10-Q 1 h25354e10vq.txt CITGO PETROLEUM CORPORATION - MARCH 31, 2005 ================================================================================ 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 MARCH 31, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ COMMISSION FILE NUMBER 1-14380 CITGO PETROLEUM CORPORATION ----------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 73-1173881 -------- ---------- (State or other jurisdiction of (I. R. S. Employer Identification No.) incorporation or organization) 1293 ELDRIDGE PARKWAY, HOUSTON, TX 77077 -------------------------------------------------- (Address of principal executive office) (Zip Code) (832) 486-4000 -------------- (Registrant's telephone number, including area code) N/A ------------------------------------------------------------ (Former name or former address if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Act): Yes [ ] No [X] Indicate 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 April 30, 2005) ================================================================================ CITGO PETROLEUM CORPORATION QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 TABLE OF CONTENTS

PAGE FACTORS AFFECTING FORWARD LOOKING STATEMENTS..................................................... 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - ~~September~~March 3031, ~~2004~~2005 and December 31, ~~2003~~2004.................................................................... 2 Condensed Consolidated Statements of Income and Comprehensive Income - Three ~~and Nine~~-Month Periods Ended ~~September~~March 3031, ~~2004~~2005 and ~~2003~~2004.................................... 3 Condensed Consolidated Statement of Shareholder's Equity - ~~Nine~~Three-Month Period Ended ~~September~~March 3031, ~~2004~~2005................................................................. 4 Condensed Consolidated Statements of Cash Flows - ~~Nine~~Three-Month Periods Ended ~~September~~March 3031, ~~2004~~2005 and ~~2003~~2004.............................................................. 5 Notes to the Condensed Consolidated Financial Statements............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 1819 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 2526 Item 4. Controls and Procedures.............................................................. 3031 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................................... 3132 Item 6. Exhibits............................................................................. 3132 SIGNATURES....................................................................................... 3233

FACTORS AFFECTING FORWARD LOOKING STATEMENTS Except for the historical information contained in this Report, certain of the matters discussed in this Report may be deemed to be "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Specifically, all statements under the caption "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" pertaining to capital expenditures and investments related to environmental compliance, strategic planning, purchasing patterns of refined products and capital resources available to CITGO Petroleum Corporation ("CITGO") are forward looking statements. Words such as "anticipate," "estimate," "expect," "project," "believe" and similar expressions generally identify a forward-looking statement. We caution readers that these forward looking statements are subject to known and unknown risks and uncertainties that may cause actual results to differ materially from the results that are projected, expressed or implied. Some of those risks and uncertainties include: - the availability and cost of crude oil, feedstocks, blending components and refined products, which can affect our ability to operate our refineries and our costs; - accidents, interruptions in transportation, inclement weather and other events that cause unscheduled shutdowns or otherwise adversely affect our refineries, pipelines or equipment, or those of our suppliers or customers; - prices or demand for CITGO products, which are influenced by general economic activity, weather patterns (including seasonal fluctuations), prices of alternative fuels, energy conservation efforts and actions by competitors; - environmental and other regulatory requirements, which affect the content of our products and our operations, operating costs and capital expenditure requirements; - costs and uncertainties associated with technological change and implementation; - inflation; and - continued access to capital markets and commercial bank financing on favorable terms, which can affect our ability to finance capital improvements, our costs and our flexibility. CITGO purchases approximately 40% of its crude oil requirements from Petroleos de Venezuela, S.A., the national oil company of the Bolivarian Republic of Venezuela and CITGO's ultimate parent corporation, under long-term supply agreements. See Note 9 of the Notes to the Condensed Consolidated Financial Statements for additional information. Readers are cautioned not to place undue reliance on these forward looking statements, which apply only as of the date of this Report. CITGO disclaims any duty to publicly release any revision to these forward looking statements to reflect events or circumstances after the date of this Report. 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CITGO PETROLEUM CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)

