10-Q 1 h10304e10vq.txt CITGO PETROLEUM CORPORATION - 9/30/2003 ================================================================================ 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, 2003 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 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 -------------- (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 by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Act): Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. COMMON STOCK, $1.00 PAR VALUE 1,000 ----------------------------- ----- (Class) (outstanding at October 31, 2003) ================================================================================ 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, 2003 TABLE OF CONTENTS

PAGE FACTORS AFFECTING FORWARD LOOKING STATEMENTS.......................................................................... 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - ~~June~~September 30, 2003 and December 31, 2002....................................................................................... 2 Condensed Consolidated Statements of Income and Comprehensive Income - Three and ~~Six~~Nine-Month Periods Ended ~~June~~September 30, 2003 and 2002.........................................~~.......~~ 3 Condensed Consolidated Statement of Shareholder's Equity - ~~Six~~Nine-Month Period Ended ~~June~~September 30, 2003...............................................................................~~.....~~ 4 Condensed Consolidated Statements of Cash Flows - ~~Six~~Nine-Month Periods Ended ~~June~~September 30, 2003 and 2002............................................................................~~......~~ 5 Notes to the Condensed Consolidated Financial Statements................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................18 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................25 24 Item 4. Controls and Procedures................................................................................29 28 PART II. OTHER INFORMATION Item 1. Legal Proceedings......................................................................................30 29 Item 6. Exhibits and Reports on Form 8-K.......................................................................30 29 SIGNATURES...........................................................................................................31 30

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 Petroleum Corporation ("CITGO", "our Company", "we", "us", "our", or similar references) are forward looking statements. In addition, when used in this document, the words "anticipate," "estimate," "project," "believe" 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 our 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, we purchase a significant portion of our crude oil requirements from Petroleos de Venezuela, S.A. (as defined herein), our ultimate parent corporation, under long-term supply agreements, and could be adversely affected by social, economic and political conditions in Venezuela. (See Exhibit 99.4 to the Form 8-K filed by CITGO on February 25, 2003 for additional information concerning risk factors). Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date of this Report. We undertake 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~~SEPTEMBER 30, 2003 DECEMBER 31, (UNAUDITED) 2002 ----------- -------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ ~~246~~131,~~287~~089 $ 33,025 Accounts receivable, net 1,~~075~~034,~~233~~931 905,178 Due from affiliates 9266,~~667~~232 93,615 Inventories ~~989~~962,~~042~~106 1,090,915 Prepaid expenses and other 5263,~~058~~837 64,767 ------------ ------------ Total current assets 2,~~455~~258,~~287~~195 2,187,500 PROPERTY, PLANT AND EQUIPMENT - Net 3,~~829~~874,~~167~~544 3,750,166 RESTRICTED CASH 2324,~~971~~648 23,486 INVESTMENTS IN AFFILIATES ~~651~~635,~~459~~490 716,469 OTHER ASSETS ~~348~~335,~~731~~231 309,291 ------------ ------------ $ 7,~~308~~128,~~615~~108 $ 6,986,912 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ ~~588~~670,634 $ 830,769 Payables to affiliates ~~433~~489,~~992~~294 417,634 Taxes other than income ~~236~~233,~~839~~809 229,072 Other ~~267~~252,~~565~~658 283,428 Income taxes payable 61128,~~119~~712 24,770 Current portion of long-term debt 31,364 190,664 Current portion of capital lease obligation 12,803 22,713 ------------ ------------ Total current liabilities 1,~~632~~819,~~316~~274 1,999,050 LONG-TERM DEBT 1,~~448~~420,~~184~~699 1,109,861 CAPITAL LEASE OBLIGATION 23,~~115~~116 24,251 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ~~284~~302,~~478~~268 247,762 OTHER NONCURRENT LIABILITIES ~~243~~287,~~274~~727 211,950 DEFERRED INCOME TAXES ~~868~~863,~~218~~202 834,880 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 1776,~~173,634~~503 925,114 Accumulated other comprehensive loss (24,~~303~~380) (25,655) ------------ ------------ Total shareholder's equity 2,~~809~~411,~~030~~822 2,559,158 ------------ ------------ $ 7,~~308~~128,~~615~~108 $ 6,986,912 ============ ============

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~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, -------------------~~--------~~ -------------------~~--------~~ 2003 2002 2003 2002 ----~~--------~~ ----~~--------~~ ----~~--------~~ ----~~--------~~ REVENUES: Net sales $ 56,~~937~~430,~~169~~568 $ 45,~~733~~342,~~631~~794 $ 1218,~~164~~595,~~885~~453 $ 813,~~355~~698,~~986~~780 Sales to affiliates 8371,~~899~~763 5967,~~810~~777 ~~231~~303,~~864~~627 ~~108~~176,~~877~~654 ------------ ------------ ------------ ------------ 6,~~021~~502,~~068~~331 45,~~793~~410,~~441~~571 1218,~~396~~899,~~749~~080 813,~~464~~875,~~863~~434 Equity in earnings of affiliates 3035,~~951~~398 3028,~~339~~132 4479,~~575~~973 4977,~~273~~405 Insurance recoveries 261,~~588~~863 ~~115~~46,~~835~~326 ~~144~~146,~~302~~165 ~~210~~256,~~541~~867 Other income (expense) - net ~~793~~1,208 (811,~~009~~492) 1516,~~691~~899 (1426,~~510~~002) ------------ ------------ ------------ ------------ Total revenues 6,~~079~~540,~~400~~800 45,~~931~~473,~~606~~537 1219,~~601~~142,~~317~~117 814,~~710~~183,~~167~~704 ------------ ------------ ------------ ------------ COST OF SALES AND EXPENSES: Cost of sales and operating expenses (including purchases of $2,~~188~~450,~~392~~149, $12,~~642~~103,~~405~~726, $46,~~229~~680,~~973~~122 and $24,~~881~~989,~~253~~436 from affiliates) 56,~~811~~267,~~233~~004 45,~~686~~298,~~882~~606 1218,~~017~~284,~~023~~027 813,~~395~~694,~~785~~391 Selling, general and administrative expenses 6380,~~983~~788 7467,~~939~~192 ~~137~~218,~~327~~115 ~~151~~218,~~326~~518 Interest expense, excluding capital lease 3231,~~852~~264 17,~~447~~188 5587,~~860~~124 3350,~~170~~358 Capital lease interest charge 1,~~474~~011 1,~~894~~615 23,~~795~~806 35,~~787~~402 ------------ ------------ ------------ ------------ Total cost of sales and expenses 56,~~909~~380,~~542~~067 45,~~781~~384,~~162~~601 1218,~~213~~593,~~005~~072 813,~~584~~968,~~068~~669 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ~~169~~160,~~858~~733 ~~150~~88,~~444~~936 ~~388~~549,~~312~~045 ~~126~~215,~~099~~035 INCOME TAXES 6157,~~149~~864 5432,~~160~~016 ~~139~~197,~~792~~656 4577,~~396~~412 ------------ ------------ ------------ ------------ NET INCOME ~~108~~102,~~709~~869 9656,~~284~~920 ~~248~~351,~~520~~389 80137,~~703~~623 ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE (LOSS) INCOME: Cash flow hedges: Reclassification adjustment for derivative losses included in net income, net of related income taxes of $4439, $4443, $87127, and $88130 7870 77 ~~155~~225 ~~155~~232 Foreign currency translation (loss) gain, net of related income taxes of $~~726~~(83), $(86), $591 and $~~674~~(86) ~~1,293~~(147) --(154) 1,~~197~~050 --(154) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE (LOSS) INCOME ~~1,371~~(77) (77) 1,~~352~~275 ~~155~~78 ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME $ ~~110~~102,~~080~~792 $ 9656,~~361~~843 $ ~~249~~352,~~872~~664 $ 80137,~~858~~701 ============ ============ ============ ============

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 ~~INCOME~~ (LOSS) INCOME TOTAL ------~~-------~~ ------~~-------~~ -------~~------~~ --------~~-----~~ ------------- -----~~--------~~ BALANCE, DECEMBER 31, 2002 1 $ 1 $ 1,659,698 $ 925,114 $ (25,655) $ 2,559,158 Net income -- -- -- ~~248~~351,~~520~~389 -- ~~248~~351,~~520~~389 Other comprehensive income -- -- -- -- 1,~~352~~275 1,~~352~~275 Dividends paid - - - (500,000) - (500,000) ---------- ----------~~---~~ ----------~~---~~ ----------~~---~~ ----------~~---~~ ----------~~---~~ BALANCE, ~~JUNE~~SEPTEMBER 30, 2003 1 $ 1 $ 1,659,698 $ 1776,~~173,634~~503 $ (24,~~303~~380) $ 2,~~809~~411,~~030~~822 ==========~~===~~ ==========~~===~~ ==========~~===~~ ==========~~===~~ ==========~~===~~ ==========~~===~~

