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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: JUNE 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 NO.: 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. Employer Identification No.)
incorporation or organization)
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.
COMMON STOCK, $1.00 PAR VALUE 1,000
----------------------------- -----
(Class) (outstanding at July 31, 1997)
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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, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS........................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets -- June 30, 1997 and
December 31, 1996......................................... 3
Condensed Consolidated Statements of Income -- Three-Month
Periods Ended June 30, 1997 and 1996 and Six-Month Periods
Ended June 30, 1997 and 1996.............................. 4
Condensed Consolidated Statements of Cash Flows -- Six-Month
Periods Ended June 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................................. 11-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
SIGNATURES............................................................. 17
</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 (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 19,725 $ 26,856
Accounts receivable....................................... 845,987 1,004,098
Due from affiliates....................................... 67,653 27,738
Inventories............................................... 1,035,927 833,191
Prepaid expenses and other................................ 16,340 21,626
---------- ----------
Total current assets.............................. 1,985,632 1,913,509
PROPERTY, PLANT AND EQUIPMENT -- Net........................ 2,819,811 2,786,703
RESTRICTED CASH............................................. 6,703 9,369
INVESTMENTS IN AFFILIATES................................... 826,465 790,576
OTHER ASSETS................................................ 144,021 129,972
---------- ----------
$5,782,632 $5,630,129
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans..................................... $ 88,000 $ 53,000
Accounts payable.......................................... 411,200 530,505
Payables to affiliates.................................... 224,732 275,375
Taxes other than income................................... 249,814 200,863
Other..................................................... 251,649 219,648
Current portion of long-term debt......................... 95,240 95,240
Current portion of capital lease obligation............... 12,440 11,778
---------- ----------
Total current liabilities.............................. 1,333,075 1,386,409
LONG-TERM DEBT.............................................. 1,550,476 1,468,738
CAPITAL LEASE OBLIGATION.................................... 123,336 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 203,201 183,370
OTHER NONCURRENT LIABILITIES................................ 192,336 194,802
DEFERRED INCOME TAXES....................................... 377,339 370,117
MINORITY INTEREST........................................... 27,363 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......................................... 720,496 635,326
---------- ----------
Total shareholder's equity........................ 1,975,506 1,870,336
---------- ----------
$5,782,632 $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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Net sales.................................. $3,369,948 $3,284,450 $6,575,295 $5,848,409
Sales to affiliates........................ 60,139 49,546 117,518 92,782
---------- ---------- ---------- ----------
3,430,087 3,333,996 6,692,813 5,941,191
Equity in earnings (losses) of
affiliates.............................. 11,949 6,956 18,816 15,336
Other income (expense) -- net.............. 1,142 (399) 1,560 (1,084)
---------- ---------- ---------- ----------
3,443,178 3,340,553 6,713,189 5,955,443
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $1,221,608,
$1,006,975, $2,193,813 and $1,882,804
from affiliates)........................ 3,261,419 3,228,540 6,439,178 5,750,391
Selling, general and administrative
expenses................................ 52,049 33,280 93,602 76,408
Interest expense, excluding capital
lease................................... 30,389 24,107 56,831 45,499
Capital lease interest charge.............. 3,980 4,276 7,960 8,553
Minority interest.......................... 495 780 732 1,530
---------- ---------- ---------- ----------
3,348,332 3,290,983 6,598,303 5,882,381
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES................... 94,846 49,570 114,886 73,062
INCOME TAXES................................. 22,136 18,341 29,351 27,033
---------- ---------- ---------- ----------
NET INCOME................................... $ 72,710 $ 31,229 $ 85,535 $ 46,029
========== ========== ========== ==========
</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>
SIX MONTHS
ENDED JUNE 30,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES................................. $ 15,851 $ (80,042)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................... (122,152) (217,097)
Proceeds from sales of property, plant and equipment............... 11,708 2,990
Decrease (increase) in restricted cash............................. 2,665 (14,520)
Investments in LYONDELL-CITGO Refining Company Ltd................. (45,635) (77,404)
Investment in subsidiary and advances to other affiliates.......... (717) --
--------- ---------
Net cash used in investing activities...................... (154,131) (306,031)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans............................ 35,000 80,000
