<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 MARCH 31, 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)
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<S> <C>
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)
</TABLE>
(918) 495-4000
(Registrant's telephone number, including area code)
N.A.
(Former name, former address and former fiscal year, if changed since last
report)
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>
<S> <C>
COMMON STOCK, $1.00 PAR VALUE 1,000
(Class) (outstanding at April 30, 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 MARCH 31, 1997
TABLE OF CONTENTS
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PAGE
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<C> <S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.......................... 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- March 31, 1997 and
December 31, 1996......................................... 3
Condensed Consolidated Statements of Income -- Three-Month
Periods Ended March 31, 1997 and 1996..................... 4
Condensed Consolidated Statements of Cash
Flows -- Three-Month Periods Ended March 31, 1997 and
1996...................................................... 5
Notes to the Condensed Consolidated Financial Statements.... 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................ 16
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended, and Section 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
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,776 $ 26,856
Accounts receivable....................................... 894,991 1,004,098
Due from affiliates....................................... 31,691 27,738
Inventories............................................... 918,423 833,191
Prepaid expenses and other................................ 6,900 21,626
---------- ----------
Total current assets.............................. 1,862,781 1,913,509
PROPERTY, PLANT AND EQUIPMENT -- Net........................ 2,800,448 2,786,703
RESTRICTED CASH............................................. 6,610 9,369
INVESTMENTS IN AFFILIATES................................... 837,935 790,576
OTHER ASSETS................................................ 140,573 129,972
---------- ----------
$5,648,347 $5,630,129
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans..................................... $ 12,000 $ 53,000
Accounts payable.......................................... 445,600 530,505
Payables to affiliates.................................... 253,826 275,375
Taxes other than income................................... 189,333 200,863
Other..................................................... 215,278 219,648
Current portion of long-term debt......................... 95,240 95,240
Current portion of capital lease obligation............... 11,778 11,778
---------- ----------
Total current liabilities......................... 1,223,055 1,386,409
LONG-TERM DEBT.............................................. 1,624,607 1,468,738
CAPITAL LEASE OBLIGATION.................................... 129,726 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 179,973 183,370
OTHER NONCURRENT LIABILITIES................................ 192,462 194,802
DEFERRED INCOME TAXES....................................... 388,495 370,117
MINORITY INTEREST........................................... 26,868 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........................................ 1,235,009 1,235,009
Retained earnings......................................... 648,151 635,326
---------- ----------
Total shareholder's equity........................ 1,883,161 1,870,336
---------- ----------
$5,648,347 $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)
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<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1997 1996
---------- ----------
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REVENUES:
Net sales................................................. $3,205,347 $2,563,959
Sales to affiliates....................................... 57,379 43,236
---------- ----------
3,262,726 2,607,195
Equity in earnings (losses) of affiliates -- net.......... 6,867 8,380
Other income (expense) -- net............................. 418 (685)
---------- ----------
3,270,011 2,614,890
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses...................... 3,177,759 2,521,851
(including purchases of $972,205 and $875,829 from
affiliates)
Selling, general and administrative expenses.............. 41,553 43,128
Interest expense, excluding capital lease................. 26,442 21,392
Capital lease interest charge............................. 3,980 4,277
Minority interest......................................... 237 750
---------- ----------
3,249,971 2,591,398
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 20,040 23,492
INCOME TAXES................................................ 7,215 8,692
---------- ----------
NET INCOME.................................................. $ 12,825 $ 14,800
========== ==========
</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>
THREE MONTHS
ENDED MARCH 31,
---------------------
1997 1996
-------- ---------
<S> <C> <C>
CASH FLOWS USED BY OPERATING ACTIVITIES..................... $(37,780) $ (17,900)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (61,231) (100,400)
Proceeds from sales of property, plant and equipment...... 10,904 2,211
Decrease (increase) in restricted cash.................... 2,759 (14,384)
Investments in LYONDELL-CITGO Refining Company Ltd........ (45,429) (40,547)
Investments in and advances to other affiliates........... (240) --
-------- ---------
Net cash used in investing activities.................. (93,237) (153,120)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans... (41,000) 122,000
Net borrowings on revolving bank loans.................... 165,000 30,000
Payments on term bank loan................................ (7,353) (7,353)
Proceeds from issuance of tax-exempt bonds................ -- 25,000
Proceeds from capital leases.............................. 76 87
Repayments of other debt.................................. (1,786) (1,786)
-------- ---------
Net cash provided by financing activities......... 114,937 167,948
-------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (16,080) (3,072)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 26,856 19,863
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 10,776 $ 16,791
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized................... $ 16,345 $ 23,036
======== =========
Income taxes, net of refund of $450 in 1997............ $ 14,578 $ 4,990
======== =========
</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-MONTH PERIODS ENDED MARCH 31, 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-month periods ended March 31, 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 periods
ended March 31, 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 March 31, 1996 financial
statements to conform with the classifications used at March 31, 1997.