See notes to condensed consolidated financial statements. 4 CITGO PETROLEUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, -------------------------- 2003 2002 ----~~------~~ ----~~------~~ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ ~~248~~351,~~520~~389 $ 80137,~~703~~623 Depreciation and amortization ~~162~~245,~~830~~397 ~~145~~220,~~003~~983 Other adjustments to reconcile net income to net cash provided by operating activities ~~163~~180,~~733~~203 3155,~~743~~083 Changes in operating assets and liabilities ~~(248~~69,~~418)~~373 ~~(135~~68,~~711)~~713 ---------- ---------- Net cash provided by operating activities ~~326~~846,~~665~~362 ~~121~~482,~~738~~402 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (~~208~~315,~~665~~105) (~~349~~478,~~957~~053) Proceeds from sales of property, plant and equipment 13,~~692~~845 ~~547~~718 ~~Decrease~~Increase ~~(increase)~~ in restricted cash (~~485~~1,162) (3633,~~012~~507) Investments in LYONDELL-CITGO Refining LP (1417,~~900~~083) (1828,700) Investments in and advances to other affiliates (2,~~299~~537) (1519,~~918~~237) ---------- ---------- Net cash used in investing activities (~~224~~332,~~657~~042) (~~420~~558,~~040~~779) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from short-term bank loans -- ~~130~~119,000 Net (repayments of) ~~proceeds from~~ revolving bank loans (279,300) 78(154,~~500~~000) (Payments on) proceeds from loans from affiliates (39,000) --37,000 Proceeds from senior notes due 2011 546,590 -- Proceeds from senior secured term loan 200,000 -- (Payments on) proceeds from ~~issuance of~~ tax-exempt bonds (98126,~~450~~050) 62,~~650~~501 Payments on taxable bonds (90,000) (25,000) Payments of capital lease obligations (1211,~~108~~860) --(9,901) Payments on master shelf agreement senior notes (50,000) (25,000) Repurchase of senior notes due 2006 (47,500) -- Repayments of other debt -- (8,~~320~~312) Dividend paid (500,000) - Debt issuance costs (1819,~~978~~136) -- ---------- ---------- Net cash ~~provided~~used byin financing activities ~~111~~(416,~~254~~256) ~~212~~(3,~~830~~712) ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ~~213~~98,~~262~~064 (8580,~~472~~089) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,025 104,362 ---------- ---------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ ~~246~~131,~~287~~089 $ 1824,~~890~~273 ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) ~~paid~~ during the period for: Interest, net of amounts capitalized $ 3366,~~738~~578 $ 3348,~~778~~077 ========== ========== Income taxes (net of refunds of $45,000 and $5051,~~700~~381) $ 4445,~~435~~305 $ (45,~~222~~293) ========== ==========

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, 2003 AND 2002 1. BASIS OF PRESENTATION The financial information for CITGO Petroleum Corporation ("CITGO" or "the Company") subsequent to December 31, 2002 and with respect to the interim three-month and nine-month periods ended September 30, 2003 and 2002 is unaudited. In management's opinion, 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, 2003 and 2002 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, 2002 on Form 10-K/A, dated September 8, 2003, for additional information. 2. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 defines variable interest entities and how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. The interpretation requires certain minimum disclosures with respect to variable interest entities in which an enterprise holds significant variable interest but which it does not consolidate. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies at December 31, 2004 to variable interest entities in which a nonpublic enterprise, as defined, holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. CITGO, which meets the definition of a nonpublic enterprise in FIN 46, expects that the application of FIN 46 at December 31, 2004 to variable interest entities in which it acquired an interest before February 1, 2003 will not have a material impact on its financial position or results of operations. CITGO holds a 49.5% partnership interest in Nelson Industrial Steam Company ("NISCO"), a variable interest entity. NISCO operates a qualified cogeneration facility in Louisiana. NISCO had total assets of approximately $179 million at December 31, 2002 and revenue of approximately $72 million for the year ended December 31, 2002. CITGO, along with certain other partners, indirectly purchases electricity produced by NISCO. In addition to its partnership interest, CITGO provides a limited guarantee on behalf of NISCO. See Note 8 for CITGO's estimate of its maximum exposure to loss as a result of its involvement with NISCO. On January 1, 2003 the Company adopted 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. The Company has identified certain asset retirement obligations that are within the scope of the standard, including obligations imposed by certain state laws pertaining to closure and/or removal of storage tanks, contractual removal obligations included in certain easement and right-of-way agreements associated with the Company's pipeline operations, and contractual removal obligations relating to a refinery processing unit located within a third-party entity's facility. The Company cannot 6 currently determine a reasonable estimate of the fair value of its asset retirement obligations due to the fact that the related assets have indeterminate useful lives which preclude development of assumptions about the potential timing of settlement dates. Such obligations will be recognized in the period in which sufficient information exists to estimate a range of potential settlement dates and estimated amounts of costs to be incurred. Accordingly, the adoption of SFAS No. 143 did not impact the Company's financial position or results of operations. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except for certain issues from SFAS No. 133 which have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied prospectively. The changes in principle effective with the adoption of SFAS No. 149 did not have a material effect on the Company's statements of financial position and results of operation. 3. ACCOUNTS RECEIVABLE On February 28, 2003, the Company established a new accounts receivable sales facility. This facility allows for the non-recourse sale of an interest in trade accounts receivable meeting specified requirements to independent third parties. A maximum of $200 million in accounts receivable may be sold at any one time. At September 30, 2003, no accounts receivable sold through this facility remained outstanding. 4. INVENTORIES Inventories, primarily at LIFO, consist of the following:

~~JUNE~~SEPTEMBER 30, 2003 DECEMBER 31, ~~2003 2002~~ (UNAUDITED) 2002 ------------~~---~~ ------------~~---~~ (000S OMITTED) Refined products $ ~~672~~582,~~227~~799 $ 781,495 Crude oil ~~231~~291,~~041~~491 221,422 Materials and supplies 8587,~~774~~816 87,998 ----------~~-----~~ ----------~~-----~~ $ ~~989~~962,~~042~~106 $ 1,090,915 ==========~~=====~~ ==========~~=====~~

5. RESTRICTED CASH Restricted cash of approximately $25 million at September 30, 2003 is related to tax-exempt industrial revenue bonds and a product sales and option agreement. CITGO issued $30 million of tax-exempt environmental facilities revenue bonds in June 2002 and $39 million in May 2003. The proceeds from these bonds will be used for spending on qualified projects at the Lemont and Corpus Christi refineries. Restricted cash of approximately $14 million at September 30, 2003 represents highly liquid investments held in trust accounts in accordance with these bond agreements. Funds 7 may be released solely to finance the qualified capital expenditures as defined in the related bond agreements. Restricted cash of approximately $11 million at September 30, 2003 relates to a product sales and option agreement and represents highly liquid investments held in accordance with a contract related to that product sales and option agreement. 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt consists of the following:

~~JUNE~~SEPTEMBER 30, 2003 DECEMBER 31, ~~2003 2002~~ (UNAUDITED) 2002 --------------- ------------~~---~~ (000S OMITTED) Revolving bank loans $ -- $ 279,300 Senior Secured Term Loan, due 2006 with variable interest rate 200,000 -- Senior Notes, $200 million face amount, due 2006 with interest rate of 7-7/8% 149,~~934~~941 199,898 Senior Notes, $550 million face amount, due 2011 with interest rate of 11-3/8% 546,~~734~~841 -- Private Placement Senior Notes, due 2003 to 2006 with interest rate of 9.30% 45,455 45,455 Master Shelf Agreement Senior Notes, due 2003 to 2009 with interest rates from 7.17% to 8.94% 185,000 235,000 Tax Exempt Bonds, due 2004 to ~~2032~~2033 with variable and fixed interest rates ~~327~~299,~~425~~826 425,872 Taxable Bonds, due 2026 to 2028 with variable interest rates 25,000 115,000 ---------~~------~~ ----------~~-----~~ 1,~~479~~452,~~548~~063 1,300,525 Current portion of long-term debt (31,364) (190,664) ---------~~------~~ ----------~~-----~~ $ 1,~~448~~420,~~184~~699 $ 1,109,861 ==========~~=====~~ ==========~~=====~~

