any Significant Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in
an involuntary case;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(8) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company or any Significant
Subsidiary in an involuntary case;
52
(B) appoints a Custodian of the Company or any Significant
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Significant Subsidiary;
or any similar relief is granted under any foreign laws and the order or
decree remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess of
$35,000,000 is entered against the Company or any Significant Subsidiary,
remains outstanding for a period of 60 consecutive days following such
judgment or decree and is not discharged, waived or stayed; or
(10) any Subsidiary Guaranty ceases to be in full force and effect
(other than in accordance with the terms of this Indenture and such
Subsidiary Guaranty) or any Subsidiary Guarantor denies or disaffirms its
obligations under its Subsidiary Guaranty.
The foregoing will constitute Events of Default whatever the reason
for any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clauses (4) or (5) shall not constitute an Event of
Default until the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes notify the Company in writing of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice.
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (6) or (9) and any event which with the giving
of notice or the lapse of time would become an Event of Default under clause (4)
or (5), its status and what action the Company is taking or proposes to take
with respect thereto.
Section 6.02. Acceleration. If an Event of Default (other than an
Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Notes by notice to the
Company and the Trustee, may declare the principal of and accrued but unpaid
interest on all the Notes to be due and payable. Upon such a declaration, such
principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.01(7) or (8) with respect to the Company occurs
and is continuing, the principal of and interest on all the Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Noteholders. The Holders of a majority in
principal amount of the Notes by notice to the Trustee may rescind an
acceleration and its consequences if the
53
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
In the event an Event of Default described in Section 6.01(6) has
occurred and is continuing, such Event of Default shall be automatically
annulled if the payment default triggering such Event of Default pursuant to
Section 6.01(6) above shall be remedied or cured by the Company or a Significant
Subsidiary or waived by the holders of the relevant Indebtedness within 60 days
of its occurrence and all other Events of Default, if any, under this Indenture
have been cured and waived.
Section 6.03. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Notes or to enforce the performance of any
provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess
any of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Noteholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
Section 6.04. Waiver of Past Defaults. The Holders of a majority in
principal amount of the Notes by written notice to the Trustee may waive an
existing Default and its consequences except: (i) a Default in the payment of
the principal of or interest on a Note; (ii) a Default arising from the failure
to redeem or purchase any Note when required pursuant to this Indenture; or
(iii) a Default in respect of a provision that under Section 9.02 cannot be
amended without the consent of each Noteholder affected. When a Default is
waived, it is deemed cured and the Company, the Trustee and the Noteholders
shall be restored to their former positions and rights hereunder, but no such
waiver shall extend to any subsequent or other Default or impair any consequent
right.
Section 6.05. Control by Majority. The Holders of a majority in
principal amount of the Notes may 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. However, the Trustee may
refuse to follow any direction that conflicts with law or this Indenture or,
subject to Section 7.01, that the Trustee determines is unduly prejudicial to
the rights of other Noteholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses, fees and expenses,
including attorneys' fees and extraordinary Trustee fees and expenses, caused by
taking or not taking such action.
Section 6.06. Limitation on Suits. Except to enforce the right to
receive payment of principal, premium (if any) or interest when due, no
Noteholder may pursue any remedy with respect to this Indenture or the Notes
unless:
54
(1) the Holder has previously given the Trustee written notice
stating that an Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Notes
have made a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders have offered the Trustee reasonable
security or indemnity against any loss, fee, liability or expense,
including attorneys' fees and expenses and extraordinary Trustee fees and
expenses;
(4) the Trustee has not complied with the request within 60 days
after receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Notes have
not given the Trustee a direction inconsistent with the request during
such 60-day period.
A Noteholder may not use this Indenture to prejudice the rights of
another Noteholder or to obtain a preference or priority over another
Noteholder.
Section 6.07. Rights of Holders to Receive Payment. Notwithstanding
any other provision of this Indenture, the right of any Holder to receive
payment of principal of and interest on the Notes held by such Holder, on or
after the respective due dates expressed in the Notes, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
Section 6.08. Collection Suit by Trustee. If an Event of Default
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
7.07.
