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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, 1999
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 (I. R. S. Employer Identification No.)
of incorporation or organization)
</TABLE>
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
(Address of principal executive office) (Zip Code)
(918) 495-4000
(Registrant's telephone number, including area code)
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, 1999)
</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, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.......................... 1
PART I. FINANCIAL INFORMATION
Item Financial Statements (Unaudited)
1.
Condensed Consolidated Balance Sheets -- March 31, 1999 and
December 31, 1998........................................... 2
Condensed Consolidated Statements of Income -- Three-Month
Periods Ended March 31, 1999 and 1998....................... 3
Condensed Consolidated Statement of Shareholder's
Equity -- Three-Month Period Ended March 31, 1999........... 4
Condensed Consolidated Statements of Cash
Flows -- Three-Month Periods Ended March 31, 1999 and
1998........................................................ 5
Notes to the Condensed Consolidated Financial Statements.... 6
Item Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................... 10
Item Quantitative and Qualitative Disclosures About Market
3. Risk........................................................ 14
PART II. OTHER INFORMATION
Item Legal Proceedings........................................... 17
1.
Item Exhibits and Reports on Form 8-K............................ 18
6.
SIGNATURES............................................................ 19
</TABLE>
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 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 Year 2000 matters, 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
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 42,171 $ 30,338
Accounts receivable....................................... 564,393 540,501
Due from affiliates....................................... 34,824 33,780
Inventories............................................... 860,777 719,625
Deferred income taxes..................................... -- 65,234
Prepaid expenses and other................................ 43,235 18,317
---------- ----------
Total current assets.............................. 1,545,400 1,407,795
PROPERTY, PLANT AND EQUIPMENT -- Net........................ 2,862,591 2,860,427
RESTRICTED CASH............................................. 9,602 9,436
INVESTMENTS IN AFFILIATES................................... 767,131 781,481
OTHER ASSETS................................................ 200,272 195,113
---------- ----------
$5,384,996 $5,254,252
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans..................................... $ 40,000 $ 37,000
Accounts payable.......................................... 368,537 384,532
Payables to affiliates.................................... 222,133 141,607
Taxes other than income................................... 277,493 219,642
Other..................................................... 192,518 209,327
Current portion of long-term debt......................... 47,078 47,078
Current portion of capital lease obligation............... 14,660 14,660
---------- ----------
Total current liabilities......................... 1,162,419 1,053,846
LONG-TERM DEBT.............................................. 1,187,492 1,259,270
CAPITAL LEASE OBLIGATION.................................... 101,926 101,926
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS................. 204,168 200,281
OTHER NONCURRENT LIABILITIES................................ 214,988 219,466
DEFERRED INCOME TAXES....................................... 551,372 543,464
MINORITY INTEREST........................................... 29,972 29,559
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
Common stock -- $1.00 par value, 1,000 shares authorized,
issued and outstanding................................. 1 1
Additional capital........................................ 1,312,616 1,312,616
Retained earnings......................................... 620,042 533,823
---------- ----------
Total shareholder's equity........................ 1,932,659 1,846,440
---------- ----------
$5,384,996 $5,254,252
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
2
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
REVENUES:
Net sales................................................. $2,229,816 $2,690,570
Sales to affiliates....................................... 26,650 51,124
---------- ----------
2,256,466 2,741,694
Equity in earnings of affiliates.......................... 9,605 24,888
Other income (expense) -- net............................. (2,390) 1,651
---------- ----------
2,263,681 2,768,233
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $947,499 and $1,109,733 from affiliates)............ 2,048,612 2,555,147
Selling, general and administrative expenses.............. 54,161 56,394
Interest expense, excluding capital lease................. 20,361 20,711
Capital lease interest charge............................. 3,279 3,649
Minority interest......................................... 413 (42)
---------- ----------
2,126,826 2,635,859
---------- ----------
INCOME BEFORE INCOME TAXES.................................. 136,855 132,374
INCOME TAXES................................................ 50,636 48,978
