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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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)
N/A
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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 April 30, 2005)
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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, 2005
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, 2005 and
December 31, 2004.................................................................... 2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three-Month Periods Ended March 31, 2005 and 2004.................................... 3
Condensed Consolidated Statement of Shareholder's Equity - Three-Month Period
Ended March 31, 2005................................................................. 4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 2005 and 2004.............................................................. 5
Notes to the Condensed Consolidated Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 26
Item 4. Controls and Procedures.............................................................. 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 32
Item 6. Exhibits............................................................................. 32
SIGNATURES....................................................................................... 33
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 40% 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. See Note 9 of the Notes to the Condensed Consolidated
Financial Statements for additional information.
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,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 244,122 $ 23,033
Accounts receivable, net 1,623,559 1,292,751
Due from affiliates 168,454 106,514
Inventories 1,103,717 1,165,660
Prepaid expenses and other 44,087 77,696
------------ ------------
Total current assets 3,183,939 2,665,654
PROPERTY, PLANT AND EQUIPMENT - Net 4,032,360 4,038,505
RESTRICTED CASH 2,021 2,315
INVESTMENTS IN AFFILIATES 573,928 580,647
OTHER ASSETS 354,035 356,551
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$ 8,146,283 $ 7,643,672
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LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,079,395 $ 888,030
Payables to affiliates 830,541 674,997
Taxes other than income 291,706 290,456
Other 319,163 251,451
Current portion of long-term debt 11,364 11,364
Current portion of capital lease obligation 4,192 4,404
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Total current liabilities 2,536,361 2,120,702
LONG-TERM DEBT 1,120,597 1,120,527
CAPITAL LEASE OBLIGATION 43,562 43,755
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 369,201 359,707
OTHER NONCURRENT LIABILITIES 331,197 337,250
DEFERRED INCOME TAXES 910,963 939,299
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,659,698 1,659,698
Retained earnings 1,200,143 1,088,096
Accumulated other comprehensive loss (25,440) (25,363)
------------ ------------
Total shareholder's equity 2,834,402 2,722,432
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$ 8,146,283 $ 7,643,672
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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, EXCEPT FOR SUPPLEMENTAL INFORMATION)
THREE MONTHS
ENDED MARCH 31,
2005 2004
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REVENUES:
Net sales (1) $ 8,486,872 $ 6,579,719
Sales to affiliates 103,397 75,510
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8,590,269 6,655,229
Equity in earnings of affiliates 52,223 46,032
Other income (expense) - net 9,523 (322)
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8,652,015 6,700,939
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases
of $3,537,831 and $2,515,917 from affiliates) (1) 8,383,051 6,533,317
Selling, general and administrative expenses 79,707 71,097
Interest expense, excluding capital lease 17,075 31,537
Capital lease interest charge 1,118 753
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8,480,951 6,636,704
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INCOME BEFORE INCOME TAXES 171,064 64,235
INCOME TAXES 59,017 22,064
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NET INCOME 112,047 42,171
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OTHER COMPREHENSIVE (LOSS) INCOME:
Cash flow hedges:
Reclassification adjustment for derivative losses included in
net income, net of related income taxes of $28 and $44 52 78
Foreign currency translation (loss) gain, net of
related income taxes of $(69) and $451 (129) 802
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OTHER COMPREHENSIVE (LOSS) INCOME (77) 880
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COMPREHENSIVE INCOME $ 111,970 $ 43,051
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SUPPLEMENTAL INFORMATION (millions of dollars)
(1) Includes amounts related to buy/sell arrangements:
Net sales $ 881.6 $ 813.2
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Cost of sales and operating expenses $ 952.2 $ 896.9
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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, 2004 1 $ 1 $ 1,659,698 $ 1,088,096 $ (25,363) $ 2,722,432
Net income - - - 112,047 - 112,047
Other comprehensive income (loss) - - - - (77) (77)
-- ------ ----------- ----------- ------------- -----------
BALANCE, MARCH 31, 2005 1 $ 1 $ 1,659,698 $ 1,200,143 $ (25,440) $ 2,834,402
== ====== =========== =========== ============= ===========
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,
-----------------------
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112,047 $ 42,171
Depreciation and amortization 95,516 86,696
Other adjustments to reconcile net income to net cash
provided by operating activities 21,385 26,055
Changes in operating assets and liabilities 120,100 54,313
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Net cash provided by operating activities 349,048 209,235
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (81,665) (67,260)
