<PAGE> 1
================================================================================
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-14380
CITGO PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<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, 1998)
</TABLE>
================================================================================
<PAGE> 2
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, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS........................... 1
PART I. FINANCIAL INFORMATION....................................... 2
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -- March 31, 1998 and
December 31, 1997......................................... 3
Condensed Consolidated Statements of Income -- Three-Month
Periods Ended March 31, 1998 and 1997..................... 4
Condensed Consolidated Statements of Cash
Flows -- Three-Month Periods Ended March 31, 1998 and
1997...................................................... 5
Notes to the Condensed Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
PART II. OTHER INFORMATION........................................... 15
Item 1. Legal Proceedings........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................. 16
</TABLE>
i
<PAGE> 3
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.
1
<PAGE> 4
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
2
<PAGE> 5
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 26,604 $ 24,363
Accounts receivable....................................... 586,682 657,864
Due from affiliates....................................... 30,394 23,498
Inventories............................................... 824,159 857,598
Prepaid expenses and other................................ 19,074 9,658
---------- ----------
Total current assets.............................. 1,486,913 1,572,981
PROPERTY, PLANT AND EQUIPMENT -- Net........................ 2,849,531 2,849,262
RESTRICTED CASH............................................. 982 6,920
INVESTMENTS IN AFFILIATES................................... 809,281 813,923
OTHER ASSETS................................................ 178,628 168,949
---------- ----------
$5,325,335 $5,412,035
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans..................................... $ 80,000 $ 3,000
Accounts payable.......................................... 399,280 469,556
Payables to affiliates.................................... 155,057 197,852
Taxes other than income................................... 248,839 180,143
Other..................................................... 244,850 240,270
Current portion of long-term debt......................... 95,240 95,240
Current portion of capital lease obligation............... 13,140 13,140
---------- ----------
Total current liabilities......................... 1,236,406 1,199,201
LONG-TERM DEBT.............................................. 1,049,397 1,158,528
CAPITAL LEASE OBLIGATION.................................... 116,586 116,586
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 201,081 199,765
OTHER NONCURRENT LIABILITIES................................ 205,334 205,533
DEFERRED INCOME TAXES....................................... 433,998 423,242
MINORITY INTEREST........................................... 28,294 28,337
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 1,255,009
Retained earnings......................................... 799,229 825,833
---------- ----------
Total shareholder's equity........................ 2,054,239 2,080,843
---------- ----------
$5,325,335 $5,412,035
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
REVENUES:
Net sales................................................. $2,690,570 $3,205,347
Sales to affiliates....................................... 51,124 57,379
---------- ----------
2,741,694 3,262,726
Equity in earnings (losses) of affiliates -- net.......... 24,888 6,867
Other income (expense) -- net............................. 1,651 418
---------- ----------
2,768,233 3,270,011
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $1,109,733 and $972,205 from affiliates)............ 2,555,147 3,177,759
Selling, general and administrative expenses.............. 56,394 41,553
Interest expense, excluding capital lease................. 20,711 26,442
Capital lease interest charge............................. 3,649 3,980
Minority interest......................................... (42) 237
---------- ----------
2,635,859 3,249,971
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 132,374 20,040
INCOME TAXES................................................ 48,978 7,215
---------- ----------
NET INCOME.................................................. $ 83,396 $ 12,825
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED BY) OPERATING ACTIVITIES....... $ 191,626 $(37,780)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (52,060) (61,231)
Proceeds from sales of property, plant and equipment...... 201 10,904
Decrease in restricted cash............................... 5,938 2,759
Investments in LYONDELL-CITGO Refining Company Ltd........ -- (45,429)
Loans to LYONDELL-CITGO Refining Company Ltd.............. (7,000) --
Proceeds from sale of Petro-Chemical Transport............ 7,160 --
Investments in and advances to other affiliates........... (1,493) (240)
--------- --------
Net cash used in investing activities............. (47,254) (93,237)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans... 77,000 (41,000)
Net (repayments of) borrowings on revolving bank loans.... (100,000) 165,000
Payments on term bank loan................................ (7,353) (7,353)
Proceeds from capital leases.............................. -- 76
Dividends paid to parent.................................. (110,000) --
Repayments of other debt.................................. (1,778) (1,786)
--------- --------
Net cash (used by) provided by financing
activities...................................... (142,131) 114,937
--------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 2,241 (16,080)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 24,363 26,856
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 26,604 $ 10,776
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized................... $ 11,183 $ 16,345
========= ========
Income taxes, net of refund of $450 in 1997............ $ 69 $ 14,578
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 8
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 1997 and with respect to the interim
three-month periods ended March 31, 1998 and 1997 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, 1998 and 1997 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, 1997 on Form 10-K, dated March 26, 1998, 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").
