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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 JUNE 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-14380
CITGO PETROLEUM CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 73-1173881
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
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(Registrant's telephone number, including area code)
N. A.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
----------------------------- -----
(Class) (outstanding at July 31, 2002)
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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 JUNE 30, 2002
TABLE OF CONTENTS
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PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 (as restated)...........2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Six-Month Periods Ended June 30, 2002 and 2001 (as restated)..............................3
Condensed Consolidated Statement of Shareholder's Equity - Six-Month Period
Ended June 30, 2002 (as restated)...................................................................4
Condensed Consolidated Statements of Cash Flows - Six-Month Periods Ended
June 30, 2002 and 2001 (as restated)................................................................5
Notes to the Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................26
Item 6. Exhibits and Reports on Form 8-K...................................................................26
SIGNATURES.......................................................................................................27
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Specifically, all statements under
the caption "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" pertaining to capital expenditures and
investments related to environmental compliance, strategic planning, purchasing
patterns of refined products and capital resources available to CITGO (as
defined herein) are forward looking statements. In addition, when used in this
document, the words "anticipate," "estimate," "prospect" and similar expressions
are used to identify forward looking statements. Those statements are subject to
risks and uncertainties, such as increased inflation, continued access to
capital markets and commercial bank financing on favorable terms, increases in
environmental and other regulatory burdens, outcomes of currently contested
matters, changes in prices or demand for CITGO products as a result of
competitive actions or economic factors and changes in the cost of crude oil,
feedstocks, blending components or refined products. Those statements are also
subject to the risks of increased costs in related technologies and those
technologies producing anticipated results. Should one or more of these risks or
uncertainties, among others, materialize, actual results may vary materially
from those estimated, anticipated or projected. Readers are cautioned not to
place undue reliance on these forward looking statements, which speak only as of
the date of this Report. CITGO undertakes no obligation 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)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
(AS RESTATED
(UNAUDITED) - SEE NOTE 1)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,890 $ 104,362
Accounts receivable, net 1,110,304 913,068
Due from affiliates 47,733 64,923
Inventories 1,127,993 1,109,346
Prepaid expenses and other 48,464 95,334
------------ ------------
Total current assets 2,353,384 2,287,033
PROPERTY, PLANT AND EQUIPMENT - Net 3,505,316 3,292,469
RESTRICTED CASH 36,012 --
INVESTMENTS IN AFFILIATES 724,265 700,701
OTHER ASSETS 274,821 228,906
------------ ------------
$ 6,893,798 $ 6,509,109
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans 130,000 --
Accounts payable 712,670 616,854
Payables to affiliates 332,489 265,517
Taxes other than income 206,511 219,699
Other 211,925 300,484
Current portion of long-term debt 531,364 107,864
Current portion of capital lease obligation 31,404 20,358
------------ ------------
Total current liabilities 2,156,363 1,530,776
LONG-TERM DEBT 971,357 1,303,692
CAPITAL LEASE OBLIGATION 35,918 46,964
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 233,166 218,706
OTHER NONCURRENT LIABILITIES 216,099 217,121
DEFERRED INCOME TAXES 798,701 767,338
MINORITY INTEREST -- 23,176
COMMITMENTS AND CONTINGENCIES (Note 7)
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 825,805 745,102
Accumulated other comprehensive loss (3,310) (3,465)
------------ ------------
Total shareholder's equity 2,482,194 2,401,336
------------ ------------
$ 6,893,798 $ 6,509,109
============ ============
See notes to condensed consolidated financial statements.
2
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(AS RESTATED (AS RESTATED
REVENUES: - SEE NOTE 1) - SEE NOTE 1)
------------ ------------
Net sales $ 4,733,631 $ 5,689,901 $ 8,355,986 $ 10,585,533
Sales to affiliates 59,810 66,070 108,877 131,989
------------ ------------ ------------ ------------
4,793,441 5,755,971 8,464,863 10,717,522
Equity in earnings of affiliates 30,339 37,190 49,273 60,821
Insurance recoveries 115,835 -- 210,541 --
Other income (expense) - net (8,009) 868 (14,510) (1,138)
------------ ------------ ------------ ------------
4,931,606 5,794,029 8,710,167 10,777,205
------------ ------------ ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $1,642,405, $1,891,288,
$2,881,253 and $3,477,258 from affiliates) 4,686,882 5,300,767 8,395,785 10,048,235
Selling, general and administrative expenses 74,939 78,484 151,326 138,547
Interest expense, excluding capital lease 17,447 17,896 33,170 36,217
Capital lease interest charge 1,894 2,406 3,787 4,813
Minority interest -- 37 -- 71
------------ ------------ ------------ ------------
4,781,162 5,399,590 8,584,068 10,227,883
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 150,444 394,439 126,099 549,322
INCOME TAXES 54,160 143,150 45,396 199,453
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 96,284 251,289 80,703 349,869
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- -- -- 13,600
------------ ------------ ------------ ------------
NET INCOME 96,284 251,289 80,703 363,469
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives, net
of related income taxes of $(850) -- -- -- (1,450)
Less: reclassification adjustment for
derivative losses included in net income, net of
related income taxes of $44, $45, $88, and $184 77 77 155 314
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) 77 77 155 (1,136)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 96,361 $ 251,366 $ 80,858 $ 362,333
============ ============ ============ ============
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
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS (LOSS) INCOME TOTAL
------ ------ ----------- -------- ------------- -----------
BALANCE, DECEMBER 31, 2001 1 $ 1 $ 1,659,698 $745,102 $ (3,465) $ 2,401,336
(As Restated - See Note 1)
Net income -- -- -- 80,703 -- 80,703
Other comprehensive income -- -- -- -- 155 155
------ ------ ----------- -------- ------------- -----------
BALANCE, JUNE 30, 2002 1 $ 1 $ 1,659,698 $825,805 $ (3,310) $ 2,482,194
====== ====== =========== ======== ============= ===========
See notes to condensed consolidated financial statements.