Proceeds from sales of property, plant and equipment 13 55
Decrease (increase) in restricted cash 294 (5)
Investments in LYONDELL-CITGO Refining LP (18,703) (6,023)
Investments in and advances to other affiliates - (1,553)
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Net cash used in investing activities (100,061) (74,786)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on master shelf agreement senior notes - (20,000)
Proceeds from tax-exempt bonds - 11,800
Payments on loans from affiliates (26,100) -
Payments of capital lease obligations (405) (784)
Financing fees and debt issuance costs (1,393) (461)
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Net cash used in financing activities (27,898) (9,445)
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INCREASE IN CASH AND CASH EQUIVALENTS 221,089 125,004
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,033 202,008
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 244,122 $ 327,012
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 10,697 $ 41,538
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Income taxes (net of refunds of $488 in 2005) $ 2,570 $ 1,759
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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, 2005 AND 2004
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, 2004 and with
respect to the interim three- month period ended March 31, 2005 and 2004, is
unaudited. In management's opinion, such interim information contains all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the results of such periods, as well as the write-off of
costs associated with the deferral of a capital project. The financial
information for the three-month period ended March 31, 2004 has been adjusted
to retrospectively reflect the effect of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("Medicare Reform"). See Note 10
for additional information. The results of operations for the three-month
period ended March 31, 2005 and 2004 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, 2004 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 Company's adoption of FIN 46R, effective January
1, 2005, had no impact on the financial position or results of operations for
the quarter ended March 31, 2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the
application of FASB Statement No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). FIN 47 clarifies (i) that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated; and (ii) when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. Retrospective application for interim financial
information is
6
permitted but is not required. The Company has not determined the impact on
its financial position or results of operations that may result from the
application of FIN 47.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, "Accounting for Income Taxes," to the
Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004" ("FSP FAS 109-1"). The American Jobs Creation Act
introduces a special 9% tax deduction on qualified production activities. FSP
FAS 109-1 clarifies that this tax deduction should be accounted for as a
special tax deduction in accordance with FASB Statement No. 109. The Company
does not expect the adoption of this new tax provision to have a material
impact on its consolidated financial position, results of operations or cash
flows.
3. ACCOUNTS RECEIVABLE
The Company has a limited purpose consolidated subsidiary, CITGO Funding
Company L.L.C. ("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 outstanding invested amount of the
interest sold to third-parties at any one time under the trade accounts
receivable sales agreement is limited to a maximum of $350 million.
As of March 31, 2005, $504 million of CITGO's accounts receivable comprised
the designated pool of trade receivables owned by CITGO Funding. As of March
31, 2005, no outstanding investment in the receivables in the designated pool
had been sold to the third party and the entire amount of the receivables was
retained by CITGO Funding.
4. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
MARCH 31,
2005 DECEMBER 31,
(UNAUDITED) 2004
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(000s OMITTED)
Refined products $ 704,469 $ 787,795
Crude oil 305,206 284,301
Materials and supplies 94,042 93,564
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$1,103,717 $1,165,660
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5. RESTRICTED CASH
CITGO issued $39 million of tax-exempt environmental facilities revenue bonds
in May 2003. The proceeds from these bonds are being used on qualified
projects at the Corpus Christi refinery. Restricted cash of approximately $2
million at March 31, 2005 represents highly liquid investments held in trust
accounts in accordance with the bond agreement. Funds may be released solely
to finance the qualified capital expenditures as defined in the related bond
agreement.
7
6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
MARCH 31,
2005 DECEMBER 31,
(UNAUDITED) 2004
----------- ------------
(000s OMITTED)
Senior Notes, $250 million face amount, due 2011 with
interest rate of 6% $ 248,360 $ 248,299
Senior Notes, $150 million face amount, due 2006 with
interest rate of 7-7/8% 149,975 149,969
Senior Notes, $6.6 million face amount, due 2011 with
interest rate of 11-3/8% 6,615 6,613
Private Placement Senior Notes, due 2005 to 2006 with an
interest rate of 9.30% 22,727 22,727
Master Shelf Agreement Senior Notes, due 2006 to
2009 with interest rates from 7.17% to 8.94% 165,000 165,000
Tax-Exempt Bonds, due 2007 to 2033 with variable
and fixed interest rates 459,284 459,283
Taxable Bonds, due 2026 to 2028 with variable interest rate 80,000 80,000
----------- -----------
1,131,961 1,131,891
Current portion of long-term debt (11,364) (11,364)
----------- -----------
$ 1,120,597 $ 1,120,527
=========== ===========
CITGO has a $260 million, three-year, unsecured revolving credit facility
maturing in December 2005. There was no outstanding balance under this
credit facility at March 31, 2005.
