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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 SEPTEMBER 30, 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
(Exact name of registrant as specified in its charter)
DELAWARE 73-1173881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1293 ELDRIDGE PARKWAY, HOUSTON, TX 77077
(Address of principal executive office) (Zip Code)
(832) 486-4000
(Registrant's telephone number, including area code)
N/A
(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 by check mark whether the registrant is a shell company (as described
in Rule 12b-2 of the Act): Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
(Class) (outstanding at October 31, 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 SEPTEMBER 30, 2005
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, 2005 and
December 31, 2004............................................. 2
Condensed Consolidated Statements of Income and Comprehensive
Income - Three-Month and Nine-Month Periods Ended
September 30, 2005 and 2004................................... 3
Condensed Consolidated Statement of Shareholder's Equity -
Nine-Month Period Ended September 30, 2005.................... 4
Condensed Consolidated Statements of Cash Flows - Nine-Month
Periods Ended September 30, 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....... 28
Item 4. Controls and Procedures.......................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 34
Item 6. Exhibits......................................................... 34
SIGNATURES............................................................... 35
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 regarding these crude 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,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 238,952 $ 23,033
Accounts receivable, net 2,144,737 1,292,751
Due from affiliates 239,205 106,514
Inventories 895,831 1,165,660
Prepaid expenses and other 183,290 77,696
---------- ----------
Total current assets 3,702,015 2,665,654
PROPERTY, PLANT AND EQUIPMENT - Net 4,070,088 4,038,505
RESTRICTED CASH 2,044 2,315
INVESTMENTS IN AFFILIATES 536,762 580,647
OTHER ASSETS 324,059 356,551
---------- ----------
$8,634,968 $7,643,672
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $1,253,570 $ 888,030
Payables to affiliates 1,120,391 674,997
Taxes other than income 240,225 290,456
Other 379,065 251,451
Current portion of long-term debt 161,350 11,364
Current portion of capital lease obligation 4,569 4,404
---------- ----------
Total current liabilities 3,159,170 2,120,702
LONG-TERM DEBT 970,753 1,120,527
CAPITAL LEASE OBLIGATION 40,968 43,755
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 389,704 359,707
OTHER NONCURRENT LIABILITIES 323,469 337,250
DEFERRED INCOME TAXES 925,404 939,299
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 1,190,393 1,088,096
Accumulated other comprehensive loss (24,592) (25,363)
---------- ----------
Total shareholder's equity 2,825,500 2,722,432
---------- ----------
$8,634,968 $7,643,672
========== ==========
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -------------------------
2005 2004 2005 2004
----------- ---------- ----------- -----------
REVENUES:
Net sales (1) $12,194,928 $8,749,338 $30,642,808 $23,292,869
Sales to affiliates 65,331 129,952 291,679 306,832
----------- ---------- ----------- -----------
12,260,259 8,879,290 30,934,487 23,599,701
Equity in earnings of affiliates 49,767 71,036 124,076 166,229
Other income (expense) - net 6,609 1,560 28,639 2,135
----------- ---------- ----------- -----------
12,316,635 8,951,886 31,087,202 23,768,065
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (1)
(including purchases of $5,107,635, $3,554,449,
$12,608,247 and $9,201,366 from affiliates) 12,073,901 8,532,015 30,154,083 22,792,607
Selling, general and administrative expenses 82,389 78,165 238,766 218,813
Interest expense, excluding capital lease 21,411 28,493 55,964 98,736
Capital lease interest charge 985 955 3,090 2,481
----------- ---------- ----------- -----------
12,178,686 8,639,628 30,451,903 23,112,637
----------- ---------- ----------- -----------
INCOME BEFORE INCOME TAXES 137,949 312,258 635,299 655,428
INCOME TAXES 44,416 107,248 216,002 225,118
----------- ---------- ----------- -----------
NET INCOME 93,533 205,010 419,297 430,310
----------- ---------- ----------- -----------
OTHER COMPREHENSIVE INCOME:
Cash flow hedges:
Reclassification adjustment for derivative losses
included in net income, net of related income
taxes of $-, $38, $28 and $123 -- 79 52 236
Foreign currency translation gain (loss), net of related
income taxes (benefit) of $200, $(5), $409 and $375 388 (11) 794 718
Minimum pension liability adjustment, net of deferred
taxes (benefit) of $-, $-, $(42) and $241 -- -- (75) 428
----------- ---------- ----------- -----------
OTHER COMPREHENSIVE INCOME 388 68 771 1,382
----------- ---------- ----------- -----------
COMPREHENSIVE INCOME $ 93,921 $ 205,078 $ 420,068 $ 431,692
=========== ========== =========== ===========
SUPPLEMENTAL INFORMATION (millions of dollars)
(1) Includes amounts related to buy/sell arrangements:
Net sales $ 1,240.2 $ 1,146.6 $ 3,271.8 $ 3,169.3
=========== ========== =========== ===========
Cost of sales and operating expenses $ 1,306.7 $ 1,158.0 $ 3,379.8 $ 3,200.9
=========== ========== =========== ===========
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 -- -- -- 419,297 -- 419,297
Other comprehensive income -- -- -- -- 771 771
Dividends paid to parent, PDV America -- -- -- (317,000) -- (317,000)
--- --- ---------- ---------- -------- ----------
BALANCE, SEPTEMBER 30, 2005 1 $ 1 $1,659,698 $1,190,393 $(24,592) $2,825,500
=== === ========== ========== ======== ==========
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,
---------------------
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 419,297 $ 430,310
