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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[X] 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)
DELAWARE 73-1173881
(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
(Address of principal executive office) (Zip Code)
(918) 495-4000
(Registrant's telephone number, including area code)
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.
COMMON STOCK, $1.00 PAR VALUE 1,000
(Class) (outstanding at July 31, 2000)
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CITGO PETROLEUM CORPORATION
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
<S> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2000 and December 31, 1999.........................2
Condensed Consolidated Statements of Income - Three and Six-Month Periods Ended
June 30, 2000 and 1999..............................................................................3
Condensed Consolidated Statement of Shareholder's Equity - Six-Month Period
Ended June 30, 2000.................................................................................4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods Ended
June 30, 2000 and 1999..............................................................................5
Notes to the Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................20
Item 6. Exhibits and Reports on Form 8-K...................................................................20
SIGNATURES ......................................................................................................21
</TABLE>
<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.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,081 $ 95,780
Accounts receivable, net 993,528 1,004,268
Due from affiliates 30,493 37,860
Inventories 999,001 953,153
Deferred income taxes 1,230 --
Prepaid expenses and other 10,222 7,136
--------------- ---------------
Total current assets 2,058,555 2,098,197
PROPERTY, PLANT AND EQUIPMENT - Net 2,830,507 2,877,305
RESTRICTED CASH -- 3,015
INVESTMENTS IN AFFILIATES 707,621 734,822
OTHER ASSETS 229,417 193,946
--------------- ---------------
$ 5,826,100 $ 5,907,285
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 34,000 $ 16,000
Accounts payable 638,514 632,295
Payables to affiliates 489,687 381,404
Taxes other than income 215,964 218,503
Other 242,070 192,579
Current portion of long-term debt 47,078 47,078
Current portion of capital lease obligation 17,276 16,356
--------------- ---------------
Total current liabilities 1,684,589 1,504,215
LONG-TERM DEBT 1,043,666 1,392,222
CAPITAL LEASE OBLIGATION 76,695 85,570
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 210,654 212,871
OTHER NONCURRENT LIABILITIES 196,915 197,024
DEFERRED INCOME TAXES 547,201 521,751
MINORITY INTEREST 31,102 29,710
COMMITMENTS AND CONTINGENCIES (Note 5)
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 725,875 654,519
Accumulated other comprehensive income (3,214) (3,214)
--------------- ---------------
Total shareholder's equity 2,035,278 1,963,922
--------------- ---------------
$ 5,826,100 $ 5,907,285
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------ -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 5,624,446 $ 3,112,862 $ 10,406,240 $ 5,342,678
Sales to affiliates 66,250 40,376 116,260 67,026
------------ ------------ ------------ ------------
5,690,696 3,153,238 10,522,500 5,409,704
Equity in earnings (losses) of affiliates (7,618) (12,824) 3,027 (3,219)
Other income (expense) - net (141) (1,524) 81 (3,914)
------------ ------------ ------------ ------------
5,682,937 3,138,890 10,525,608 5,402,571
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $2,697,886, $1,331,092,
$4,870,354 and $2,278,591 from affiliates) 5,556,184 3,037,583 10,270,445 5,086,195
Selling, general and administrative expenses 49,468 56,343 92,635 110,504
Interest expense, excluding capital lease 21,053 20,184 42,139 40,545
Capital lease interest charge 2,866 3,279 5,733 6,558
Minority interest 701 (19) 1,392 394
------------ ------------ ------------ ------------
5,630,272 3,117,370 10,412,344 5,244,196
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 52,665 21,520 113,264 158,375
INCOME TAXES 19,486 (3,373) 41,908 47,263
------------ ------------ ------------ ------------
NET INCOME $ 33,179 $ 24,893 $ 71,356 $ 111,112
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
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<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 1 $ 1 $ 1,312,616 $ 654,519 $ (3,214) $ 1,963,922
Net Income -- -- -- 71,356 -- 71,356