Section 6.09. Trustee May File Proofs of Claim. The Trustee may file
such proofs of claim and other papers or documents as may be necessary or
advisable in order to have the claims of the Trustee and the Noteholders allowed
in any judicial proceedings relative to the Company, its creditors or its
property and, unless prohibited by law or applicable regulations, may vote on
behalf of the Holders in any election of a trustee in bankruptcy or other Person
performing similar functions, and any Custodian in any such judicial proceeding
is hereby authorized by each Holder to make payments to the Trustee and, in the
event that the Trustee shall consent to the making of such payments directly to
the Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and its counsel, and any other amounts due the Trustee under Section 7.07.
Section 6.10. Priorities. If the Trustee collects any money or
property pursuant to this Article 6, it shall pay out the money or property in
the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
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SECOND: to Noteholders for amounts due and unpaid on the Notes for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes for principal
and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment
to Noteholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Noteholder and the Trustee a notice that
states the record date, the payment date and amount to be paid.
Section 6.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% in principal amount of the Notes.
Section 6.12. Waiver of Stay or Extension Laws. The Company (to the
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
Section 7.01. Duties of Trustee.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise the rights and powers vested in it by this Indenture and
use the same degree of care and skill in their exercise as a prudent Person
would exercise or use under the circumstances in the conduct of such Person's
own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed
56
therein, upon certificates or opinions furnished to the Trustee and
conforming to the requirements of this Indenture. However, the Trustee
shall examine the certificates and opinions to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own willful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b) of
this Section;
(2) the Trustee shall not be liable for any error of judgment made
in good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may, at its sole option, agree in
writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from
other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of
its rights or powers, if it shall have reasonable grounds to believe that
repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(h) Every provision of this Indenture relating to the conduct or
affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the
TIA.
Section 7.02. Rights of Trustee. Subject to TIA Sections 315(a)
through (d):
(a) The Trustee may rely, and shall be protected in acting or
refraining from acting, upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture,
note, other evidence of indebtedness or other paper or document believed by it
to be genuine and to have been signed or presented by the proper person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel, which shall conform to
Section 11.04. The Trustee shall not be liable for any action it takes or omits
to take in good faith in reliance on the Officers' Certificate or Opinion of
Counsel.
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(c) The Trustee may act through agents and shall not be responsible
for the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute
willful misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or opinion
of counsel with respect to legal matters relating to this Indenture and the
Notes shall be full and complete authorization and protection from liability in
respect to any action taken, omitted or suffered by it hereunder in good faith
and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall not be bound to make any investigation into
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee in its discretion may make such further
inquiry into such facts or matters as it may see fit.
(g) The Trustee shall not be required to take notice or be deemed to
have taken notice of any Default hereunder, except Events of Default described
in paragraphs (1) and (2) of Section 6.01 hereof, unless the Trustee shall be
specifically notified in writing of such Default by the Company or by the
Holders of at least 25% in aggregate principal amount of the outstanding Notes
at its designated corporate trust office.
(h) The permissive right of the Trustee to act hereunder will not be
construed as a duty.
Section 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Notes and
may otherwise deal with the Company or its Affiliates with the same rights it
would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or
co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
Section 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's use
of the proceeds from the Notes, and it shall not be responsible for any
statement of the Company in the Indenture or in any document issued in
connection with the sale of the Notes or in the Notes other than the Trustee's
certificate of authentication.
Section 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Noteholder notice of the Default within 90 days after it occurs; provided,
however, that if such Default constitutes a failure to comply with Section 4.04,
the Trustee must mail to each Holder of the Notes notice of such Default within
40 days after it occurs. Except in the case of a Default in payment of principal
of or interest on any Note (including payments pursuant to the mandatory
redemption provisions of such Note, if any), the Trustee may withhold the notice
if and so long as a committee of its Trust Officers in good faith determines
that withholding the notice is in the interests of Noteholders.
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Section 7.06. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with the May 15 following the date of
this Indenture, and in any event prior to July 15 in each year, the Trustee
shall mail to each Noteholder, as provided in TIA Section 313(c), a brief
report dated as of May 15 that complies with TIA Section 313(a). The Trustee
also shall comply with TIA Section 313(b).