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." The Company had
no items of other comprehensive income during the three-month periods ended
March 31, 1998 and 1997.
Certain reclassifications have been made to the March 31, 1997 financial
statements to conform with the classifications used at March 31, 1998.
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Refined products.................................... $614,009 $662,061
Crude oil........................................... 154,556 138,049
Materials and supplies.............................. 55,594 57,488
-------- --------
$824,159 $857,598
======== ========
</TABLE>
6
<PAGE> 9
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loan........................................ $ 35,000 $ 135,000
Term bank loan............................................. 51,470 58,823
7.875% Senior Notes $200 million face amount, due 2006..... 199,752 199,745
Private Placement:
8.75% Series A Senior Notes due 1998..................... 18,750 18,750
9.03% Series B Senior Notes due 1998 to 2001............. 114,286 114,286
9.30% Series C Senior Notes due 1998 to 2006............. 102,273 102,273
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
Louisiana wastewater facility revenue bonds due 2026..... 2,000 2,000
Taxable Louisiana wastewater facility revenue bonds due
2026..................................................... 118,000 118,000
Cit-Con bank credit agreement.............................. 26,786 28,571
---------- ----------
1,144,637 1,253,768
Less current portion of long-term debt..................... (95,240) (95,240)
---------- ----------
$1,049,397 $1,158,528
========== ==========
</TABLE>
On April 29, 1998, CITGO issued $25 million of Gulf Coast Industrial
Development Authority Solid Waste Disposal Revenue Bonds due 2028.
4. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims -- Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. 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 below, 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
reporting period. The term "reasonably possible" is used herein to mean that the
chance of a future
7
<PAGE> 10
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
transaction or event occurring is more than remote but less than likely.
However, based upon management's current assessments of these lawsuits and
claims and that provided by counsel in such matters, and the capital resources
available to the Company, management of the Company believes that the ultimate
resolution of these lawsuits and claims would not exceed by a material amount,
the aggregate of the amounts accrued in respect of such lawsuits and claims and
the insurance coverages available to the Company and, therefore, should not have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
Included among these lawsuits and claims is litigation against CITGO by a
number of current and former employees and applicants on behalf of themselves
and a class of similarly situated persons asserting claims under federal and
state laws of racial discrimination in connection with the employment practices
at CITGO's Lake Charles refining complex; the plaintiffs seek injunctive relief
and monetary damages and have appealed the Court's denial of class
certification; the initial trials relating to this litigation are not currently
included in the trial docket.
In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against UNO-VEN to assert claims against
CITGO, PDVSA, PDV America, PDVMR, and Unocal 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
terms and conditions of employment, but did not assume the existing labor
agreement. The union seeks compensation for monetary differences in medical,
pension and other benefits between the CITGO and UNO-VEN plans and reinstatement
of all of the UNO-VEN benefit plans. The union also seeks to require CITGO to
abide by the terms of the collective bargaining agreement between the union and
UNO-VEN.
On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected units
were shut down for repair and were returned to full service in early August,
1997. The Company has property damage, business interruption and general
liability insurance which related to this event. As a result, the property
damage and business interruption did not have a material adverse effect on the
Company's financial condition or results of operations. There are presently five
lawsuits against the Company pending in federal and state courts in Corpus
Christi, Texas, alleging property damages, personal injury and punitive damages
allegedly arising from the incident and other similar lawsuits have been
threatened. Approximately 6,000 individual claims have been received by the
Company allegedly arising from the incident.