In October 2004, CITGO issued $250 million of 6% unsecured senior notes
due October 15, 2011. In connection with this transaction, CITGO
repurchased approximately $543 million principal amount of its 11-3/8%
senior notes due 2011 as part of a tender offer for such notes. After the
tender offer for the 11-3/8% notes in October 2004, approximately $6.6
million remain outstanding at March 31, 2005.
In April 1996, CITGO filed a registration statement with the Securities
and Exchange Commission relating to the shelf registration of $600 million
of debt securities. In May 1996, CITGO issued $200 million aggregate
principal amount of 7-7/8% unsecured senior notes due 2006. Due to CITGO's
credit ratings, the shelf registration statement is not presently
available.
Approximately $362 million of the outstanding taxable and tax-exempt bonds
are supported by letters of credit issued by various banks.
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
8
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 March 31, 2005.
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 March 31, 2005, CITGO has a note receivable from LYONDELL-CITGO of $35
million. The note bears interest at market rates, which was approximately 2.7
percent at March 31, 2005. 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)
March 31, December 31,
2005 2004
----------- ------------
(Unaudited)
Carrying value of investment $ 402,657 $ 409,782
Note receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 515,000 $ 359,000
Non current assets 1,305,000 1,288,000
Current liabilities 845,000 588,000
Noncurrent liabilities 819,000 819,000
Partners' capital 156,000 240,000
Three Months Ended
March 31,
--------------------------
2005 2004
---------- ----------
(Unaudited)
Equity in net income $ 42,947 $ 35,237
Cash distribution received 68,775 44,550
Summary of LYONDELL-CITGO's operating results:
Revenue $1,535,622 $1,153,538
Gross profit 129,986 116,066
Net income 109,842 91,494
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 March 31, 2005.
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. Of the
pre-September 30, 2003 cases, CITGO is defending itself in Madison County,
Illinois state court and in a New York county state court. As of early
October 2004, settlements in principle had been reached in both Madison
County, Illinois cases and one of the cases was settled in March 2005. 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 72 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. Subsequently, the judge denied the plaintiffs' motion to
certify her rulings on the remand motion for an interlocutory appeal. It is
not possible to estimate the loss or range of loss, if any, related to these
cases. In an April 20, 2005 ruling, the judge refused to dismiss most of the
plaintiffs' causes of action. In doing so, the judge held that the plaintiffs
might be able to prove liability under a commingled product market share
liability theory because the plaintiffs could not identify the particular
defendants which had manufactured the gasoline that caused the alleged
contamination to drinking water supplies.
Claims have been made against CITGO in approximately 350 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.
In 2001, Miami-Dade County sued seventeen defendants for the costs of
remediation of pollution rising from jet fuel operations during the past
decades at the Miami International Airport ("the Airport"). Although not a
defendant in this case, CITGO along with approximately 250 other former jet
fuel operators at the Airport has received a payment demand from Miami-Dade
County for the remediation costs for alleged pollution occurring while CITGO
had jet fuel operations at the Airport. CITGO is exploring settlement
discussions with Miami-Dade County. CITGO is contesting the amount of damages
that Miami-Dade County claims are attributed to CITGO's jet fuel operations
at the Airport and will vigorously defend itself should no settlement
11
be reached. CITGO does not believe that the resolution of this matter will
have a material adverse effect on its financial condition or results of
operations.
On April 19, 2005, CITGO received a claim from Dixie Pipeline Company
("Dixie") that CITGO may have injected contaminated propane into Dixie's
pipeline system. Dixie and CITGO are cooperating to investigate the facts.
CITGO does not have sufficient information to determine liability, if any, or
to estimate the loss or range of loss, if any, related to this claim.
At March 31, 2005, CITGO's balance sheet included an accrual for lawsuits and
claims of $18 million compared with $24 million at December 31, 2004.