A copy of each report at the time of its mailing to Noteholders
shall be mailed to the Company and filed with the SEC and each stock exchange
(if any) on which the Notes are listed. The Company agrees to notify promptly
the Trustee whenever the Notes become listed on any stock exchange and of any
delisting thereof.
Section 7.07. Compensation and Indemnity. The Company shall pay to
the Trustee such compensation as shall be agreed upon in writing for its
services hereunder. The Trustee's compensation shall not be limited by any law
on compensation of a trustee of an express trust. The Company shall reimburse
the Trustee upon request for all reasonable out-of-pocket expenses incurred or
made by it, in addition to the compensation for its services. Such expenses
shall include the reasonable compensation and expenses, disbursements and
advances of the Trustee's agents, counsel, accountants and experts. The Company
agrees to indemnify and hold the Trustee and its directors, officers, agents and
employees (collectively the "Indemnitees") harmless from and against any and all
claims, liabilities, losses, damages, fines, penalties, and expenses, including
out-of-pocket and incidental expenses and legal fees (including the allocated
costs and expenses of in-house counsel and legal staff) ("Losses") that may be
imposed on, incurred by, or asserted against, the Indemnitees or any of them for
following any instructions or other directions upon which the Trustee is
authorized to rely pursuant to the terms of the Indenture. In addition to and
not in limitation of the immediately preceding sentence, the Company also agrees
to indemnify and hold the Indemnitees and each of them harmless from and against
any and all Losses that may be imposed on, incurred by, or asserted against, the
Indemnitees or any of them in connection with or arising out of the Trustee's
performance under the Indenture, provided the Indemnitees have not acted with
negligence or engaged in willful misconduct. The provisions of this Section
shall survive expiration or termination of this Indenture. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity.
Failure by the Trustee to so notify the Company shall not relieve the Company of
its obligations hereunder. The Company shall defend the claim and the Trustee
shall cooperate in the defense. The Trustee may have separate counsel and the
Company shall pay the reasonable fees and expenses of such counsel. The Company
need not pay for any settlement made without its consent, which consent shall
not be unreasonably withheld.
To secure the Company's payment obligations in this Section, the
Trustee shall have a lien prior to the Notes on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of and interest on particular Notes.
The Company's payment obligations pursuant to this Section shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(7) or (8) with respect to
the Company, the expenses are intended to constitute expenses of administration
under the Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section
313(b)(2) to the extent applicable.
59
Section 7.08. Replacement of Trustee. The Trustee may resign at any
time by so notifying the Company in writing at least 30 days prior to the date
of the proposed resignation. The Holders of a majority in principal amount of
the Notes may remove the Trustee by so notifying the Trustee and may appoint a
successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee
or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders
of a majority in principal amount of the Notes and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Noteholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the Company or the Holders of a majority
in principal amount of the Notes may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10 or shall fail to
comply with TIA Section 310(b), any Noteholder may petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this
Section, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.
If the Trustee is removed without cause, all fees and expenses of
the Trustee incurred in the administration of the trusts or in performing the
duties hereunder shall be paid to the Trustee prior to the effective date of
such removal.
Section 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee with the
60
same effect as if the successor Trustee has been named the Trustee herein,
provided such corporation shall be otherwise qualified and eligible under this
Article.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Notes shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Notes so
authenticated; and in case at that time any of the Notes shall not have been
authenticated, any successor to the Trustee may authenticate such Notes either
in the name of any predecessor hereunder or in the name of the successor to the
Trustee; and in all such cases such certificates shall have the full force which
it is anywhere in the Notes or in this Indenture provided that the certificate
of the Trustee shall have.
Section 7.10. Eligibility; Disqualification. The Trustee shall at
all times satisfy the requirements of TIA Section 310(a). The Trustee shall
always have a combined capital and surplus of at least $50,000,000 as set forth
in its most recent published annual report of condition. The Trustee shall
comply with TIA Section 310(b); provided, however, that there shall be excluded
from the operation of TIA Section 310(b)(1) any indenture or indentures under
which other securities or certificates of interest or participation in other
securities of the Company are outstanding if the requirements for such exclusion
set forth in TIA Section 310(b)(1) are met.
