20-F 1 a05-16826_120f.htm 20-F

 

As filed with the Securities and Exchange Commission on October 7, 2005.

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 20-F

 

(Mark One)

 

o

 

Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

 

 

 

ý

 

Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the fiscal year ended December 31, 2003

 

 

 

o

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

 

 

For the transition period from                                          to              

 

 

 

 

 

Commission File No. 333-09678

 

PDVSA Finance Ltd.

(Exact name of Registrant as specified in its charter)

 

Cayman Islands

(Jurisdiction of incorporation or organization)

 

Caledonian Bank & Trust Ltd.

Caledonian House

P.O. Box 1043

George Town, Grand Cayman

Cayman Islands

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:  None

 

Securities to be registered pursuant to Section 12(g) of the Act:  None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

$300,000,000 6.650% Notes due 2006

 

$250,000,000 9.375% Notes due 2007

$300,000,000 6.800% Notes due 2008

 

$250,000,000 9.750% Notes due 2010

$500,000,000 8.500% Notes due 2012

 

$400,000,000 7.400% Notes due 2016

$100,000,000 9.950% Notes due 2020

 

$400,000,000 7.500% Notes due 2028

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 200,000,000 shares of common stock of PDVSA Finance Ltd. were outstanding as of December 31, 2003.

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes         o            No           ý

 

Indicate by check mark which financial statement item the registrant has elected to follow:

 

Item 17   o            Item 18   ý

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Item 17   o            Item 18   ý

 

 



 

Table of Contents

 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

 

 

 

 

 

 

 

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

 

 

Item 1.

 

Identity of Directors, Senior Management and Advisers

 

 

Item 2.

 

Offer Statistics and Expected Timetable

 

 

Item 3.

 

Key Information

 

 

 

 

3.A

Selected financial data

 

 

 

 

3.D

Risk factors

 

 

Item 4.

 

Information on the Company

 

 

 

 

4.A

History and development of the company

 

 

 

 

4.B

Business overview

 

 

 

 

4.C

Organizational structure

 

 

 

 

4.D

Property, plants and equipment

 

 

Item 5.

 

Operating and Financial Review and Prospects

 

 

 

 

5.A

Operating results

 

 

 

 

5.B

Liquidity and capital resources

 

 

 

 

5.C

Research and development, patents and licenses

 

 

 

 

5.D

Trend information

 

 

 

 

5.E

Off-balance sheet arrangements

 

 

 

 

5.F

Tabular disclosure of contractual obligations

 

 

 

 

5.G

Safe harbor

 

 

Item 6.

 

Directors, Senior Management and Employees

 

 

 

 

6.A

Directors and senior management

 

 

 

 

6.B

Compensation

 

 

 

 

6.C

Board practices

 

 

 

 

6.D

Employees

 

 

 

 

6.E

Share ownership

 

 

Item 7.

 

Major Shareholders and Related Party Transactions

 

 

 

 

7.A

Major shareholders

 

 

 

 

7.B

Related party transactions

 

 

Item 8.

 

Financial Information

 

 

 

 

8.A

Consolidated Statements and Other Financial Information

 

 

Item 9.

 

The Offer and Listing

 

 

 

 

9.A

Offer and listing details

 

 

Item 10.

 

Additional Information

 

 

 

 

10.B

Memorandum and articles of association

 

 

 

 

10.C

Material contracts

 

 

 

 

10.D

Exchange controls

 

 

 

 

10.E

Taxation

 

 

 

 

10.H

Documents on display

 

 

Item 11.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

Item 12.

 

Description of Securities Other than Equity Securities

 

 

 

i




 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

 

The annual report on Form 20-F of Petróleos de Venezuela, S.A. for the year ended December 31, 2003, first filed with the U.S. Securities and Exchange Commission (Commission File No. 001-12142) on October 7, 2005, is incorporated herein by reference.

 

The consolidated financial statements of CITGO Petroleum Corporation (a wholly owned subsidiary of Petróleos de Venezuela, S.A.) for the year ended December 31, 2003, are incorporated herein by reference to the annual report on Form 10-K of CITGO Petroleum Corporation for the year ended December 31, 2003, filed with the U.S. Securities and Exchange Commission (Commission File No. 001-14380) on March 30, 2004.

 

FACTORS AFFECTING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Specifically, certain statements under the caption “Item 4.B Business overview” relating to the operation and performance of PDVSA Finance Ltd., Petróleos de Venezuela, S.A. and PDVSA Petróleo, S.A. (together with its predecessor, “PDVSA Petróleo”) and under the caption “Item 5. Operating and Financial Review and Prospects” are forward-looking statements.  You can identify forward-looking statements by, among other things, the use of forward-looking language, such as the words “believe,” “expect,” “anticipate” and similar expressions.  These forward-looking statements reflect our expectations for future events and financial performance.  These statements are based on current plans, estimates and projections.  Such statements are subject to certain risks and uncertainties, such as changes in import controls or import duties, levies or taxes in international markets and changes in prices or demand for products produced by PDVSA Petróleo or its subsidiaries or affiliates in international markets as a result of competitive, economic, political and other factors, the availability of continued access to capital markets and financing on favorable terms, regulatory compliance requirements, labor disputes and the performance by third parties of their contractual obligations.  Although we believe that the expectations reflected by such forward-looking statements are reasonable based on information currently available to us, we cannot assure you that such expectations will prove to be correct.  Actual results could differ materially from the results projected in the forward-looking statements as a result of the risks described above.  Accordingly, readers are cautioned not to place undue reliance on the forward-looking statements.  Forward-looking statements speak only as of the date they were made.  We undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this annual report.

 

The annual report on Form 20-F of Petróleos de Venezuela S.A. for the fiscal year ended December 31, 2003, incorporated herein by reference, also contains forward-looking statements.  For a discussion of the factors affecting the forward-looking statements contained therein, see “Factors Affecting Forward-Looking Statements” on page ii thereof.

 

As used in this annual report references to “dollars” or “$” are to the lawful currency of the United States.  When used in this annual report, the terms “we,” “our,” “ us” and “PDVSA Finance” refer to PDVSA Finance Ltd., the term “Petróleos de Venezuela” refers to Petróleos de Venezuela, S.A. and the term “PDVSA” refers to Petróleos de Venezuela and its consolidated subsidiaries.

 

As used in this annual report, capitalized terms shall have the meaning assigned to them herein, in the agreements referred to in Item 10.C “Material contracts,” or in “Annex A — Glossary of Certain Defined Terms Used Primarily Under “Item 10.C Material Contracts”.”

 

1



 

PART I

 

Item 1.                                   Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.                                   Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.                                   Key Information

 

3.A          Selected financial data

 

The following selected financial data have been derived from our audited financial statements.  See “Item 18.  Financial Statements.”

 

Our financial statements are prepared and presented in accordance with International Financial Reporting Standards (“IFRS”) (formerly International Accounting Standards or IAS) adopted by the International Accounting Standards Board (“IASB”).  Although there are a number of significant differences between IAS and Accounting Principles Generally Accepted in the United States of America (“U.S. GAAP”), as of and for the years ended December 31, 2003, 2002 2001, 2000 and 1999, the application of U.S. GAAP would not have produced material differences with respect to our shareholder’s equity and net income, except for the recording of the transition adjustment as of January 1, 2001 resulting from adopting IAS 39, which differs from the accounting treatment under SFAS No. 133.  See note 2(j) to our financial statements.

 

The selected financial data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, our financial statements, “Item 5. Operating and Financial Review and Prospects” herein, and the consolidated financial statements of Petróleos de Venezuela and the section entitled “Item 5. Operating and Financial Review and Prospects,” both of which are included in the annual report of Petróleos de Venezuela on Form 20-F for the year ended December 31, 2003.  Petróleos de Venezuela’s annual report on Form 20-F for the year ended December 31, 2003 is incorporated by reference herein.

 

 

 

Years ended December 31,

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

($ in thousands)

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

376,089

 

382,826

 

354,377

 

353,949

 

313,899

 

Total revenues

 

379,511

 

386,506

 

358,607

 

360,464

 

317,454

 

Interest expense

 

(254,424

)

(276,050

)

(252,285

)

(255,310

)

(227,357

)

General and administrative expenses

 

(7,601

)

(8,266

)

(8,723

)

(11,691

)

(6,877

)

Income before income taxes

 

117,731

 

104,437

 

99,142

 

97,575

 

97,695

 

Income tax expense

 

(18,616

)

(18,950

)

(17,542

)

(17,520

)

(15,538

)

Net income(1)

 

99,115

 

85,487

 

81,600

 

80,055

 

82,157

 

 

2



 

 

 

December 31,

 

 

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

($ in thousands)

 

Balance Sheet Data (at the end of period):

 

 

 

 

 

 

 

 

 

 

 

Current purchased accounts receivable(1)

 

924,225

 

429,992

 

585,947

 

905,054

 

825,091

 

Rights to future (ungenerated) purchased accounts receivable

 

2,707,250

 

3,214,181

 

3,737,332

 

2,979,235

 

3,031,863

 

Total assets

 

4,021,016

 

4,256,272

 

4,454,409

 

3,985,651

 

3,964,436

 

Long-term debt

 

2,792,496

 

2,994,826

 

3,320,092

 

3,113,040

 

3,225,000

 

Total liabilities

 

3,078,793

 

3,413,164

 

3,696,788

 

3,291,320

 

3,350,160

 

Capital stock

 

200,000

 

200,000

 

200,000

 

200,000

 

200,000

 

Shareholder’s equity(2)

 

942,223

 

843,108

 

757,621

 

694,331

 

614,276

 

 


(1)

 

Net of unamortized discounts.

(2)

 

If the change in accounting for derivative financial instruments in 2001 had been recorded in accordance with U.S. GAAP, a cumulative effect adjustment of $18.3 million would have been recorded in our income statement and our reported net income would have been $63.3 million. The difference in accounting between IFRS and U.S. GAAP had no impact on shareholder’s equity for 2001. From our inception through December 31, 2003 we have not declared any dividends.

 

3.D          Risk factors

 

You should carefully consider all of the information set forth in this annual report and the following risk factors.  The risks below are not the only ones we face.  Additional risks not currently known by us may also impair our business operations.  Our business, financial condition or results of operations could be materially adversely affected by any of these risks.  This annual report also contains forward-looking statements that involve risks and uncertainties.  Our results could materially differ from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this annual report.  See “Factors Affecting Forward-Looking Statements.”

 

Our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness is dependent on the ability of PDVSA Petróleo to sell crude oil and other refined petroleum products and on the operations of Petróleos de Venezuela and PDVSA Petróleo over which we have no control.

 

We do not produce, transport, refine or sell crude oil or other refined petroleum products.  We have no control over Petróleos de Venezuela or any of its subsidiaries or affiliates, including PDVSA Petróleo, or any of their operations.  Accordingly, our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness depends on the ability of PDVSA Petróleo to sell enough crude oil and other petroleum products to designated customers over time to generate sufficient eligible receivables.  Significant delays or disruptions in the production of crude oil by PDVSA for a substantial period, due to competitive, economic, political or other factors beyond our control, may materially and adversely affect the ability of PDVSA Petróleo to generate sufficient eligible receivables for our purchase.

 

For example, in December 2002 and January 2003, an extensive work stoppage by PDVSA employees halted most of PDVSA’s operations, including the production and export of crude oil, gas and related products.  This resulted in a sharp decline in the amount of eligible receivables generated by PDVSA Petróleo during that period.  A similar work stoppage briefly occurred in February 2002.  While PDVSA’s production and export have substantially returned to pre-December 2002 levels, we have no control over the occurrence of such developments and cannot assure you that similar events will not occur in the future.

 

3



 

We also rely on PDVSA Petróleo in its capacity as servicer under the Servicing and Collection Agency Agreement.  While we may terminate the agreement in limited cases, we have no control over the manner in which PDVSA Petróleo carries out its duties.

 

Our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness is dependent on the ability of PDVSA Petróleo to generate sufficient eligible receivables.

 

PDVSA Petróleo’s ability to generate enough eligible receivables to allow us to meet our obligations in respect of our outstanding indebtedness and any future indebtedness depends on two factors:

 

                                          whether the designated customers buy enough crude oil and other petroleum products from PDVSA Petróleo; and

 

                                          whether PDVSA Petróleo can maintain sufficient production levels.

 

Designated customers may reduce the amount of oil they purchase.  PDVSA Petróleo can generate the eligible receivables of designated customers that we purchase from them only if the designated customers have a continuing need for and ability to purchase crude oil and refined petroleum products from PDVSA Petróleo.  A designated customer’s demand for these products from PDVSA Petróleo could decrease for a variety of reasons, including:

 

                                          changes in the market for that designated customer’s products;

 

                                          a decision to purchase products from someone other than PDVSA Petróleo; or

 

                                          a deterioration in the customer’s business or financial condition.