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, JUNE 30, 2000 1 $ 1 $ 1,312,616 $ 725,875 $ (3,214) $ 2,035,278
============ ============ ============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 351,233 $ 124,761
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (53,556) (110,770)
Proceeds from sales of property, plant and equipment 3,949 973
Decrease (increase) in restricted cash 3,015 (254)
Loans to LYONDELL-CITGO Refining LP (25,130) (17,000)
Investment in LYONDELL-CITGO Refining LP (4,700) --
Investments in and advances to other affiliates (8,000) (2,712)
--------- ---------
Net cash used in investing activities (84,422) (129,763)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 18,000 97,000
Net repayments of revolving bank loans (345,000) (65,000)
Proceeds from issuance of tax-exempt bonds -- 25,000
Payments on taxable bonds -- (25,000)
Dividends paid to Parent (PDV America) -- (15,000)
Payments of capital lease obligations (7,954) (7,130)
Repayments of other debt (3,556) (3,556)
--------- ---------
Net cash (used in) provided by financing activities (338,510) 6,314
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (71,699) 1,312
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,780 30,338
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,081 $ 31,650
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 49,787 $ 47,837
========= =========
Income taxes, net of refunds of $15,008 and $30,000 $ (12,776) $ (28,080)
========= =========
</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 AND SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 1999 and with respect to the interim
three-month and six-month periods ended June 30, 2000 and 1999 is
unaudited. In the opinion of management, such interim information contains
all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of such periods. The
results of operations for the three-month and six-month periods ended June
30, 2000 and 1999 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, 1999 on Form 10-K, dated March 24,
2000, 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>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
-------------- --------------
(000'S OMITTED)
<S> <C> <C>
Refined products $ 772,938 $ 747,620
Crude oil 167,753 150,092
Materials and supplies 58,310 55,441
-------------- --------------
$ 999,001 $ 953,153
============== ==============
</TABLE>
6
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3. LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
----------- -----------
(000'S OMITTED)
<S> <C> <C>
Revolving bank loans $ -- $ 345,000
Senior Notes $200 million face amount, due 2006 with
interest rate of 7.875% 199,822 199,806
Private Placement Senior Notes, due 2000 to 2006 with
interest rates from 9.03% to 9.30% 136,688 136,688
Master Shelf Agreement Senior Notes, due 2002 to
2009 with interest rates from 7.17% to 8.94% 260,000 260,000
Tax Exempt Bonds, due 2004 to 2029 with variable
and fixed interest rates 305,520 305,520
Taxable Bonds, due 2026 to 2028 with variable interest rates 178,000 178,000
Cit-Con bank credit agreement 10,714 14,286
----------- -----------
1,090,744 1,439,300
Current portion of long-term debt (47,078) (47,078)
----------- -----------
$ 1,043,666 $ 1,392,222
=========== ===========
</TABLE>
At June 30, 2000, the net year to date repayments on the revolving bank
loans were $345 million.
On May 10, 2000, CITGO renewed its $150 million 364-day revolving bank
loan facility for another term.
4. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by
subsidiaries of CITGO and Lyondell Chemical Company ("the Owners"). The
heavy crude oil processed by the Houston refinery is supplied by Petroleos
de Venezuela, S.A. ("PDVSA" which may also be used to refer to one or more
of its subsidiaries) under a long-term crude oil supply contract that
expires in 2017. CITGO purchases substantially all of the gasoline, diesel
and jet fuel produced at the Houston refinery under a long-term contract.
In April 1998, the crude oil supplier exercised its contractual rights and
reduced deliveries of crude oil to LYONDELL-CITGO. LYONDELL-CITGO has been
required to obtain alternative sources of crude oil supply in replacement,
which has resulted in lower operating margins.
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<PAGE> 10
CITGO has a 41.25% participation interest in LYONDELL-CITGO. CITGO has a
one-time option to increase, for an additional investment, its
participation interest to 50 percent. This option must be exercised no
later than September 30, 2000.