Depreciation and amortization 293,709 270,220
Other adjustments to reconcile net income to net cash
provided by operating activities 101,500 88,872
Changes in operating assets and liabilities 63,497 (92,425)
--------- ---------
Net cash provided by operating activities 878,003 696,977
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (263,092) (226,549)
Proceeds from sales of property, plant and equipment 82 539
Decrease in restricted cash 271 4,576
Investments in LYONDELL-CITGO Refining LP (51,745) (19,511)
Investments in and advances to other affiliates -- (1,554)
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Net cash used in investing activities (314,484) (242,499)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of senior secured term loan -- (200,000)
Payments on master shelf agreement senior notes -- (20,000)
Proceeds from tax-exempt bonds -- 61,800
Payments on taxable bonds -- (25,000)
Payments on loans from affiliates (26,100) --
Payments of capital lease obligations (2,622) (2,604)
Financing fees and debt issuance costs (1,878) (728)
Dividends paid to parent, PDV America (317,000) --
--------- ---------
Net cash used in financing activities (347,600) (186,532)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 215,919 267,946
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,033 202,008
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 238,952 $ 469,954
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 53,899 $ 111,643
========= =========
Income taxes (net of refunds of $1,947 in 2005 and $231 in 2004)(Note 9) $ 355,206 $ 137,554
========= =========
See notes to condensed consolidated financial statements.
5
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE-MONTHS ENDED SEPTEMBER 30, 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 and nine-month periods ended
September 30, 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, such interim information also reflects the write-off of costs
associated with the deferral of two capital projects. The results of
operations for the three-month and nine-month periods ended September 30,
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 nine-month period ended
September 30, 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 is
currently evaluating the impact, if any, on its financial position or
results of operations that may result from the application of FIN 47.
6
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 phased in 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 for the year ended December 31, 2005.
In September 2005, the FASB ratified the consensus reached by the Emerging
Issues Task Force ("EITF") in Issue No. 04-13, "Accounting for Purchases
and Sales of Inventory with the Same Counterparty" ("EITF 04-13"). In this
issue, the EITF reached consensus on i) the circumstances under which two
or more transactions involving inventory with the same counterparty should
be viewed as a single nonmonetary transaction within the scope of APB
Opinion No. 29, Accounting for Nonmonetary Transactions; and ii) whether
there are circumstances under which nonmonetary exchanges of inventory
within the same line of business should be recognized at fair value. EITF
04-13 is effective for new arrangements entered into in reporting periods
beginning after March 15, 2006. The Company is currently evaluating the
impact, if any, on its financial position and results of operations that
may result from the application of EITF 04-13.
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 September 30, 2005, $844 million of CITGO's accounts receivable
comprised the designated pool of trade receivables owned by CITGO Funding.
As of September 30, 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:
SEPTEMBER 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
(000S OMITTED)
Refined products $594,312 $ 787,795
Crude oil 205,279 284,301
Materials and supplies 96,240 93,564
-------- ----------
$895,831 $1,165,660
======== ==========
7
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 September 30, 2005 represents highly liquid
investments held in trust accounts in accordance with the related trust
indenture. Funds may be released solely to finance the qualified capital
expenditures as defined in the related loan agreement.
6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-term debt consists of the following:
SEPTEMBER 30,
2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
(000S OMITTED)
Senior Notes, $250 million face amount, due 2011 with
interest rate of 6% $ 248,486 $ 248,299
Senior Notes, $150 million face amount, due 2006 with
interest rate of 7-7/8% 149,986 149,969
Senior Notes, $6.6 million face amount, due 2011 with
interest rate of 11-3/8% 6,617 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 2032 with variable
and fixed interest rates 459,287 459,283
Taxable Bonds, due 2026 with variable interest rate 80,000 80,000
---------- ----------
1,132,103 1,131,891
Current portion of long-term debt (161,350) (11,364)
---------- ----------
$ 970,753 $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 September 30, 2005. The Company is actively reviewing
and intends to replace the revolving credit facility by the maturity date.
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 September 30, 2005.
8
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 $392 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 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, 2005.
See Note 14 for information regarding cash tender offers relating to the
7-7/8% senior notes due 2006 and the 6% senior notes due 2011; CITGO's
election to redeem all of its outstanding 11-3/8% senior notes due 2011,
its outstanding 9.30% private placement senior notes due 2006, and its
outstanding master shelf agreement senior notes due 2006 through 2009; and
a senior secured credit facility that CITGO is seeking.