 

A reduction in designated customer demand could materially limit PDVSA Petróleo’s ability to generate the receivables that we purchase under the Receivables Purchase Agreement.  Similarly, PDVSA Petróleo may materially change the terms under which it sells its products to any designated customer, which may make it more difficult for that designated customer to purchase from PDVSA Petróleo.  We have no control over the designated customers or PDVSA Petróleo in situations like these.

 

PDVSA Petróleo may not produce sufficient crude oil and refined petroleum products to generate enough eligible receivables.  PDVSA Petróleo’s ability to generate eligible receivables also depends on its maintaining sufficiently high production levels.  In order to maintain production levels, PDVSA Petróleo may need to invest in new production facilities as existing facilities become obsolete.  The production activities of PDVSA Petróleo are critical to the future creation of receivables.  Additionally, significant delays or disruptions in the production of crude oil by PDVSA for a substantial period, due to competitive, economic or other factors beyond our control, may materially and adversely affect the ability of PDVSA Petróleo to generate sufficient eligible receivables for our purchase.  We have no control over PDVSA Petróleo or any of its subsidiaries and cannot guarantee that PDVSA Petróleo will be able to maintain a sufficient production of crude oil and refined petroleum products or find additional reserves or invest in new facilities.

 

See “Item 4.B Business overview – PDVSA’s customers and receivables.”

 

If collections on purchased receivables are held in the retention account, cash flow available to PDVSA Petróleo could be reduced, which could hurt PDVSA Petróleo’s ability to produce oil and generate eligible receivables.

 

If the provisions of the Fiscal Agency Agreement requiring the funding of the retention account are triggered, the resulting distribution of collections on purchased receivables into the retention account could significantly reduce our ongoing purchases of eligible receivables, which could in turn reduce PDVSA Petróleo’s operating cash flow.  Any reduction in cash flow available to PDVSA Petróleo to fund its operations on a day-to-day

 

4



 

basis could impair its ability to produce oil and, in turn, its ability to meet its obligations under existing sales contracts relating to purchased receivables and its ability to enter into new ones.

 

For an explanation of the circumstances in which collections will be paid into the retention account, see “Item 10.C Material contracts – The Fiscal Agency Agreement.”

 

If PDVSA Petróleo fails to generate eligible receivables that we have already purchased, we have no recourse to Petróleos de Venezuela or PDVSA Petróleo.

 

We purchase receivables that PDVSA Petróleo will generate in the future.  To the extent that the time between the purchase and generation of future purchased receivables increases, we will bear the generation risks for a longer period.  In addition, we cannot guarantee that current market conditions will continue to prevail.  Since we have no recourse to Petróleos de Venezuela or PDVSA Petróleo except in limited circumstances, we alone bear the risk that PDVSA Petróleo will not be able to generate the future eligible receivables for which we have already paid.

 

If a designated customer fails to honor its payment obligations, we have no recourse to Petróleos de Venezuela or PDVSA Petróleo.

 

Except in limited circumstances, PDVSA Petróleo has no obligation to refund any of our payments for eligible receivables.  Without recourse to Petróleos de Venezuela or PDVSA Petróleo, we bear the risk of a designated customer failing to honor its payment obligations with respect to any of the eligible receivables purchased from PDVSA Petróleo.

 

There are only two limited situations in which we may rescind our purchases of eligible receivables and claim repayment of the purchase price from PDVSA Petróleo.  We may rescind our purchases if:

 

                                          a receivable was sold to us pursuant to an inaccurate representation or warranty at the time of sale or if a receivable was owing by a designated customer that was not an eligible customer as of the applicable date of determination; or

 

                                          PDVSA Petróleo does not comply with covenants in the Receivables Purchase Agreement designed to ensure the continuity of its operations and its ability to sell eligible receivables on an ongoing basis.

 

These limited circumstances do not include the failure of a designated customer to fulfill its payment obligations.  Therefore, once PDVSA Petróleo has generated an eligible receivable, PDVSA Petróleo will have satisfied its obligation to deliver that receivable, regardless of whether that customer ultimately pays.  See “Item 10.C Material contracts – The Receivables Purchase Agreement.”

 

Because our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness depends on designated customers making timely payments into the collection account, a deterioration of their business could adversely affect us.

 

If one or more designated customers suffer significant negative changes in their business or financial condition that make it difficult or impossible for them to make payments on the purchased receivables, it may impair our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness.  The magnitude of this negative effect will depend primarily on the amounts these designated customers owe with respect to purchased receivables.

 

This risk is not necessarily spread over a large number of designated customers.  There is no concentration limit on purchased receivables owing from a particular customer, nor is there a concentration limit on purchased receivables owing from affiliates of Petróleos de Venezuela, either individually or in the aggregate.  This means that one or a few designated customers could come to represent a substantial portion of the collections that we are owed on purchased receivables, subjecting us to the risk that even a single customer’s failure to pay could impair our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness.  Certain

 

5



 

designated customers accounted for more than 10% of PDVSA Petróleo’s total sales to designated customers during 2002.  However, because there is no concentration limit on purchased receivables owing from a particular customer, nor any restriction on the ability of PDVSA Petróleo to channel its exports towards or away from any particular customer, we cannot predict what percentage of PDVSA Petróleo’s sales will be attributable to any given customer in any future period.  The composition of the pool of receivables owned by us is likely to vary over time, reflecting fluctuations in the level of demand by each of PDVSA Petróleo’s customers.

 

We are not assured a predictable flow of payments.  In addition, the designated customers do not buy crude oil and refined petroleum products at set intervals.  Accordingly, we cannot guarantee that any particular pattern of payments into the collection account will occur.

 

We cannot guarantee that the business and financial condition of the designated customers will not deteriorate and that they will be able to make timely payment on the purchased receivables.  See “Item 4.B Business overview – PDVSA’s customers and receivables.”

 

A court may not treat our purchase of eligible receivables as a sale or may contest our purchase, which may make it difficult or impossible for us to meet our obligations in respect of our outstanding indebtedness and any future indebtedness if PDVSA Petróleo becomes insolvent or bankrupt.

 

We have been advised by our internal legal counsel in Venezuela and in the Cayman Islands that transfers of eligible receivables under the Receivables Purchase Agreement would qualify as sales under the laws of those jurisdictions.  However, no legal precedent in either of these jurisdictions directly supports that advice.  Therefore, we cannot assure you that a court in a relevant jurisdiction would consider the transfer of eligible receivables from PDVSA Petróleo to us to be sales.  If the transfer is not treated as a sale, we may have difficulty making payments on our outstanding indebtedness and any future indebtedness if PDVSA Petróleo becomes insolvent or subject to bankruptcy or equivalent proceedings.

 

Further, payments could be delayed or reduced if any conservator, receiver or bankruptcy trustee of PDVSA Petróleo were to:

 

                                          claim that the transfer of eligible receivables from PDVSA Petróleo to us was not a sale, and should instead be treated as security for a loan or as a claim for monies paid;

 

                                          require PDVSA Petróleo or us to establish our right to payments on purchased eligible receivables;

 

                                          request a stay under any bankruptcy proceeding involving PDVSA Petróleo so that we or PDVSA Petróleo may establish our rights to payments on purchased eligible receivables; or

 

                                          claim that the monies that we or PDVSA Petróleo may recover should be subordinated to claims of other creditors.

 

Furthermore, our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness could be limited if a court were to void a transfer by which we received eligible receivables.  A court could void a transfer of eligible receivables if the transfer were made:

 

                                          at a time when PDVSA Petróleo was insolvent;

 

                                          at a time when PDVSA Petróleo was contemplating insolvency;

 

                                          with the intent to hinder, delay or defraud PDVSA Petróleo or its creditors; or

 

                                          without the exchange of the purchase price required by the Receivables Purchase Agreement.

 

6



 

In addition, if a judicial or administrative body were to appoint a conservator, receiver or bankruptcy trustee for PDVSA Petróleo, no further eligible receivables would be sold to us.

 

Treatment under Venezuelan and Cayman Law.  Instead of treating the transfers of eligible receivables as sales, courts applying Venezuelan or Cayman law could treat these transfers as assignments of collateral as security from PDVSA Petróleo to us.  This security interest should not be subject to avoidance if PDVSA Petróleo becomes insolvent and is placed in receivership, and payments to us on the receivables should not be subject to recovery by a conservator or receiver for PDVSA Petróleo if:

 

                                          the security interest was validly perfected before PDVSA Petróleo’s insolvency; and

 

                                          the security interest was not granted or taken in contemplation of insolvency or with the intent to hinder, delay or defraud PDVSA Petróleo or its creditors.

 

However, if PDVSA Petróleo’s conservator or receiver asserts a contrary position or takes the steps discussed above, payments could be delayed or reduced.

 

If PDVSA Petróleo becomes subject to bankruptcy or insolvency proceedings or suspension of payments under Venezuelan law, Venezuelan legal doctrine could limit our rights to eligible receivables that we purchased before the declaration of bankruptcy but that PDVSA Petróleo generated after the declaration of the bankruptcy event.  Although no Venezuelan court has yet decided this issue, a court could hold that the sale of a receivable in these circumstances either:

 

                                          effectively transferred full ownership of the receivable to us; or

 

                                          allows us only to recover from PDVSA Petróleo the purchase price we paid for the receivable.

 

We cannot guarantee that the sale would transfer effectively full ownership of the receivable to us.  If we were awarded only the right to recover the purchase price of the receivable, this right would rank equally with all of PDVSA Petróleo’s other unsecured indebtedness or other obligations.  If PDVSA Petróleo’s assets were inadequate to cover all the claims, we could only recover our ratable share of the assets.  Furthermore, the terms of our current indebtedness contain no limitations on PDVSA Petróleo’s ability to incur or secure indebtedness or other obligations that could rank senior to or on a par with our right to recover the purchase price for the receivables.

 

We rely on and have limited control over PDVSA Petróleo in its capacity as servicer.

 

PDVSA Petróleo has been named the servicer pursuant to the Servicing and Collection Agency Agreement.  While we may terminate the agreement in certain limited circumstances, we have no control over the manner in which PDVSA Petróleo or any subsequently named servicer carries out its duties.

 

As the servicer, PDVSA Petróleo services, manages, administers and collects the eligible receivables that we have purchased.  PDVSA Petróleo has agreed not to resign as servicer so long as:

 

                                          the Servicing and Collection Agency Agreement remains in effect; or

 

                                          any document governing the transactions described in this annual report requires that eligible receivables be generated, sold to us and collected.

 

We cannot guarantee that any subsequently named servicer will be able to fulfill its duties as efficiently as PDVSA Petróleo.  See “Item 10.C Material contracts – The Servicing and Collection Agency Agreement – Duties of the Servicer.”

 

7



 

Petróleos de Venezuela and PDVSA Petróleo may not honor their waivers of sovereign immunity.

 

Petróleos de Venezuela and PDVSA Petróleo are decentralized public entities of the government of Venezuela and the government, through Petróleos de Venezuela, controls PDVSA Petróleo.  Because the government is a foreign sovereign, claimants may not be able to obtain a judgment in a United States court against Petróleos de Venezuela or PDVSA Petróleo.

 

Both Petróleos de Venezuela and PDVSA Petróleo have waived any sovereign immunity from suit or other legal process, subject to certain limitations, under the Receivables Purchase Agreement and the Servicing and Collection Agency Agreement.  Petróleos de Venezuela is required by law to honor contractual waivers of sovereign immunity, and has honored these contractual waivers since its formation in 1975.  However, we cannot guarantee that Petróleos de Venezuela will continue to do so in the future, and neither Petróleos de Venezuela nor PDVSA Petróleo has entered into arrangements similar to the Receivables Purchase Agreement and the Servicing and Collection Agency Agreement.  See “Item 10.C Material contracts – The Receivables Purchase Agreement – Immunity.”

 

Changes in the application of Venezuelan tax rules could substantially raise our tax burden.

 

Under Venezuelan tax law, if we are considered an “offshore financial institution not domiciled in Venezuela,” or a “qualified financial institution,” any income of Venezuelan origin that we receive by purchasing receivables at a discount under the Receivables Purchase Agreement would be subject to withholding tax at the rate of 4.95%.

 

No Venezuelan tax, administrative or judicial authority has yet addressed whether a special purpose vehicle like PDVSA Finance qualifies as a qualified financial institution, and we have received no ruling or opinion from the Venezuelan tax authorities on this issue.  As recently amended, the Venezuelan income tax law indicates that any entity that has been qualified as a financial institution by the competent authorities of its country of establishment constitutes a qualified financial institution for Venezuelan income tax purposes.  PDVSA Finance’s application for a license to be qualified as a financial institution by competent authorities of the Cayman Islands is in process.  As of the date of this annual report, such Cayman Island authorities have not issued a response on PDVSA Finance’s license application.  Nevertheless, the internal Venezuelan tax counsel of PDVSA has advised us that, given the nature of our operations, we should continue to be considered a qualified financial institution for Venezuelan income tax purposes.  However, such internal Venezuelan tax counsel reached its conclusion about our tax status solely by interpreting the relevant Venezuelan statutes.  As a result, we cannot assure you that the Venezuelan taxing authority will not conclude that we do not constitute a qualified financial institution.  If this happened, any Venezuelan income that we receive would be subject to taxation in Venezuela at a rate of 34%.  Under the Receivables Purchase Agreement, PDVSA Petróleo must indemnify and hold us harmless for Venezuelan taxes that we must pay on income from the receivables it purchases from PDVSA Petróleo under the Receivables Purchase Agreement.