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
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<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(000'S OMITTED)
<S> <C> <C>
Refined products............................................ $680,137 $616,527
Crude oil................................................... 185,688 165,564
Materials and supplies...................................... 52,598 51,100
-------- --------
$918,423 $833,191
======== ========
</TABLE>
6
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan........................................ $ 515,000 $ 350,000
Term bank loan............................................. 80,882 88,235
7.875% Senior Notes $200 million face amount, due 2006..... 199,722 199,715
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.............................. 33,929 35,714
---------- ----------
1,719,847 1,563,978
Less current portion of long-term debt..................... (95,240) (95,240)
---------- ----------
$1,624,607 $1,468,738
========== ==========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims in the ordinary
course of business are pending against the Company. Included among these are:
(i) litigation with a contractor who is claiming additional compensation of
approximately $42 million, including interest and profits, for sludge removal
and treatment at CITGO's Lake Charles, Louisiana refinery; a portion of any
damages awarded would be paid by a former owner; CITGO is seeking contractual
penalties for nonperformance and breach of contract; a trial is currently
scheduled for 1998; and (ii) 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
7
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on the trial docket.
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 the aggregate of the
amounts accrued in respect of such lawsuits and claims and the insurance
coverages available to the Company by a material amount and, therefore, should
not have a material adverse effect on the Company's financial condition, results
of operations or liquidity.
Environmental Compliance and Remediation -- The Company is subject to
various Federal, state and local environmental laws and regulations which may
require the Company to take 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 March 31, 1997, the Company had $54 million of environmental accruals
included in other noncurrent liabilities. Based on currently available
information, including the continuing participation of former owners in
remediation actions, management believes these accruals are adequate. Conditions
which require additional expenditures may exist for various sites of the Company
including, but not limited to, operating refinery complexes, former refinery
sites, service stations and crude oil and petroleum product storage terminals.
The amount of such future expenditures, if any, is indeterminable.
Recent Developments Relating to Environmental Compliance -- Recent
developments relating to environmental compliance and remediation matters
include the following: (i) During 1994 and 1995, CITGO Asphalt Refining Company
("CARCO") received two Notices of Violation ("NOV") and two Compliance Orders
from the Environmental Protection Agency ("EPA") relating to the operation of
certain units at the Paulsboro Refinery; a Consent Order resolving these issues
was entered by a federal court in February, 1997; under the terms of the Consent
Order, CARCO paid a $1,230,000 penalty; the Consent Order will terminate January
30, 1998; and (ii) on September 30, 1996, CITGO received an NOV from the 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 applicable
oxygen content. The EPA has not yet proposed penalties, but CITGO anticipates
the proposed penalty could possibly exceed $100,000. CITGO does not expect that
such penalties will have a material adverse effect on its financial condition,
results of operations or liquidity.
