<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER: 1-14380
CITGO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 73-1173881
(State or other jurisdiction of (I.R.S. Employee
incorporation or organization) Identification No.)
ONE WARREN PLACE
6100 SOUTH YALE AVENUE
TULSA, OKLAHOMA 74136
(Address of principal
executive offices
and zip code)
(918) 495-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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CITGO PETROLEUM CORPORATION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Income - Three-Month Periods
Ended June 30, 1996 and 1995 and Six-Month Periods Ended
June 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods
Ended June 30, 1996 and 1995 5
Notes to the Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11 - 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 31E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the caption " Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations"
relating to capital expenditures and investments related to environmental
compliance and strategic planning, purchasing patterns of refined products and
capital resources available to the Company (as defined herein) are forward
looking statements. Such statements are subject to certain risks and
uncertainties, such as increased inflation, continued access to capital markets
and commercial bank financing on favorable terms, increases in regulatory
burdens, changes in prices or demand for the Company's products as a result of
competitive actions or economic factors and changes in the cost of crude oil,
feedstocks, blending components or refined products. Such statements are also
subject to the risks of increased costs in related technologies and such
technologies producing anticipated results. Should one or more of these risks
or uncertainties, among others, materialize, actual results may vary materially
from those estimated, anticipated or projected. Although CITGO believes that
the expectations reflected by such forward looking statements are reasonable
based on information currently available to the Company, no assurances can be
given that such expectations will prove to have been correct.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,904 $ 19,863
Accounts receivable 979,098 817,990
Due from affiliates 26,324 28,991
Inventories 952,401 785,275
Prepaid expenses and other 43,451 30,199
------------ ------------
Total current assets 2,021,178 1,682,318
PROPERTY, PLANT AND EQUIPMENT - Net 2,641,380 2,491,849
RESTRICTED CASH 15,778 1,258
INVESTMENTS IN AFFILIATES 730,844 650,360
OTHER ASSETS 120,665 97,793
------------ ------------
$ 5,529,845 $ 4,923,578
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 105,000 $ 25,000
Accounts payable 460,070 438,172
Payables to affiliates 243,519 176,800
Taxes other than income 193,586 173,915
Other 226,657 224,077
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 11,150 10,557
------------ ------------
Total current liabilities 1,335,222 1,143,761
LONG-TERM DEBT 1,470,685 1,159,263
CAPITAL LEASE OBLIGATION 135,776 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 175,672 167,905
OTHER NONCURRENT LIABILITIES 191,361 186,376
DEFERRED INCOME TAXES 403,781 367,644
MINORITY INTEREST 27,148 25,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares 1 1
authorized, issued and outstanding
Additional capital 1,235,009 1,222,345
Retained earnings 555,190 509,161
------------ ------------
Total shareholder's equity 1,790,200 1,731,507
------------ ------------
$ 5,529,845 $ 4,923,578
============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 3,246,330 $ 2,902,321 $ 5,813,072 $ 5,211,315
Sales to affiliates 87,666 49,823 128,119 98,311
-------------- --------------- -------------- ---------------
3,333,996 2,952,144 5,941,191 5,309,626
Equity in earnings (losses) of
affiliates 6,956 6,685 15,336 17,130
Other income (expense) - net (399) (554) (1,084) 2,350
------------- -------------- -------------- ---------------
3,340,553 2,958,275 5,955,443 5,329,106
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $1,006,975,
$882,413, $1,882,804 and $1,626,641
from affiliates) 3,228,540 2,849,693 5,750,391 5,087,184
Selling, general and administrative
expenses 33,280 38,868 76,408 72,964
Interest expense, excluding capital
lease 24,107 23,898 45,499 43,510
Capital lease interest charge 4,276 4,543 8,553 9,086
Minority interest 780 410 1,530 816
-------------- --------------- -------------- ---------------
3,290,983 2,917,412 5,882,381 5,213,560
-------------- --------------- -------------- ---------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 49,570 40,863 73,062 115,546
INCOME TAXES 18,341 15,120 27,033 42,642
-------------- --------------- -------------- ---------------
INCOME BEFORE EXTRAORDINARY
ITEM 31,229 25,743 46,029 72,904
EXTRAORDINARY GAIN, early
extinguishment of debt, net of related
income taxes of $2,160 --- --- --- 3,380
-------------- --------------- -------------- ---------------
NET INCOME $ 31,229 $ 25,743 $ 46,029 $ 76,284
============== =============== ============== ===============
</TABLE>
See notes to condensed consolidated financial statements
4
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
-----------------------------------
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ (80,042) $ 73,447