Unrelated to the reduction in the accrual, CITGO estimates that an additional
loss of $35 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 believes it is in
material compliance with the requirements of all of these environmental
regulatory programs. CITGO does not have any material Comprehensive
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 require
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,
will 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
CITGO's 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. A mutually acceptable closure plan was
filed with the LDEQ in 1993. 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. 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.
12
CITGO's Corpus Christi, Texas refinery and current and former employees are
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. 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. A Consent Decree was approved in the District court
for the Southern District of Texas in January 2005. 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 settled for $325 million which included a civil penalty of $3.6
million, split between the U.S. EPA and the states. CITGO accrued for the
civil penalty during 2003 and paid it in February 2005. 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. 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. This matter has been consolidated with the matters described in the
second preceding paragraph.
In October 2004, the New Jersey Natural Lands 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 the bald eagle
and other wildlife. 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 March 31, 2005, CITGO's balance sheet included an environmental accrual of
$66 million compared with $65 million at December 31, 2004. Results of
operations reflect an increase in the accrual during 2005 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 $30 million is
reasonably possible in connection with environmental matters.
13
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
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, 2005,
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, 2005, the
balance sheet captions prepaid expenses and other current assets and other
current liabilities include $11 million and $20 million, respectively,
related to the fair values of open commodity derivatives.
GUARANTEES - As of March 31, 2005, 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 2005 - 2006
Bank debt
Equity investment 5,500 none
Customers 1,262 2006
Financing debt of customers
Customer equipment acquisition 191 2005 - 2007
Equipment acquisition - NISCO 9,038 2008
-------
Total $48,972
=======
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.
14
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 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 40% 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 March 31, 2005,
there was no outstanding balance on these notes. At December 31, 2004, the
amounts outstanding on these notes were $7 million, $14 million and $5
million from PDV Texas, PDV America and PDV Holding, respectively.
15
10. EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
For the three months ended March 31:
PENSION BENEFITS OTHER BENEFITS
------------------------- -------------------------
2005 2004 2005 2004
(000s OMITTED)
Service cost $ 5,920 $ 5,743 $ 2,359 $ 2,285
Interest cost 8,303 7,953 5,922 5,767
Expected return on plan assets (8,124) (7,286) (18) (18)
Amortization of Transition Asset (5) (11) - -
Amortization of prior service cost (192) (193) (124) (130)
Amortization of net loss 1,540 818 4,536 4,911
---------- ---------- ---------- ----------
Net periodic benefit cost $ 7,442 $ 7,024 $ 12,675 $ 12,815
========== ========== ========== ==========
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
non-taxable 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 quarter ended March 31, 2004 and the year ended
December 31, 2004 was reduced $10 million and $40 million, respectively, related
to this actuarial gain. The financial information for the three-month period
ended March 31, 2004 has been adjusted to retrospectively reflect the $10
million reduction of benefit costs.
EMPLOYER CONTRIBUTIONS
CITGO expects to contribute $12 million to its pension plan in 2005. No
contributions were made in the quarter ended March 31, 2005.
16
11. CORPORATE HEADQUARTERS RELOCATION
In April 2004, CITGO announced its decision to move its corporate
headquarters from Tulsa, Oklahoma to Houston, Texas. The transfer of
approximately 700 positions from a total of approximately 1,000 positions in
Tulsa began in August 2004. At March 31, 2005, approximately 475 positions
have been transferred. The relocation is expected to be complete in July
2005. A summary of relocation costs follows
Expected Amount Cumulative
Total Incurred Amount
Amount 1st Quarter 2005 Incurred
-------- ---------------- ----------
($ in millions)
Relocation costs $ 32 $ 4 $ 20
Severance and related costs 21 2 15
Property and leasehold improvements 37 4 21
-------- --------- ----------
Total $ 90 $ 10 $ 56
======== ========= ==========
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. Costs
related to property and leasehold improvements are included in CITGO's
condensed consolidated balance sheet as a component of the caption property,
plant and equipment. An accrual of $2 million related to property, leasehold
improvements and relocation costs is included in CITGO's condensed
consolidated balance sheet as a component of the caption current liabilities
other.