Section 7.11. Preferential Collection of Claims Against Company. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
Section 8.01. Discharge of Liability on Notes; Defeasance.
(a) When (1) the Company delivers to the Trustee all outstanding
Notes (other than Notes replaced pursuant to Section 2.07) for cancellation or
(2) all outstanding Notes have become due and payable, whether at maturity or on
a redemption date as a result of the mailing of a notice of redemption pursuant
to Article 3 hereof and the Company irrevocably deposits with the Trustee funds
sufficient to pay at maturity or upon redemption all outstanding Notes,
including interest thereon to maturity or such redemption date (other than Notes
replaced pursuant to Section 2.07), and if in either case the Company pays all
other sums payable hereunder by the Company, then this Indenture shall, subject
to Section 8.01(c), cease to be of further effect. The Trustee shall acknowledge
satisfaction and discharge of this Indenture on demand of the Company
accompanied by an Officers' Certificate and an Opinion of Counsel and at the
cost and expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any time
may terminate (1) all of its obligations under the Notes and this Indenture
("legal defeasance option") or (2) its obligations under Sections 4.02, 4.03,
4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, and 4.13 and the operation of Sections
6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9)
61
(but, in the case of Sections 6.01(7) and (8), with respect only to Significant
Subsidiaries) and the limitations contained in Sections 5.01(3) ("covenant
defeasance option"). The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. If the
Company exercises its legal defeasance option or its covenant defeasance option,
each Subsidiary Guarantor, if any, shall be released from all its obligations
with respect to its Subsidiary Guaranty.
If the Company exercises its legal defeasance option, payment of the
Notes may not be accelerated because of an Event of Default with respect
thereto. If the Company exercises its covenant defeasance option, payment of the
Notes may not be accelerated because of an Event of Default specified in
Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in the case of
Sections 6.01(7) and (8), with respect only to Significant Subsidiaries) or
because of the failure of the Company to comply with Section 5.01(3).
Upon satisfaction of the conditions set forth herein and upon the
written request of the Company, the Trustee shall acknowledge in writing the
discharge of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07 and 7.08 and in
this Article 8 shall survive until the Notes have been paid in full. Thereafter,
the Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive.
Section 8.02. Conditions to Defeasance. The Company may exercise its
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal of and
interest on the Notes to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Notes to maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the 123-day
period no Default specified in Sections 6.01(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or
is qualified as, a regulated investment company under the Investment
Company Act of 1940;
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(6) in the case of the legal defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (B) since the date of this Indenture there
has been a change in the applicable Federal income tax law, in either case
to the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Noteholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Noteholders will not recognize income, gain or loss for Federal income tax
purposes as a result of such covenant defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Notes as contemplated by this Article 8
have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Notes at a future date in
accordance with Article 3.
Section 8.03. Application of Trust Money. The Trustee shall hold in
trust money or U.S. Government Obligations deposited with it pursuant to this
Article 8. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Notes.
Section 8.04. Repayment to Company. The Trustee and the Paying Agent
shall promptly turn over to the Company upon written request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and
the Paying Agent shall pay to the Company upon request any money held by them
for the payment of principal of or interest on the Notes that remains unclaimed
for two years, and, thereafter, Noteholders entitled to the money must look to
the Company for payment as general creditors. In the absence of any such written
request, the Trustee shall from time to time deliver such unclaimed funds to or
as directed by pertinent escheat authority, as identified by the Trustee in its
sole discretion, pursuant to and in accordance with applicable unclaimed
property laws, rules or regulations. Any such delivery shall be in accordance
with the customary practices and procedures of the Trustee and the escheat
authority. All moneys held by the Trustee and subject to this Section 8.04 shall
be held uninvested and without liability for interest thereon. Before making any
payment under this Section 8.04, the Trustee shall be entitled to receive at the
Company's expense an opinion of counsel to the effect that said payment is
permitted under applicable law.