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (217,097) (131,717)
Proceeds from sales of property, plant and equipment 2,990 894
Increase in restricted cash (14,520) (9,251)
Investments in LYONDELL-CITGO Refining Company Ltd. (77,404) (146,118)
Investment in subsidiary and advances to other affiliates --- (47,805)
-------------- ----------------
Net cash used in investing activities (306,031) (333,997)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 80,000 23,500
Net borrowings on revolving bank loans 105,000 165,001
Payments on term bank loan (14,706) ---
Proceeds from master shelf agreement --- 25,000
Proceeds from issuance of senior notes 199,699 ---
Proceeds from issuance of tax-exempt bonds 25,000 90,700
Payments on tax-exempt bonds --- (40,237)
Payments of capital lease obligations (5,308) (4,715)
(Repayments) borrowings on other debt (3,571) 5,968
-------------- ----------------
Net cash provided by financing activities 386,114 265,217
-------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 41 4,667
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,863 16,271
-------------- ----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 19,904 $ 20,938
============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 52,631 $ 53,432
============== ================
Income taxes, net of refunds of $3,449 and $3,682 in
1996 and 1995 $ 21,628 $ 34,759
============== ================
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Noncash capital contribution from parent (PDV America) $ 12,664 $ ---
============== ================
See notes to condensed consolidated financial statements
</TABLE>
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 1996 AND 1995
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 1995 and with respect to the interim
three and six-month periods ended June 30, 1996 and 1995 is unaudited. In
the opinion of management, such interim information contains all
adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the results of such periods. The results of
operations for the three-month and six-month periods ended June 30, 1996
and 1995 are not necessarily indicative of the results to be expected for
the full year. Reference is made to the audited consolidated financial
statements and notes thereto for the fiscal years ended December 31, 1995
and 1994 included in CITGO's General Form for Registration of Securities on
Form 10, as amended, for additional information.
Effective January 1, 1996, CITGO adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held
and used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS No. 121 did not have a
material effect on the consolidated financial position or results of
operations of CITGO.
The condensed consolidated financial statements include the accounts of
CITGO, its wholly owned subsidiaries, and Cit-Con Oil Corporation, which
is 65 percent owned by CITGO (collectively, "the Company").
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Refined products $ 715,893 $ 588,696
Crude Oil 190,216 149,414
Materials and supplies 46,292 47,165
----------- ----------
$ 952,401 $ 785,275
=========== ==========
</TABLE>
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3. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan $ 395,000 $ 290,000
Term bank loan 102,941 117,647
7.875% Senior Notes $200 million face amount due 2006 199,699 ---
Private Placement:
8.75% Series A Senior Notes due 1998 56,250 56,250
9.03% Series B Senior Notes due 2001 171,429 171,429
9.30% Series C Senior Notes due 2006 125,000 125,000
Master Shelf Agreement:
8.55% Senior Notes due 2002 25,000 25,000
8.68% Senior Notes due 2003 50,000 50,000
7.29% Senior Notes due 2004 20,000 20,000
8.59% Senior Notes due 2006 40,000 40,000
8.94% Senior Notes due 2007 50,000 50,000
7.17% Senior Notes due 2008 25,000 25,000
7.22% Senior Notes due 2009 50,000 50,000
Tax Exempt Bonds:
Pollution control revenue bonds due 2004 15,800 15,800
Port facilities revenue bonds due 2007 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023 3,020 3,020
Louisiana wastewater facility revenue bonds due 2024 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026 25,000 ---
Cit-Con bank credit agreement 39,286 42,857
------------- -------------
1,565,925 1,254,503
Less current portion of long-term debt (95,240) (95,240)
------------- -------------
$ 1,470,685 $ 1,159,263
============= =============
</TABLE>
In March 1996, CITGO issued $25 million of Port of Corpus Christi Sewage
and Solid Waste Disposal Revenue Bonds due in the year 2026.
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In April 1996, CITGO filed a registration statement with the Securities and
Exchange Commission relating to the shelf registration of $600 million of
debt securities that may be offered and sold from time to time. In May
1996, the registration became effective and CITGO sold a tranche of debt
securities with an aggregate offering price of $200 million. The Company
used the net proceeds from the sale of the notes for working capital and
the repayment of borrowings under the Company's revolving credit
facility. This repayment will not permanently reduce the Company's
borrowing capacity thereunder. The Company may, in the future, borrow
additional amounts under its revolving credit facility to fund capital
expenditures, to fund working capital requirements or for other corporate
purposes.
4. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims in the ordinary
course of business are pending against the Company. Included among these
are (i) litigation with a contractor who is claiming additional
compensation for sludge removal and treatment at CITGO's Lake Charles,
Louisiana refinery; CITGO is seeking contractual penalties for
nonperformance and breach of contract and also a determination that a
portion of any damages awarded would be recoverable from a former owner;
(ii) litigation against the State of Louisiana concerning a potential
assessment to CITGO and other refiners of a use tax on petroleum coke which
accumulates on catalyst during refining operations and a change to the
calculation of the sales/use tax on fuel gas generated by refinery
operations; and (iii) litigation against CITGO by a number of current and
former employees and applicants on behalf of themselves and a class of
similarly situated persons asserting claims under Federal and State laws of
racial discrimination in connection with the employment practices at
CITGO's Lake Charles, Louisiana refining complex; the plaintiffs have
appealed the Court's denial of class certification. The Company is
vigorously contesting such lawsuits and claims and believes that its
positions are sustainable. The Company has recorded accruals for losses it
considers to be probable and reasonably estimable. However, due to
uncertainties involved in litigation, there are cases in which the outcome
is not reasonably predictable, and the losses, if any, are not reasonably
estimable. If such lawsuits and claims were to be determined in a manner
adverse to the Company, and in amounts in excess of the Company's accruals,
it is reasonably possible that such determinations could have a material
adverse effect on the Company's results of operations in a given year. The
term "reasonably possible" is used herein to mean that the chance of a
future transaction or event occurring is more than remote but less than
likely. However, based upon management's current assessments of these
lawsuits and claims and that provided by counsel in such matters, and the
capital resources available to the Company, management of the Company
believes that the ultimate resolution of these lawsuits and claims would
not exceed the aggregate of the amounts accrued in respect of such lawsuits
and claims and the insurance coverages available to the Company by a
material amount and, therefore, should not have a material adverse effect
on the Company's financial condition, results of operations or liquidity.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - The Company is subject to
various Federal, state and local environmental laws and regulations which
may require the Company to take
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action to correct or improve the effects on the environment of prior
disposal or release of petroleum substances by the Company or other
parties. Management believes the Company is in compliance with these laws
and regulations in all material aspects. Maintaining compliance with
environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
At June 30, 1996, the Company had $59 million of environmental accruals
included in other noncurrent liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, management believes these accruals are adequate.
Conditions which require additional expenditures may exist for various
sites of the Company including, but not limited to, operating refinery
complexes, former refinery sites, service stations and crude oil and
petroleum product storage terminals. The amount of such future
expenditures, if any, is indeterminable.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - CITGO enters into
petroleum futures contracts primarily to reduce its inventory exposure to
market risk. CITGO also buys and sells commodity options for delivery and
receipt of crude oil and refined products. Such contracts are entered into
through major brokerage houses and traded on national exchanges and can be
settled in cash or through delivery of the commodity. Such contracts
generally qualify for hedge accounting and correlate to market price
movements of crude oil and refined products. Resulting gains and losses,
therefore, will generally be offset by gains and losses on CITGO's hedged
inventory or future purchases and sales.
CITGO has only limited involvement with other derivative financial
instruments and does not use them for trading purposes. They are used to
manage well defined interest rate and commodity price risks arising out of
CITGO's core activities. CITGO has entered into various interest rate swap
and cap agreements to manage its risk related to interest rate changes on
its debt. The fair value of the interest rate swap agreements in place at
June 30, 1996, based on the estimated amount that CITGO would receive or
pay to terminate the agreements as of that date and taking into account
current interest rates, was an unrealized gain of $1.5 million. In
connection with the determination of said fair market value, the Company
considers the creditworthiness of the counterparties, but no adjustment was
determined to be necessary as a result.
The impact of these instruments on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented. Management
considers the market risk to the Company related to these instruments to be
insignificant during the periods presented.
5. RELATED PARTY TRANSACTIONS
CITGO has various crude oil and feedstock supply agreements with
subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"). Effective January
1, 1992, the supply agreements with respect to CITGO's Lake Charles,
Corpus Christi and Paulsboro refineries were modified to reduce the price
levels to be paid by CITGO by a fixed amount per barrel of crude oil
purchased from PDVSA. Such reductions were intended to defray CITGO's
costs of certain
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environmental compliance expenditures. This modification resulted in a
decrease in the cost of crude oil purchased under these agreements of
approximately $70 million per year for the years 1992 through 1994 as
compared to the amount that would otherwise have been payable thereunder.
