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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 SEPTEMBER 30, 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)
1293 ELDRIDGE PARKWAY, HOUSTON, TX 77077
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(Address of principal executive office) (Zip Code)
(832) 486-4000
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(Registrant's telephone number, including area code)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
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(Former name or former address 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 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
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(Class) (outstanding at October 31, 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 SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS................................................. 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2004 and
December 31, 2003................................................................ 2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Nine-Month Periods Ended September 30, 2004 and 2003................... 3
Condensed Consolidated Statement of Shareholder's Equity - Nine-Month Period
Ended September 30, 2004......................................................... 4
Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 30, 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............................................................ 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 25
Item 4. Controls and Procedures.......................................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 31
Item 6. Exhibits......................................................................... 31
SIGNATURES................................................................................... 32
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)
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 469,954 $ 202,008
Accounts receivable, net 1,440,053 1,060,333
Due from affiliates 109,532 71,336
Inventories 1,001,353 1,017,613
Prepaid expenses and other 48,875 28,003
----------- -----------
Total current assets 3,069,767 2,379,293
PROPERTY, PLANT AND EQUIPMENT - Net 3,960,810 3,907,203
RESTRICTED CASH 2,310 6,886
INVESTMENTS IN AFFILIATES 580,886 647,649
OTHER ASSETS 356,874 332,462
----------- -----------
$ 7,970,647 $ 7,273,493
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 758,800 $ 766,331
Payables to affiliates 722,001 486,058
Taxes other than income 238,798 173,932
Other 380,698 255,953
Current portion of long-term debt 11,364 31,364
Current portion of capital lease obligation 3,403 2,336
----------- -----------
Total current liabilities 2,115,064 1,715,974
LONG-TERM DEBT 1,279,244 1,442,100
CAPITAL LEASE OBLIGATION 46,285 25,969
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 349,868 319,911
OTHER NONCURRENT LIABILITIES 315,730 308,248
DEFERRED INCOME TAXES 931,280 959,807
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 1,293,403 863,093
Accumulated other comprehensive loss (19,926) (21,308)
----------- -----------
Total shareholder's equity 2,933,176 2,501,484
----------- -----------
$ 7,970,647 $ 7,273,493
=========== ===========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- ------------------------
2004 2003 2004 2003
----------- ------------ ----------- -----------
REVENUES:
Net sales $ 8,749,338 $ 6,430,568 $23,292,869 $18,595,453
Sales to affiliates 129,952 71,763 306,832 303,627
----------- ------------ ----------- -----------
8,879,290 6,502,331 23,599,701 18,899,080
Equity in earnings of affiliates 71,036 35,398 166,229 79,973
Insurance recoveries - 1,863 - 146,165
Other income (expense) - net 1,560 1,208 2,135 16,899
----------- ------------ ----------- -----------
8,951,886 6,540,800 23,768,065 19,142,117
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including
purchases of $3,554,449, $2,450,149, $9,201,366,
and $6,680,122 from affiliates) 8,532,015 6,267,004 22,792,607 18,284,027
Selling, general and administrative expenses 78,165 80,788 218,813 218,115
Interest expense, excluding capital lease 28,493 31,264 98,736 87,124
Capital lease interest charge 955 1,011 2,481 3,806
----------- ------------ ----------- -----------
8,639,628 6,380,067 23,112,637 18,593,072
----------- ------------ ----------- -----------
INCOME BEFORE INCOME TAXES 312,258 160,733 655,428 549,045
INCOME TAXES 107,248 57,864 225,118 197,656
----------- ------------ ----------- -----------
NET INCOME 205,010 102,869 430,310 351,389
----------- ------------ ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Reclassification adjustment for derivative losses
included in net income, net of related income
taxes of $38, $39, $123 and $127 79 70 236 225
Foreign currency translation (loss) gain, net of related
income taxes of $(5), $(83), $375 and $591 (11) (147) 718 1,050
Minimum pension liability adjustment, net of deferred
taxes of $241 - - 428 -
----------- ------------ ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS) 68 (77) 1,382 1,275
----------- ------------ ----------- -----------
COMPREHENSIVE INCOME $ 205,078 $ 102,792 $ 431,692 $ 352,664
=========== ============ =========== ===========
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 - - - 430,310 - 430,310
Other comprehensive income (loss) - - - - 1,382 1,382
- -- ---------- ---------- -------- ----------
BALANCE, SEPTEMBER 30, 2004 1 $1 $1,659,698 $1,293,403 $(19,926) $2,933,176
= == ========== ========== ======== ==========
See notes to condensed consolidated financial statements.