---------- ----------
NET INCOME.................................................. $ 86,219 $ 83,396
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
--------------- ADDITIONAL RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998................ 1 $1 $1,312,616 $533,823 $1,846,440
Net Income................................ -- -- -- 86,219 86,219
-- -- ---------- -------- ----------
BALANCE, MARCH 31, 1999................... 1 $1 $1,312,616 $620,042 $1,932,659
== == ========== ======== ==========
</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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES........................ $135,357 $191,626
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (55,355) (52,060)
Proceeds from sales of property, plant and equipment...... 775 201
(Increase) decrease in restricted cash.................... (166) 5,938
Loans to LYONDELL-CITGO Refining LP....................... -- (7,000)
Proceeds from sale of Petro-Chemical Transport............ -- 7,160
Investments in and advances to other affiliates........... -- (1,493)
-------- --------
Net cash used in investing activities............. (54,746) (47,254)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans................... 3,000 77,000
Net repayments of revolving bank loans.................... (70,000) (100,000)
Payments on term bank loans............................... -- (7,353)
Dividends paid to Parent (PDV America).................... -- (110,000)
Repayments of other debt.................................. (1,778) (1,778)
-------- --------
Net cash used in financing activities............. (68,778) (142,131)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 11,833 2,241
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 30,338 24,363
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 42,171 $ 26,604
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized................... $ 12,738 $ 11,183
======== ========
Income taxes........................................... $ 456 $ 69
======== ========
</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, 1999 AND 1998
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 1998 and with respect to the interim
three-month periods ended March 31, 1999 and 1998 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, 1999 and 1998 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, 1998 on Form 10-K, dated March 17, 1999, 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").
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Refined products............................................ $647,193 $539,675
Crude oil................................................... 154,084 123,927
Materials and supplies...................................... 59,500 56,023
-------- --------
$860,777 $719,625
======== ========
</TABLE>
Inventories at December 31, 1998 were carried at estimated net market value
which was $159 million lower than historical cost. At March 31, 1999 estimated
net market values exceeded historical cost, and accordingly, no valuation
reserve was necessary.
6
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(UNAUDITED)
(000'S OMITTED)
<S> <C> <C>
Revolving bank loans........................................ $ 95,000 $ 165,000
7.875% Senior Notes $200 million face amount, due 2006...... 199,784 199,776
Private Placement:
9.03% Series B Senior Notes due 1999 to 2001.............. 85,714 85,714
9.30% Series C Senior Notes due 1999 to 2006.............. 90,909 90,909
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
Louisiana wastewater facility revenue bonds due 2026...... 12,000 12,000
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
Gulf Coast solid waste facility revenue bonds due 2028.... 25,000 25,000
Industrial development facilities revenue bonds due
2028................................................... 22,200 22,200
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026................................. 25,000 25,000
Taxable Bonds:
Louisiana wastewater facility revenue bonds due 2026...... 108,000 108,000
Gulf Coast environmental facilities revenue bonds due
2028................................................... 100,000 100,000
Cit-Con bank credit agreement............................... 19,643 21,429
---------- ----------
1,234,570 1,306,348
Current portion of long-term debt........................... (47,078) (47,078)
---------- ----------
$1,187,492 $1,259,270
========== ==========
</TABLE>
On April 15, 1999, CITGO issued $25 million of tax exempt revenue bonds due
2029. The proceeds were used to redeem $25 million of the taxable Gulf Coast
environmental facilities 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 records
accruals for potential losses when, in management's opinion, such losses are
probable and reasonably estimable. If known lawsuits and claims were to be
determined in a manner adverse to the Company, and in amounts greater than the
Company's accruals, then
7
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
such determinations could have a material adverse effect on the Company's
results of operations in a given reporting period. However, in management's
opinion the ultimate resolution of these lawsuits and claims will not exceed, by
a material amount, the amount of the accruals and the insurance coverage
available to the Company. This opinion is based upon management's and counsel's
current assessment of these lawsuits and claims. The most significant lawsuits
and claims are discussed below.