This modification was to expire at December 31, 1996; however, in the third
quarter of 1995, PDVSA and CITGO agreed to adjust this modification so that
the 1992 fixed amount per barrel would be reduced and the adjusted
modification would not expire until December 31, 1999. The estimated
impact of this adjustment is an increase in crude oil cost of $11 million
per quarter and $45 million per year over what would otherwise have been
payable. As a result of the adjustments to the original modification,
crude costs for the first quarter and second quarter of 1996 increased
approximately $11 million and $12 million, respectively, over such costs in
the first quarter and second quarter of 1995. The Company anticipates that
the effect of the adjustments to the original modifications will be to
reduce the price of crude oil purchased from PDVSA under these agreements
by $25 million per year in 1997 through 1999, in each case without giving
effect to any other factors that may affect the price payable for crude oil
under these agreements. Due to the pricing formula under the supply
agreements, the aggregate price actually paid for crude oil purchased from
PDVSA under these agreements in each of these years will depend primarily
upon the then current prices for refined products and certain actual costs
of CITGO. These estimates are also based on the assumption that CITGO will
purchase the base volumes of crude oil under the agreements.
CITGO and PDV America, Inc. are parties to a tax allocation agreement which
is designed to provide PDV America, Inc. with sufficient cash to pay its
consolidated income tax liabilities. In April 1996, $12.7 million due from
CITGO to PDV America, Inc., under this tax allocation agreement for the tax
years 1992 through 1994, was classified and accounted for as a contribution
of capital. In the event that CITGO should cease to be part of the
consolidated federal income tax return, any amounts included in
shareholder's equity under this agreement may be required to be paid to PDV
America, Inc.
6. SUBSEQUENT EVENT
On July 25, 1996, CITGO issued $120 million of taxable environmental
revenue bonds due in the year 2026. The bonds were issued with a variable
rate that was 5.429% on the date of issuance. The proceeds were used for
the repayment of borrowings under the Company's revolving credit facility.
This repayment will not permanently reduce the Company's borrowing capacity
thereunder. The Company may in the future borrow additional amounts under
its revolving credit facility to fund capital expenditures, to fund working
capital requirements or for other corporate purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the unaudited condensed
consolidated financial statements of CITGO included elsewhere herein.
Petroleum industry operations and profitability are influenced by a
large number of factors, some of which individual petroleum refining and
marketing companies have little control over. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
limiting their profits directly. Demand for crude oil and refined products is
largely driven by the condition of local and worldwide economies, although
weather patterns and taxation relative to other energy sources also play a
significant part. Due to the seasonality of refined products markets and
refinery maintenance schedules, results of operations for any quarter of a
calendar year are not necessarily indicative of results to be expected for a
full year. CITGO's consolidated operating results are affected by these
industry factors and by Company-specific factors, such as the success of
wholesale marketing programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by
high fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of CITGO.
In general, prices for refined products are significantly influenced
by the price of crude oil, feedstocks and blending components. Although an
increase or decrease in the price for crude oil, feedstocks and blending
components generally results in a corresponding increase or decrease in prices
for refined products, generally there is a lag in the realization of the
corresponding increase or decrease in prices for refined products. The effect
of changes in crude oil prices on CITGO's consolidated operating results
therefore depends in part on how quickly refined product prices adjust to
reflect these changes. A substantial or prolonged increase in crude oil prices
without a corresponding increase in refined product prices, a substantial or
prolonged decrease in refined product prices without a corresponding decrease
in crude oil prices, or a substantial or prolonged decrease in demand for
refined products could have a significant negative effect on the Company's
earnings and cash flows. CITGO purchases a significant amount of its crude oil
requirements from PDVSA or subsidiaries thereof under long-term supply
agreements (expiring in the years 2006 through 2013). These supply agreements
are designed to reduce the volatility of earnings and cash flows from CITGO's
refining operations by providing a relatively stable level of
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gross margin on crude oil supplied by PDVSA. This supply represented
approximately two-thirds of the crude oil processed in refineries operated by
CITGO in the six months ended June 30, 1996. However, CITGO also purchases
significant volumes of refined products to supplement the production from its
refineries to meet marketing demands and to resolve logistical issues. The sale
of petrochemicals was a significant contributor to CITGO's income during 1995,
but while still substantial, petrochemical profit margins have decreased
significantly from 1995 levels during the six months ended June 30, 1996.
Inflation was not a significant factor in the operations of CITGO during 1995 or
during the first six months of 1996. As a result of these factors, the earnings
and cash flows of CITGO may experience substantial fluctuations.