4
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 430,310 $ 351,389
Depreciation and amortization 270,220 245,397
Other adjustments to reconcile net income to net cash
provided by operating activities 88,872 180,203
Changes in operating assets and liabilities (92,425) 69,373
--------- ---------
Net cash provided by operating activities 696,977 846,362
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (226,549) (315,105)
Proceeds from sales of property, plant and equipment 539 3,845
Decrease (increase) in restricted cash 4,576 (1,162)
Investments in LYONDELL-CITGO Refining LP (19,511) (17,083)
Investments in and advances to other affiliates (1,554) (2,537)
--------- ---------
Net cash used in investing activities (242,499) (332,042)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior notes due 2011 - 546,590
(Payment of) proceeds from senior secured term loan (200,000) 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 61,800 (126,050)
Payments on taxable bonds (25,000) (90,000)
Payments on loans from affiliates - (39,000)
Payments of capital lease obligations (2,604) (11,860)
Dividend paid - (500,000)
Debt issuance costs (728) (19,136)
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Net cash used in financing activities (186,532) (416,256)
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INCREASE IN CASH AND CASH EQUIVALENTS 267,946 98,064
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 202,008 33,025
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 469,954 $ 131,089
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 111,643 $ 66,578
========= =========
Income taxes (net of refunds of $231 in 2004 and $47,769 in 2003) $ 137,554 $ 45,305
========= =========
See notes to condensed consolidated financial statements.
5
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE-MONTHS ENDED SEPTEMBER 30, 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 and nine-month periods ended
September 30, 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 and nine-month
periods ended September 30, 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 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 nine-month period ended
September 30, 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.
6
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.
As of September 30, 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:
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
------------- ------------
(000S OMITTED)
Refined products $ 746,535 $ 686,483
Crude oil 162,775 239,974
Materials and supplies 92,043 91,156
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$1,001,353 $1,017,613
========== ==========
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 $2 million at
September 30, 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:
SEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED)
------------ ------------
(000S OMITTED)
Senior Secured Term Loan, due 2006 with variable interest rate $ - $ 200,000
Senior Notes, $150 million face amount, due 2006 with
interest rate of 7-7/8% 149,964 149,946
Senior Notes, $550 million face amount, due 2011 with
interest rate of 11-3/8% 547,272 546,949
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 2031 with variable
and fixed interest rates 394,281 332,478
Taxable Bonds, due 2028 with variable interest rate - 25,000
----------- -----------
1,290,608 1,473,464
Current portion of long-term debt (11,364) (31,364)
----------- -----------
$ 1,279,244 $ 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 September 30, 2004.
The Company had a senior secured term loan under an agreement with a
syndicate of various lenders. The senior loan was secured by CITGO's
equity interest in two pipeline companies. CITGO retired the senior loan
on June 25, 2004. The costs to retire the senior loan prior to the
maturity date of February 2006 included a prepayment charge of $4 million.
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 principal 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 $247 million of the outstanding 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. In
8
September 2004, CITGO reissued $25 million of tax-exempt revenue bonds due
2031 which had been repurchased by the Company during 2003 due to lack of
letter of credit support.
On May 3, 2004, CITGO issued $25 million of tax-exempt environmental
revenue bonds due 2032 through a governmental issuer that refunded $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.
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. Various of our
debt agreements, including the agreements governing the Private Placement
Senior Notes and the Master Shelf Agreement Senior Notes and the
reimbursement agreements relating to various letters of credit that
provide liquidity support for our tax-exempt bonds, contain provisions
requiring that we equally and ratably secure those instruments if we issue
secured debt other than as permitted by those instruments. CITGO is in
compliance with its covenants under its debt financing arrangements at
September 30, 2004.
7. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265
thousand barrels per day 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 September 30, 2004, CITGO has a note receivable from LYONDELL-CITGO
of $35 million. The note bears interest at market rates, which was
approximately 1.8 percent at September 30, 2004. Principal and interest
are due January 1, 2008. Accordingly, the note and related accrued
interest are included in the balance sheet caption other assets,
noncurrent, 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)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
Carrying value of investment $ 392,831 $ 454,679
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 409,000 $ 316,000
Non current assets 1,271,000 1,321,000
Current liabilities 662,000 386,000
Noncurrent liabilities 814,000 828,000
Partners' capital 204,000 423,000
Nine Months Ended
September 30,
---------------------------
2004 2003
---------- ----------
(Unaudited)
Equity in net income $ 133,910 $ 56,552
Cash distribution received 215,944 150,904
Summary of LYONDELL-CITGO's operating results:
Revenue $4,038,659 $3,117,794
Gross profit 409,970 224,145
Net income 341,292 155,360
On May 21, 2004, LYONDELL-CITGO closed on a three-year, $550 million
credit facility to replace its expiring $520 million credit facility. The
new credit facility is comprised of a $450 million senior secured term
loan and a $100 million senior secured revolver, both with an interest
rate of the London Interbank Offered Rate ("LIBOR") plus 2.5 percent. The
facility is secured by substantially all of the assets of LYONDELL-CITGO
and contains covenants that require LYONDELL-CITGO to maintain specified
financial ratios. In September 2004, LYONDELL-CITGO obtained an amendment
to the new facility which reduces the interest rate to LIBOR plus 2
percent and eases certain financial covenants, including the debt to total
capitalization ratio. There was no outstanding balance under the working
capital revolving credit facility at September 30, 2004.