CITGO's revolving bank loan agreements with various banks consist of (i) a $260 million, three-year, revolving bank facility, maturing in December 2005; and (ii) a $260 million, 364-day, revolving bank facility, maturing in December 2003. CITGO does not intend to replace the $260 million, 364-day, revolving bank facility when it matures. On May 15, 2003, CITGO issued $39 million of tax-exempt revenue bonds due 2008. The proceeds of those bonds will be used for spending on qualified projects at the Corpus Christi refinery. On February 27, 2003, CITGO closed on a three-year $200 million, senior secured term loan with a variable interest rate. The loan is secured by a pledge of CITGO's 15.8 percent equity interest in Colonial Pipeline and 6.8 percent equity interest in Explorer Pipeline. 8 On February 27, 2003 CITGO issued $550 million aggregate principal amount of 11-3/8% unsecured senior notes due February 1, 2011. In connection with this debt issuance, CITGO redeemed $50 million principal amount of its 7-7/8% senior notes due 2006. The taxable and tax-exempt bonds are supported by letters of credit. CITGO repurchased $90 million of taxable bonds and $165 million of tax-exempt bonds due to the non-renewal of these letters of credit in the nine-month period ending September 30, 2003. We will seek to reissue these bonds, with replacement letters of credit in support or, alternatively, we will seek to replace these bonds with new bonds that will not require letter of credit support. Our various debt instruments require maintenance of a specified minimum net worth and impose restrictions on our ability to: incur additional debt unless we meet specified interest coverage and debt to capitalization ratios; place liens on our property, subject to specified exceptions; sell assets, subject to specified exceptions; make restricted payments, including dividends, repurchases of capital stock and specified investments; and merge, consolidate or transfer assets. CITGO is in compliance with its covenants under its debt financing arrangements at September 30, 2003. 7. INVESTMENT IN LYONDELL-CITGO REFINING LP LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 thousand barrels per day refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%) and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery processes heavy crude oil supplied by Petroleos de Venezuela, S.A. ("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. From February 2001 through March 2003 PDVSA, pursuant to its contractual rights, declared force majeure and reduced deliveries of crude oil to LYONDELL-CITGO. This action required LYONDELL-CITGO to obtain replacement crude oil supplies, which resulted in lower operating margins. Most recently, LYONDELL-CITGO received notice of force majeure from PDVSA in December 2002. Crude oil was purchased in the spot market to replace the volume not delivered under the contract during December 2002. By February 2003, crude oil deliveries had returned to contract volumes and the force majeure was lifted March 6, 2003. CITGO has a note receivable from LYONDELL-CITGO of approximately $35 million at September 30, 2003 and December 31, 2002. The note bears interest at 1.95% at September 30, 2003. Principal and interest are due in December 2004. Accordingly, this note and the related accrued interest is included in the balance sheet caption 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) ~~June~~September 30, December 31, 2003 2002 --------------- ------------~~---~~ (Unaudited) Carrying value of investment $ ~~454~~441,~~063~~010 $ 518,279 Notes receivable 35,278 35,278 Participation interest 41% 41% Summary of LYONDELL-CITGO's financial position: Current assets $ ~~262~~246,000 $ 357,000 Non current assets 1,~~350~~328,000 1,400,000 Current liabilities: Distributions payable to partners 388,000 181,000 Current portion of long-term debt 450,000 -- Other ~~324~~313,000 333,000 Noncurrent liabilities (including long-term debt of $0 at ~~June~~September 30, 2003 and $450,000 at December 31, 2002) ~~378~~380,000 840,000 Partners' capital 423,000 403,000

~~Six~~Nine Months Ended ~~June~~September 30, -------------------------------~~------~~ 2003 2002 ------------~~---~~ --------------- (Unaudited) Equity in net income $ 3056,~~725~~552 $ 3856,~~089~~127 Cash distribution received ~~109~~150,~~841~~904 3580,~~802~~137 Summary of LYONDELL-CITGO's operating results: Revenue $ 23,~~087~~117,~~689~~794 $ 12,~~545~~435,~~725~~792 Gross profit ~~132~~224,~~510~~ 145 216,~~384~~499 Net income 86155,~~313~~360 ~~104~~153,~~325~~969