Additionally, there is a class action lawsuit pending against the Company
and other operators and owners of nearby 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. The certification of this case as a class
action in 1995 was appealed by CITGO and other parties. 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. Two related personal
injury and wrongful death lawsuits were filed in 1996 and are in preliminary
stages of discovery at this time. In 1997, the Company signed an agreement to
settle the property damage class action lawsuit for approximately $17.3 million
which included the purchase of
8
<PAGE> 11
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
approximately 290 properties in an adjacent neighborhood. Of this amount, $15.7
million was expensed in 1997.
CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear the Company's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
the Company. For these reasons, the Company opposed the approval and enforcement
of the settlement agreement as proposed to be revised and enforcement has now
been stayed pending a ruling by the Texas Supreme Court. If the settlement
agreement is enforced, the Company could be liable for the full settlement
amount of $17.3 million less amounts related to properties acquired pursuant to
a previously announced independent purchase program. CITGO has entered into
agreements to acquire approximately 88% of the properties which were the subject
of the purchase provisions of the settlement agreement and to settle the related
property damage claims. Closings of these transactions are expected to occur
within the next twelve months.
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, 1998, the Company had $48.7 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 Company sites
including, but not limited to, the Company's operating refinery complexes,
former refinery sites, service stations and crude oil and petroleum product
storage terminals. The amount of such future expenditures, if any, is
indeterminable.
Derivative Commodity and Financial Instruments -- CITGO enters into
petroleum futures contracts primarily to reduce its inventory exposure to market
risk. CITGO also buys and sells commodity options for delivery and receipt of
crude oil and refined products. Such contracts are entered into through major
brokerage houses and traded on national exchanges and can be settled in cash or
through delivery of the commodity. Such contracts generally qualify for hedge
accounting and correlate to market price movements of crude oil and refined
products. Resulting gains and losses on such contracts, therefore, will
generally be offset by gains and losses on CITGO's hedged inventory or future
purchases and sales. Non-hedging activity in the first quarter of 1998, resulted
in an immaterial gain that was recorded in the current period.
CITGO has only limited involvement with other derivative financial
instruments and generally does not use them for trading purposes. Generally,
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, 1998, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $2.8 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.
9
<PAGE> 12
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) -- (CONTINUED)
The impact of these instruments on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented. Management considers
the market risk to the Company related to these instruments to be insignificant
during the periods presented.
5. RELATED PARTY TRANSACTIONS
On April 8, 1998, PDVSA Petroleo y Gas, S.A. notified CITGO and other
companies to whom it supplies crude oil of reductions in crude production as
well as a declaration of force majeure on its long-term crude supply contracts
pursuant to orders from the government of the Republic of Venezuela. The impacts
on CITGO include (i) a 25 thousand barrel per day reduction in crude supply to
its asphalt refineries; (ii) an increase in the specific gravity of the crude
oil supplied to its other refineries which precludes optimal use of the
Company's refining facilities; and (iii) an increase in the specific gravity of
the crude oil supplied to LYONDELL-CITGO which precludes optimal use of its
refining facilities. With respect to its asphalt operations, CITGO is attempting
to secure alternate asphalt supplies. With respect to its light fuels
refineries, CITGO is attempting to minimize the effect of the change in specific
gravity by seeking alternate supplies and by adjusting its operations. It is not
possible to determine the effect of this development on CITGO's operations
because of the uncertainties concerning the Company's ability to mitigate the
impact of the actions described above and the duration of this situation.
10
<PAGE> 13
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, 1997 on
Form 10-K, dated March 26, 1998, for additional information and a description of
factors which may cause substantial fluctuations in the earnings and cash flows
of CITGO.
In the first quarter ended March 31, 1998, CITGO generated net income of
$83.4 million on revenue of $2.8 billion compared to net income of $12.8 million
on revenues of $3.3 billion for the same period last year. This improvement is
due primarily to a general decline in the cost of goods sold, especially
reductions in the cost of crude oil, relative to the selling price of refined
products.