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues:
<TABLE>
<CAPTION>
CITGO SALES
Quarter Year-to-date Quarter Year-to-date
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
-------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------------------------------------------------------------------------------------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline $ 1,989 $ 1,902 $ 3,471 $ 3,314 2,902 2,961 5,411 5,551
Jet fuel 322 284 645 553 563 549 1,093 1,100
Diesel/#2 fuel 595 327 1,048 659 1,021 656 1,815 1,356
Petrochemicals, 200 216 389 420 343 344 677 656
industrial products
and other products
Asphalt 75 76 88 95 175 159 207 204
Lubricants and waxes 114 100 215 188 58 51 110 100
-------------------------------------------------------------------------------------
Total refined $ 3,295 $ 2,905 $ 5,856 $ 5,229 5,062 4,720 9,313 8,967
product sales
Other sales 39 47 85 81
-------------------------------------------------------------------------------------
Total sales $ 3,334 $ 2,952 $ 5,941 $ 5,310 5,062 4,720 9,313 8,967
=====================================================================================
</TABLE>
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The following table summarizes CITGO's cost of sales and operating expenses:
CITGO COST OF SALES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
Quarter Year-to-date
Ended June 30, Ended June 30,
------------------- ---------------------
1996 1995 1996 1995
------------------- ---------------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
Crude oil $ 765 $ 712 $ 1,382 $ 1,252
Refined products 2,016 1,707 3,394 2,891
Intermediate feedstocks 228 214 426 435
Refining and manufacturing costs 206 189 401 364
Other operating costs and expenses
and inventory changes 14 28 147 145
------------------- ---------------------
Total cost of sales and operating expenses $ 3,229 $ 2,850 $ 5,750 $ 5,087
=================== =====================
</TABLE>
Sales increased $382 million, or approximately 13%, in the three-month
period ended June 30, 1996, and by $631 million, or 12%, in the six-month
period ended June 30, 1996 as compared to the same periods in 1995. Total
sales volumes increased by 7% from 4,720 million gallons in the second quarter
of 1995 to 5,062 million gallons in the second quarter of 1996, and increased
by 4% from 8,967 million gallons in the first six months of 1995 to 9,313
million gallons in the first six months of 1996. The increase in volumes,
coupled with increases in most product sales prices resulted in the strong
increase in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 12% in the
second quarter of 1996 as compared to the second quarter of 1995, and increased
by 11% in the first six months of 1996 as compared to the same period in 1995.
Gasoline, jet fuel and diesel/#2 fuel, excluding bulk sales, had sales volume
increases of 11%, 4% and 33%, respectively, in the second quarter of 1996,
compared to the second quarter of 1995. For the six-month period ended June
30, 1996 versus the same period in 1995, gasoline, jet fuel and diesel/#2 fuel,
excluding bulk sales, had sales volume increases of 11%, 2% and 22%,
respectively. Gasoline sales volumes increased due to successful marketing
efforts, including the net addition of 799 independently owned CITGO branded
retail outlets since June 30, 1995, bringing the total number of CITGO branded
retail outlets to 14,396 at June 30, 1996, (17 of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, have been higher in
1996 than in 1995. The average increase for the second quarter of 1996 over
the second quarter of 1995 is 4 cents per gallon, or a 7% increase. Sales
prices of jet fuel and diesel/#2 fuel, excluding bulk sales, increased 8 cents
and 10 cents per gallon, respectively, or 15% and 19%, respectively, in the
second quarter of 1996 as compared to the same period in 1995. For the
six-month period ended
13
<PAGE> 15
June 30, 1996 gasoline prices were approximately 7% higher, jet fuel prices were
approximately 17% higher and diesel/#2 fuel prices were approximately 21%
higher than for the same period in 1995.
To meet demand for its products and to manage logistics, timing
differences and product grade imbalances, CITGO purchases and sells gasoline,
diesel/#2 fuel and jet fuel from and to other refiners and in the spot market.
Such bulk sales decreased by $5 million, or less than 1%, from $758 million in
the three-month period ended June 30, 1995 to $753 million in the same period
in 1996, and by $117 million, or 9%, from $1,294 million in the six-month
period ended June 30, 1995 to $1,177 million in the same period in 1996. The
decrease in revenue is a result of a 5% decrease in volumes partially offset by
a 4% increase in bulk sales prices between the quarters and a 15% decrease in
volumes partially offset by a 7% increase in bulk sales prices between the
six-month periods. Despite the decrease in overall bulk sales revenue, bulk
sales revenue of diesel/#2 fuel increased by $159 million, or 109% for the
second quarter ended June 30, 1996 and increased $201 million, or 74% for the
six-month period ended June 30,1996 as compared to the same periods in 1995.
The increase in diesel/#2 fuel bulk sales revenue is the result of an 80%
increase in volumes combined with a 16% increase in sales prices between the
quarters and a 49% increase in volumes combined with a 17% increase in bulk
sales prices between the six-month periods.
