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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 MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
COMMISSION FILE NUMBER 1-14380
CITGO PETROLEUM CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 73-1173881
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
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(Address of principal executive office) (Zip Code)
(918) 495-4000
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(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Act): Yes [ ] No [X]
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, 2004)
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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, 2004
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS.................................................. 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2004 and
December 31, 2003................................................................ 2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three Month Periods Ended March 31, 2004 and 2003................................ 3
Condensed Consolidated Statement of Shareholder's Equity - Three-Month Period
Ended March 31, 2004............................................................. 4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 2004 and 2003.......................................................... 5
Notes to the Condensed Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 23
Item 4. Controls and Procedures.......................................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 29
Item 6. Exhibits and Reports on Form 8-K................................................. 29
SIGNATURES.................................................................................... 30
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
Except for the historical information contained in this Report, certain of
the matters discussed in this Report may be deemed to be "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Specifically, all statements
under the caption "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" pertaining to capital expenditures and
investments related to environmental compliance, strategic planning, purchasing
patterns of refined products and capital resources available to CITGO Petroleum
Corporation ("CITGO") are forward looking statements. Words such as
"anticipate," "estimate," "expect," "project," "believe" and similar expressions
generally identify a forward-looking statement.
We caution readers that these forward looking statements are subject to
known and unknown risks and uncertainties that may cause actual results to
differ materially from the results that are projected, expressed or implied.
Some of those risks and uncertainties include:
- the availability and cost of crude oil, feedstocks, blending components
and refined products, which can affect our ability to operate our
refineries and our costs;
- accidents, interruptions in transportation, inclement weather and other
events that cause unscheduled shutdowns or otherwise adversely affect our
refineries, pipelines or equipment, or those of our suppliers or
customers;
- prices or demand for CITGO products, which are influenced by general
economic activity, weather patterns (including seasonal fluctuations),
prices of alternative fuels, energy conservation efforts and actions by
competitors;
- environmental and other regulatory requirements, which affect the content
of our products and our operations, operating costs and capital
expenditure requirements;
- costs and uncertainties associated with technological change and
implementation;
- inflation: and
- continued access to capital markets and commercial bank financing on
favorable terms, which can affect our ability to finance capital
improvements, our costs and our flexibility.
CITGO purchases approximately one-half of its crude oil requirements from
Petroleos de Venezuela, S.A., the national oil company of the Bolivarian
Republic of Venezuela and CITGO's ultimate parent corporation, under long-term
supply agreements.
Readers are cautioned not to place undue reliance on these forward looking
statements, which apply only as of the date of this Report. CITGO disclaims any
duty to publicly release any revision to these forward looking statements to
reflect events or circumstances after the date of this Report.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED)
--------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 327,012 $ 202,008
Accounts receivable, net 1,145,500 1,060,333
Due from affiliates 96,265 71,336
Inventories 952,990 1,017,613
Prepaid expenses and other 35,213 28,003
----------- ------------
Total current assets 2,556,980 2,379,293
PROPERTY, PLANT AND EQUIPMENT - Net 3,909,191 3,907,203
RESTRICTED CASH 6,891 6,886
INVESTMENTS IN AFFILIATES 640,888 647,649
OTHER ASSETS 366,121 332,462
----------- ------------
$ 7,480,071 $ 7,273,493
=========== ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 773,159 $ 766,331
Payables to affiliates 540,575 486,058
Taxes other than income 285,338 173,932
Other 232,045 255,953
Current portion of long-term debt 11,364 31,364
Current portion of capital lease obligation 2,336 2,336
----------- ------------
Total current liabilities 1,844,817 1,715,974
LONG-TERM DEBT 1,454,015 1,442,100
CAPITAL LEASE OBLIGATION 25,185 25,969
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 339,975 319,911
OTHER NONCURRENT LIABILITIES 312,097 308,248
DEFERRED INCOME TAXES 966,929 959,807
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,659,698 1,659,698
Retained earnings 897,782 863,093
Accumulated other comprehensive loss (20,428) (21,308)
----------- ------------
Total shareholder's equity 2,537,053 2,501,484
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$ 7,480,071 $ 7,273,493
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See notes to condensed consolidated financial statements
2
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
--------------------------
2004 2003
----------- ------------
REVENUES:
Net sales $ 6,579,719 $ 6,227,716
Sales to affiliates 75,510 147,965
----------- ------------
6,655,229 6,375,681
Equity in earnings of affiliates 46,032 13,624
Insurance recoveries - 117,714
Other income (expense) - net (322) 14,898
----------- ------------
6,700,939 6,521,917
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $2,515,917 and $2,041,581 from affiliates) 6,540,842 6,205,790
Selling, general and administrative expenses 73,606 73,344
Interest expense, excluding capital lease 31,537 23,008
Capital lease interest charge 753 1,321
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6,646,738 6,303,463
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INCOME BEFORE INCOME TAXES 54,201 218,454
INCOME TAXES 19,512 78,643
----------- ------------
NET INCOME 34,689 139,811
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OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Reclassification adjustment for derivative losses included
in net income, net of related income taxes of $44 and $43 78 77
Foreign currency translation gain (loss), net of related
income taxes of $451 and $(54) 802 (96)
----------- ------------
OTHER COMPREHENSIVE INCOME (LOSS) 880 (19)
----------- ------------
COMPREHENSIVE INCOME $ 35,569 $ 139,792
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See notes to condensed consolidated financial statements.
3
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER
--------------- ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ------ ----------- --------- ------------- -----------
BALANCE, DECEMBER 31, 2003 1 $ 1 $ 1,659,698 $ 863,093 $ (21,308) $ 2,501,484
Net income - - - 34,689 - 34,689
Other comprehensive income (loss) - - - - 880 880
------ ------ ----------- --------- ------------- -----------
BALANCE, MARCH 31, 2004 1 $ 1 $ 1,659,698 $ 897,782 $ (20,428) $ 2,537,053
====== ====== =========== ========= ============= ===========
See notes to condensed consolidated financial statements.