4
CITGO PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30,
--------------
2002 2001
--------- ---------
(AS RESTATED
- SEE NOTE 1)
-------------
CASH FLOWS FROM OPERATING ACTIVITIES $ 121,738 $ 397,335
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (349,957) (81,113)
Proceeds from sales of property, plant and equipment 547 1,036
Increase in restricted cash (36,012) --
Investments in LYONDELL-CITGO Refining LP (18,700) (5,700)
Investments in and advances to other affiliates (15,918) (304)
--------- ---------
Net cash used in investing activities (420,040) (86,081)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans 130,000 (37,500)
Net proceeds from revolving bank loans 78,500 16,000
Proceeds from issuance of tax-exempt bonds 62,650 25,000
Payments on taxable bonds (25,000) (25,000)
Payments of capital lease obligations -- (17,276)
Payments of master shelf agreement notes (25,000) --
Repayment of other debt (8,320) (11,577)
--------- ---------
Net cash provided by (used in) financing activities 212,830 (50,353)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (85,472) 260,901
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104,362 19,038
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,890 $ 279,939
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 33,778 $ 45,939
========= =========
Income taxes, net of refunds of $50,700 in 2002 $ 45,222 $ 184,300
========= =========
See notes to condensed consolidated financial statements.
5
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for CITGO Petroleum Corporation ("CITGO" or "the
Company") subsequent to December 31, 2001 and with respect to the interim
three-month and six-month periods ended June 30, 2002 and 2001 (as restated)
is unaudited. In the opinion of management, such interim information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of such periods. The
results of operations for the six-month periods ended June 30, 2002 and 2001
(as restated) 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, 2001 on Form 10-K, dated March 28, 2002, for
additional information.
On January 1, 2002, PDV America, the parent company of CITGO, made a
contribution to the capital of CITGO of all of the common stock of PDV
America's wholly owned subsidiary, VPHI Midwest, Inc. ("VPHI"). No
additional shares of the capital stock of CITGO were issued in connection
with the contribution. Effective January 1, 2002, the accounts of VPHI are
included in the consolidated financial statements of CITGO at the historical
carrying value of PDV America's investment in VPHI. CITGO recorded the
effects of this transaction in a manner similar to "pooling-of-interests"
accounting. The 2001 financial statements have been restated to reflect the
Company's financial condition at December 31, 2001 and the results of
operations for the three-month and six-month periods ended June 30, 2001 as
if the transaction had occurred on January 1, 2001. The following unaudited
proforma information presents the separate results of operations for CITGO
and VPHI for the three months and six months ended June 30, 2001:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
(000s omitted)
Net Income CITGO $149,571 $228,921
Net Income VPHI 101,718 134,548
-------- --------
Net Income Consolidated $251,289 $363,469
======== ========
The principal asset of VPHI is a petroleum refinery owned by its wholly
owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR"), located in Lemont,
Illinois. CITGO has operated this refinery and purchased substantially all
of its primary output, consisting of transportation fuels and
petrochemicals, since 1997.
The condensed consolidated financial statements include the accounts of
CITGO and its wholly owned subsidiaries and Cit-Con Oil Corporation, which
was 65% owned by CITGO through December 31, 2001 (collectively, "the
Company"). On January 1, 2002, CITGO acquired the outstanding 35 percent
interest in Cit-Con from Conoco, Inc. The principal asset of Cit-Con is a
lubricants refinery in Lake Charles, Louisiana. This transaction did not
have a material effect on the consolidated financial position or results of
operations of the Company. The legal entity, Cit-Con Oil Corporation, was
dissolved effective April 1, 2002.
Certain reclassifications have been made to the June 30, 2001 financial
statements to conform to the classifications used for the periods ended
June 30, 2002.
6
2. CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001 the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement, as amended, establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives, at
fair value, as either assets or liabilities in the statement of financial
position with an offset either to shareholder's equity and comprehensive
income or income depending upon the classification of the derivative. Under
the transition provisions of SFAS No. 133, on January 1, 2001 the Company
recorded an after-tax, cumulative-effect-type transition benefit of $13.6
million (as restated-See Note 1) to net income related to derivatives that
existed on that date and an after-tax, cumulative-effect-type transition
charge of $1.5 million to accumulated other comprehensive income.
3. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED) (AS RESTATED)
----------- -----------
(000'S OMITTED)
Refined products $ 778,023 $ 836,683
Crude oil 268,650 193,319
Materials and supplies 81,320 79,344
----------- -----------
$ 1,127,993 $ 1,109,346
=========== ===========
4. SHORT-TERM BANK LOANS
As of July 30, 2002, the Company had established $150 million of
uncommitted, unsecured, short-term borrowing facilities with various banks.
Interest rates on these facilities are determined daily based upon the
federal funds' interest rates. Maturity options vary up to 30 days. The
Company had $130 million and $0 of borrowings outstanding under these
facilities at June 30, 2002 and December 31, 2001, respectively.