10
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. CITGO
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. As of early
October 2004, settlements in principle had been reached in both Madison
County, Illinois cases. There will be no effect on results of operations
because the accrual for these cases was adequate. The post-September 30,
2003 cases were filed after new federal legislation was proposed that
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.
The remaining New York state case has been removed to federal court and
consolidated with the MDL 1358 cases and the judge has denied plaintiffs'
motion to remand that case. It is not possible to estimate the loss or
range of loss, if any, related to these cases.
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. CITGO does not believe that the resolution of these
cases will have a material adverse effect on its financial condition or
results of operations.
At September 30, 2004, CITGO's balance sheet included an accrual for
lawsuits and claims of $24 million compared with $27 million at December
31, 2003. Unrelated to the reduction in the accrual, CITGO estimates that
an additional loss of $17 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
11
Environmental Response, Compensation and Liability Act ("CERCLA")
liability because the former owners 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
requires additional capital and operating expenditures, and alters
significantly the U.S. refining industry and the return realized on
refinery investments.
In addition, CITGO is subject to various other federal, state and local
environmental laws and regulations that 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 $32 million to $37
million in addition to the approximately $49 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 environmental
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 United States Environmental Protection Agency ("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 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 to the Bayou
D'Inde tributary section of the Calcasieu Estuary, and the companies are
proceeding with a Feasibility Study Work Plan.
12
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, electric utilities and other
industrial sources modified air emission sources. Without admitting any
violation CITGO reached a settlement with the United States and the states
of Louisiana, Illinois, New Jersey, and Georgia. The settlement has been
memorialized in a Consent Decree lodged in the District court for the
Southern District of Texas on October 6, 2004. The Consent Decree requires
the implementation of control equipment at CITGO's refineries and a
Supplemental Environment Project at CITGO's Corpus Christi, Texas
refinery. CITGO estimates that the costs of the settlement could range up
to $325 million which includes a civil penalty of $3.6 million, split
between the U.S. EPA and the states. CITGO accrued for the civil penalty
during 2003. The capital costs will be incurred over a period of time,
primarily between 2004 and 2009.
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. This matter has been 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 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. This
matter has been consolidated with the matters described in the previous
paragraph related to the U.S. EPA's enforcement initiative.
In October 2004, the New Jersey Land Trust voted to reject the donation by
CITGO of a conservation easement covering the 365 acre Petty's Island,
which is located in the Delaware River in Pennsauken, New Jersey and owned
by CITGO. Petty's Island contains a CITGO closed petroleum terminal and
other industrial facilities, but it is also the habitat for endangered
species like the bald eagle. The City of Pennsauken through a private
developer wants to condemn Petty's Island through eminent domain and to
redevelop Petty's Island into residential and commercial uses. The
granting of the conservation easement would have mitigated the amount of
remediation that CITGO would have to perform on Petty's Island. The
ultimate outcome cannot be determined at this time.
At September 30, 2004, CITGO's balance sheet included an environmental
accrual of $65 million compared with $63 million at December 31, 2003.
Results of operations reflect an increase in the accrual during 2004 due
primarily to a revision of the Company's estimated share of costs related
to two sites indicating higher costs offset in part, by spending on
environmental projects. CITGO estimates that an additional loss of $36
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 or inspections of CITGO
and its subsidiaries' facilities and operations. Those compliance audits
or inspections 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 does not believe that any such prior compliance
audit or inspection or any resulting proceeding will have a material
adverse effect on its future business and operating results, other than
matters described above.
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
13
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 September 30, 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 September 30,
2004, the balance sheet captions prepaid expenses and other current assets
and other current liabilities include $25 million and $22 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 September 30, 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 $1 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 September 30, 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 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 none
Customers 1,729 2006
Financing debt of customers
Customer equipment acquisition 389 2004-2007
Equipment acquisition - NISCO 10,047 2008
-------
Total $50,646
=======
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. CITGO and PDVSA are
evaluating possible changes to certain provisions and conditions of these
supply agreements, including the pricing mechanisms, volumes and term. If
PDVSA and CITGO determine to pursue these changes and are able to
successfully negotiate any related amendments to the supply agreements,
the effectiveness of these amendments may require the consent of some of
the holders of CITGO's outstanding debt.