Net borrowings on revolving bank loans............................. 100,000 105,000
Payments on term bank loan......................................... (14,706) (14,706)
Proceeds from issuance of senior notes............................. -- 199,699
Proceeds from issuance of tax-exempt bonds......................... -- 25,000
Capital contribution received from parent (PDV America)............ 20,000 --
Payments of capital lease obligations.............................. (5,574) (5,308)
Repayments of other debt........................................... (3,571) (3,571)
--------- ---------
Net cash provided by financing activities.................. 131,149 386,114
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................... (7,131) 41
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....................... 26,856 19,863
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................. $ 19,725 $ 19,904
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized............................ $ 65,014 $ 52,631
========= =========
Income taxes, net of refund of $450 in 1997..................... $ 25,867 $ 21,628
========= =========
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 SIX-MONTH PERIODS ENDED JUNE 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 six-month periods ended June 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
six-month periods ended June 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 June 30, 1996 financial
statements to conform with the classifications used at June 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 $354
thousand in the second quarter of 1997. Proceeds received in June 1997 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>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Refined products.................................................... $ 781,704 $616,527
Crude oil........................................................... 196,942 165,564
Materials and supplies.............................................. 57,281 51,100
---------- --------
$1,035,927 $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>
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan............................................... $ 450,000 $ 350,000
Term bank loan.................................................... 73,529 88,235
7.875% Senior Notes $200 million face amount due 2006............. 199,730 199,715
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..................................... 32,143 35,714
---------- -----------
1,645,716 1,563,978
Less current portion of long-term debt............................ (95,240) (95,240)
---------- -----------
$1,550,476 $ 1,468,738
========== ===========
</TABLE>
5. INCOME TAXES
Income taxes were based on an effective tax rate of 26% for the six-month
period ended June 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.
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
7
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
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, previously scheduled for July
1997, are not currently included in the trial docket.
In June 1997, CITGO settled litigation with a contractor who had claimed
additional compensation for sludge removal and treatment at CITGO's Lake
Charles, Louisiana refinery. The settlement did not have a material effect on
CITGO's financial position or results of operations. CITGO believes that it has
no further exposure to losses related to this matter.
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 are expected to be returned to full service in
early August, 1997. This event did not have a material adverse effect on the
Company's financial condition or results of operations. There are five lawsuits
against the Company pending in federal and state courts in Corpus Christi, Texas
alleging property damage and personal injury arising from the incident.
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 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 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
8
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) -- (CONTINUED)
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 June 30, 1997, the Company had $48.3 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 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.
Recent Developments Relating to Environmental Compliance -- Recent
developments relating to environmental compliance and remediation matters
include the following: (i) On September 30, 1996, CITGO received a Notice of
Violation ("NOV") from the United States Environmental Protection Agency
("EPA"), Washington, D.C., alleging violations of the Clean Air Act in the
Chicago-Gary-Lake County, Illinois-Indiana-Wisconsin area, arising from the sale
of gasoline that failed to meet the applicable minimum or maximum oxygen
content. CITGO has agreed to settle the NOV for $15,000; and (ii) on July 2,
1997, the Executive Director of the Texas Natural Resource 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.
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, 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 $1.2 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, The UNO-VEN Company ("UNO-VEN") transferred certain assets
and liabilities to PDV Midwest Refining, L.L.C. ("PDVMR"), a subsidiary of
CITGO's parent company, PDV America, Inc. ("PDVA"), in liquidation of PDVA's 50
percent ownership interest in UNO-VEN. The assets include a 153 thousand barrel
per day refinery in Lemont, Illinois, as well as eleven product distribution
terminals and 89 retail sites located in the Midwest. CITGO operates these
facilities and purchases the products produced at the refinery. CITGO believes
that this new relationship strengthens its marketing position because of the
assured access to the refined products produced.