7
5. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
JUNE 30, DECEMBER 31,
2002 2001
(UNAUDITED) (AS RESTATED)
----------- -------------
(000'S OMITTED)
Revolving bank loans $ 470,000 $ 391,500
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7.875% 199,882 199,867
Private Placement Senior Notes, due 2002 to 2006 with
interest rate of 9.30% 56,819 56,819
Master Shelf Agreement Senior Notes, due 2003 to
2009 with interest rates from 7.17% to 8.94% 235,000 260,000
Tax Exempt Bonds, due 2004 to 2032 with variable
and fixed interest rates 420,020 357,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 121,000 146,000
----------- -------------
1,502,721 1,411,556
Current portion of long-term debt (531,364) (107,864)
----------- -------------
$ 971,357 $ 1,303,692
=========== =============
The Company's revolving bank loan agreements with various banks mature in
May 2003 and consist of (i) a $400 million, five-year, revolving bank loan;
(ii) a $150 million, 364-day, revolving bank loan; and (iii) a $25 million,
364-day, revolving bank loan. The Company intends to replace the revolving
bank loans when they mature.
On March 20, 2002, CITGO issued $25 million of tax exempt revenue bonds due
2032. The proceeds were used to redeem $25 million of taxable Gulf Coast
Environmental facilities revenue bonds due 2032.
On May 3, 2002, CITGO issued $7.7 million of environmental facilities
revenue bonds due 2032. On June 28, 2002, CITGO issued $30 million of
environmental facilities revenue bonds due 2032. The proceeds from both of
these issuances will be used for capital projects at the Lemont refinery.
Restricted cash of $36 million at June 30, 2002 represents highly liquid
investments held in trust accounts in accordance with these bond agreements.
Funds are released solely for financing the qualified capital expenditures
as defined in the bond agreements.
8
6. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%)
and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery
processes heavy crude oil supplied by Petroleos de Venezuela, S.A. ("PDVSA"
which may also be used to refer to one or more of its subsidiaries) 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.
On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective February
1, 2001, it had declared force majeure under the contract described above.
As of December 31, 2001, PDVSA deliveries of crude oil to LYONDELL-CITGO had
not been reduced due to PDVSA's declaration of force majeure. On January 22,
2002, PDVSA notified LYONDELL-CITGO that pursuant to the February 9, 2001
declaration of force majeure, effective March 1, 2002, PDVSA expected to
deliver approximately 20 percent less than the contract volume and PDVSA
indicated that force majeure will be in effect until at least June 2002. To
date, there have been no updates to the January 22, 2002 notification, and
as a result, force majeure remains in effect. PDVSA delivered approximately
83 percent of the contractual crude oil volume during the second quarter of
2002. In the six months ended June 30, 2002, PDVSA delivered approximately
86 percent of the contractual crude oil volume. When PDVSA reduces its
delivery of crude oil under the crude oil supply contract, LYONDELL-CITGO
may obtain alternative sources of crude oil which may result in reduced
operating margins. As a result, LYONDELL-CITGO estimates that crude oil
costs in the quarter and the six-month period ended June 30, 2002 were
increased by $17 million. The future effect of this declaration on
LYONDELL-CITGO's crude oil supply and the duration of this situation are not
known at this time.
CITGO has notes receivable from LYONDELL-CITGO which total $35 million at
June 30, 2002 and December 31, 2001. The notes bear interest at market rates
and are due July 1, 2003. These notes are included in other assets in the
accompanying consolidated balance sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity method
of accounting and records its share of the net earnings of LYONDELL-CITGO
based on allocations of income agreed to by the Owners. Cash distributions
are allocated to the Owners based on participation interest. Information on
CITGO's investment in LYONDELL-CITGO follows:
9
June 30, December 31,
2002 2001
------------ ------------
(Unaudited)
(000s omitted)
Carrying value of investment $ 528,927 $ 507,940
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of financial position:
Current assets $ 281,000 $ 227,000
Non current assets 1,419,000 1,434,000
Current liabilities (including debt of 802,000 377,000
$460,000 and $50,000 at June 30,
2002 and December 31, 2001,
respectively)
Non current liabilities (including debt 345,000 776,000
of $0 and $450,000 at June 30,
2002 and December 31, 2001,
respectively)
Member's equity 553,000 508,000
Six Months Ended June 30,
---------------------------
2002 2001
----------- -----------
(Unaudited)
Equity in net income $ 38,089 $ 39,220
Cash distribution received 35,802 37,002
Summary of operating results:
Revenue $ 1,545,725 $ 1,841,785
Gross profit 145,384 166,324
Net income 104,325 107,507
LYONDELL-CITGO's 18-month term loan and working capital revolver will mature
in January 2003. The Owners are currently reviewing financing alternatives
to address this situation.
10
7. COMMITMENTS AND CONTINGENCIES
LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. The Company
records accruals for potential losses when, in management's opinion, such
losses are probable and reasonably estimable. If known lawsuits and claims
were to be determined in a manner adverse to the Company, and in amounts
greater than the Company's accruals, then such determinations could have a
material adverse effect on the Company's results of operations in a given
reporting period. The most significant lawsuits and claims are discussed
below.
A class action lawsuit brought by four former marketers of the UNO-VEN
Company ("UNO-VEN") in U.S. District Court in Wisconsin against UNO-VEN
alleging improper termination of the UNO-VEN Marketer Sales Agreement under
the Petroleum Marketing Practices Act in connection with PDVMR's 1997
acquisition of Unocal's interest in UNO-VEN has resulted in the judge
granting the Company's motion for summary judgment. The plaintiffs are
appealing the summary judgment. PDVMR and its parent, VPHI, jointly and
severally, have agreed to indemnify UNO-VEN and certain other related
entities against certain liabilities and claims, including this matter.
A lawsuit is pending against PDVMR and CITGO in Illinois state court which
claims damages as a result of PDVMR invoicing a partnership in which it is a
partner, and an affiliate of the other partner of the partnership, alleging
excessive charges for electricity utilized by these entities' facilities
located adjacent to the Lemont, Illinois refinery. The electricity supplier
to the refinery is seeking recovery from the Company of alleged
underpayments for electricity. The Company has denied all allegations and is
pursuing its defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery. No serious
personal injuries were reported. There are seventeen related lawsuits
pending in Corpus Christi, Texas state court against CITGO on behalf of
approximately 9,000 individuals alleging property damages, personal injury
and punitive damages. A trial of the claims of approximately 20 plaintiffs
which began in April 2002 is currently stayed. Approximately 1,300 claims
have been resolved for immaterial amounts.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO which claims damages for reduced value of residential
properties as a result of alleged air, soil and groundwater contamination.