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Section 8.05. Indemnity for Government Obligations. The Company
shall pay and shall indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against deposited U.S. Government Obligations or the
principal and interest received on such U.S. Government Obligations.
Section 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit had
occurred pursuant to this Article 8 until such time as the Trustee or Paying
Agent is permitted to apply all such money or U.S. Government Obligations in
accordance with this Article 8; provided, however, that, if the Company has made
any payment of interest on or principal of any Notes because of the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money or U.S.
Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
Section 9.01. Without Consent of Holders. The Company, the
Subsidiary Guarantors, if any, and the Trustee may amend this Indenture or the
Notes without notice to or consent of any Noteholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Notes in addition to or in place
of certificated Notes; provided, however, that the uncertificated Notes
are issued in registered form for purposes of Section 163(f) of the Code
or in a manner such that the uncertificated Notes are described in Section
163(f)(2)(B) of the Code;
(4) to add Guarantees with respect to the Notes, including
Subsidiary Guaranties, or to secure the Notes;
(5) to add to the covenants of the Company or any Subsidiary
Guarantors for the benefit of the Holders or to surrender any right or
power herein conferred upon the Company or any Subsidiary Guarantor;
(6) to make any change that does not adversely affect the rights of
any Noteholder; or
(7) to comply with any requirements of the SEC in connection with
qualifying, or maintaining the qualification of, this Indenture under the
TIA.
After an amendment under this Section becomes effective, the Company
shall mail to Noteholders a notice briefly describing such amendment. The
failure to give
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such notice to all Noteholders, or any defect therein, shall not impair or
affect the validity of an amendment under this Section.
Section 9.02. With Consent of Holders. The Company, the Subsidiary
Guarantors, if any, and the Trustee may amend this Indenture or the Notes
without notice to any Noteholder, but with the written consent of the Holders of
at least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a tender offer or exchange for the Notes).
However, without the consent of each Noteholder affected thereby, an amendment
or waiver, including a waiver pursuant to Section 6.04, may not:
(1) reduce the amount of Notes whose Holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on
any Note;
(3) reduce the principal amount of or extend the Stated Maturity of
any Note;
(4) change the provisions applicable to the redemption of any Note
set forth in such Note or Article 3;
(5) make any Note payable in money other than that stated in the
Note;
(6) impair the right of any Holder to receive payment of principal
of and 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;
(7) make any change in Section 6.04 or 6.07 or the second sentence
of this Section;
(8) make any changes in the ranking or priority of any Note that
would adversely affect the Noteholders; or
(9) make any change in any Subsidiary Guaranty that would adversely
affect the Noteholders.
It shall not be necessary for the consent of the Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company
shall mail to Noteholders a notice briefly describing such amendment. The
failure to give such notice to all Noteholders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
Section 9.03. Compliance with Trust Indenture Act. Every amendment
to this Indenture or the Notes shall comply with the TIA as then in effect.
65
Section 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Note shall bind the Holder
and every subsequent Holder of that Note or portion of the Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
or waiver is not made on the Note. However, any such Holder or subsequent Holder
may revoke the consent or waiver as to such Holder's Note or portion of the Note
if the Trustee receives the notice of revocation before the date the amendment
or waiver becomes effective. After an amendment or waiver becomes effective, it
shall bind every Noteholder. An amendment or waiver becomes effective upon the
execution of such amendment or waiver by the Trustee.
The Company may, but shall not be obligated to, fix a record date
for the purpose of determining the Noteholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Noteholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
Section 9.05. Notation on or Exchange of Notes. If an amendment or
waiver changes the terms of a Note, the Trustee may require the Holder of the
Note to deliver it to the Trustee. The Trustee may place an appropriate notation
on the Note regarding the changed terms and return it to the Holder.
Alternatively, if the Company or the Trustee so determines, the Company in
exchange for the Note shall issue and the Trustee shall authenticate a new Note
that reflects the changed terms. Failure to make the appropriate notation or to
issue a new Note shall not affect the validity of such amendment or waiver.
Section 9.06. Trustee To Sign Amendments. The Trustee shall sign any
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that such
amendment is authorized or permitted by this Indenture.