On May 1, 1997, pursuant to the operating agreement with PDVMR, CITGO
became the operator of the Lemont refinery, and employed the substantial
majority of employees previously employed 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. A corresponding amount due
from PDVMR is included in Due from affiliates at June 30, 1997 pending final
determination of the method of settlement by the parent company.
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
June 1997, $365 thousand due from PDV America, Inc., under this tax allocation
agreement for the year 1992 was classified and accounted for as a dividend. 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.
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 second quarter ended June 30, 1997, CITGO generated net income of
$72.7 million on revenue of $3.4 billion compared to net income of $31.2 million
on revenues of $3.3 billion for the same period last year. Net income for the
six months ended June 30, 1997 was $85.5 million on revenues of $6.7 billion in
1997 compared to net income of $46.0 on revenues of $6.0 billion for the same
period in 1996. This improvement is due primarily to improved margins; in
addition, a favorable resolution of a significant tax issue with the IRS in the
second quarter of 1997 contributed to this result. These positive factors were
offset to some extent by the lost production and the additional expenses
associated with the fire and explosion which occurred at the Corpus Christi
Refinery on May 12, 1997.
On May 1, 1997, UNO-VEN transferred certain assets and liabilities to
PDVMR, a subsidiary of CITGO's parent company, PDVA, in liquidation of PDVA's 50
percent ownership interest in UNO-VEN. The assets include a 153 thousand barrel
per day refinery in Lemont, Illinois, as well as eleven product distribution
terminals and 89 retail sites located in the Midwest. CITGO operates these
facilities and purchases the products produced at the refinery.
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues and
sales volumes for the three-month and six-month periods ended June 30, 1997 and
1996:
<TABLE>
<CAPTION>
THREE MONTHS
THREE MONTHS SIX MONTHS ENDED JUNE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, 30, ENDED JUNE 30,
--------------- --------------- ------------- --------------
1997 1996 1997 1996 1997 1996 1997 1996
------ ------ ------ ------ ----- ----- ------ -----
($ IN MILLIONS) (MM GALLONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline............................ $1,952 $1,989 $3,773 $3,471 2,998 2,902 5,635 5,411
Jet fuel............................ 286 322 647 645 504 563 1,055 1,093
Diesel/#2 fuel...................... 600 595 1,274 1,048 1,087 1,021 2,156 1,815
Petrochemicals, industrial products
and other products................ 304 200 533 389 499 343 856 677
Asphalt............................. 122 75 157 88 216 175 279 207
Lubricants and waxes................ 120 114 224 215 62 58 116 110
------ ------ ------ ------ ----- ----- ------ -----
Total refined product
sales................... $3,384 $3,295 $6,608 $5,856 5,366 5,062 10,097 9,313
Other sales......................... 46 39 85 85
------ ------ ------ ------ ----- ----- ------ -----
Total sales............... $3,430 $3,334 $6,693 $5,941 5,366 5,062 10,097 9,313
====== ====== ====== ====== ===== ===== ====== =====
</TABLE>
11
<PAGE> 13
The following table summarizes CITGO's cost of sales and operating expenses
for the three-month and six-month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1997 1996 1997 1996
------ ------ ------ ------
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C>
Crude oil.......................................... $ 754 $ 765 $1,467 $1,382
Refined products................................... 2,013 2,016 3,955 3,394
Intermediate feedstocks............................ 244 228 529 426
Refining and manufacturing costs................... 211 206 411 401
Other operating costs and expenses and inventory
changes.......................................... 39 14 77 147
------ ------ ------ ------
Total cost of sales and operating
expenses............................... $3,261 $3,229 $6,439 $5,750
====== ====== ====== ======
</TABLE>
Sales revenues and volumes. Sales increased $96 million, or approximately
3%, in the three-month period ended June 30, 1997, and by $752 million, or 13%,
in the six-month period ended June 30, 1997 as compared to the same periods in
1996. Total sales volumes increased by 6% from 5,062 million gallons in the
second quarter of 1996 to 5,366 million gallons in the second quarter of 1997,
and increased by 8% from 9,313 million gallons in the first six months of 1996
to 10,097 million gallons in the first six months of 1997. The increase in
volumes, coupled with increases in most product sales prices resulted in the
increase in revenues between the six-month periods.