On December 11, 2002, LYONDELL-CITGO completed a refinancing of its working capital revolver and its term bank loan. The new term loan and working capital revolver mature in June 2004 and are shown above in current liabilities. 10 8. 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. In September 2002, a Texas court ordered the Company to pay property owners and their attorneys approximately $6 million based on an alleged settlement of class action property damage claims as a result of alleged air, soil and groundwater contamination from emissions released from the Company's Corpus Christi, Texas refinery. CITGO has appealed the ruling to the Texas Court of Appeals. CITGO is a defendant in a number of state lawsuits alleging contamination of private and public water supplies by methyl tertiary butyl ether ("MTBE"), a component of gasoline. In general, the plaintiffs claim that MTBE renders the water not potable. In addition to compensatory and punitive damages, plaintiffs seek testing and monitoring, remediation and/or restoration of groundwater and drinking water sources, and other equitable relief. Pending Litigation - New York: Four actions are currently pending against the Company, and others, in New York state courts. Two have been filed by individual property owners, one has been filed by a public water supplier, and one is a purported class action on behalf of private well owners in two New York communities. The Company has moved to dismiss each of the cases. - Illinois: The Company is defending two actions pending in Illinois state court (Madison County). One is a purported class action on behalf of Illinois private well owners. The other case was filed by the Village of East Alton alleging contamination of its public water supplies. Both cases are scheduled for trial in the fall of 2004. New developments The Company has learned that approximately 50 new MTBE lawsuits have been filed in state courts in Illinois, New York, New Hampshire, Connecticut, Massachusetts, Florida, Iowa, Indiana and California since September 30, 2003. To date, CITGO has been served in approximately ten of these cases, in Connecticut, New Hampshire, Illinois, Indiana and New York. The Connecticut, Indiana and New York lawsuits were filed on behalf of public water suppliers and allege MTBE contamination of public drinking water sources. The Illinois lawsuit is a putative nationwide class action on behalf of all public water suppliers and alleges MTBE contamination of public drinking water sources. The New Hampshire case was filed by the New Hampshire State Attorney General to protect the state's water resources. The lawsuit seeks restoration and remediation, monitoring and testing of all public and private water supplies in the state, as well as compensatory and punitive damages, and fines. 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. 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 was affirmed by the Court of International Trade on December 17, 2002. In February 2003, the independent oil producers appealed the decision of the Court of International Trade. 11 CITGO has been named as a defendant in approximately 125 asbestos lawsuits pending in state and federal courts, primarily in Louisiana, Texas and Illinois. These cases, most of which involve multiple defendants, are brought by former employees or contractor employees seeking damages for asbestos related illnesses allegedly caused, at least in part, from exposure at refineries owned or operated by CITGO in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these cases, the plaintiffs' alleged exposure occurred over a period of years extending back to a time before CITGO owned or operated the premises at issue. In some of these cases, CITGO is indemnified by or has the right to seek indemnification for losses and expenses that CITGO may incur from prior owners of the refineries or employers of the claimants. In other cases, CITGO's involvement arises not from having been sued directly but because prior owners of the CITGO refineries have asserted indemnification rights against CITGO. The Company does not believe that the resolution of these cases will have a material adverse effect on its financial condition or results of operations. At September 30, 2003, CITGO's balance sheet included an accrual for lawsuits and claims of $25 million compared with $23 million at December 31, 2002. The increase in the accrual is due primarily to a revision in the estimated cost to CITGO in resolving various lawsuits and claims. In addition, CITGO estimates that an additional loss of $3 million is reasonably possible in connection with such lawsuits and claims. ENVIRONMENTAL COMPLIANCE AND REMEDIATION - CITGO is subject to the federal Clean Air Act ("CAA") which includes the New Source Review ("NSR") program as well as the Title V air permitting program; the federal Clean Water Act which includes the National Pollution Discharge Elimination System program; the Toxic Substances Control Act; and the federal Resource Conservation and Recovery Act and their equivalent state programs. CITGO is required to obtain permits under all of these programs and believes it is in material compliance with the terms of these permits. CITGO does not have any material Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") liability because the former owners of many of CITGO's assets have by explicit contractual language assumed all or the material portion of CERCLA obligations related to those assets. This includes the Lake Charles refinery and the Lemont refinery. The U.S. refining industry is required to comply with increasingly stringent product specifications under the 1990 Clean Air Act Amendments for reformulated gasoline and low sulphur gasoline and diesel fuel that have necessitated additional capital and operating expenditures, and altered significantly the U.S. refining industry and the return realized on refinery investments. Also, regulatory interpretations by the U.S. EPA regarding the term "modifications" to refinery equipment under the NSR provisions of the CAA have created uncertainty about the extent to which additional capital and operating expenditures will be required and administrative penalties imposed. In addition, CITGO is subject to various other federal, state and local environmental laws and regulations that may require CITGO to take additional compliance actions and also actions to remediate the effects on the environment of prior disposal or release of petroleum, hazardous substances and other waste and/or pay for natural resource damages. Maintaining compliance with environmental laws and regulations could require significant capital expenditures and additional operating costs. Also, numerous other factors affect the Company's plans with respect to environmental compliance and related expenditures. See "Factors Affecting Forward Looking Statements." 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. 12 In 1992, the Company reached an agreement with the Louisiana Department of Environmental Quality ("LDEQ") to cease usage of certain surface impoundments at its Lake Charles refinery by 1994. A mutually acceptable closure plan was filed with the LDEQ in 1993. The Company and the former owner of the refinery are participating in the closure and sharing the related costs based on estimated contributions of waste and ownership periods. The remediation commenced in December 1993. In 1997, CITGO presented a proposal to the LDEQ revising the 1993 closure plan. In 1998 and 2000, CITGO 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 has begun. CITGO has incurred remediation costs to date related to these surface impoundments of approximately $45 million. Based on currently available information and proposed remedial approach, CITGO currently anticipates closure and post-closure costs related to these surface impoundments and related solid waste management units to range from $36 million to $41 million. The Texas Commission on Environmental Quality ("TCEQ") and CITGO have reached agreement in principle on the general terms of a settlement agreement that is intended to resolve all outstanding enforcement issues between the Company and the TCEQ related to the Corpus Christi Refinery. This settlement includes all issues which have been the subject of prior, pending or threatened enforcement proceedings by the TCEQ. Although the complete terms of the settlement have not yet been finalized in an Agreed Order between the TCEQ and CITGO, CITGO estimates that the capital expenditures and penalties that will be required under the settlement will range up to an aggregate of $21 million, to be incurred over a period of years. In June 1999, CITGO and numerous other industrial companies received notice from the U.S. EPA that the U.S. EPA believed that CITGO and these other 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 CERCLA. The U.S. EPA made a demand for payment of its past investigation costs from CITGO and other PRPs and since 1999 has been conducting a remedial investigation/feasibility study ("RI/FS") under its CERCLA authority. The U.S. EPA released the draft of the remedial investigation phase of the report in May 2003. CITGO and other PRPs may be potentially responsible for the costs of the RI/FS, subsequent remedial actions and natural resource damages. Although CITGO is still reviewing the recent remedial investigation phase of the report and its implications, CITGO submitted initial comments on the report in July 2003. Also the EPA and the LDEQ issued a memorandum of understanding in June 2003 assigning the primary areas of responsibility between the agencies related to the Calcasieu Estuary. While the Company disagrees with many of the U.S. EPA's earlier allegations and conclusions, the Company is in discussions with the LDEQ on issues relative to its operations adjacent to the Bayou D'Inde tributary section of the Calcasieu Estuary and separately on issues relative to its refinery operations on other sections of the Estuary. If necessary, the Company still 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 CAA. 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 or installing new control equipment under the NSR provisions of the CAA. The NOVs followed inspections and formal information requests regarding the Company's Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois refineries. Since mid-2002, CITGO has been engaged in global settlement negotiations with the United States. The settlement negotiations have focused on different levels of air pollutant emission reductions and the merits of various types of control equipment to achieve those reductions. No settlement agreement, or agreement in principal, has been reached. Based primarily on the costs of control equipment reported by the United States and other petroleum companies and the types and number of emission control devices that have been agreed to in previous petroleum companies' NSR settlements with the United States, CITGO estimates that the capital costs of a settlement with the United States could be approximately $200 million. Any such capital costs would be incurred 13 over a period of years, anticipated to be from 2003 to 2008. Also, this cost estimate range, while based on current information and judgment, is dependent on a number of subjective factors, including the types of control devices installed, the emission limitations set for the units, the year the technology may be installed, and possible future operational changes. The Company also may be subject to possible penalties. If settlement discussions fail, CITGO is prepared to contest the NOVs. If CITGO is found to have violated the provisions cited in the NOVs, it estimates the capital expenditures and penalties that might result could range up to $290 million, to be incurred over a period of years. In June 1999, an NOV was issued by the U.S. EPA alleging violations of the National Emission Standards for Hazardous Air Pollutants regulations covering benzene emissions from wastewater treatment operations at the Company's Lemont, Illinois refinery. CITGO is in settlement discussions with the U.S. EPA. CITGO 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 various violations of the Louisiana air quality regulations at CITGO's Lake Charles, Louisiana refinery during 2001. The majority of the alleged violations related to the leak detection and repair program. Current settlement discussions with the LDEQ are reasonably expected to include a penalty in excess of $100,000. At September 30, 2003, CITGO's balance sheet included an environmental accrual of $63 million compared with $68 million at December 31, 2002. The decline in the accrual is due primarily to a revision of the Company's estimated share of costs related to a site which is still under investigation by the U.S. EPA. In addition, CITGO estimates that an additional loss of $15 million is reasonably possible in connection with environmental matters. Various regulatory authorities have the right to conduct, and from time to time do conduct, environmental compliance audits of CITGO 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, CITGO 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 CITGO believe that any such audit or their findings will have a material adverse effect on its future business and operating results, other than matters described above. Conditions which require additional expenditures may exist with respect to the Company's various sites including, but not limited to, its operating refinery complexes, former refinery sites, service stations and crude oil and petroleum product storage terminals. Based on currently available information, CITGO cannot determine the amount of any such future expenditures. DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - As of September 30, 2003 CITGO's petroleum commodity derivatives included exchange traded futures contracts, forward purchase and sale contracts, exchange traded and over-the-counter options and over-the-counter swaps. At September 30, 2003, the balance sheet captions prepaid expenses and other current assets and other current liabilities include $21 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 the Company's risk related to interest rate changes on its debt. The fair value of the interest rate swap agreements in place at September 30, 2003, based on the estimated amount that the Company 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 14 market value, the Company considered the creditworthiness of the counterparties, but no adjustment was determined to be necessary as a result. GUARANTEES - As of September 30, 2003, the Company has guaranteed the debt of others in a variety of circumstances including letters of credit issued for an affiliate, bank debt of an affiliate, bank debt of an equity investment, bank debt of customers, customer debt related to the acquisition of marketing equipment and financing debt incurred by an equity investment as shown in the following table:

EXPIRATION DATE (000s omitted) ------------ ~~(000S OMITTED)~~ Letters of credit $ 32,981 2003 - 2004 Bank debt Affiliate 10,000 2003 - 2004 Equity investment 5,500 2004 Customers 32,~~122~~393 2005 - 2009 Financing debt ofCustomer ~~customers~~equipment ~~Equipment~~ acquisition 1,~~727~~306 2003 - 2007 Equity investment - NISCO 11,894 2008 --------~~---~~ Total $ 5364,~~330~~074 ========~~====~~