CITGO has notes receivable from LYONDELL-CITGO which total $53 million and
$28 million at June 30, 2000 and December 31, 1999, respectively. The
notes bear interest at market rates and are due July 1, 2003. These notes
are included in other assets in the accompanying consolidated balance
sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------------- --------------
(Unaudited)
(000s omitted)
<S> <C> <C>
Carrying value of investment $ 536,079 $ 560,227
Notes receivable 53,385 28,255
Participation interest 41% 41%
Summary of financial position:
Current assets $ 336,004 $ 219,365
Non current assets 1,402,042 1,405,879
Current liabilities 847,093 696,661
Non current liabilities 350,219 316,492
Member's equity 540,734 612,091
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------
2000 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Equity in net loss $ (5,711) $ (14,109)
Cash distribution received 23,137 22,412
Summary of operating results:
Revenue $ 1,760,190 $ 913,957
Gross profit 55,692 30,315
Net loss (480) (23,107)
</TABLE>
LYONDELL-CITGO has arranged interim financing and repaid a $450 million
term loan that matured on May 5, 2000.
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5. 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 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.
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 incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively were not
material. There are presently seventeen lawsuits filed on behalf of
approximately 9,000 individuals arising out of this incident in federal
and state courts in Corpus Christi alleging property damages, personal
injury and punitive damages. A trial of 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. Another
lawsuit, involving five plaintiffs, was settled during trial for amounts
which were not material. There are no other trials on these claims
scheduled to take place until mid-2001.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO 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. CITGO has contracted to
purchase all of the 275 properties included in the lawsuit which are in an
area adjacent to CITGO's Corpus Christi refinery and settle the property
damage claims relating to these properties. Related to this purchase,
$15.7 million was expensed in 1997. The trial judge ruled, over CITGO's
objections, that a settlement agreement CITGO entered into in September
1997 and subsequently withdrew from, that provided for settlement of the
remaining property damage claims for $5 million is enforceable. CITGO has
asked the court to reconsider its ruling. The trial against CITGO of these
remaining claims has been postponed indefinitely. Two related personal
injury and wrongful death lawsuits were filed against CITGO in 1996 and
are scheduled for trial in 2001.
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. The first trial in this case, which
involved two plaintiffs, began in October 1999 and resulted in verdicts
for the Company. The Court granted the Company's motion for summary
judgment with respect to another group of claims; this action has been
appealed to the Fifth Circuit Court of Appeals. Trials of all the
remaining cases have been taken off the trial court's docket pending this
appeal.
CITGO is among defendants to lawsuits in North Carolina, New York and
Illinois alleging contamination of water supplies by methyl tertiary butyl
ether ("MTBE"), a component of gasoline. A similar case in California has
been settled for an immaterial amount. The North Carolina case, filed in
January 1999, and the New York case, filed in January 2000 are putative
class actions on behalf of owners of water wells and other drinking water
supplies in such states. The Illinois class
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action, filed in April 2000, purports to be on behalf of well owners in
sixteen states. All of these actions allege that MTBE poses public health
risks. The suits seek damages as well as remediation of the alleged
contamination. These matters are in early stages of discovery. 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.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998
and 1999. TNRCC has issued Notices of Violation ("NOV") related to each of
the reviews and has proposed fines of approximately $970,000 based on the
1998 review and $700,000 based on the 1999 review. Most of the alleged
violations refer to recordkeeping and reporting issues, failure to meet
required emission levels, and failure to properly monitor emissions. The
Company is currently reviewing the alleged violations and intends to
vigorously protest the alleged violations and proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency ("EPA") that the EPA
believes these companies have contributed to contamination in the
Calcasieu Estuary, in the proximity of Lake Charles, Calcasieu Parish,
Louisiana and are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). The EPA made a demand for payment of its past investigation
costs from CITGO and other PRPs and advised it is conducting a Remedial
Investigation/Feasibility Study ("RI/FS") under its CERCLA authority.
CITGO and other PRPs may be potentially responsible for the costs of the
RI/FS. CITGO disagrees with the EPA's allegations and intends to contest
this matter.