 

Because PDVSA Finance and Petróleos de Venezuela are foreign companies, you may not be able to effect service of process on PDVSA Finance or enforce judgments against PDVSA Finance.

 

PDVSA Finance.  PDVSA Finance is organized under the laws of the Cayman Islands, and all directors and officers, as well as some of the experts named in this annual report, reside outside the United States.  All or a substantial portion of our assets and of the assets of these persons may be located outside the United States.  As a result, you may not be able to effect service of process on us or our directors or officers within the United States.  You also may not be able to enforce in the United States judgments obtained against us or our directors or officers.  Accordingly, you may not be able to enforce in the United States any judgments based on the civil liability provisions of the federal securities laws of the United States.

 

Our Cayman Islands counsel has advised us that the courts of the Cayman Islands will recognize and enforce a foreign judgment without re-examining the merits of that judgment so long as:

 

8



 

                                          it is final; the court had jurisdiction over the defendant according to Cayman Islands conflict of law rules;

 

                                          the judgment is conclusive and is for an amount of money which is not a penalty, a tax, a fine or similar obligation; and

 

                                          neither the manner in which the judgment was obtained nor the kind of judgment which was obtained would be contrary to natural justice or the public policy of the Cayman Islands.

 

Nevertheless, we do not know whether you would be able to enforce liabilities based on the federal securities laws of the United States in the Cayman Islands.  We also do not know whether Cayman Island courts would enforce judgments of United States courts based on the civil liability provisions of the federal securities laws of the United States.

 

Petróleos de Venezuela.  Petróleos de Venezuela is organized under the laws of the Bolivarian Republic of Venezuela and all of its directors and officers, as well as some of the experts named in this annual report, reside outside the United States.  All or a substantial portion of the assets of Petróleos de Venezuela, and of these persons, are located outside the United States.  As a result, you may not be able to effect service of process on Petróleos de Venezuela, its directors or officers or the experts within the United States.  You also may not be able to enforce in the United States judgments obtained against Petróleos de Venezuela, its directors or officers or the experts.  Accordingly, you may not be able to enforce in the United States any judgments based on the civil liability provisions of the federal securities laws of the United States.  We do not know whether you would be able to enforce liabilities based on the federal securities laws of the United States in the Bolivarian Republic of Venezuela.  We also do not know whether Venezuelan courts would enforce judgments of United States courts based on the civil liability provisions of the federal securities laws of the United States.

 

PDVSA’s business depends substantially on international prices for crude oil and refined petroleum products and such prices are volatile.  A decrease in such prices could materially and adversely affect PDVSA’s business.

 

PDVSA’s business, financial condition, results of operations and prospects depend largely on international prices for crude oil and refined petroleum products.  Historically, prices of international crude oil and refined petroleum products have been volatile and have fluctuated widely due to various factors that are beyond our control, including:

 

                                          changes in global supply and demand for crude oil and refined petroleum products;

 

                                          political events in major oil producing and consuming nations;

 

                                          agreements among OPEC members;

 

                                          the availability and price of competing products;

 

                                          actions of commodity markets participants and competitors;

 

                                          international economic trends;

 

                                          currency exchange fluctuations; and

 

                                          inflation.

 

Historically, members of the Organization of the Petroleum and Exporting Countries, otherwise known as OPEC, have entered into agreements to reduce their production of crude oil.  Such agreements have sometimes increased global crude oil prices by decreasing the global supply of crude oil.  Venezuela is a party to and has complied with such OPEC production agreement quotas and we expect that Venezuela will continue to comply with

 

9



 

such production quota agreements with other OPEC members.  Since 1998, OPEC’s production quotas have resulted in a worldwide decline in production and substantial increases in the international crude oil prices.

 

A reduction in PDVSA’s crude oil production or export activities or a decline in the prices of crude oil and refined petroleum products for a substantial period could materially and adversely affect the ability of PDVSA Petróleo to generate eligible receivables to support payments on our indebtedness.

 

Risks related to the ownership, regulation and supervision of PDVSA.

 

The Bolivarian Republic of Venezuela is the sole owner of Petróleos de Venezuela.  The Venezuelan government, through the Ministry of Energy and Petroleum, establishes national petroleum policies and also regulates and supervises PDVSA’s operations.  The President of Venezuela appoints the president of Petróleos de Venezuela and the members of its board of directors by executive decree.  Since November 2004, the Minister of Energy and Petroleum has also served as President of PDVSA.  However, the Bolivarian Republic of Venezuela is not legally liable for the obligations of Petróleos de Venezuela, including its guarantees of indebtedness of its subsidiaries, or the obligations of its subsidiaries.

 

Petróleos de Venezuela has been operated as an independent commercial entity since its formation; however, recent changes to the Venezuelan law regarding the oil sector impose significant social commitments upon PDVSA, which will affect its saving capacity, and, indirectly, its commercial affairs.  Given that PDVSA is controlled by the Venezuelan government, we cannot assure you that the Venezuelan government will not in the future impose further material commitments upon PDVSA or intervene in its commercial affairs in a manner that will adversely affect our business.  For instance, through Petróleos de Venezuela, the government could cause PDVSA Petróleo to reduce production or limit future capital expenditure to levels that would limit PDVSA Petróleo’s ability to generate the necessary flow of receivables to support payments on our indebtedness.  In addition, the Company has no control over events affecting PDVSA’s operations or the occurrence of any prolonged disruption in PDVSA’s activities resulting from actions taken by opponents of the Venezuelan government such as the work stoppages that occurred in late 2002 and early 2003, which in the opinion of PDVSA constituted sabotage, and cannot assure you that such events will not occur in the future.

 

PDVSA’s business requires substantial capital expenditures.

 

PDVSA’s business is capital intensive.  Specifically, the exploration and development of hydrocarbon reserves, production, processing and refining costs and the maintenance of machinery and equipment require substantial capital expenditures.  PDVSA must continue to invest capital to maintain or to increase the amount of hydrocarbon reserves that it operates and the amount of crude oil that it processes.

 

We cannot assure you that PDVSA will be able to maintain its production levels or generate sufficient cash flow or that it will have access to sufficient investments, loans or other financing alternatives to continue its refining, exploration and development activities at or above its present levels.  A reduction in PDVSA’s refining, exploration and development activities for a substantial period could materially and adversely affect the ability of PDVSA Petróleo to generate eligible receivables to support payments on our indebtedness.

 

PDVSA does not own any of the hydrocarbon reserves that it develops and operates.

 

Under Venezuelan law, the hydrocarbon reserves that PDVSA develops and operates belong to the Bolivarian Republic of Venezuela and not to PDVSA.  The exploration and exploitation of these hydrocarbon reserves are reserved to the Bolivarian Republic of Venezuela.  Petróleos de Venezuela was formed by the government of Venezuela to coordinate, monitor and control its operations that relate to hydrocarbon reserves.

 

While Venezuelan law requires that the Bolivarian Republic of Venezuela retain exclusive ownership of Petróleos de Venezuela, it does not require the Bolivarian Republic of Venezuela to continue to conduct its crude oil exploration and exploitation activities through PDVSA.  See “Item 7.A.  Major shareholders” of Petróleos de Venezuela’s annual report on Form 20-F for the year ended December 31, 2003, incorporated herein by reference.  If the government elects to conduct its hydrocarbon activities other than through PDVSA, PDVSA’s operations,

 

10



 

including the ability of PDVSA Petróleo to generate eligible receivables to support payments on our indebtedness, could be materially and adversely affected.  We can offer no assurance that changes in Venezuelan law or the implementation of policies by the Venezuelan government will not adversely affect PDVSA Petróleo’s ability to generate eligible receivables.

 

PDVSA is subject to production, equipment, transportation and other risks that are common to oil and gas companies.

 

PDVSA is an integrated oil and gas company and is exposed to production, equipment and transportation risks that are common to oil and gas companies, including fluctuations in production volume due to changes in reserve levels, production accidents, mechanical difficulties, adverse natural conditions, unforeseen production costs, condition of pipelines and the vulnerability of other modes of transportation and the adequacy of our equipment and production facilities.  See “Item 4.B Business overview – Exploration and Production” of Petróleos de Venezuela’s annual report on Form 20-F for the year ended December 31, 2003, incorporated herein by reference.

 

These risks may, among other things, lower PDVSA’s production levels, increase its production costs and expenses, cause damage to its property or cause personal injury to its employees or others.  PDVSA maintains insurance to cover certain losses and exposure to liability.  However, consistent with industry practice, PDVSA is not fully insured against the risks described above.  We cannot assure you that PDVSA’s insurance coverage is sufficient to cover all of its losses or its exposure to liability that may result from these risks.  As a result of these risks, PDVSA Petróleo’s ability to generate eligible receivables to support payments on our indebtedness may be materially and adversely affected.

 

Item 4.                                   Information on the Company

 

4.A          History and development of the company

 

PDVSA Finance is a limited liability company organized on March 18, 1998 under the laws of the Cayman Islands.  We are domiciled in and are governed by the laws of the Cayman Islands.  We are a wholly owned subsidiary of Petróleos de Venezuela, the national oil company of the Bolivarian Republic of Venezuela.

 

Our registered office is located at Caledonian Bank & Trust, Ltd., Caledonian House, P.O. Box 1043, George Town, Grand Cayman, Cayman Islands and our telephone number is 011-345-949-0050.

 

4.B          Business overview

 

General

 

We are the principal vehicle for corporate financing of PDVSA.  We raise capital by issuing unsecured debt.  We also acquire from PDVSA Petróleo, a wholly owned subsidiary of Petróleos de Venezuela, certain current and future accounts receivable of PDVSA Petróleo.

 

The following chart presents an overview of our business structure and the principal agreements governing our business.  This overview is not complete and is subject to, and qualified in its entirety by reference to, the provisions of the principal agreements governing our business, which are filed as exhibits to this annual report.  Capitalized terms used in this annual report and not otherwise defined herein shall have their respective meanings set forth in Annex A to this annual report.

 

11



 

Overview of business structure and principal agreements:

 

 

Flow of Funds

 

 


*                                         Other than in limited circumstances, PDVSA Finance has no recourse to or claim against PDVSA Petróleo for funds advanced toward payment of current and future eligible receivables.

 

12



 

The summary of principal agreements contained in the points below do not purport to be complete and is qualified entirely by reference to the provisions of the Indenture, the Fiscal Agency Agreement, the Receivables Purchase Agreement and the Servicing and Collection Agency Agreement (each, as defined under “Item 10.C Material contracts”).  Defined terms used herein and not otherwise defined shall have the meanings set forth in Annex A hereto.

 

1.               PDVSA Finance is a wholly owned subsidiary of Petróleos de Venezuela, domiciled in the Cayman Islands.  It was established to act as PDVSA’s principal vehicle for corporate financing through the issuance of unsecured debt.

 

2.               Receivables Purchase Agreement among Petróleos de Venezuela, PDVSA Finance and PDVSA Petróleo.  PDVSA Finance purchases from PDVSA Petróleo certain present or future accounts receivable (“Eligible Receivables”) generated or to be generated by the export of crude oil and refined petroleum products to Designated Customers (as defined herein).  Any Eligible Receivables that are not due and payable when purchased will be purchased at a discount determined on the basis of the Discount Rate (as defined herein).  Petróleos de Venezuela will guarantee the performance of PDVSA Petróleo’s obligations under the Receivables Purchase Agreement but not payment under the Purchased Receivables (as defined herein).  See “Item 10.C Material contracts – The Receivables Purchase Agreement.”

 

3.               PDVSA Petróleo has notified certain of its Customers (each a “Designated Customer”) that it is a party to the Receivables Purchase Agreement and that Receivables (as defined herein) generated with such Designated Customer may have been sold to PDVSA Finance and instructed each Designated Customer to remit all payments with respect to receivables owing to PDVSA Petróleo or its assignees to a Collection Account maintained by PDVSA Finance and PDVSA Petróleo at Citibank, N.A., as a Collection Agent.  The Designated Customers have acknowledged receipt of such instruction.  Payments made to the Collection Account will be allocated on a daily basis by the Servicer who will manage and administer such payments, to PDVSA Finance and PDVSA Petróleo in accordance with their respective interests therein.  Unless certain events have occurred and are continuing (see point 7 below), all Collections (as defined herein) corresponding to PDVSA Finance’s interest in the underlying Receivable will be transferred to PDVSA Finance.  See “Item 10.C Material contracts – The Servicing and Collection Agency Agreement.”