Section 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Notes unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
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ARTICLE 10
Subsidiary Guaranties
Section 10.01. Guaranties. Each Subsidiary Guarantor hereby
unconditionally and irrevocably guarantees, jointly and severally, to each
Holder and to the Trustee and its successors and assigns (a) the full and
punctual payment of principal of and interest on the Notes when due, whether at
maturity, by acceleration, by redemption or otherwise, and all other monetary
obligations of the Company under this Indenture and the Notes and (b) the full
and punctual performance within applicable grace periods of all other
obligations of the Company under this Indenture and the Notes (all the foregoing
being hereinafter collectively called the "Guarantied Obligations"). Each
Subsidiary Guarantor further agrees that the Guarantied Obligations may be
extended or renewed, in whole or in part, without notice or further assent from
such Subsidiary Guarantor and that such Subsidiary Guarantor will remain bound
under this Article 10 notwithstanding any extension or renewal of any Guarantied
Obligation.
Each Subsidiary Guarantor waives presentation to, demand of, payment
from and protest to the Company of any of the Guarantied Obligations and also
waives notice of protest for nonpayment. Each Subsidiary Guarantor waives notice
of any default under the Notes or the Guarantied Obligations. The obligations of
each Subsidiary Guarantor hereunder shall not be affected by (a) the failure of
any Holder or the Trustee to assert any claim or demand or to enforce any right
or remedy against the Company or any other Person under this Indenture, the
Notes or any other agreement or otherwise; (b) any extension or renewal of any
thereof; (c) any rescission, waiver, amendment or modification of any of the
terms or provisions of this Indenture, the Notes or any other agreement; (d) the
release of any security held by any Holder or the Trustee for the Guarantied
Obligations or any of them; (e) the failure of any Holder or the Trustee to
exercise any right or remedy against any other guarantor of the Guarantied
Obligations; or (f) except as set forth in Section 10.06, any change in the
ownership of such Subsidiary Guarantor.
Each Subsidiary Guarantor further agrees that its Subsidiary
Guaranty herein constitutes a guarantee of payment, performance and compliance
when due (and not a guarantee of collection) and waives any right to require
that any resort be had by any Holder or the Trustee to any security held for
payment of the Guarantied Obligations.
Except as expressly set forth in Sections 8.01(b), 10.02 and 10.06,
the obligations of each Subsidiary Guarantor hereunder shall not be subject to
any reduction, limitation, impairment or termination for any reason, including
any claim of waiver, release, surrender, alteration or compromise, and shall not
be subject to any defense of setoff, counterclaim, recoupment or termination
whatsoever or by reason of the invalidity, illegality or unenforceability of the
Guarantied Obligations or otherwise. Without limiting the generality of the
foregoing, the obligations of each Subsidiary Guarantor herein shall not be
discharged or impaired or otherwise affected by the failure of any Holder or the
Trustee to assert any claim or demand or to enforce any remedy under this
Indenture, the Notes or any other agreement, by any waiver or modification of
any thereof, by any default, failure or delay, willful or otherwise, in the
performance of the obligations, or by any other act or thing or omission or
delay to do any other act or thing which may or might in any manner or to any
extent vary the risk of such Subsidiary
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Guarantor or would otherwise operate as a discharge of such Subsidiary Guarantor
as a matter of law or equity.
Each Subsidiary Guarantor further agrees that its Guarantee herein
shall continue to be effective or be reinstated, as the case may be, if at any
time payment, or any part thereof, of principal of or interest on any Obligation
is rescinded or must otherwise be restored by any Holder or the Trustee upon the
bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any other
right which any Holder or the Trustee has at law or in equity against any
Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay
the principal of or interest on any Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Guarantied Obligation, each Subsidiary
Guarantor hereby promises to and shall, upon receipt of written demand by the
Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the
Trustee an amount equal to the sum of (1) the unpaid amount of such Guarantied
Obligations, (2) accrued and unpaid interest on such Guarantied Obligations (but
only to the extent not prohibited by law) and (3) all other monetary Guarantied
Obligations of the Company to the Holders and the Trustee.