The Oil Chemical and Atomic Workers, Local 7-517 (the "Union") asserted
claims in federal court against CITGO, PDVSA, PDV America, PDVMR, UNO-VEN and
Unocal pursuant to the Labor Management Relations Act. The Union alleges that
CITGO and the other defendants are bound by the terms of a collective bargaining
agreement between UNO-VEN and the Union covering certain employees at a refinery
in Lemont, Illinois. This refinery was acquired by PDVMR on May 1, 1997 in a
transaction involving the former partners of UNO-VEN. Pursuant to an operating
agreement with PDVMR, CITGO became the operator of this refinery and employed
the substantial majority of the employees previously employed by UNO-VEN
pursuant to its initial terms and conditions of employment, but CITGO did not
assume the existing labor agreement. The Union sought monetary compensation for
certain differences in employee benefits and reinstatement of all of the UNO-VEN
benefit plans and to require CITGO to abide by the terms of the collective
bargaining agreement between the Union and UNO-VEN. In March 1999, the federal
appeals court affirmed the trial court's grant of the motions for summary
judgment filed by CITGO and the other defendants. The Union has stated that it
will not seek review of this decision by the U.S. Supreme Court. This
effectively terminated this matter.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property damage
related to the above noted incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively are not material.
There are presently four lawsuits pending against CITGO in federal and state
courts alleging property damages, personal injury and punitive damages. The
Company expects that additional lawsuits will be filed. A trial in one of the
federal court lawsuits in October 1998 involving ten bellwether plaintiffs, out
of approximately 400 plaintiffs, resulted in a verdict for CITGO. The remaining
plaintiffs in this case have agreed to settle for an immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO and other operators and owners of nearby industrial facilities
which claims damages for reduced value of residential properties located in the
vicinity of the industrial facilities as a result of air, soil and groundwater
contamination. Trial is scheduled for January 2000. In 1997, CITGO offered to
purchase about 275 properties in a neighborhood adjacent to CITGO's Corpus
Christi refinery, which were included in the lawsuit. Related to this offer,
$15.7 million was expensed in 1997. To date, CITGO has reached agreements to buy
all but 15 of such properties, which include settlements of property damage
claims, and has offers open to purchase the remaining properties. Two related
personal injury and wrongful death lawsuits were filed against the same
defendants in 1996 and are scheduled for trial in 2000.
Litigation is pending in federal court in Lake Charles, Louisiana, against
CITGO by a number of current and former Lake Charles refinery employees and
applicants asserting claims of racial discrimination in connection with CITGO's
employment practices. Trials in this case are set to begin in the fall of 1999.
CITGO is among defendants to lawsuits in California and North Carolina
alleging contamination of water supplies by methyl tertiary butyl ether
("MTBE"), a component of gasoline. The action in California was filed in
November 1998 by the South Tahoe Public Utility District and CITGO was added as
a defendant in February 1999. The North Carolina case, filed in January 1999, is
a putative class action on behalf of owners of water wells and other drinking
water supplies in the state. Both actions allege that MTBE poses public health
risks. Both actions seek damages as well as remediation of the alleged
contamination. These
8
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CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
matters are in early stages and there has been no discovery conducted against
CITGO. CITGO has denied all of the allegations and is pursuing its defenses.
Environmental Compliance and Remediation -- CITGO is subject to various
federal, state and local environmental laws and regulations which may require
CITGO to take action to correct or improve the effects on the environment of
prior disposal or release of petroleum substances by CITGO 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.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. Based on currently available information, including the continuing
participation of former owners in remediation actions and indemnification
agreements with third parties, CITGO believes that its accruals are sufficient
to address its environmental clean-up obligations.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, CITGO's operating refinery
complexes, closed refineries, 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, options and other over-the-counter commodity
derivatives, primarily to reduce its inventory exposure to market risk. Such
contracts are generally 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. In the
three-month period ended March 31, 1999, there was no non-hedging activity.
CITGO has only limited involvement with other derivative financial
instruments and does not currently use them for trading purposes. 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, 1999, 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 $3.6
million. In connection with the determination of fair market value, the Company
considers the creditworthiness of the counterparties, but no adjustment was
determined to be necessary as a result.
The impact of these instruments on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented. Management considers
the market risk to the Company related to these instruments to be insignificant
during the periods presented.