 

4.               PDVSA Finance will issue unsecured debt, including Notes and other debt instruments, and will use the net proceeds of such Notes or any other issue of debt securities or other borrowing to purchase Eligible Receivables of Designated Customers from PDVSA Petróleo, service or refinance existing debt or for other general corporate actions necessary and convenient to accomplish the foregoing as permitted by its covenants.  Under the Fiscal Agency Agreement, the Indenture and outstanding Notes, PDVSA Finance must comply with certain debt coverage incurrence and maintenance tests and maintain at all times a Liquidity Facility (as defined herein).  See “Item 10.C Material contracts – The Fiscal Agency Agreement.”

 

5.               PDVSA Petróleo will cause the monthly average amount of Eligible Receivables of Designated Customers that are Generated by PDVSA Petróleo during any consecutive twelve-month period and that are not subject to any encumbrance other than pursuant to the Receivables Purchase Agreement to represent at least the lesser of (x) 4.5 million barrels of crude oil of less than 30° API gravity and (y) 40% of PDVSA Petróleo’s total Eligible Receivables Generated from Sales of crude oil of less than 30° API gravity.  See “Item 10.C Material contracts – The Receivables Purchase Agreement.”

 

6.               Each Designated Customer has been instructed to make all payments in respect of any Receivables owing to PDVSA Petróleo to a Collection Account.

 

7.               Unless certain events have occurred and are continuing, Collections corresponding to PDVSA Finance’s interest in such Receivables will be transferred to PDVSA Finance.  The Collection Agent allocates the payments received from the Designated Customers to PDVSA Finance and the Retention Account, if applicable, in accordance with the Servicing and Collection Agency Agreement.  PDVSA Finance maintains the Liquidity Facility at an amount at least equal to the aggregate amount of Scheduled Debt Service PDVSA Finance is next scheduled to pay under each of its debt agreements, including the Notes and other Indebtedness, provided that at any date the balance of the Liquidity Facility shall be at least equal to the aggregate amount of Scheduled Debt

 

13



 

Service scheduled to be paid within the 30-day period following such date.  Subject to certain limitations, amounts owing to the holders of Notes because of acceleration of the maturity of the Notes will be made from the Retention Account.  See “Item 10.C Material contracts – The Receivables Purchase Agreement.”

 

8.               PDVSA Finance makes interest and principal payments through the Fiscal Agent.  Upon the declaration of a Specified Event or the acceleration of the maturity of any of its Indebtedness, PDVSA Finance has agreed to instruct, or cause the Fiscal Agent to instruct, the Collection Agent to transfer on each Business Day an amount equal to 25% of (a) Collections in respect of Purchased Receivables paid into the Collection Account on the immediately preceding Business Day less (b) Debt Service (other than Accelerated Debt Service) paid on such immediately preceding Business Day; provided that such amount shall be 100% of such Collections in the case of certain specified Events of Default.  See “Item 10.C Material contracts – The Fiscal Agency Agreement.”

 

9.               So long as notice of a Specified Event is not in effect and maturity of any Indebtedness of PDVSA Finance has not been accelerated, cash not required to service debt or maintain the Liquidity Facility will be used by PDVSA Finance to purchase additional Eligible Receivables of Designated Customers from PDVSA Petróleo under the Receivables Purchase Agreement, to pay operating expenses and dividends and for other general corporate purposes.  See “Item 10.C Material contracts – The Fiscal Agency Agreement.”

 

10.         PDVSA Finance may make periodic payments of dividends to Petróleos de Venezuela.

 

Our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness is primarily dependent on the ability of Petróleos de Venezuela, operating through PDVSA Petróleo, to generate sufficient eligible receivables of designated customers, which is in turn dependent upon the demand for PDVSA’s crude oil and refined petroleum products from foreign customers that qualify as designated customers under the Receivables Purchase Agreement, as well as upon the ability of PDVSA Petróleo to maintain levels of production sufficient to generate these receivables.  Our ability to make payments on our indebtedness also depends directly on the timely payment of purchased receivables by designated customers.  See “Item 3.D Risk factors.”

 

PDVSA’s customers and receivables

 

Except as otherwise indicated, all figures given in this section regarding percentage of total exports and market share are based on volumes of crude oil and/or refined petroleum products and not on sales revenue.  See note 19 to Petróleos de Venezuela’s consolidated financial statements, incorporated herein by reference to the annual report of Petróleos de Venezuela on Form 20-F for the year ended December 31, 2003, for segment information regarding PDVSA Petróleo’s operations.  In addition, for an assessment of the market for Venezuelan crude oils and Venezuelan petroleum products relative to the present customer relationships and contracts of PDVSA, with a particular focus on the United States and the designated customers, see the report entitled “U.S. Market Analysis of Venezuela Crude Oil and Refined Products” prepared by Purvin & Gertz, Inc., dated May 2004, attached hereto as Exhibit 14.3.

 

In 2003, PDVSA exported 1,648 thousand barrels per day (“MBPD”) of crude oil, or 67% of its total crude oil production.  In addition, in 2003, PDVSA exported 502 MBPD, or 49%, of refined petroleum products produced in Venezuela.  Of total exports of crude oil and refined petroleum products, 1,183 MBPD, or 55%, were sold to the United States and Canada.

 

In 2003, PDVSA Petróleo exported 1,648 MBPD of crude oil, or 67% of its total crude oil production.  PDVSA Petróleo conducts all export operations of crude oil and refined products from Venezuela on behalf of PDVSA.  Of total crude oil exports by PDVSA Petróleo in 2003, an aggregate of 923 MBPD were exported to the United States and Canada.  In 2003, the total crude oil sales to customers (including customers outside of the United States and Canada) who qualified as designated customers were 1,033 MBPD. Affiliated customers of PDVSA accounted for 79% of crude oil sales to designated customers and the remainder of crude oil sales were to designated third parties.

 

For the year ended December 31, 2003, CITGO accounted for approximately 58% of PDVSA Petróleo’s total sales, by volume, of crude oil and refined products to designated customers.  Under the terms of our Notes

 

14



 

(defined under “Item 10.C Material contracts – The Indenture”), the amount of purchased receivables owing from any given designated customer is not subject to a concentration limit, nor is there any concentration limit on the amount of purchased receivables owing from affiliated customers of PDVSA, whether individually or in the aggregate.  Certain other designated customers accounted for 10% or more of PDVSA Petróleo’s total sales to designated customers for the period from January through December 2003.  Of crude oil exports not sold in the United States and Canada, 88 MBPD were sold in Europe, 572 MBPD in the Caribbean and Central America and 65 MBPD in South America and other destinations.

 

Of total refined petroleum products produced in Venezuela in 2003, 432 MBPD were consumed in the domestic market and 502 MBPD were exported.  Of total exports of refined petroleum products by PDVSA Petróleo in 2003, 260 MBPD were sold to the United States and Canada.  In 2003, the total refined petroleum products sales to customers (including to customers outside of the United States and Canada) who qualified as designated customers was 122 MBPD.  Affiliated customers of PDVSA accounted for 81% of refined product sales to designated customers and the remainder of refined product sales were to designated third parties. Of refined petroleum products not sold in the United States and Canada, 103 MBPD were sold in the Caribbean and Central America and 139 MBPD were exported to South America and other destinations.

 

Most of PDVSA Petróleo’s crude oil customers are long-standing customers that have had relationships with PDVSA for 15 to 28 years.  In 2003, approximately 71% of PDVSA Petróleo’s crude oil export sales were made pursuant to PDVSA Petróleo’s customary terms and conditions to customers with whom it maintains long-standing commercial relationships.  In 2003, approximately 40% of PDVSA Petróleo’s total crude oil exports, were made under long-term contracts for specified volumes to U.S. subsidiaries or affiliated customers of PDVSA, approximately 31% were sales under long-term contracts for specified volumes to non-U.S. subsidiaries or affiliated customers of PDVSA and approximately 3% were sales under long-term contracts for specified volumes to third parties.

 

A majority of PDVSA’s crude oil customers receive shipments on a regular basis.  In the aggregate, such shipments are for relatively constant volumes throughout the year.  As a result, other than with respect to certain U.S. producers of asphalt that purchase crude oil primarily from late spring through early fall, there is little seasonality in PDVSA’s sales volumes of crude oil.  Crude oil customers are invoiced pursuant to pricing formulas set forth in the applicable contracts, which are generally based on market prices and standard payment terms of 30 days after delivery of crude oil or refined petroleum products.  In 2003, over 90% of the invoices for crude oil and refined petroleum product export sales were paid on time and in accordance with the established credit terms.

 

The evaluation of the creditworthiness of each potential customer is undertaken by PDVSA Petróleo’s credit unit.  The Financial Evaluation Credit unit recommends specific credit limits, terms and conditions for each potential customer, including the requirement for a letter of credit issued by a qualified bank in the case of customers that represent relatively higher degree of credit risk, based on its financial evaluation, the estimated business potential of such potential customer and its appraisal of current market conditions.  PDVSA has a comprehensive program to monitor its outstanding receivables.

 

PDVSA has not experienced any losses for accounts receivables on net sales of crude oil and/or refined petroleum products since 1998, and, as of December 31, 2003, carried on its books provisions for losses of accounts receivable generated by the export of crude oil by its Venezuelan operating subsidiaries of approximately $72.9 million, representing approximately 3.1% of PDVSA’s total accounts receivable as of December 31, 2003 or less than 0.17% of PDVSA’s export sales for 2003.  Based upon PDVSA Finance’s historical experience of not having any credit losses and based upon PDVSA Finance’s review of its receivables outstanding at December 31, 2003, PDVSA Finance did not carry any allowance for credit losses at December 31, 2003.  There can be no assurance, however, that loss and delinquency for the receivables, including purchased receivables, in the future will be similar to that experienced in the past.  See “Item 4.B Business overview – Credit and Collection Policies.”

 

15



 

The following tables set forth the composition of PDVSA’s exports of crude oil and refined petroleum products for the years 2001 through 2003:

 

 

 

Year ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(MBPD)

 

(% of total)

 

(MBPD)

 

(% of total)

 

(MBPD)

 

(% of total)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Light (API gravity of 30º or more)

 

657

 

40

%

672

 

38

%

659

 

32

%

Medium (API gravity of 21º or more and less than 30º)

 

299

 

18

 

360

 

20

 

585

 

28

 

Heavy and extra-heavy (API gravity of less than 21º)

 

692

 

42

 

732

 

42

 

821

 

40

 

Subtotal

 

1,648

 

100

%

1,764

 

100

%

2,065

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refined petroleum products:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gasoline/Naphtha

 

108

 

22

%

137

 

21

%

165

 

24

%

Distillate(2)

 

167

 

33

 

231

 

36

 

241

 

35

 

Low sulfur residual

 

 

 

 

 

3

 

 

High sulfur residual

 

134

 

27

 

149

 

23

 

189

 

27

 

Liquid petroleum gas

 

51

 

10

 

56

 

9

 

44

 

6

 

Other

 

42

 

8

 

74

 

11

 

55

 

8

 

Subtotal

 

502

 

100

%

647

 

100

%

697

 

100

%

Total exports

 

2,150

 

 

 

2,411

 

 

 

2,762

 

 

 

 


(1)

 

Includes sales of crude oil and subsidiaries and affiliated refineries (including to the Isla refinery in Curaçao) of 1,117 MBPD, 1,028 MBPD and 1,143 MBPD in 2003, 2002, and 2001, respectively.

(2)

 

Includes kerosene.

 

Average sales prices of PDVSA Exports

 

 

 

Year ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

($ per barrel)

 

 

 

 

 

 

 

 

 

Crude oil(1)

 

24.35

 

21.19

 

18.95

 

Refined petroleum products

 

26.53

 

24.23

 

23.94

 

Liquid petroleum gas

 

25.04

 

17.65

 

19.55

 

Weighted average for the year

 

24.89

 

21.94

 

20.21

 

 


(1)                                  Includes sales of crude oil to affiliates.