~~SEPTEMBER~~MARCH 3031, 2005 DECEMBER 31, ~~2004 2003~~ (UNAUDITED) 2004 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ ~~469~~244,~~954~~122 $ ~~202~~23,~~008~~033 Accounts receivable, net 1,~~440~~623,~~053~~559 1,~~060~~292,~~333~~751 Due from affiliates ~~109~~168,~~532~~454 71106,~~336~~514 Inventories 1,~~001~~103,~~353~~717 1,~~017~~165,~~613~~660 Prepaid expenses and other 4844,~~875~~087 2877,~~003~~696 ------------ ------------ Total current assets 3,~~069~~183,~~767~~939 2,~~379~~665,~~293~~654 PROPERTY, PLANT AND EQUIPMENT - Net 34,~~960~~032,~~810~~360 34,~~907~~038,~~203~~505 RESTRICTED CASH 2,~~310~~021 62,~~886~~315 INVESTMENTS IN AFFILIATES ~~580~~573,~~886~~928 ~~647~~580,~~649~~647 OTHER ASSETS ~~356~~354,~~874~~035 ~~332~~356,~~462~~551 ------------ ------------ $ 78,~~970~~146,~~647~~283 $ 7,~~273~~643,~~493~~672 ============ ============ LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable $ ~~758~~1,~~800~~079,395 $ ~~766~~888,~~331~~030 Payables to affiliates ~~722~~830,~~001~~541 ~~486~~674,~~058~~997 Taxes other than income ~~238~~291,~~798~~706 ~~173~~290,~~932~~456 Other ~~380~~319,~~698~~163 ~~255~~251,~~953~~451 Current portion of long-term debt 11,364 3111,364 Current portion of capital lease obligation 34,~~403~~192 24,~~336~~404 ------------ ------------ Total current liabilities 2,~~115~~536,~~064~~361 12,~~715~~120,~~974~~702 LONG-TERM DEBT 1,~~279~~120,~~244~~597 1,~~442~~120,~~100~~527 CAPITAL LEASE OBLIGATION 4643,~~285~~562 2543,~~969~~755 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS ~~349~~369,~~868~~201 ~~319~~359,~~911~~707 OTHER NONCURRENT LIABILITIES ~~315~~331,~~730~~197 ~~308~~337,~~248~~250 DEFERRED INCOME TAXES ~~931~~910,~~280~~963 ~~959~~939,~~807~~299 COMMITMENTS AND CONTINGENCIES (Note 8) SHAREHOLDER'S EQUITY: Common stock - $1.00 par value, 1,000 shares authorized, issued and outstanding 1 1 Additional capital 1,659,698 1,659,698 Retained earnings 1,~~293~~200,~~403~~143 ~~863~~1,~~093~~088,096 Accumulated other comprehensive loss (1925,~~926~~440) (2125,~~308~~363) ------------ ------------ Total shareholder's equity 2,~~933~~834,~~176~~402 2,~~501~~722,~~484~~432 ------------ ------------ $ 78,~~970~~146,~~647~~283 $ 7,~~273~~643,~~493~~672 ============ ============

See notes to condensed consolidated financial statements. 2 CITGO PETROLEUM CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT FOR SUPPLEMENTAL INFORMATION)