12. OTHER INFORMATION
In mid-March 2005, representatives of a special commission of the Venezuelan
National Assembly (the "VNA Commission") visited CITGO's Houston, Texas
offices for the purpose of interviewing several CITGO employees as part of
an inquiry that the VNA Commission had been charged with conducting. CITGO
has not received any direct statements from the VNA Commission describing
the scope of their inquiry. CITGO understands from the interviewed employees
that the questions were directed at the rationale for, and analysis
underlying, note financings that CITGO completed in 2003 and 2004, the
relocation of its corporate headquarters to Houston, Texas, and several
minor transactions. The questions did not identify any unlawful or
unrecorded activities, and CITGO is not aware of any such activities. CITGO
is cooperating with the VNA Commission.
Shortly following the VNA Commission's visit, a CITGO employee sent a
memorandum to both CITGO's auditors and the SEC referencing the VNA
Commission and other matters. CITGO was not aware of any improper
activities, but engaged counsel to investigate the employee's allegations.
The report of the independent counsel has been delivered to the Audit
Committee of CITGO. The independent counsel investigation did not find any
evidence of any acts or omissions that could have resulted in material
misstatements in any of CITGO's previously issued financial statements, nor
did they find evidence that would bring into question the veracity of
representations made by management to CITGO's independent auditors in
connection with prior audits of CITGO's financial statements, or in the
answers to questionnaires previously submitted by CITGO's managers to its
Controller and General Auditor in connection with any prior issuance of
financial statements. They did not find any evidence of any other acts or
omissions by CITGO in violation of federal securities laws; however, they
took note of, but did not address matters that were the subject of, pending
internal reviews. These reviews involve payments beginning in 1999, a
portion of which were made for the benefit of the Venezuelan Government
which owns PDVSA, CITGO's ultimate parent entity. The aggregate amount of
such payments is not believed to be significant. CITGO is reviewing those
payments as well as their compliance with applicable law.
17
13. CAPITAL PROJECT DEFERRAL
The Company periodically reviews investment decisions based on market
conditions, availability of supply, and optimization of investments and
synergies with other CITGO sites. As the result of such a review, the Company
has decided to indefinitely defer a capital project at its Corpus Christi
refinery related to production of ultra low sulfur diesel fuel. Accordingly,
results for the three months ended March 31, 2005 include, in cost of sales,
a charge against income of approximately $29 million to write off the costs
incurred to date on the project. Approximately $20 million in work in process
assets were removed from net, property, plant and equipment, and
approximately $9 million was included in other current liabilities for
additional expenses and cancellation charges.
18
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 $112 million on total revenue of $8.7 billion
in the quarter ended March 31, 2005 compared to net income of $42 million on
total revenue of $6.7 billion for the same period last year. (See "Gross
margin").
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We make a number of significant estimates, assumptions and judgments in
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, 2004, for a discussion of the estimates and
judgments necessary in our accounting for environmental expenditures, litigation
and injury claims, health care costs and pensions.
19
RESULTS OF OPERATIONS
THREE MONTHS INCREASE
ENDED MARCH 31, (DECREASE)
2005 2004 FROM 2004
(DOLLARS IN MILLIONS) --------- --------- ------------------
Net sales $ 8,487 $ 6,580 $ 1,907
Sales to affiliates 103 75 28
--------- --------- ----------
8,590 6,655 1,935 29%
--------- --------- ----------
Equity in earnings of affiliates 52 46 6
Other income (expense), net 10 - 10
--------- --------- ----------
8,652 6,701 1,951 29%
--------- --------- ----------
Cost of sales and operating expenses 8,383 6,533 1,850
Selling, general and administrative expenses 80 71 9
Interest expense, excluding capital lease 17 32 (15)
Capital lease interest charge 1 1 -
--------- --------- ----------
8,481 6,637 1,844 28%
--------- --------- ----------
Income before income taxes 171 64 107
Income taxes 59 22 37
--------- --------- ----------
Net income $ 112 $ 42 $ 70 167%
========= ========= ==========
Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 6.26 $ 6.22 $ 0.04 1%
Average CITGO price per gallon of gasoline (2) $ 1.36 $ 1.08 $ 0.28 26%
Average CITGO cost per barrel of crude oil (3) $ 42.09 $ 30.73 $ 11.36 37%
(1) The Gulf Coast 3/2/1 crack spread is used as a benchmark for gauging
changes in refining industry margins based upon a hypothetical yield from a
barrel of crude oil. It is calculated as 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 2005, the heavy crack
spread was $17.08 per barrel versus $9.45 per barrel 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, 2005 and 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.