 

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The following table sets forth the geographic breakdown of PDVSA’s exports of all types of crude oil, identifying sales to affiliates and third parties for the years 2001 through 2003, together with certain information regarding PDVSA’s exports of light and medium/heavy crude oil and of refined petroleum products for those years:

 

 

 

Year ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

(MBPD)

 

(% of total)

 

(MBPD)

 

(% of total)

 

(MBPD)

 

(% of total)

 

Crude Oil:

 

 

 

 

 

 

 

 

 

 

 

 

 

All types

 

1,648

 

100

%

1,764

 

100

%

2,065

 

100

%

United States and Canada

 

923

 

56

 

1,053

 

60

 

1,190

 

58

 

Subsidiaries and affiliates

 

579

 

35

 

678

 

38

 

694

 

34

 

Third parties

 

344

 

21

 

375

 

22

 

496

 

24

 

Europe

 

88

 

5

 

134

 

8

 

151

 

7

 

Subsidiaries and affiliates

 

65

 

4

 

61

 

4

 

63

 

3

 

Third parties

 

23

 

1

 

73

 

4

 

88

 

4

 

Caribbean and Central America

 

572

 

35

 

500

 

28

 

573

 

28

 

Subsidiaries and affiliates

 

473

 

29

 

360

 

20

 

386

 

19

 

Third parties

 

99

 

6

 

140

 

8

 

187

 

9

 

South America and others

 

65

 

4

 

77

 

4

 

151

 

7

 

Third parties

 

65

 

4

 

77

 

4

 

151

 

7

 

Light (API gravity of 30º or
greater)(1)

 

657

 

40

 

672

 

38

 

659

 

32

 

United States and Canada

 

273

 

17

 

256

 

14

 

273

 

13

 

Others

 

384

 

23

 

416

 

24

 

386

 

19

 

Medium/Heavy (API gravity of less than 30º)(2)

 

991

 

60

 

1,092

 

62

 

1,406

 

68

 

United States and Canada

 

651

 

40

 

797

 

45

 

913

 

44

 

Others

 

340

 

20

 

295

 

17

 

493

 

24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refined petroleum products

 

502

 

100

 

647

 

100

 

697

 

100

 

United States and Canada

 

260

 

52

 

216

 

33

 

307

 

44

 

Others

 

242

 

48

 

431

 

67

 

390

 

56

 

Total crude oil and refined petroleum products exports

 

2,150

 

n.a.

 

2,411

 

n.a.

 

2,762

 

n.a.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average sales price per barrel (in U.S.$)

 

 

 

 

 

 

 

 

 

 

 

 

 

Light (API gravity of 30º or greater)

 

$

27.16

 

 

 

$

23.46

 

 

 

$

22.47

 

 

 

Medium/Heavy (API gravity of less than 30º)

 

22.56

 

 

 

20.24

 

 

 

17.29

 

 

 

Refined petroleum products

 

26.53

 

 

 

23.52

 

 

 

23.94

 

 

 

 


(1)                                  Includes condensate.

(2)                                  Heavy oil includes reconstituted oil, which is a blend of heavy crude oil with lighter crudes, condensates or refined petroleum products.

 

Crude oils can also be classified by sulfur content.  “Sour” crudes contain 0.5% or greater sulfur content (by weight) and “sweet” crudes contain less than 0.5% sulfur content (by weight).  Substantially all of PDVSA’s exports are classified as sour crude.

 

Our Designated Customers and Purchased Receivables

 

Our Designated Customers

 

Pursuant to the Receivables Purchase Agreement, we have agreed to buy, and PDVSA Petróleo has agreed to sell, without recourse, eligible receivables of designated customers to be generated by PDVSA Petróleo from time to time.  A designated customer is an eligible customer that has acknowledged receipt of a designated customer’s

 

17



 

notice delivered by PDVSA Petróleo and us jointly, providing notice of the sale to us of existing and future receivables owed by such eligible customer arising from the sale to such customer of crude oil and/or petroleum products by PDVSA Petróleo.  Any customer that is a person organized under the laws of any state of the United States or Canada is an eligible customer.  In addition, PDVSA Petróleo may cause customers that are not United States or Canadian persons to become eligible customers, by delivering to us an opinion of counsel to the effect that a designated customer’s notice, once executed by a customer that is neither a U.S. nor Canadian person, constitutes a valid, binding and enforceable obligation of such customer.

 

Under the Receivables Purchase Agreement, PDVSA Petróleo must ensure that the monthly average amount of sales to designated customers by PDVSA Petróleo during any consecutive twelve-month period represent at least the lesser of (1) 27 million barrels of oil of less than 30°API gravity and (2) 80% of PDVSA Petróleo’s total sales of oil of less than 30°API gravity to eligible customers.  Effective as of August 2, 2004, the Receivables Purchase Agreement was amended to provide that PDVSA Petróleo must ensure that the monthly average amount of sales to designated customers by PDVSA Petróleo during any consecutive twelve-month period represent at least the lesser of (1) 4.5 million barrels of oil of less than 30°API gravity and (2) 40% of PDVSA Petróleo’s total sales of oil of less than 30°API gravity to eligible customers.  Compliance with the above-mentioned covenant will require that PDVSA Petróleo deliver a designated customer’s notice to, and obtain the acknowledgment thereof by, any future U.S. or Canadian customer that accounts for any significant portion of PDVSA Petróleo’s sales of oil of less than 30°API gravity to the United States and Canada.  In 2003, designated customers accounted for more than 87% of PDVSA Petróleo’s monthly crude oil shipments to the United States and Canada, and certain designated customers accounted for more than 10% of PDVSA Petróleo’s total sales to designated customers during 2003.

 

Our Purchased Receivables

 

Pursuant to the Receivables Purchase Agreement, by depositing the purchase price in an account designated by PDVSA Petróleo, we purchase from PDVSA Petróleo its existing (previously generated) eligible receivables of designated customers or, in the event no such receivables have been generated on or prior to the date of payment of the purchase price, future eligible receivables of designated customers, in the order in which they are by their respective terms generated, with the eligible receivables of designated customers first to be generated being purchased first and eligible receivables of designated customers last to be generated being purchased last.  Eligible receivables consist of receivables of an eligible customer that (1) upon delivery of a final invoice to the customer, which shall occur by no later than two days prior to the date on which such receivable shall be due and payable, shall be an obligation to pay a sum certain and not subject to a credit memorandum or any other setoff, reduction or other form of negative adjustment and (2) is required to be paid in full no later than sixty (60) days (or any longer period of up to 90 days that becomes the prevailing practice in the international oil business) after the date of the bill of lading with respect to the shipment to which such receivable relates, whether or not such receivable is actually paid during such period.

 

PDVSA Petróleo and we have jointly notified each designated customer that certain receivables owed by such designated customer may have been sold to PDVSA Finance and have instructed each designated customer to remit all payments with respect to receivables to a collection account maintained by PDVSA Finance and PDVSA Petróleo at Citibank, N.A.  The designated customers have acknowledged receipt of such instruction.  Payments made to the collection account on account of purchased eligible receivables are distributed to PDVSA Finance on a daily basis.  PDVSA Finance uses such funds first to service its indebtedness, then for general corporate purposes, and finally to purchase additional eligible receivables of designated customers.  See “Item 10.C Material contracts – The Fiscal Agency Agreement – Certain Covenants.”

 

18



 

The following table sets forth our accounts receivable outstanding at December 31, 2003, 2002 and 2001.

 

Our Outstanding Accounts Receivable at December 31, 2003, 2002 and 2001

 

 

 

December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

($ in millions)

 

Current purchased accounts receivable:

 

 

 

 

 

 

 

Affiliates

 

718.2

 

266.4

 

365.8

 

Non-affiliates

 

209.8

 

169.5

 

222.4

 

Subtotal

 

928.0

 

435.9

 

588.2

 

Rights to future (ungenerated) purchased accounts

 

 

 

 

 

 

 

Receivable

 

2,707.2

 

3,214.2

 

3,737.3

 

Total

 

3,635.2

 

3,650.1

 

4,325.5

 

 

The decrease in our rights to future purchased accounts receivable at December 31, 2003 compared to the prior year was due principally to an increase in the current accounts receivable generated by PDVSA Petróleo resulting for an increase on volume of sales from 21.3 million barrels in 2002 to 33.5 million barrels in 2003 and an increase in the prices of receivables purchased by PDVSA Finance of crude oil and refined petroleum products (from $20.54 average in 2002 to $27.6 average in 2003).

 

PDVSA’s Crude Oil Exports

 

Geographic Distribution of Exports

 

In 2003, PDVSA exported 67% of its total crude oil production.  The balance was refined in Venezuela and the products were either exported or consumed in Venezuela.  In 2003, approximately 56% PDVSA’s crude oil (by volume) was exported to North America — 54% to the United States and 2% to Canada.  In 2003, 35% of PDVSA’s crude oil (by volume) was exported to the Caribbean and Central America, 5% was exported to Europe and 4% was exported to South America and other destinations.

 

Designated Customers for Crude Oil

 

In 2003, 63% of PDVSA’s crude oil exports were to customers (including customers outside of the United States and Canada) that qualified as designated customers.

 

The following table sets forth the list of customers that qualify as designated customers on the date hereof, identifying the designated customers who also are affiliated customers, and, where applicable, indicating the total years of relationship with PDVSA:

 

Designated Customer

 

Total Years of Relationship

 

 

 

 

 

Amerada Hess Corporation(1)

 

8

 

Amoco Oil Company

 

28

 

Cargill Energy Inc

 

28

 

Chemoil Corporation

 

28

 

Chevron Products Company

 

28

 

CITGO Asphalt Refining and Chemicals LP(4)

 

Affiliated Customer

 

CITGO International Supply Co.(4)

 

Affiliated Customer

 

CITGO Petroleum Corporation(4)

 

Affiliated Customer

 

CITGO Refining and Chemicals LP(4)

 

Affiliated Customer

 

CITGO Venezuela Supply Co.(4).

 

Affiliated Customer

 

Coastal Petroleum NV

 

26

 

Conoco Inc.

 

21

 

Crown Central Petroleum Corporation

 

9

 

 

19



 

Designated Customer

 

Total Years of Relationship

 

 

 

 

 

Equiva Trading International LLC(4)

 

6

 

Ergon Refining Inc.

 

21

 

Exxon Trading Company International

 

28

 

Exxon Mobil Sales and Supply Corporation

 

2

 

Farmland Industries Inc.

 

9

 

Fina Oil and Chemical Company

 

8

 

Hovensa, L.L.C(3)

 

Affiliated Customer

 

Hunt Refining Co.

 

28

 

Koch Supply and Trading Company

 

28

 

Koch Petroleum Group L.P.

 

28

 

Lyondell CITGO Refining Company Ltd.

 

Affiliated Customer

 

Marathon Ashland Petroleum L.L.C.

 

11

 

Mepco Venezuela, Ltd.

 

13

 

Mobil Sales and Supply Corporation

 

28

 

Morgan Stanley Capital Group

 

28

 

Murphy Central Asia Oil Co., Ltd

 

13

 

Murphy Falklands Oil Co., Ltd

 

13

 

Murphy Faroes Oil Co., Ltd.

 

13

 

Murphy Oil Corporation

 

13

 

Murphy Oil Trading Company

 

13

 

Murphy Pacific Rim, Ltd

 

13

 

Murphy Philippines Oil Co. Ltd

 

13

 

Murphy Sabah Oil Co., Ltd

 

13

 

Murphy Sarawack Oil Co., Ltd

 

13

 

Murphy South Asia Oil Co. Ltd

 

13

 

National Cooperative Refinery Association

 

11

 

Neste Trifinery Petroleum Company

 

21

 

PDV Midwest Refining L.L.C.

 

Affiliated Customer

 

Pecten Trading Company

 

28

 

Petro Canada

 

28

 

Phillips Petroleum Company

 

28

 

Shell Canada Products Limited

 

28

 

Sinclair Oil Corporation

 

11

 

Star Enterprise

 

15

 

Texaco International Trader Inc.

 

28

 

Valero Marketing and Supply Company

 

28

 

 


(1)

PDVSA has a 50% interest in a refinery in the U.S. Virgin Islands previously owned by Hess Oil Virgin Islands Corporation, pursuant to the terms of its joint venture in Hovensa, L.L.C. with Amerada Hess.

(2)

Equiva Trading International LLC is a trading company established by Equilon Enterprises LLC (owned by Shell Oil Company and Texaco Inc.) and Motiva Enterprises LLC (owned by Shell Oil Company, Texaco Inc. and Saudi Refining Inc.) through their joint venture Equiva Trading Company.

(3)

PDVSA has a 50% interest in a refinery in the U.S. Virgin Islands previously owned by Hess Oil Virgin Islands Corporation, pursuant to the terms of its joint venture in Hovensa, L.L.C. with Amerada Hess.

(4)

Effective August 2, 2004, these clients are not Designated Customers anymore.

 

 

20



 

The following table provides a breakdown of the composition of sales of crude oil for the year ended December 31, 2003 to customers that qualify as designated customers on the date hereof, identifying sales to affiliated customers and third parties.