5. RELATED PARTY TRANSACTIONS
As of February 1, 1999, PDVSA Petroleo y Gas, S. A. has reduced deliveries
of crude oil to CITGO by approximately 15 percent under the force majeure
clauses of its four long-term crude oil supply contracts with CITGO. The Company
has been required to obtain alternative sources of crude oil supply in
replacement. As a result, CITGO estimates that margins in the quarter ended
March 31, 1999 were reduced by an immaterial amount, but due to the complexity
of the factors effecting crude oil and refined product prices, it is not
possible to forecast future financial impacts of this reduction on CITGO
margins. CITGO has been advised by PDVSA Petroleo y Gas, S.A. that effective May
1, 1999, there will be further reductions of deliveries of crude oil under the
same force majeure clauses. At this time, it is not possible to forecast the
duration of the force majeure.
In April 1999, the Company declared and paid a $15 million dividend.
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. Reference
is made to CITGO's Annual Report for the fiscal year ended December 31, 1998 on
Form 10-K, dated March 17, 1999, 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, 1999, CITGO generated net income of
$86.2 million on revenue of $2.3 billion compared to net income of $83.4 million
on revenues of $2.8 billion for the same period last year. Gross margin for the
first quarter of 1999 benefited from the sale of inventories that were written
down by $159 million at December 31, 1998, to reflect market prices at that
time. At March 31, 1999, estimated net market value of inventories exceeded
historical cost and, accordingly, no write down of inventories was required.
(See "Gross margin").
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues and
sales volumes for the three-month periods ended March 31, 1999 and 1998:
CITGO SALES REVENUES AND VOLUMES
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
($ IN MILLIONS) (MM GALLONS)
<S> <C> <C> <C> <C>
Gasoline............................................. $1,256 $1,580 3,101 3,159
Jet fuel............................................. 191 204 536 428
Diesel/#2............................................ 452 524 1,309 1,158
Asphalt.............................................. 26 23 70 52
Petrochemicals and industrial products............... 196 255 577 516
Lubricants and waxes................................. 119 108 68 55
------ ------ ----- -----
Total refined product sales................ 2,240 2,694 5,661 5,368
Other sales.......................................... 16 48
------ ------ ----- -----
Total sales................................ $2,256 $2,742 5,661 5,368
====== ====== ===== =====
</TABLE>
The following table summarizes CITGO's cost of sales and operating expenses
for the three-month periods ended March 31, 1999 and 1998:
CITGO COST OF SALES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998
------- -------
($ IN MILLIONS)
<S> <C> <C>
Crude oil................................................... $ 443 $ 482
Refined products............................................ 1,289 1,457
Intermediate feedstocks..................................... 122 243
Refining and manufacturing costs............................ 193 191
Other operating costs, expenses and inventory changes(1).... 2 182
------ ------
Total cost of sales and operating expenses........ $2,049 $2,555
====== ======
</TABLE>
- ---------------
(1) The three months ended March 31, 1999, includes the impact of the inventory
valuation reserve of $159 million recorded at December 31, 1998. See "Gross
Margin".
10
<PAGE> 13
Sales revenues and volumes. Sales decreased $486 million, or approximately
18%, in the three-month period ended March 31, 1999 as compared to the same
period in 1998. This was due to a decrease in average sales price of 22%
partially offset by an increase in sales volume of 5%. (See CITGO Sales Revenues
and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $15.3 million for the three-month period as compared to the same
period in 1998. The decrease was primarily due to the change in the earnings of
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO"), CITGO's share of which decreased
$15 million, from $19 million in the first three months of 1998 to $4 million in
the first three months of 1999. This decrease is due primarily to a reduction of
contract crude supply, lower margins on spot purchases and a reduction of
production rate due to low margins.
Other income (expense). Other income (expense) was $(2.4) million for the
three-month period ended March 31, 1999 as compared to $1.7 million for the same
period in 1998. 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 $506 million or 20%, in the quarter ended March 31, 1999 as
compared to the same period in 1998. (See CITGO Cost of Sales and Operating
Expenses table above.)
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 63% and 57% of total cost of sales and operating
expenses for the first quarters of 1999 and 1998. 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 wholesale 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 meet marketing demands.