THREE MONTHS ~~NINE MONTHS~~ ENDED ~~SEPTEMBER~~MARCH 3031, ~~ENDED~~2005 ~~SEPTEMBER 30, -------------------------- ------------------------~~ 2004 ~~2003 2004 2003~~ ----------- ------------ ~~----------- -----------~~ REVENUES: Net sales (1) $ 8,~~749~~486,~~338~~872 $ 6,~~430~~579,~~568~~719 ~~$23,292,869 $18,595,453~~ Sales to affiliates ~~129~~103,~~952~~397 7175,~~763~~510 ~~306,832 303,627~~ ----------- ------------ ~~----------- -----------~~ 8,~~879~~590,~~290~~269 6,~~502~~655,~~331~~229 ~~23,599,701 18,899,080~~ Equity in earnings of affiliates 7152,~~036~~223 3546,~~398~~032 ~~166,229 79,973 Insurance recoveries - 1,863 - 146,165~~ Other income (expense) - net 19,~~560~~523 ~~1,208~~(322) ~~2,135 16,899~~ ----------- ------------ ~~----------- -----------~~ 8,~~951~~652,~~886~~015 6,~~540~~700,~~800~~939 ~~23,768,065 19,142,117~~ COST OF SALES AND EXPENSES: Cost of sales and operating expenses (including purchases of $3,~~554~~537,~~449,~~831 ~~$2,450,149, $9,201,366,~~ and $62,~~680~~515,~~122~~917 from affiliates) (1) 8,~~532~~383,~~015~~051 6,~~267~~533,~~004~~317 ~~22,792,607 18,284,027~~ Selling, general and administrative expenses 7879,~~165~~707 8071,~~788~~097 ~~218,813 218,115~~ Interest expense, excluding capital lease 2817,~~493~~075 31,~~264~~537 ~~98,736 87,124~~ Capital lease interest charge ~~955~~ 1,~~011~~118 ~~2,481~~753 ~~3,806~~ ----------- ------------ ~~----------- -----------~~ 8,~~639~~480,~~628~~951 6,~~380~~636,~~067~~704 ~~23,112,637 18,593,072~~ ----------- ------------ ~~----------- -----------~~ INCOME BEFORE INCOME TAXES ~~312~~171,~~258~~064 ~~160~~64,~~733~~235 ~~655,428 549,045~~ INCOME TAXES ~~107~~59,~~248~~017 5722,~~864~~064 ~~225,118 197,656~~ ----------- ------------ ~~----------- -----------~~ NET INCOME ~~205~~112,~~010~~047 ~~102~~42,~~869~~171 ~~430,310 351,389~~ ----------- ------------ ~~----------- -----------~~ OTHER COMPREHENSIVE ~~INCOME~~ (LOSS) INCOME: Cash flow hedges: Reclassification adjustment for derivative losses included in net income, net of related income taxes of $~~38,~~28 ~~$39, $123~~ and $~~127~~44 7952 7078 ~~236 225~~ Foreign currency translation (loss) gain, net of related income taxes of $(569), ~~$(83), $375~~ and $~~591~~451 (11129) ~~(147)~~802 ~~718 1,050 Minimum pension liability adjustment, net of deferred taxes of $241~~ - - ~~428~~ - --------~~---~~ ------------ ~~----------- -----------~~ OTHER COMPREHENSIVE ~~INCOME~~ (LOSS) 68INCOME (77) ~~1,382~~880 ~~1,275~~ ----------- ------------ ~~----------- -----------~~ COMPREHENSIVE INCOME $ ~~205~~111,~~078~~970 $ ~~102~~43,~~792~~051 =========== =========== SUPPLEMENTAL INFORMATION (millions of dollars) (1) Includes amounts related to buy/sell arrangements: Net sales $ ~~431,692~~881.6 $ ~~352,664~~813.2 =========== ============ Cost of sales and operating expenses $ 952.2 $ 896.9 =========== ===========

See notes to condensed consolidated financial statements. 3 CITGO PETROLEUM CORPORATION CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED) (DOLLARS AND SHARES IN THOUSANDS)

ACCUMULATED COMMON STOCK OTHER ----------------- ADDITIONAL RETAINED COMPREHENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) TOTAL ------ ------ ----------- ----------- ------------- ----------- BALANCE, DECEMBER 31, ~~2003~~2004 1 $ 1 $ 1,659,698 $ ~~863~~1,~~093~~088,096 $ (2125,~~308~~363) $ 2,~~501~~722,~~484~~432 Net income - - - ~~430~~112,~~310~~047 - ~~430~~112,~~310~~047 Other comprehensive income (loss) - - - - ~~1,382~~(77) ~~1,382~~(77) -- ------ ----------- ----------- ------------- ----------- BALANCE, ~~SEPTEMBER~~MARCH 3031, ~~2004~~2005 1 $ 1 $ 1,659,698 $ 1,~~293~~200,~~403~~143 $ (1925,~~926~~440) $ 2,~~933~~834,~~176~~402 == ====== =========== =========== ============= ===========