 

Profile of PDVSA Petróleo’s Crude Oil Sales to Designated Customers
for the Year Ended December 31, 2003

 

 

 

Light

 

Medium/Heavy

 

Total

 

Medium
and Heavy
to
Designated
Customers/
Total
Medium
and Heavy
to U.S. and
Canadian
Eligible Customers
(1)

 

Total Crude
Oil to
Designated
Customers/
Total Crude
Oil to U.S.
and
Canadian
Eligible Customers
(1)

 

 

 

(MBPD)

 

($  in thousands)

 

(MBPD)

 

($  in thousands)

 

(MBPD)

 

($  in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliated Customers(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CITGO(3)

 

41

 

402,735

 

294

 

2,446,623

 

335

 

2,849,358

 

43

%

29

%

LYONDELL-CITGO

 

2

 

12,252

 

231

 

1,755,097

 

233

 

1,767,349

 

33

 

20

 

Midwest Refining

 

3

 

32,218

 

0

 

0

 

3

 

32,218

 

0

 

0

 

Hovensa

 

147

 

1,487,875

 

99

 

857,547

 

246

 

2,345,422

 

14

 

21

 

Subtotal Affiliated Customers

 

193

 

1,935,080

 

624

 

5,059,267

 

817

 

6,994,347

 

90

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third parties:

 

150

 

1,517,479

 

66

 

564,131

 

216

 

2,081,610

 

10

 

19

 

Total

 

343

 

3,452,559

 

690

 

5,623,398

 

1,033

 

9,075,957

 

100

%

89

%

 


(1)

 

By volume of sales.

(2)

 

Includes short-term sales and sales made pursuant to long-term supply agreements.

(3)

 

Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

21



 

Profile of PDVSA Petróleo’s Crude Oil Sales to Designated Customers
for the Year Ended December 31, 2002

 

 

 

Light

 

Medium/Heavy

 

Total

 

Medium
and Heavy
to
Designated
Customers/
Total
Medium
and Heavy
to U.S. and
Canadian
Eligible
Customers
(1)

 

Total Crude
Oil to
Designated
Customers/
Total Crude
Oil to U.S.
and
Canadian
Eligible
Customers
(1)

 

 

 

(MBPD)

 

($ in thousands)

 

(MBPD)

 

($ in thousands)

 

(MBPD)

 

($ in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliated Customers(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CITGO(3)

 

26

 

227,575

 

273

 

1,954,641

 

299

 

2,204,317

 

34

%

25

%

LYONDELL-CITGO

 

0

 

0

 

202

 

1,404,484

 

202

 

1,157,912

 

25

 

17

 

Midwest Refining

 

0

 

0

 

1

 

0

 

1

 

13,213

 

0

 

0

 

Hovensa

 

158

 

1,410,787

 

44

 

395,967

 

202

 

1,759,501

 

5

 

17

 

Subtotal Affiliated Customers

 

184

 

1,638,362

 

520

 

3,496,581

 

704

 

5,134,943

 

64

 

59

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third parties:

 

167

 

1,475,333

 

289

 

2,166,720

 

456

 

3,642,053

 

36

 

39

 

Total

 

351

 

3,113,695

 

809

 

5,663,301

 

1,160

 

8,776,996

 

100

%

98

%

 


(1)                                  By volume of sales.

(2)                                  Includes short-term sales and sales made pursuant to long-term supply agreements.

(3)                                  Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

Because sales to designated customers change over time, the information in these tables is not necessarily indicative of future sales.

 

22



 

The following table provides information regarding average daily export sales of crude oil (by volume) to customers that qualify as designated customers on the date hereof, identifying sales to affiliated customers and third parties and indicating the percentage of sales to designated customers compared to the total sales to eligible customers for the years 2001 through 2003:

 

PDVSA Petróleo’s Crude Oil Exports to Designated Customers
Historic Sales from 2001 through 2003

 

 

 

Year ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

Volume

 

% of
Designated
Customers
(1)

 

Medium
and Heavy
to
Designated
Customers/
Total
Medium
and Heavy
to U.S. and
Canadian
Eligible
Customers
(1)

 

Volume

 

% of Designated Customers (1)

 

Medium
and Heavy
to
Designated
Customers/
Total
Medium
and Heavy
to U.S. and
Canadian
Eligible
Customers
(1)

 

Volume

 

% of
Designated
Customers
(1)

 

Medium
and Heavy
to
Designated
Customers/
Total
Medium
and Heavy
to U.S. and
Canadian
Eligible
Customers
(1)

 

 

 

(MBPD)

 

 

 

 

 

(MBPD)

 

 

 

 

 

(MBPD)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliated Customers(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CITGO(2)

 

335

 

29

 

43

%

299

 

25

 

34

%

325

 

23

 

28

%

LYONDELL-CITGO

 

233

 

20

 

33

 

202

 

17

 

25

 

234

 

17

 

22

 

Midwest Refining

 

3

 

0

 

0

 

1

 

0

 

0

 

9

 

1

 

0

 

Hovensa

 

246

 

21

 

14

 

202

 

17

 

5

 

179

 

13

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal Affiliated Customers

 

817

 

70

 

90

 

704

 

59

 

64

 

747

 

54

 

55

 

Third Parties:

 

216

 

19

 

10

 

456

 

39

 

36

 

561

 

40

 

37

 

Total

 

1,033

 

89

 

100

%

1,160

 

98

 

100

%

1,308

 

94

 

92

%

 


(1)                                  Includes short-term sales and sales made pursuant to long-term agreements.

(2)                                  Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

PDVSA’s Sales to Affiliated Customers

 

PDVSA supplies all of its international refining affiliates with crude oil and feedstocks that are either produced by PDVSA or purchased in the open market.  Some of PDVSA’s affiliated customers in the United States that are designated customers have entered into long-term supply contracts with PDVSA.  These contracts require the supply of minimum quantities of crude oil and other feedstocks for a fixed period of usually 20 to 25 years, with terms expiring on or after 2006.

 

These contracts incorporate price formulas based on the market value of a slate of refined petroleum products deemed to be produced by a specific refining configuration from each particular grade of crude oil or feedstocks, less (1) certain deemed refining costs, (2) certain actual costs, including transportation charges, import duties and taxes and (3) a fixed margin, which varies according to the grade of crude oil or other feedstocks delivered.  Fixed margins and deemed costs are adjusted periodically by formulae primarily based on the rate of inflation.  Because deemed operating costs and the slate of refined petroleum products deemed to be produced for a given barrel of crude oil or other feedstocks do not necessarily reflect the actual costs and yields for any given period, the actual refining margin earned by the purchaser under the various contracts will vary depending on, among other things, the efficiency with which such purchaser conducts its operations during such period.  These contracts are designed to reduce the inherent earnings volatility of the refining and marketing operations of PDVSA’s international refining affiliates.  Other supply contracts between PDVSA and its affiliated customers in the United States provide for the sale of crude oil at market prices.  Some of these contracts also provide that, under

 

23



 

certain circumstances, if supplies are interrupted, PDVSA is required to compensate the affected affiliate for any additional costs incurred in securing other sources of crude oil or other feedstocks.

 

These crude oil supply contracts may be terminated by mutual agreement, by either party in the event of a material default, bankruptcy or similar financial hardship on the part of the other party or, in certain cases, if PDVSA no longer holds, directly or indirectly, 50% or more of the ownership interests in the related affiliate.  Following Venezuela’s agreement to reduce current levels of crude oil production, PDVSA Petróleo has reduced, on a pro rata basis, the amount of crude oil that it supplies to its affiliated customers, including CITGO, under long-term supply contracts.

 

PDVSA’s Sales to Third Parties

 

A majority of PDVSA’s sales to third parties of crude oil, including sales to its customers in the United States with which it maintains long-standing commercial relationships, are made at market prices pursuant to customary terms and conditions established by PDVSA and are priced in U.S. dollars.  Among its customers are major oil companies and other large private and state-owned companies.  Although PDVSA’s customary terms and conditions do not require specified volumes to be bought or sold, historically, a majority of PDVSA’s crude oil customers have taken shipments on a monthly basis at a relatively constant volume throughout the year.  PDVSA has also negotiated a limited number of long-term contracts, with terms ranging from two to ten years, with certain customers for the sale of heavy crude oil at market-related prices.

 

The following table sets forth the accounts receivable outstanding as of December 31, 2003, 2002 and 2001, corresponding to export sales by PDVSA Petróleo of crude oil to affiliated customers and third parties that qualify as our designated customers on the date hereof:

 

PDVSA Petróleo’s Accounts Receivable by Customer Affiliation
for Designated Customers
(crude oil only)

 

 

 

As of December 31,

 

Type of Customer

 

2003

 

2002

 

2001

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

Affiliated Customers(1)

 

644.3

 

389.5

 

304.7

 

Third Parties

 

255.6

 

221.5

 

186.2

 

 


(1)                                  CITGO, LYONDELL-CITGO, Hovensa and Midwest Refining are customers under long-term contracts.

 

Refined Petroleum Products Exports

 

In 2003, PDVSA exported 49% of the refined petroleum products it produced in Venezuela. Of PDVSA’s exports of refined petroleum products produced in Venezuela in 2003, 52% were exported to the United States and Canada, 21% to the Caribbean and Central America and 27% to South America and other destinations.

 

Our Designated Customers for Refined Petroleum Products

 

The following tables provide information regarding average daily export sales of refined petroleum products in volume to customers that qualify as our designated customers as of the date hereof, identifying sales to affiliated customers and third parties and indicating the percentage of sales to our designated customers compared to the total sales to eligible customers for the years ended December 31, 2003 and 2002:

 

24



 

Profile of PDVSA Petróleo’s Refined Petroleum Products Sales to Designated Customers
For the Year Ended December 31, 2003

 

 

 

Volume

 

Sales

 

Total Refined
Petroleum Products
to Designated
Customers/Total
Refined Petroleum
Products to U.S. and
Canadian Eligible
Customers(1)

 

 

 

MBPD

 

($ in thousands)

 

(%)

 

 

 

 

 

 

 

 

 

Affiliated Customers(2):

 

 

 

 

 

 

 

CITGO(3)

 

99

 

1,169,526

 

56

 

Subtotal Affiliated Customers

 

99

 

1,169,526

 

56

 

Third Parties:

 

23

 

244,333

 

13

 

Total:

 

122

 

1,413,859

 

69

 

 


(1)

 

By volume of sales.

(2)

 

Includes short-term sales and sales made pursuant to long-term supply agreements.

(3)

 

Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

Profile of PDVSA Petróleo’s Refined Petroleum Products Sales to Designated Customers
For the Year Ended December 31, 2002

 

 

 

Volume

 

Sales

 

Total Refined
Petroleum Products
to Designated
Customers/Total
Refined Petroleum
Products to U.S. and
Canadian Eligible
Customers(1)

 

 

 

MBPD

 

($ in thousands)

 

(%)

 

 

 

 

 

 

 

 

 

Affiliated Customers(2):

 

 

 

 

 

 

 

CITGO(3)

 

58

 

621,426

 

29

 

LYONDELL-CITGO

 

5

 

45,288

 

3

 

HOVENSA

 

9

 

87,470

 

5

 

Subtotal Affiliated Customers

 

72

 

754,184

 

37

 

Third Parties:

 

45

 

441,408

 

23

 

Total:

 

117

 

1,195,592

 

60

 

 


(1)

 

By volume of sales.

(2)

 

Includes short-term sales and sales made pursuant to long-term supply agreements.

(3)

 

Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

25



 

The following table provides information regarding average daily export sales of refined petroleum products in volume to customers that qualify as designated customers as of the date hereof, identifying sales to affiliated customers and third parties indicating the percentage of total sales to such customers represented for the years 2001 through 2003:

 

PDVSA Petróleo’s Refined Petroleum Products Exports to Designated Customers
Historic Sales from 2001 through 2003

 

 

 

December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

Volume

 

% of
Designated
Customers(1)

 

Volume

 

% of
Designated
Customers(1)

 

Volume

 

% of
Designated
Customers(1)

 

 

 

(MBPD)

 

 

 

(MBPD)

 

 

 

(MBPD)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Affiliated Customers(2):

 

 

 

 

 

 

 

 

 

 

 

 

 

CITGO

 

99

 

56

 

58

 

29

 

55

 

16

 

LYONDELL-CITGO

 

0

 

0

 

5

 

3

 

7

 

2

 

HOVENSA

 

0

 

0

 

9

 

5

 

5

 

2

 

Subtotal Affiliated Customers

 

99

 

56

 

72

 

37

 

67

 

20

 

Third Parties:

 

23

 

13

 

45

 

23

 

60

 

17

 

Total:

 

122

 

69

 

117

 

60

 

127

 

37

 

 


(1)                                  By volume of sales.

(2)                                  Includes short-term sales and sales made pursuant to long-term supply agreements.

(3)                                  Includes CITGO, CITGO Refining and Chemicals LP, CITGO Venezuela Supply Company, CITGO Asphalt Refining Company and CITGO International Supply Co.