20
Sales revenues and volumes. Sales increased $1.9 billion, or approximately
29%, in the three-month period ended March 31, 2005 as compared to the same
period in 2004. This increase was primarily due to an increase in average sales
price of 32%. The following table summarizes the sources of our sales revenues
and sales volumes for the three-month periods ended March 31, 2005 and 2004:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------------ ---------------------
2005 2004 2005 2004
------- ------- -------- ---------
($ in millions) (Gallons in millions)
Gasoline $ 4,327 $ 3,724 3,181 3,439
Jet fuel 855 588 607 598
Diesel/#2 fuel 2,118 1,408 1,524 1,497
Asphalt 119 105 166 165
Petrochemicals and industrial products 974 656 722 668
Lubricants and waxes 175 152 67 64
------- ------- ----- -----
Total refined product sales 8,568 6,633 6,267 6,431
Other sales 22 22
------- ------- ----- -----
Total sales $ 8,590 $ 6,655 6,267 6,431
======= ======= ===== =====
Equity in earnings of affiliates. The table below shows the changes during
the three months ended March 31, 2005 compared to the same period in 2004 in the
equity in earnings of affiliates. The increase in LYONDELL-CITGO's earnings in
the first quarter of 2005 as compared to the same period in 2004 was due
primarily to higher margins on crude oil refining and aromatics.
THREE MONTHS
ENDED
MARCH 31, INCREASE
-------------------- (DECREASE)
2005 2004 OVER 2004
-------- --------- ---------
($ in millions)
LYONDELL-CITGO $ 43 $ 35 $ 8
Pipeline investments 10 10 -
Other (1) 1 (2)
-------- --------- ---------
Total $ 52 $ 46 $ 6
======== ========= =========
21
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,
2005 and 2004:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS
ENDED MARCH 31,
------------------------
2005 2004
---------- ----------
($ in millions)
Crude oil $ 2,681 $ 1,633
Refined products 4,529 3,774
Intermediate feedstocks 758 701
Refining and manufacturing costs 370 363
Other operating costs and expenses 45 62
---------- ----------
Total cost of sales and operating expenses $ 8,383 $ 6,533
========== ==========
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 54% and 58% of total cost of sales and
operating expenses for the first quarter of 2005 and 2004, 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".)
The Company periodically reviews investment decisions based on market
conditions, availability of supply, and optimization of investments and
synergies with other CITGO sites. As the result of such a review, the Company
has decided to indefinitely defer a capital project at its Corpus Christi
refinery related to production of ultra low sulfur diesel fuel. Accordingly,
results for the three months ended March 31, 2005 include a charge against
income of approximately $29 million to write off the costs incurred to date on
the project. In addition, the deferral of the project will reduce previously
estimated capital expenditures by approximately $183 million over the five-year
period from 2005 through 2009.
Gross margin. Gross margin increased approximately 1.4 cents per gallon in
the quarter ended March 31, 2005 compared to the same period in 2004. Gross
margin for the quarter ended March 31, 2005 was approximately 3.3 cents per
gallon compared to gross margin of approximately 1.9 cents per gallon for the
same period in 2004.
Revenue per gallon for the first quarter 2005 increased approximately 32%
compared to the first quarter 2004. Cost of sales and operating expenses per
gallon for the quarter ended March 31, 2005 increased approximately 32% compared
to the same period in 2004.
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.
22
Our 74% increase in gross margin per gallon for the first quarter of 2005
versus the first quarter of 2004 compares to the 81% increase in the industry
heavy crack spread over the same period. In the first quarter of 2004 we did not
capture the full benefit of improved industry margins due to the heavy
turnaround activities at our fuels refineries during that quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $9 million, or 13% from $71 million in the
first quarter of 2004 to $80 million in the first quarter of 2005. The increase
is primarily a result of the decision to relocate the corporate headquarters.
Additionally, the selling, general and administrative expenses in the first
quarter of 2004 were reduced by the subsidy allowed under Medicare Reform (see
Note 10 of the Notes to the Condensed Consolidated Financial Statements).