4
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
--------------------------
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,689 $ 139,811
Depreciation and amortization 86,696 79,178
Other adjustments to reconcile net income to net cash
provided by operating activities 26,055 94,578
Changes in operating assets and liabilities 61,795 (13,976)
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Net cash provided by operating activities 209,235 299,591
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (67,260) (90,425)
Proceeds from sales of property, plant and equipment 55 1,582
Increase in restricted cash (5) (37)
Investments in LYONDELL-CITGO Refining LP (6,023) (14,900)
Investments in and advances to other affiliates (1,553) (1,250)
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Net cash used in investing activities (74,786) (105,030)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes due 2011 - 546,590
Proceeds from senior secured term loan - 200,000
Net repayments of revolving bank loans - (279,300)
Repurchase of senior notes due 2006 - (47,500)
Payments on master shelf agreement senior notes (20,000) (50,000)
Proceeds from (payments on) tax-exempt bonds 11,800 (75,000)
Payments on loans from affiliates - (29,500)
Payments of capital lease obligations (784) -
Debt issuance costs (461) (11,687)
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Net cash (used in) provided by financing activities (9,445) 253,603
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INCREASE IN CASH AND CASH EQUIVALENTS 125,004 448,164
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 202,008 33,025
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 327,012 $ 481,189
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 41,538 $ 9,230
=========== ============
Income taxes $ 1,759 $ (45,801)
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See notes to condensed consolidated financial statements.
5
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTHS ENDED MARCH 31, 2004 AND 2003
1. BASIS OF PRESENTATION
CITGO Petroleum Corporation ("CITGO" or the "Company") and its
subsidiaries are engaged in the refining, marketing and transportation of
petroleum products including gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, asphalt and refined waxes, mainly within the
continental United States east of the Rocky Mountains. The Company does
not own any crude oil reserves or crude oil exploration or production
facilities. It operates as a single segment. It is an indirect wholly
owned subsidiary of Petroleos de Venezuela, S.A. ("PDVSA", which may also
be used herein to refer to one or more of its subsidiaries), the national
oil company of the Bolivarian Republic of Venezuela.
The financial information for CITGO subsequent to December 31, 2003 and
with respect to the interim three-month periods ended March 31, 2004 and
2003 is unaudited. In management's opinion, 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, 2004 and
2003 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, 2003 on Form 10-K.
2. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements."
FIN 46 defines variable interest entities and how an enterprise should
assess its interests in a variable interest entity to decide whether to
consolidate that entity. In December 2003, the FASB issued a revision of
FIN 46 (FIN 46R), primarily to clarify the required accounting for
investments in variable interest entities. This standard replaces FIN 46.
For CITGO, which meets the definition of a nonpublic enterprise for
purposes of applying FIN 46R, application is required immediately for
variable interest entities created after December 31, 2003 and for
variable interest entities in which an interest is acquired after that
date, and to all entities that are subject to FIN 46R by January 1, 2005.
The interpretation requires certain minimum disclosures with respect to
variable interest entities in which an enterprise holds significant
variable interest but which it does not consolidate. FIN 46R may be
applied prospectively with a cumulative-effect adjustment as of the date
on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of
the beginning of the first year restated. The applicable provisions of FIN
46R had no impact on financial position or results of operations for the
three-month period ended March 31, 2004 and CITGO expects that the
application of FIN 46R will not have a material impact on its financial
position or results of operations in the future.
3. ACCOUNTS RECEIVABLE
The Company has a limited purpose consolidated subsidiary, CITGO Funding
Corporation ("CITGO Funding"), which established a non-recourse agreement
to sell an undivided interest in specified trade accounts receivables
("pool") to independent third parties. Under the terms of the agreement,
new receivables are added to the pool as collections (administered by
CITGO) reduce previously sold receivables. CITGO pays specified fees
related to its sale of receivables under the program. The amount sold to
third-parties at any one time under the trade accounts receivable sales
agreement is limited to a maximum of $275 million (increased from $200
million through an amendment in November 2003).
6
As of March 31, 2004, none of the receivables in the designated pool had
been sold to the third party and the entire amount was retained by CITGO
Funding.
4. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED)
-------------- ------------
(000S OMITTED)
Refined products $ 575,792 $ 686,483
Crude oil 286,188 239,974
Materials and supplies 91,010 91,156
-------------- ------------
$ 952,990 $ 1,017,613
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5. RESTRICTED CASH
CITGO issued $30 million of tax-exempt environmental facilities revenue
bonds in June 2002 and $39 million in May 2003. The proceeds from these
bonds are being used for spending on qualified projects at the Lemont and
Corpus Christi refineries. Restricted cash of approximately $7 million at
March 31, 2004 represents highly liquid investments held in trust accounts
in accordance with these bond agreements. Funds may be released solely to
finance the qualified capital expenditures as defined in the related bond
agreements.
7
6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
MARCH 31, DECEMBER 31,
2004 2003
(UNAUDITED)
----------- -------------
(000S OMITTED)
Senior Secured Term Loan, due 2006 with variable interest rate $ 200,000 $ 200,000
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7-7/8% 149,952 149,946
Senior Notes, $550 million face amount, due 2011 with
interest rate of 11-3/8% 547,057 546,949
Private Placement Senior Notes, due 2004 to 2006 with an
interest rate of 9.30% 34,091 34,091
Master Shelf Agreement Senior Notes, due 2006 to
2009 with interest rates from 7.17% to 8.94% 165,000 185,000
Tax-Exempt Bonds, due 2007 to 2033 with variable
and fixed interest rates 344,279 332,478
Taxable Bonds, due 2028 with variable interest rates 25,000 25,000
----------- ------------
1,465,379 1,473,464
Current portion of long-term debt (11,364) (31,364)
----------- ------------
$ 1,454,015 $ 1,442,100
=========== ============
CITGO has a $260 million unsecured revolving credit facility maturing in
December 2005. There was no outstanding balance under this credit facility
at March 31, 2004.
The Company has outstanding a senior secured term loan under an agreement
with a syndicate of various lenders. The senior loan is secured by CITGO's
equity interest in two pipeline companies.
In February 2003, CITGO issued $550 million aggregate principal amount of
11-3/8% unsecured senior notes due February 1, 2011. In connection with
this debt issuance, CITGO repurchased $50 million principal amount of its
7-7/8% senior notes due 2006.
In May 1996, CITGO issued $200 million aggregate principle amount of
7-7/8% unsecured senior notes due 2006. These notes were issued under a
shelf-registration statement covering $600 million of debt securities that
was filed with the Securities and Exchange Commission. Due to CITGO's
credit ratings, the shelf registration statement is not presently
available.
Approximately $234 million of the outstanding taxable and tax-exempt bonds
are supported by letters of credit issued by various banks. In February
2004 CITGO reissued $11.8 million of tax-exempt revenue bonds due 2007
which had been repurchased by the Company during 2003 due to lack of
letter of credit support.
8
Our various debt instruments require maintenance of a specified minimum
net worth and impose restrictions on our ability to: incur additional debt
unless we meet specified interest coverage and debt to capitalization
ratios; place liens on our property, subject to specified exceptions; sell
assets, subject to specified exceptions; make restricted payments,
including dividends, repurchases of capital stock and specified
investments; and merge, consolidate or transfer assets. CITGO is in
compliance with its covenants under its debt financing arrangements at
March 31, 2004.
7. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%)
and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery
processes heavy crude oil supplied by PDVSA under a long-term supply
contract that expires in 2017. CITGO purchases substantially all of the
gasoline, diesel and jet fuel produced at the refinery under a long-term
contract.
As of March 31, 2004, CITGO has a note receivable from LYONDELL-CITGO of
$35 million. The note bears interest at market rates, which was
approximately 1.9 percent at March 31, 2004. Principal and interest are
due in July 2005. Accordingly, the note and related accrued interest are
included in the balance sheet caption other assets in the accompanying
consolidated balance sheets.
9
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
which differ from participation interests. Cash distributions are
allocated to the Owners based on participation interest. Information on
CITGO's investment in LYONDELL-CITGO follows:
(000s omitted)
March 31, December 31,
2004 2003
----------- -------------
(Unaudited)
Carrying value of investment $ 451,388 $ 454,679
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 332,000 $ 316,000
Non current assets 1,303,000 1,321,000
Current liabilities:
Distributions payable to partners 36,000 36,000
Current portion of long-term debt 450,000 -
Other 378,000 350,000
Noncurrent liabilities:
Long-term debt - 450,000
Notes payable to partners 265,000 265,000
Other 83,000 113,000
Partners' capital 423,000 423,000
Three Months Ended March 31,
2004 2003
------------ ------------
(Unaudited)
Equity in net income $ 35,237 $ 9,110
Cash distribution received 44,550 62,238
Summary of LYONDELL-CITGO's operating results:
Revenue $ 1,153,538 $ 1,183,128
Gross profit 116,066 49,664
Net income 91,494 28,180
LYONDELL-CITGO has a $450 million credit facility and a $70 million
working capital revolving credit facility, both of which expire in June
2004. Management of LYONDELL-CITGO and the Owners are pursuing a
refinancing of these facilities and expect to complete the refinancing
before they expire. On March 11, 2004, LYONDELL-CITGO entered into an
agreement with a major financial institution to refinance the facilities
on a long-term basis, with interest of LIBOR plus 3%, but in no event more
than LIBOR plus 8%, and with other terms substantially similar to the
current facilities. The closing of the new facility is subject to normal
conditions of closing, as well as the maintenance of certain financial and
10
operating ratios. The $450 million term bank loan amount has been
classified by LYONDELL-CITGO in its balance sheet as a current liability
at March 31, 2004. There was no outstanding balance under the working
capital revolving credit facility at March 31, 2004.
8. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the
ordinary course of business are pending against CITGO. CITGO 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 CITGO, and in amounts greater than
CITGO's accruals, then such determinations could have a material adverse
effect on CITGO's results of operations in a given reporting period. The
most significant lawsuits and claims are discussed below.
In September 2002, a Texas court ordered CITGO to pay property owners and
their attorneys approximately $6 million based on an alleged settlement of
class action property damage claims as a result of alleged air, soil and
groundwater contamination from emissions released from CITGO's Corpus
Christi, Texas refinery. CITGO has appealed the ruling to the Texas Court
of Appeals.
CITGO, along with most of the other major oil companies, is a defendant in
a number of federal and state lawsuits alleging contamination of private
and public water supplies by methyl tertiary butyl ether ("MTBE"), a
gasoline additive. In general, the plaintiffs claim that MTBE renders the
water not potable. In addition to compensatory and punitive damages,
plaintiffs seek injunctive relief to abate the contamination. The Company
intends to defend all of the MTBE lawsuits vigorously. CITGO's MTBE
litigation can be divided into two categories -- pre and post-September
30, 2003 litigation. In the six pre-September 30, 2003 cases, CITGO is
defending itself in Madison County, Illinois state court and in two New
York county state courts. In several of the New York cases, the judge on
March 26, 2004, granted CITGO's Motion for Summary Judgment. The
post-September 30, 2003 cases were filed after new federal legislation was
proposed which would have precluded plaintiffs from filing lawsuits based
on the theory that gasoline with MTBE is a defective product. These
approximately 60 cases, the majority of which were filed by municipal
authorities, were removed to federal court and at the defendants' request
consolidated in Multi-District Litigation ("MDL") 1358. On March 16, 2004,
the judge in MDL 1358 denied the plaintiffs' motion to remand the cases to
state court.
CITGO has been named as a defendant in approximately 150 asbestos lawsuits
pending in state and federal courts. These cases, most of which involve
multiple defendants, are brought by former employees or contractor
employees seeking damages for asbestos related illnesses allegedly caused,
at least in part, from exposure at refineries owned or operated by CITGO
in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In
many of these cases, the plaintiffs' alleged exposure occurred over a
period of years extending back to a time before CITGO owned or operated
the premises at issue. The Company does not believe that the resolution of
these cases will have a material adverse effect on its financial condition
or results of operations.
At March 31, 2004, CITGO's balance sheet included an accrual for lawsuits
and claims of $26 million compared with $27 million at December 31, 2003.
In addition, CITGO estimates that an additional loss of $4 million is
reasonably possible in connection with such lawsuits and claims.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - CITGO is subject to the federal
Clean Air Act ("CAA") which includes the New Source Review ("NSR") program
as well as the Title V air permitting program; the federal Clean Water Act
which includes the National Pollution Discharge Elimination System
program; the Toxic Substances Control Act; and the federal Resource
Conservation and Recovery Act and their equivalent state programs. CITGO
is required to obtain permits under all of these programs and believes it
is in material compliance with the terms of these permits. CITGO does not
have any material Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") liability because the former owners
11
of many of CITGO's assets have by explicit contractual language assumed
all or the material portion of CERCLA obligations related to those assets.
This includes the Lake Charles refinery and the Lemont refinery.
The U.S. refining industry is required to comply with increasingly
stringent product specifications under the 1990 Clean Air Act Amendments
for reformulated gasoline and low sulfur gasoline and diesel fuel that
required additional capital and operating expenditures, and altered
significantly the U.S. refining industry and the return realized on
refinery investments. Also, regulatory interpretations by the United
States Environmental Protection Agency ("U.S. EPA") regarding
"modifications" to refinery equipment under the NSR provisions of the CAA
have created uncertainty about the extent to which additional capital and
operating expenditures will be required and administrative penalties
imposed.
In addition, CITGO is subject to various other federal, state and local
environmental laws and regulations which may require CITGO to take
additional compliance actions and also actions to remediate the effects on
the environment of prior disposal or release of petroleum, hazardous
substances and other waste and/or pay for natural resource damages.