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
September 30, 2004 and December 31, 2003, there was no outstanding balance
on these notes.
15
10. EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
For the three months ended September 30:
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
2004 2003 2004 2003
(000S OMITTED)
Service cost $ 5,743 $ 4,975 $ 2,285 $ 2,200
Interest cost 7,954 7,332 5,767 5,556
Expected return on plan assets (7,285) (6,563) (18) (18)
Amortization of Transition Asset (12) (38) - -
Amortization of prior service cost (193) (192) (130) -
Amortization of net loss 818 806 4,911 12,537
-------- -------- -------- --------
Net periodic benefit cost $ 7,025 $ 6,320 $ 12,815 $ 20,275
======== ======== ======== ========
For the nine months ended September 30:
PENSION BENEFITS OTHER BENEFITS
------------------- -------------------
2004 2003 2004 2003
(000S OMITTED)
Service cost $ 17,229 $ 14,925 $ 6,855 $ 6,600
Interest cost 23,862 21,996 17,301 16,668
Expected return on plan assets (21,855) (19,689) (54) (54)
Amortization of Transition Asset (36) (114) - -
Amortization of prior service cost (579) (576) (390) -
Amortization of net (gain) loss 2,454 2,418 14,734 37,611
-------- -------- -------- --------
Net periodic benefit cost $ 21,075 $ 18,960 $ 38,446 $ 60,825
======== ======== ======== ========
EFFECT OF RECENT LEGISLATION ON OTHER BENEFITS COST
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("Medicare Reform") was signed into law.
Medicare Reform introduces a prescription drug benefit under Medicare
(Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least
actuarially equivalent to Medicare Part D. In May 2004, the FASB Staff
issued FASB Staff Position No. FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." The Staff Position permits a sponsor to report
the effects of Medicare Reform prospectively in the third quarter of 2004
or retrospectively to the measurement date following enactment of the
legislation. CITGO has chosen to use the retrospective method to reflect
Medicare Reform as of January 1, 2004. The effect of this legislation at
that date was to reduce the benefit obligation by approximately $40
million. The service cost and interest cost components of that reduction
total approximately $3 million. Under CITGO's accounting policy for
recognizing actuarial gains, net periodic benefit cost for the third
quarter and nine months ended September 30, 2004 have been reduced $10
million and $30 million, respectively, related to this actuarial gain.
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. Through October 15, 2004, CITGO has contributed
approximately $41 million to its pension plan in 2004.
16
11. CORPORATE HEADQUARTERS RELOCATION
In April 2004, CITGO announced its strategic decision to move its
corporate headquarters from Tulsa, Oklahoma to Houston, Texas. The
transfer of approximately 700 positions from a total of approximately
1,000 positions in Tulsa began in August 2004. At September 30, 2004, 106
positions have been transferred. The relocation is expected to be complete
in July 2005.
Expected Amount Cumulative
Total Incurred Amount
Amount this Quarter Incurred
-------- ------------ ----------
($ in millions)
Relocation costs $ 27 $ 7 $ 7
Severance and related costs 21 3 3
Property and infrastructure costs 33 1 1
---- ----- -----
Total $ 81 $ 11 $ 11
==== ===== =====
Relocation costs and severance and related costs are included in CITGO's
condensed consolidated statement of income and comprehensive income as a
component of the caption selling, general and administrative expense. An
accrual of $2 million related to relocation costs is included in CITGO's
condensed consolidated balance sheet as a component of the caption current
liabilities other. Costs related to property and infrastructure are
included in CITGO's condensed consolidated balance sheet as a component of
the caption property, plant and equipment.
CITGO expects to spend approximately $36 million in the fourth quarter of
2004 related to this relocation.
12. SUBSEQUENT EVENT
On October 22, 2004, CITGO issued $250 million of 6% unsecured senior
notes due October 15, 2011. In connection with this transaction, CITGO
repurchased approximately $540 million principal amount of its 11-3/8%
senior notes due 2011 as part of a tender offer for such notes. CITGO will
record, as charges to interest expense in the fourth quarter of 2004, a
$121.9 million tender premium, $10.6 million unamortized fees and $2.7
million unamortized discounts. As a result of this transaction, CITGO's
weighted average cost of fixed rate borrowing was reduced from 8.8% to
6.7%.