In each case, if the debtor fails to meet its obligation, CITGO could be obligated to make the required payment. The Company has not recorded any amounts on the Company's balance sheet relating to these guarantees. In the event of debtor default on the letters of credit, CITGO has been indemnified by PDV Holding, Inc. ("PDV Holding"), the direct parent of PDV America. In the event of debtor default on the affiliate's and equity investment bank debt, CITGO has no recourse. In the event of debtor default on customer bank debt, CITGO generally has recourse to personal guarantees from principals or liens on property, except in one case, in which the guaranteed amount is $170 thousand, CITGO has no recourse. In the event of debtor default on financing debt incurred by customers, CITGO would receive an interest in the equipment being financed after making the guaranteed debt payment. In the event of debtor default on financing debt incurred by an equity investee, CITGO has no recourse. CITGO has granted indemnities to the buyers in connection with past sales of product terminal facilities. These indemnities provide that CITGO will accept responsibility for claims arising from the period in which CITGO owned the facilities. Due to the uncertainties in this situation, the Company is not able to estimate a liability relating to these indemnities. The Company has not recorded a liability on its balance sheet relating to product warranties because historically, product warranty claims have not been significant. 15 9. RELATED PARTY TRANSACTIONS CITGO purchases approximately one-half of the crude oil processed in its refineries from subsidiaries of PDVSA under long-term supply agreements. These supply agreements extend through the year 2006 for the Lake Charles refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi refinery and 2013 for the Savannah refinery. These crude supply agreements contain force majeure provisions that excuse the performance by either party of its obligations under the agreement under specified circumstances. PDVSA invoked the force majeure provisions and reduced the volume of crude oil supplied under the contracts in April 1998, from February 1999 through October 2000 and from February 2001 through March 2003. As a result of these declarations of force majeure, the Company was required to obtain crude oil from alternative sources, which resulted in increased volatility in its operating margins. The Company was notified that effective March 6, 2003, PDVSA ended its most recent declaration of force majeure under the crude oil supply agreements. In August 2002, three affiliates entered into agreements to advance excess cash to the Company from time to time under demand notes for amounts of up to a maximum of $10 million with PDV Texas, Inc. ("PDV Texas"), $30 million with PDV America and $10 million with PDV Holding. The notes bear interest at rates equivalent to 30-day LIBOR plus .875% payable quarterly. Amounts outstanding on these notes at December 31, 2002 were $5 million, $30 million and $4 million from PDV Texas, PDV America and PDV Holding, respectively. At September 30, 2003, there was no outstanding balance on these notes. 10. INSURANCE RECOVERIES On August 14, 2001, a fire occurred at the crude oil distillation unit of the Lemont refinery. A new crude unit was operational at the end of May 2002. On September 21, 2001, a fire occurred at the hydrocracker unit of the Lake Charles refinery. Operations at the hydrocracker resumed on November 22, 2001. The Company recognizes property damage insurance recoveries in excess of the amount of recorded losses and related expenses, and business interruption insurance recoveries when such amounts are realized. During the three-month periods ended September 30, 2003 and 2002, the Company recorded $2 million and $46 million, respectively, of insurance recoveries primarily related to these fires. During the nine-month periods ended September 30, 2003 and 2002, the Company recorded $146 million and $257 million, respectively, of insurance recoveries primarily related to these fires. The Company received cash proceeds of $20 million and $49 million during the three-month periods ended September 30, 2003 and 2002. The Company received cash proceeds of $146 million and $292 million during the nine-month periods ended September 30, 2003 and 2002. In July 2003, the Company received the final payment related to the Lemont fire. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this report. We also direct your attention to our Form 10-K annual report for our fiscal year ended December 31, 2002, for additional information and a description of critical accounting policies and factors that may cause substantial fluctuations in our earnings and cash flows. We generated net income of $102.9 million on total revenue of $6.5 billion in the quarter ended September 30, 2003 compared to a net income of $56.9 million on total revenue of $5.5 billion for the same period last year. We generated net income of $351.4 million on revenue of $19.1 billion in the nine months ended September 30, 2003 compared to net income of $137.6 million on total revenue of $14.2 billion for the same period last year. (See "Gross margin"). RESULTS OF OPERATIONS The following table summarizes the sources of our sales revenues and sales volumes for the three-month and nine-month periods ended September 30, 2003 and 2002: CITGO SALES REVENUES AND VOLUMES

THREE MONTHS ~~SIX~~NINE MONTHS THREE MONTHS ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, ------------------ ------------------ ------------------ ------------------ 2003 2002 2003 2002 2003 2002 2003 2002 ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ ($ in millions) (gallons in millions) Gasoline $ 3,~~534~~831 $ 23,~~960~~363 $ 610,~~896~~727 $ 58,~~069~~432 3,~~988~~918 34,~~619~~056 711,~~354~~272 611,~~958~~014 Jet fuel ~~421~~513 ~~322~~359 ~~938~~1,451 ~~632~~991 ~~555~~640 ~~472~~479 1,~~094~~734 1,~~004~~483 Diesel/#2 fuel 1,~~202~~173 ~~783~~899 4,043 2,~~870~~439 1,~~540~~479 1,~~558~~232 14,~~173~~762 3,~~283~~724 ~~2,492~~ Asphalt ~~206~~238 ~~183~~245 ~~276~~514 ~~223~~468 ~~266~~331 ~~277~~353 ~~358~~689 ~~354~~707 Petrochemicals and industrial products ~~516~~570 ~~376~~379 1,~~083~~653 ~~674~~1,053 ~~636~~662 ~~538~~555 1,~~253~~915 1,~~038~~593 Lubricants and waxes ~~149~~157 ~~149~~143 ~~291~~448 ~~279~~422 6167 6967 ~~127~~194 ~~128~~195 ------- ---------- ------- ---------- ------- ---------- ------- ---------- Total refined product sales 6,~~028~~482 45,~~773~~388 1218,~~354~~836 813,~~417~~805 7,~~064~~097 6,~~148~~742 1320,~~469~~566 1118,~~974~~716 Other sales and adjustments ~~(7)~~ 20 4323 4863 70 ------- ---------- ------- ---------- ------- ---------- ------- ---------- Total sales $ 6,~~021~~502 $ 45,~~793~~411 $1218,~~397~~899 $ 813,~~465~~875 7,~~064~~097 6,~~148~~742 1320,~~469~~566 1118,~~974~~716 ======= ========== ======= ========== ======= ========== ======= ==========

17 The following table summarizes our cost of sales and operating expenses for the three-month and nine-month periods ended September 30, 2003 and 2002: CITGO COST OF SALES AND OPERATING EXPENSES

THREE MONTHS ~~SIX~~NINE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ENDED ~~JUNE~~SEPTEMBER 30, --------------------- --------------------- 2003 2002 2003 2002 ------- ------- ------- ------- ($ in millions) ~~($ in millions)~~ Crude oil $ 1,~~606~~724 $ 1,~~295~~641 $ 35,~~386~~110 $ 23,~~186~~827 Refined products 3,~~326~~577 2,~~550~~876 610,~~832~~409 47,~~680~~556 Intermediate feedstocks 481 ~~486~~352 ~~939~~1,420 ~~752~~1,104 Refining and manufacturing costs ~~326~~323 ~~303~~314 ~~640~~963 ~~586~~900 Other operating costs, expenses and inventory changes 72162 53116 ~~220~~382 ~~192~~307 ------- ------- ------- ------- Total cost of sales and operating expenses $ 56,~~811~~267 $ 45,~~687~~299 $1218,~~017~~284 $ 813,~~396~~694 ======= ======= ======= =======