CITGO has purchased 275 adjacent properties included in the lawsuit and
settled those related property damage claims. Over CITGO's objections, the
trial court has recently ruled that an agreement by CITGO that purported to
provide for settlement of the remaining property damage claims for $5
million payable by it is enforceable. CITGO will appeal this decision.
A lawsuit alleging wrongful death and personal injury filed in 1996 against
CITGO and other industrial facilities in Corpus Christi, Texas state court
brought by persons who claim that exposure to refinery hydrocarbon emissions
have caused various forms of illness has been settled by the Company for an
immaterial amount.
Litigation is pending in federal court in Lake Charles, Louisiana against
CITGO by a number of current and former refinery employees and applicants
asserting claims of racial discrimination in connection with CITGO's
employment practices. A trial involving two plaintiffs resulted in verdicts
for the Company. The Court granted the Company summary judgment with respect
to another group of claims; these rulings have been affirmed by the Fifth
Circuit Court of Appeals. Trials of the remaining cases will be set in the
future.
11
CITGO is among defendants to putative class action and individual lawsuits
in New York and Illinois alleging contamination of water supplies by methyl
tertiary butyl ether ("MTBE"), a component of gasoline. These actions allege
that MTBE poses public health risks and seek testing, damages and
remediation of the alleged contamination. These matters are in early stages
of discovery. One of the Illinois cases was consolidated in U.S. District
Court in New York with the case pending in New York and the judge in the
case denied the plaintiffs' motion for class certification.
In August 1999, the U.S. Department of Commerce rejected a petition filed by
a group of independent oil producers to apply antidumping measures and
countervailing duties against imports of crude oil from Venezuela, Iraq,
Mexico and Saudi Arabia. The petitioners appealed this decision before the
U.S. Court of International Trade based in New York, where the matter is
still pending. On September 19, 2000, the Court of International Trade
remanded the case to the Department of Commerce with instructions to
reconsider its August 1999 decision. The Department of Commerce was required
to make a revised decision as to whether or not to initiate an investigation
within 60 days. The Department of Commerce appealed to the U.S. Court of
Appeals for the Federal Circuit, which dismissed the appeal as premature on
July 31, 2001. The Department of Commerce issued its revised decision, which
again rejected the petition, in August 2001. The revised decision is
awaiting review by the Court of International Trade.
Approximately 280 lawsuits are currently pending against the Company in
state and federal courts, primarily in Louisiana, Texas, and Illinois. The
cases were brought by former employees and contractors seeking damages for
asbestos related illnesses allegedly resulting from exposure at refineries
owned or operated by the Company in Lake Charles, Louisiana, Corpus Christi,
Texas and Lemont, Illinois. In many of these cases, there are multiple
defendants. In some cases, the Company is indemnified by or has the right to
seek indemnification for losses and expense that it may incur from prior
owners of the refineries or employers of the claimants. The Company does not
believe that the resolution of the cases will have an adverse material
effect on its financial condition or results of operations.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION - CITGO is subject to various
federal, state and local environmental laws and regulations which may
require CITGO to take additional compliance actions and also actions to
remediate the effects on the environment of prior disposal or release of
petroleum, hazardous substances and other waste and/or pay for natural
resource damages. Maintaining compliance with environmental laws and
regulations could require significant capital expenditures and additional
operating costs.
CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. CITGO believes the amounts provided in its consolidated
financial statements, as prescribed by generally accepted accounting
principles, are adequate in light of probable and estimable liabilities and
obligations. However, there can be no assurance that the actual amounts
required to discharge alleged liabilities and obligations and to comply with
applicable laws and regulations will not exceed amounts provided for or will
not have a material adverse affect on its consolidated results of
operations, financial condition and cash flows.
In 1992, the Company reached an agreement with the Louisiana Department of
Environmental Quality ("LDEQ") to cease usage of certain surface
impoundments at the Company's Lake Charles refinery by 1994. A mutually
acceptable closure plan was filed with the LDEQ in 1993. The
12
Company and its former owner are participating in the closure and sharing
the related costs based on estimated contributions of waste and ownership
periods. The remediation commenced in December 1993. In 1997, the Company
presented a proposal to the LDEQ revising the 1993 closure plan. In 1998 and
2000, the Company submitted further revisions as requested by the LDEQ. The
LDEQ issued an administrative order in June 2002 that addressed the
requirements and schedule for proceeding to develop and implement the
corrective action or closure plan for these surface impoundments and related
waste units. Compliance with the terms of the administrative order will
begin in 2002.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998 and
1999. CITGO and TNRCC have agreed to settle all matters related to the
compliance reviews. CITGO has agreed to revise certain environmental
practices and reports and has agreed to pay $750 thousand.
In June 1999, CITGO and numerous other industrial companies received notice
from the U.S. EPA that the U.S. EPA believes these companies have
contributed to contamination in the Calcasieu Estuary, in the proximity of
Lake Charles, Calcasieu Parish, Louisiana and are Potentially Responsible
Parties ("PRPs") under the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). The U.S. EPA made a demand for
payment of its past investigation costs from CITGO and other PRPs and is
conducting a Remedial Investigation/Feasibility Study ("RI/FS") under its
CERCLA authority. CITGO and other PRPs may be potentially responsible for
the costs of the RI/FS, subsequent remedial actions and natural resource
damages. CITGO disagrees with the U.S. EPA's allegations and intends to
contest this matter.