 

Contract Terms and Conditions

 

Most of PDVSA Petróleo’s crude oil customers are long-standing customers that have had commercial relationships with PDVSA for 15 to 27 years.  In 2003, approximately 71% of PDVSA Petróleo’s total crude oil export sales were made pursuant to PDVSA Petróleo’s customary terms and conditions to such long-standing customers, out of which approximately 40% were sales under long-term contracts for specified volumes to U.S. subsidiaries or affiliates of PDVSA and approximately 31% were sales under long-term contracts for specified volumes to non-U.S. subsidiaries or affiliates of PDVSA.

 

Of PDVSA’s total sales by volume of refined petroleum products in 2003, 96% were made pursuant to short-term contracts and in accordance with PDVSA’s customary terms and conditions and 4% of refined petroleum products exported were sold pursuant to long-term contracts for specified volumes, priced pursuant to formulas that are based on market prices.

 

26



 

The following table sets forth the accounts receivable outstanding as of December 31, 2003, corresponding to export sales by PDVSA Petróleo of refined petroleum products produced in Venezuela to affiliated customers and third parties that qualify as designated customers on the date hereof:

 

PDVSA Petróleo’s Accounts Receivable by Customer Affiliation for Designated Customers
(for Refined Petroleum Products only)

 

 

 

As of December 31,

 

Type of Customer and Basis of Sale

 

2003

 

2002

 

2001

 

 

 

($ in millions)

 

Affiliated Customers(1)

 

109.2

 

44.2

 

61.2

 

Third Parties

 

23.5

 

18.0

 

36.1

 

 


(1)                                  CITGO is the only affiliate purchasing refined petroleum products under long-term contracts.

 

Credit and Collection Policies

 

Credit Approval Process

 

The evaluation of the creditworthiness of each potential customer is undertaken by PDVSA’s Financial Evaluation Credit unit, located within the International Finance Operation Department.  The Financial Evaluation Credit unit conducts a credit analysis of each potential customer, based on a detailed review of the three latest audited financial statements of such customer, a calculation of financial ratios, an analysis of the percentage of cross-section and trends and the generation and review of cash flow reports of such potential customer.  In addition, this unit also requests three commercial and three banking references for each potential customer.  Such references are evaluated and reviewed by them.  The analysis of the financial statements conducted by the Financial Evaluation Credit unit involves trend and cross-section analysis of each report.  In addition, the financial ratios derived using such financial statements are compared against key business ratios of each industrial sector which are annually provided by internationally recognized rating agencies, such as Bloomberg and Dun & Bradstreet, among others, who also provide external credit reports used to value other credit parameters such as quality of debt and other financial issues of the potential customer and its environment.  The analysis is completed with a review of the amount of cash generated by the potential customer from operations.  This allows the Financial Evaluation Credit unit to establish the financial strength and payment capability of the potential customer as well as its capacity to generate cash flow.  This unit also prepares a brief report on the main activities, operations, organization and the prior credit history of the potential customer.  The Financial Evaluation Credit unit revises its evaluation parameters for each potential customer based on the customer type - i.e., whether the customer is a large oil company, trader, refiner, and wholesaler or retailer.  In addition, the creditworthiness of existing customers is monitored from time to time by this unit, and sales conditions are periodically adjusted to reflect changes in the customer’s creditworthiness.

 

Based on the credit analysis, estimated business potential of the customer and an appraisal of current market conditions, the Financial Evaluation Credit unit recommends a specific credit limit and specific terms and conditions with respect to accounts opened for each potential customer.  As recommended by the credit unit, accounts are opened with one of the following conditions: (1) unrestricted account, for the highest credit quality customers; (2) accounts with a parent company guarantee, for customers whose parent companies have a high quality credit rating; (3) accounts that are backed by a documentary or stand-by letter of credit, which PDVSA requires in advance from customers that do not provide the credit documents required by the Financial Evaluation Credit unit or that have a lower credit profile.  Additionally, in selected case, PDVSA may sell crude oil or refined petroleum products to customers that do not meet the above creditworthiness criteria if it determines that it is advisable to do so for commercial or market reasons.  In theses cases, PDVSA sells its products on a prepaid basis, where the customer pays for its purchases in advance of delivery.  In 2003, 2002 and 2001, the percentages of PDVSA’s total export sales of crude oil that were backed by letters of credit were 9%, 11% and 5%, respectively.  The recommended term of credit is usually net cash within 30 days after the bill of lading date.

 

27



 

Billing and Payment

 

A majority of PDVSA’s export sales of crude oil and refined petroleum products are conducted on a free on board (FOB) basis, and title to the crude oil or refined petroleum product passes to the customer upon its loading on the ship.  Subsequent to the delivery of crude oil or refined petroleum products at the designated port, PDVSA provides the customer with a preliminary estimate of the purchase price for the volume delivered which is based on the formula price specified in the applicable sales contract.  The final price for the quantity delivered is stated on an invoice prepared by the Invoicing unit within the International Finance Area in PDVSA Petróleo, generally within 25 days of the delivery of crude oil or refined petroleum product, and the invoice is presented to the customer immediately by fax or telex transmission. The full amount of the invoice is due within the term established by PDVSA Petróleo’s commerce and supply division for such customer depending on the payment modality, which can be: open account, letter of credit (documentary letter of credit or stand by letter of credit) or prepayment, also the period to issue the invoice to the client is directly related to the payment modality. PDVSA typically imposes interest and administrative charges on a daily basis equivalent to an annual rate of 18% for all accounts that are past due.  PDVSA does not provide discounts or rebates for advance payments of any amount due.

 

Monitoring of Existing Accounts

 

PDVSA has a comprehensive program to monitor outstanding receivables.  Senior management in the sales and finance departments of PDVSA are notified on a daily basis of any overdue payments and further sales may be suspended and credit may be canceled, unless the customer promptly pays its overdue invoices.  In addition, the creditworthiness of existing customers is monitored by PDVSA Petróleo’s Financial Evaluation Credit unit, and the terms and conditions of sales to such customers are periodically adjusted to reflect changes in the customers creditworthiness.

 

Loss and Delinquency Experience

 

PDVSA has not experienced any losses for accounts receivables on net sales of crude oil and/or refined petroleum products since 1998, and, as of December 31, 2003, carried on its books provisions for losses of accounts receivable generated by the export of crude oil by its Venezuelan operating subsidiaries of approximately $72.9 million, representing approximately 3.1% of PDVSA’s total accounts receivable as of December 31, 2003 or less than 0.17% of PDVSA’s export sales for 2003.  These provisions for losses are currently being pursued by PDVSA’s legal department either through direct negotiations with the customers or by means of legal proceedings.  Based upon PDVSA Finance’s historical experience of not having any credit losses and based upon PDVSA Finance’s review of its receivables outstanding at December 31, 2003, PDVSA Finance did not carry any allowance for credit losses at December 31, 2003.  There can be no assurance, however, that loss and delinquency for the receivables, including purchased receivables, in the future will be similar to that experienced in the past.

 

The evaluation of the creditworthiness of each potential customer is undertaken by PDVSA Petróleo’s Financial Evaluation Credit unit.  This unit recommends specific credit limits, terms and conditions for each potential customer, including the requirement for a letter of credit issued by a qualified bank in the case of customers that represent a relatively higher degree of credit risk, based on its financial evaluation, the estimated business potential of such potential customer and its appraisal of current market conditions. PDVSA has a comprehensive program to monitor its outstanding receivables.

 

28



 

The table set forth below illustrates the loss and delinquency experience (understanding delinquency as all those invoices that were emitted at least five days before their expiration date and for the payment date, they had not been canceled by the customer) of receivables generated by export sales of oil and oil products to all of PDVSA’s customers and by export sales to designated customers (net of recoveries):

 

Delinquency and Loss Experience of Receivables

 

 

 

Delinquency Experience

 

Loss Experience

 

Year Ended December 31,

 

PDVSA’s
Customers

 

Designated
Customers

 

PDVSA’s
Customers

 

Designated
Customers

 

 

 

($ in thousands)

 

 

 

($ in thousands)

 

 

 

2003

 

141.9

 

0.5

 

0

 

0

 

2002

 

62.9

 

0

 

0

 

0

 

2001

 

15.8

 

0

 

0

 

0

 

 

 

220.6

 

0.5

 

0

 

0

 

 

The figures corresponding to delinquencies for the period from 2001 to 2003 represent 0.0002% of the total amount of sales for that period.  Such delinquencies are not considered significant or unusual and are not expected to have any impact on the future performance of the portfolio of receivables.

 

As of December 31, 2003, PDVSA Finance has not experienced any credit losses.  All of our accounts receivables are current as of December 31, 2003.  PDVSA Finance has no allowance for credit losses at December 31, 2003 and has not recorded any provision for credit losses for the years ended December 31, 2003, 2002 and 2001.

 

Average Delinquencies

 

Approximately 90% of PDVSA’s customers pay their amounts invoiced by the payment due date, in accordance with the credit terms established in the sales contract.  PDVSA’s low rate of payment delinquencies is attributable to the high credit quality of its portfolio of customers, its contract terms and the relatively high interest rate and administrative charges that PDVSA charges as a penalty on delinquent payments.  The majority of payment delinquencies that PDVSA has experienced have resulted from claims that relate to difference in prices or the quality or quantity of crude oil or refined petroleum product received.

 

During 2003, PDVSA’s Invoicing Unit did not timely prepare invoices such that customers could pay invoices prior to the due date.  The invoicing delays, among other factors, was due to the December 2002 work stoppage that derived in the suspension of the support systems, the lack of information to apply the corresponding price formulas and to the inexperience of the personal biller. The following table sets forth information concerning the aging schedule for accounts receivable generated by export sales of crude oil and refined petroleum products at December 31, 2003:

 

Current Aging Schedule at December 31, 2003

 

 

 

Number of Days

 

 

 

 

 

0-30

 

31-60

 

>60

 

Total

 

 

 

 

 

($ in millions)

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

Crude Oil

 

303.1

 

62.7

 

523.1

 

888.9

 

Refined Petroleum Products

 

235.0

 

85.0

 

193.2

 

513.2

 

Total

 

538.1

 

147.7

 

716.3

 

1,402.1

 

 

As of December 31, 2003, all of our purchased account receivables are current.

 

29



 

The following table sets forth information concerning the aging schedule for accounts receivable generated by export sales of crude oil and refined petroleum products at the end of each quarter in 2003 and 2002:

 

Quarterly Historic Aging Schedule for 2003 and 2002(1)

 

 

 

Number of Days

 

 

 

 

 

0-30

 

31-60

 

>60

 

Total

 

 

 

 

 

($ in millions)

 

 

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

2003

 

 

 

 

 

 

 

 

 

March 31

 

644.3

 

291.7

 

647.9

 

1,583.9

 

June 30

 

523.9

 

445.5

 

1,122.9

 

2,092.3

 

September 30

 

451.2

 

253.2

 

1,142.4

 

1,846.8

 

December 31

 

538.1

 

147.7

 

716.3

 

1,402.1

 

2002

 

 

 

 

 

 

 

 

 

March 31

 

1,309.6

 

88.4

 

66.2

 

1,464.2

 

June 30

 

1,349.4

 

35.2

 

160.9

 

1,545.5

 

September 30

 

1,798.2

 

45.6

 

137.1

 

1,980.9

 

December 31

 

332.6

 

783.5

 

133.7

 

1,249.8

 

 


(1)                                  Includes only export sales of crude oil and refined petroleum products from Venezuela.

 

4.C                             Organizational structure

 

Petróleos de Venezuela conducts its operations through its Venezuelan and international subsidiaries.  Through December 31, 1997, PDVSA conducted its operations in Venezuela through three main operating subsidiaries, Corpoven, S.A., Lagoven, S.A. and Maraven, S.A. In 1997, PDVSA established a new operating structure based on business units.  Since then, PDVSA has been involved in a process of transforming its operations with the aim of improving productivity, modernizing its administrative processes and enhancing the return on capital.  This process involved the merger of Lagoven, S.A. and Maraven, S.A. into Corpoven, S.A., effective January 1, 1998, and renaming the combined entity PDVSA Petróleo y Gas, S.A. (“PDVSA P&G”).  In May 2001, Petróleos de Venezuela renamed PDVSA P&G “PDVSA Petróleo, S.A.” and began the process of transferring non-associated gas assets to PDVSA Gas, S.A. during the second quarter of 2001.

 

Additionally, PDVSA has also made several adjustments within its organization to enhance the internal control of its operations, to improve on our governance model and to align our operating structure with the long-term strategies of our shareholder.  These adjustments consist primarily of the adoption of a new framework of operating structure that increases the involvement of our board of directors in our activities, and, at the same time, enhances PDVSA’s operational independence.

 

In the United States, PDVSA conducts its crude oil refining and refined petroleum product operations through its wholly owned subsidiary, PDV Holding, Inc.  In Europe, PDVSA conducts its crude oil refining and refined petroleum product activities through PDV Europa B.V.

 

PDVSA Finance was established in 1998 to serve as PDVSA’s principal vehicle for corporate financing through the issuance of unsecured debt.  PDVSA Finance has no subsidiaries.