In October 1999, the EPA issued an NOV to CITGO for violations of federal
regulations regarding reformulated gasoline found during a May 1998
inspection at CITGO's Braintree, Massachusetts terminal and recommended a
penalty of $218,500. The Company intends to vigorously contest the
proposed fines and allegations.
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
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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 six-month
period ended June 30, 2000, 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 swaps to manage its risk related to
interest rate changes on its debt. The fair value of the interest rate
swap agreements in place at June 30, 2000, based on the estimated amount
that CITGO would receive or pay to terminate the agreements as of that
date and taking into account current interest rates, was an unrealized
loss of $1 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 commodity instruments increased cost of sales and operating expenses
and decreased pretax earnings by $5 million for the quarter and $6 million
for the six months ended June 30, 2000. The commodity instruments did not
have a material impact on cost of sales and operating expenses or pretax
earnings in the quarter or the six months ended June 30, 1999. The impact
of the interest rate swaps on cost of sales and operating expenses and
pretax earnings was immaterial for all periods presented.
6. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries. These crude oil supply
agreements contain force majeure provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements under specified circumstances. As of June 30, 2000,
PDVSA deliveries of crude oil to CITGO were less than contractual base
volumes due to PDVSA's declaration of force majeure pursuant to all of the
long-term crude oil supply contracts related to CITGO's refineries.
Therefore, the Company has been required to use alternative sources of
crude oil which resulted in lower operating margins. It is not possible to
forecast future financial impacts of these reductions in crude oil
deliveries on CITGO's costs because the correlation between crude oil and
refined product prices is not constant over time. Additionally, because of
among other things, changes in crude oil economics, the duration of the
force majeure cannot be forecasted.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements and oblige the supplier to pay CITGO the deemed margin
under that contract for each barrel of reduced crude oil and feedstocks.
During the six months ended June 30, 2000, PDVSA did not deliver naphtha
pursuant to two of the contracts. As a result, the Company has been
required to use alternative sources of naphtha which resulted in lower
operating margins. There was no shortfall in the naphtha deliveries in the
six months ended June 30, 1999.
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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, 1999 on
Form 10-K, dated March 24, 2000, for additional information and a description of
factors which may cause substantial fluctuations in the earnings and cash flows
of CITGO.
In the quarter ended June 30, 2000, CITGO generated net income of $33.2
million on revenue of $5.7 billion compared to net income of $24.9 million on
revenues of $3.1 billion for the same period last year. In the six months ended
June 30, 2000, CITGO generated net income of $71.4 million on revenue of $10.5
billion compared to net income of $111.1 million on revenues of $5.4 billion for
the same period last year. Gross margin for the first six months of 1999
benefited from the sale of inventories that were written down by $159 million at
December 31, 1998, to reflect market prices at that time.(See "Gross margin").
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues
and sales volumes for the three-month and six-month periods ended June 30, 2000
and 1999:
CITGO SALES REVENUES AND VOLUMES
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
------------------- ------------------- ------------------ ------------------
2000 1999 2000 1999 2000 1999 2000 1999
------- ------- ------- ------- ------- ------- ------- -------
($ in millions) ($ in millions) (MM gallons) (MM gallons)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline $ 3,441 $ 1,878 $ 6,096 $ 3,134 3,650 3,386 6,791 6,487
Jet fuel 440 238 934 429 571 535 1,182 1,071
Diesel/#2 fuel 1,030 560 2,124 1,012 1,338 1,293 2,718 2,602
Asphalt 166 93 213 119 244 227 321 297
Petrochemicals and industrial products 461 236 852 432 430 469 816 1,046
Lubricants and waxes 139 122 254 241 72 75 128 143
------- ------- ------- ------- ------- ------- ------- -------
Total refined product sales 5,677 3,127 10,473 5,367 6,305 5,985 11,956 11,646
Other sales 14 26 50 43
------- ------- ------- ------- ------- ------- ------- -------
Total sales $ 5,691 $ 3,153 $10,523 $ 5,410 6,305 5,985 11,956 11,646
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
12
<PAGE> 15
The following table summarizes CITGO's cost of sales and operating
expenses for the three-month and six-month periods ended June 30, 2000 and 1999:
CITGO COST OF SALES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
Crude oil $ 1,332 $ 680 $ 2,458 $ 1,123
Refined products 3,558 1,859 6,442 3,148
Intermediate feedstocks 373 183 650 305
Refining and manufacturing costs 223 203 431 396
Other operating costs, expenses and inventory changes (1) 70 113 289 114
-------- -------- -------- --------
Total cost of sales and operating expenses $ 5,556 $ 3,038 $ 10,270 $ 5,086
======== ======== ======== ========
</TABLE>
(1) The six months ended June 30, 1999, includes the impact of the inventory
valuation reserve of $159 million recorded at December 31, 1998. See "Gross
Margin".
