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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, 2002
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.)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
--------------
(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 October 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 SEPTEMBER 30, 2002
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, 2002 and
December 31, 2001 (as restated)........................................................2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Nine-Month Periods Ended September 30, 2002 and 2001 (as restated)...........3
Condensed Consolidated Statement of Shareholder's Equity - Nine-Month Period
Ended September 30, 2002 (as restated).................................................4
Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 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
Item 4. Controls and Procedures...............................................................28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................29
Item 6. Exhibits and Reports on Form 8-K......................................................29
SIGNATURES..........................................................................................30
CERTIFICATIONS......................................................................................31
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 forward looking statements are subject to risks and uncertainties
that could cause actual results to differ materially from the forward looking
statements. Those risks and uncertainties include changes in the availability
and cost of crude oil, feedstocks, blending components and refined products;
changes in prices or demand for CITGO products as a result of competitive
actions or economic factors; changes in environmental and other regulatory
requirements, which may affect 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. In addition, CITGO purchases a
significant portion of its crude oil requirements from Petroleos de Venezuela,
S.A. ("PDVSA" which may also be used to refer to one or more of its
subsidiaries), its ultimate parent corporation, under long-term supply
agreements, and could be adversely affected by social, economic and political
conditions in Venezuela.
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)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
(AS RESTATED
(UNAUDITED) - SEE NOTE 1)
------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 24,273 $ 104,362
Accounts receivable, net 1,054,058 913,068
Due from affiliates 72,692 64,923
Inventories 1,080,993 1,109,346
Prepaid expenses and other 44,221 95,334
----------- -----------
Total current assets 2,276,237 2,287,033
PROPERTY, PLANT AND EQUIPMENT - Net 3,576,094 3,292,469
RESTRICTED CASH 33,507 --
INVESTMENTS IN AFFILIATES 714,007 700,701
OTHER ASSETS 267,012 228,906
----------- -----------
$ 6,866,857 $ 6,509,109
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans 119,000 --
Accounts payable 686,405 616,854
Payables to affiliates 500,640 265,517
Taxes other than income 204,124 219,699
Other 249,232 300,484
Current portion of long-term debt 298,864 107,864
Current portion of capital lease obligation 21,503 20,358
----------- -----------
Total current liabilities 2,079,768 1,530,776
LONG-TERM DEBT 971,216 1,303,692
CAPITAL LEASE OBLIGATION 35,918 46,964
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 240,376 218,706
OTHER NONCURRENT LIABILITIES 209,065 217,121
DEFERRED INCOME TAXES 791,477 767,338
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 882,725 745,102
Accumulated other comprehensive loss (3,387) (3,465)
----------- -----------
Total shareholder's equity 2,539,037 2,401,336
----------- -----------
$ 6,866,857 $ 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
(AS RESTATED (AS RESTATED
- SEE NOTE 1) - SEE NOTE 1)
------------- -------------
REVENUES:
Net sales $ 5,342,794 $ 5,090,755 $ 13,698,780 $ 15,676,288
Sales to affiliates 67,777 77,357 176,654 209,346
----------- ----------- ------------ ------------
5,410,571 5,168,112 13,875,434 15,885,634
Equity in earnings of affiliates 28,132 36,722 77,405 97,543
Insurance recoveries 46,326 -- 256,867 --
Other expense - net (11,492) (17,510) (26,002) (18,648)
----------- ----------- ------------ ------------
5,473,537 5,187,324 14,183,704 15,964,529
----------- ----------- ------------ ------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses
(including purchases of $2,103,726, $1,803,022,
$4,989,436 and $5,280,280 from affiliates) 5,298,606 4,979,758 13,694,391 15,027,993
Selling, general and administrative expenses 67,192 72,876 218,518 211,423
Interest expense, excluding capital lease 17,188 16,797 50,358 53,014
Capital lease interest charge 1,615 2,157 5,402 6,970
Minority interest -- 957 -- 1,028
----------- ----------- ------------ ------------
5,384,601 5,072,545 13,968,669 15,300,428
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 88,936 114,779 215,035 664,101
INCOME TAXES 32,016 42,613 77,412 242,066
----------- ----------- ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 56,920 72,166 137,623 422,035