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
8
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and refined products. Resulting gains and losses on such contracts, 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 March 31, 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
gain of $0.3 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.
5. SUBSEQUENT EVENTS
CITGO's interest in LYONDELL-CITGO Refining Company Ltd. at December 31,
1996 approximated 13%, which increased to approximately 42% on April 1, 1997 in
accordance with the agreements concerning such interest. CITGO has an option,
for 18 months after the completion date and for an additional investment, to
increase its participation interest up to a maximum of 50%.
On May 1, 1997, PDV America, Inc. and Unocal Corporation closed a
transaction relating to The Uno-Ven Company, a midwest refining and marketing
partnership held equally between affiliates of PDV America, Inc. and Unocal. The
transaction involves the transfer of certain assets and liabilities to PDV
Midwest Refining, L.L.C., a PDV America, Inc. affiliate. CITGO has entered into
agreements to operate the assets which include: a 153,000 barrel per day, high
conversion refinery in Lemont, Illinois; a lubricants blending plant in
Cincinnati, Ohio; twelve light oils and lubricants terminals located in the
Midwest; a 25 percent interest in a needle coke facility at the refinery; and
108 branded, retail gasoline outlets.
On May 12, 1997 an explosion and fire occurred at CITGO's Corpus Christi
Refinery. There were no reports of serious injuries to workers in the plant. The
affected units are not currently operating. The Company is conducting an
investigation into the cause of the event and the extent of the resulting
damage. The financial effects of this event are not presently determinable.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the unaudited condensed
consolidated financial statements of CITGO included elsewhere herein.
Petroleum industry operations and profitability are influenced by a large
number of factors, some of which individual petroleum refining and marketing
companies have little control over. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products, and, in some cases, limiting
their profits directly. Demand for crude oil and refined products is largely
driven by the condition of local and worldwide economies, although weather
patterns and taxation relative to other energy sources also play a significant
part. Due to the seasonality of refined products markets and refinery
maintenance schedules, results of operations for any quarter of a calendar year
are not necessarily indicative of results to be expected for a full year.
CITGO's consolidated operating results are affected by these industry factors
and by Company-specific factors, such as the success of wholesale marketing
programs and refinery operations.
The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of CITGO.
In general, prices for refined products are significantly influenced by the
price of crude oil, feedstocks and blending components. Although an increase or
decrease in the price for crude oil, feedstocks and blending components
generally results in a corresponding increase or decrease in prices for refined
products, generally there is a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on CITGO's consolidated operating results therefore depends in
part on how quickly refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a corresponding
increase in refined product prices, a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, or
a substantial or prolonged decrease in demand for refined products could have a
significant negative effect on the Company's earnings and cash flows. CITGO
purchases a significant amount of its crude oil requirements from PDVSA or
subsidiaries thereof under long-term supply agreements (expiring in the years
2006 through 2013). These supply agreements are designed to reduce the
volatility of earnings and cash flows from CITGO's refining operations by
providing a relatively stable level of gross margin on crude oil supplied by
PDVSA. This supply represented approximately two-thirds of the crude oil
processed in refineries operated by CITGO in the three months ended March 31,
1997. However, CITGO also purchases significant volumes of refined products to
supplement the production from its refineries to meet marketing demands and to
resolve logistical issues. CITGO's earnings and cash flows are also affected by
the cyclical nature of petrochemical prices. Inflation was not a significant
factor in the operations of CITGO during 1996 or during the first three months
of 1997. As a result of these factors, the earnings and cash flows of CITGO may
experience substantial fluctuations.