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues and
sales volumes for the three-month periods ended March 31, 1998 and 1997:
CITGO SALES REVENUES AND VOLUMES
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1998 1997 1998 1997
------ ------ ------ ------
($ IN MILLIONS) (MM GALLONS)
<S> <C> <C> <C> <C>
Gasoline............................................ $1,580 $1,821 3,159 2,637
Jet fuel............................................ 204 361 428 551
Diesel/#2 fuel...................................... 524 674 1,158 1,069
Petrochemicals, industrial products and other
products.......................................... 255 229 516 357
Asphalt............................................. 23 35 52 63
Lubricants and waxes................................ 108 104 55 54
------ ------ ----- -----
Total refined product sales............... 2,694 3,224 5,368 4,731
Other sales......................................... 48 39
------ ------ ----- -----
Total sales............................... $2,742 $3,263 5,368 4,731
====== ====== ===== =====
</TABLE>
The following table summarizes CITGO's cost of sales and operating expenses
for the three-month periods ended March 31, 1998 and 1997:
CITGO COST OF SALES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------ ------
($ IN MILLIONS)
<S> <C> <C>
Crude oil................................................... $ 482 $ 713
Refined products............................................ 1,457 1,942
Intermediate feedstocks..................................... 243 285
Refining and manufacturing costs............................ 191 194
Other operating costs and expenses and inventory changes.... 182 44
------ ------
Total cost of sales and operating expenses........ $2,555 $3,178
====== ======
</TABLE>
Sales revenues and volumes. Sales decreased $521 million, or approximately
16%, in the three-month period ended March 31, 1998 as compared to the same
period in 1997. Total sales volumes increased by 13% from 4,731 million gallons
in the first quarter of 1997 to 5,368 million gallons in the first quarter of
1998. The increase in volumes, offset by decreases in most product sales prices
resulted in the decrease in revenues.
11
<PAGE> 14
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel),
excluding bulk sales made for logistical reasons, increased by 1% in the first
quarter of 1998 as compared to the first quarter of 1997. Gasoline and diesel/#2
fuel, excluding bulk sales, had sales volume increases of 6% and 8%,
respectively, in the first quarter of 1998, compared to the first quarter of
1997. Jet fuel, excluding bulk sales, had a sales volume decrease of 28% in the
first quarter of 1998 compared to the first quarter of 1997. Gasoline sales
volumes increased due to successful marketing efforts, including the net
addition of 379 independently owned CITGO branded outlets since March 31, 1997.
Sales prices of gasoline, excluding bulk sales, have decreased for the
three-month period ended March 31, 1998 as compared to the same period in 1997.
The average decrease for the first quarter of 1998 over the first quarter of
1997 is 19 cents per gallon, or a 26% decrease. Sales prices of jet fuel and
diesel/#2 fuel, excluding bulk sales, decreased 18 cents, or 27% in the first
quarter of 1998 as compared to the same period in 1997.
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 $19 million, or 3%, from $684 million in the three-month period
ended March 31, 1997 to $703 million in the same period in 1998. The increase in
revenue for the quarter ended March 31, 1998 is a result of a 44% increase in
volumes and a 28% decrease in bulk sales prices between the quarters. Bulk sales
revenue of gasoline increased by $96 million, or 30% for the quarter ended March
31, 1998 as compared to the same period in 1997. The increase in gasoline bulk
sales is the result of an 81% increase in volumes offset by a 29% decrease in
price between the quarters. Bulk sales revenue of diesel/#2 fuel decreased by
$75 million, or 23% for the quarter ended March 31, 1998 as compared to the same
period in 1997. The decrease in diesel/#2 fuel bulk sales revenue is the result
of a 29% decrease in sales prices offset by an 8% increase in volumes between
the quarters.
Petrochemicals and industrial products sales revenues decreased 3% and
increased 40%, respectively, for the three months ended March 31, 1998 as
compared to the three months ended March 31, 1997. The petrochemicals revenue
decrease for the quarter was the result of a 26% decrease in unit sales price,
offset by a 31% increase in sales volume, as compared to the same period in
1997. The petrochemical sales volumes increased primarily because of increased
production of cumene and refinery grade propylene. The industrial products
revenue increase was the result of a 57% increase in sales volume and an 11%
decrease in unit sales prices for the first quarter of 1998 as compared to the
same period in 1997. The increase in industrial products sales volumes was due
to the purchase of product for sale from the PDVMR refinery.