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- -- -- 13,600
----------- ----------- ------------ ------------
NET INCOME 56,920 72,166 137,623 435,635
----------- ----------- ------------ ------------
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 $43, $46, $130, and $230 77 78 232 392
----------- ----------- ------------ ------------
77 78 232 (1,058)
Foreign currency translation loss, net of related
income taxes of $(86) (154) -- (154) --
----------- ----------- ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) (77) 78 78 (1,058)
----------- ----------- ------------ ------------
COMPREHENSIVE INCOME $ 56,843 $ 72,244 $ 137,701 $ 434,577
=========== =========== ============ ============
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 -- -- -- 137,623 -- 137,623
Other comprehensive income -- -- -- -- 78 78
--- --- ---------- --------- ------- ----------
BALANCE, SEPTEMBER 30, 2002 1 $ 1 $1,659,698 $ 882,725 $(3,387) $2,539,037
=== === ========== ========= ======= ==========
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,
---------------------------
2002 2001
---- ----
(AS RESTATED
- SEE NOTE 1)
-------------
CASH FLOWS FROM OPERATING ACTIVITIES (See Note 9) $ 482,402 $ 456,930
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (478,053) (144,175)
Proceeds from sales of property, plant and equipment 718 1,656
Increase in restricted cash (33,507) --
Investments in LYONDELL-CITGO Refining LP (28,700) (19,900)
Investments in and advances to other affiliates (19,237) (304)
---------- ----------
Net cash used in investing activities (558,779) (162,723)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term bank loans 119,000 26,500
Net (repayments of) proceeds from revolving bank loans (154,000) 103,350
Proceeds from loans from affiliates 37,000 --
Proceeds from issuance of tax-exempt bonds 62,501 25,000
Payments on taxable bonds (25,000) (25,000)
Payments of capital lease obligations (9,901) (17,276)
Payments of master shelf agreement notes (25,000) --
Repayments of other debt (8,312) (13,196)
Dividends paid -- (383,900)
---------- ----------
Net cash used in financing activities (3,712) (284,522)
---------- ----------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (80,089) 9,685
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 104,362 19,038
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 24,273 $ 28,723
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of $1,686 and $1,052 capitalized in 2002 and 2001 $ 48,077 $ 56,608
========== ==========
Income taxes, net of refunds of $51,381 in 2002 $ (45,293) $ 186,141
========== ==========
See notes to condensed consolidated financial statements
5
CITGO PETROLEUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 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 nine-month periods ended September 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 nine-month periods ended
September 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, Inc. ("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 nine-month
periods ended September 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
nine months ended September 30, 2001:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
------------------ ------------------
(000'S OMITTED)
Net Income CITGO $ 87,925 $ 316,846
Net (Loss) Income VPHI (15,759) 118,789
-------- ---------
Net Income Consolidated $ 72,166 $ 435,635
======== =========
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
6
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 September 30, 2001
financial statements to conform to the classifications used for the
periods ended September 30, 2002.
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:
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED) (AS RESTATED)
----------- -------------
(000's omitted)
Refined products $ 836,085 $ 836,683
Crude oil 160,909 193,319
Materials and supplies 83,999 79,344
----------- -----------
$ 1,080,993 $ 1,109,346
=========== ===========
4. SHORT-TERM BANK LOANS
As of September 30, 2002, the Company had established $140 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 $119 million and $0 of borrowings outstanding under these
facilities at September 30, 2002 and December 31, 2001, respectively.
7
5. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
SEPTEMBER 30, DECEMBER 31,
2002 2001
(UNAUDITED) (AS RESTATED)
------------- -------------
(000'S OMITTED)
Revolving bank loans $ 237,500 $ 391,500
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7.875% 199,890 199,867
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 419,871 357,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 121,000 146,000
----------- -----------
1,270,080 1,411,556
Current portion of long-term debt (298,864) (107,864)
----------- -----------
$ 971,216 $ 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 tax exempt environmental
facilities revenue bonds due 2032. On June 28, 2002, CITGO issued $30
million of tax exempt 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 $34 million at September 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.