 

4.D                             Property, plants and equipment

 

PDVSA Finance does not own or lease any material physical properties or assets other than the accounts receivable of designated customers acquired from PDVSA Petróleo.

 

30



 

Item 5.                                   Operating and Financial Review and Prospects

 

Basis of presentation

 

The following discussion should be read in conjunction with our financial statements included herein.  Our financial statements are prepared and presented in accordance with IFRS.  Although there are a number of significant differences between IFRS and U.S. GAAP, as of and for the years ended December 31, 2003, 2002 and 2001, the application of U.S. GAAP would not have produced material differences with respect to our shareholder’s equity and net income, except for the recording of the transition adjustment resulting from adopting IAS 39, which differs from the accounting treatment under SFAS No. 133.  See note 2(j) to our financial statements.

 

Critical Accounting Policies

 

In connection with the preparation of our financial statements included in this annual report, we have relied on variables and assumptions derived from historical experience and various other factors that we deemed reasonable and relevant.  Although we review these estimates and assumptions in the ordinary course of business, the portrayal of our financial condition and results of operation often requires our management to make judgments regarding the effects of matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions. See note 2 to our financial statements for a summary of the significant accounting policies and methods used in the preparation of our financial statements.

 

5.A                             Operating results

 

Overview and Trends

 

PDVSA Finance was established by Petróleos de Venezuela on March 18, 1998 as a wholly owned subsidiary.  We are the principal vehicle for corporate financing of Petróleos de Venezuela and its consolidated subsidiaries.  We raise capital through transactions in selected financing activities outside the Cayman Island. Our business is limited to issuing unsecured debt and using the net proceeds of our borrowings to purchase eligible receivables of designated customers from PDVSA Petróleo under the Receivables Purchase Agreement. We entered into the Receivables Purchase Agreement on April 27, 1998 and we began operating shortly thereafter.

 

Our ability to meet our obligations in respect of our outstanding indebtedness and any future indebtedness is primarily dependent on the ability of Petróleos de Venezuela, operating through PDVSA Petróleo, to generate sufficient eligible receivables of designated customers for our purchase.  This is in turn dependent upon the demand for PDVSA’s crude oil and refined petroleum products from foreign customers that qualify as designated customers under the Receivables Purchase Agreement, as well as upon the ability of PDVSA Petróleo to maintain levels of production sufficient to generate these receivables, including the need to add reserves and make continuing capital investments in production facilities as existing resources are depleted and existing facilities become obsolete.

 

At the end of February 2002, PDVSA personnel initiated labor actions against political decisions of the Venezuelan government relating to PDVSA matters.  These protests resulted in a brief period of disruption in production at certain PDVSA refineries and shipping terminals in Venezuela.  A similar disruption occurred in December 2002 and January 2003, when a nationwide work stoppage halted most of PDVSA’s operations.  As a result, PDVSA’s crude oil production was reduced from around 3 million barrels per day in November 2002 to an average of about 1.2 million barrels per day in December 2002 and an average of about 0.7 million barrels per day in January 2003.  Consequently, there was a sharp decline in the volume of crude oil supplied to PDVSA’s customers during that period, resulting in force majeure declarations under PDVSA’s crude oil supply agreements.  The amount of eligible receivables generated by PDVSA Petróleo for our purchase during the periods of disruption also decreased substantially.

 

PDVSA’s operations, including the production of crude oil, began to normalize in February 2003. By April 2003, PDVSA’s crude oil production levels returned to approximately 3.2 million barrels per day.  PDVSA’s crude oil production level was approximately 2.8 million barrels per day in December 2003 and approximately 2.8 million barrels in August 2005.  While PDVSA’s production and export have substantially returned to pre-December 2002

 

31



 

levels, we have no control over the occurrence of such developments and cannot assure you that similar events will not occur in the future.

 

Our ability to make payments on our indebtedness also depends directly on the timely payment of purchased receivables by designated customers.  A material adverse change in the business or financial condition of a designated customer could adversely affect the customer’s ability to make timely payments on receivables purchased by PDVSA Finance under the Receivables Purchase Agreement.  The impact of a material adverse change in the business or financial condition of a designated customer may vary with the amount of purchased receivables owing from such designated customer.  The amount of purchased receivables owing from any given designated customer is not subject to a concentration limit, nor is there any concentration limit on the amount of purchased receivables owing from affiliates of PDVSA, whether individually or in the aggregate.  There can be no assurance that one or more of the designated customers will not suffer material adverse changes in their respective businesses that negatively affect their abilities to make timely payment on the purchased receivables.  Furthermore, to the extent that we have paid for future eligible receivables of designated customers which PDVSA Petróleo has not yet generated, we are exposed to PDVSA Petróleo’s generation risk and to risks PDVSA faces (as guarantor of PDVSA Petróleo’s obligations under the Receivables Purchase Agreement).  See note 5 to our financial statements.

 

The market for crude oil and refined petroleum products is subject to price volatility.  Our business and financial condition depend to a large degree on the international prices for crude oil and refined petroleum products.  Petróleos de Venezuela’s crude oil exports to the United States are generally composed of heavy sour crude oil (oil of less than 30°API gravity), which has a smaller and more concentrated market, and is more exposed to volatility than the overall market for crude oil.

 

On June 28, 2004, PDVSA Finance launched a cash tender offer for any and all of its outstanding notes. Concurrently with the tender offer, the Company solicited from noteholders consents to amendments to certain provisions of the Senior Indenture, as supplemented, under which each series of notes were issued, and waivers of certain provisions of related transaction documents. Adoption of the proposed amendments required the consent of a majority in aggregate principal amount of all series then outstanding, voting as a single class.

 

PDVSA Finance commenced the tender offer and consent solicitation to reduce its overall indebtedness, and to modify certain covenants and waive certain provisions under the Senior Indenture, as supplemented, and under the related transaction documents. The modifications were intended to provide PDVSA with greater financing flexibility by removing certain affiliates of PDVSA as Designated Customers, thereby reducing the receivables dedicated to PDVSA Finance. The proposed amendments modified certain covenants in the Senior Indenture, as supplemented, and the related transaction documents primarily to reflect such reduction.

 

Holders of an aggregate of approximately 96.34% in principal amount of the notes tendered and delivered their consents pursuant to the terms of the tender offer and consent solicitation. On August 2, 2004, PDVSA Finance purchased all notes validly tendered in the tender offer. Amendments to certain provisions of the Senior Indenture, as supplemented, under which each series of notes were issued, and related transaction documents also were executed on this date.

 

32



 

After the settlement of the tender offer and consent solicitation on August 2, 2004, the following notes remain outstanding:

 

Notes

 

Outstanding
Principal Amount
Before Tender
Offer

 

Principal
Amount
Validly
Tendered

 

Outstanding
Principal
Amount After
Tender Offer

 

6.250% Euro Notes due 2006

 

Euro

88,400,000

 

87,449,258

 

950,742

 

6.650% Notes due 2006

 

US$ 

300,000

 

291,693

 

8,307

 

9.375% Notes due 2007

 

US$ 

250,000

 

243,980

 

6,020

 

6.800% Notes due 2008

 

US$ 

300,000

 

293,859

 

6,141

 

9.750% Notes due 2010

 

US$ 

250,000

 

225,810

 

24,190

 

8.500% Notes due 2012

 

US$ 

500,000

 

471,133

 

28,867

 

7.400% Notes due 2016

 

US$ 

400,000

 

387,335

 

12,665

 

9.950% Notes due 2020

 

US$ 

100,000

 

97,050

 

2,950

 

7.500% Notes due 2028

 

US$ 

400,000

 

394,790

 

5,210

 

 

Total outstanding principal amount of notes:

 

US$

2,607,326

(1)

Total principal amount of notes tendered:

 

US$

2,511,822

(1)

Percentage of notes tendered, considered as a single class:

 

 

96.34

%(1)

 


(1)                                  Using the US dollar/Euro exchange rate of 1.2141 as of 5:00 p.m., New York City time, on July 26, 2004 (the expiration date of the tender offer).

 

PDVSA Finance funded its purchase of the tendered notes, and fees and expenses related to the tender offer and consent solicitation, by selling to PDVSA Petróleo its rights to future (ungenerated) purchased accounts receivable.

 

Taxation

 

The Cayman Islands currently impose no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.  On May 5, 1998, we received an Undertaking as to Tax Concessions pursuant to the Tax Concessions Law (1995 Revision, as amended) which provides that, for a period of 20 years from the date of issue of the undertaking, no law enacted in the Cayman Islands imposing any taxes or duty to be levied on income or capital assets, gains or appreciation will apply to any of our income or property. The only government charge payable by us in the Cayman Islands is an annual charge of $2,400 calculated based on the nominal amount of our authorized share capital.  Stamp duty will be payable on any documents that are executed in or brought to the Cayman Islands.

 

We conduct our operations in the Cayman Islands and, according to the advice of our Venezuelan special tax counsel, we will not be subject to taxation in Venezuela other than with respect to income generated as a result of the purchase of receivables at a discount from PDVSA Petróleo under the Receivables Purchase Agreement, to the extent such income originated from Venezuela.  Under Venezuelan tax law, if we are considered an “offshore financial institution not domiciled in Venezuela,” or a “qualified financial institution,” any income originating from Venezuela that we receive by purchasing Receivables at a discount under the Receivables Purchase Agreement would be subject to income tax at the rate of 4.95%.  No Venezuelan tax, administrative or judicial authority has yet addressed whether a special purpose vehicle like PDVSA Finance qualifies as a qualified financial institution, and we have received no ruling or opinion from the Venezuelan tax authorities on this issue.  As recently amended, the Venezuelan income tax law indicates that any entity that has been qualified as a financial institution by the competent authorities of its country of establishment constitutes a qualified financial institution for Venezuelan income tax purposes.  Based solely on the interpretation of the relevant Venezuelan statutes, our special Venezuelan tax counsel has advised us that given the nature of our operations we should continue to be considered a qualified financial institution.

 

33



 

Results of Operations — December 31, 2003 compared to December 31, 2002

 

Revenues

 

Our revenues are primarily composed of discounts on purchased accounts receivable from designated customers.  Our revenues also include other income attributable to earnings on amounts invested in temporary cash investments during the period, including on amounts held overnight in the collection account pursuant to the Receivables Purchase Agreement and amounts earned through the liquidity facility that was established pursuant to the Fiscal Agency Agreement.  See “Item 10.C Material contracts.”

 

The following table sets forth the amount of revenues and the source of revenues earned during the periods indicated.

 

 

 

Year ended December 31,

 

 

 

2003

 

2002

 

 

 

($ in thousands)

 

 

 

 

 

 

 

Discounts on future purchased eligible receivables

 

36,927

 

58,250

 

Discounts on current purchased eligible receivables

 

339,162

 

324,576

 

Other income

 

3,422

 

3,680

 

Total revenues

 

379,511

 

386,506

 

 

Purchased accounts receivable from designated customers include future eligible receivables (i.e., accounts receivable which we have paid for pursuant to the Receivable Purchase Agreement but which have not yet been generated by PDVSA Petróleo, in each case as of the date of the corresponding balance sheet) as well as current eligible receivables (i.e., accounts receivable which we have paid for and which have been generated by PDVSA Petróleo as of the date of the corresponding balance sheet).

 

The decrease in discounts on future purchased eligible receivables was due primarily to the decrease in the rights to future (ungenerated) accounts receivable caused by the repayment of $352 million of principal in 2003, and to an increased in our rights to current purchased eligible receivable.

 

Due to the nature of our business, our sources of revenue are unlikely to change in the future.

 

Revenue from the discount on purchased accounts receivable is recorded as income when earned as follows:

 

                                          Discounts on future (ungenerated) purchased accounts receivable are determined by applying the relevant discount rate to the average daily balance of the future eligible receivables.

 

                                          Discounts on current purchased accounts receivable are determined by applying the relevant discount rate to the invoice amount of the receivable based on the number of days from generation until the current eligible receivable becomes due and payable by the designated customer.

 

The discount relating to the period from generation until the current eligible receivable becomes due and payable by the designated customer is recorded as income when earned during this period using the interest method.  Any unearned discount at the financial statements date is recorded as deferred income.

 

The total amount of the discount on each purchased eligible receivable (i.e., the total revenue generated by each purchased eligible receivable) is determined by discounting the invoice amount of the eligible receivable for the period from the date on which the purchase price for the eligible receivable was paid to PDVSA Petróleo to the day on which the purchased eligible receivable is due from the designated customer.  The discount rate is equal in each case to the weighted average of the yield of our outstanding indebtedness on the day the price for the eligible receivable was paid to PDVSA Petróleo (as adjusted to reflect certain costs and expenses, including taxes, incurred by us in connection with the issuance of debt and the purchase of eligible receivables), plus 50 basis points.  The

 

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