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Citgo cuts Y2K cost estimate in half

By Reuters Special to CNET News.com November 12, 1999, 2:45 p.m. PT

WASHINGTON -- Citgo said today the costs of addressing potential Y2K complications will be about half what was previously expected, or about $18 million, according to regulatory documents.

The company had expected to spend about $35 million readying its systems for the upcoming century date change, the company said in its quarterly earnings report filed with the Securities and Exchange Commission.

"The reduction is due to less than expected need for remediation of embedded systems and refinements in expense estimates," Citgo said.

Tulsa, Oklahoma-based Citgo is wholly owned by PDV America, a subsidiary of state-owned Petroleos de Venezuela.

The company already has spent about $12 million to address Y2K issues.

The so-called "Y2K bug" could prevent some computers from distinguishing the year 2000 from 1900 because of old shortcuts that recorded the year with only two digits. Unless fixed, this could disrupt everything from airlines to hospitals to communications systems.

Separately, Citgo disclosed in the filing that the Environmental Protection Agency issued a Notice of Violation of federal regulations last month regarding reformulated gasoline found during an inspection of Citgo's Braintree, Massachusetts, terminal in May 1998.

The EPA recommended a penalty of $218,500 be assessed against Citgo, although the company said it plans to "vigorously contest the proposed fines and allegations."

Story Copyright ) 1999 Reuters Limited. All rights reserved.

http://news.cnet.com/news/0-1009-200-1437131.html?tag=st.ne.1002.

-- Chicken Little (panic@forthebirds.net), November 16, 1999

Answers

Wow... see if you can figure this out! I don't know a lot about accounting procedures, but I suspect something sneaky here. Sorry to be cynical, but I've seen the kinds of things these companies do. This almost looks like it should be illegal, but I'm sure they figured out a way to get away with it.

Citgo 10-Q

"The total cost of the SAP implementation is estimated to be approximately $125 million, which includes software, hardware, reengineering and change management. Management has determined that SAP is an appropriate solution to the Year 2000 issue related to the systems for which SAP is implemented. Such systems comprise approximately 80 percent of CITGO's total information systems.

The estimated total cost of the Project is not expected to exceed $20 million, down from an original estimate of $35 million.

The cost of implementing SAP replacement systems is not included in these estimates."

HUH ???

What the hell was that...fancy accounting, or an outright deception?

They spent over $125 million, and they SAY they only spent $20 million??

I don't know a lot about how these guys come up with this stuff, but my guess is that they are somehow putting remediation down as a capital investment expenditure so it shows up on the bottom line under "assets."

Thanks Chicken, I think we have a classic example here of some slick deception about actual Y2K expenses.

Any of you investors know what the hell is going on here?

-- Hawk (flyin@high.again), November 16, 1999.

The way I read it, they spent 20 on embedded's and 125 on the puters. Then they had a creative accounting class.

-- FLAME AWAY (BLehman202@aol.com), November 16, 1999.

Let me translate: we have treated Y2K just like any other software project, and have cut corners, shuffled budgets and otherwise obfuscated the original purpose for political and personal gain.

-- Colin MacDonald (roborogerborg@yahoo.com), November 16, 1999.

Flame and Colin,

Yep, I think you guys are right. They are basically fudging the records, but in a way that is legal.

I bet most companies are doing the same thing. They are not charging any of the "software, hardware, reengineering and change management" that was done with respect to the SAP system as part of the Y2K Project, even though they state that this is being used as the solution for 80% of the year 2000 problems.

What exactly is "reengineering and change management"? It would be interesting to see exactly how much of the $125 mil was actually spent on hardware, and how much was spent hiring programmers and consulting personnel to provide services.

By charging all of this as an investment into assets rather than an expense, they are in essence falsifying their actual net worth. Investors should not be suprised when some businesses go bankrupt because in reality they have a negative net worth. Their stocks are worth about as much as our currency will be worth if the Fed Reserve goes into default.

-- Hawk (flyin@high.again), November 16, 1999.

FWIW, the pitch is that SAP, an ERP, is a capital expenditure which has benefits aside from its Y2K benefits, therefore it does not need to be expensed as do expenditures that are strictly for Y2K purposes. This approach is done not only with SAP, but with other expeditures that can be capitalized rather than expensed.

Jerry

-- Jerry B (skeptic76@erols.com), November 17, 1999.

Jerry,

Out of the $125 mil how much do you think is real physical hardware that would represent actual value in their net worth, and how much is just spent on consulting and labor for such services? Do these costs lower the value of the stock in anyway? If not, where does the money come from?

-- Hawk (flyin@high.again), November 17, 1999.

Oh GOODY. Yet another company that *overbudgeted* for their Y2K program! Folks, I am going to lose my faith in human nature.

I think I have now seen about 15 or 20 reports of 'overbudgeted' projects for Y2K. This represents 15 or 20 more than I ever heard of before. (Usually, the 'overbudget' part comes at the end, when the stuff don't work, and it costs two arms, a leg, first born male child, and droit-du-signeur with your teenage daughter to get it fixed.)

My heart leaps to think that maybe, just maybe, we have finally learned to do project management.

-- just another (another@engineer.com), November 17, 1999.