17
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 $205.0 million on total revenue of $9.0
billion in the quarter ended September 30, 2004 compared to net income of $102.9
million on total revenue of $6.5 billion (which included $2 million in insurance
recoveries) for the same period last year. We generated net income of $430.3
million on total revenue of $23.8 billion in the nine months ended September 30,
2004 compared to net income of $351.4 million on total revenue of $19.1 billion
(which included $146 million in insurance recoveries) for the same period in
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.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED INCREASE NINE MONTHS ENDED INCREASE
SEPTEMBER 30, (DECREASE) SEPTEMBER 30, (DECREASE)
2004 2003 FROM 2003 2004 2003 FROM 2003
---------- ----------- ---------------- ------------ ---------- ---------------
(DOLLARS IN MILLIONS)
Net sales $ 8,749 $ 6,431 $ 2,318 $ 23,293 $ 18,595 $ 4,698
Sales to affiliates 130 72 58 307 304 3
---------- ----------- ------------ ------------ ---------- ---------
8,879 6,503 2,376 37% 23,600 18,899 4,701 25%
---------- ----------- ------------ ------------ ---------- ---------
Equity in earnings of affiliates 71 35 36 166 80 86
Insurance recoveries - 2 (2) - 146 (146)
Other income (expense), net 2 1 1 2 17 (15)
---------- ----------- ------------ ------------ ---------- ---------
8,952 6,541 2,411 37% 23,768 19,142 4,626 24%
---------- ----------- ------------ ------------ ---------- ---------
Cost of sales and operating expenses 8,532 6,267 2,265 22,793 18,284 4,509
Selling, general and administrative expense 78 81 (3) 219 218 1
Interest expense, excluding capital lease 29 31 (2) 99 87 12
Capital lease interest charge 1 1 - 2 4 (2)
---------- ----------- ------------ ------------ ---------- ---------
8,640 6,380 2,260 35% 23,113 18,593 4,520 24%
---------- ----------- ------------ ------------ ---------- ---------
Income before income taxes 312 161 151 655 549 106
Income taxes 107 58 49 225 198 27
---------- ----------- ------------ ------------ ---------- ---------
Net income $ 205 $ 103 $ 102 99% $ 430 $ 351 $ 79 23%
========== =========== ============ ============ ========== =========
Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 6.16 $ 5.21 $ 0.95 18% $ 7.12 $ 4.75 $ 2.37 50%
Average price per gallon of gasoline (2) $ 1.28 $ 0.98 $ 0.30 31% $ 1.22 $ 0.95 $ 0.27 28%
Average cost per barrel of crude oil (3) $ 37.46 $ 26.76 $ 10.70 40% $ 34.45 $ 27.15 $ 7.30 27%
- ----------
(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 third quarter of 2004, the heavy crack
spread was $17.91 per barrel versus $11.00 per barrel during the third
quarter of 2003. 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 and nine-month periods ended
September 30, 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.
19
Sales revenues and volumes. Sales increased $2.4 billion, or
approximately 37%, in the three-month period ended September 30, 2004 as
compared to the same period in 2003. This increase was primarily due to an
increase in average sales price of 36%. Sales increased $4.7 billion, or
approximately 25% in the nine-month period ended September 30, 2004 as compared
to the same period in 2003. This increase was almost entirely due to an increase
in average sales price of 26%. The following table summarizes the sources of our
sales revenues and sales volumes for the three-month and nine-month periods
ended September 30, 2004 and 2003:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
-------------- ---------------- ------------- ----------------
2004 2003 2004 2003 2004 2003 2004 2003
------ ------ ------- ------- ------ ----- ------- ------
($ in millions) (Gallons in millions)
Gasoline $4,866 $3,831 $13,303 $10,727 3,791 3,918 10,889 11,272
Jet fuel 692 513 1,882 1,451 564 640 1,736 1,734
Diesel/#2 fuel 1,773 1,173 4,594 4,043 1,488 1,479 4,396 4,762
Asphalt 334 238 723 514 422 331 983 689
Petrochemicals and industrial products 1,012 570 2,503 1,653 789 662 2,214 1,915
Lubricants and waxes 188 157 517 448 77 67 214 194
------ ------ ------- ------- ----- ----- ------ ------
Total refined product sales 8,865 6,482 23,522 18,836 7,131 7,097 20,432 20,566
Other sales 14 20 78 63
------ ------ ------- ------- ----- ----- ------ ------
Total sales $8,879 $6,502 $23,600 $18,899 7,131 7,097 20,432 20,566
====== ====== ======= ======= ===== ===== ====== ======
Equity in earnings of affiliates. The table below shows the changes
during the three months and nine months ended September 30, 2004 compared to the
same periods in 2003 in the equity in earnings of affiliates. The increase in
LYONDELL-CITGO's earnings in the third quarter and the first nine months of 2004
as compared to the same periods in 2003 was due primarily to higher margins on
crude oil refining and aromatics. LYONDELL-CITGO also benefited from higher
crude processing rates in the first nine months of 2004 as compared to the same
period in 2003.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, INCREASE
-------------- (DECREASE) ------------- (DECREASE)
2004 2003 OVER 2003 2004 2003 OVER 2003
---- ---- --------- ---- ---- ---------
($ in millions)
LYONDELL-CITGO $ 58 $ 26 $ 32 $ 134 $ 57 $ 77
Pipeline investments 10 10 - 29 26 3
Other 3 (1) 4 3 (3) 6
--------- ----- ------ ------- ----- -----
Total $ 71 $ 35 $ 36 $ 166 $ 80 $ 86
========= ===== ====== ======= ===== =====
20
Cost of sales and operating expenses. The following table summarizes
our cost of sales and operating expenses for the three-month and nine-month
periods ended September 30, 2004 and 2003:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ---------------------
2004 2003 2004 2003
---- ---- ---- ----
($ in millions)
Crude oil $ 2,502 $ 1,724 $ 6,417 $ 5,110
Refined products 4,749 3,577 12,830 10,409
Intermediate feedstocks 739 481 1,991 1,420
Refining and manufacturing costs 378 323 1,123 963
Other operating costs and expenses 164 162 432 382
------- ------- -------- ----------
Total cost of sales and operating expenses $ 8,532 $ 6,267 $ 22,793 $ 18,284
======= ======= ======== ==========
We purchase refined products to supplement the production from our
refineries in order to meet marketing demands and to optimize distribution.