In January and July 2001, CITGO received Notices of Violation ("NOVs") from
the U.S. EPA alleging violations of the Federal Clean Air Act. The NOVs are
an outgrowth of an industry-wide and multi-industry U.S. EPA enforcement
initiative alleging that many refineries and electric utilities modified air
emission sources without obtaining permits under the New Source Review
provisions of the Clean Air Act. The NOV's to CITGO followed inspections and
formal Information Requests regarding the Company's Lake Charles, Louisiana
and Corpus Christi, Texas refineries and the Lemont, Illinois refinery which
at the time was operated by CITGO but not owned by CITGO. At the U.S. EPA's
request, the Company is engaged in settlement discussions, but is prepared
to contest the NOVs if settlement discussions fail. If the Company settles
or is found to have violated the provisions cited in the NOVs, it would be
subject to possible penalties and significant capital expenditures for
installation or upgrading of pollution control equipment or technologies.
In June 1999, a NOV was issued by the U.S. EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants regulations
covering benzene emissions from wastewater treatment operations at the
Lemont, Illinois refinery operated by CITGO. CITGO is in settlement
discussions with the U.S. EPA. The Company believes this matter will be
consolidated with the matters described in the previous paragraph.
In 1992, an agreement was reached between the Company and a former owner
concerning a number of environmental issues which provides, in part, that
the former owner will continue to share the costs of certain specific
environmental remediation and certain tort liability actions based on
ownership periods and specific terms of the agreement.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, CITGO's operating
refinery complexes, closed refineries, service
13
stations and crude oil and petroleum product storage terminals. The amount
of such future expenditures, if any, is indeterminable.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of June 30, 2002 the
Company's petroleum commodity derivatives included exchange traded futures
contracts, forward purchase and sale contracts and over-the-counter swaps.
At June 30, 2002, the balance sheet captions prepaid expenses and other
current assets and other current liabilities include $19 million and $13
million, respectively, related to the fair values of open commodity
derivatives.
CITGO has also entered into various interest rate swaps to manage its risk
related to interest rate changes on its debt. The fair value of the interest
rate swap agreements in place at June 30, 2002, based on the estimated
amount that CITGO would receive or pay to terminate the agreements as of
that date and taking into account current interest rates, was a loss of $3
million, the offset of which is recorded in the balance sheet caption other
current liabilities. In connection with the determination of fair market
value, the Company considers the creditworthiness of the counterparties, but
no adjustment was determined to be necessary as a result.
14
8. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries. These crude oil supply
agreements contain force majeure provisions which entitle PDVSA to reduce
the quantity of crude oil and feedstocks delivered under the crude oil
supply agreements under specified circumstances. On February 9, 2001, PDVSA
notified CITGO that it had declared force majeure, effective February 1,
2001, under each of the long-term crude oil supply agreements it has with
CITGO. Under a force majeure declaration, PDVSA may reduce the amount of
crude oil that it would otherwise be required to supply under these
agreements. During 2001, PDVSA deliveries of crude oil to CITGO were
slightly less than contractual base volumes due to this declaration of force
majeure. Therefore, the Company was required to obtain alternative sources
of crude oil, which resulted in lower operating margins. On January 22,
2002, PDVSA notified CITGO that pursuant to the February 9, 2001 declaration
of force majeure, effective March 1, 2002, PDVSA expected to deliver
approximately 20 percent less than the contract volume and PDVSA indicated
that force majeure will be in effect until at least June 2002. To date,
there have been no updates to the January 22, 2002 notification, and as a
result, force majeure remains in effect. PDVSA delivered approximately 81
percent of the contractual crude oil volume during the second quarter of
2002. In the six months ended June 30, 2002, PDVSA delivered approximately
87 percent of the contractual crude oil volume. When PDVSA reduces its
delivery of crude oil under these crude oil supply agreements, CITGO may
obtain alternative sources of crude oil or increase its purchases of refined
products which may result in reduced operating margins. As a result, CITGO
estimates that crude oil costs during the quarter ended June 30, 2002 were
increased by $12 million and during the six months ended June 30, 2002
were increased by $16 million. The future effect of this declaration on
CITGO's crude oil supply and the duration of this situation are not known at
this time.
During the first half of 2002, PDVSA did not deliver naphtha pursuant to
certain contracts and has made or will make contractually specified payments
in lieu thereof.
9. INSURANCE RECOVERIES
The insurance recoveries of $116 million included in the quarter ended June
30, 2002 and $211 million included in the six-months ended June 30, 2002
relate primarily to a fire which occurred on August 14, 2001 at the Lemont
refinery. The crude unit was destroyed and the refinery's other processing
units were temporarily taken out of production. A new crude unit was
operational at the end of May 2002. The Company has insurance coverage for
this type of event including business interruption insurance. The Company
received cash proceeds of $142 million during the quarter ended June 30,
2002 and $243 million during the six months ended June 30, 2002, a portion
of which were applied to receivables recorded during 2001. The Company
expects to recover additional amounts related to this event subject to
final settlement negotiations.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the unaudited condensed
consolidated financial statements of CITGO included elsewhere herein. Reference
is made to CITGO's Annual Report for the fiscal year ended December 31, 2001 on
Form 10-K, dated March 28, 2002, for additional information and a description of
critical accounting policies and factors which may cause substantial
fluctuations in the earnings and cash flows of CITGO.
