<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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)
<TABLE>
<C> <C>
DELAWARE 73-1173881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
(Address of principal executive office) (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 ____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
COMMON STOCK, $1.00 PAR VALUE 1,000
----------------------------- -----
<C> <C>
(Class) (outstanding at October 31, 1997)
</TABLE>
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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 SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<C> <S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS........................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- September 30, 1997
and December 31, 1996....................................... 3
Condensed Consolidated Statements of Income -- Three-Month
Periods Ended September 30, 1997 and 1996 and Nine-Month
Periods Ended September 30, 1997 and 1996................... 4
Condensed Consolidated Statements of Cash
Flows -- Nine-Month Periods Ended September 30, 1997 and
1996........................................................ 5
Notes to the Condensed Consolidated Financial Statements.... 6-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 17
Item 6. Exhibits and Reports on Form 8-K............................ 17
SIGNATURES............................................................. 18
</TABLE>
1
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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 1933, as
amended, and Section 21E 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. In addition, when used in this document, the words
"anticipate," "estimate," "prospect" and similar expressions are used to
identify 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.
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 25,014 $ 26,856
Accounts receivable....................................... 915,131 1,004,098
Due from affiliates....................................... 28,512 27,738
Inventories............................................... 997,064 833,191
Prepaid expenses and other................................ 18,625 21,626
---------- ----------
Total current assets.............................. 1,984,346 1,913,509
PROPERTY, PLANT AND EQUIPMENT -- Net........................ 2,833,657 2,786,703
RESTRICTED CASH............................................. 6,822 9,369
INVESTMENTS IN AFFILIATES................................... 828,771 790,576
OTHER ASSETS................................................ 142,759 129,972
---------- ----------
$5,796,355 $5,630,129
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans..................................... $ 98,000 $ 53,000
Accounts payable.......................................... 425,591 530,505
Payables to affiliates.................................... 228,869 275,375
Taxes other than income................................... 238,960 200,863
Other..................................................... 308,822 219,648
Current portion of long-term debt......................... 95,240 95,240
Current portion of capital lease obligation............... 12,440 11,778
---------- ----------
Total current liabilities......................... 1,407,922 1,386,409
LONG-TERM DEBT.............................................. 1,361,345 1,468,738
CAPITAL LEASE OBLIGATION.................................... 123,336 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 201,490 183,370
OTHER NONCURRENT LIABILITIES................................ 196,981 194,802
DEFERRED INCOME TAXES....................................... 415,569 370,117
MINORITY INTEREST........................................... 27,861 26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock -- $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional capital........................................ 1,255,009 1,235,009
Retained earnings......................................... 806,841 635,326
---------- ----------
Total shareholder's equity........................ 2,061,851 1,870,336
---------- ----------
$5,796,355 $5,630,129
========== ==========
</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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1997 1996
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales.............................. $3,504,752 $3,267,356 $10,080,047 $9,115,765
Sales to affiliates.................... 51,073 43,100 168,591 135,882
---------- ---------- ----------- ----------
3,555,825 3,310,456 10,248,638 9,251,647
Equity in earnings (losses) of
affiliates.......................... 23,892 3,891 42,708 19,227
Other income (expense) -- net.......... (14,150) (456) (12,590) (1,540)
---------- ---------- ----------- ----------
3,565,567 3,313,891 10,278,756 9,269,334
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses... 3,327,669 3,186,413 9,766,847 8,936,804
(including purchases of $1,289,172,
$960,193, $3,482,985 and $2,842,997
from affiliates)
Selling, general and administrative
expenses............................ 55,940 44,562 149,542 120,970
Interest expense, excluding capital
lease............................... 28,699 25,306 85,530 70,805
Capital lease interest charge.......... 3,818 4,133 11,778 12,686
Minority interest...................... 498 (77) 1,230 1,453
---------- ---------- ----------- ----------
3,416,624 3,260,337 10,014,927 9,142,718
---------- ---------- ----------- ----------
INCOME BEFORE INCOME TAXES............... 148,943 53,554 263,829 126,616
INCOME TAXES............................. 56,598 19,815 85,949 46,848
---------- ---------- ----------- ----------
NET INCOME............................... $ 92,345 $ 33,739 $ 177,880 $ 79,768
========== ========== =========== ==========
</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)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $ 268,182 $ 73,055
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (183,639) (318,343)
Proceeds from sales of property, plant and equipment...... 12,057 3,696
Decrease (increase) in restricted cash.................... 2,547 (10,770)
Investments in LYONDELL-CITGO Refining Company Ltd........ (45,635) (106,361)
Investment in subsidiary and advances to other
affiliates............................................. (1,417) --
--------- ---------
Net cash used in investing activities............. (216,087) (431,778)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans................... 45,000 61,000
Net payments on revolving bank loans...................... (80,000) (10,000)
Payments on term bank loan................................ (22,059) (22,059)
Proceeds from issuance of senior notes.................... -- 199,694
Proceeds from issuance of taxable bonds................... -- 120,000
Proceeds from issuance of tax-exempt bonds................ -- 25,000
Capital contribution received from parent (PDV America)... 20,000 --
Dividend paid to parent................................... (6,000) --
Payments of capital lease obligations..................... (5,521) (5,912)
Repayments of other debt.................................. (5,357) (5,357)
--------- ---------
Net cash (used in) provided by financing
activities...................................... (53,937) 362,366
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............ (1,842) 3,643
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 26,856 19,863
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 25,014 $ 23,506
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized................... $ 82,863 $ 73,857
========= =========
Income taxes, net of refunds of $450 and $3,449 in 1997
and 1996.............................................. $ 24,813 $ 44,033
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Noncash capital contribution from parent (PDV America).... $ -- $ 12,664
========= =========
Noncash dividend paid to parent (PDV America)............. $ (365) $ --
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 1996 and with respect to the interim three
and nine-month periods ended September 30, 1997 and 1996 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 nine-month periods ended September 30, 1997 and 1996 are not
necessarily indicative of the results to be expected for the full year.