Sales revenues and volumes. Sales increased $1.1 billion, or approximately 20%, in the three-month period ended September 30, 2003 as compared to the same period in 2002. This increase was due to an increase in average sales price of 14% and an increase in sales volume of 5%. Sales increased $5.0 billion, or approximately 36%, in the nine-month period ended September 30, 2003 compared to the same period in 2002. This increase was due to an increase in average sales price of 24% and an increase in refined product sales volume of 10%. (See CITGO Sales Revenues and Volumes table above.) Equity in earnings of affiliates. Equity in earnings of affiliates increased by $7 million for the three-month period ended September 30, 2003 and increased $3 million for the nine-month period ended September 30, 2003 as compared to the same period in 2002. The increase in the three-month period was due primarily to an increase in the earnings of LYONDELL-CITGO, our share of which increased $8 million. The increase in LYONDELL-CITGO'S earnings was primarily due to improved refinery margins during the third quarter of 2003 as compared to the same period in 2002. Insurance recoveries. We recorded insurance recoveries of $2 million in the three months ended September 30, 2003 and $146 million in the nine months ended September 30, 2003. The recoveries for the nine-month period related 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. These recoveries are, in part, reimbursements for expenses incurred in 2002 and 2001 to mitigate the effect of the fire on our earnings. We do not expect any additional insurance recoveries related to the Lemont fire. Cost of sales and operating expenses. Cost of sales and operating expenses increased by $968 million or 18%, in the quarter ended September 30, 2003 as compared to the same period in 2002. Cost of sales and operating expenses increased by $4.6 billion or 34%, in the nine months ended September 30, 2003 as compared to the same period in 2002. (See CITGO Cost of Sales and Operating Expenses table above.) We purchase refined products to supplement the production from our refineries to meet marketing demands and resolve logistical issues. Refined product purchases represented 57% and 54% of total cost of sales and operating expenses for the third quarter of 2003 and 2002, respectively and 57% and 55% for the nine-months of 2003 and 2002, respectively. We estimate margins on purchased products, on average, are lower than margins on produced products due to the fact that we can only receive the marketing portion of the total margin received on the produced refined products. However, purchased products are not segregated from our produced products and margins may vary due to market conditions and other factors beyond our control. As such, it is not practical to 18 measure the effects on profitability of changes in volumes of purchased products. In the near term, other than normal refinery turnaround maintenance, we do not anticipate operational actions or market conditions which might cause a material change in anticipated purchased product requirements; however, there could be events beyond our control which impact the volume of refined products purchased. (See also "Factors Affecting Forward Looking Statements".) Gross margin. The gross margin for the three-month period ended September 30, 2003 was approximately 3.3 cents per gallon, compared to approximately 1.7 cents per gallon for the same period in 2002. The gross margin for the nine-month period ended September 30, 2003 was approximately 3.0 cents per gallon, compared to less than one cent per gallon for the same period in 2002. The revenue per gallon component in the three-month period ended September 30, 2003 increased approximately 14% and the cost per gallon component increased approximately 12%. As a result, the gross margin increased approximately 1.7 cents on a per gallon basis in the quarter ended September 30, 2003 compared to the same period in 2002. In the nine-month period ended September 30, 2003, the revenue per gallon component increased approximately 24% and the cost per gallon component increased approximately 22%. As a result, the gross margin increased approximately 2.0 cents on a per gallon basis in the nine months ended September 30, 2003 compared to the same period in 2002. 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 our consolidated operating results therefore depends in part on how quickly refined product prices adjust to reflect these changes. However, in the first nine months of 2002, there was a substantial decrease in sales price without an equivalent decrease in refined product costs resulting in a significant negative impact on our gross margin and earnings. Selling, general and administrative expenses. Selling, general and administrative expenses increased 20% from $67 million in the third quarter of 2002 to $81 million in the third quarter of 2003. Selling, general and administrative expenses remained relatively flat at $219 million in the first nine months of 2002 compared to $218 million in the same period in 2003. The increase in selling, general and administrative expenses during the quarter ended September 30, 2003 is primarily related to an increase in labor burden, incentive compensation, and expenses related to an early retirement program. Interest expense. Interest expense increased by $13 million in the three-month period ended September 30, 2003 and increased $35 million in the nine-month period ended September 30, 2003 as compared to the same period in 2002. This was primarily due to the net increase in the outstanding debt balance and higher overall interest rates resulting from the issuance of the $550 million senior notes and the closing of the $200 million secured term loan in February 2003. LIQUIDITY AND CAPITAL RESOURCES Consolidated net cash provided by operating activities totaled approximately $846 million for the nine-month period ended September 30, 2003. Operating cash flows were derived primarily from net income of $351 million, depreciation and amortization of $245 million, distributions in excess of equity in earnings of affiliates of $100 million, increase in deferred taxes of $54 million, and changes in operating assets and liabilities of $69 million. The more significant changes in operating assets and liabilities include an increase in notes and accounts receivable and a decrease in current liabilities offset, in part, by a decrease in inventory. 19 Net cash used in investing activities in the nine month period ended September 30, 2003 totaled $332 million consisting primarily of capital expenditures of $315 million. These capital expenditures consisted of:

Three ~~Six~~Nine Months Months ---------- ---------- Ended ~~June~~September 30, 2003 ------------------------ ($ in millions) Regulatory requirements $ 8075 $ ~~123~~198 Maintenance capital projects 1410 3242 Strategic capital expenditures 2521 5475 ---------- ---------- Total capital expenditures $ ~~119~~106 $ ~~209~~315 ========== ==========

Net cash used by financing activities totaled $416 million for the nine-month period ended September 30, 2003, consisting primarily of the payment of a $500 million dividend payment to PDV America, the repayments of $279 million on revolving bank loans; the repurchase of $126 million of tax-exempt bonds; the repurchase of $90 million of taxable bonds; the repurchase of $50 million of our 7-7/8% senior notes due 2006 for a cash payment of $47.5 million; the payment of $50 million on master shelf agreement notes; the repayment of loans from affiliates of $39 million; $19 million in debt issuance costs associated with the 11-3/8% senior notes due 2011, the senior secured loan, and the repurchase of taxable and tax-exempt bonds; and capital lease payments of $12 million. These payments were offset by proceeds from our senior secured term loan of $200 million and the proceeds from our 11-3/8% senior notes due in 2011 of $547 million. As of September 30, 2003, capital resources available to us included cash on hand totaling $131 million generated by operations and other sources, and available borrowing capacity under our committed bank facilities of $517 million. Our management believes that we have 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. We periodically evaluate other sources of capital in the marketplace and anticipate that long-term capital requirements will be satisfied with current capital resources and future financing arrangements, including the issuance of debt securities. Our ability to obtain such financing will depend on numerous factors, including market conditions and our perceived creditworthiness at that time. (See also "Factors Affecting Forward Looking Statements".) Our various debt instruments require maintenance of a specified minimum net worth and impose restrictions on our ability to: - incur additional debt unless we meet specified interest coverage and debt to capitalization ratios; - place liens on our property, subject to specified exceptions; - sell assets, subject to specified exceptions; - make restricted payments, including dividends, repurchases of capital stock and specified investments; and - merge, consolidate or transfer assets. We are in compliance with our covenants under our debt financing arrangements at September 30, 2003. 20 Upon the occurrence of a change of control of our Company, as defined in the Indenture governing our 11-3/8% senior notes due 2011, the holders of those notes have the right to require us to repurchase them at a price equal to 101% of the principal amount plus accrued interest. In addition, our bank credit agreements provide that, unless lenders holding two-thirds of the commitments thereunder otherwise agree, a change in control of our Company, as defined in those agreements, will constitute a default under those credit agreements. Internally generated cash flow, together with borrowings available under our credit facilities, are expected to be sufficient to fund capital expenditures during the remainder of 2003. In addition, we have taken steps to reduce our capital expenditures in 2003 by approximately $250 million, resulting in budgeted total 2003 expenditures of $460 million, and will reassess the economics of the postponed projects at a later date. Of the $250 million spending reduction, 60% was discretionary, 27% was maintenance of the business and 13% was regulatory. The regulatory and maintenance of the business projects will be completed under a delayed schedule. Discretionary spending will be restarted in 2004 as funds become available. Finally, we are continuing to review the timing and amount of scheduled expenditures under our planned capital spending programs, including regulatory and environmental projects in the near term. We have outstanding letters of credit that support taxable and tax-exempt bonds that were issued previously for our benefit. Through September 30, 2003, we repurchased $90 million of taxable bonds and $165 million of tax-exempt bonds due to the non-renewal of these letters of credit. We will seek to reissue these bonds, with replacement letters of credit in support or, alternatively, we will seek to replace these bonds with new bonds that will not require letter of credit support. As of November 1, 2003, we have an additional $182 million of letters of credit outstanding that back or support other bond issues that we have issued through governmental entities, which are subject to renewal during the period ending September 30, 2004. In August 2002, three of our affiliates entered into agreements to advance excess cash to us from time to time under demand notes. These notes provide for maximum amounts of $10 million from PDV Texas, $30 million from PDV America and $10 million from PDV Holding. Amounts outstanding on these notes at December 31, 2002 were $5 million, $30 million and $4 million from PDV Texas, PDV America and PDV Holding, respectively. At September 30, 2003, there was no outstanding balance on these notes. Our senior unsecured debt ratings, as currently assessed by the three major debt rating agencies, are as follows: ~~Moody's Investor's Services Ba3 Standard & Poor's Ratings Group BB Fitch Investors Services, Inc. BB-~~

