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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
--------------
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
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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 April 30, 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 MARCH 31, 2000
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.............................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999....................2
Condensed Consolidated Statements of Income - Three-Month Periods Ended
March 31, 2000 and 1999.........................................................................3
Condensed Consolidated Statement of Shareholder's Equity - Three-Month Period
Ended March 31, 2000............................................................................4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 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.....................................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................19
Item 6. Exhibits and Reports on Form 8-K...............................................................19
SIGNATURES .............................................................................................20
</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.
1
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,278 $ 95,780
Accounts receivable, net 1,005,980 1,004,268
Due from affiliates 57,129 37,860
Inventories 914,675 953,153
Prepaid expenses and other 13,581 7,136
------------ ------------
Total current assets 2,012,643 2,098,197
PROPERTY, PLANT AND EQUIPMENT - Net 2,850,697 2,877,305
RESTRICTED CASH -- 3,015
INVESTMENTS IN AFFILIATES 714,198 734,822
OTHER ASSETS 214,166 193,946
------------ ------------
$ 5,791,704 $ 5,907,285
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 147,000 $ 16,000
Accounts payable 706,793 632,295
Payables to affiliates 351,413 381,404
Taxes other than income 201,829 218,503
Other 208,950 192,579
Current portion of long-term debt 47,078 47,078
Current portion of capital lease obligation 16,356 16,356
------------ ------------
Total current liabilities 1,679,419 1,504,215
LONG-TERM DEBT 1,045,444 1,392,222
CAPITAL LEASE OBLIGATION 85,570 85,570
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 211,782 212,871
OTHER NONCURRENT LIABILITIES 198,288 197,024
DEFERRED INCOME TAXES 538,700 521,751
MINORITY INTEREST 30,402 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 692,696 654,519
Accumulated other comprehensive income (3,214) (3,214)
------------ ------------
Total shareholder's equity 2,002,099 1,963,922
------------ ------------
$ 5,791,704 $ 5,907,285
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
REVENUES:
Net sales $ 4,781,794 $ 2,229,816
Sales to affiliates 50,010 26,650
------------ ------------
4,831,804 2,256,466
Equity in earnings of affiliates 10,645 9,605
Other income (expense) - net 222 (2,390)
------------ ------------
4,842,671 2,263,681
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $2,172,468 and $947,499 from affiliates) 4,714,261 2,048,612
Selling, general and administrative expenses 43,167 54,161
Interest expense, excluding capital lease 21,086 20,361
Capital lease interest charge 2,867 3,279
Minority interest 691 413
------------ ------------
4,782,072 2,126,826
------------ ------------
INCOME BEFORE INCOME TAXES 60,599 136,855
INCOME TAXES 22,422 50,636
------------ ------------
NET INCOME $ 38,177 $ 86,219
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<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 -- -- -- 38,177 -- 38,177
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, MARCH 31, 2000 1 $ 1 $1,312,616 $ 692,696 $ (3,214) $2,002,099
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 169,475 $ 135,357
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (26,749) (55,355)
Proceeds from sales of property, plant and equipment 3,735 775
Decrease (increase) in restricted cash 3,015 (166)
Loans to LYONDELL-CITGO Refining LP (2,700) --
Investments in and advances to other affiliates (5,500) --
---------- ----------
Net cash used in investing activities (28,199) (54,746)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 131,000 3,000
Net repayments of revolving bank loans (345,000) (70,000)
Repayments of other debt (1,778) (1,778)
---------- ----------
Net cash used in financing activities (215,778) (68,778)
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (74,502) 11,833
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,780 30,338
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,278 $ 42,171
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 15,748 $ 12,738
========== ==========
Income taxes $ 31 $ 456
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 8
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
THREE-MONTH PERIODS ENDED MARCH 31, 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 periods ended March 31, 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 periods ended March 31, 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>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
----------- ------------
(000'S OMITTED)
<S> <C> <C>
Refined products $676,032 $747,620
Crude oil 183,240 150,092
Materials and supplies 55,403 55,441
-------- --------
$914,675 $953,153
======== ========
</TABLE>
6
<PAGE> 9
3. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
(UNAUDITED)
------------ -----------
(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% 199,814 199,806
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 12,500 14,286
------------ ------------
1,092,522 1,439,300
Current portion of long-term debt (47,078) (47,078)
------------ ------------
$ 1,045,444 $ 1,392,222
============ ============
</TABLE>
At March 31, 2000, the net year to date repayments on the revolving
bank loans were $345 million.
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.
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.
7
<PAGE> 10
CITGO has notes receivable from LYONDELL-CITGO which total $31 million
and $28 million at March 31, 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>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
(Unaudited)
(000s omitted)
<S> <C> <C>
Carrying value of investment $ 543,366 $ 560,227
Notes receivable 30,955 28,255
Participation interest 41% 41%
Summary of financial position:
Current assets $ 221,890 $ 219,365
Non current assets 1,399,162 1,405,879
Current liabilities 718,115 696,661
Non current liabilities 325,302 316,492
Member's equity 577,635 612,091
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Equity in net income $ 6,276 $ 3,591
Cash distribution received 23,137 18,393
Summary of operating results:
Revenue $ 859,288 $ 431,750
Gross profit 47,873 42,248
Net income 21,810 14,864
</TABLE>
LYONDELL-CITGO has arranged interim financing and repaid a $450 million
term loan that matured on May 5, 2000.