Interest expense. Interest expense, including capital lease interest
charge, decreased $15 million in the three-month period ended March 31, 2005 as
compared to the same period in 2004. The decrease in interest expense for the
quarter reflects the retirement of the senior secured term loan during the
second quarter of 2004 and the redemption in October 2004 of approximately $543
million of our 11-3/8% notes due 2011.
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes cash flows during the three-month periods ended
March 31, 2005 and 2004:
Three Months Ended
March 31,
-------------------
2005 2004
-------- --------
($ in millions)
Net cash provided by/(used in):
Operating activities $ 349 $ 209
Investing activities $ (100) $ (75)
Financing activities $ (28) $ (9)
Cash Provided by Operating Activities
Consolidated net cash provided by operating activities totaled
approximately $349 million for the three-month period ended March 31, 2005.
Operating cash flows were derived primarily from net income of $112 million,
depreciation and amortization of $96 million, distributions in excess of equity
in earnings of affiliates of $25 million, decrease in deferred taxes of $27
million, asset retirements of $20 million and changes in operating assets and
liabilities of $120 million. The more significant changes in operating assets
and liabilities include an increase in current liabilities and income taxes
payable and a decrease in inventories, offset in part, by an increase in notes
and accounts receivable.
23
Cash Used in Investing Activities
Net cash used in investing activities in the three month period ended
March 31, 2005 totaled $100 million consisting primarily of capital expenditures
of $82 million. These capital expenditures consisted of:
Three Months Ended
March 31, 2005
------------------
($ in millions)
Regulatory requirements $ 36
Maintenance capital projects 16
Strategic capital expenditures 30
-------
Total capital expenditures $ 82
=======
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, 2004 for additional information concerning projected
capital expenditures.
Cash Used in Financing Activities
Net cash used in financing activities totaled $28 million for the
three-month period ended March 31, 2005, consisting primarily of the payment of
$26 million on loans from affiliates.
As of March 31, 2005, capital resources available to us included cash on
hand totaling $244 million generated by operations and other sources, and
available borrowing capacity under our committed bank facilities of $254
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 $543 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.
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 the covenants under our debt financing
arrangements at March 31, 2005.
24
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. 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, 2005 there was no outstanding balance on these notes.
At December 31, 2004, the amounts outstanding on these notes were $7 million,
$14 million and $5 million from PDV Texas, PDV America and PDV Holding,
respectively.
As of March 31, 2005, CITGO had an effective shelf registration with the
SEC under which it could have publicly offered up to $400 million principal
amount of debt securities. Due to CITGO's current credit ratings, the shelf
registration statement is not presently available.
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 March 17, 2005, 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 $350 million in accounts receivable may
be sold at any one time. As of March 31, 2005, 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.
We believe that we have adequate liquidity from existing sources to
support our operations for the foreseeable future.
25
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
Company's adoption of FIN 46R, effective January 1, 2005, had no impact on the
financial position or results of operations for the quarter ended March 31,
2005.
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the
application of FASB Statement No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). FIN 47 clarifies (i) that an entity is required
to recognize a liability for the fair value of a conditional asset retirement
obligation when incurred if the liability's fair value can be reasonably
estimated; and (ii) when an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. FIN 47 is
effective no later than the end of fiscal years ending after December 15, 2005.
Retrospective application for interim financial information is permitted but is
not required. The Company has not determined the impact on its financial
position or results of operations that may result from the application of FIN
47.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-1,
"Application of FASB Statement No. 109, "Accounting for Income Taxes," to the
Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004" ("FSP FAS 109-1"). The American Jobs Creation Act
introduces a special 9% tax deduction on qualified production activities. FSP
FAS 109-1 clarifies that this tax deduction should be accounted for as a special
tax deduction in accordance with FASB Statement No. 109. The Company does not
expect the adoption of this new tax provision to have a material impact on its
consolidated financial position, results of operations or cash flows.
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. 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, 2005, 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, 2005, CITGO's
total crude and refined products inventory was 50 million barrels. Aggregate
commodity derivative positions entered into for price risk management purposes
at that date totaled 0.8 million barrels. The following disclosures do not
attempt to quantify the price risk associated with such commodity inventories.