On May 9, 2003, Standard & Poor's Ratings Group ("S&P") upgraded our senior unsecured debt rating to BB-. S&P upgraded our senior unsecured debt rating to BB on July 31, 2003 and Fitch Investors Services, Inc. ("Fitch") upgraded our senior unsecured debt rating to BB- on August 8, 2003. Our secured debt ratings, as currently assessed by the three major debt rating agencies, are as follows: ~~Moody's Investor's Services Ba2 Standard & Poor's Ratings Group BB+ Fitch Investors Services, Inc. BB+~~

On May 9, 2003, S&P upgraded our secured debt rating to BB. S&P upgraded our secured debt rating to BB+ on July 31, 2003 and Fitch upgraded our secured debt rating to BB+ on August 8, 2003. 21 On February 28, 2003, a new accounts receivable sales facility was established. This facility allows for the non-recourse sale of certain accounts receivable to independent third parties. A maximum of $200 million in accounts receivable may be sold at any one time. On July 25, 2003 we made a $500 million dividend payment for the purpose of enabling our parent, PDV America to make the principal payment on $500 million, 7-7/8% senior notes due August 1, 2003. Our $550 million, 11-3/8% senior notes due 2011 have certain minimum liquidity requirements for payment of such a dividend and we were in compliance with those requirements on July 25, 2003. Our debt instruments do not contain any covenants that trigger increased costs or burdens as a result of a change in our securities ratings. However, certain of our guarantee agreements, which support approximately $20 million of PDV Texas, an affiliate, letters of credit, require us to cash collateralize the applicable letters of credit upon a reduction of our credit rating below a stated level. We believe that we have adequate liquidity from existing sources to support our operations for the foreseeable future. We are continuing to review our operations for opportunities to reduce operating and capital expenditures. NEW ACCOUNTING STANDARDS On January 1, 2003 we adopted 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. We have identified certain asset retirement obligations that are within the scope of the standard, including obligations imposed by certain state laws pertaining to closure and/or removal of storage tanks, contractual removal obligations included in certain easement and right-of-way agreements associated with our pipeline operations, and contractual removal obligations relating to a refinery processing unit located within a third-party entity's facility. We cannot currently determine a reasonable estimate of the fair value of our asset retirement obligations due to the fact that the related assets have indeterminate useful lives which preclude development of assumptions about the potential timing of settlement dates. Such obligations will be recognized in the period in which sufficient information exists to estimate a range of potential settlement dates. Accordingly, the adoption of SFAS No. 143 did not impact our financial position or results of operations. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 defines variable interest entities and how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. The interpretation requires certain minimum disclosures with respect to variable interest entities in which an enterprise holds significant variable interest but which it does not consolidate. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies at December 31, 2004 to variable interest entities in which a nonpublic enterprise, as defined, holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We meet the definition of a nonpublic enterprise and expect that the application of FIN 46 at December 31, 2004 to variable interest entities in which we acquired an interest before February 1, 2003 will not have a material impact on our financial position or results of operations. We hold a 49.5% partnership interest in NISCO, a variable interest entity. NICSO operates a qualified cogeneration facility in Louisiana. NISCO had total assets of approximately $179 million at December 31, 2002 and revenue of approximately $72 million for the year ended December 31, 2002. We, along with certain other 22 partners, indirectly purchase electricity produced by NISCO. In addition to our partnership interest, we provide a limited guarantee on behalf of NISCO. See Note 8 for our estimate of our maximum exposure to loss as a result of our involvement with NISCO. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except for certain issues from SFAS No. 133 which have been effective for fiscal quarters that began prior to June 15, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of SFAS No. 149 should be applied prospectively. The changes in principle effective with the adoption of SFAS No. 149 did not have a material effect on our statements of financial position and results of operation. PROPOSED ACCOUNTING CHANGE The American Institute of Certified Public Accountants ("AICPA") 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 unamortized 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 the effect of expensing existing unamortized deferred non-capital major maintenance costs will be reported as a cumulative effect of an accounting change in the consolidated statement of income. The final accounting requirements are not known at this time. Currently, adoption is not expected to be required before fiscal years beginning after December 15, 2004. At September 30, 2003, we have included turnaround costs of $172 million in other assets. Our management has not determined the amount, if any, of these costs that could be capitalized under the provisions of the exposure draft. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction. We have exposure to price fluctuations of natural gas, crude oil, feedstocks, and refined products as well as fluctuations in interest rates. To manage these exposures, our management has authorized the use of commodity derivatives in a Risk Management Program. We do not attempt to manage the price risk related to all of our inventories and fixed forward commitments. As a result at September 30, 2003, we were exposed to the risk of broad market price movements with respect to a substantial portion of our current and anticipated commodity needs. We have at least 30 million barrels of current inventory and fixed forward price contracts at price risk on any given day. In addition, we have price risk on purchasing 1.8 trillion Btu of natural gas every month. As of September 30, 2003 aggregate commodity derivative positions entered into for price risk management purposes totaled 3.2 million barrels and 1.0 trillion Btu. Commodity Instruments. We balance our crude oil and petroleum product supply/demand and manage a portion of our price risk by entering into petroleum commodity derivatives. Generally, our risk management strategies qualified as hedges through December 31, 2000. Effective January 1, 2001, our policy is to elect hedge accounting only under limited circumstances involving derivatives with initial terms of 90 days or greater and notional amounts of $25 million or greater. At September 30, 2003, none of our commodity derivatives were accounted for as hedges. NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT SEPTEMBER 30, 2003

MATURITY NUMBER OF CONTRACT MARKET COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE (4) --------- ---------- ----~~----~~ ------------ -------- --------- ~~Long~~LONG/(~~Short~~SHORT) ~~Asset~~ASSET/(~~Liability~~LIABILITY) ------------ -------------------- ($ in millions) No Lead Gasoline (1) Futures Purchased 2003 20452 $ 014.78 $ 015.3 Futures Sold 2003 (450) $ (14.7) $ (15.2) Forward Purchase Contracts 2003 26,~~058~~745 $ 70223.8 $ 72223.31 Forward Sales Contracts 2003 (15,~~493~~203) $ (51174.13) $ (53171.01) Distillates (1) Futures Purchased 2003 1,~~035~~551 $ 3149.9 $ 3451.78 Futures Purchased 2004 ~~666~~1,457 $ 2045.15 $ 2147.3 ~~OTC~~Futures ~~Swaps~~Sold 2003 (~~Pay~~75) ~~Fixed/Receive~~$ ~~Float~~(2.5) $ (32.5) OTC Call Options Purchased 2003 612 $ -- $ -- ~~Forward~~OTC ~~Purchase~~Put ~~Contracts~~Options Purchased 2003 ~~809~~12 $ ~~24.9~~- $ 250.61 ~~Forward~~OTC ~~Sale~~Call ~~Contracts~~Options Sold 2003 (~~782~~12) $ ~~(24.8)~~- $ (250.31) ~~Crude~~OTC ~~Oil~~Put ~~(1)~~Options ~~Futures~~Sold ~~Purchased~~ 2003 10(12) $ ~~0.3~~- $ ~~0.3~~- ~~Futures~~OTC ~~Sold~~Swaps ~~2003~~(Pay Fixed/Receive Float)(~~661~~3) 2003 3 $ ~~(19.0)~~- $ ~~(19.7)~~- Forward Purchase Contracts 2003 ~~1,834~~675 $ 5521.32 $ 5521.08 Forward Sale Contracts 2003 (~~697~~965) $ (2131.64) $ (2131.49) ~~Natural~~Crude ~~Gas~~Oil (21) ~~Futures~~OTC ~~Purchased~~Swaps (Pay Fixed/Receive Float)(3) 2003 ~~230~~900 $ ~~14.5~~- $ 120.81 ~~Listed~~OTC ~~Call~~Swaps ~~Options~~(Pay ~~Purchased~~Float/Receive Fixed)(3) 2003 80(1,100) $ -- $ 0.52 ~~Listed~~Forward ~~Put~~Purchase ~~Options~~Contracts ~~Sold~~ 2003 ~~(20)~~1,550 $ --40.2 $ (043.2)0 ~~Heat~~Forward ~~Crack~~Sale Contracts 2003 (1,032) ~~OTC~~$ ~~Swaps~~ (~~Pay~~28.3) ~~Fixed/Receive~~$ ~~Float~~(29.9) Natural Gas (32) Listed Call Options Purchased 2003 ~~725~~100 $ -- $ ~~(0.7)~~- ~~OTC~~Listed ~~Swaps~~Call ~~(Pay~~Options ~~Float/Receive~~Sold ~~Fixed) (3)~~ 2003 (~~725~~100) $ -- $ ~~0.3~~-