8
<PAGE> 11
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, is
scheduled for May 2000.
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. 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 recently
ruled, over CITGO's objections, that a settlement agreement CITGO
entered into in September 1997 and subsequently withdrew from, which
provided for settlement of the remaining property damage claims for $5
million is enforceable. CITGO believes this ruling is erroneous and has
appealed. The trial against CITGO of these remaining claims has been
postponed indefinitely. Two related personal injury and wrongful death
lawsuits were filed against the same defendants 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; an appeal of
this ruling is expected. Trials of the remaining cases are currently
stayed.
CITGO is among defendants to lawsuits in California, North Carolina,
New York and Illinois 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, and the New York
case, filed in January 2000 are putative class actions on behalf of
9
<PAGE> 12
owners of water wells and other drinking water supplies in such states.
The Illinois class 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
an environmental compliance review at the Corpus Christi refinery in
the first and second quarters of 1998. In January 1999, the TNRCC
issued the Company a Notice of Violation ("NOV") arising from this
review and in October 1999 proposed fines of approximately $1.6 million
related to the NOV. Most of the alleged violations refer to
recordkeeping and reporting issues, failure to keep proper records,
failure to meet required emission levels, and failure to properly
monitor emissions. TNRCC issued the Company another NOV in December
1999 based on its 1999 audits which cites items similar to items cited
earlier and the agency has tentatively suggested that the two audits
should be combined for resolution. The Company 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 intends to conduct 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 a 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
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, 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 March 31, 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 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.
10
<PAGE> 13
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
March 31, 2000, PDVSA's 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. As a result, CITGO estimates that
crude oil costs in the three months ended March 31, 2000 were higher by
$5 million than what would have otherwise been the case. 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 numerous factors, including unpredictable
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 three months ended March 31, 2000, PDVSA did not
deliver naphtha pursuant to two of the contracts and, as a result,
naphtha costs, net of deemed margin, were higher by $1 million than
what would have otherwise been the case.
11
<PAGE> 14
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 first quarter ended March 31, 2000, CITGO generated net income
of $38.2 million on revenue of $4.8 billion compared to net income of $86.2
million on revenues of $2.3 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 $159 million at December 31, 1998, to reflect market prices at
that time.(See "Gross margin").
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues
and sales volumes for the three-month periods ended March 31, 2000 and 1999:
CITGO SALES REVENUES AND VOLUMES
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
($ in millions) (MM gallons)
<S> <C> <C> <C> <C>
Gasoline $ 2,655 $ 1,256 3,141 3,101
Jet fuel 494 191 611 536
Diesel/#2 fuel 1,094 452 1,380 1,309
Asphalt 47 26 77 70
Petrochemicals and industrial products 391 196 386 577
Lubricants and waxes 115 119 56 68
-------- -------- -------- --------
Total refined product sales 4,796 2,240 5,651 5,661
Other sales 36 16
-------- -------- -------- --------
Total sales $ 4,832 $ 2,256 5,651 5,661
======== ======== ======== ========
</TABLE>
12
<PAGE> 15
The following table summarizes CITGO's cost of sales and operating
expenses for the three-month periods ended March 31, 2000 and 1999:
CITGO COST OF SALES AND OPERATING EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------
2000 1999
-------- --------
($ in millions)
<S> <C> <C>
Crude oil $ 1,126 $ 443
Refined products 2,884 1,289
Intermediate feedstocks 277 122
Refining and manufacturing costs 208 193
Other operating costs, expenses and inventory changes (1) 219 2
-------- --------
Total cost of sales and operating expenses $ 4,714 $ 2,049
======== ========
</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".
Sales revenues and volumes. Sales increased $2.6 billion, or
approximately 114%, in the three-month period ended March 31, 2000 as compared
to the same period in 1999. This was due to an increase in average sales price
of 115% and a decrease in sales volume of less than 1%. (See CITGO Sales
Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
increased by $1 million for the three-month period ended March 31, 2000 as
compared to the same period in 1999. The increase was primarily due to the
change in the earnings of LYONDELL-CITGO. CITGO's share of these earnings
increased $2 million, from $4 million in the first three months of 1999 to $6
million in the first three months of 2000.
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2.7 billion or 130%, in the quarter ended March 31, 2000
as compared to the same period in 1999. (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 61% and 63% of total cost of sales and operating
expenses for the first quarters 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 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.
13
<PAGE> 16
Gross margin. The gross margin for the three-month period ended March
31, 2000 was approximately 2.1 cents per gallon, compared to approximately 3.7
cents per gallon for the same period in 1999. In the three-month period ended
March 31, 2000, the revenue per gallon component increased approximately 115%
while the cost per gallon component increased approximately 130%. As a result,
the gross margin decreased approximately 1.6 cents on a per gallon basis in the
quarter ended March 31, 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. At March 31, 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 first quarter of 2000 by 20%, from $54
million in the first quarter of 1999 to $43 million in the first quarter of
2000. The decrease is principally due to the write-off of the bad debt reserve
related to credit card receivables. The write-off 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 three-month period ended March 31, 2000, the Company's
consolidated net cash provided by operating activities totaled approximately
$169 million. Operating cash flows were derived from net income of $38 million,
depreciation and amortization of $59 million, and changes in other assets and
liabilities of $72 million.