Equity in earnings (losses) of affiliates -- net. Equity in earnings of
affiliates increased by $18 million overall for the three-month period ended
March 31, 1998, as compared to the same period in 1997. The increase was
primarily due to the change in equity in earnings of LYONDELL-CITGO Refining
Company Ltd. ("LYONDELL-CITGO"), which increased $18.2 million, from $1.1
million in the first quarter of 1997 to $19.3 million in the first quarter of
1998. This increase is due primarily to the change in CITGO's interest in
LYONDELL-CITGO, which increased from approximately 13% at March 31, 1997 to
approximately 42% on April 1, 1997 and to the improvement in LYONDELL-CITGO's
operations since completion of its refinery enhancement project during the first
quarter of 1997.
Other income (expense). Other income (expense) was $1.7 million for the
three month period ended March 31, 1998 as compared to $418 thousand for the
same period in 1997. The difference is primarily due to a $2.7 million gain on
the sale of Petro-Chemical Transport in the first quarter of 1998.
Cost of sales and operating expenses. Cost of sales and operating expenses
decreased by $623 million or 20%, in the quarter ended March 31, 1998, as
compared to the same period in 1997. Lower crude oil costs (a decrease from $713
million in the first quarter of 1997 to $482 million in the first quarter of
1998) resulted from a 41% decrease in crude prices, offset by a 15% increase in
crude oil run volumes. Refined product purchases decreased in 1998 as compared
to the comparable period in 1997 (down 25%, from $1,942 million to $1,457
million for the first quarter). The decrease resulted from a decrease in prices
(down 28% for the first quarter of 1998 as compared to the same period in 1997),
offset by an increase in refined product purchase volumes (up 4% for the first
quarter of 1998 as compared to the same period in 1997). Intermediate feedstock
12
<PAGE> 15
purchases decreased to $243 million in the first quarter of 1998 from $285
million in the first quarter of 1997. Intermediate feedstock prices decreased
30%, and volumes purchased increased 22% between the quarters ended March 31,
1997 and March 31, 1998. Refining and manufacturing costs decreased 2% in the
first quarter of 1998 as compared to the first quarter of 1997 (from $194
million to $191 million). Depreciation and amortization expense increased by $5
million, from $49 million to $54 million for the quarters ended March 31, 1997
and 1998, respectively.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 57% and 61% of total cost of sales and operating
expenses for the first quarters of 1998 and 1997 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 volume 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 and profit margins.
Gross margin. The gross margin (sales revenue less cost of sales and
operating expenses) for the three-month period ended March 31, 1998 was $187
million, or 6.8%, compared to $85 million, or 2.6%, for the same period in 1997.
The gross margin percentage in 1998 has been affected by a general decline in
the cost of goods sold, especially reductions in the cost of crude oil, relative
to the selling price of refined products.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the first quarter of 1998 by 36%, from $42
million in the first quarter of 1997 to $56 million in the first quarter of
1998. The increase is due primarily to salary and related burden allocations as
well as increases in advertising expense.
Interest expense. Interest expense decreased by approximately $6 million,
or 20% (from $30 million to $24 million), for the quarter ended March 31, 1998,
as compared to the same period in 1997.
Income taxes. Income taxes reported were based on an effective tax rate of
37% for the three month period ended March 31, 1998 and 36% for the comparable
period in 1997. The increase is due primarily to a decrease in the effective tax
rate impact of the dividend exclusion deduction offset in part by a decrease in
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended March 31, 1998, the Company's consolidated
net cash provided by operating activities totaled approximately $192 million.
Net income of $83 million and depreciation and amortization of $54 million were
augmented by net changes in other items of $55 million. The more significant
changes in other items included decreases in accounts receivable, inventory, and
accounts payable and other liabilities. The decline in accounts receivable is
primarily a result of a general decline in refined product selling prices during
the period. The decrease in inventory is primarily due to management's
initiatives during the first quarter to reduce inventory levels. The decrease in
accounts payable is primarily due to a decrease in the volume of domestic crude
oil purchased and a decrease in price.
Net cash used in investing activities totaled $47 million for the
three-month period ended March 31, 1998 consisting primarily of capital
expenditures of $52 million (compared to $61 million for the same period in
1997) and additional investments in and loans to LYONDELL-CITGO of $7 million
(compared to $45 million for the same period in 1997) offset by a decrease in
restricted cash of $6 million and proceeds from the sale of Petro-Chemical
Transport of $7 million.