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 1997 as compared to the second quarter of 1996, and increased by 8%
in the first six 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 11% and 30% and a decrease of 2%, respectively, in the second
quarter of 1997, compared to the second quarter of 1996. For the six-month
period ended June 30, 1997 versus the same period in 1996, gasoline, diesel/#2
fuel and jet fuel, excluding bulk sales, had sales volume increases of 7%, 20%
and 3%, respectively. Gasoline sales volumes increased due to successful
marketing efforts, including the net addition of 314 independently owned CITGO
branded retail outlets since June 30, 1996, bringing the total number of CITGO
branded retail outlets to 14,710 at June 30, 1997, substantially all of which
are independently owned.
Sales prices of gasoline, excluding bulk sales, were lower in the second
quarter of 1997 than in the second quarter of 1996. The average decrease for the
second quarter of 1997 over the second quarter of 1996 was 4 cents per gallon,
or a 6% decrease. Sales prices of jet fuel and diesel/#2 fuel, excluding bulk
sales, decreased 3 cents and 5 cents per gallon, respectively, or 5% and 8%,
respectively, in the second quarter of 1997 as compared to the same period in
1996. For the six-month period ended June 30, 1997, gasoline prices, excluding
bulk sales, were approximately 4% higher, jet fuel prices were approximately 4%
higher and diesel/#2 fuel prices were less than 1% lower than prices 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 $173 million or 23% from $753 million in the three-month
period ended June 30, 1996 to $580 million in the same period in 1997. The
decrease is attributable to a 4% decline in prices and a 20% decline in volumes.
Such bulk sales revenue increased by $87 million or 7% from $1,177 million in
the six-month period ended June 30, 1996 to $1,264 million in the same period in
1997. The increase is attributable to a 6% increase in prices and a 2% increase
in volumes.
Petrochemicals and industrial products sales revenues increased 46% and
76%, respectively, for the three months ended June 30, 1997 as compared to the
three months ended June 30, 1996, and increased 39% and 33%, respectively, for
the six months ended June 30, 1997 versus the six months ended June 30, 1996.
The petrochemicals revenue increases were the result of an 8% increase in unit
sales price, and a 36% increase in volume for the second quarter of 1997 and a
15% increase in unit sales price and a 21% increase in volume for the six-month
period ended June 30, 1997, as compared to the same periods in 1996. The
industrial products
12
<PAGE> 14
revenue increases were the result of a 12% increase in unit sales price and a
57% increase in volumes for the second quarter of 1997 and a 7% increase in unit
sales price and a 24% volume increase for the six-month period ended June 30,
1997, as compared to the same periods in 1996.
Asphalt sales revenues in the second quarter of 1997 were $47 million
higher while sales volumes were 23% higher, than in the same period in 1996.
Sales revenues were $69 million higher, and sales volumes were 35% higher, in
the first six months of 1997 as compared to the same period in 1996. Asphalt
sales prices increased 32% in the second quarter of 1997, and 32% in the first
six months of 1997, from the same periods in 1996.