Refined product purchases represented 56% and 57% of total cost of sales and
operating expenses for the third quarter of 2004 and 2003, respectively, and 56%
and 57% of total cost of sales for the nine month periods ended September 30,
2004 and 2003, respectively. Margins on purchased products, on average, are
lower than margins on refinery produced products because refinery produced
products benefit from the whole supply chain upgrade and purchased refined
products do not. However, purchased products are not segregated from our
produced products and margins may vary due to market conditions and other
factors beyond our control. 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 increased approximately 1.6 cents per
gallon in the quarter ended September 30, 2004 compared to the same period in
2003 and one cent per gallon in the nine months ended September 30, 2004
compared to the same period in 2003. Gross margin for the quarter ended
September 30, 2004 was approximately 4.9 cents per gallon compared to gross
margin of approximately 3.3 cents per gallon for the same period in 2003. Gross
margin for the nine months ended September 30, 2004 was approximately 4.0 cents
per gallon compared to the gross margin of approximately 3.0 cents per gallon
for the same period in 2003.
Revenue per gallon for the third quarter 2004 increased
approximately 36% compared to the third quarter 2003 and increased approximately
26% for the first nine months of 2004 compared to the first nine months of 2003.
Cost of sales and operating expenses per gallon for the quarter ended September
30, 2004 increased approximately 35% compared to the same period in 2003 and for
the nine months ended September 30, 2004 increased approximately 25% 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 in feedstock costs.
Our 48% increase in gross margin for the third quarter of 2004
versus the third quarter of 2003 compares to the 63% increase in the industry
heavy crack spread over the same period. Gross margin for the nine months ended
September 30, 2004 increased 33% over the same period for 2003. Although
industry heavy crack spreads during the first nine months of 2004 were 47%
higher than 2003, we did not capture the full benefit of improved
21
industry margins in the nine months ended September 30, 2004 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 decreased $3 million, or 4% from $81 million in the
third quarter of 2003 to $78 million in the third quarter of 2004. Selling,
general and administrative expenses increased $1 million, from $218 million in
the first nine months of 2003 to $219 million in the first nine months of 2004.
Interest expense. Interest expense, including capital lease interest
charge, decreased $2 million in the three-month period ended September 30, 2004
as compared to the same period in 2003 and increased $10 million in the
nine-month period ended September 30, 2004 as compared to the same period in
2003. The decrease in interest expense for the quarter is due to the retirement
of the senior secured term loan during the second quarter of 2004. The increase
in the nine-month period ended September 30, 2004 was primarily due to the net
increase in the average outstanding debt balance and higher overall interest
rates resulting from the issuance in February 2003 of the $550 million 11-3/8%
senior notes and the closing of the $200 million secured term loan which was
based on a floating rate. In addition, a $4 million prepayment penalty,
included in interest expense, was paid in the second quarter of 2004 in
connection with the early retirement of the senior secured term loan.
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes cash flows during the nine-month periods
ended September 30, 2004 and 2003:
Nine Months Ended
September 30,
-------------------
2004 2003
---- ----
($ in millions)
Net cash provided by/(used in):
Operating activities $ 697 $ 846
Investing activities $ (242) $ (332)
Financing activities $ (187) $ (416)
Cash Provided by Operating Activities
Consolidated net cash provided by operating activities totaled
approximately $697 million for the nine-month period ended September 30, 2004.