10
<PAGE> 12
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues and
sales volumes for the three-month periods ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1997 1996 1997 1996
------ ------ ------ ------
($ IN MILLIONS) (MM GALLONS)
<S> <C> <C> <C> <C>
Gasoline.............................................. $1,821 $1,482 2,637 2,509
Jet fuel.............................................. 361 323 551 530
Diesel/#2 fuel........................................ 674 453 1,069 794
Petrochemicals, industrial products and other
products............................................ 229 189 357 334
Asphalt............................................... 35 13 63 32
Lubricants and waxes.................................. 104 101 54 52
------ ------ ----- -----
Total refined product sales................. $3,224 $2,561 4,731 4,251
Other sales........................................... 39 46
------ ------ ----- -----
Total sales................................. $3,263 $2,607 4,731 4,251
====== ====== ===== =====
</TABLE>
The following table summarizes CITGO's cost of sales and operating expenses
for the three-month periods ended March 31, 1997 and 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
($ IN MILLIONS)
<S> <C> <C>
Crude oil................................................... $ 713 $ 617
Refined products............................................ 1,942 1,378
Intermediate feedstocks..................................... 285 197
Refining and manufacturing costs............................ 200 195
Other operating costs and expenses and inventory changes.... 38 135
------ ------
Total cost of sales and operating expenses........ $3,178 $2,522
====== ======
</TABLE>
Sales revenues and volumes. Sales increased $656 million, or approximately
25%, in the three-month period ended March 31, 1997 as compared to the same
period in 1996. Total sales volumes increased by 11% from 4,251 million gallons
in the first quarter of 1996 to 4,731 million gallons in the first quarter of
1997. The increase in volumes, coupled with increases in most product sales
prices resulted in the increase in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 5% in the first
quarter of 1997 as compared to the first quarter of 1996. Gasoline, jet fuel and
diesel/#2 fuel , excluding bulk sales, had sales volume increases of 2%, 9% and
11%, respectively, in the first quarter of 1997, compared to the first quarter
of 1996. Gasoline sales volumes increased due to successful marketing efforts,
including the net addition of 397 independently owned CITGO branded retail
outlets since March 31, 1996, bringing the total number of CITGO branded retail
outlets to 14,556 at March 31, 1997 (17 of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, have been higher for the
three-month period ended March 31, 1997 as compared to the same period in 1996.
The average increase for the first quarter of 1997 over the first quarter of
1996 is 10 cents per gallon, or a 17% increase. Sales prices of jet fuel and
diesel/#2 fuel, excluding bulk sales, increased 7 cents and 5 cents per gallon,
respectively, or 13% and 8%, respectively, in the first quarter of 1997 as
compared to 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
increased by $260 million, or 61%, from $424 million in the three-month period
ended March 31, 1996 to $684 million in the same period in 1997. The increase in
revenue for the
11
<PAGE> 13
quarter ended March 31, 1997 is a result of an 18% increase in bulk sales prices
and a 36% increase in volumes between the quarters. Bulk sales revenue of
diesel/#2 fuel alone increased by $157 million, or 94% for the first quarter
ended March 31, 1997 as compared to the same period in 1996. The increase in
diesel/#2 fuel bulk sales revenue is the result of a 69% increase in volumes
combined with a 15% increase in sales prices between the quarters.
Petrochemicals and industrial products sales revenues increased 32% and
decreased 4%, respectively, for the three months ended March 31, 1997 as
compared to the three months ended March 31, 1996. The petrochemicals revenue
increase for the quarter was the result of a 7% increase in volume, and a 24%
increase in unit sales price, as compared to the same period in 1996. The
industrial products revenue decrease was the result of a less than 1% increase
in unit sales price and a 5% decrease in volumes for the first quarter of 1997
as compared to the same period in 1996.
Asphalt sales revenues in the first quarter of 1997 were $22 million higher
and sales volumes were 97% higher as compared to the same period in 1996.
Asphalt sales prices increased 37% in the first quarter of 1997, as compared to
the same period in 1996.