Reference is made to CITGO's Annual Report for the fiscal year ended December
31, 1996 on Form 10-K, dated March 27, 1997, for additional information.
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").
Certain reclassifications have been made to the September 30, 1996
financial statements to conform with the classifications used at September 30,
1997.
2. ACCOUNTS RECEIVABLE
During the second quarter of 1997, the Company established a new limited
purpose subsidiary, CITGO Funding Corporation, which entered into an agreement
to sell, on an ongoing basis and without recourse, up to a maximum of $125
million of trade accounts receivable at any one point in time. This agreement
has a minimum term of one year expiring in June, 1998 and is renewable for
successive one year terms by mutual agreement. Fees and expenses related to the
agreement were recorded as Other Income (Expense) and totaled approximately $1.9
million in the third quarter of 1997 and $2.2 million for the nine months ended
September 30, 1997. Proceeds from the initial sale were used primarily to make
payments on the revolving bank loan.
3. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Refined products........................................... $800,559 $616,527
Crude oil.................................................. 141,997 165,564
Materials and supplies..................................... 54,508 51,100
-------- --------
$997,064 $833,191
======== ========
</TABLE>
6
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan......................................... $ 270,000 $ 350,000
Term bank loan.............................................. 66,176 88,235
7.875% Senior Notes $200 million face amount due 2006....... 199,738 199,715
Private Placement:
8.75% Series A Senior Notes due 1998...................... 37,500 37,500
9.03% Series B Senior Notes due 2001...................... 142,857 142,857
9.30% Series C Senior Notes due 2006...................... 113,637 113,637
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 25,000
Taxable Louisiana wastewater facility revenue bonds due
2026...................................................... 120,000 120,000
Cit-Con bank credit agreement............................... 30,357 35,714
---------- ----------
1,456,585 1,563,978
Less current portion of long-term debt...................... (95,240) (95,240)
---------- ----------
$1,361,345 $1,468,738
========== ==========
</TABLE>
5. INCOME TAXES
Income taxes were based on an effective tax rate of 38% for the three-month
period ended September 30, 1997, as compared to 37% for the comparable period in
1996. The effective tax rate was 33% for the nine month period ended September
30, 1997, as compared to 37% for the comparable period in 1996. The decrease is
due primarily to the favorable resolution of a significant tax issue with the
Internal Revenue Service ("IRS") in the second quarter of 1997. The resolution
resulted in the reduction of a contingency reserve previously established
related to this matter. The decrease was partially offset by the recording of a
valuation allowance related to a capital loss carryforward that, will more
likely than not, expire in 1998.
7
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. Included among
these is litigation against CITGO by a number of current and former employees
and applicants on behalf of themselves and a class of similarly situated persons
asserting claims under federal and state laws of racial discrimination in
connection with the employment practices at CITGO's Lake Charles, Louisiana
refining complex; the plaintiffs seek injunctive relief and monetary damages and
have appealed the Court's denial of class certification; the initial trials
relating to this litigation are not currently included in the trial docket.