Gross margin. The gross margin for the three-month period ended March 31,
1999 was $208 million, or 9.2%, compared to $187 million, or 6.8%, for the same
period in 1998. In the three-month period ended March 31, 1999, the revenue per
gallon component declined approximately 22% while the cost per gallon component
declined approximately 24%. As a result, the gross margin increased
approximately one-tenth of one cent on a per gallon basis in the quarter ended
March 31, 1999 compared to the same period in 1998. Inventories at December 31,
1998 had been revalued resulting in a charge of $159 million to the results of
operations for the year 1998. The sale of these revalued inventories during the
first quarter of 1999 is the principal factor in driving the cost of sales down
relative to sales revenue. At March 31, 1999 estimated net market values
exceeded historical cost, and accordingly, no valuation reserve was necessary.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased in the first quarter of 1999 by 4%, from $56
million in the first quarter of 1998 to $54 million in the first quarter of
1999.
Income taxes. Income taxes reported were based on an effective tax rate of
37% for the three-month periods ended March 31, 1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three-month period ended March 31, 1999, the Company's consolidated
net cash provided by operating activities totaled approximately $135 million.
Operating cash flows were derived from net income of $86 million and
depreciation and amortization of $55 million reduced by changes in other assets
and liabilities of $6 million.
Net cash used in investing activities totaled $55 million for the
three-month period ended March 31, 1999 consisting primarily of capital
expenditures of $55 million (compared to $52 million for the same period in
1998).
11
<PAGE> 14
Net cash used in financing activities totaled $69 million for the
three-month period ended March 31, 1999 consisting primarily of $70 million net
repayment on revolving bank loans.
As of March 31, 1999, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $455 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 the Company 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 is in compliance with its obligations under its debt financing
arrangements at March 31, 1999.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The statement establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives, at fair value, as either
assets or liabilities in the statement of financial position with an offset
either to shareholder's equity and comprehensive income or income depending upon
the classification of the derivative. The company has not determined the impact
on its financial statements that may result from adoption of SFAS No. 133, which
is required no later than January 1, 2000.
YEAR 2000 READINESS
General. The inability of computers, software and other equipment using
microprocessors to recognize and properly process data fields containing a
two-digit year is commonly referred to as the Year 2000 issue. As the Year 2000
approaches, such systems may be unable to accurately process certain date-based
information.
To mitigate any adverse impact this may cause, CITGO has established a
company wide Year 2000 Project ("Project") to address the issue of computer
programs and embedded computer chips which may be unable to correctly function
with the Year 2000. The Project is proceeding on schedule. In addition, CITGO is
updating major elements of its information systems by implementing programs
purchased from SAP. The first phase of SAP implementation, which included the
financial reporting and materials management systems, was brought into
production on January 1, 1998. Additional SAP modules including plant
maintenance work order and cost tracking were implemented throughout 1998. The
implementation has continued into 1999. The total cost of the SAP implementation
is estimated to be approximately $120 million, which includes software,
hardware, reengineering and change management. Management has determined that
SAP is an appropriate solution to the Year 2000 issue related to the systems for
which SAP is implemented. Such systems comprise approximately 80 percent of
CITGO's total information systems. The implementation of SAP is 75 percent
complete, and is on schedule and on budget as revised through March 31, 1999.
Remaining business software systems are expected to be made Year 2000 ready
through the Year 2000 Project or they will be replaced.
The Project. CITGO's Year 2000 Project Team is divided into two groups. One
group is working with Information Systems ("I.S.") and Information Technology
("I.T.") related matters, while the other is analyzing non-I.S./I.T. business
and asset integrity matters. A risk-based approach toward Year 2000 readiness
was applied to non-SAP systems and processes, with most fix-or-replace decisions
made by year-end 1998. The strategy for achieving Year 2000 business and asset
integrity is focused on equipment, software and relationships that are critical
to the Company's primary business operations, including refinery operations,
12
<PAGE> 15
terminal operations, crude oil purchase and shipment operations, and refined
product distribution operations. The Company engaged third party consultants to
review and validate the methodology and organization of the Project. The Project
strategy involves a number of phases: Inventory and Assessment of Critical
Equipment, Software and Relationships; Contingency Planning; Remediation;
Testing; and Readiness.
The Inventory and Assessment of Critical Equipment and Software phase of
the Project has been completed. The Inventory and Assessment of business
relationships with customers and suppliers to assure continuity of purchases,
sales and inter-company communications began in June 1998. CITGO now requires
that all new contracts with vendors, suppliers, or business partners include a
clause covering Year 2000 readiness. CITGO also seeks evidence of Year 2000
readiness from service providers prior to procuring new services.