The Company is preparing for a debt offering of up to $250 million from
its remaining $400 million shelf registration with the Securities and
Exchange Commission. Net proceeds to be received from the sale of the
8
debt securities will be used for general corporate purposes, including
capital expenditures and repayment of indebtedness.
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 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.
On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective February
1, 2001, it had declared force majeure under the contract described above.
Under a force majeure declaration, PDVSA may reduce the amount of crude
oil that it would otherwise be required to supply under the agreement.
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 increased crude costs. 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. Deliveries remained
approximately 20 percent less than contract volume through June 30, 2002.
Beginning in July 2002, contract volumes delivered increased and
deliveries are returning to contractual levels. PDVSA delivered
approximately 95 percent of the contractual crude oil volume during the
third quarter of 2002. In the nine months ended September 30, 2002, PDVSA
delivered approximately 89 percent of the contractual crude oil volume.
Crude oil was purchased in the market to replace the volume not delivered
under the contract.
CITGO has notes receivable from LYONDELL-CITGO which total $35 million at
September 30, 2002 and December 31, 2001. The notes bear interest at
market rates. Principal and interest are due July 1, 2003. The Company
presently expects that the term of these notes will be extended as part of
the total debt restructuring described below; accordingly, these notes are
included in other assets in the accompanying consolidated balance sheets.
9
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners
which differ from participation interests. Cash distributions are
allocated to the Owners based on participation interest. Information on
CITGO's investment in LYONDELL-CITGO follows:
(000S OMITTED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- ------------
(UNAUDITED)
Carrying value of investment $ 512,630 $ 507,940
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of LYONDELL-CITGO's financial position:
Current assets $ 258,000 $ 227,000
Non current assets 1,400,000 1,434,000
Current liabilities:
Debt 463,000 50,000
Loans from owners 265,000 -
Other 380,000 327,000
Non current liabilities (including debt 69,000 776,000
of $0 and $450,000 at September 30,
2002 and December 31, 2001,
respectively)
Members' equity 482,000 508,000
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2002 2001
-------------- ------------
(UNAUDITED)
Equity in net income $ 56,127 $ 69,597
Cash distribution received 80,137 92,683
Summary of LYONDELL-CITGO's operating results:
Revenue $ 2,435,792 $ 2,691,753
Gross profit 216,499 273,484
Net income 153,969 185,822
LYONDELL-CITGO's 18-month term loan and working capital revolver will mature in
January 2003. The Owners have engaged an underwriter and expect to replace these
two credit facilities prior to the existing maturity date.
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,
allegedly excessive charges for electricity utilized by these entities'
facilities located adjacent to the Lemont, Illinois refinery. The Company
believes it will be able to resolve these claims for a non-material
amount. 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.
Approximately seventeen related lawsuits were filed in federal and state
courts in Corpus Christi, Texas against CITGO on behalf of approximately
9,000 individuals alleging property damages, personal injury and punitive
damages. In September 2002, CITGO reached an agreement to settle
substantially all of the claims related to this incident for an amount
that will not have a material financial impact on the Company.
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 are
set to begin in December 2003. The Company does not expect that the
ultimate resolution of these cases will have an adverse material effect
on its financial condition or results of operations.
CITGO is among refinery defendants to state and federal lawsuits in New
York and a state action in Illinois alleging contamination of water
supplies by methyl tertiary butyl ether ("MTBE"), a component of gasoline.