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, 2005, CITGO has a note receivable from LYONDELL-CITGO
of $35 million. The note bears interest at market rates, which was
approximately 3.9 percent at September 30, 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)
September 30, December 31,
2005 2004
------------- ------------
(Unaudited)
Carrying value of investment $ 365,298 $ 409,782
Note receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 487,000 $ 359,000
Non current assets 1,367,000 1,288,000
Current liabilities 883,000 588,000
Noncurrent liabilities 811,000 819,000
Partners' capital 159,000 240,000
Nine Months Ended
September 30,
-----------------------
2005 2004
---------- ----------
(Unaudited)
Equity in net income $ 87,201 $ 133,910
Cash distribution received 183,311 215,944
Summary of LYONDELL-CITGO's operating results:
Revenue $5,301,238 $4,038,659
Gross profit 289,029 409,970
Net income 228,822 341,292
LYONDELL-CITGO has a three-year, $550 million credit facility secured by
substantially all of its assets. The credit facility is comprised of a $450
million senior secured term loan and a $100 million senior secured revolver,
both with an interest rate based on the London Interbank Offered Rate ("LIBOR").
There was no outstanding balance under the working capital revolving credit
facility at September 30, 2005. In October 2005, the capacity of
LYONDELL-CITGO's senior secured revolver was increased from $100 million to
$150 million.
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. In October 2005, the Texas Court of Appeals
sustained CITGO's appeal of the trial court's order and remanded the case
to the trial court. CITGO shall continue to vigorously defend this case and
does not believe that the resolution of this matter will have a material
adverse effect on its financial condition or results of operations.
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. 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. Two
plaintiffs have appealed the denial of the remand to state court to the
U.S. Court of Appeals for the Second Circuit. The Appeals Court denied the
defendants' motion for summary affirmance of the denial of the remand order
and the appeal will proceed. 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.
Defendants have filed a motion for summary judgment on plaintiffs' claims
on the grounds that they are pre-empted by federal law. Resolution of that
motion is not expected this year. CITGO management does not believe that
the resolution of these matters will have a material adverse effect on its
financial condition, but may have a significant effect on its financial
results for a given period.
Claims have been made against CITGO in approximately 650 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. Although 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 be reached, CITGO has voluntarily executed a
case
11
management order in an attempt to settle the claim. CITGO does not believe
that the resolution of this matter will have a material adverse effect on
its financial condition or results of operations.
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 management cannot predict the outcome of any such charges,
but does not believe that the resolution of this matter will have a
material adverse effect on its financial condition or results of
operations.
On November 26, 2004, the Athos I, a merchant tanker, struck a submerged
anchor in the public channel of the Delaware River near Paulsboro, New
Jersey and released crude oil owned by CITGO Asphalt Refining Company
("CARCO"), a subsidiary of CITGO. In a maritime limitation of liability
action in federal court in Philadelphia, Pennsylvania, the owner of the
Athos I has counterclaimed against CARCO for over $125 million in oil spill
recovery and clean costs. CITGO does not believe that CARCO has any
liability and will vigorously defend itself.
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 September 30, 2005, CITGO's balance sheet included an accrual for
lawsuits and claims of $36 million compared with $24 million at December
31, 2004. CITGO estimates that an additional loss of $103 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.
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.
12
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.
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 executed a Consent Decree with the United States and the states of
Louisiana, Illinois, New Jersey, and Georgia. 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.
Approximately $300 million in capital costs will be incurred over a period
of time, primarily between 2005 and 2010.
In October 2004, the New Jersey Natural Lands Trust voted to reject the
donation by CITGO of a conservation easement covering the 392 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 September 30, 2005, CITGO's balance sheet included an environmental
accrual of $70 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 $31
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
13
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 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 September 30, 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 September 30, 2005,
the balance sheet captions prepaid expenses and other current assets and
other current liabilities include $83 million and $71 million,
respectively, related to the fair values of open commodity derivatives.
GUARANTEES - As of September 30, 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
and financing debt incurred by an equity investment as shown in the
following table:
Expiration
Date
----------
(000s omitted)
Letters of credit $20,296 2006
Bank debt
Equity investment 5,500 none
Customers 737 2006
Financing debt
Equipment acquisition - NISCO 7,966 2008
-------
Total $34,499
=======
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 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 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.
14
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.
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
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.
The Company and PDV Holding are parties to a tax allocation agreement that
is designed to provide PDV Holding with sufficient cash to pay its
consolidated income tax liabilities. PDV Holding appointed CITGO as its
agent to handle the payment of such liabilities on its behalf. As such,
CITGO calculates the taxes due, allocates the payments among the tax
allocation agreement members according to the agreement and bills each
member accordingly. Each member records its amounts due from or payable to
CITGO in a related party account. At September 30, 2005 and December 31,
2004, CITGO had net related party receivables related to federal income
taxes of $150 million and $28 million, respectively, which is included in
due from affiliates.