On January 1, 2002, PDV America, the parent company of CITGO, made a
contribution to the capital of CITGO of all of the common stock of PDV America's
wholly owned subsidiary, VPHI. Effective January 1, 2002, the accounts of VPHI
are included in the consolidated financial statements of CITGO at the historical
carrying value of PDV America's investment in VPHI. (See Note 1 to the condensed
consolidated financial statements). In the following discussion and analysis of
financial condition and results of operations, 2001 data has been restated to
reflect the Company's financial condition and results of operations for the
three-month and six-month periods ended June 30, 2001 as if the transaction had
occurred on January 1, 2001.
In the quarter ended June 30, 2002, CITGO generated a net income of
$96.3 million on total revenue of $4.9 billion compared to net income of $251.3
million on total revenue of $5.8 billion for the same period last year. In the
six months ended June 30, 2002, CITGO generated net income of $80.7 million on
revenue of $8.7 billion compared to net income of $363.5 million on revenue of
$10.8 billion for the same period last year. (See "Gross margin").
16
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues
and sales volumes for the three-month and six-month periods ended June 30, 2002
and 2001:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS SIX MONTHS THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------- ----------------- ------------------
2002 2001 2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- ------ ------ ------ ------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
------------- ------------- ------------- -------------
($ in millions) (gallons in millions)
Gasoline $ 2,960 $ 3,553 $ 5,069 $ 6,213 3,619 3,508 6,958 6,522
Jet fuel 322 456 632 938 472 564 1,004 1,137
Diesel/#2 fuel 783 1,005 1,540 2,193 1,173 1,264 2,492 2,721
Asphalt 183 136 223 186 277 255 354 345
Petrochemicals and industrial products 376 439 674 865 538 604 1,038 1,140
Lubricants and waxes 149 153 279 295 69 72 128 142
-------- -------- -------- -------- ----- ----- ------ ------
Total refined product sales 4,773 5,742 8,417 10,690 6,148 6,267 11,974 12,007
Other sales 20 14 48 28
-------- -------- -------- -------- ----- ----- ------ ------
Total sales $ 4,793 $ 5,756 $ 8,465 $ 10,718 6,148 6,267 11,974 12,007
======== ======== ======== ======== ===== ===== ====== ======
17
The following table summarizes CITGO's cost of sales and operating
expenses for the three-month and six-month periods ended June 30, 2002 and 2001:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
(AS RESTATED) (AS RESTATED)
------------- -------------
($ in millions) ($ in millions)
Crude oil $ 1,294 $ 1,455 $ 2,186 $ 2,781
Refined products 2,481 3,063 4,463 5,525
Intermediate feedstocks 486 448 752 757
Refining and manufacturing costs 303 281 586 582
Other operating costs, expenses and inventory changes 123 54 409 403
-------- -------- -------- --------
Total cost of sales and operating expenses $ 4,687 $ 5,301 $ 8,396 $ 10,048
======== ======== ======== ========
Sales revenues and volumes. Sales decreased $963 million, or
approximately 17%, in the three-month period ended June 30, 2002 as compared to
the same period in 2001. This was due to a decrease in average sales price of
15% and a decrease in sales volume of 2%. Sales decreased $2.3 billion, or
approximately 21%, in the six-month period ended June 30, 2002 as compared to
the same period in 2001. This was due to a decrease in average sales price of
21% and a decrease in sales volume of less than 1%. (See CITGO Sales Revenues
and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $7 million for the three-month period ended June 30, 2002 and
decreased $12 million for the six-month period ended June 30, 2002 as compared
to the same periods in 2001. The decrease was primarily due to the decrease in
the earnings of Nelson Industrial Steam Company. CITGO's share of these earnings
decreased $4 million, from $3 million in the second quarter of 2001 to $(1)
million in the second quarter of 2002, and $12 million, from $9 million in the
first six months of 2001 to $(3) million in the first six months of 2002.
Insurance recoveries. The insurance recoveries of $116 million included
in the three months ended June 30, 2002 and $211 million included in the six
months ended June 30, 2002 relate primarily to a fire which occurred on August
14, 2001 at the Lemont refinery. The crude unit was destroyed and the refinery's
other processing units were temporarily taken out of production. A new crude
unit was operational at the end of May 2002. The Company has insurance coverage
for this type of event including business interruption insurance. The Company
expects to recover additional amounts related to this event subject to final
settlement negotiations.
Cost of sales and operating expenses. Cost of sales and operating
expenses decreased by $614 million or 12%, in the quarter ended June 30, 2002 as
compared to the same period in 2001. Cost of sales and operating expenses
decreased by $1.7 billion or 16%, in the six months ended June 30, 2002 as
compared to the same period in 2001. (See CITGO Cost of Sales and Operating
Expenses table above.)
CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. Refined
product purchases represented 53% and 58% of total cost of sales and operating
expenses for the second quarters of 2002 and 2001, respectively and 53%
18
and 55% for the first six months of 2002 and 2001, respectively. CITGO estimates
that margins on purchased products, on average, are lower than margins on
produced products due to the fact that CITGO can only receive the marketing
portion of the total margin received on the produced refined products. However,
purchased products are not segregated from CITGO produced products and margins
may vary due to market conditions and other factors beyond the Company's
control. As such, it is difficult to measure the effects on profitability of
changes in volumes of purchased products. In the near term, other than normal
refinery turnaround maintenance, CITGO does not anticipate operational actions
or market conditions which might cause a material change in anticipated
purchased product requirements; however, there could be events beyond the
control of CITGO which impact the volume of refined products purchased. (See
also "Factors Affecting Forward Looking Statements".)