Operating cash flows were derived primarily from net income of $430 million,
depreciation and amortization of $270 million, distributions in excess of equity
in earnings of affiliates of $76 million, decrease in deferred taxes of $4
million, and changes in operating assets and liabilities of $(92) million. The
more significant changes in operating assets and liabilities include an increase
in notes and accounts receivable and an increase in noncurrent assets offset, in
part, by an increase in current liabilities and an increase in income taxes
payable.
22
Cash Used in Investing Activities
Net cash used in investing activities in the nine month period ended
September 30, 2004 totaled $243 million consisting primarily of capital
expenditures of $227 million. These capital expenditures consisted of:
Nine Months Ended
September 30, 2004
------------------
($ in millions)
Regulatory requirements $ 76
Maintenance capital projects 64
Strategic capital expenditures 87
-----
Total capital expenditures $ 227
=====
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in our Form 10-K for
the year ended December 31, 2003 for additional information concerning projected
capital expenditures.
Cash Used in Financing Activities
Net cash used in financing activities totaled $187 million for the
nine-month period ended September 30, 2004, consisting primarily of the early
retirement of the senior secured term loan of $200 million, the payment of $20
million on master shelf agreement notes and $25 million on taxable bonds. These
payments were offset by proceeds of approximately $62 million from the issuance
of tax-exempt bonds.
As of September 30, 2004, capital resources available to us included
cash on hand totaling $470 million generated by operations and other sources,
and available borrowing capacity under our committed bank facilities of $256
million.
On October 22, 2004, we issued $250 million aggregate principal
amount of our 6% unsecured senior notes due October 15, 2011. On that date, we
used the net proceeds from that note issue, together with cash on hand, to
repurchase approximately $540 million aggregate principal amount of our 11-3/8%
senior notes due 2011 that had been tendered to us in accordance with a tender
offer we made for those notes. We also received the necessary consents of the
holders of those notes to amend the indenture governing those notes to remove
substantially all of the restrictive covenants and specified events of default.
CITGO will record, as charges to interest expense in the fourth quarter of 2004,
a $121.9 million tender premium, $10.6 million unamortized fees and $2.7 million
unamortized discounts. However, this transaction will reduce annual interest
expense by approximately $50 million and our weighted average cost of fixed rate
borrowing was reduced from 8.8% to 6.7%. In addition, this transaction removes
the restrictive covenants provided for in the $550 million 11-3/8% senior notes.
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;
23
- make restricted payments, including dividends, repurchases of
capital stock and specified investments; and
- merge, consolidate or transfer assets.
We are in compliance with the covenants under our debt financing
arrangements at September 30, 2004.
Upon the occurrence of a change of control of our Company, as
defined in the indenture governing our 6% senior notes due 2011, coupled with a
rating decline on these notes, 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 and the
reimbursement agreements governing various of the letters of credit issued to
provide liquidity support for our tax-exempt bonds 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.
Various of our debt agreements, including the agreements governing
the Private Placement Senior Notes and the Master Shelf Agreement Senior Notes
and the reimbursement agreements relating to various letters of credit that
provide liquidity support for our tax-exempt bonds, contain provisions requiring
that we equally and ratably secure those instruments if we issue secured debt
other than as permitted by those instruments.
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 September 30, 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
---------
Moody's Investor's Services Ba2
Standard & Poor's Ratings Group BB
Fitch Investors Services, Inc. BB
On February 28, 2003, we established an accounts receivable sales
facility. This facility allows the non-recourse sale of specified accounts
receivable to independent third parties. A maximum of $275 million in accounts
receivable may be sold at any one time. As of September 30, 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 an adverse change in our securities
ratings. However, certain of our guarantee agreements, which support
approximately $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.
24
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 nine-month period ended September 30, 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
September 30, 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 September 30, 2004, CITGO's total crude and refined products
inventory was 46 million barrels. Aggregate commodity derivative positions
entered into for price risk management purposes at that date totaled 1.5 million
barrels. 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 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
$25 million or greater. At September 30, 2004 none of the Company's commodity
derivatives were accounted for as hedges.