Plaintiffs claim that MTBE is a defective product and that refiners failed
to adequately warn customers and the public about risks associated with
the use of MTBE in gasoline. These actions allege that MTBE poses public
health risks and seek testing, damages and remediation of the alleged
contamination. Plaintiffs filed putative class action lawsuits in federal
courts in Illinois, California, Florida and New York. CITGO was named as a
defendant in all but the California case. The federal cases were all
consolidated in a Multidistrict Litigation case in the United States
District Court for the Southern District of New York ("MDL 1358"). In July
2002, the court in the MDL case denied plaintiffs' motion for class
certification. In August 2002, a New York state court judge handling two
separate but related individual MTBE lawsuits dismissed
11
plaintiffs' product liability claims, leaving only traditional nuisance
and trespass claims for leakage from underground storage tanks at gasoline
stations near plaintiffs' water wells. The judge in the Illinois state
court action is expected to hear plaintiffs' motion for class
certification in that case sometime within the next year.
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 310 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 contractor employees 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 Lake Charles refinery by 1994. A mutually acceptable
closure plan was filed with the LDEQ in 1993. The 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
12
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 has begun.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted a
multi-media investigation of the Corpus Christi Refinery during the second
quarter of 2002 and has issued a Notice of Enforcement to the Company
which identifies approximately 35 items of alleged violations of Texas
environmental regulations. The Company anticipates that penalties will be
proposed with respect to these matters, but no amounts have yet been
specified.
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 June 2002, a Consolidated Compliance Order and Notice of Potential
Penalty was issued by the LDEQ alleging violations of the Louisiana air
quality regulations at the Lake Charles, Louisiana refinery. CITGO is in
settlement discussions with the LDEQ.
Various regulatory authorities have the right to conduct, and from time to
time do conduct, environmental compliance audits of the Company's and its
subsidiaries' facilities and operations. Those audits have the potential
to reveal matters that those authorities believe represent non-compliance
in one or more respects with regulatory requirements and for which those
authorities may seek corrective actions and/or penalties in an
administrative or judicial proceeding. Based upon current information, the
Company is not aware that any such audits or their findings have resulted
in the filing of such a proceeding or is the subject of a threatened
filing with respect to such a proceeding, nor does the Company believe
that any such audit or their findings will have a material adverse effect
on its future business and operating results, except for events otherwise
described in its Annual Report on Form 10-K for the year ended December
31, 2001 or in this Quarterly Report on Form 10-Q for the period ended
September 30, 2002.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, CITGO's operating
refinery complexes, former refinery sites, service 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 September 30, 2002
the Company'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,
2002, the balance sheet captions prepaid expenses and other current assets
and other
13
current liabilities include $26 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 September 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 $4 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.
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. When PDVSA reduces its delivery of crude oil under these
crude oil supply agreements, CITGO may obtain alternative sources of crude
oil which may result in increased crude costs or increase its purchases of
refined products. 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.
Deliveries remained approximately 20 percent less than contract volume
through June 30, 2002. Beginning in July 2002, contract volumes delivered
increased and deliveries are returning to contractual levels. PDVSA
delivered approximately 98 percent of the contractual crude oil volume
during the third quarter of 2002. In the nine months ended September 30,
2002, PDVSA delivered approximately 91 percent of the contractual crude
oil volume. As a result, CITGO estimates that crude oil costs during the
quarter ended September 30, 2002 were increased by $1 million and during
the nine months ended September 30, 2002 were increased by $22 million.
In August 2002, three affiliates entered into agreements to advance excess
cash to CITGO 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, Inc. ("PDV Holding"). The
notes bear interest at rates equivalent to 30-day LIBOR plus .875% payable
quarterly. Amounts outstanding on these notes at September 30, 2002 were $5
million, $28 million and $4 million from PDV Texas, PDV America and PDV
Holding, respectively and are included in payables to affiliates in the
accompanying consolidated balance sheet.
14
9. INSURANCE RECOVERIES
The insurance recoveries of $46 million included in the quarter ended
September 30, 2002 and $257 million included in the nine-months ended
September 30, 2002 relate primarily to a fire which occurred on August 14,
2001 at the Lemont refinery. These recoveries are, in part, reimbursements
for expenses incurred in 2002 to mitigate the effect of the fire on the
Company's earnings. The Company received cash proceeds of $49 million
during the quarter ended September 30, 2002 and $292 million during the
nine months ended September 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 nine-month periods ended September 30, 2001 as if the
transaction had occurred on January 1, 2001.