Petrochemicals and industrial products sales revenues decreased 19%
and increased 7%, respectively, for the three months ended June 30, 1996 as
compared to the three months ended June 30, 1995, and decreased 22% and
increased 11%, respectively, for the six months ended June 30, 1996 versus the
six months ended June 30, 1995. The petrochemicals revenue decreases were the
result of a 20% decrease in unit sales price, and a 1% decrease in volume for
the second quarter of 1996 and a 22% decrease in unit sales price and a less
than 1% decrease in volume for the six-month period ended June 30, 1996, as
compared to the same periods in 1995. The industrial products revenue
increases were the result of a 7% increase in unit sales price and a less than
1% increase in volumes for the second quarter of 1996 and a 5% increase in unit
sales price and a 5% volume increase for the six-month period ended June 30,
1996, as compared to the same periods in 1995.
Asphalt sales revenues in the second quarter of 1996 were $1 million
lower while sales volumes were 10% higher, than in the same period in 1995, and
sales revenues were $7 million lower, and sales volumes were 1% higher, in the
first six months of 1996 as compared to the same period in 1995. Asphalt sales
prices decreased 10% in the second quarter of 1996, and 7% in the first six
months of 1996, from the same periods in 1995.
Equity in earnings of affiliates increased by $0.3 million overall for
the three-month period but decreased $1.8 million overall for the six-month
period ended June 30, 1996 as compared to the same periods in 1995. For the
second quarter periods, the increase was primarily due to the change in the
equity in earnings of two affiliates. Equity in the earnings of Nelson
Industrial Steam Company ("NISCO") increased by $2.5 million, from a loss of
$2.6 million in the second quarter of 1995 to a loss of $0.1 million in the
second quarter of 1996. Equity in the earnings of LYONDELL-CITGO Refining
Company Ltd. ("LYONDELL-CITGO") decreased $1.7 million, from $2.6 million in
the second quarter of 1995 to $0.9 million in the second quarter of 1996. For
the first six months,
14
<PAGE> 16
the decrease in 1996 from 1995 was primarily due to a decrease in the equity in
the earnings of LYONDELL-CITGO which decreased $2.9 million, from $7.3 million
in the first six months of 1995 to $4.4 million in the first six months of
1996. This decrease was partially offset by an increase in the equity in
earnings of NISCO of $1.0 million, from a loss of $3.3 million to a loss of
$2.3 million in the six months ended June 30, 1995 as compared to 1996.
Other income (expense) was $(1.1) million for the six-month period
ended June 30, 1996 as compared to $2.4 million for the same period in 1995.
The difference is primarily due to a $2.4 million gain on the termination of an
interest rate swap agreement recognized in the first six months of 1995.
Cost of sales and operating expenses increased by $379 million or 13%,
in the quarter ended June 30, 1996, and increased $663 million or 13%, in the
six-month period ended June 30, 1996, as compared to the same periods in 1995.
Higher crude oil costs ( an increase from $712 million in the second quarter of
1995 to $765 million in the second quarter of 1996) resulted from a 7% increase
in crude prices, and a 1% increase in crude oil volumes purchased. Crude oil
costs increased from $1,252 million in the six-month period ended June 30, 1995
to $1,382 million in the first six months of 1996, the result of a 10% increase
in crude prices, and a less than 1% increase in crude oil volumes purchased.
Refined product purchases increased in 1996 as compared to the comparable
periods in 1995 (up 18%, from $1,707 million to $2,016 million for the second
quarter, and up 17%, from $2,891 million to $3,394 million, for the first six
months). These increases resulted from increases in refined product purchase
volumes (up 12% for the second quarter and 8% for the first six months of 1996
as compared to the same periods in 1995), and changes in prices (up 6% for the
second quarter and 8% for the first six months of 1996 as compared to the same
periods in 1995). Intermediate feedstock purchases increased to $228 million
from $214 million in the second quarter of 1995, or an increase of 7%, but
decreased to $426 million for the first six months of 1996 from $435 million
for the first six months of 1995, or a decrease of 2%. Intermediate feedstock
volumes purchased increased 5%, and prices increased 2% between the quarters
ended June 30, 1995 and June 30, 1996. Intermediate feedstock volumes purchased
decreased 6% and prices increased 4% between the six-month periods ended June
30, 1995 and June 30, 1996. Refining and manufacturing costs increased for
both periods in 1996 as compared to 1995, 9% for the second quarter (from $189
million to $206 million), and 10% for the six-month period ended June 30 (from
$364 million to $401 million). The increases in refining and manufacturing
costs are due primarily to increased costs of purchased fuel and electricity at
CITGO's Lake Charles and Corpus Christi refineries as well as the additional
manufacturing costs related to the lubricants plant acquired in May 1995.