Equity in earnings (losses) of affiliates. Equity in earnings of affiliates
increased by $5.0 million overall for the three-month period and increased $3.5
million overall for the six-month period ended June 30, 1997 as compared to the
same periods in 1996. For the second quarter period, 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 $1.3 million,
from a loss of $0.1 million in the second quarter of 1996 to a loss of $1.4
million in the second quarter of 1997. Equity in the earnings of LYONDELL-CITGO
Refining Company Ltd. ("LYONDELL-CITGO") increased $7.9 million, from $0.9
million in the second quarter of 1996 to $8.8 million in the second quarter of
1997. For the first six months, the increase in 1997 from 1996 was primarily due
to an increase in the equity in the earnings of LYONDELL-CITGO which increased
$5.5 million, from $4.4 million in the first six months of 1996 to $9.9 million
in the first six 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. The increase in CITGO's interest in
LYONDELL-CITGO was offset by a decrease in LYONDELL-CITGO's earnings due to
lower refined product volumes, higher production and maintenance costs and
declines in the profitability of petrochemicals as compared to the second
quarter of 1996.
Other income (expense). Other income (expense) was $1.6 million for the six
month period ended June 30, 1997 as compared to $(1.1) million for the same
period in 1996. The difference is primarily due to a $1.3 million net management
fee charged to PDVMR in the first six months of 1997 and a $1.3 million gain on
the sale of pipeline assets in the first three months of 1997.
Cost of sales and operating expenses. Cost of sales and operating expenses
increased by $32 million or 1%, in the quarter ended June 30, 1997, and
increased $689 million or 12%, in the six-month period ended June 30, 1997, as
compared to the same periods in 1996. Lower crude oil costs ( a decrease from
$765 million in the second quarter of 1996 to $754 million in the second quarter
of 1997) resulted from a 6% decrease in crude prices and a 5% increase in crude
oil volumes purchased. Crude oil costs increased from $1,382 million in the
six-month period ended June 30, 1996 to $1,467 million in the first six months
of 1997, the result of a 4% increase in crude prices and a 2% increase in crude
oil volumes purchased. Refined product purchases decreased in the second quarter
of 1997 as compared to the same quarter in 1996 (down less than 1%, from $2,016
million to $2,013 million for the second quarter), and increased in the first
six months of 1997 as compared to the same period in 1996 (up 17%, from $3,394
million to $3,955 million, for the first six months). These changes resulted
from increases in refined product purchase volumes, (up 5% for the second
quarter and 12% for the first six months of 1997 as compared to the same periods
in 1996), and changes in prices (down 5% for the second quarter and up 4% for
the first six months of 1997 as compared to the same periods in 1996).
Intermediate feedstock purchases increased to $244 million from $228 million in
the second quarter of 1996, or an increase of 7%, and increased to $529 million
for the first six months of 1997 from $426 million for the first six months of
1996, or an increase of 24%. Intermediate feedstock volumes purchased increased
10%, and prices decreased 3% between the quarters ended June 30, 1996 and June
30, 1997. Intermediate feedstock volumes purchased increased 16% and prices
increased 7% between the six-month periods ended June 30, 1996 and June 30,
1997. Refining and manufacturing costs increased for both periods in 1997 as
compared to 1996, 2% for the second quarter (from $206 million to $211 million),
and 2% for the six-month period ended June 30 (from $401 million to $411
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 increased from $44 million to $54 million
between the quarters ended June 30, 1996 and 1997, respectively, and from $88
million to $103 million between the six-month periods ended June 30, 1996
13
<PAGE> 15
and 1997, respectively, due in both cases to significant capital projects
formerly classified as work in progress put into service during the 1997
reporting periods.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 62% of total cost of sales and operating expenses
for the second quarter of both 1997 and 1996, and 61% and 59% for the first six
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. 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.