Equity in earnings (losses) of affiliates -- net. Equity in earnings of
affiliates decreased by $1.5 million overall for the three-month period ended
March 31, 1997 as compared to the same period in 1996. The decrease was
primarily due to the change in the equity in earnings of two affiliates. Equity
in the earnings of LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO")
decreased $2.5 million, from $3.6 million in the first quarter of 1996 to $1.1
million in the first quarter of 1997. This decrease is due primarily to a
decline in refining margins on non-Venezuelan crude oil and declines in the
profitability of petrochemicals and lubricants. The decrease was partially
offset by an increase in the equity in earnings of NISCO of $1.4 million, from a
loss of $2.2 million in the first three months of 1996 to a loss of $0.8 million
in the first three months of 1997.
Other income (expense). Other income (expense) was $418 thousand for the
three month period ended March 31, 1997 as compared to $(685) thousand for the
same period in 1996. The difference is primarily due to 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 $656 million or 26%, in the quarter ended March 31, 1997, as
compared to the same period in 1996. Higher crude oil costs (an increase from
$617 million in the first quarter of 1996 to $713 million in the first quarter
of 1997) resulted from a 17% increase in crude prices, offset by a 1% decrease
in crude oil volumes purchased. Refined product purchases increased in 1997 as
compared to the comparable period in 1996 (up 41%, from $1,378 million to $1,942
million for the first quarter). The increase resulted from an increase in
refined product purchase volumes (up 21% for the first quarter of 1997 as
compared to the same period in 1996), and an increase in prices (up 17% for the
first quarter of 1997 as compared to the same period in 1996). Intermediate
feedstock purchases increased to $285 million in the first quarter 1997 from
$197 million in the first quarter of 1996. Intermediate feedstock volumes
purchased increased 22%, and prices increased 18% between the quarters ended
March 31, 1996 and March 31, 1997. Refining and manufacturing costs increased 3%
in the first quarter of 1997 as compared to the first quarter of 1996 (from $195
million to $200 million). Depreciation and amortization expense increased by $5
million, from $44 million to $49 million for the quarters ended March 31, 1996
and 1997, respectively. Increased capital expenditures are expected to continue
to result in increases in depreciation expense.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 61% and 55% of total cost of sales and operating
expenses for the first quarters of 1997 and 1996 respectively. CITGO estimates
that margins on purchased products, on average, are somewhat lower than margins
on produced products due to the fact that CITGO can only receive the marketing
portion of the total margin received on the produced refined products. However,
purchased products are not segregated from CITGO's produced products and margins
may vary due to market conditions and other factors beyond the Company's
control. As such, it is difficult to measure the effects on profitability of
changes in volumes of purchased products. CITGO anticipates that its purchased
refined product requirements will continue to increase to meet marketing
12
<PAGE> 14
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 and profit margins.
Gross margin. The gross margin for the three-month period ended March 31,
1997 was $85 million, or 2.6%, compared to $85 million, or 3.3%, for the same
period in 1996. The gross margin percentage in 1997 has been adversely affected
by the increased volumes of refined products purchased as a percentage of sales
volume. In addition, unscheduled outages at both the Lake Charles refinery and
the Corpus Christi refinery reduced production of refined products. In order to
satisfy customer demand, it was necessary for CITGO to purchase additional
volumes of refined products.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased in the first quarter of 1997 by 2%, from $43
million in the first quarter of 1996 to $42 million in the first quarter of
1997.
Interest expense. Interest expense increased by approximately $4 million,
or 15% (from $26 million to $30 million), for the first quarter ended March 31,
1997, as compared to the same period in 1996. This increase is due primarily to
an increase in the amount of debt outstanding during the first quarter 1997
compared to the first quarter 1996.
Income taxes. Income taxes reported were based on an effective tax rate of
36% for the three month period ended March 31, 1997 and 37% for the comparable
period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended March 31, 1997, the Company's consolidated
net cash used in operating activities totaled approximately $38 million. Net
income of $12.8 million and depreciation and amortization of $48.9 million were
reduced by net changes in other items of $99 million. The more significant
changes in other items included a decrease in accounts receivable (including
amounts due from affiliates) of $101 million and an increase in interest payable
of $14 million, which were offset by decreases in accounts payable (including
amounts due to affiliates) of $110 million, increases in inventory of $85
million and a decrease in other liabilities of $6 million. The decrease in
accounts receivable is due primarily to a decrease in refined product and crude
oil receivables. The decrease in crude oil receivables is a result of a decrease
in crude oil sales volumes and prices in March 1997 compared to December 1996.