15
10. EMPLOYEE BENEFIT PLANS
COMPONENTS OF NET PERIODIC BENEFIT COST
For the three months ended September 30:
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
(000S OMITTED)
Service cost $ 5,920 $ 5,743 $ 2,359 $ 2,285
Interest cost 8,303 7,954 5,922 5,767
Expected return on plan assets (8,124) (7,285) (19) (18)
Amortization of Transition Asset (5) (12) -- --
Amortization of prior service cost (193) (193) (123) (130)
Amortization of net loss 1,540 818 4,536 4,911
------- ------- ------- -------
Net periodic benefit cost $ 7,441 $ 7,025 $12,675 $12,815
======= ======= ======= =======
For the nine months ended September 30:
PENSION BENEFITS OTHER BENEFITS
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
(000S OMITTED)
Service cost $ 17,760 $ 17,229 $ 7,078 $ 6,855
Interest cost 24,910 23,862 17,766 17,301
Expected return on plan assets (24,372) (21,855) (56) (54)
Amortization of Transition Obligation (Asset) (15) (36) -- --
Amortization of prior service cost (579) (579) (371) (390)
Amortization of net loss 4,621 2,454 13,608 14,734
-------- -------- ------- -------
Net periodic benefit cost $ 22,325 $ 21,075 $38,025 $38,446
======== ======== ======= =======
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 and
nine-month period ended September 30, 2004 and the year ended December 31,
2004 was reduced $10 million, $30 million and $40 million, respectively,
related to this actuarial gain.
EMPLOYER CONTRIBUTIONS
CITGO contributed approximately $35 million to its pension plan in the
quarter ended September 30, 2005.
16
11. CORPORATE HEADQUARTERS RELOCATION
In April 2004, CITGO announced its decision to move its corporate
headquarters from Tulsa, Oklahoma to Houston, Texas. The transfer of
approximately 700 positions from a total of approximately 1,000 positions
in Tulsa began in August 2004. At September 30, 2005, essentially all of
the positions have been transferred. While the relocation was substantially
completed in July 2005, CITGO expects related costs will continue to be
incurred over the next three months. A summary of relocation costs follows:
Expected Cumulative
Total Amount Incurred Amount
Amount 3rd Quarter 2005 Incurred
-------- ---------------- ----------
($ in millions)
Relocation costs $32 $5 $28
Severance and related costs 21 1 16
Property and leasehold improvements 29 -- 29
--- --- ---
Total $82 $6 $73
=== === ===
During the third quarter 2005, the expected total cost of the relocation
was reduced to $82 million from the estimate of $85 million at the end of
the second quarter. The original estimate for the relocation project was
$90 million. 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 $9 million related to
the relocation is included in CITGO's condensed consolidated balance sheet
as a component of the caption current liabilities other.
12. OTHER INFORMATION
As previously reported, CITGO received an informal inquiry from the
Securities and Exchange Commission ("SEC") seeking information from CITGO
regarding a now concluded inquiry conducted by a special commission of the
Venezuelan National Assembly (the "VNA"), allegations made by a CITGO
employee in a letter sent to both CITGO's auditors as well as the SEC, and
CITGO's October 2004 tender offer for its 11-3/8% senior notes. CITGO is
continuing to cooperate with the SEC and has provided it with the requested
information. Two independent law firms, retained to investigate various
payments that were part of the inquiries, concluded there was not any
evidence that such payments were improper. The aggregate amount of these
payments is not material.
17
13. CAPITAL PROJECT DEFERRALS
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 defer a capital project at its Corpus Christi
refinery related to production of ultra low sulfur diesel fuel.
Accordingly, results for the nine months ended September 30, 2005 include,
in cost of sales, a charge against income of approximately $18 million to
write off the costs incurred to date on the project. Approximately $13
million in work in process assets were removed from net, property, plant
and equipment, and approximately $5 million was included in other current
liabilities for additional expenses and cancellation charges.
In addition, the Company decided to cancel an energy conservation project
at its Lemont refinery when costs escalated over original expectations.
Accordingly, results for the nine months ended September 30, 2005 include
in cost of sales, a charge of approximately $18 million to write off the
costs incurred to date on the project. Approximately $10 million in work in
process assets were removed from net, property, plant and equipment, and
approximately $8 million was included in other current liabilities for
additional expenses and cancellation charges.
14. SUBSEQUENT EVENT
On October 13, 2005, the Company announced cash tender offers for all of
its outstanding 7-7/8% senior notes due 2006 and 6% senior notes due 2011.
On October 14, 2005, the Company sent notices of its election to redeem
prior to their stated maturity dates the following debt securities:
- all of its outstanding 11-3/8% senior notes due 2011;
- all of its outstanding 9.30% private placement senior notes due
2006; and
- all of its outstanding master shelf agreement senior notes due
2006 through 2009 with interest rates ranging from 7.17% to
8.94%.
The Company is also working with two co-lead banks who have committed on a
$1.85 billion senior secured credit facility, which would consist of a
five-year revolving credit facility in the amount of $1.15 billion and a
seven-year term loan of $700 million. The credit facility, which is subject
to the completion of documentation and a number of other conditions, would
be secured by CITGO's interests in its Lake Charles, Louisiana and Corpus
Christi, Texas refineries, its trade accounts receivable and its
inventories and is subject to covenants typical for secured financing. The
Company expects to close this transaction in the fourth quarter of 2005.