Net cash used in investing activities totaled $28 million for the
three-month period ended March 31, 2000 consisting primarily of capital
expenditures of $27 million (compared to $55 million for the same period in
1999). The decline in capital expenditures in the first quarter of 2000 compared
to the first quarter of 1999 is due primarily to projects which are progressing
more slowly than anticipated and projects which had to be postponed when the
turnarounds with which they were associated were postponed.
Net cash used in financing activities totaled $216 million for the
three-month period ended March 31, 2000 consisting primarily of $345 million net
repayment on revolving bank loans partially offset by proceeds from short-term
borrowings of $131 million.
As of March 31, 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 $53 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
14
<PAGE> 17
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.
The Company is in compliance with its obligations under its debt
financing arrangements at March 31, 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"). 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. CITGO 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, 2001.
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, 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.
15
<PAGE> 18
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 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 Purchased 2000 69 $ 2.5 $ 2.5
Futures Sold 2000 60 $ 2.1 $ 2.2
OTC Swap Options Purchased 2000 1,500 $ (0.5) $ --
OTC Swap Options Sold 2000 1,500 $ 0.5 $ (0.1)
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 500 $ 14.0 $ 16.6
Heating Oil (1) Futures Purchased 2000 71 $ 1.8 $ 2.0
Futures Purchased 2001 19 $ 0.5 $ 0.5
Futures Sold 2000 75 $ 2.4 $ 2.5
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 400 $ 9.7 $ 11.5
OTC Swaps (Pay Fixed/Receive Floating)(4) 2000 10 $ 0.2 $ 0.3
Crude Oil (1) OTC Swaps (Pay Fixed/Receive Floating)(4) 2000 900 $ 21.0 $ 23.8
Natural Gas (3) Futures Purchased 2000 15 $ 0.4 $ 0.4
</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.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 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 44 $ 1.0 $ 1.0
Futures Sold 1999 25 $ 0.5 $ 0.5
Heating Oil (1) Futures Purchased 1999 117 $ 2.4 $ 2.2
Futures Sold 1999 25 $ 0.4 $ 0.5
OTC Caps Purchased 1999 60 $ -- $ --
Natural Gas (3) Futures Purchased 1999 150 $ 2.9 $ 3.2
</TABLE>
- ----------------------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
16
<PAGE> 19
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,
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 MARCH 31, 2000 AND 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, 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 $1 million.
17
<PAGE> 20
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT MARCH 31, 2000
<TABLE>
<CAPTION>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
<S> <C> <C> <C> <C>
2000 $ 40 9.11% $ 152 7.17%
2001 40 9.11% 7 7.54%
2002 36 8.78% -- 8.20%
2003 61 8.79% -- 8.54%
2004 31 8.02% 16 8.71%
Thereafter 391 8.02% 465 9.32%
------- ------- ------- -------
Total $ 599 8.29% $ 640 8.77%
======= ======= ======= =======
Fair Value $ 599 $ 640
======= =======
</TABLE>
DEBT OBLIGATIONS
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 6.25%
2000 40 9.11% 7 6.34%
2001 40 9.11% 7 6.76%
2002 36 8.78% -- 7.18%
2003 61 8.79% 95 7.59%
Thereafter 422 8.02% 481 9.58%
----- ---- ----- ----
Total $ 639 8.34% $ 635 8.98%
===== ==== ===== ====
Fair Value $ 616 $ 635
===== =====
</TABLE>
18
<PAGE> 21
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.
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITGO PETROLEUM CORPORATION
Date: May 9, 2000 /s/ R. M. Bright
------------------------------------
R. M. Bright
Controller (Chief Accounting Officer)
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule (filed electronically only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 21,278
<SECURITIES> 0
<RECEIVABLES> 1,073,164
<ALLOWANCES> (10,055)
<INVENTORY> 914,675
<CURRENT-ASSETS> 2,012,643
<PP&E> 3,950,679
<DEPRECIATION> (1,099,982)
<TOTAL-ASSETS> 5,791,704
<CURRENT-LIABILITIES> 1,679,419
<BONDS> 1,045,444
0
0
<COMMON> 1
<OTHER-SE> 2,002,098
<TOTAL-LIABILITY-AND-EQUITY> 5,791,704
<SALES> 4,831,804
<TOTAL-REVENUES> 4,842,671
<CGS> 4,714,261
<TOTAL-COSTS> 4,760,107
<OTHER-EXPENSES> 691
<LOSS-PROVISION> (2,679)
<INTEREST-EXPENSE> 23,953
<INCOME-PRETAX> 60,599
<INCOME-TAX> 22,422
<INCOME-CONTINUING> 38,177
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,177
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