26
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
$25 million or greater. At March 31, 2005, none of the Company's commodity
derivatives were accounted for as hedges.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2005
NUMBER OF CONTRACT MARKET
CONTRACTS VALUE VALUE(3)
MATURITY ----------- --------- ---------
COMMODITY DERIVATIVE DATE Long/(Short) Asset/(Liability)
--------- ---------- ------------ ------------ ----------------------
($ in millions)
No Lead Gasoline (1) Futures Purchased 2005 910 $ 60.3 $ 63.6
Futures Sold 2005 (1,010) $ (60.6) $ (64.5)
Forward Purchase Contracts 2005 2,184 $ 96.0 $ 98.1
Forward Sales Contracts 2005 (2,107) $ (119.8) $ (126.5)
Distillates (1) Futures Purchased 2005 973 $ 60.6 $ 66.0
Futures Purchased 2006 78 $ 4.6 $ 5.3
Futures Sold 2005 (820) $ (52.5) $ (55.6)
OTC Swaps (Pay Fixed / Receive Float) (4) 2005 666 $ - $ 3.5
OTC Swaps (Pay Float / Receive Fixed) (4) 2005 (426) $ - $ (2.0)
Forward Purchase Contracts 2005 857 $ 42.7 $ 45.1
Forward Sale Contracts 2005 (1,532) $ (53.8) $ (63.5)
Forward Sale Contracts 2006 (78) $ (4.8) $ (5.4)
Crude Oil (1) Futures Purchased 2005 860 $ 46.7 $ 47.6
Futures Sold 2005 (830) $ (45.0) $ (46.0)
Listed Call Options Purchased 2005 200 $ - $ 0.2
Listed Call Options Sold 2005 (200) $ - $ (0.1)
Listed Put Options Purchased 2005 120 $ - $ 0.1
Listed Put Options Sold 2005 (320) $ - $ (0.1)
Forward Purchase Contracts 2005 1,589 $ 19.7 $ 19.4
Forward Sale Contracts 2005 (344) $ (19.1) $ (19.2)
Natural Gas (2) Futures Purchased 2005 28 $ 2.1 $ 2.1
Listed Put Options Purchased 2005 10 $ - $ -
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Based on actively quoted prices.
(4) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
27
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT MARCH 31, 2004
NUMBER OF CONTRACT MARKET
CONTRACTS VALUE VALUE(4)
MATURITY ----------- --------- ---------
COMMODITY DERIVATIVE DATE 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.
28
Debt Related Instruments. We have fixed and floating U.S. currency
denominated debt. At March 31, 2005, our primary exposures were to LIBOR and
floating rates on tax exempt bonds. We manage the risk related to interest rates
by using both fixed and floating rates.
For interest rate swaps, all of which expired in February 2005, 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
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 were recorded in other
income (expense) in the first quarter of 2004 with the offset recorded in the
balance sheet caption other current liabilities at March 31, 2004. There were no
interest rate swap agreements in place at March 31, 2005.
29
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, 2005
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ in millions) ($ in millions)
2005 $ 11 9.30% $ - -
2006 201 8.10% - -
2007 50 8.94% 12 5.53%
2008 25 7.17% 20 5.73%
2009 50 7.22% - -
Thereafter 403 6.77% 360 6.62%
----- ---- ----- ----
Total $ 740 7.36% $ 392 6.54%
===== ==== ===== ====
Fair Value $ 749 $ 392
===== =====
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
====== ======
30
ITEM 4. CONTROLS AND PROCEDURES
During the first quarter of 2005, 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 as appropriate
to allow timely decisions regarding required disclosure, 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. 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, 2005, 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.
31
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 March 31, 2005 filed by the
following officers:
31.1 Filed by Felix Rodriguez, President and Chief Executive
Officer.
31.2 Filed by Larry E. Krieg, Vice President Finance and 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, 2005 filed by the following
officers:
32.1 Filed by Felix Rodriguez, President and Chief Executive
Officer.
32.2 Filed by Larry E. Krieg, Vice President Finance and Chief
Financial Officer.
32
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 16, 2005 /s/ Paul Largess
-------------------------------------
Paul Largess
Controller, Chief Accounting Officer
33
INDEX TO EXHIBITS
31.1 Filed by Felix Rodriguez, President and Chief Executive
Officer.
31.2 Filed by Larry E. Krieg, Vice President Finance and Chief
Financial Officer.
32.1 Filed by Felix Rodriguez, President and Chief Executive
Officer.
32.2 Filed by Larry E. Krieg, Vice President Finance and Chief
Financial Officer.
34