In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against The UNO-VEN Company ("UNO-VEN") to
assert claims against CITGO, Petroleos de Venezuela, S.A., PDV America, Inc.,
PDV Midwest Refining, L.L.C. ("PDVMR") and Union Oil Company of California
pursuant to Section 301 of the Labor Management Relations Act ("LMRA"). This
complaint alleges that CITGO and the other defendants constitute a single
employer, joint employers or alter-egos for purposes of the LMRA, and are
therefore bound by the terms of a collective bargaining agreement between
UNO-VEN and Local 7-517 covering certain production and maintenance employees at
a Lemont, Illinois petroleum refinery. On May 1, 1997, in a transaction
involving the former partners of UNO-VEN, the Lemont refinery was acquired by
PDVMR. Pursuant to an operating agreement with PDVMR, CITGO became the operator
of the Lemont refinery, and employed the substantial majority of employees
previously employed by UNO-VEN pursuant to its initial employment terms, but did
not assume the existing labor agreement.
On May 12, 1997 an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected units
were shut down for repair and were returned to full service in early August,
1997. The Company has property damage and business interruption insurance which
related to this event. As a result, this event did not have a material adverse
effect on the Company's financial condition or results of operations. There are
six lawsuits against the Company pending in federal and state courts in Corpus
Christi, Texas alleging property damage and personal injury arising from the
incident as well as punitive damages.
Additionally, there is a class action lawsuit pending against the Company
and other operators and owners of nearby heavy industrial facilities which was
filed in state court in Corpus Christi, Texas in 1993 on behalf of property
owners in the vicinity of these facilities. This lawsuit asserts property damage
claims and diminution in property values allegedly resulting from environmental
contamination in the air, soil, and groundwater, occasioned by ongoing
operations of the Company's Corpus Christi refinery and the respective
industrial facilities of the other defendants. The certification of the class
action has been appealed to the Texas Supreme Court by the Company and other
defendants. Two related personal injury and wrongful death lawsuits were filed
in 1996 and are in preliminary stages of discovery at this time. The Company has
signed an agreement to settle the property damage class action lawsuit for
approximately $17.3 million which includes the purchase of approximately 290
properties in an adjacent neighborhood. Of this amount, $15.7 million was
expensed during the third quarter 1997. The agreement provides that the Company
may terminate the settlement if more than ten percent of the class members elect
to opt out of the settlement. The court is currently considering the approval of
the settlement agreement.
The Company is vigorously contesting or pursuing, as applicable, such
lawsuits and claims and believes that its positions are sustainable. The Company
has recorded accruals for losses it considers to be probable and reasonably
estimable. However, due to uncertainties involved in litigation, there are
cases, including the significant matters noted above, in which the outcome is
not reasonably predictable, and the losses, if any, are not reasonably
estimable. If such lawsuits and claims were to be determined in a manner adverse
to the Company, and in amounts in excess of the Company's accruals, it is
reasonably possible that such
8
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
determinations could have a material adverse effect on the Company's results of
operations in a given reporting period. The term "reasonably possible" is used
herein to mean that the chance of a future transaction or event occurring is
more than remote but less than likely. However, based upon management's current
assessments of these lawsuits and claims and that provided by counsel in such
matters, and the capital resources available to the Company, management of the
Company believes that the ultimate resolution of these lawsuits and claims would
not exceed, by a material amount, the aggregate of the amounts accrued in
respect of such lawsuits and claims and the insurance coverages available to the
Company and, therefore, should not have a material adverse effect on the
Company's financial condition, results of operations or liquidity.
Environmental Compliance and Remediation -- The Company is subject to
various federal, state and local environmental laws and regulations which may
require the Company to take action to correct or improve the effects on the
environment of prior disposal or release of petroleum substances by the Company
or other parties. Management believes the Company is in compliance with these
laws and regulations in all material aspects. Maintaining compliance with
environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
At September 30, 1997, the Company had $48.0 million of environmental
accruals included in other non-current liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, management believes these accruals are adequate. Conditions
which would require additional expenditures may exist for various 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 September 30, 1997, based on
the estimated amount that CITGO would receive or pay to terminate the agreements
as of that date and taking into account current interest rates, was an
unrealized loss of $2.3 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.
9
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
7. RELATED PARTY TRANSACTIONS
On May 1, 1997, pursuant to an operating agreement with PDV Midwest
Refining, L.L.C. ("PDVMR"), a subsidiary of CITGO's parent company, PDV America,
Inc. ("PDVA"), CITGO became the operator of the PDVMR Lemont refinery, and
employed a substantial number of employees previously employed in the refinery
by UNO-VEN and as a result, CITGO assumed a liability for postretirement
benefits other than pensions of approximately $27 million related to those
employees. The corresponding amount due from PDVMR is included in Payables to
affiliates at September 30, 1997 pending final determination of the method of
settlement by the parent company.
An affiliate of Petroleos de Venezuela S.A., CITGO's indirect parent,
acquired a 50 percent equity interest in Mobil Corporation's refinery in
Chalmette, Louisiana in October, 1997 and has assigned to CITGO it's option to
purchase up to 50 percent of the refined products produced at the refinery
through December 31, 1998. CITGO exercised this option on November 1, 1997 and
is acquiring approximately 80 thousand barrels per day of refined products,
approximately one half of which is gasoline.