Maintaining compliance with environmental laws and regulations could
require significant capital expenditures and additional operating costs.
Also, numerous other factors affect CITGO's plans with respect to
environmental compliance and related expenditures.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. Environmental liabilities are not discounted to their present
value and are recorded without consideration of potential recoveries from
third parties. Subsequent adjustments to estimates, to the extent
required, may be made as more refined information becomes available. CITGO
believes the amounts provided in its consolidated financial statements, as
prescribed by generally accepted accounting principles, are adequate in
light of probable and estimable liabilities and obligations. However,
there can be no assurance that the actual amounts required to discharge
alleged liabilities and obligations and to comply with applicable laws and
regulations will not exceed amounts provided for or will not have a
material adverse affect on its consolidated results of operations,
financial condition and cash flows.
In 1992, CITGO reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at the Lake Charles refinery by 1994. The remediation
commenced in December 1993. CITGO is complying with a June 2002 LDEQ
administrative order about the development and implementation of a
corrective action or closure plan. Based on currently available
information and proposed remedial approach, CITGO currently anticipates
closure and post-closure costs related to these surface impoundments and
related solid waste management units to range from $36 million to $41
million in addition to the approximately $45 million already expended.
CITGO and the former owner of the refinery are participating in the
closure and sharing the related costs based on estimated contributions of
waste and ownership periods.
CITGO's Corpus Christi, Texas refinery is being investigated by state and
federal agencies for alleged criminal violations of federal environment
statutes and regulations, including the CAA and the Migratory Bird Act.
CITGO is cooperating with the investigation. CITGO believes that it has
defenses to any such charges. At this time, CITGO cannot predict the
outcome of or the amount or range of any potential loss that would ensue
from any such charges.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. EPA that the U.S. EPA believes these companies have
contributed to contamination in the Calcasieu Estuary, near Lake Charles,
Louisiana and are potentially responsible parties ("PRPs") under the
CERCLA. The U.S. EPA made a demand for payment of its past investigation
costs from CITGO and other PRPs and since 1999 has been conducting a
remedial investigation/feasibility study ("RI/FS") under its CERCLA
authority. While CITGO disagrees with many of the U.S. EPA's earlier
allegations and conclusions, CITGO and other industrial companies signed
in December 2003, a Cooperative Agreement with the LDEQ on issues relative
12
to the Bayou D'Inde tributary section of the Calcasieu Estuary, and the
companies are proceeding with a Feasibility Study Work Plan. CITGO will
continue to deal separately with the LDEQ on issues relative to its
refinery operations on another section of the Calcasieu Estuary. The
Company still intends to contest this matter if necessary.
In January and July 2001, CITGO received notices of violation ("NOVs")
from the U.S. EPA alleging violations of the CAA. The NOVs are an
outgrowth of an industry-wide and multi-industry U.S. EPA enforcement
initiative alleging that many refineries and electric utilities modified
air emission sources without obtaining permits or installing new control
equipment under the NSR provisions of the CAA. The NOVs followed
inspections and formal information requests regarding CITGO's Lake
Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois refineries.
Since mid-2002, CITGO has been engaged in global settlement negotiations
with the United States. The settlement negotiations have focused on
different levels of air pollutant emission reductions and the merits of
various types of control equipment to achieve those reductions. No
settlement agreement, or agreement in principal, has been reached. Based
primarily on the costs of control equipment reported by the United States
and other petroleum companies and the types and number of emission control
devices that have been agreed to in previous petroleum companies' NSR
settlements with the United States, CITGO estimated that the capital costs
of a settlement with the United States could be approximately $200
million. Any such capital costs would be incurred over a period of years,
anticipated to be from 2004 to 2008. Also, this cost estimate range, while
based on current information and judgment, is dependent on a number of
subjective factors, including the types of control devices installed, the
emission limitations set for the units the year the technology may be
installed, and possible future operational changes. CITGO also may be
subject to possible penalties. If settlement discussions fail, CITGO is
prepared to contest the NOVs. If CITGO is found to have violated the
provisions cited in the NOVs, it estimated the capital expenditures and
penalties that might result could range up to $290 million, to be incurred
over a period of years. As a result of better project definition based on
additional engineering and third party vendor quotations, CITGO is
reviewing these estimates of future capital expenditures. Based on
preliminary assessments, CITGO expects these estimates will increase, most
likely by a material amount.
In June 1999, an NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations
covering benzene emissions from wastewater treatment operations at CITGO's
Lemont, Illinois refinery. CITGO is in settlement discussions with the
U.S. EPA. CITGO believes this matter will be consolidated with the matters
described in the previous paragraph.
In June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air
quality regulations at the CITGO's Lake Charles, Louisiana refinery during
2001. The majority of the alleged violations related to the leak detection
and repair program. CITGO is in settlement discussions with the LDEQ. The
LDEQ believes this matter will be consolidated with the matters described
in the previous paragraph related to the EPA's NSR enforcement initiative.
At March 31, 2004, CITGO's balance sheet included an environmental accrual
of $69 million compared with $63 million at December 31, 2003. Results of
operations reflect an increase in the accrual of $6 million during 2004
due primarily to a revision of the Company's estimated share of costs
related to two sites indicating higher costs. CITGO estimates that an
additional loss of $20 million is reasonably possible in connection with
environmental matters.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of CITGO and its
subsidiaries' facilities and operations. Those audits have the potential
to reveal matters that those authorities believe represent non-compliance
in one or more respects with regulatory requirements and for which those
authorities may seek corrective actions and/or penalties in an
administrative or judicial proceeding. Based upon current information,
CITGO is not aware that any such audits or their findings have resulted in
the filing of such a proceeding or is the subject of a threatened filing
with respect to such a proceeding, nor does CITGO believe that any such
audit or their findings will have a material adverse effect on its future
business and operating results, other than matters described above.
13
Conditions which require additional expenditures may exist with respect to
CITGO's various sites including, but not limited to, its operating
refinery complexes, former refinery sites, service stations and crude oil
and petroleum product storage terminals. Based on currently available
information, CITGO cannot determine the amount of any such future
expenditures.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of March 31, 2004,
CITGO's petroleum commodity derivatives included exchange traded futures
contracts, forward purchase and sale contracts, exchange traded and
over-the-counter options and over-the-counter swaps. At March 31, 2004,
the balance sheet captions prepaid expenses and other current assets and
other current liabilities include $12 million and $7 million,
respectively, related to the fair values of open commodity derivatives.