-------------------------------- (1) 1,000 barrels per contract (2) Ten-thousands of mmbtu per contract (3) Floating price based on market index designated in contract; fixed price agreed upon at date of contract. (4) Based on actively quoted prices. 24 NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT SEPTEMBER 30, 2002

MATURITY NUMBER OF CONTRACT MARKET COMMODITY DERIVATIVE DATE CONTRACTS VALUE VALUE (54) --------- ---------- ----~~----~~ ------------ ---------- ----------- ~~Long~~LONG/(~~Short~~SHORT) ~~Asset~~ASSET/(~~Liability~~LIABILITY) ------------ --------------------~~-----~~ ($ in millions) No Lead Gasoline (1) Futures Purchased 2002 ~~599~~50 $ 191.47 $ 191.87 Futures Sold 2002 ~~(915)~~2,902 $ ~~(30~~99.0)4 $ ~~(30~~98.1) ~~OTC Swaos (Pay Floating/Receive Floating)(4) 2002 (25) $ -- $ --~~ Forward Purchase Contracts 2002 35,~~004~~901 $ 96194.07 $ 95204.26 Forward Sale Contracts 2002 (4,~~023)~~765 $ ~~(129~~159.1)8 $ ~~(127~~164.6)3 Distillates (1) Futures Purchased 2002 12,~~256~~253 $ 3472.58 $ 3676.56 Futures Purchased 2003 ~~375~~646 $ 1018.23 $ 1020.96 Futures Sold 2002 ~~(317)~~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 $ - $ (90.1) Forward Purchase Contracts 2002 ~~1,135~~812 $ 3026.7 $ 3127.63 Forward Sale Contracts 2002 (1,~~295)~~255 $ ~~(34~~42.7)6 $ ~~(36~~42.3)8 Crude Oil (1) Futures Purchased 2002 ~~250~~2,732 $ 683.60 $ 683.72 Futures Purchased 2003 595 $ 16.5 $ 16.5 Futures Sold 2002 ~~(1,110)~~377 $ ~~(28~~10.7)0 $ ~~(29~~11.4)3 Futures Sold 2003 ~~(400)~~475 $ (911.8)6 $ ~~(10~~13.1)5 Listed Options Purchased 2002 300 $ - $ - Listed Options Sold 2002 300 $ - $ - OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 (1,~~270)~~280 $ -- $ (0.64) Forward Purchase Contracts 2002 86,~~106~~794 $ ~~202~~178.01 $ ~~212~~187.10 Forward Sale Contracts 2002 (4,~~883)~~149 $ ~~(123~~111.5) $ ~~(130~~116.0)1 Natural Gas (2) Futures ~~Purchased~~Sold 2002 ~~300~~40 $ 1.06 $ 1.07 Propane (1) OTC Swaps (Pay Floating/Receive Fixed)(3) 2002 ~~(400)~~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 $ - $ 0.63

-------------------------------- (1) Thousands of barrels (2) Ten-thousands of mmbtu (3) Floating price based on market index designated in contract; fixed price agreed upon at date of contract. (4) Based on actively quoted prices. 25 Debt Related Instruments. We have fixed and floating U.S. currency denominated debt. We use interest rate swaps to manage our debt portfolio toward a benchmark of 40 to 70 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 our long-term costs. At September 30, 2003 and 2002, our 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, 2003 AND 2002

NOTIONAL FIXED PRINCIPAL VARIABLE RATE INDEX EXPIRATION DATE RATE PAID AMOUNT ------------------- ----------------- ---------~~---~~ ------~~---------------~~ ($ in millions) J.J. Kenny February 2005 5.30% $ 12 J.J. Kenny February 2005 5.27% 15 J.J. Kenny February 2005 5.49% 15 ---~~------------------~~ $ 42 ===~~==================~~

Changes in the fair value of these agreements are recorded in other income (expense). The fair value of the interest rate swap agreements in place at September 30, 2003, based on the estimated amount that we 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. 26 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, 2003

EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE ------------------- ---------~~------~~ --------------- ---------~~------~~ -------------~~---~~ ($ in millions) ($ in millions) 2003 $ 11 9.30% $ -- -- 2004 31 8.02% 16- ~~6.24%~~- 2005 11 9.30% -- -- 2006 201 8.10% 200 7.0541% 2007 50 8.94% 12- ~~7.63%~~- Thereafter ~~769~~770 10.3230% ~~177~~178 109.2139% ------~~---------~~ ------~~---------~~ ----~~-----------~~ -----~~----------~~ Total $ 1,~~073~~074 9.7574% $378 ~~405~~ 8.4234% ======~~=========~~ ======~~=========~~ ====~~===========~~ =====~~==========~~ Fair Value $ 1,~~154~~166 $378 ~~405~~ ======~~=========~~ ====~~===========~~

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% $ ~~130~~119 3.2007% 2003 61 8.79% ~~470~~238 43.2094% 2004 31 8.02% 16 54.1581% 2005 11 9.30% -- -- 2006 ~~251~~252 8.06% -- -- Thereafter ~~160~~183 7.8890% ~~492~~467 78.9924% -----~~----------~~ -----~~----------~~ -----~~----------~~ -----~~----------~~ Total $ ~~525~~549 8.14% $ ~~1,108~~840 56.7823% =====~~==========~~ =====~~==========~~ =====~~==========~~ =====~~==========~~ Fair Value $ ~~551~~580 $ ~~1,108~~840 =====~~==========~~ =====~~==========~~

27 ITEM 4. CONTROLS AND PROCEDURES During the third quarter of 2003, the Company's management, including the principal executive officer and principal financial officer, evaluated the Company's disclosure controls and procedures related to the recording, processing, summarization and reporting of information in the Company's periodic reports that it files with the Securities and Exchange Commission ("SEC"). These disclosure controls and procedures have been designed to ensure that (a) material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's management, including these officers, by other employees of the Company and its subsidiaries, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The Company's controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. Also, the Company does not control or manage certain of its unconsolidated entities and thus, its access and ability to apply procedures to those entities are more limited than is the case for its consolidated subsidiaries. As of September 30, 2003, these officers concluded that the Company's disclosure controls and procedures were effective to accomplish their objectives. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 28 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 Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 filed by the following officers: 31.1 Filed by Luis Marin, President and Chief Executive Officer. 31.2 Filed by Eddie R. Humphrey, Chief Financial Officer. Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code as to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 filed by the following officers: 32.1 Filed by Luis Marin, President and Chief Executive Officer. 32.2 Filed by Eddie R. Humphrey, Chief Financial Officer. (b) Reports on Form 8-K: A report on Form 8-K was filed with the Securities and Exchange Commission on August 18, 2003. The purpose of this report was to furnish information included in our press release on earnings for the second quarter of 2003. A report on Form 8-K/A was filed with the Securities and Exchange Commission on September 8, 2003 to amend the information in our report on Form 8-K filed May 2, 2003. A report on Form 8-K was filed with the Securities and Exchange Commission on October 28, 2003 to furnish information included in our press release of the same date clarifying certain published reports. A report on Form 8-K was filed with the Securities and Exchange Commission on October 31, 2003 to furnish information included in our press release on earnings for the third quarter of 2003. 29 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 10, 2003 /s/ Larry E. Krieg ------------------------------------ Larry E. Krieg Controller (Chief Accounting Officer) 30 EXHIBIT INDEX (a) Exhibits Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 filed by the following officers: 31.1 Filed by Luis Marin, President and Chief Executive Officer. 31.2 Filed by Eddie R. Humphrey, Chief Financial Officer. Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code as to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003 filed by the following officers: 32.1 Filed by Luis Marin, President and Chief Executive Officer. 32.2 Filed by Eddie R. Humphrey, Chief Financial Officer. 31

EXHIBIT NUMBER DESCRIPTION ------- ----------- 31.1 Filed by Luis Marin, President and Chief Executive Officer. 31.2 Filed by Eddie R. Humphrey, Chief Financial Officer. 32.1 Filed by Luis Marin, President and Chief Executive Officer. 32.2 Filed by Eddie R. Humphrey, Chief Financial Officer.

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