The ratings on the new senior secured credit facility, as currently
assessed by the three major debt rating agencies, are as follows:
Secured
-------
Standard & Poor's Ratings Group BBB-
Moody's Investors Service Ba1
Fitch Investors Services, Inc. BB+
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 $90 million on total revenue of $12.3
billion in the quarter ended September 30, 2005 compared to net income of $205
million on total revenue of $9.0 billion for the same period last year. We
generated net income of $416 million on total revenue of $31.1 billion in the
nine-month period ended September 30, 2005 compared to net income of $430
million on total revenue of $23.8 billion for the same period last year. (See
"Gross margin").
The decrease in net income for the quarter ended September 30, 2005
compared to the same period last year is due primarily to a decline of the gross
margin on asphalt, petrochemicals and other industrial products. The gross
margin on light products such as gasoline, jet fuel and diesel fuel were higher
than those in the same period last year. However, earnings on gasoline sales
were reduced due to a nine percent drop in sales volume when compared to the
same period last year. Inventory levels at September 30, 2005 were lower than at
December 31, 2004. CITGO intends to rebuild its inventory to year-end 2004
levels by year-end 2005. The temporary inventory decrement as of September 30,
2005 was valued at expected replacement cost which is included in the results of
operations for the period ending September 30, 2005. Also contributing to the
decline in net income was a reduction in LYONDELL-CITGO earnings during the
quarter ended September 30, 2005 as compared to the same period last year.
Despite higher price levels in the nine months ended September 30,
2005 compared to the same period last year, the gross margin on sales remained
approximately the same. Reductions in LYONDELL-CITGO earnings and increases in
selling, general and administrative expenses were offset by reductions in
interest expense and increases in other income (expense), net.
In preparation for the possible impact from Hurricane Rita, CITGO
began shutting down its 425 thousand barrels per day Lake Charles refinery on
September 21, 2005. On September 24, 2005 Hurricane Rita hit Lake Charles,
Louisiana. Although the hurricane inflicted only minor damage to the equipment,
the refinery did not have electricity other than from emergency generators until
October 3, 2005. As soon as Hurricane Rita passed, CITGO began recalling its
employees and contractors to inspect each system, clean up debris, make any
necessary repairs and restart the units. Although accomplished in phases, the
refinery was fully operational by October 26, 2005.
LYONDELL-CITGO's 265 thousand barrels per day Houston refinery was
also shut down in preparation for Hurricane Rita. LYONDELL-CITGO experienced
difficulty in restarting its refinery and had a fire in its catalytic cracker
while restarting. It is estimated to be fully operational by December 1, 2005.
CITGO purchases all of the transportation petroleum products produced
at the LYONDELL-CITGO refinery. Inventories were drawn down because of the
storm. Most of CITGO's crude and feedstock suppliers and petroleum product and
by-product customers cooperated with CITGO in canceling or deferring shipments.
However, for those few customers who were unwilling to voluntarily cancel or
defer shipments, CITGO was compelled to declare force majeure.
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
19
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.
RESULTS OF OPERATIONS
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, INCREASE
---------------- (DECREASE) ----------------- (DECREASE)
2005 2004 FROM 2004 2005 2004 FROM 2004
------- ------ ------------- ------- ------- ------------
(DOLLARS IN MILLIONS)
Net sales $12,194 $8,749 $3,445 $30,642 $23,293 $7,349
Sales to affiliates 66 130 (64) 292 307 (15)
------- ------ ------ ------- ------- ------
12,260 8,879 3,381 38% 30,934 23,600 7,334 31%
------- ------ ------ ------- ------- ------
Equity in earnings of affiliates 50 71 (21) 124 166 (42)
Other income (expense), net 7 2 5 29 2 27
------- ------ ------ ------- ------- ------
12,317 8,952 3,365 38% 31,087 23,768 7,319 31%
------- ------ ------ ------- ------- ------
Cost of sales and operating expenses 12,074 8,532 3,542 30,154 22,793 7,361
Selling, general and administrative expenses 83 78 5 239 219 20
Interest expense, excluding capital lease 21 29 (8) 56 99 (43)
Capital lease interest charge 1 1 -- 3 2 1
------- ------ ------ ------- ------- ------
12,179 8,640 3,539 41% 30,452 23,113 7,339 32%
------- ------ ------ ------- ------- ------
Income before income taxes 138 312 (174) 635 655 (20)
Income taxes 44 107 (63) 216 225 (9)
------- ------ ------ ------- ------- ------
Net income $ 94 $ 205 $ (111) -54% $ 419 $ 430 $ (11) -3%
======= ====== ====== ======= ======= ======
Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 16.45 $ 6.16 $10.29 167% $ 10.74 $ 7.12 $ 3.62 51%
Average price per gallon of gasoline (2) $ 1.92 $ 1.28 $ 0.64 50% $ 1.62 $ 1.22 $ 0.40 33%
Average cost per barrel of crude oil (3) $ 57.72 $37.46 $20.26 54% $ 48.18 $ 34.45 $13.73 40%
- ----------
(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 third quarter of 2005, the heavy crack
spread was $32.11 per barrel versus $17.91 per barrel during the third
quarter of 2004. During the first nine months of 2005, the heavy crack
spread was $26.00 per barrel versus $17.08 per barrel for the same period
in 2004. The values used to calculate the Gulf Coast 3/2/1 crack spread and