The decrease in refined product receivables is due to a decrease in refined
product sales volumes and prices in March 1997 compared to December 1996. Crude
oil inventories have increased due to unscheduled outages at both the Corpus
Christi and Lake Charles refineries. Refined products inventories have increased
following typical declines in inventory balances at year-end despite decreases
in refined product prices during the first quarter as compared to year-end. In
addition, distillates inventory remained higher than normal due to lower sales
of fuel oil as a result of a warmer than expected winter in the Northeast. The
decrease in accounts payable is due primarily to the decrease in crude oil
volumes purchases and costs.
Net cash used in investing activities of $93 million for the three-month
period ended March 31, 1997 included capital expenditures of $61 million
(compared to $100 million for the same period in 1996) and additional
investments in LYONDELL-CITGO of $45 million (compared to $41 million for the
same period in 1996) offset by proceeds from the sale of property, plant and
equipment of $11 million and a decrease in restricted cash of $3 million.
Net cash provided by financing activities of $115 million for the
three-month period ended March 31, 1997 included proceeds of $165 million from a
revolving bank loan and repayments of $41 million on short term borrowing
facilities, repayments of $7 million on the Company's term loan and repayments
of $2 million of other debt.
13
<PAGE> 15
As of March 31, 1997, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $160 million and $168 million of uncommitted
short-term borrowing facilities with various banks. Additionally, the remaining
$400 million from CITGO's shelf registration with the Securities and Exchange
Commission for $600 million of debt securities may be offered and sold from time
to time. 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,
including the issuance of debt securities. The Company's ability to obtain such
financing will depend on numerous factors, including market conditions and the
perceived creditworthiness of the Company at that time.
The Company believes that it is in material compliance with its obligations
under its debt financing arrangements at March 31, 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 March 31, 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
gain of $0.3 million. In connection with the determination of said fair market
value, CITGO considered the creditworthiness of the counterparties, but no
adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and operating expenses
and pretax earnings was immaterial for all periods presented. Management
considers the market risk to the Company related to these instruments to be
insignificant during the periods presented.
14
<PAGE> 16
PART II. OTHER INFORMATION
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:
On January 8, 1997, CITGO filed a Report on Form 8-K relating to the
announcement that its parent company, PDV America, Inc., had signed a letter of
intent with Union Oil Company of California for the restructuring of the UNO-VEN
Company's refining and marketing business.
15
<PAGE> 17
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: May 13, 1997 /s/ R. M. BRIGHT
------------------------------------
R. M. Bright
Controller (Chief Accounting
Officer)
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
27 -- Financial Data Schedule (filed electronically only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,776
<SECURITIES> 0
<RECEIVABLES> 945,139
<ALLOWANCES> 18,457
<INVENTORY> 918,423
<CURRENT-ASSETS> 1,862,781
<PP&E> 3,434,490
<DEPRECIATION> 634,042
<TOTAL-ASSETS> 5,648,347
<CURRENT-LIABILITIES> 1,223,055
<BONDS> 1,624,607
<COMMON> 1
0
0
<OTHER-SE> 1,883,160
<TOTAL-LIABILITY-AND-EQUITY> 5,648,347
<SALES> 3,262,726
<TOTAL-REVENUES> 3,270,011
<CGS> 3,177,759
<TOTAL-COSTS> 3,219,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,989
<INTEREST-EXPENSE> 30,422
<INCOME-PRETAX> 20,040
<INCOME-TAX> 7,215
<INCOME-CONTINUING> 12,825
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,825
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