Sales revenues and volumes. Sales increased $2.5 billion, or
approximately 80%, in the three-month period ended June 30, 2000 as compared to
the same period in 1999. This was due to an increase in average sales price of
71% and an increase in sales volume of 5%. Sales increased $5.1 billion, or
approximately 95%, in the six-month period ended June 30, 2000 as compared to
the same period in 1999. This was due to an increase in average sales price of
89% and an increase in sales volume of 3%. (See CITGO Sales Revenues and Volumes
table above.)
Equity in earnings (losses) of affiliates. Equity in earnings (losses)
of affiliates increased by $5 million for the three-month period and increased
$6 million for the six-month period ended June 30, 2000 as compared to the same
periods in 1999. The increase was primarily due to the change in the earnings of
LYONDELL-CITGO. CITGO's share of these earnings increased $9 million, from $(14)
million in the first six months of 1999 to $(5) million in the first six months
of 2000. The six-month periods in both 2000 and 1999 experienced lower crude
processing rates. In 2000, this was due to a major planned turnaround. In 1999,
it was due to unplanned production unit outages. However, the improvement in
2000 compared to 1999 was primarily due to higher margins reflecting a stronger
gasoline market in the first six months of 2000.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2.5 billion or 83%, in the quarter ended June 30, 2000 as
compared to the same period in 1999. Cost of sales and operating expenses
increased by $5.2 billion or 102%, in the six months ended June 30, 2000 as
compared to the same period in 1999. (See CITGO Cost of Sales and Operating
Expenses table above.)
As a result of the invocation of the force majeure clause in its crude
supply contracts, CITGO estimates that crude oil costs in the six months ended
June 30, 2000 were higher by $5 million than what would have otherwise been the
case. However, in the three months ended June 30, 2000, CITGO estimates that
the declaration of force majeure did not result in crude costs higher than what
would have otherwise been the case. CITGO estimates that the cost of crude oil
purchased in the three months and six months ended June 30, 1999 increased by
$13 million and $17 million, respectively, from what would have otherwise been
the case. These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements and oblige the supplier to pay CITGO the deemed margin under
that contract for each barrel of reduced crude oil and feedstocks. During the
six months ended June 30, 2000, PDVSA did not deliver naphtha pursuant to two
of the contracts. As a result, naphtha costs, net of deemed margin were higher
by $2 million and $3 million than what would have otherwise been the case for
the three months and six months ended June 30, 2000. There was no shortfall in
the naphtha deliveries in the six months ended June 30, 1999.
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 64% and 61% of total cost of sales and operating
expenses for the second quarters of 2000 and 1999, respectively and 63% and 62%
for the first six months of 2000 and 1999, respectively. CITGO estimates that
margins on purchased products, on average, are lower than margins on produced
products due to the fact that CITGO can only receive the marketing portion of
the total margin received on the produced refined products. However, purchased
products are not segregated from CITGO 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
13
<PAGE> 16
effects on profitability of changes in volumes of purchased products. 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 anticipated purchased product requirements; however, there could be
events beyond the control of CITGO which impact the volume of refined products
purchased. See also "Factors Affecting Forward Looking Statements."