the heavy crack spread are obtained from Platts (an energy industry
information reporting service) using an average of daily prices for the
three-month and nine-month periods ended September 30, 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 $3.4 billion, or
approximately 38%, in the three-month period ended September 30, 2005 as
compared to the same period in 2004. This increase was primarily due to an
increase in average sales price of 46%. Sales increased $7.3 billion, or
approximately 31%, in the nine-month period ended September 30, 2005 as compared
to the same period in 2004. This increase was primarily due to an increase in
average sales price of 36%. The following table summarizes the sources of our
sales revenues and sales volumes for the three-month and nine-month periods
ended September 30, 2005 and 2004:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------- ------------- ------ ------
2005 2004 2005 2004 2005 2004 2005 2004
------- ------ ------- ------- ----- ----- ------ ------
($ in millions) (Gallons in millions)
Gasoline $ 6,619 $4,866 $16,160 $13,303 3,442 3,791 9,972 10,889
Jet fuel 1,122 692 2,912 1,882 607 564 1,806 1,736
Diesel/#2 fuel 2,732 1,773 7,214 4,594 1,479 1,488 4,521 4,396
Asphalt 399 334 811 723 442 422 964 983
Petrochemicals and industrial products 1,145 1,012 3,172 2,503 732 789 2,260 2,214
Lubricants and waxes 210 188 592 517 67 77 206 214
------- ------ ------- ------- ----- ----- ------ ------
Total refined product sales 12,227 8,865 30,861 23,522 6,769 7,131 19,729 20,432
Other sales 33 14 73 78
------- ------ ------- ------- ----- ----- ------ ------
Total sales $12,260 $8,879 $30,934 $23,600 6,769 7,131 19,729 20,432
======= ====== ======= ======= ===== ===== ====== ======
Equity in earnings of affiliates. The table below shows the changes
during the three-month and nine-month periods ended September 30, 2005 compared
to the same periods in 2004 in the equity in earnings of affiliates. The
decrease in LYONDELL-CITGO's earnings in the third quarter and the first nine
months of 2005 as compared to the same periods in 2004 was due primarily to
lower crude processing rates which were a result of unplanned plant maintenance
and an outage of an external processor of refinery produced gas during the
second quarter of 2005, and refinery shut down due to the hurricane threat
during the third quarter of 2005.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, INCREASE SEPTEMBER 30, INCREASE
------------- (DECREASE) ------------- (DECREASE)
2005 2004 FROM 2004 2005 2004 FROM 2004
---- ---- ---------- ---- ---- ----------
($ in millions)
LYONDELL-CITGO $35 $58 $(23) $ 87 $134 $(47)
Pipeline investments 11 10 1 31 29 2
Other 4 3 1 6 3 3
--- --- ---- ---- ---- ----
Total $50 $71 $(21) $124 $166 $(42)
=== === ==== ==== ==== ====
21
Cost of sales and operating expenses. The following table summarizes
our cost of sales and operating expenses for the three-month and nine-month
periods ended September 30, 2005 and 2004:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -----------------
2005 2004 2005 2004
------- ------ ------- -------
($ in millions)
Crude oil $ 4,035 $2,502 $ 9,961 $ 6,417
Refined products 6,794 4,749 16,606 12,830
Intermediate feedstocks 636 739 1,990 1,991
Refining and manufacturing costs 353 378 1,165 1,123
Other operating costs and expenses 256 164 432 432
------- ------ ------- -------
Total cost of sales and operating expenses $12,074 $8,532 $30,154 $22,793
======= ====== ======= =======
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% of total cost of sales and operating
expenses for the third quarters of both 2005 and 2004 and 55% and 56% for the
first nine months 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 defer a capital project at its Corpus Christi refinery related to
production of ultra low sulfur diesel fuel. Accordingly, results for the nine
months ended September 30, 2005 include a charge against income of approximately
$22 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 $194 million over the five-year period from 2005
through 2009.
In addition, the Company decided to cancel an energy conservation
project at its Lemont refinery when costs escalated over original expectations.
Accordingly, results for the nine months ended September 30, 2005 include in
cost of sales, a charge of approximately $18 million to write off the costs
incurred to date on the project.
Gross margin. Gross margin decreased approximately 2.1 cents per
gallon in the quarter ended September 30, 2005 compared to the same period in
2004 and remained flat in the nine months ended September 30, 2005 compared to
the same period in 2004. Gross margin for the quarter ended September 30, 2005
was approximately 2.8 cents per gallon compared to gross margin of approximately
4.9 cents per gallon for the same period in 2004. The decline in gross margin
for the quarter ended September 30, 2005 compared to the same period in 2004 is
attributable primarily to a decline in profitability of asphalt, petrochemicals
and industrial products. The selling price of these products did not respond to
increases in the cost of crude oil and feedstocks as readily as the price of
gasoline, jet fuel or diesel fuel. In addition, the combined sales volume of
gasoline, jet fuel and diesel fuel declined approximately 5% for the quarter
ended September 30, 2005 compared to the same period in 2004 primarily due to
the disruption in operations related to hurricanes on the Gulf Coast. Gross
margin for the nine months ended September 30, 2005 and 2004 was approximately
4.0 cents per gallon.