Gross margin. The gross margin for the three-month period ended June
30, 2002 was approximately 1.7 cents per gallon, compared to approximately 7.3
cents per gallon for the same period in 2001. The gross margin for the six-month
period ended June 30, 2002 was approximately 0.6 cents per gallon, compared to
approximately 5.6 cents per gallon for the same period in 2001. In the
three-month period ended June 30, 2002, the revenue per gallon component
decreased approximately 15% while the cost per gallon component decreased
approximately 10%. As a result, the gross margin decreased approximately 5.5
cents on a per gallon basis in the quarter ended June 30, 2002 compared to the
same period in 2001. In the six-month period ended June 30, 2002, the revenue
per gallon component decreased approximately 21% while the cost per gallon
component decreased approximately 16%. As a result, the gross margin decreased
approximately 5.0 cents on a per gallon basis in the six months ended June 30,
2002 compared to the same period in 2001. The gross margin is directly affected
by changes in selling prices relative to changes in costs. An increase or
decrease in the price for crude oil, feedstocks and blending products generally
results in a corresponding increase or decrease in prices for refined products.
Generally, the effect of changes in crude oil and feedstock prices on CITGO's
consolidated operating results therefore depends in part on how quickly refined
product prices adjust to reflect these changes. In the first half of 2002, there
was a substantial decrease in refined product sales prices without an equivalent
decrease in costs resulting in a significant negative impact on CITGO's gross
margin and earnings.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased from $78 million in the second quarter of 2001
to $75 million in the second quarter of 2002, or 5%. Selling, general and
administrative expenses increased from $139 million in the first six months of
2001 to $151 million in the same period in 2002, or 9%. The increase for the
six-month period is primarily related to sponsorship fees and the start-up
expenses related to international operations.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended June 30, 2002, the Company's
consolidated net cash provided by operating activities totaled approximately
$122 million including $243 million from insurance proceeds. Operating cash
flows were derived from net income of $81 million, depreciation and amortization
of $145 million and changes in operating assets and liabilities of $(104)
million. The more significant changes in operating assets and liabilities
included the increase in accounts receivable, including receivables from
affiliates, of approximately $187 million, the decrease in prepaid expenses of
$84 million, and the decrease in accounts payable and other current liabilities,
including payables to affiliates, of approximately $49 million. Additionally,
other long-term assets which mainly consist of costs of major refinery
turnaround maintenance increased $78 million.
Net cash used in investing activities totaled $420 million for the
six-month period ended June 30, 2002 consisting primarily of capital
expenditures of $350 million (compared to $81 million for the same period in
2001), the increase of restricted cash of $36 million, and the increase in
investments in affiliates of $35 million. The capital expenditures during the
six-month period of 2002 relate primarily to crude unit
19
reconstruction at the Lemont refinery. On August 14, 2001, a fire occurred at
the crude distillation unit of the Lemont refinery. The crude unit was destroyed
and the refinery's other processing units were temporarily taken out of
production. The new crude unit was operational at the end of May 2002.
Net cash provided by financing activities totaled $213 million for the
six-month period ended June 30, 2002 consisting primarily of $130 million in
proceeds from short term borrowings, $79 million in proceeds from revolving bank
loans, and $63 million in proceeds from the tax-exempt bonds. These proceeds are
offset in part by the payment of $25 million on master shelf agreement notes and
the payment of $25 million on taxable bonds.
As of June 30, 2002, capital resources available to the Company
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $25 million and $40 million of uncommitted
short-term borrowing facilities with various banks. Additionally, the remaining
$400 million from CITGO's shelf registration with the Securities and Exchange
Commission for $600 million of debt securities may be offered and sold from time
to time. CITGO management believes that the Company has sufficient capital
resources to carry out planned capital spending programs, including regulatory
and environmental projects in the near term, and to meet currently anticipated
future obligations as they arise. CITGO periodically evaluates other sources of
capital in the marketplace and anticipates that long-term capital requirements
will be satisfied with current capital resources and future financing
arrangements, including the issuance of debt securities. The Company's ability
to obtain such financing will depend on numerous factors, including market
conditions and the perceived creditworthiness of the Company at that time. (See
also "Factors Affecting Forward Looking Statements".)
In April 2000, CITGO amended an agreement to sell trade accounts
receivable on an ongoing basis and without recourse. The amendment increased the
amount of such receivables that can be sold to $225 million. The amended
agreement expires in June 2003 and is renewable for successive annual terms by
mutual agreement.
The Company is in compliance with its obligations under its debt
financing arrangements at June 30, 2002.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which
is fully effective in fiscal years beginning after December 15, 2001, although
certain provisions of SFAS No. 142 were applicable to goodwill and other
intangible assets acquired in transactions completed after June 30, 2001. SFAS
No. 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and requires that goodwill and intangibles with an
indefinite life no longer be amortized but instead be periodically reviewed for
impairment. The adoption of SFAS No. 142 did not materially impact the Company's
financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143") which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of lessees. This statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002. The Company
has not determined the impact on its financial statements that may result from
the adoption of SFAS No. 143.
20
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets by requiring that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discontinued operations to include more disposal transactions. SFAS No. 144
is effective for financial statements issued for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years. The provisions
of this statement generally are to be applied prospectively; therefore, the
adoption of SFAS No. 144 did not impact the Company's financial position or
results of operations.