CITGO has also entered into various interest rate swaps to manage the
Company's risk related to interest rate changes on its debt. The fair
value of the interest rate swap agreements in place at March 31, 2004,
based on the estimated amount that the Company would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was a loss of $2 million, the offset of which is recorded
in the balance sheet caption other current liabilities. In connection with
the determination of fair market value, the Company considered the
creditworthiness of the counterparties, but no adjustment was determined
to be necessary as a result.
GUARANTEES - As of March 31, 2004, the Company has guaranteed the debt of
others in a variety of circumstances including letters of credit issued
for an affiliate, bank debt of an affiliate, bank debt of an equity
investment, bank debt of customers, customer debt related to the
acquisition of marketing equipment and financing debt incurred by an
equity investment as shown in the following table:
Expiration
Date
----------
(000s omitted)
Letters of credit $ 32,981 2004-2005
Bank debt
Equity investment 5,500 2004
Customers 2,206 2005-2006
Financing debt of customers
Customer equipment acquisition 773 2004-2007
Equipment acquisition - NISCO 10,998 2008
--------------
Total $ 52,458
==============
In each case, if the debtor fails to meet its obligation, CITGO could be
obligated to make the required payment. The Company has not recorded any
amounts on the Company's balance sheet relating to these guarantees.
In the event of debtor default on the letters of credit, CITGO has been
indemnified by PDV Holding, Inc., the direct parent of PDV America, which
is CITGO's direct parent. In the event of debtor default on the equity
investment bank debt, CITGO has no recourse. In the event of debtor
default on customer bank debt, CITGO generally has recourse to personal
guarantees from principals or liens on property. In the event of debtor
default on financing debt incurred by customers, CITGO would receive an
interest in the equipment being financed after making the guaranteed debt
payment. In the event of debtor default on financing debt incurred by an
equity investee, CITGO has no recourse.
CITGO has granted indemnities to the buyers in connection with past sales
of product terminal facilities. These indemnities provide that CITGO will
accept responsibility for claims arising from the period in which
14
CITGO owned the facilities. Due to the uncertainties in this situation,
the Company is not able to estimate a liability relating to these
indemnities.
The Company has not recorded a liability on its balance sheet relating to
product warranties because historically, product warranty claims have not
been significant.
9. RELATED PARTY TRANSACTIONS
CITGO purchases approximately one-half of the crude oil processed in its
refineries from subsidiaries of PDVSA under long-term supply agreements.
These supply agreements extend through the year 2006 for the Lake Charles
refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi
refinery and 2013 for the Savannah refinery.
These crude supply agreements contain force majeure provisions that excuse
the performance by either party of its obligations under the agreement
under specified circumstances.
Three affiliates entered into agreements to advance excess cash to the
Company from time to time under demand notes for amounts of up to a
maximum of $10 million with PDV Texas, Inc. ("PDV Texas"), $30 million
with PDV America and $10 million with PDV Holding. The notes bear interest
at rates equivalent to 30-day LIBOR plus 0.875% payable quarterly. At
March 31, 2004 and December 31, 2003, there was no outstanding balance on
these notes.
10. EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
PENSION BENEFITS OTHER BENEFITS
------------------ --------------------
2004 2003 2004 2003
(000S OMITTED)
Service cost $ 5,743 $ 4,975 $ 2,517 $ 2,200
Interest cost 7,953 7,333 6,388 5,556
Expected return on plan assets (7,286) (6,564) (18) (18)
Amortization of Transition Obligation (Asset) (11) (38) - -
Amortization of prior service cost (193) (191) (130) -
Amortization of net (gain) loss 818 806 14,093 12,536
------- ------- -------- --------
Net periodic benefit cost $ 7,024 $ 6,321 $ 22,850 $ 20,274
======= ======= ======== ========
EMPLOYER CONTRIBUTIONS
CITGO previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $58 million to its
pension plan in 2004. On April 15, 2004, CITGO contributed approximately
$5 million to its pension plan. CITGO presently anticipates contributing
an additional $53 million to fund its pension plan in 2004 for a total of
$58 million.
15
11. SUBSEQUENT EVENTS
On April 26, 2004, CITGO announced it will move its corporate headquarters
from Tulsa, Oklahoma to Houston, Texas. The Company estimates that it will
take two years to complete this transition.
On May 3, 2004, CITGO issued $25 million of tax-exempt environmental
revenue bonds due 2032 through a governmental issuer. The proceeds of that
issue were used to redeem $25 million of taxable environmental revenue
bonds due 2028 previously issued through that issuer. The tax-exempt bonds
are supported by a letter of credit issued by a bank.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This discussion of our financial condition and results of operations
should be read in conjunction with our unaudited condensed consolidated
financial statements included elsewhere in this report.
We generated net income of $35 million on total revenue of $6.7 billion in
the quarter ended March 31, 2004 compared to a net income of $140 million on
total revenue of $6.5 billion for the same period last year. The first quarter
of 2004 was a time of heavy turnaround activities at our refineries,
consequently, the average utilization at our light oils refineries was down and
our refined products production was lower compared with the first quarter of
2003. (See "Gross margin").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We make a number of significant estimates, assumptions and judgments on
the preparation of our financial statements. We direct your attention to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies" in our Form 10-K annual report for
our fiscal year ended December 31, 2003, for a discussion of the estimates and
judgments necessary in our accounting for environmental expenditures, litigation
and injury claims, health care costs and pensions.
17
RESULTS OF OPERATIONS
INCREASE INCREASE
THREE MONTHS ENDED MARCH 31, (DECREASE) (DECREASE)
2004 2003 OVER 2003 OVER 2003 (%)
------------ -------------- ---------- -------------
(000s omitted)
Net sales $ 6,579,719 $ 6,227,716 $ 352,003
Sales to affiliates 75,510 147,965 (72,455)
------------ -------------- ----------
6,655,229 6,375,681 279,548 4%
------------ -------------- ----------
Equity in earnings of affiliates 46,032 13,624 32,408
Insurance recoveries - 117,714 (117,714)
Other income (expense), net (322) 14,898 (15,220)
------------ -------------- ----------
6,700,939 6,521,917 179,022 3%
------------ -------------- ----------
Cost of sales and operating expenses 6,540,842 6,205,790 335,052
Selling, general and administrative expenses 73,606 73,344 262
Interest expense, excluding capital lease 31,537 23,008 8,529
Capital lease interest charge 753 1,321 (568)
------------ -------------- ----------
6,646,738 6,303,463 343,275 5%
------------ -------------- ----------
Income before income taxes 54,201 218,454 (164,253)
Income taxes 19,512 78,643 (59,131)
------------ -------------- ----------
Net income $ 34,689 $ 139,811 $ (105,122) -75%
============ ============== ==========
Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 6.22 $ 5.46 $ 0.76 14%
Average price per gallon of gasoline (2) $ 1.08 $ 1.00 $ 0.08 8%
Average cost per barrel of crude oil (3) $ 30.73 $ 29.83 $ 0.90 3%
- ------------------------
(1) The Gulf Coast 3/2/1 crack spread is the value of two-thirds barrel of
gasoline plus one-third barrel of distillate minus one barrel of crude
(West Texas Intermediate or "WTI"). Heavy crude refiners also evaluate the
light/heavy crude spread (WTI minus Maya). The sum of these benchmarks is
the heavy crack spread. During the first quarter of 2004, the heavy crack
spread was $15.67 per barrel versus $13.03 per barrel during the first
quarter of 2003. CITGO did not realize the full increase in the heavy
crack spread in its net income due to heavy planned turnaround activity
during the first quarter of 2004. The values used to calculate the Gulf
Coast 3/2/1 crack spread and the heavy crack spread are obtained from
Platts using an average of daily prices for the three month period ended
March 31, 2004 (excluding weekends and holidays).