Depreciation and amortization expense increased by $4 million, from $40 million
to $44 million for the quarters ended June 30, 1995 and 1996, respectively, and
by $8 million, from $80 million to $88 million for the six-month periods ended
June 30, 1995 and 1996, respectively, due in both cases to increases in
depreciation offset by decreases in turnaround amortization. Increased capital
expenditures are expected to continue to result in increases in depreciation
expense.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 62% and 60% of total cost of sales and operating
expenses for the second quarter and 59% and 57%
15
<PAGE> 17
for the first six months of 1996 and 1995, respectively. CITGO estimates that
margins on purchased products, on average, are somewhat lower than margins on
produced products due to the fact that CITGO can only receive the marketing
portion of the total margin received on the produced refined products. However,
purchased products are not segregated from CITGO's produced products and margins
may vary due to market conditions and other factors beyond the Company's
control. As such, it is difficult to measure the effects on profitability of
changes in volumes of purchased products. CITGO anticipates that its purchased
refined product requirements will continue to increase to meet marketing
demands. In the near term, other than normal refinery turnaround maintenance,
CITGO does not anticipate operational actions or market conditions which might
cause a material change in purchased product requirements. However, there could
be events beyond the control of CITGO which would impact the volume of refined
products purchased.
Commencing in the third quarter of 1995, certain deductible costs
under certain of CITGO's supply agreements with subsidiaries of PDVSA were and
will be deferred from 1995 and 1996 to the years 1997 through 1999. The
estimated impact of this adjustment is an increase in crude oil cost of $11
million per quarter and $45 million per year over what would otherwise have
been payable. As a result of this deferral, crude costs for the second quarter
of 1996 increased approximately $12 million over such costs in the second
quarter of 1995, and $22 million over such costs in the first six months of
1995. (See Note 5 to the Unaudited Condensed Consolidated Financial
Statements). From 1997 through 1999, crude oil costs are estimated to decrease
by approximately $25 million per year as a result of the deferral and without
giving effect to other factors that may affect the price paid for crude oil
under the supply agreements, effective January 1, 1992, between CITGO and
PDVSA.
The gross margin for the three-month period ended June 30, 1996 was
$105 million, or 3.1%, compared to $102 million, or 3.5%, for the same period
in 1995. The gross margin for the six-month period ended June 30, 1996 was $191
million, or 3.2%, compared to $222 million, or 4.2%, for the six-month period
ended June 30, 1995. Gross margins in 1996 have been adversely affected by the
scheduled modifications to the pricing provisions in the crude and feedstock
supply agreements, the decline in petrochemical profitability and increased
volumes of refined products purchased as a percentage of sales volume
(in each case, as discussed above).
Selling, general and administrative expenses decreased in the second
quarter of 1996 by 15%, from $39 million in the second quarter of 1995 to $33
million in the second quarter of 1996, and increased 4% from $73 million in the
first six months of 1995 to $76 million in the same period in 1996. The
decrease between the quarters is primarily due to the difference in focus of
the Company's marketing programs in the respective quarters. The primary
program in effect through March 1996 was designed to increase the number of
branded outlets and improve CITGO's overall image. Accordingly, costs were and
continue to be expensed as incurred. The program initiated in April 1996
primarily focuses on defending market share and increasing volumes sold to
existing distributors by providing an incentive which is earned over time. The
accounting for the new program recognizes the program expenses when the
incentives are earned.
16
<PAGE> 18
Interest expense remained flat at $28 million for the second quarter
ended June 30, 1996, and increased year-to-date by approximately $1 million,
or 2% (from $53 million to $54 million), as compared to the same periods in
1995.
Income taxes for each period reported were based on an effective tax
rate of 37%.
The net income of $76 million for the six-month period ended June 30,
1995 includes an after tax extraordinary gain of $3.4 million on the early
extinguishment of certain tax-exempt debt.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 1996, the Company's
consolidated net cash used in operating activities totaled approximately $80
million. Net income of $46 million and depreciation and amortization of $88
million were offset by net changes in other items of $(214) million. The more
significant changes in other items included an increase in accounts receivable
(including amounts due from affiliates) of $164 million, increases in inventory
of $167 million and increases in prepaid expenses and other assets of $36
million, which were partially offset by increases in accounts payable
(including amounts due to affiliates) of $122 million, increases in deferred
taxes of $13 million and increase in other liabilities of $9 million. The
increase in accounts receivable is due primarily to an increase in wholesale
and credit card sales driven by increases in both sales volumes and sales
prices. Crude oil and refined products inventories have increased from both
year-end 1995 and the end of the first quarter of 1996. The increases are due
to normal seasonal demand fluctuations for various products. The Company
anticipates that inventory levels will be reduced to approximate December 31,
1995 levels by the end of 1996.