25
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2004
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(3)
--------- ---------- -------- ----------- -------- --------
Long/(Short) Asset/(Liability)
----------------------
($ in millions)
No Lead Gasoline (1) Listed Put Options Purchased 2004 225 $ - $ -
Listed Put Options Sold 2004 (450) $ - $ -
Listed Call Options Purchased 2004 200 $ - $ -
Forward Purchase Contracts 2004 3,967 $ 216.3 $ 216.8
Forward Sales Contracts 2004 (2,365) $ (131.7) $ (132.2)
Distillates (1) Futures Purchased 2004 938 $ 45.0 $ 54.6
Futures Purchased 2005 1,159 $ 52.7 $ 63.5
Futures Sold 2004 (150) $ (8.0) $ (8.7)
Forward Purchase Contracts 2004 1,352 $ 78.2 $ 80.2
Forward Sale Contracts 2004 (2,521) $ (133.3) $ (143.5)
Forward Sale Contracts 2005 (1,153) $ (54.9) $ (64.4)
Crude Oil (1) Listed Put Options Purchased 2004 600 $ - $ 0.3
Listed Put Options Sold 2004 (400) $ - $ -
Forward Purchase Contracts 2004 336 $ 13.4 $ 14.1
Forward Sale Contracts 2004 (270) $ (12.5) $ (13.4)
Natural Gas (2) Futures Purchased 2004 24 $ 1.5 $ 1.7
Listed Call Options Purchased 2004 100 $ - $ -
Listed Put Options Sold 2004 (100) $ - $ -
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Based on actively quoted prices.
26
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 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 452 $ 14.8 $ 15.3
Futures Sold 2003 (450) $ (14.7) $ (15.2)
Forward Purchase Contracts 2003 6,745 $ 223.8 $ 223.1
Forward Sale Contracts 2003 (5,203) $ (174.3) $ (171.1)
Distillates (1) Futures Purchased 2003 1,551 $ 49.9 $ 51.8
Futures Purchased 2004 1,457 $ 45.5 $ 47.3
Futures Sold 2003 (75) $ (2.5) $ (2.5)
OTC Call Options Purchased 2003 12 $ - $ -
OTC Put Options Purchased 2003 12 $ - $ 0.1
OTC Call Options Sold 2003 (12) $ - $ (0.1)
OTC Put Options Sold 2003 (12) $ - $ -
OTC Swaps (Pay Fixed/Receive Float)(3) 2003 3 $ - $ -
Forward Purchase Contracts 2003 675 $ 21.2 $ 21.8
Forward Sale Contracts 2003 (965) $ (31.4) $ (31.9)
Crude Oil (1) OTC Swaps (Pay Fixed/Receive Float)(3) 2003 900 $ - $ 0.1
OTC Swaps (Pay Float/Receive Fixed)(3) 2003 (1,100) $ - $ 0.2
Forward Purchase Contracts 2003 1,550 $ 40.2 $ 43.0
Forward Sale Contracts 2003 (1,032) $ (28.3) $ (29.9)
Natural Gas (2) Listed Call Options Purchased 2003 100 $ - $ -
Listed Put Options Sold 2003 (100) $ - $ -
- ----------
(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.
27
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 September 30, 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 SEPTEMBER 30, 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 September 30, 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 $1 million, the offset of which is recorded in the
balance sheet caption other current liabilities.
28
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2004
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- --------------- --------- ----------------
($ in millions) ($ in millions)
2004 $ 11 9.30% $ - -
2005 11 9.30% - -
2006 201 8.10% - -
2007 50 8.94% 12 5.58%
2008 25 7.17% 20 5.86%
Thereafter 745 10.40% 215 7.08%
---------- ----- ----- ----
Total $ 1,043 9.79% $ 247 6.91%
========== ===== ===== ====
Fair Value $ 1,229 $ 247
========== =====
DEBT OBLIGATIONS
AT SEPTEMBER 30, 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% - -
2005 11 9.30% - -
2006 201 8.10% 200 7.41%
2007 50 8.94% - -
Thereafter 770 10.30% 178 9.39%
--------- ----- ----- ----
Total $ 1,074 9.74% $ 378 8.34%
========= ===== ===== ====
Fair Value $ 1,166 $ 378
========= =====
29
ITEM 4. CONTROLS AND PROCEDURES
During the third 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 September 30, 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.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II
of this Report from the information under the subheadings "Litigation and Injury
Claims" and "Environmental Compliance and Remediation" in Note 8 of the Notes to
the Condensed Consolidated Financial Statements included in Part I of this
Report.
ITEM 6. 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 September 30, 2004
filed by the following officers:
31.1 Filed by Luis Marin, President and Chief Executive
Officer.
31.2 Filed by Larry E. Krieg, Vice President Finance (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 September 30, 2004 filed by the
following officers:
32.1 Filed by Luis Marin, President and Chief Executive
Officer.
32.2 Filed by Larry E. Krieg, Vice President Finance (chief
financial officer).
31
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: November 8, 2004 /s/ Larry E. Krieg
----------------------------------
Larry E. Krieg
Vice President Finance
(principal financial officer)
32
EXHIBIT INDEX
Exhibits Description
- -------- -----------
31.1 Filed by Luis Marin, President and Chief Executive Officer.
31.2 Filed by Larry E. Krieg, Vice President Finance (chief financial
officer).
32.1 Filed by Luis Marin, President and Chief Executive Officer.
32.2 Filed by Larry E. Krieg, Vice President Finance (chief financial
officer).