(2) The average price per gallon of gasoline is based on CITGO gasoline sales
revenue divided by CITGO gasoline sales volume. See the "CITGO Sales
Revenues and Volumes" table that follows.
(3) The average cost per barrel of crude oil is based on CITGO's crude oil
cost divided by CITGO refinery crude inputs. See the "CITGO Cost of Sales
and Operating Expenses" table that follows.
18
Sales revenues and volumes. Sales increased $280 million, or approximately
4%, in the three-month period ended March 31, 2004 as compared to the same
period in 2003. This increase was primarily due to an increase in average sales
price of 4%. The following table summarizes the sources of our sales revenues
and sales volumes for the three-month periods ended March 31, 2004 and 2003:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- -------- ---------
($ in millions) (Gallons in millions)
Gasoline $ 3,724 $ 3,362 3,439 3,366
Jet fuel 588 517 598 539
Diesel/#2 fuel 1,408 1,668 1,497 1,725
Asphalt 105 70 165 92
Petrochemicals and industrial products 656 567 668 616
Lubricants and waxes 152 142 64 66
--------- --------- -------- --------
Total refined product sales 6,633 6,326 6,431 6,404
Other sales 22 50
--------- --------- -------- --------
Total sales $ 6,655 $ 6,376 6,431 6,404
========= ========= ======== ========
Equity in earnings of affiliates. The table below shows the changes during
the three months ended March 31, 2004 compared to the same period in 2003 in the
equity in earnings of affiliates. The increase in LYONDELL-CITGO's earnings in
the first quarter of 2004 as compared to the same period in 2003 was due
primarily to increased crude processing rates which were possible due to
receiving crude oil deliveries in excess of contract volumes. In contrast, net
income in the first quarter of 2003 was negatively affected by decreased crude
processing rates which were a result of a disruption of contract crude oil
deliveries, by recognition of an asset impairment of approximately $25 million,
and by higher natural gas costs.
THREE MONTHS INCREASE
ENDED MARCH 31, (DECREASE)
--------------- ----------
2004 2003 OVER 2003
------ ------ ----------
($ in millions)
LYONDELL-CITGO $ 35 $ 9 $ 26
Pipeline investments 10 7 3
Other 1 (2) 3
---- ------ ----------
Total $ 46 $ 14 $ 32
==== ====== ==========
19
Cost of sales and operating expenses. The following table summarizes our
cost of sales and operating expenses for the three-month periods ended March 31,
2004 and 2003:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS
ENDED MARCH 31,
---------------
2004 2003
------ ------
($ in millions)
Crude oil $1,633 $1,780
Refined products 3,774 3,506
Intermediate feedstocks 701 458
Refining and manufacturing costs 363 314
Other operating costs and expenses 70 148
------ ------
Total cost of sales and operating expenses $6,541 $6,206
====== ======
We purchase refined products to supplement the production from our
refineries to meet marketing demands and to optimize distribution. Refined
product purchases represented 58% and 56% of total cost of sales and operating
expenses for the first quarter of 2004 and 2003, respectively. We estimate
margins on purchased products, on average, are lower than margins on produced
products due to the fact that we can only receive the marketing portion of the
total margin received on the produced refined products. However, purchased
products are not segregated from our produced products and margins may vary due
to market conditions and other factors beyond our control. As such, it is not
practical to measure the effects on profitability of changes in volumes of
purchased products. In the near term, other than normal refinery turnaround
maintenance, we do not anticipate operational actions or market conditions which
might cause a material change in anticipated purchased product requirements;
however, there could be events beyond our control which impact the volume of
refined products purchased. (See also "Factors Affecting Forward Looking
Statements".)
Gross margin. Gross margin decreased approximately nine-tenths of one cent
per gallon in the quarter ended March 31, 2004 compared to the same period in
2003. Gross margin for the quarter ended March 31, 2004 was approximately 1.8
cents per gallon compared to gross margin of approximately 2.7 cents per gallon
for the same period in 2003.
Revenue per gallon for the first quarter 2004 increased approximately 4%
compared to the first quarter 2003. Cost of sales and operating expenses for
the quarter ended March 31, 2004 increased approximately 5% compared to the
same period in 2003.
A change in the price of crude oil, feedstocks and blending products
generally results in a corresponding change in the sales price of refined
products. The impact of changes in crude oil and feedstock prices on our
consolidated income before taxes depends, in part, on how quickly refined
product prices are adjusted to reflect these changes.
We did not capture the full benefit of improved industry margins due to
the heavy turnaround activities at our fuels refineries during the first
quarter of 2004.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1 million, or 1% from $73 million in the
first quarter of 2003 to $74 million in the first quarter of 2004.
Interest expense. Interest expense increased by $9 million in the
three-month period ended March 31, 2004 as compared to the same period in 2003.
This was primarily due to the net increase in the outstanding debt balance and
higher overall interest rates resulting from the issuance of the $550 million
senior notes and the closing of the $200 million secured term loan in February
2003.
20
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes cash flows during the three-month period ended
March 31, 2004 and 2003:
Three Months
Ended March 31,
------------------
2004 2003
-------- -----
($ in millions)
Net cash provided by/(used in):
Operating activities $ 209 $ 300
Investing activities $ (75) $(105)
Financing activities $ (9) $ 254
Cash Provided by Operating Activities
Consolidated net cash provided by operating activities totaled
approximately $209 million for the three-month period ended March 31, 2004.