Gross margin. The gross margin for the three-month period ended June
30, 2000 was approximately 2.1 cents per gallon, compared to approximately 1.9
cents per gallon for the same period in 1999. The gross margin for the six-month
period ended June 30, 2000 was approximately 2.1 cents per gallon, compared to
approximately 2.8 cents per gallon for the same period in 1999. In the
three-month period ended June 30, 2000, the revenue per gallon component
increased approximately 71% while the cost per gallon component increased
approximately 74%. As a result, the gross margin increased approximately
two-tenths of one cent on a per gallon basis in the quarter ended June 30, 2000
compared to the same period in 1999. In the six-month period ended June 30,
2000, the revenue per gallon component increased approximately 89% while the
cost per gallon component increased approximately 97%. As a result, the gross
margin decreased approximately seven-tenths of one cent on a per gallon basis in
the six-months ended June 30, 2000 compared to the same period in 1999.
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
the higher gross margins realized during the first quarter of 1999. The gross
margin for the six-month period ended June 30, 1999 would have been 1.4 cents
per gallon if these inventories had not been revalued. At June 30, 2000 and 1999
estimated net market values of inventories exceeded historical cost, and
accordingly, no valuation reserve was necessary.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased in the second quarter of 2000 by 12%, from $56
million in the second quarter of 1999 to $49 million in the second quarter of
2000. Selling, general and administrative expenses decreased in the first six
months of 2000 by 16%, from $111 million in the first six months of 1999 to $93
million in the first six months of 2000. The decrease is principally due to the
decrease in professional and consulting fees and the recovery of the bad debt
reserve related to credit card receivables. The recovery was in connection with
the sale of CITGO's proprietary consumer credit card receivables and related
credit card program on March 1, 2000 as described below.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 2000, the Company's
consolidated net cash provided by operating activities totaled approximately
$351 million. Operating cash flows were derived from net income of $71 million,
depreciation and amortization of $118 million, and changes in other assets and
liabilities of $162 million.
Net cash used in investing activities totaled $84 million for the
six-month period ended June 30, 2000 consisting primarily of capital
expenditures of $54 million (compared to $111 million for the same period in
1999). The decline in capital expenditures in the first six months of 2000
compared to the first six months of 1999 is due primarily to projects which are
progressing more slowly than anticipated. Total capital expenditures for the
year are currently estimated to be approximately $130 million. This is
approximately 60 percent of 1999 capital expenditures. In addition, CITGO
has loaned $25 million to LYONDELL-CITGO in the six-month period ended
June 30, 2000.
14
<PAGE> 17
Net cash used in financing activities totaled $339 million for the
six-month period ended June 30, 2000 consisting primarily of $345 million net
repayment on revolving bank loans partially offset by proceeds from short-term
borrowings of $18 million.
As of June 30, 2000, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $550 million and $186 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.
On March 1, 2000, CITGO sold its proprietary consumer credit card
receivables and related credit card program to Associates First Capital
Corporation ("Associates"). In this transaction, Associates acquired
approximately $19 million in receivables from CITGO and $113 million from Royal
Bank of Canada which had previously been purchased from CITGO under a revolving
sale facility. In addition, Associates acquired 1.2 million active consumer
accounts. The sale did not affect CITGO's commercial or fleet credit card
programs.
In April 2000, CITGO amended an agreement to sell trade accounts
receivable on an ongoing basis and without recourse. The amendment increased the
amount of such receivables that can be sold to $225 million. The amended
agreement has a minimum term of one year and is renewable for successive annual
terms by mutual agreement. $225 million has been sold under this amended
agreement as of June 30, 2000. Proceeds from the sale were used for general
corporate purposes.
The Company is in compliance with its obligations under its debt
financing arrangements at June 30, 2000.
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"). In June 2000, Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities" ("SFAS No. 138"), an amendment of
SFAS No. 133, was issued. The statement, as amended by SFAS No. 138, 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. CITGO has not determined
the impact on its financial statements that may result from adoption of SFAS No.
133, as amended by SFAS No. 138, which is required no later than January 1,
2001.