Each Subsidiary Guarantor further agrees that, as between it, on the
one hand, and the Holders and the Trustee, on the other hand, (x) the maturity
of the Guarantied Obligations hereby may be accelerated as provided in Article 6
for the purposes of such Subsidiary Guarantor's Subsidiary Guaranty herein,
notwithstanding any stay, injunction or other prohibition preventing such
acceleration in respect of the Guarantied Obligations, and (y) in the event of
any declaration of acceleration of such Guarantied Obligations as provided in
Article 6, such Guarantied Obligations (whether or not due and payable) shall
forthwith become due and payable by such Subsidiary Guarantor for the purposes
of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs and
expenses (including reasonable attorneys' fees and expenses) incurred by the
Trustee or any Holder in enforcing any rights under this Section.
Section 10.02. Limitation on Liability. Any term or provision of
this Indenture to the contrary notwithstanding, the maximum aggregate amount of
the Guarantied Obligations by any Subsidiary Guarantor shall not exceed the
maximum amount that can be hereby guaranteed without rendering this Indenture,
as it relates to such Subsidiary Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally.
Section 10.03. Successors and Assigns. This Article 10 shall be
binding upon each Subsidiary Guarantor and its successors and assigns and shall
enure to the benefit of the successors and assigns of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights and privileges conferred upon that party in this
Indenture and in the Notes shall automatically extend to and be vested in such
transferee or assignee, all subject to the terms and conditions of this
Indenture.
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Section 10.04. No Waiver. Neither a failure nor a delay on the part
of either the Trustee or the Holders in exercising any right, power or privilege
under this Article 10 shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege. The rights, remedies and benefits of the Trustee and the
Holders herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article 10 at law,
in equity, by statute or otherwise.
Section 10.05. Modification. No modification, amendment or waiver of
any provision of this Article 10, nor the consent to any departure by any
Subsidiary Guarantor therefrom, shall in any event be effective unless the same
shall be in writing and signed by the Trustee, and then such waiver or consent
shall be effective only in the specific instance and for the purpose for which
given. No notice to or demand on any Subsidiary Guarantor in any case shall
entitle such Subsidiary Guarantor to any other or further notice or demand in
the same, similar or other circumstances.
Section 10.06. Release of Subsidiary Guarantor. (a) Upon (i) the
sale or other disposition (including by way of consolidation or merger) of any
Subsidiary Guarantor (other than to the Company or an Affiliate of the Company),
(ii) the sale or disposition of all or substantially all the assets of such
Subsidiary Guarantor (other than to the Company or an Affiliate of the Company)
or (iii) the designation of such Subsidiary Guarantor as an Unrestricted
Subsidiary, in each case in accordance with the provisions of this Indenture,
(b) if a Subsidiary Guarantor originally became a Subsidiary Guarantor pursuant
to the requirements of Section 4.08 in connection with such Subsidiary
Guarantor's Guarantee of other Indebtedness or creation of a Lien to secure the
payment of other Indebtedness, upon the release or discharge of the Guarantee or
security of payment of other Indebtedness (other than a discharge by or as a
result of payment under such Guarantee or security), subject to paragraph 5 of
Section 10.01, when all the Guarantied Obligations shall have been irrevocably
paid in full, such Subsidiary Guarantor shall be deemed released from all
obligations under such Subsidiary Guaranty, this Indenture and the Notes without
any further action required on the part of the Trustee or any Holder. At the
request of the Company, the Trustee shall execute and deliver an appropriate
instrument evidencing such release.
Section 10.07. Form of Supplemental Indenture. Where this Indenture
requires that any Restricted Subsidiary execute and deliver a supplemental
indenture to this Indenture pursuant to which such Restricted Subsidiary
guarantees payment of the Notes, such Restricted Subsidiary shall execute and
deliver a supplemental indenture in the form attached to this Indenture as
Exhibit I.