Operating cash flows were derived primarily from net income of $35 million,
depreciation and amortization of $87 million, distributions in excess of equity
in earnings of affiliates of $8 million, increase in deferred taxes of $8
million, and changes in operating assets and liabilities of $62 million. The
more significant changes in operating assets and liabilities include an increase
in current liabilities and a decrease in inventories offset, in part, by an
increase in notes and accounts receivable.
Cash Used in Investing Activities
Net cash used in investing activities in the three month period ended
March 31, 2004 totaled $75 million consisting primarily of capital expenditures
of $67 million. These capital expenditures consisted of:
Three Months Ended
March 31, 2004
------------------
($ in millions)
Regulatory requirements $ 32
Maintenance capital projects 18
Strategic capital expenditures 17
----
Total capital expenditures $ 67
====
Cash Used in Financing Activities
Net cash used by financing activities totaled $9 million for the
three-month period ended March 31, 2004, consisting primarily of the payment of
$20 million on master shelf agreement notes. These payments were offset by
proceeds of $12 million from the issuance of tax-exempt bonds.
As of March 31, 2004, capital resources available to us included cash
on hand totaling $327 million generated by operations and other sources, and
available borrowing capacity under our committed bank facilities of $257
million.
21
Our various debt instruments require maintenance of a specified minimum
net worth and impose restrictions on our ability to:
- incur additional debt unless we meet specified interest coverage and debt
to capitalization ratios;
- place liens on our property, subject to specified exceptions;
- sell assets, subject to specified exceptions;
- make restricted payments, including dividends, repurchases of capital
stock and specified investments; and
- merge, consolidate or transfer assets.
We are in compliance with our covenants under our debt financing
arrangements at March 31, 2004.
Upon the occurrence of a change of control of our Company, as defined in
the Indenture governing our 11-3/8% senior notes due 2011, the holders of those
notes have the right to require us to repurchase them at a price equal to 101%
of the principal amount plus accrued interest. In addition, our bank credit
agreements provide that, unless lenders holding two-thirds of the commitments
thereunder otherwise agree, a change in control of our Company, as defined in
those agreements, will constitute a default under those credit agreements.
We believe that we will have sufficient resources to carry out planned
capital spending programs, including regulatory and environmental projects in
the near term, and to meet currently anticipated future obligations and other
planned expenditures as they arise. We periodically evaluate other sources of
capital in the marketplace and anticipate that long-term capital requirements
will be satisfied with current capital resources and future financing
arrangements, including the issuance of debt securities. Our ability to obtain
such financing will depend on numerous factors, including market conditions,
compliance with existing debt covenants and the perceived creditworthiness of
the Company at that time. See also "Factors Affecting Forward Looking
Statements."
Three of our affiliates entered into agreements to advance excess cash to
us from time to time under demand notes. These notes provide for maximum amounts
of $10 million from PDV Texas, $30 million from PDV America and $10 million from
PDV Holding. At March 31, 2004 and December 31, 2003, there was no outstanding
balance on these notes.
Our debt ratings, as currently assessed by the three major debt rating
agencies, are as follows:
Unsecured Secured
--------- -------
Moody's Investor's Services Ba3 Ba2
Standard & Poor's Ratings Group BB BB+
Fitch Investors Services, Inc. BB- BB+
On February 28, 2003, an accounts receivable sales facility was
established. This facility allows for the non-recourse sale of certain accounts
receivable to independent third parties. A maximum of $275 million in accounts
receivable may be sold at any one time. As of March 31, 2004, no receivables had
been sold under this facility.
Our debt instruments do not contain any covenants that trigger increased
costs or burdens as a result of a change in our securities ratings. However,
certain of our guarantee agreements, which support approximately
22
$33 million letters of credit of PDV Texas, an affiliate, require us to cash
collateralize the applicable letters of credit upon a reduction of our credit
rating below a stated level.
We believe that we have adequate liquidity from existing sources to
support our operations for the foreseeable future.
NEW ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
which clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements." FIN 46 defines variable interest entities
and how an enterprise should assess its interests in a variable interest entity
to decide whether to consolidate that entity. In December 2003, the FASB issued
a revision of FIN 46 (FIN 46R), primarily to clarify the required accounting for
investments in variable interest entities. This standard replaces FIN 46. For
CITGO, which meets the definition of a nonpublic enterprise for purposes of
applying FIN 46R, application is required immediately for variable interest
entities created after December 31, 2003 and for variable interest entities in
which an interest is acquired after that date, and to all entities that are
subject to FIN 46R by January 1, 2005. The interpretation requires certain
minimum disclosures with respect to variable interest entities in which an
enterprise holds significant variable interest but which it does not
consolidate. FIN 46R may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated. The
applicable provisions of FIN 46R had no impact on financial position or results
of operations for the three-month period ended March 31, 2004 and CITGO expects
that the application of FIN 46R will not have a material impact on its financial
position or results of operations in the future.
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, 2004, 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. As of March 31, 2004 CITGO's total crude and refined products
inventory was 47 million barrels. Aggregate commodity derivative positions
entered into for price risk management purposes at that date totaled 1 million
barrels. The following disclosures do not attempt to quantify the price risk
associated with such commodity inventories.
23
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 qualified
as hedges through December 31, 2000. Effective January 1, 2001, the Company's
policy is to elect hedge accounting only under limited circumstances involving
derivatives with initial terms of 90 days or greater and notional amounts of $25
million or greater. At March 31, 2004 none of the Company's commodity
derivatives were accounted for as hedges.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2004
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(4)
- -------------------- -------------------------------------- -------- ------------ -------- ---------
Long/(Short) Asset/(Liability)
------------ --------------------
($ in millions)
No Lead Gasoline (1) Futures Purchased 2004 175 $ 8.3 $ 8.3
Futures Sold 2004 (175) $ (8.3) $ (8.3)
Listed Call Options Purchased 2004 200 $ - $ 0.6
Forward Purchase Contracts 2004 2,800 $ 128.5 $ 134.5
Forward Sales Contracts 2004 (1,691) $ (77.6) $ (81.7)
Distillates (1) Futures Purchased 2004 641 $ 21.9 $ 24.0
Futures Purchased 2005 47 $ 1.6 $ 1.7
Futures Sold 2004 (225) $ (8.5) $ (8.5)
OTC Swaps (Pay Fixed/Receive Float)(3) 2004 175 $ - $ (0.1)
OTC Swaps (Pay Float/Receive Fixed)(3) 2004 (175) $ - $ (0.1)
Forward Purchase Contracts 2004 915 $ 34.5 $ 34.5
Forward Sale Contracts 2004 (872) $ (32.8) $ (33.6)
Forward Sale Contracts 2005 (54) $ (2.0) $ (2.0)
Crude Oil (1) Futures Purchased 2004 300 $ 10.3 $ 10.5
Futures Sold 2004 (300) $ (9.6) $ (9.8)
Forward Purchase Contracts 2004 473 $ 16.7 $ 15.9
Forward Sale Contracts 2004 (741) $ (26.8) $ (25.5)
Natural Gas (2) Listed Call Options Purchased 2004 136 $ - $ 0.5
Listed Call Options Sold 2004 (91) $ - $ -
Listed Put Options Sold 2004 (60) $ - $ -
- ------------------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
(4) Based on actively quoted prices.