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

~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER~~MARCH 3031, ----------------------- 2005 2004 ~~2003~~ --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ ~~430~~112,~~310~~047 $ ~~351~~42,~~389~~171 Depreciation and amortization ~~270~~95,~~220~~516 ~~245~~86,~~397~~696 Other adjustments to reconcile net income to net cash provided by operating activities 8821,~~872~~385 ~~180~~26,~~203~~055 Changes in operating assets and liabilities ~~(92~~120,~~425)~~100 6954,~~373~~313 --------- --------- Net cash provided by operating activities ~~696~~349,~~977~~048 ~~846~~209,~~362~~235 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (~~226~~81,~~549~~665) (~~315~~67,~~105~~260) Proceeds from sales of property, plant and equipment ~~539~~13 ~~3,845~~55 Decrease (increase) in restricted cash ~~4,576~~294 (~~1,162~~5) Investments in LYONDELL-CITGO Refining LP (1918,~~511~~703) (176,~~083~~023) Investments in and advances to other affiliates - (1,~~554~~553) ~~(2,537)~~ --------- --------- Net cash used in investing activities (~~242~~100,~~499~~061) (~~332~~74,~~042~~786) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from senior notes due 2011 - 546,590 (Payment of) proceeds from senior secured term loan (200,000) 200,000 Net repayments of revolving bank loans - (279,300) Repurchase of senior notes due 2006 - (47,500) Payments on master shelf agreement senior notes - (20,000) ~~(50,000)~~ Proceeds from ~~(payments on)~~ tax-exempt bonds 61- 11,800 ~~(126,050)~~ Payments on ~~taxable bonds (25,000) (90,000) Payments on~~ loans from affiliates - (3926,~~000~~100) - Payments of capital lease obligations (~~2,604~~405) (~~11,860~~784) ~~Dividend~~Financing ~~paid~~fees -and ~~(500,000)~~debt ~~Debt~~ issuance costs (~~728~~1,393) (~~19,136~~461) --------- --------- Net cash used in financing activities (~~186~~27,~~532~~898) (~~416~~9,~~256~~445) --------- --------- INCREASE IN CASH AND CASH EQUIVALENTS ~~267~~221,~~946~~089 98125,~~064~~004 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,033 202,008 ~~33,025~~ --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ ~~469~~244,~~954~~122 $ ~~131~~327,~~089~~012 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of amounts capitalized $ ~~111~~10,~~643~~697 $ 6641,~~578~~538 ========= ========= Income taxes (net of refunds of $~~231~~488 in ~~2004 and $47,769 in 2003~~2005) $ ~~137~~2,~~554~~570 $ 451,~~305~~759 ========= =========

See notes to condensed consolidated financial statements. 5 CITGO PETROLEUM CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) THREE-MONTHS ENDED MARCH 31, 2005 AND 2004 1. BASIS OF PRESENTATION CITGO Petroleum Corporation ("CITGO" or the "Company") and its subsidiaries are engaged in the refining, marketing and transportation of petroleum products including gasoline, diesel fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes, mainly within the continental United States east of the Rocky Mountains. The Company does not own any crude oil reserves or crude oil exploration or production facilities. It operates as a single segment. It is an indirect wholly owned subsidiary of Petroleos de Venezuela, S.A. ("PDVSA", which may also be used herein to refer to one or more of its subsidiaries), the national oil company of the Bolivarian Republic of Venezuela. The financial information for CITGO subsequent to December 31, 2004 and with respect to the interim three- month period ended March 31, 2005 and 2004, is unaudited. In management's opinion, such interim information contains all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of such periods, as well as the write-off of costs associated with the deferral of a capital project. The financial information for the three-month period ended March 31, 2004 has been adjusted to retrospectively reflect the effect of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Reform"). See Note 10 for additional information. The results of operations for the three-month period ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year. Reference is made to CITGO's Annual Report for the fiscal year ended December 31, 2004 on Form 10-K. 2. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 defines variable interest entities and how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. In December 2003, the FASB issued a revision of FIN 46 (FIN 46R), primarily to clarify the required accounting for investments in variable interest entities. This standard replaces FIN 46. For CITGO, which meets the definition of a nonpublic enterprise for purposes of applying FIN 46R, application is required immediately for variable interest entities created after December 31, 2003 and for variable interest entities in which an interest is acquired after that date, and to all entities that are subject to FIN 46R by January 1, 2005. The interpretation requires certain minimum disclosures with respect to variable interest entities in which an enterprise holds significant variable interest but which it does not consolidate. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company's adoption of FIN 46R, effective January 1, 2005, had no impact on the financial position or results of operations for the quarter ended March 31, 2005. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the application of FASB Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). FIN 47 clarifies (i) that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated; and (ii) when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application for interim financial information is 6 permitted but is not required. The Company has not determined the impact on its financial position or results of operations that may result from the application of FIN 47. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP FAS 109-1"). The American Jobs Creation Act introduces a special 9% tax deduction on qualified production activities. FSP FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with FASB Statement No. 109. The Company does not expect the adoption of this new tax provision to have a material impact on its consolidated financial position, results of operations or cash flows. 3. ACCOUNTS RECEIVABLE The Company has a limited purpose consolidated subsidiary, CITGO Funding Company L.L.C. ("CITGO Funding"), which established a non-recourse agreement to sell an undivided interest in specified trade accounts receivables ("pool") to independent third parties. Under the terms of the agreement, new receivables are added to the pool as collections (administered by CITGO) reduce previously sold receivables. CITGO pays specified fees related to its sale of receivables under the program. The outstanding invested amount of the interest sold to third-parties at any one time under the trade accounts receivable sales agreement is limited to a maximum of $350 million. As of March 31, 2005, $504 million of CITGO's accounts receivable comprised the designated pool of trade receivables owned by CITGO Funding. As of March 31, 2005, no outstanding investment in the receivables in the designated pool had been sold to the third party and the entire amount of the receivables was retained by CITGO Funding. 4. INVENTORIES Inventories, primarily at LIFO, consist of the following:

~~SEPTEMBER~~MARCH 3031, 2005 DECEMBER 31, ~~2004 2003~~ (UNAUDITED) 2004 ------------- ------------ (~~000S~~000s OMITTED) Refined products $ ~~746~~704,~~535~~469 $ ~~686~~787,~~483~~795 Crude oil ~~162~~305,~~775~~206 ~~239~~284,~~974~~301 Materials and supplies 9294,~~043~~042 9193,~~156~~564 ---------- ---------- $1,~~001~~103,~~353~~717 $1,~~017~~165,~~613~~660 ========== ==========

5. RESTRICTED CASH CITGO issued $39 million of tax-exempt environmental facilities revenue bonds in May 2003. The proceeds from these bonds are being used on qualified projects at the Corpus Christi refinery. Restricted cash of approximately $2 million at March 31, 2005 represents highly liquid investments held in trust accounts in accordance with the bond agreement. Funds may be released solely to finance the qualified capital expenditures as defined in the related bond agreement. 7 6. LONG-TERM DEBT AND FINANCING ARRANGEMENTS Long-term debt consists of the following:

~~SEPTEMBER~~MARCH 3031, 2005 DECEMBER 31, ~~2004 2003~~ (UNAUDITED) 2004 ------------ ------------ (~~000S~~000s OMITTED) Senior ~~Secured~~Notes, ~~Term~~$250 ~~Loan~~million face amount, due ~~2006~~2011 with ~~variable~~ interest rate of 6% $ -248,360 $ ~~200~~248,~~000~~299 Senior Notes, $150 million face amount, due 2006 with interest rate of 7-7/8% 149,~~964~~975 149,~~946~~969 Senior Notes, $~~550~~6.6 million face amount, due 2011 with interest rate of 11-3/8% ~~547~~6,~~272~~615 ~~546~~6,~~949~~613 Private Placement Senior Notes, due ~~2004~~2005 to 2006 with an interest rate of 9.30% 3422,~~091~~727 3422,~~091~~727 Master Shelf Agreement Senior Notes, due 2006 to 2009 with interest rates from 7.17% to 8.94% 165,000 ~~185~~165,000 Tax-Exempt Bonds, due 2007 to ~~2031~~2033 with variable and fixed interest rates ~~394~~459,~~281~~284 ~~332~~459,~~478~~283 Taxable Bonds, due 2026 to 2028 with variable interest rate -80,000 2580,000 ----------- ----------- 1,~~290~~131,~~608~~961 1,~~473~~131,~~464~~891 Current portion of long-term debt (11,364) (3111,364) ----------- ----------- $ 1,~~279~~120,~~244~~597 $ 1,~~442~~120,~~100~~527 =========== ===========