10
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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. Reference
is made to CITGO's Annual Report for the fiscal year ended December 31, 1996 on
Form 10-K, dated March 27, 1997, for additional information and a description of
factors which may cause substantial fluctuations in the earnings and cash flows
of CITGO.
In the third quarter ended September 30, 1997, CITGO generated net income
of $92.3 million on revenue of $3.6 billion compared to net income of $33.7
million on revenues of $3.3 billion for the same period last year. Net income
for the nine months ended September 30, 1997 was $177.9 million on revenues of
$10.3 billion compared to net income of $79.8 million on revenues of $9.3
billion for the same period in 1996. This improvement is due primarily to very
favorable refinery margins combined with strong operating performances at all of
CITGO's refineries, as well as better than expected earnings contributions from
CITGO's petrochemicals and asphalt operations.
In July 1997, the Company's senior management implemented a Transformation
Program designed to ensure that numerous expense control, business information
systems and business efficiency initiatives underway are effectively coordinated
to achieve desired results. Included in this program are reviews of the
Company's business units, assets, strategies, and business processes. As part of
this program, the first phase of Systems, Applications and Products in Data
Processing ("SAP") implementation, which includes the Company's financial
reporting systems, is scheduled for January 1, 1998. Additional SAP modules are
to be implemented throughout 1998 and 1999.
Although specifics have not yet been determined, the Transformation Program
may result in various financial reporting classification changes.
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues and
sales volumes for the three-month and nine-month periods ended September 30,
1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------- ------------- ---------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------- ------ ----- ----- ------ ------
($ IN MILLIONS) (MM GALLONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline.................... $2,128 $1,959 $ 5,901 $5,430 3,180 3,023 8,815 8,434
Jet fuel.................... 241 396 888 1,041 424 634 1,479 1,727
Diesel/#2 fuel.............. 541 496 1,815 1,544 1,007 817 3,163 2,632
Petrochemicals, industrial
products and other
products.................. 318 212 851 601 532 366 1,388 1,043
Asphalt..................... 151 94 308 182 280 209 559 416
Lubricants and waxes........ 127 111 351 326 63 56 179 166
------ ------ ------- ------ ----- ----- ------ ------
Total refined
product sales.... $3,506 $3,268 $10,114 $9,124 5,486 5,105 15,583 14,418
Other sales................. 50 42 135 128
------ ------ ------- ------ ----- ----- ------ ------
Total sales........ $3,556 $3,310 $10,249 $9,252 5,486 5,105 15,583 14,418
====== ====== ======= ====== ===== ===== ====== ======
</TABLE>
11
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The following table summarizes CITGO's cost of sales and operating expenses
for the three-month and nine-month periods ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
NINE MONTHS
THREE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------
1997 1996 1997 1996
-------- -------- ------ ------
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Crude oil....................................... $ 798 $ 747 $2,265 $2,129
Refined products................................ 1,916 1,829 5,871 5,224
Intermediate feedstocks......................... 276 250 805 676
Refining and manufacturing costs................ 201 201 612 602
Other operating costs and expenses and inventory
changes....................................... 137 159 214 306
------ ------ ------ ------
Total cost of sales and operating
expenses............................ $3,328 $3,186 $9,767 $8,937
====== ====== ====== ======
</TABLE>
Sales revenues and volumes. Sales increased $246 million, or approximately
7%, in the three-month period ended September 30, 1997, and by $997 million, or
11%, in the nine-month period ended September 30, 1997 as compared to the same
periods in 1996. Total sales volumes increased by 7% from 5,105 million gallons
in the third quarter of 1996 to 5,486 million gallons in the third quarter of
1997, and increased by 8% from 14,418 million gallons in the first nine months
of 1996 to 15,583 million gallons in the first nine months of 1997. The increase
in volumes, coupled with increases in most product sales prices resulted in the
increase in revenues between the nine-month periods.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 9% in the third
quarter of 1997 as compared to the third quarter of 1996, and increased by 9% in
the first nine months of 1997 as compared to the same period in 1996. Gasoline,
diesel/ #2 fuel and jet fuel, excluding bulk sales, had sales volume increases
of 14% and 35% and a decrease of 30%, respectively, in the third quarter of
1997, compared to the third quarter of 1996. For the nine-month period ended
September 30, 1997 versus the same period in 1996, gasoline, diesel/#2 fuel and
jet fuel, excluding bulk sales, had sales volume increases of 9% and 25% and a
decrease of 9%, respectively. Gasoline sales volumes increased due to successful
marketing efforts, including the net addition of 315 independently owned CITGO
branded retail outlets since September 30, 1996, bringing the total number of
CITGO branded retail outlets to 14,887 at September 30, 1997, substantially all
of which are independently owned. Diesel/#2 fuel sales volumes increased in part
due to sales to former UNO-VEN customers which have become CITGO customers. In
addition, CITGO has increased its marketing effort relative to diesel/#2 fuel in
order to sell the increased production of the LYONDELL-CITGO Refining Company
Ltd. ("LYONDELL-CITGO") facility (see also Equity in earnings (losses) of
affiliates). Jet fuel sales volume decreased as CITGO reduced its contract sales
volume in order to bring it closer to the refinery production volume.