In the quarter ended September 30, 2002, CITGO generated net income of
$56.9 million on total revenue of $5.5 billion compared to net income of $72.2
million on total revenue of $5.2 billion for the same period last year. In the
nine months ended September 30, 2002, CITGO generated net income of $137.6
million on total revenue of $14.2 billion compared to net income of $435.6
million on total revenue of $16.0 billion for the same period last year. (See
"Gross margin").
16
RESULTS OF OPERATIONS
The following table summarizes the sources of CITGO's sales revenues
and sales volumes for the three-month and nine-month periods ended September 30,
2002 and 2001:
CITGO SALES REVENUES AND VOLUMES
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------------- -------------------------------------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
------------- ------------- ------------- -------------
($ in millions) (gallons in millions)
Gasoline $ 3,363 $ 3,069 $ 8,432 $ 9,282 4,056 3,717 11,014 10,239
Jet fuel 359 426 991 1,364 479 556 1,483 1,693
Diesel/#2 fuel 899 999 2,439 3,192 1,232 1,353 3,724 4,074
Asphalt 245 192 468 378 353 365 707 710
Petrochemicals and industrial products 379 308 1,053 1,173 555 501 1,593 1,641
Lubricants and waxes 143 156 422 451 67 74 195 216
--------------------------------------------- -------------------------------------------
Total refined product sales 5,388 5,150 13,805 15,840 6,742 6,566 18,716 18,573
Other sales 23 18 70 46
--------------------------------------------- -------------------------------------------
Total sales $ 5,411 $ 5,168 $ 13,875 $ 15,886 6,742 6,566 18,716 18,573
============================================= ===========================================
17
The following table summarizes CITGO's cost of sales and operating
expenses for the three-month and nine-month periods ended September 30, 2002 and
2001:
CITGO COST OF SALES AND OPERATING EXPENSES
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ -----------------------
2002 2001 2002 2001
---- ---- ---- ----
(AS RESTATED) (AS RESTATED)
($ in millions) ($ in millions)
Crude oil $ 1,641 $ 1,257 $ 3,827 $ 4,038
Refined products 2,840 2,767 7,303 8,292
Intermediate feedstocks 352 400 1,104 1,157
Refining and manufacturing costs 314 269 900 851
Other operating costs, expenses and inventory changes 152 287 560 690
------------------------ -----------------------
Total cost of sales and operating expenses $ 5,299 $ 4,980 $13,694 $15,028
======================== =======================
Sales revenues and volumes. Sales increased $243 million, or
approximately 5%, in the three-month period ended September 30, 2002 as compared
to the same period in 2001. This was due to an increase in average sales price
of 2% and an increase in sales volume of 3%. Sales decreased $2 billion, or
approximately 13%, in the nine-month period ended September 30, 2002 as compared
to the same period in 2001. This was due to a decrease in average sales price of
13%. (See CITGO Sales Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
decreased by $9 million for the three-month period ended September 30, 2002 and
decreased by $20 million for the nine-month period ended September 30, 2002 as
compared to the same periods in 2001. The decrease for the three-month period
was primarily due to the change in the earnings of LYONDELL-CITGO, CITGO's share
of which decreased $12 million, from $30 million in the third quarter of 2001 to
$18 million in the third quarter of 2002. The decrease for the nine-month period
was primarily due to the decrease in the earnings of LYONDELL-CITGO and Nelson
Industrial Steam Company ("NISCO"). CITGO's share of LYONDELL-CITGO's earnings
decreased $14 million, from $70 million in the first nine months of 2001 to $56
million in the first nine months of 2002. CITGO's share of NISCO's earnings
decreased $11 million, from $8 million in the first nine months of 2001 to $(3)
million in the first nine months of 2002. The decrease in LYONDELL-CITGO's
earnings was primarily due to a reduction of contract crude supply and lower
margins on crude purchased in the spot market. The decrease in NISCO's earnings
was primarily related to a decrease in electricity rates from the prior year.