Gross margin. The gross margin for the three-month period ended June 30,
1997 was $169 million, or 5%, compared to $105 million, or 3%, for the same
period in 1996. The gross margin for the six-month period ended June 30, 1997
was $254 million, or 4%, compared to $191 million, or 3%, for the six-month
period ended June 30, 1996. Gross margins in 1997 have been positively affected
by asphalt and petrochemical activities as well as generally improved operating
margins (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the second quarter of 1997 by 58%, from $33
million in the second quarter of 1996 to $52 million in the second quarter of
1997, and increased 24% from $76 million in the first six months of 1996 to $94
million in the same period in 1997. The increase during the second quarter and
the six months ended June 30, 1997 is primarily 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. In addition, selling, general and
administrative expenses increased in several other areas including purchasing,
legal, 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.
Interest expense. Interest expense increased $6 million, or 21% (from $28
million to $34 million), for the second quarter ended June 30, 1997, and
increased year-to-date by approximately $11 million, or 20% (from $54 million to
$65 million), as compared to the same periods in 1996. This increase is
primarily due to the increase in the amount outstanding under the Company's
revolving bank loan and senior notes.
Income taxes. Income taxes were based on an effective tax rate of 26% for
the six-month period ended June 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 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.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 1997, the Company's consolidated
net cash provided by operating activities totaled approximately $16 million. Net
income of $86 million and depreciation and amortization of $103 million were
offset by net changes in other items of $173 million. The more significant
changes in other items included a decrease in accounts receivable (including
amounts due from affiliates) of $109 million, decreases in prepaid expenses and
other assets of $6 million and increases in deferred taxes of $7 million, offset
by increases in inventory of $203 million, decreases in accounts payable
(including amounts due to affiliates) of $89 million, and increases in other
liabilities of $38 million. 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. Refined
products inventories have increased since the end of 1996 due to increases in
both volumes purchased and costs. The decrease in
14
<PAGE> 16
accounts payable is due primarily to the purchase of inventories of an
affiliated company for which the amount due is included in a net receivable
position due from the affiliate.
Net cash used in investing activities of $154 million for the six-month
period ended June 30, 1997 included capital expenditures of $122 million
(compared to $217 million for the same period in 1996) and an additional
investment in LYONDELL-CITGO of $46 million (compared to $77 million for the
same period in 1996). Net cash provided by financing activities of $131 million
for the six-month period ended June 30, 1997 included proceeds to CITGO of $35
million from short-term borrowing facilities, additional proceeds during the
period of $100 million on its revolving bank facility and a capital contribution
of $20 million from its parent company, PDV America, Inc. 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, 1997, capital resources available to the Company included
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $225 million and $127 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 statement filed with the Securities and Exchange Commission which
became effective in May 1996. 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, 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, 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, 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 $1.2 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.
15
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of certain recent developments, see Note 6 to the
Condensed Consolidated Financial Statements for the Three and Six-Month Periods
ended June 30, 1997, included in Part I hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule (filed electronically only)
</TABLE>
(b) Reports on Form 8-K:
None.
16
<PAGE> 18
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 13, 1997 /s/ R. M. BRIGHT
------------------------------------
R. M. Bright
Controller (Chief Accounting
Officer)
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------------------- ------------------------------------------------------------------------
<C> <S>
27 -- Financial Data Schedule (filed electronically only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,725
<SECURITIES> 0
<RECEIVABLES> 934,169
<ALLOWANCES> 20,529
<INVENTORY> 1,035,927
<CURRENT-ASSETS> 1,985,632
<PP&E> 3,493,453
<DEPRECIATION> 673,642
<TOTAL-ASSETS> 5,782,632
<CURRENT-LIABILITIES> 1,333,075
<BONDS> 1,673,812
0
0
<COMMON> 1
<OTHER-SE> 1,975,505
<TOTAL-LIABILITY-AND-EQUITY> 5,782,632
<SALES> 6,692,813
<TOTAL-REVENUES> 6,713,189
<CGS> 6,439,178
<TOTAL-COSTS> 6,532,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8,890
<INTEREST-EXPENSE> 64,791
<INCOME-PRETAX> 114,886
<INCOME-TAX> 29,351
<INCOME-CONTINUING> 85,535
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 85,535
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