PROPOSED ACCOUNTING CHANGE
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is expected
to require companies to expense the non-capital portion of major maintenance
costs as incurred. The statement is expected to require that any existing
deferred non-capital major maintenance costs be expensed immediately. This
statement also has provisions which will change the method of determining
depreciable lives. The impact on future depreciation expense is not determinable
at this time. The exposure draft indicates that this change will be required to
be adopted for fiscal years beginning after June 15, 2003, and that the effect
of expensing existing deferred major maintenance costs will be reported as a
cumulative effect of an accounting change in the consolidated statement of
income. At June 30, 2002, the Company had included turnaround costs of $148
million in other assets. Company management has not determined the amount, if
any, of these costs that could be capitalized under the provisions of the
exposure draft.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. CITGO has exposure to price fluctuations of crude oil and
refined products as well as fluctuations in interest rates. To manage these
exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which the Company operates and
finances its assets. CITGO does not attempt to manage the price risk related to
all of its inventories of crude oil and refined products. As a result, at June
30, 2002, CITGO was exposed to the risk of broad market price declines with
respect to a substantial portion of its crude oil and refined product
inventories. The following disclosures do not attempt to quantify the price risk
associated with such commodity inventories.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply/demand and manages a portion of its price risk by entering into
petroleum commodity derivatives.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2002
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- -------- ---------- -------- -------
($ in millions)
---------------
No Lead Gasoline (1) Futures Purchased 2002 599 $ 19.4 $ 19.8
Futures Sold 2002 915 $ 30.0 $ 30.1
OTC Swaps (Pay Floating/Receive Floating)(4) 2002 25 $ -- $ --
Forward Purchase Contracts 2002 3,004 $ 96.0 $ 95.2
Forward Sale Contracts 2002 4,023 $ 129.1 $ 127.6
Distillates (1) Futures Purchased 2002 1,256 $ 34.5 $ 36.5
Futures Purchased 2003 375 $ 10.2 $ 10.9
Futures Sold 2002 317 $ 8.9 $ 9.1
Forward Purchase Contracts 2002 1,135 $ 30.7 $ 31.6
Forward Sale Contracts 2002 1,295 $ 34.7 $ 36.3
Crude Oil (1) Futures Purchased 2002 250 $ 6.6 $ 6.7
Futures Sold 2002 1,110 $ 28.7 $ 29.4
Futures Sold 2003 400 $ 9.8 $ 10.1
OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 1,270 $ -- $ 0.6
Forward Purchase Contracts 2002 8,106 $ 202.0 $ 212.1
Forward Sale Contracts 2002 4,883 $ 123.5 $ 130.0
Natural Gas (2) Futures Purchased 2002 30 $ 1.0 $ 1.0
Propane (1) OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 400 $ -- $ 0.8
OTC Swaps (Pay Floating/Receive Fixed)(3) 2003 300 $ -- $ 0.6
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed
price agreed upon at date of contract.
(4) Pay floating price based on a market index designated in contract;
receive floating price based on a different market index designated in
contract
22
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2001
(AS RESTATED)
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- ---------- ---------- --------- ----------
($ in millions)
---------------
No Lead Gasoline (1) Futures Purchased 2001 299 $ 9.3 $ 9.2
Futures Sold 2001 815 $ 27.0 $ 24.2
OTC Swaps (Pay Floating/Receive Fixed)(3) 2001 200 $ -- $ (0.4)
Forward Purchase Contracts 2001 6014 $ 194.5 $ 163.6
Forward Sale Contracts 2001 6086 $ 195.7 $ 167.8
Distillates (1) Futures Purchased 2001 1697 $ 54.6 $ 52.3
Futures Purchased 2002 720 $ 22.2 $ 21.9
OTC Swap Options Purchased 2001 10 $ -- $ --
OTC Swap Options Sold 2001 10 $ -- $ --
OTC Swap Options Purchased 2002 30 $ -- $ --
OTC Swap Options Sold 2002 30 $ -- $ --
Forward Purchase Contracts 2001 1092 $ 34.3 $ 32.1
Forward Sale Contracts 2001 1482 $ 46.2 $ 44.9
Crude Oil (1) Futures Purchased 2001 947 $ 26.2 $ 24.7
Forward Purchase Contracts 2001 6,785 $ 190.1 $ 180.2
Forward Sale Contracts 2001 7,549 $ 210.4 $ 200.4
Natural Gas (2) Futures Purchased 2001 85 $ 3.4 $ 2.9
OTC Swap Options Purchased 2001 240 $ -- $ 0.1
OTC Swap Options Sold 2001 140 $ -- $ (1.3)
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
23
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At June 30, 2002
and 2001, CITGO's primary exposures were to LIBOR and floating rates on tax
exempt bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT JUNE 30, 2002 AND 2001
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
===========
The fair value of the interest rate swap agreements in place at June
30, 2002, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was a loss of $3 million.
24
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT JUNE 30, 2002
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- ----------- ------------- ----------- ----------------
($ in millions) ($ in millions)
2002 $ 11 9.30% $ 130 3.20%
2003 61 8.79% 470 4.20%
2004 31 8.02% 16 5.15%
2005 11 9.30% -- --
2006 251 8.06% -- --
Thereafter 160 7.88% 492 7.99%
----------- ----------- ----------- -----------
Total $ 525 8.14% $ 1,108 5.78%
=========== =========== =========== ===========
Fair Value $ 551 $ 1,108
=========== ===========
DEBT OBLIGATIONS
AT JUNE 30, 2001
(AS RESTATED)
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- ----------- ------------- ----------- ----------------
($ in millions) ($ in millions)
2001 $ 40 9.11% $ 4 4.67%
2002 36 8.78% 16 5.01%
2003 61 8.79% -- --
2004 31 8.02% 16 6.41%
2005 11 9.30% -- --
Thereafter 381 7.99% 484 8.37%
----------- ----------- ----------- -----------
Total $ 560 8.23% $ 520 8.17%
=========== =========== =========== ===========
Fair Value $ 574 $ 520
=========== ===========
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of
this Report from Note 7 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 Certificate Pursuant to Section 1350
of Chapter 63 of Title 18 of the United
States Code
(b) Reports on Form 8-K:
None.
26
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: August 12, 2002 /s/ Larry E. Krieg
-------------------------------------
Larry E. Krieg
Controller (Chief Accounting Officer)
27
EXHIBIT INDEX
Exhibit 99.1 Certificate Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code