Insurance recoveries. The insurance recoveries of $46 million included
in the three months ended September 30, 2002 and $257 million included in the
nine months ended September 30, 2002 relate primarily to a fire which occurred
on August 14, 2001 at the Lemont refinery. These recoveries are, in part,
reimbursements for expenses incurred in 2002 to mitigate the effect of the fire
on the Company's earnings. The Company expects to recover additional amounts
related to this event subject to final settlement negotiations.
18
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $319 million or 6%, in the quarter ended September 30,
2002 as compared to the same period in 2001. Cost of sales and operating
expenses decreased by $1.3 billion or 9%, in the nine months ended September 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 54% and 56% of total cost of sales and operating
expenses for the third quarters of 2002 and 2001, respectively and 53% and 55%
for the first nine 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
September 30, 2002 was approximately 1.7 cents per gallon, compared to
approximately 2.9 cents per gallon for the same period in 2001. The gross margin
for the nine-month period ended September 30, 2002 was less than one cent per
gallon, compared to approximately 4.6 cents per gallon for the same period in
2001. In the three-month period ended September 30, 2002, the revenue per gallon
component increased approximately 2% while the cost per gallon component
increased approximately 4%. As a result, the gross margin decreased
approximately 1.2 cents on a per gallon basis in the quarter ended September 30,
2002 compared to the same period in 2001. In the nine-month period ended
September 30, 2002, the revenue per gallon component decreased approximately 13%
while the cost per gallon component decreased approximately 10%. As a result,
the gross margin decreased approximately 3.6 cents on a per gallon basis in the
nine months ended September 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 nine months 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 $73 million in the third quarter of 2001
to $67 million in the third quarter of 2002, or 8%. Selling, general and
administrative expenses increased from $211 million in the first nine months of
2001 to $219 million in the same period in 2002, or 4%. The decrease for the
quarter is primarily related to a decrease in incentive compensation. The
increase for the nine-month period is primarily related to sponsorship fees,
media fees and the start-up expenses related to international operations.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended September 30, 2002, the Company's
consolidated net cash provided by operating activities totaled approximately
$482 million.
19
Operating cash
flows were derived from net income of $138 million, depreciation and
amortization of $221 million and changes in operating assets and liabilities of
$124 million. The more significant changes in operating assets and liabilities
included the increase in accounts receivable, including receivables from
affiliates, of approximately $163 million, the decrease in prepaid expenses of
$87 million, the increase in income taxes payable of $68 million, and the
increase in accounts payable and other current liabilities, including payables
to affiliates, of approximately $112 million. Additionally, other long-term
assets, which mainly consist of costs of major refinery turnaround maintenance,
increased $89 million.
Net cash used in investing activities totaled $559 million for the
nine-month period ended September 30, 2002 consisting primarily of capital
expenditures of $478 million (compared to $144 million for the same period in
2001), the increase of restricted cash of $34 million, and investments in
affiliates of $48 million. The capital expenditures during the nine-month period
of 2002 relate primarily to crude unit 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 used in financing activities totaled $4 million for the
nine-month period ended September 30, 2002 consisting primarily of the payment
of $154 million on revolving bank loans, the payment of $25 million on master
shelf agreement notes, the payment of $25 million on taxable bonds, the payment
of capital lease obligations of $10 million and the net repayments of other debt
of $8 million. These payments are offset in part by $119 million in proceeds
from short term borrowings, $63 million in proceeds from tax exempt bonds, and
$37 million in proceeds from loans from affiliates.
As of September 30, 2002, capital resources available to the Company
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $287 million and $21 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. The Company is preparing for a debt offering of up to $250 million from
this shelf registration. 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 and other planned expenditures 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.
20
CITGO's senior unsecured debt ratings, as assessed by the three major
credit rating agencies, are as follows:
---------------------------------------
| Fitch | BBB- |
---------------------------------------
| Moody's | Baa2 |
---------------------------------------
| Standard & Poor's | BB- |
---------------------------------------
CITGO's debt instruments do not contain any provisions which trigger
acceleration of payment or decreases in available borrowing capacity as a result
of changes in credit ratings.