24
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2003
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(4)
- -------------------- -------------------------------------- -------- ------------ -------- ---------
Long/(Short) Asset/(Liability)
------------ --------------------
($ in millions)
No Lead Gasoline (1) Futures Purchased 2003 20 $ 0.8 $ 0.8
Forward Purchase Contracts 2003 3,307 $ 133.0 $ 132.2
Forward Sale Contracts 2003 (2,685) $ (100.6) $ (103.2)
Distillates (1) Futures Purchased 2003 583 $ 17.6 $ 18.3
Futures Purchased 2004 141 $ 4.2 $ 4.3
Futures Sold 2003 (25) $ (0.8) $ (0.8)
OTC Swaps (Pay Fixed/Receive Float)(3) 2003 120 $ - $ (0.2)
Forward Purchase Contracts 2003 1,717 $ 79.4 $ 73.6
Forward Sale Contracts 2003 (2,320) $ (78.3) $ (74.4)
Crude Oil (1) Listed Put Options Purchased 2003 150 $ - $ -
Listed Put Options Sold 2003 (600) $ - $ (0.2)
Forward Purchase Contracts 2003 2,681 $ 81.7 $ 76.6
Forward Sale Contracts 2003 (777) $ (23.6) $ (22.6)
Natural Gas (2) Listed Call Options Purchased 2003 25 $ - $ -
Listed Put Options Sold 2003 (25) $ - $ (0.1)
Gas Crack (1) OTC Swaps (Pay Float/Receive Fixed)(3) 2003 (550) $ - $ (0.1)
Heat Crack (1) OTC Swaps (Pay Fixed/Receive Float)(3) 2003 1,150 $ - $ (1.3)
OTC Swaps (Pay Float/Receive Fixed)(3) 2003 (1,650) $ - $ 0.8
- ------------------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
(4) Based on actively quoted prices.
25
Debt Related Instruments. We have fixed and floating U.S. currency
denominated debt. We use interest rate swaps to manage our debt portfolio toward
a benchmark of 40 to 70 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 our long-term costs. At March 31, 2004 and 2003, our
primary exposures were to LIBOR and floating rates on tax exempt bonds.
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, 2004 AND 2003
NOTIONAL
EXPIRATION FIXED RATE PRINCIPAL
VARIABLE RATE INDEX DATE PAID AMOUNT
- ------------------- ------------- ---------- ---------------
($ in millions)
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
===============
Changes in the fair value of these agreements are recorded in other income
(expense). The fair value of the interest rate swap agreements in place at March
31, 2004, based on the estimated amount that we would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was a loss of $2 million, the offset of which is recorded in the
balance sheet caption other current liabilities.
26
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT MARCH 31, 2004
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ in millions) ($ in millions)
2004 $ 11 9.30% $ - -
2005 11 9.30% - -
2006 201 8.10% 200 5.22%
2007 50 8.94% 12 5.42%
2008 25 7.17% 20 5.72
Thereafter 745 10.40% 190 7.03%
--------------- ------------- --------------- ----------------
Total $ 1,043 9.79% $ 422 6.07%
=============== ============= =============== ================
Fair Value $ 1,257 $ 422
=============== ===============
DEBT OBLIGATIONS
AT MARCH 31, 2003
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ in millions) ($ in millions)
2003 $ 11 9.30% $ - -
2004 31 8.02% 16 6.68%
2005 11 9.30% - -
2006 201 8.10% 200 8.47%
2007 50 8.94% 12 8.92%
Thereafter 731 10.41% 330 10.54%
--------------- ------------- --------------- ----------------
Total $ 1,035 9.79% $ 558 9.65%
=============== ============= =============== ================
Fair Value $ 1,072 $ 558
=============== ===============
27
ITEM 4. CONTROLS AND PROCEDURES
During the first quarter of 2004, the Company's management, including the
principal executive officer and principal financial officer, evaluated the
Company's disclosure controls and procedures related to the recording,
processing, summarization and reporting of information in the Company's periodic
reports that it files with the Securities and Exchange Commission ("SEC"). These
disclosure controls and procedures have been designed to ensure that (a)
material information relating to the Company, including its consolidated
subsidiaries, is made known to the Company's management, including these
officers, by other employees of the Company and its subsidiaries, and (b) this
information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC's rules and forms. Due
to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The Company's controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been met.
Also, the Company does not control or manage certain of its unconsolidated
entities and thus its access and ability to apply its disclosure controls and
procedures to entities that it does not control or manage are more limited than
is the case for the subsidiaries it controls and manages.
Accordingly, as of March 31, 2004, these officers (principal executive
officer and principal financial officer) concluded that the Company's disclosure
controls and procedures were effective to accomplish their objectives.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
28
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 8 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
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 as to the Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2004 filed by the
following officers:
31.1 Filed by Luis Marin, President and Chief Executive Officer.
31.2 Filed by Jerry E. Thompson, Chief Operating Officer (Acting
Chief Financial Officer).
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18
United States Code as to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004 filed by the following
officers:
32.1 Filed by Luis Marin, President and Chief Executive Officer.
32.2 Filed by Jerry E. Thompson, Chief Operating Officer (Acting
Chief Financial Officer).
(b) Reports on Form 8-K:
A report on Form 8-K was filed with the Securities and Exchange
Commission on March 11, 2004 to furnish information included in our press
release on earnings for the fourth quarter of 2003.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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 7, 2004 /s/ Larry E. Krieg
-------------------------------------
Larry E. Krieg
Controller (Chief Accounting Officer)
30
INDEX TO EXHIBITS
(a) Exhibits
Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 as to the Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2004 filed by the
following officers:
31.1 Filed by Luis Marin, President and Chief Executive Officer.
31.2 Filed by Jerry E. Thompson, Chief Operating Officer (Acting
Chief Financial Officer).
Certifications Pursuant to Section 1350 of Chapter 63 of Title 18
United States Code as to the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004 filed by the following
officers:
32.1 Filed by Luis Marin, President and Chief Executive Officer.
32.2 Filed by Jerry E. Thompson, Chief Operating Officer (Acting
Chief Financial Officer).
31