Net cash used in financing activities totaled $142 million for the
three-month period ended March 31, 1998 consisting primarily of dividends paid
to parent of $110 million, $100 million net repayment on revolving
13
<PAGE> 16
bank loans and $7 million net repayment on a term loan, partially offset by
proceeds from short-term bank loans of $77 million.
As of March 31, 1998, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $640 million and $135 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. CITGO management 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, 1998.
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 on such contracts,
therefore, will generally be offset by gains and losses on CITGO's hedged
inventory or future purchases and sales. Non-hedging activity in the first
quarter of 1998, resulted in an immaterial gain that was recorded in the current
period.
CITGO has only limited involvement with other derivative financial
instruments and generally does not use them for trading purposes. Generally,
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, 1998, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $2.8 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.
RECENT DEVELOPMENTS
On April 8, 1998, PDVSA Petroleo y Gas, S.A. notified CITGO and other
companies to whom it supplies crude oil of reductions in crude production as
well as a declaration of force majeure on its long-term crude supply contracts
pursuant to orders from the government of the Republic of Venezuela. The impacts
on CITGO include (i) a 25 thousand barrel per day reduction in crude supply to
its asphalt refineries; (ii) an increase in the specific gravity of the crude
oil supplied to its other refineries which precludes optimal use of the
Company's refining facilities; and (iii) an increase in the specific gravity of
the crude oil supplied to LYONDELL-CITGO which precludes optimal use of its
refining facilities. With respect to its asphalt operations, CITGO is attempting
to secure alternate asphalt supplies. With respect to its light fuels
refineries, CITGO is attempting to minimize the effect of the change in specific
gravity by seeking alternate supplies and by adjusting its operations. It is not
possible to determine the effect of this development on CITGO's operations
because of the uncertainties concerning the Company's ability to mitigate the
impact of the actions described above and the duration of this situation.
14
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is a class action lawsuit pending against the Company and other
operators and owners of nearby 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. The certification of this case as a class action
in 1995 was appealed by CITGO and other parties. 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. Two related personal injury and
wrongful death lawsuits were filed in 1996 and are in preliminary stages of
discovery at this time. In 1997, the Company signed an agreement to settle the
property damage class action lawsuit for approximately $17.3 million which
included the purchase of approximately 290 properties in an adjacent
neighborhood. Of this amount, $15.7 million was expensed in 1997.
CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear the Company's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
the Company. For these reasons, the Company opposed the approval and enforcement
of the settlement agreement as proposed to be revised and enforcement has now
been stayed pending a ruling by the Texas Supreme Court. If the settlement
agreement is enforced, the Company could be liable for the full settlement
amount of $17.3 million less amounts related to properties acquired pursuant to
a previously announced independent purchase program. CITGO has entered into
agreements to acquire approximately 88% of the properties which were the subject
of the purchase provisions of the settlement agreement and to settle the related
property damage claims. Closings of these transactions are expected to occur
within the next twelve months.
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.
15
<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
/s/ R. M. BRIGHT
------------------------------------
R. M. Bright
Controller (Chief Accounting
Officer)
Date: May 8, 1998
16
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
27 -- Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,604
<SECURITIES> 0
<RECEIVABLES> 639,590
<ALLOWANCES> 22,514
<INVENTORY> 824,159
<CURRENT-ASSETS> 1,486,913
<PP&E> 3,641,724
<DEPRECIATION> 792,193
<TOTAL-ASSETS> 5,325,335
<CURRENT-LIABILITIES> 1,236,406
<BONDS> 1,049,397
0
0
<COMMON> 1
<OTHER-SE> 2,054,238
<TOTAL-LIABILITY-AND-EQUITY> 5,325,335
<SALES> 2,741,694
<TOTAL-REVENUES> 2,768,233
<CGS> 2,555,147
<TOTAL-COSTS> 2,611,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,000
<INTEREST-EXPENSE> 24,360
<INCOME-PRETAX> 132,374
<INCOME-TAX> 48,978
<INCOME-CONTINUING> 83,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,396
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