The Company is in compliance with its obligations under its debt
financing arrangements at September 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.
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 CHANGES
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
21
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 September 30, 2002, the Company had included turnaround costs of $136
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.
In May 2002, the FASB issued an exposure draft of a proposed
interpretation, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". This
proposed interpretation would elaborate on the disclosures made by a guarantor
in its financial statements about its obligations under certain guarantees that
it issued. It would also require a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations it has undertaken
in issuing the guarantee. The initial recognition and initial measurement
provisions of the proposed interpretation are expected to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are expected to be effective for financial statements of
interim or annual periods ending after December 15, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. CITGO has exposure to price fluctuations of crude oil and
refined products as well as fluctuations in interest rates. To manage these
exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which the Company operates and
finances its assets. CITGO does not attempt to manage the price risk related to
all of its inventories of crude oil and refined products. As a result, at
September 30, 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.
22
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2002
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- -------- ---------- -------- ------
($ in millions)
------------------------
No Lead Gasoline (1) Futures Purchased 2002 50 $ 1.7 $ 1.7
Futures Sold 2002 2,902 $ 99.4 $ 98.1
Forward Purchase Contracts 2002 5,901 $ 194.7 $ 204.6
Forward Sale Contracts 2002 4,765 $ 159.8 $ 164.3
Distillates (1) Futures Purchased 2002 2,253 $ 72.8 $ 76.6
Futures Purchased 2003 646 $ 18.3 $ 20.6
Futures Sold 2002 350 $ 11.8 $ 11.9
Futures Sold 2003 595 $ 18.7 $ 18.5
OTC Options Purchased 2002 66 $ - $ 0.1
OTC Options Sold 2002 66 $ - $ (0.1)
Forward Purchase Contracts 2002 812 $ 26.7 $ 27.3
Forward Sale Contracts 2002 1,255 $ 42.6 $ 42.8
Crude Oil (1) Futures Purchased 2002 2,732 $ 83.0 $ 83.2
Futures Purchased 2003 595 $ 16.5 $ 16.5
Futures Sold 2002 377 $ 10.0 $ 11.3
Futures Sold 2003 475 $ 11.6 $ 13.5
Listed Options Purchased 2002 300 $ - $ -
Listed Options Sold 2002 300 $ - $ -
OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 1,280 $ - $ (0.4)
Forward Purchase Contracts 2002 6,794 $ 178.1 $ 187.0
Forward Sale Contracts 2002 4,149 $ 111.5 $ 116.1
Natural Gas (2) Futures Sold 2002 40 $ 1.6 $ 1.7
Propane (1) OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 300 $ - $ (0.8)
OTC Swaps (Pay Floating/Receive Fixed)(3) 2003 300 $ - $ (0.8)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2002 75 $ - $ 0.3
OTC Swaps (Pay Fixed/Receive Floating)(3) 2003 75 $ - $ 0.3
- ------------------------
(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
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2001
(AS RESTATED)
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- ---- ------ ----- -----
($ in millions)
-----------------------
No Lead Gasoline (1) Futures Purchased 2001 740 $ 22.8 $ 20.0
Futures Sold 2001 880 $ 24.5 $ 23.8
Forward Purchase Contracts 2001 5,126 $ 149.4 $ 135.5
Forward Sale Contracts 2001 3,856 $ 111.6 $ 100.9
Distillates (1) Futures Purchased 2001 1,483 $ 45.6 $ 42.1
Futures Purchased 2002 1,184 $ 35.7 $ 33.0
Futures Purchased 2003 12 $ 0.3 $ 0.3
Futures Sold 2001 959 $ 30.5 $ 27.0
Futures Sold 2002 600 $ 18.7 $ 16.8
OTC Options Purchased 2001 10 $ - $ -
OTC Options Sold 2001 10 $ - $ -
OTC Options Purchased 2002 30 $ - $ -
OTC Options Sold 2002 30 $ - $ (0.1)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2001 1 $ - $ -
Forward Purchase Contracts 2001 1,298 $ 38.5 $ 38.0
Forward Sale Contracts 2001 1,321 $ 36.7 $ 36.3
Forward Sale Contracts 2002 25 $ 0.8 $ 0.7
Crude Oil (1) Futures Purchased 2001 1,512 $ 41.9 $ 35.5
Futures Purchased 2002 600 $ 15.8 $ 14.3