ARTICLE 11
Miscellaneous
Section 11.01. Trust Indenture Act Controls. If any provision of
this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
Section 11.02. Notices. Any notice or communication shall be in
writing and delivered in person or mailed by first-class mail addressed as
follows, provided,
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however, that any notice to the Trustee shall not be deemed to be given until it
is actually received by the Trustee:
J.P. Morgan Trust Company, National Association
Chase National Tower
250 West Huron Road, Suite 220
Cleveland, OH 44113
Attention: Corporate Trust Administrator
The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Noteholder shall be mailed
to the Noteholder at the Noteholder's address as it appears on the registration
books of the Registrar and shall be sufficiently given if so mailed within the
time prescribed.
Any notice or communication shall also be so mailed to any Person
described in TIA Section 313(c), to the extent required by the TIA. Copies of
any such communication or notice to a Holder shall also be mailed to the
Trustee, the Registrar, co-registrar, Paying Agent and transfer agent at the
same time.
Failure to mail a notice or communication to a Noteholder or any
defect in it shall not affect its sufficiency with respect to other Noteholders.
If a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waiver of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
In case by reason of the suspension of regular mail service or by
reason of any other cause it shall be impracticable to give such notice by mail,
then such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
Section 11.03. Communication by Holders with Other Holders.
Noteholders may communicate pursuant to TIA Section 312(b) with other
Noteholders with respect to their rights under this Indenture or the Notes. The
Company, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
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Section 11.04. Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take or refrain
from taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
Section 11.05. Statements Required in Certificate or Opinion. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
provided, however, that, with respect to matters of fact, an Opinion of Counsel
may rely on an Officers' Certificate or certificates of public officials.
Section 11.06. When Notes Disregarded. In determining whether the
Holders of the required principal amount of Notes have concurred in any
direction, waiver or consent, Notes owned by the Company or by any Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Company shall be disregarded and deemed not to be
outstanding, except that, for the purpose of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes which the Trustee knows are so owned shall be so disregarded. Also,
subject to the foregoing, only Notes outstanding at the time shall be considered
in any such determination.
Section 11.07. Rules by Trustee, Paying Agent and Registrar. The
Trustee may make reasonable rules for action by or a meeting of Noteholders. The
Registrar and the Paying Agent may make reasonable rules for their functions.
Section 11.08. Legal Holidays. If a payment date is a Legal Holiday,
payment shall be made on the next succeeding day that is not a Legal Holiday,
and no
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interest shall accrue for the intervening period. If a regular record date is a
Legal Holiday, the record date shall not be affected.
Section 11.09. Governing Law. This Indenture and the Notes shall be
governed by, and construed in accordance with, the laws of the State of New York
but without giving effect to applicable principles of conflicts of law to the
extent that the application of the laws of another jurisdiction would be
required thereby.
Section 11.10. No Recourse Against Others. A director, officer,
employee, controlling person, stockholder or other equity holder as such, of the
Company shall not have any liability for any obligations, covenants or
agreements of the Company under the Notes or this Indenture or for any claim
based on, in respect of or by reason of such obligations or their creation. By
accepting a Note, each Noteholder shall waive and release all such liability.
The waiver and release shall be part of the consideration for the issue of the
Notes.
Section 11.11. Successors. All agreements of the Company in this
Indenture and the Notes shall bind its successors. All agreements of the Trustee
in this Indenture shall bind its successors.
Section 11.12. Multiple Originals. The parties may sign any number
of copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture.
Section 11.13. Table of Contents; Headings. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
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IN WITNESS WHEREOF, the parties have caused this Indenture to be
duly executed as of the date first written above.
CITGO PETROLEUM CORPORATION
by
/s/ Philip J. Reedy
----------------------------
Name: Philip J. Reedy
Title: Treasurer
J.P. MORGAN TRUST COMPANY, NATIONAL
ASSOCIATION, as Trustee
[FORM OF SUPPLEMENTAL INDENTURE TO BE
DELIVERED BY SUBSIDIARY GUARANTORS]
SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), dated as of
[ ] among [ ] (the "New Subsidiary Guarantor"), CITGO Petroleum Corporation, a
Delaware corporation (or its permitted successor) (the "Company"), the
Subsidiary Guarantors (the "Existing Subsidiary Guarantors"), if any, and J.P.
Mor
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