While the CITGO Project is systematically assessing the Year 2000 readiness
of third party suppliers and customers, there can be no guarantee that third
parties of business importance to the Company will successfully and timely
reprogram, replace, or test all of their own computer hardware, software and
process control systems. CITGO has therefore chosen to continue assessment and
reevaluation of third party relationships beyond the deadline for completion of
other aspects of Inventory and Assessment phases of the Project. Reviews of
third party Year 2000 readiness will continue through 1999.
CITGO has also established a Year 2000 Contingency Planning Team. The
strategy for Contingency Planning includes a review and analysis of existing
contingency plans for CITGO refineries, terminals, pipelines and other
operations, in light of potential Year 2000 issues discovered in the Inventory
and Assessment phases of the Project. The Contingency Planning phase will also
evaluate and implement changes to the existing contingency plans. Contingency
plans based on this process are scheduled to be written in phases, with
completion scheduled for June 30, 1999. Additional planning is underway for the
Remediation phase of the Project. Remediation has begun and includes technical
analysis, testing and, if necessary, retrofitting or replacement of systems and
equipment determined to be incapable of reliable operations in the Year 2000.
Target for substantial completion of the Remediation phase is August 1, 1999.
The final phase of the Project, Readiness, is being conducted concurrently with
other Project phases. As systems, equipment, processes and business
relationships are determined and documented as Year 2000 ready, Project
resources are being shifted to pursue Readiness in remaining areas of the
enterprise.
The following is CITGO's definition of Year 2000 Readiness:
- Correctly and accurately handle date information before, during and after
midnight, December 31, 1999.
- Function correctly and accurately, and without disruption, before, during
and after January 1, 2000.
- Respond to two-digit year date input in a way that resolves ambiguity as
to the century in a disclosed, defined and predetermined manner.
- Process all date data to reflect the year 2000 as a leap year.
- Correctly and accurately recognize and process any date with a year
specified as "99" and "00".
Costs. The estimated total cost of the Project is not expected to exceed
$25 million, down from an original estimate of $35 million. The reduction is due
to less than expected need for remediation of embedded systems and refinements
in expense estimates. This estimate does not include CITGO's potential share of
Year 2000 costs that may be incurred by partnerships and joint ventures in which
CITGO participates but is not the managing partner or operator. The total amount
expended through March 31, 1999 was approximately $7.2 million. Approximately
65% of these expenditures were for internal costs to conduct the company-wide
Inventory and Assessment phases of the Project. The remaining 35% of the cost
was primarily for consultants in the specialized areas of Project Management,
Contingency Planning, Information Technology, Database Administration and
Operations Analysis, as well as fees paid to third parties for Quality
Assessment analysis of Project organization and methodology.
13
<PAGE> 16
The costs of the Project are being funded with cash from operations. No
existing or planned I.T. projects have been deferred or delayed due to Year 2000
readiness initiatives. The cost of implementing SAP replacement systems is not
included in these estimates.
The majority of estimated future costs for completing the Project are
anticipated to be directed toward the replacement and repair of systems and
equipment found to be incapable of reliable operation in the Year 2000.
Estimates for replacement and repair costs will be refined over time as the
Remediation phase progresses.
Risks. The failure to correct a material Year 2000 problem could result in
an interruption, or failure of, certain normal business activities or
operations. Because the Company is dependent, to a very substantial degree, upon
the proper functioning of its computer systems and its interaction with third
parties, including vendors and customers and their computer systems, a failure
of any of these systems to be Year 2000 compliant could have a material adverse
effect on the Company. Failure of this kind could, for example, cause disruption
in the supply of crude oil, cause disruption in refinery operations, cause
disruption in the distribution of refined products, lead to incomplete or
inaccurate accounting, recording, or processing of purchases of supplies or
sales of refined products, or result in generation of erroneous results. If not
remedied, potential risks include business interruption, financial loss,
regulatory actions, reputational harm, and legal liability. Such failures could
adversely affect CITGO's results of operations, liquidity and financial
condition. Unlike other business interruption scenarios, Year 2000 implications
could include multiple, simultaneous events which could result in unpredictable
outcomes.