Futures Sold 2001 579 $ 15.7 $ 13.5
Listed Options Purchased 2001 694 $ - $ 0.6
Listed Options Sold 2001 1,194 $ - $ 0.4
Forward Purchase Contracts 2001 4,215 $ 114.1 $ 98.6
Forward Sale Contracts 2001 3,711 $ 100.5 $ 86.7
Natural Gas (2) Futures Sold 2001 30 $ 0.8 $ 0.8
Futures Sold 2002 20 $ 0.6 $ 0.6
OTC Options Purchased 2001 60 $ - $ (0.1)
OTC Options Sold 2001 30 $ - $ (0.5)
OTC Options Sold 2001 11 $ - $ (0.1)
- -------------------------
(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.
24
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 preferred mix of 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 September 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 SEPTEMBER 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
September 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 $4 million.
25
For debt obligations, the table below presents principal cash flows
and related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
AT SEPTEMBER 30, 2002
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2002 $ 11 9.30% $ 119 3.07%
2003 61 8.79% 238 3.94%
2004 31 8.02% 16 4.81%
2005 11 9.30% - -
2006 252 8.06% - -
Thereafter 183 7.90% 467 8.24%
----- ---- ----- ----
Total $ 549 8.14% $ 840 6.23%
===== ==== ===== ====
Fair Value $ 580 $ 840
===== =====
DEBT OBLIGATIONS
AT SEPTEMBER 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% $ 66 3.44%
2002 36 8.78% 18 3.81%
2003 61 8.79% 85 4.45%
2004 31 8.02% 16 5.14%
2005 11 9.30% - -
Thereafter 381 7.99% 485 8.14%
----- ---- ----- ----
Total $ 560 8.23% $ 670 6.99%
===== ==== ===== ====
Fair Value $ 592 $ 670
===== =====
26
ITEM 4. CONTROLS AND PROCEDURES
The certifying officers of the Company are responsible for establishing
and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the Company and have (i) designed such disclosure
controls and procedures to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in which this
quarterly report is being prepared; and (ii) evaluated the effectiveness of the
Company's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the "Evaluation Date"). Based on
this evaluation, the chief executive officer and the chief financial officer of
the Company have concluded that the Company's disclosure controls and procedures
were effective during the quarter being reported on in this quarterly report.
The Company's certifying officers have indicated that there were no
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of their most
recent evaluation, including any significant deficiencies or material weaknesses
that would require corrective actions.
27
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 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
None.
28
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, 2002 /s/ Larry E. Krieg
-------------------------- --------------------------------------
Larry E. Krieg
Controller (Chief Accounting Officer)
29
CERTIFICATIONS
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Oswaldo Contreras, President and Chief Executive Officer of CITGO Petroleum
Corporation (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2002 of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
30
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 7, 2002 /s/ Oswaldo Contreras
---------------------- ------------------------------------
Name: Oswaldo Contreras
Title: Chief Executive Officer
31
QUARTERLY CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eddie R. Humphrey, Chief Financial Officer of CITGO Petroleum Corporation
(the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended
September 30, 2002 of the Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this
quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the audit committee
of the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record,
process, summarize and report financial data and have identified for the
Company's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls;
and
32
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Dated: November 7, 2002 /s/ Eddie R. Humphrey
-------------------- ----------------------------------
Name: Eddie R. Humphrey
Title: Chief Financial Officer
33
EXHIBIT INDEX
Exhibit 99.1 Certificate Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.