Sales prices of gasoline, excluding bulk sales, were higher in the third
quarter of 1997 than in the third quarter of 1996. The average increase for the
third quarter of 1997 over the third quarter of 1996 was 1 cent per gallon, or a
2% increase. Sales prices of jet fuel and diesel/#2 fuel, excluding bulk sales,
decreased 6 cents and 8 cents per gallon, respectively, or 9% and 13%,
respectively, in the third quarter of 1997 as compared to the same period in
1996. For the nine-month period ended September 30, 1997, gasoline prices,
excluding bulk sales, were approximately 3% higher, diesel/#2 fuel prices were
approximately 5% lower and jet fuel prices were less than 1% lower than for the
same period in 1996.
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
revenue decreased by $106 million or 15% from $712 million in the three-month
period ended September 30, 1996 to $606 million in the same period in 1997. The
decrease is attributable to a 2% decrease in prices and 13% decline in volumes.
Such bulk sales revenue decreased by $19 million or 1% from $1,889 million in
the nine-month period ended September 30, 1996 to $1,870 million in the same
period in 1997. The decrease is attributable to a 4% decrease in volumes offset
by a 3% increase in prices.
12
<PAGE> 14
Petrochemicals and industrial products sales revenues increased 41% and
67%, respectively, for the three months ended September 30, 1997 as compared to
the three months ended September 30, 1996, and increased 40% and 45%,
respectively, for the nine months ended September 30, 1997 versus the nine
months ended September 30, 1996. The petrochemicals revenue increases were the
result of a 50% increase in volume, offset by a 6% decrease in unit sales price
for the third quarter of 1997 and a 30% increase in volume and a 7% increase in
unit sales price for the nine-month period ended September 30, 1997, as compared
to the same periods in 1996. The increase in sales volume of petrochemicals is
due primarily to significant increases in the production of xylene and polymer
grade propylene in 1997 compared to 1996. The industrial products revenue
increases were the result of a 16% increase in unit sales price and a 44%
increase in volumes for the third quarter of 1997 and a 10% increase in unit
sales price and a 31% volume increase for the nine-month period ended September
30, 1997, as compared to the same periods in 1996.
Asphalt sales revenues in the third quarter of 1997 were $57 million higher
while sales volumes were 34% higher, than in the same period in 1996. Sales
revenues were $126 million higher, and sales volumes were 34% higher, in the
first nine months of 1997 as compared to the same period in 1996. Asphalt sales
prices increased 20% in the third quarter of 1997, and 26% in the first nine
months of 1997, from the same periods in 1996. The increase in sales volume of
asphalt is due primarily to the Company's efforts in production and marketing to
take advantage of Sun Oil Company's withdrawal from the East Coast asphalt
market.
Equity in earnings (losses) of affiliates. Equity in earnings of affiliates
increased by $20 million overall for the three-month period and increased $23.5
million overall for the nine-month period ended September 30, 1997 as compared
to the same periods in 1996. For the third quarter, 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") decreased by $0.6 million,
from a loss of $0.1 million in the third quarter of 1996 to a loss of $0.7
million in the third quarter of 1997. Equity in the earnings of LYONDELL-CITGO
increased $19.4 million, from a loss of $0.8 million in the third quarter of
1996 to $18.6 million in the third quarter of 1997. For the first nine months,
the increase in 1997 from 1996 was primarily due to an increase in the equity in
the earnings of LYONDELL-CITGO which increased $24.9 million, from $3.6 million
in the first nine months of 1996 to $28.5 million in the first nine months of
1997. This increase was due primarily to the change in CITGO's interest in
LYONDELL-CITGO which increased from 13% at December 31, 1996 to approximately
42% on April 1, 1997. In addition, during the third quarter of 1997,
LYONDELL-CITGO's operating and financial performance showed significant
improvement from the second quarter. The key improvement factors were the
processing of 100% of available crude under the Venezuelan supply agreement in
the third quarter compared to 92% in the second quarter; significantly better
gross refining margins due to the fact that the second quarter margins were
adversely affected by product downgrades associated with the fluid unit outage
during the second quarter; and improved aromatics and lubes performance as
compared to the second quarter due to increased sales volumes.