Revenue per gallon for the third quarter 2005 increased approximately
46% compared to the third quarter 2004 and increased approximately 36% for the
first nine months of
22
2005 compared to the first nine months of 2004. Cost of sales and operating
expenses per gallon for the quarter ended September 30, 2005 increased
approximately 50% compared to the same period in 2004 and for the nine months
ended September 30, 2005 increased approximately 37% 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.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $5 million, or 6% from $78 million in the
third quarter of 2004 to $83 million in the third quarter of 2005. Selling,
general and administrative expenses increased $20 million, or 9% from $219
million in the first nine months of 2004 to $239 million in the first nine
months of 2005. The increase is primarily related to professional and consulting
fees, contract services and the decision to relocate corporate headquarters.
Interest expense. Interest expense, including capital lease interest
charge, decreased $8 million in the three-month period ended September 30, 2005
as compared to the same period in 2004 and decreased $42 million in the
nine-month period ended September 30, 2005 as compared to the same period in
2004. The decrease in interest expense for the quarter and nine-month period
reflects the retirement of the senior secured term loan during the second
quarter of 2004 and the redemption in October 2004 of approximately $543 million
of our 11-3/8% notes due 2011.
LIQUIDITY AND CAPITAL RESOURCES
The following summarizes cash flows during the nine-month periods
ended September 30, 2005 and 2004:
Nine Months
Ended
September 30,
---------------
2005 2004
----- -----
($ in millions)
Net cash provided by/(used in):
Operating activities $ 878 $ 697
Investing activities $(314) $(242)
Financing activities $(348) $(187)
Cash Provided by Operating Activities
Consolidated net cash provided by operating activities totaled
approximately $878 million for the nine-month period ended September 30, 2005.
Operating cash flows were derived primarily from net income of $419 million,
depreciation and amortization of $294 million, distributions in excess of equity
in earnings of affiliates of $88 million, decrease in deferred taxes of $20
million, asset retirements of $27 million and changes in operating assets and
liabilities of $63 million. The more significant changes in operating assets and
liabilities include an increase in current liabilities and a decrease in
inventories, offset in part, by an increase in notes and accounts receivable.
23
Cash Used in Investing Activities
Net cash used in investing activities in the nine-month period ended
September 30, 2005 totaled $314 million consisting primarily of capital
expenditures of $263 million. These capital expenditures consisted of:
Nine Months Ended
September 30, 2005
------------------
($ in millions)
Regulatory requirements $130
Maintenance capital projects 53
Strategic capital expenditures 80
----
Total capital expenditures $263
====
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 $348 million for the
nine-month period ended September 30, 2005, consisting primarily of the payment
of $317 million in dividends to PDV America, our parent company, and the payment
of loans from affiliates.
As of September 30, 2005, capital resources available to us included
cash on hand totaling $239 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 $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 September 30, 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 September 30, 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 September 30, 2005, we had an effective shelf registration with
the SEC under which we could have publicly offered up to $400 million principal
amount of debt securities. Due to our current credit ratings, the shelf
registration statement is not presently available.
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 September 30, 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 $20 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.
On October 13, 2005, we announced cash tender offers for all of our
outstanding 7-7/8% senior notes due 2006 and 6% senior notes due 2011.
25
On October 14, 2005, we sent notices of our election to redeem prior
to their stated maturity dates the following debt securities:
- all of our outstanding 11-3/8% senior notes due 2011;
- all of our outstanding 9.30% private placement senior notes due 2006;
and
- all of our outstanding master shelf agreement senior notes due 2006
through 2009 with interest rates ranging from 7.17% to 8.94%.
We are also working with two co-lead banks who have committed on a
$1.85 billion senior secured credit facility, which would consist of a five-year
revolving credit facility in the amount of $1.15 billion and a seven-year term
loan of $700 million. The credit facility, which is subject to the completion of
documentation and a number of other conditions, would be secured by our
interests in our Lake Charles, Louisiana and Corpus Christi, Texas refineries,
our trade accounts receivable and our inventories and is subject to covenants
typical for secured financing. We expect to close this transaction in the fourth
quarter of 2005.
The ratings on the new senior secured credit facility, as currently
assessed by the three major debt rating agencies, are as follows:
Secured
-------
Standard & Poor's Ratings Group BBB-
Moody's Investors Service Ba1
Fitch Investors Services, Inc. BB+
26
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 nine-month period ended
September 30, 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 is currently evaluating the impact, if any, 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.
In September 2005, the FASB ratified the consensus reached by the
Emerging Issues Task Force ("EITF") in Issue No. 04-13, "Accounting for
Purchases and Sales of Inventory with the Same Counterparty" ("EITF 04-13"). In
this issue, the EITF reached consensus on i) the circumstances under which two
or more transactions involving inventory with the same counterparty should be
viewed as a single nonmonetary transaction within the scope of APB Opinion No.