CITGO has a $260 million, three-year, unsecured revolving credit facility maturing in December 2005. There was no outstanding balance under this credit facility at March 31, 2005. In October 2004, CITGO issued $250 million of 6% unsecured senior notes due October 15, 2011. In connection with this transaction, CITGO repurchased approximately $543 million principal amount of its 11-3/8% senior notes due 2011 as part of a tender offer for such notes. After the tender offer for the 11-3/8% notes in October 2004, approximately $6.6 million remain outstanding at March 31, 2005. In April 1996, CITGO filed a registration statement with the Securities and Exchange Commission relating to the shelf registration of $600 million of debt securities. In May 1996, CITGO issued $200 million aggregate principal amount of 7-7/8% unsecured senior notes due 2006. Due to CITGO's credit ratings, the shelf registration statement is not presently available. Approximately $362 million of the outstanding taxable and tax-exempt bonds are supported by letters of credit issued by various banks. Our various debt instruments require maintenance of a specified minimum net worth and impose restrictions on our ability to: incur additional debt unless we meet specified interest coverage and debt to capitalization ratios; place liens on our property, subject to specified exceptions; sell assets, subject to specified exceptions; make restricted payments, including dividends, repurchases of capital stock and specified investments; and 8 merge, consolidate or transfer assets. Various of our debt agreements, including the agreements governing the Private Placement Senior Notes and the Master Shelf Agreement Senior Notes and the reimbursement agreements relating to various letters of credit that provide liquidity support for our tax-exempt bonds, contain provisions requiring that we equally and ratably secure those instruments if we issue secured debt other than as permitted by those instruments. CITGO is in compliance with its covenants under its debt financing arrangements at March 31, 2005. 7. INVESTMENT IN LYONDELL-CITGO REFINING LP LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 thousand barrels per day refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%) and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery processes heavy crude oil supplied by PDVSA under a long-term supply contract that expires in 2017. CITGO purchases substantially all of the gasoline, diesel and jet fuel produced at the refinery under a long-term contract. As of March 31, 2005, CITGO has a note receivable from LYONDELL-CITGO of $35 million. The note bears interest at market rates, which was approximately 2.7 percent at March 31, 2005. Principal and interest are due January 1, 2008. Accordingly, the note and related accrued interest are included in the balance sheet caption other assets, noncurrent, in the accompanying consolidated balance sheets. 9 CITGO accounts for its investment in LYONDELL-CITGO using the equity method of accounting and records its share of the net earnings of LYONDELL-CITGO based on allocations of income agreed to by the Owners which differ from participation interests. Cash distributions are allocated to the Owners based on participation interest. Information on CITGO's investment in LYONDELL-CITGO follows:

(000s omitted) ~~September~~March 3031, December 31, 2005 2004 ~~2003~~ ------------- ------------ (Unaudited) Carrying value of investment $ ~~392~~402,~~831~~657 $ ~~454~~409,~~679~~782 ~~Notes~~Note receivable 35,278 35,278 Participation interest 41% 41% Summary of LYONDELL-CITGO's financial position: Current assets $ ~~409~~515,000 $ ~~316~~359,000 Non current assets 1,~~271~~305,000 1,~~321~~288,000 Current liabilities ~~662~~845,000 ~~386~~588,000 Noncurrent liabilities ~~814~~819,000 ~~828~~819,000 Partners' capital ~~204~~156,000 ~~423~~240,000

~~Nine~~Three Months Ended ~~September~~March 3031, --------------------------- 2005 2004 ~~2003~~ ---------- ---------- (Unaudited) Equity in net income $ ~~133~~42,~~910~~947 $ 5635,~~552~~237 Cash distribution received ~~215~~68,~~944~~775 ~~150~~44,~~904~~550 Summary of LYONDELL-CITGO's operating results: Revenue $41,~~038~~535,~~659~~622 $31,~~117~~153,~~794~~538 Gross profit ~~409~~129,~~970~~986 ~~224~~116,~~145~~066 Net income ~~341~~109,~~292~~842 ~~155~~91,~~360~~494