Other income (expense). Other income (expense) was $(12.6) million for the
nine month period ended September 30, 1997 as compared to $(1.5) million for the
same period in 1996. The difference is primarily due to a $15.7 million charge
related to the proposed Corpus Christi neighborhood settlement during the third
quarter (see Note 6 to the Condensed Consolidated Financial Statements for the
Three and Nine-Month Periods ended September 30, 1997, included in Part I
hereof), a $6 million write off of a capital project during the third quarter,
and $2.2 million, during the second and third quarters, in fees related to the
sale of accounts receivable in June 1997. These items were offset by a net $8.3
million property insurance recovery relating to the Corpus Christi alkylation
unit fire during the third quarter, a $1.8 million net management fee charged to
PDVMR over the nine months of 1997, and a $1.3 million gain on the sales of
pipeline assets in the first quarter of 1997.
Cost of sales and operating expenses. Cost of sales and operating expenses
increased by $141 million or 4%, in the quarter ended September 30, 1997, and
increased $830 million or 9%, in the nine-month period ended September 30, 1997,
as compared to the same periods in 1996. Higher crude oil costs (an increase
from $747 million in the third quarter of 1996 to $798 million in the third
quarter of 1997) resulted from a 15% increase in crude oil volumes purchased,
offset by a 7% decrease in crude prices. Crude oil costs increased from $2,129
million in the nine-month period ended September 30, 1996 to $2,265 million in
the first nine months of 1997, the result of a 7% increase in crude oil volumes
purchased, and a less than 1% decrease in
13
<PAGE> 15
crude prices. Refined product purchases increased in the third quarter of 1997
as compared to the same quarter in 1996 (up 5%, from $1,829 million to $1,916
million for the third quarter), and increased in the first nine months of 1997
as compared to the same period in 1996 (up 12%, from $5,224 million to $5,871
million, for the first nine months). These changes resulted from increases in
refined product purchase volumes, (up 6% for the third quarter and 10% for the
first nine months of 1997 as compared to the same periods in 1996), and changes
in prices (down 1% for the third quarter and up 3% for the first nine months of
1997 as compared to the same periods in 1996). Intermediate feedstock purchases
increased to $276 million from $250 million in the third quarter of 1996, or an
increase of 10%, and increased to $805 million for the first nine months of 1997
from $676 million for the first nine months of 1996, or an increase of 19%.
Intermediate feedstock volumes purchased increased 12%, and prices decreased 1%
between the quarters ended September 30, 1996 and September 30, 1997.
Intermediate feedstock volumes purchased increased 14% and prices increased 4%
between the nine-month periods ended September 30, 1996 and September 30, 1997.
Refining and manufacturing costs were $201 million for each of the third
quarters, and increased 2% for the nine-month period ended September 30 (from
$602 million to $612 million). CITGO incurred additional expenses associated
with the fire and explosion which occurred at the Corpus Christi refinery on May
12, 1997. Depreciation and amortization expense decreased from $51 million to
$50 million between the quarters ended September 30, 1996 and 1997,
respectively, due to a decrease in amortization offset by an increase in
depreciation. Depreciation and amortization increased from $139 million to $153
million between the nine month periods ended September 30, 1996 and 1997,
respectively, due to an increase in depreciation offset by a minor decrease in
amortization. The increases in depreciation are due to significant capital
projects, formerly classified as work in progress, put into service during the
1997 reporting periods. The decrease in amortization is due to an increase in
the time periods between turnarounds for many of the refining units.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases, including purchases from LYONDELL-CITGO and PDVMR,
represented 58% and 57% of total cost of sales and operating expenses for the
third quarter of 1997 and 1996, respectively, and 60% and 58% for the first nine
months of 1997 and 1996, respectively. CITGO estimates that margins on purchased
products, on average, are lower than margins on produced products due to the
fact that CITGO can only receive the marketing portion of the total margin
received on the produced refined products. However, purchased products are not
segregated from CITGO's produced products and margins may vary due to market
conditions and other factors beyond the Company's control. As CITGO increases
its focus on strategic growth, CITGO anticipates that its purchased refined
product requirements will stabilize in the near term. However, there could be
events beyond the control of CITGO which would impact the volume of refined
products purchased during any given period.