Net cash used in investing activities of $306 million for the
six-month period ended June 30, 1996 included capital expenditures of $217
million (compared to $132 million for the same period in 1995), additional
investment in LYONDELL-CITGO of $77 million (compared to $146 million for the
same period in 1995) and an increase in restricted cash of $15 million. Net
cash provided by financing activities of $386 million for the six-month period
ended June 30, 1996 included proceeds to CITGO of $80 million from short term
borrowing facilities, additional proceeds during the period of $105 million on
its revolving bank facility and proceeds of $25 million from a revenue bond
issue. CITGO also received approximately $200 million from the public offering
of a tranche of debt securities from the $600 million shelf registration
statement filed with the Securities and Exchange Commission in April 1996.
Funds received from these financing activities were partially offset by net
repayments of $24 million on the Company's term note and other debt.
As of June 30, 1996, capital resources available to the Company
include cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $280 million and $87 million of
uncommitted short-term borrowing facilities with various banks. Additionally,
the remaining $400 million from CITGO's shelf registration with the Securities
and Exchange Commission for $600 million of debt securities may be offered and
sold from time to time. In July 1996, CITGO issued $120 million of taxable
environmental revenue bonds due in the year 2026. The Company believes that it
has sufficient capital resources to carry out planned capital spending
programs, including regulatory and environmental projects in the near term, and
to meet currently anticipated future obligations as they arise. CITGO
periodically evaluates other sources of capital in the marketplace and
anticipates that long-term capital requirements will be satisfied with current
capital resources and future financing arrangements. The Company believes that
it is in material compliance with its obligations under its debt financing
arrangements at June 30, 1996.
17
<PAGE> 19
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS
CITGO enters into petroleum futures contracts primarily to reduce its
inventory exposure to market risk. CITGO also buys and sells commodity options
for delivery and receipt of crude oil and refined products. Such contracts are
entered into through major brokerage houses and traded on national exchanges and
can be settled in cash or through delivery of the commodity. Such contracts
generally qualify for hedge accounting and correlate to market price movements
of crude oil and refined products. Resulting gains and losses, therefore, will
generally be offset by gains and losses on CITGO's hedged inventory or future
purchases and sales.
CITGO has only limited involvement with other derivative financial
instruments, and does not use them for trading purposes. They are used to
manage well defined interest rate and commodity price risks arising out of
CITGO's core activities. CITGO has entered into various interest rate swap and
cap agreements to manage its risk related to interest rate changes on its debt.
The fair value of the interest rate swap agreements in place at June 30, 1996,
based on the estimated amount that CITGO would receive or pay to terminate the
agreements as of that date and taking into account current interest rates was
an unrealized gain of $1.5 million. In connection with the determination of
said fair market value, CITGO considered the creditworthiness of the
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and operating
expenses and pretax earnings was immaterial for all periods presented.
Management considers the market risk to the Company related to these
instruments to be insignificant during the periods presented.
NEW ACCOUNTING STANDARD
Effective January 1, 1996, the Company adopted SFAS 121. SFAS 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS 121 did not have a
material effect on the consolidated financial position or results of operations
of the Company.
18
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
---------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8 - K:
No reports on Form 8 - K were filed during the quarter for
which this report is filed
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITGO PETROLEUM CORPORATION
Date: August 14, 1996 /s/ R. M. Bright
----------------------------
R. M. Bright
Controller
Date: August 14, 1996 /s/ Steven R. Berlin
----------------------------
Steven R. Berlin
Senior Vice President, Finance and Administration
Chief Financial Officer
20
<PAGE> 22
INDEX TO EXHIBITS
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,904
<SECURITIES> 0
<RECEIVABLES> 1,025,159
<ALLOWANCES> 19,737
<INVENTORY> 952,401
<CURRENT-ASSETS> 2,021,178
<PP&E> 3,181,690
<DEPRECIATION> 540,310
<TOTAL-ASSETS> 5,529,845
<CURRENT-LIABILITIES> 1,335,222
<BONDS> 1,470,685
<COMMON> 1
0
0
<OTHER-SE> 1,790,199
<TOTAL-LIABILITY-AND-EQUITY> 5,529,845
<SALES> 5,941,191
<TOTAL-REVENUES> 5,955,443
<CGS> 5,750,391
<TOTAL-COSTS> 5,826,799
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,960
<INTEREST-EXPENSE> 54,052
<INCOME-PRETAX> 73,062
<INCOME-TAX> 27,033
<INCOME-CONTINUING> 46,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,029
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