15
<PAGE> 18
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 June
30, 2000, 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.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply/demand and manages a portion of its price risk by entering into
petroleum commodity derivatives. Generally, CITGO's risk management strategies
qualify as hedges, however, certain strategies that CITGO may use on commodity
positions do not qualify as hedges.
Non Trading Commodity Derivatives
Open Positions at June 30, 2000
<TABLE>
<CAPTION>
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value(2) Value
--------- ---------- -------- --------- -------- ------
($ in millions)
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Sold 2000 100 $ 4.1 $ 4.2
OTC Swap Options Purchased 2000 500 $ -- $ --
OTC Swap Options Sold 2000 500 $ -- $ --
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 1,500 $ 55.7 $ 58.6
Heating Oil(1) Futures Purchased 2000 188 $ 9.0 $ 10.1
Futures Purchased 2001 337 $ 6.9 $ 7.6
Futures Sold 2000 25 $ 0.9 $ 0.9
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 29 $ 0.8 $ 0.6
Crude Oil(1) Futures Sold 2000 300 $ 9.2 $ 9.8
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 3,400 $104.9 $110.5
Natural Gas(3) Futures Purchased 2000 23 $ 0.9 $ 1.0
</TABLE>
-------------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
(4) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
16
<PAGE> 19
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT JUNE 30, 1999
<TABLE>
<CAPTION>
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE(2) VALUE
--------- ---------- -------- --------- -------- -----
($ in millions)
<S> <C> <C> <C> <C> <C>
No Lead Gasoline(1) Futures Purchased 1999 5 $ 0.1 $ 0.1
Futures Sold 1999 25 $ 0.5 $ 0.6
Heating Oil(1) Futures Purchased 1999 242 $ 4.7 $ 5.0
Futures Purchased 2000 12 $ 0.2 $ 0.3
Futures Sold 1999 50 $ 1.0 $ 1.0
OTC Swaps 1999 14 $ 0.3 $ 0.3
OTC Swaps 2000 17 $ 0.3 $ 0.4
Natural Gas (3) Futures Purchased 1999 79 $ 1.6 $ 2.0
</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 June 30, 2000,
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 June 30, 2000
<TABLE>
<CAPTION>
Notional
Expiration Fixed Rate Principal
Variable Rate Index Date Paid Amount
------------------- ---------- ---------- ---------
($ in millions)
<S> <C> <C> <C>
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
----
$ 42
====
</TABLE>
17
<PAGE> 20
NON TRADING INTEREST RATE DERIVATIVES
Open Positions at June 30, 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 June
30, 2000, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1 million.
18
<PAGE> 21
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT JUNE 30, 2000
<TABLE>
<CAPTION>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- --------- ------------- --------- ----------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
2000 $ 40 9.11% $ 38 7.04%
2001 40 9.11% 7 7.46%
2002 36 8.78% -- 7.99%
2003 61 8.79% -- 8.27%
2004 31 8.02% 16 8.52%
Thereafter 391 8.02% 465 9.29%
----- ---- ---- ----
Total $ 599 8.29% $526 9.08%
===== ==== ==== ====
Fair Value $ 592 $526
===== ====
</TABLE>
DEBT OBLIGATIONS
AT JUNE 30, 1999
<TABLE>
<CAPTION>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- --------- ------------- --------- ----------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
1999 $ 40 9.11% $138 5.49%
2000 40 9.11% 7 6.06%
2001 40 9.11% 7 6.81%
2002 36 8.78% -- 7.17%
2003 61 8.79% 100 7.53%
Thereafter 422 8.02% 481 9.23%
----- ----- ---- -----
Total $ 639 8.34% $733 8.24%
===== ====== ==== =====
Fair Value $ 617 $733
===== ====
</TABLE>
19
<PAGE> 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 5 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K:
None.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITGO PETROLEUM CORPORATION
Date: August 4, 2000 /s/ R. M. Bright
--------------------------
R. M. Bright
Controller (Chief Accounting Officer)
21
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
(filed electronically only)
</TABLE>