Gross margin. The gross margin for the three-month period ended September
30, 1997 was $228 million, or 6.4%, compared to $124 million, or 3.8%, for the
same period in 1996. The gross margin for the nine-month period ended September
30, 1997 was $482 million, or 4.7%, compared to $315 million, or 3.4%, for the
nine-month period ended September 30, 1996. Gross margins in 1997 have been
positively affected by strong refining margins and a strong operating
performance led by high crude runs as well as asphalt and petrochemical
activities (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the third quarter of 1997 by 24%, from $45
million in the third quarter of 1996 to $56 million in the third quarter of
1997, and increased 24% from $121 million in the first nine months of 1996 to
$150 million in the same period in 1997. The increase during the third quarter
and the nine months ended September 30, 1997 is due to increased selling
expenses in 1997 including the effect of the change in focus of the Company's
marketing programs initiated in April 1996, increased employee burden and
benefit accruals, and increases in several other areas including purchasing,
administrative services, information systems, corporate executive, credit card
and other charges, none of which increased more than $4 million individually,
but in the aggregate increased approximately $13 million for the third quarter.
For the nine-month period, none of these areas increased more than $5 million
individually, but in the aggregate increased $22 million.
Interest expense. Interest expense increased $4 million, or 14% (from $29
million to $33 million), for the third quarter ended September 30, 1997, and
increased year-to-date by approximately $14 million, or 17% (from $83 million to
$97 million), as compared to the same periods in 1996. This increase is
primarily due to
14
<PAGE> 16
the public debt and certain industrial revenue bonds which were outstanding for
only a partial year during 1996 and CITGO's revolving bank loan which had a
higher outstanding balance during most of 1997 as compared to 1996.
Income taxes. Income taxes were based on an effective tax rate of 38% for
the three-month period ended September 30, 1997, compared to 37% for the
comparable period in 1996. The effective rate was 33% for the nine-month period
ended September 30, 1997, as compared to 37% for the comparable period in 1996.
The decrease is due primarily to the favorable resolution of a significant tax
issue with the IRS in the second quarter. The resolution resulted in the
reduction of a contingency reserve previously established related to this
matter. The decrease was partially offset by the recording of a valuation
allowance related to a capital loss carryforward that will more likely than not
expire in 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the nine month period ended September 30, 1997, the Company's
consolidated net cash provided by operating activities totaled approximately
$268 million. Net income of $178 million and depreciation and amortization of
$153 million were offset by net changes in other items of $63 million. The more
significant changes in other items included an increase in inventory of $164
million and an increase in other assets of $48 million which were partially
offset by a decrease in accounts receivable of $75 million and an increase in
deferred taxes of $48 million. Refined products inventories have increased since
the end of 1996 due to increases in both volumes purchased and costs. The
decrease in accounts receivable is due primarily to the sale of $125 million of
accounts receivable in June 1997, proceeds of which were used primarily to make
payments on the revolving bank loan.
Net cash used in investing activities of $216 million for the nine month
period ended September 30, 1997 included capital expenditures of $184 million
(compared to $318 million for the same period in 1996) and an additional
investment in LYONDELL-CITGO of $46 million (compared to $106 million for the
same period in 1996). Net cash used in financing activities of $54 million for
the nine-month period ended September 30, 1997 included net payments during the
period of $80 million on its revolving bank facility, net payments of $33
million on the Company's term note and other debt and $6 million in dividends
which were partially offset by proceeds of $45 million from short-term borrowing
facilities and a capital contribution of $20 million from its parent company.
As of September 30, 1997, capital resources available to the Company
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $405 million and $117 million of
uncommitted short-term borrowing facilities with various banks. Additionally,
the Company may offer and sell up to $400 million of debt securities under a
shelf registration filed with the Securities and Exchange Commission which
became effective in May 1996. The Company has recently initiated a Medium Term
Note program under such shelf registration that would permit the Company to sell
up to $235 million in principal amount of notes from time to time in tranches.
Any tranche of notes could have a maturity ranging from nine months to 30 years
from the date of issuance and could bear interest at a fixed rate or at a
fluctuating rate based on one of several possible indices. In addition, the
Company anticipates selling an additional $150-200 million of accounts
receivable in November 1997. 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 September 30, 1997.
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,
15
<PAGE> 17
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 September 30, 1997, based on
the estimated amount that CITGO would receive or pay to terminate the agreements
as of that date and taking into account current interest rates was an unrealized
loss of $2.3 million. In connection with the determination of such 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 STANDARDS
In October 1996, the Accounting Standards Executive Committee issued
Statement of Position 96-1 -- Environmental Remediation Liabilities (SOP 96-1),
which is effective for the Company's fiscal year ending December 31, 1997. The
statement provides guidance on environmental liabilities and disclosure.
Adoption of SOP 96-1 did not have a material effect on the Company's financial
statements.
In February 1997, the FASB issued SFAS No. 129 -- Disclosure of Information
about Capital Structure, which is effective for the Company's fiscal year ending
December 31, 1997. The statement establishes standards for disclosing
information about a company's capital structure. Adoption of SFAS No. 129
relates to disclosure within the financial statements and will not have a
material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130 -- Reporting Comprehensive
Income which is effective for the Company's fiscal year ending December 31,
1998. The statement addresses the reporting and display of comprehensive income
and its components. The Company does not currently believe adoption of SFAS 130
will result in material differences between comprehensive income and net income.