29, Accounting for Nonmonetary Transactions; and ii) whether there are
circumstances under which nonmonetary exchanges of inventory within the same
line of business should be recognized at fair value. EITF 04-13 is effective for
new arrangements entered into in reporting periods beginning after March 15,
2006. The Company is currently evaluating the impact, if any, on its financial
position and results of operations that may result from the application of
EITF 04-13.
27
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 September 30, 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 September 30, 2005,
CITGO's total crude and refined products inventory was 47 million barrels.
Aggregate commodity derivative positions entered into for price risk management
purposes at that date totaled 2.9 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 from time to time enters into petroleum commodity
derivative contracts. 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 $25 million or
greater. At September 30, 2005, none of the Company's commodity derivatives were
accounted for as hedges. Changes in the fair value of these contracts are
recorded in cost of sales and operating expense.
28
COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2005
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE(3)
- --------- ---------- -------- ------------ -------- --------
Long/(Short) Asset/(Liability)
------------ -------------------
($ in millions)
No Lead Gasoline (1) Futures Purchased 2005 203 $ 16.7 $ 17.7
Futures Sold 2005 (161) $ (12.8) $ (14.0)
Listed Put Options Sold 2005 (10) $ -- $ --
Listed Call Options Purchased 2005 50 $ -- $ 0.3
Listed Call Options Sold 2005 (50) $ -- $ (0.2)
OTC Swaps (Pay Fixed / Receive Float) (4) 2005 100 $ -- $ 2.7
Forward Purchase Contracts 2005 2,038 $ 85.1 $ 93.5
Forward Sale Contracts 2005 (1,070) $ (76.1) $ (87.4)
Distillates (1) Futures Purchased 2005 1,223 $ 86.5 $ 110.6
Futures Purchased 2006 1,458 $ 102.0 $ 128.3
Futures Sold 2005 (284) $ (23.6) $ (25.5)
Futures Sold 2006 (110) $ (8.0) $ (9.8)
Listed Call Options Purchased 2005 6 $ -- $ --
Listed Call Options Sold 2005 (6) $ -- $ --
OTC Swaps (Pay Fixed / Receive Float) (4) 2005 445 $ -- $ 17.8
OTC Swaps (Pay Fixed / Receive Float) (4) 2006 316 $ -- $ 2.2
OTC Swaps (Pay Float / Receive Fixed) (4) 2005 (368) $ -- $ (14.8)
Forward Purchase Contracts 2005 696 $ 40.5 $ 47.6
Forward Sale Contracts 2005 (1,889) $(150.1) $(181.1)
Forward Sale Contracts 2006 (1,130) $ (82.2) $ (99.7)
Crude Oil (1) Futures Purchased 2005 595 $ 39.2 $ 39.4
Futures Purchased 2006 190 $ 12.2 $ 12.7
Futures Sold 2005 (720) $ (46.4) $ (47.7)
Futures Sold 2006 (120) $ (8.0) $ (8.0)
Listed Call Options Purchased 2006 150 $ -- $ 0.2
Listed Call Options Sold 2005 (150) $ -- $ (0.2)
Listed Put Options Purchased 2005 228 $ -- $ 0.2
Listed Put Options Sold 2005 (220) $ -- $ (0.1)
OTC Swaps (Pay Fixed / Receive Float) (4) 2005 100 $ -- $ 0.8
OTC Swaps (Pay Float / Receive Fixed) (4) 2005 (100) $ -- $ (1.3)
Forward Purchase Contracts 2005 4,370 $ 176.9 $ 179.7
Forward Sale Contracts 2005 (2,903) $(187.6) $(187.9)
Natural Gas (2) Futures Purchased 2005 18 $ 2.6 $ 2.6
Futures Sold 2005 (20) $ (2.9) $ (2.9)
Listed Call Options Purchased 2005 45 $ -- $ 0.8
Listed Call Options Sold 2005 (45) $ -- $ (0.4)
Propane (1) OTC Swaps (Pay Fixed / Receive Float) (4) 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.
29
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.
30
Debt Related Instruments. We have fixed and floating U.S. currency
denominated debt. At September 30, 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.
INTEREST RATE DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 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
---
$42
===
Changes in the fair value of these agreements were recorded in other
income (expense) in the third quarter of 2004 with the offset recorded in the
balance sheet caption other current liabilities at September 30, 2004. There
were no interest rate swap agreements in place at September 30, 2005.
31
For debt obligations, the table below presents principal cash flows
and related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2005
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ in millions) ($ in millions)
2005 $ 11 9.30% $ -- --
2006 201 8.10% -- --
2007 50 8.94% 12 5.88%
2008 25 7.17% 20 5.95%
2009 50 7.22% -- --
Thereafter 403 6.77% 360 6.58%
---- ---- ---- ----
Total $740 7.36% $392 6.53%
==== ==== ==== ====
Fair Value $743 $392
==== ====
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2004
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
- ------------------- --------------- ------------- --------------- ----------------
($ 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
====== ====
32
ITEM 4. CONTROLS AND PROCEDURES
During the third 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 September 30, 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.
33
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, 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 September 30, 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.
34
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, 2005 /s/ Paul Largess
----------------------------------------
Paul Largess
Controller, Chief Accounting Officer
35
Index to 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, 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
September 30, 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.