Due to the general uncertainty inherent in the Year 2000 problem, resulting
in part from the uncertainty of the Year 2000 readiness of third party suppliers
and customers, CITGO management is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
operations, liquidity or financial position. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
impact. CITGO management believes that, with the implementation of new SAP
business systems and completion of the Project as scheduled, the possibility of
significant interruptions of normal operations should be minimized. See also
"Factors Affecting Forward Looking Statements".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. CITGO has exposure to price fluctuations of crude oil and
refined products as well as fluctuations in interest rates. To manage these
exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which the Company operates and
finances its assets. CITGO does not attempt to manage the price risk related to
all of its inventories of crude oil and refined products. As a result, at March
31, 1999, CITGO was exposed to the risk of broad market price declines with
respect to a substantial portion of its crude oil and refined product
inventories. The following disclosures do not attempt to quantify the price risk
associated with such commodity inventories.
14
<PAGE> 17
Commodity Instruments. CITGO balances its crude oil and petroleum product
supply/demand and manages a portion of its price risk by entering into petroleum
futures contracts, options and other over-the-counter commodity derivatives.
Generally, CITGO's risk management strategies qualify as hedges. However,
certain strategies do not qualify as hedges. CITGO may take commodity positions
based on its views or expectations of specific commodity prices or price
differentials between commodity types.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 1999
<TABLE>
<CAPTION>
MATURITY VOLUMES OF CONTRACT MARKET
DERIVATIVE DATE CONTRACTS VALUE(2) VALUE
---------- -------- ---------- -------- ------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1)....... Futures Purchased 1999 44 $1 $1
Futures Sold 1999 25 $1 $1
Heating Oil(1)............ Futures Purchased 1999 117 $2 $2
Futures Sold 1999 25 $0 $0
OTC Caps Purchased 1999 60 $0 $0
Natural Gas(3)............ Futures Purchased 1999 150 $3 $3
</TABLE>
- ---------------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At March 31,
1999, CITGO's primary exposures were to U.S. dollar LIBOR and U.S. Treasury
rates.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT MARCH 31, 1999
<TABLE>
<CAPTION>
NOTIONAL
EXPIRATION FIXED RATE PRINCIPAL
VARIABLE RATE INDEX DATE PAID AMOUNT
- ------------------- ---------- ---------- ---------------
($ IN MILLIONS)
<S> <C> <C> <C>
One-month LIBOR............................... May 2000 6.28% $25
J.J. Kenny.................................... May 2000 4.72% 25
J.J. Kenny.................................... February 2005 5.30% 12
J.J. Kenny.................................... February 2005 5.27% 15
J.J. Kenny.................................... February 2005 5.49% 15
---
$92
===
</TABLE>
The fair value of the interest rate swap agreements in place at March 31,
1999, 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 $3.6 million.
15
<PAGE> 18
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
LONG-TERM DEBT
AT MARCH 31, 1999
<TABLE>
<CAPTION>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ IN MILLIONS) ($ IN MILLIONS)
<S> <C> <C> <C> <C>
1999........................... $ 40 9.11% $ 45 5.11%
2000........................... 40 9.11% 7 5.51%
2001........................... 40 9.11% 7 5.78%
2002........................... 36 8.78% -- 5.88%
2003........................... 61 8.79% 95 5.98%
Thereafter..................... 422 8.02% 481 6.15%
---- ---- ---- ----
Total................ $639 8.34% $635 6.04%
==== ==== ==== ====
Fair Value..................... $616 $635
==== ====
</TABLE>
16
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. The Company records accruals for potential losses
when, in management's opinion, such losses are probable and reasonably
estimable. If known lawsuits and claims were to be determined in a manner
adverse to the Company, and in amounts greater than the Company's accruals, then
such determinations could have a material adverse effect on the Company's
results of operations in a given reporting period. However, in management's
opinion the ultimate resolution of these lawsuits and claims will not exceed, by
a material amount, the amount of the accruals and the insurance coverage
available to the Company. This opinion is based upon management's and counsel's
current assessment of these lawsuits and claims. The most significant lawsuits
and claims are discussed below.