Also in June 1997, the FASB issued SFAS No. 131 -- Disclosures About
Segments of an Enterprise and Related Information which is effective for the
fiscal year ending December 31, 1998. SFAS No. 131 modifies current segment
reporting requirements and establishes, for public companies, criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers in annual and interim financial statements. The Company is
unable to determine the full extent of disclosure changes that may result from
adoption of SFAS No. 131 because of the potential for change as a result of the
Company's Transformation Program which began in July 1997.
CURRENT DEVELOPMENTS
The Company has numerous computer systems which were developed employing
six digit date structures. Where date logic requires the year 2000 or beyond,
such date structures may produce inaccurate results. Management has implemented
a program to comply with year 2000 requirements on a system-by-system basis,
including the implementation of SAP. The program includes extensive systems
testing and is expected to be completed by the end of 1998. Each of the systems
has a solution that is potentially unique and often dependent on third-party
software and developers. A failure on the part of the Company to ensure that its
computer systems are year 2000 compliant could have a material adverse effect on
the Company's operations.
An affiliate of Petroleos de Venezuela S.A., CITGO's indirect parent,
acquired a 50 percent equity interest in Mobil Corporation's refinery in
Chalmette, Louisiana in October, 1997 and has assigned to CITGO it's option to
purchase up to 50 percent of the refined products produced at the refinery
through December 31, 1998. CITGO exercised this option on November 1, 1997 and
is acquiring approximately 80 thousand barrels per day of refined products,
approximately one half of which is gasoline.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Recent Developments Relating to Litigation and Injury Claims -- Various
lawsuits and claims arising in the ordinary course of business are pending
against the Company.
On May 12, 1997 an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected units
were shut down for repair and were returned to full service in early August,
1997. The Company has property damage and business interruption insurance which
related to this event. As a result, this event did not have a material adverse
effect on the Company's financial condition or results of operations. There are
six lawsuits against the Company pending in federal and state courts in Corpus
Christi, Texas alleging property damage and personal injury arising from the
incident as well as punitive damages.
Additionally, there is a class action lawsuit pending against the Company
and other operators and owners of nearby heavy industrial facilities which was
filed in state court in Corpus Christi, Texas in 1993 on behalf of property
owners in the vicinity of these facilities. This lawsuit asserts property damage
claims and diminution in property values allegedly resulting from environmental
contamination in the air, soil, and groundwater, occasioned by ongoing
operations of the Company's Corpus Christi refinery and the respective
industrial facilities of the other defendants. The certification of the class
action has been appealed to the Texas Supreme Court by the Company and other
defendants. Two related personal injury and wrongful death lawsuits were filed
in 1996 and are in preliminary stages of discovery at this time. The Company has
signed an agreement to settle the property damage class action lawsuit for
approximately $17.3 million which includes the purchase of approximately 290
properties in an adjacent neighborhood. Of this amount, $15.7 million was
expensed during the third quarter 1997. The agreement provides that the Company
may terminate the settlement if more than ten percent of the class members elect
to opt out of the settlement. The court is currently considering the approval of
the settlement agreement.
Recent Developments Relating to Environmental Compliance -- On July 2,
1997, the Executive Director of the Texas Natural Resources Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's
rules relating to operating a hazardous waste management unit without a permit.
The Report recommended a penalty of $699,200. CITGO Refining disagrees with
these allegations and the proposed penalties and plans to contest the matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
-------- -----------
<C> <S>
27 -- Financial Data Schedule (filed electronically only)
</TABLE>
(b) Reports on Form 8-K
None.
17
<PAGE> 19
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
/s/ R. M. BRIGHT
------------------------------------
R. M. Bright
Controller (Chief Accounting
Officer)
Date: November 12, 1997
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 25,014
<SECURITIES> 0
<RECEIVABLES> 965,853
<ALLOWANCES> 22,210
<INVENTORY> 997,064
<CURRENT-ASSETS> 1,984,346
<PP&E> 3,545,865
<DEPRECIATION> 712,208
<TOTAL-ASSETS> 5,796,355
<CURRENT-LIABILITIES> 1,407,922
<BONDS> 1,484,681
0
0
<COMMON> 1
<OTHER-SE> 2,061,850
<TOTAL-LIABILITY-AND-EQUITY> 5,796,355
<SALES> 10,248,638
<TOTAL-REVENUES> 10,278,756
<CGS> 9,766,847
<TOTAL-COSTS> 9,916,389
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13,597
<INTEREST-EXPENSE> 97,308
<INCOME-PRETAX> 263,829
<INCOME-TAX> 85,949
<INCOME-CONTINUING> 177,880
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,880
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