The Oil Chemical and Atomic Workers, Local 7-517 (the "Union") asserted
claims in federal court against CITGO, PDVSA, PDV America, PDVMR, UNO-VEN and
Unocal pursuant to the Labor Management Relations Act. The Union alleges that
CITGO and the other defendants are bound by the terms of a collective bargaining
agreement between UNO-VEN and the Union covering certain employees at a refinery
in Lemont, Illinois. This refinery was acquired by PDVMR on May 1, 1997 in a
transaction involving the former partners of UNO-VEN. Pursuant to an operating
agreement with PDVMR, CITGO became the operator of this refinery and employed
the substantial majority of the employees previously employed by UNO-VEN
pursuant to its initial terms and conditions of employment, but CITGO did not
assume the existing labor agreement. The Union sought monetary compensation for
certain differences in employee benefits and reinstatement of all of the UNO-VEN
benefit plans and to require CITGO to abide by the terms of the collective
bargaining agreement between the Union and UNO-VEN. In March 1999, the federal
appeals court affirmed the trial court's grant of the motions for summary
judgment filed by CITGO and the other defendants. The Union has stated that it
will not seek review of this decision by the U.S. Supreme Court. This
effectively terminated this matter.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property damage
related to the above noted incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively are not material.
There are presently four lawsuits pending against CITGO in federal and state
courts alleging property damages, personal injury and punitive damages. The
Company expects that additional lawsuits will be filed. A trial in one of the
federal court lawsuits in October 1998 involving ten bellwether plaintiffs, out
of approximately 400 plaintiffs, resulted in a verdict for CITGO. The remaining
plaintiffs in this case have agreed to settle for an immaterial amount.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO and other operators and owners of nearby industrial facilities
which claims damages for reduced value of residential properties located in the
vicinity of the industrial facilities as a result of air, soil and groundwater
contamination. Trial is scheduled for January 2000. In 1997, CITGO offered to
purchase about 275 properties in a neighborhood adjacent to CITGO's Corpus
Christi refinery, which were included in the lawsuit. Related to this offer,
$15.7 million was expensed in 1997. To date, CITGO has reached agreements to buy
all but 15 of such properties, which include settlements of property damage
claims, and has offers open to purchase the remaining properties. Two related
personal injury and wrongful death lawsuits were filed against the same
defendants in 1996 and are scheduled for trial in 2000.
Litigation is pending in federal court in Lake Charles, Louisiana, against
CITGO by a number of current and former Lake Charles refinery employees and
applicants asserting claims of racial discrimination in connection with CITGO's
employment practices. Trials in this case are set to begin in the fall of 1999.
CITGO is among defendants to lawsuits in California and North Carolina
alleging contamination of water supplies by methyl tertiary butyl ether
("MTBE"), a component of gasoline. The action in California was filed in
November 1998 by the South Tahoe Public Utility District and CITGO was added as
a defendant in February 1999. The North Carolina case, filed in January 1999, is
a putative class action on behalf of
17
<PAGE> 20
owners of water wells and other drinking water supplies in the state. Both
actions allege that MTBE poses public health risks. Both actions seek damages as
well as remediation of the alleged contamination. These matters are in early
stages and there has been no discovery conducted against CITGO. CITGO has denied
all of the allegations and is pursuing its defenses.
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.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CITGO PETROLEUM CORPORATION
/s/ R. M. BRIGHT
------------------------------------
R. M. Bright
Controller (Chief Accounting
Officer)
Date: May 7, 1999
19
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 42,171
<SECURITIES> 0
<RECEIVABLES> 615,817
<ALLOWANCES> 16,600
<INVENTORY> 860,777
<CURRENT-ASSETS> 1,545,400
<PP&E> 3,796,459
<DEPRECIATION> 933,868
<TOTAL-ASSETS> 5,384,996
<CURRENT-LIABILITIES> 1,162,419
<BONDS> 1,187,492
0
0
<COMMON> 1
<OTHER-SE> 1,932,658
<TOTAL-LIABILITY-AND-EQUITY> 5,384,996
<SALES> 2,256,466
<TOTAL-REVENUES> 2,263,681
<CGS> 2,048,612
<TOTAL-COSTS> 2,098,878
<OTHER-EXPENSES> 413
<LOSS-PROVISION> 3,895
<INTEREST-EXPENSE> 23,640
<INCOME-PRETAX> 136,855
<INCOME-TAX> 50,636
<INCOME-CONTINUING> 86,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,219
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