On May 21, 2004, LYONDELL-CITGO closed on a three-year, $550 million credit facility to replace its expiring $520 million credit facility. The new credit facility is comprised of a $450 million senior secured term loan and a $100 million senior secured revolver, both with an interest rate of the London Interbank Offered Rate ("LIBOR") plus 2.5 percent. The facility is secured by substantially all of the assets of LYONDELL-CITGO and contains covenants that require LYONDELL-CITGO to maintain specified financial ratios. In September 2004, LYONDELL-CITGO obtained an amendment to the new facility which reduces the interest rate to LIBOR plus 2 percent and eases certain financial covenants, including the debt to total capitalization ratio. There was no outstanding balance under the working capital revolving credit facility at March 31, 2005. 10 8. COMMITMENTS AND CONTINGENCIES LITIGATION AND INJURY CLAIMS - Various lawsuits and claims arising in the ordinary course of business are pending against CITGO. CITGO records accruals for potential losses when, in management's opinion, such losses are probable and reasonably estimable. If known lawsuits and claims were to be determined in a manner adverse to CITGO, and in amounts greater than CITGO's accruals, then such determinations could have a material adverse effect on CITGO's results of operations in a given reporting period. The most significant lawsuits and claims are discussed below. In September 2002, a Texas court ordered CITGO to pay property owners and their attorneys approximately $6 million based on an alleged settlement of class action property damage claims as a result of alleged air, soil and groundwater contamination from emissions released from CITGO's Corpus Christi, Texas refinery. CITGO has appealed the ruling to the Texas Court of Appeals. CITGO, along with most of the other major oil companies, is a defendant in a number of federal and state lawsuits alleging contamination of private and public water supplies by methyl tertiary butyl ether ("MTBE"), a gasoline additive. In general, the plaintiffs claim that MTBE renders the water not potable. In addition to compensatory and punitive damages, plaintiffs seek injunctive relief to abate the contamination. CITGO intends to defend all of the MTBE lawsuits vigorously. CITGO's MTBE litigation can be divided into two categories -- pre and post-September 30, 2003 litigation. Of the pre-September 30, 2003 cases, CITGO is defending itself in Madison County, Illinois state court and in a New York county state court. As of early October 2004, settlements in principle had been reached in both Madison County, Illinois cases and one of the cases was settled in March 2005. There will be no effect on results of operations because the accrual for these cases was adequate. The post-September 30, 2003 cases were filed after new federal legislation was proposed that would have precluded plaintiffs from filing lawsuits based on the theory that gasoline with MTBE is a defective product. These approximately 72 cases, the majority of which were filed by municipal authorities, were removed to federal court and at the defendants' request consolidated in Multi-District Litigation ("MDL") 1358. On March 16, 2004, the judge in MDL 1358 denied the plaintiffs' motion to remand the cases to state court. Subsequently, the judge denied the plaintiffs' motion to certify her rulings on the remand motion for an interlocutory appeal. It is not possible to estimate the loss or range of loss, if any, related to these cases. In an April 20, 2005 ruling, the judge refused to dismiss most of the plaintiffs' causes of action. In doing so, the judge held that the plaintiffs might be able to prove liability under a commingled product market share liability theory because the plaintiffs could not identify the particular defendants which had manufactured the gasoline that caused the alleged contamination to drinking water supplies. Claims have been made against CITGO in approximately 350 asbestos lawsuits pending in state and federal courts. These cases, most of which involve multiple defendants, are brought by former employees or contractor employees seeking damages for asbestos related illnesses allegedly caused, at least in part, from exposure at refineries owned or operated by CITGO in Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois. In many of these cases, the plaintiffs' alleged exposure occurred over a period of years extending back to a time before CITGO owned or operated the premises at issue. CITGO does not believe that the resolution of these cases will have a material adverse effect on its financial condition or results of operations. In 2001, Miami-Dade County sued seventeen defendants for the costs of remediation of pollution rising from jet fuel operations during the past decades at the Miami International Airport ("the Airport"). Although not a defendant in this case, CITGO along with approximately 250 other former jet fuel operators at the Airport has received a payment demand from Miami-Dade County for the remediation costs for alleged pollution occurring while CITGO had jet fuel operations at the Airport. CITGO is exploring settlement discussions with Miami-Dade County. CITGO is contesting the amount of damages that Miami-Dade County claims are attributed to CITGO's jet fuel operations at the Airport and will vigorously defend itself should no settlement 11 be reached. CITGO does not believe that the resolution of this matter will have a material adverse effect on its financial condition or results of operations. On April 19, 2005, CITGO received a claim from Dixie Pipeline Company ("Dixie") that CITGO may have injected contaminated propane into Dixie's pipeline system. Dixie and CITGO are cooperating to investigate the facts. CITGO does not have sufficient information to determine liability, if any, or to estimate the loss or range of loss, if any, related to this claim. At March 31, 2005, CITGO's balance sheet included an accrual for lawsuits and claims of $18 million compared with $24 million at December 31, 2004. Unrelated to the reduction in the accrual, CITGO estimates that an additional loss of $35 million is reasonably possible in connection with such lawsuits and claims. ENVIRONMENTAL COMPLIANCE AND REMEDIATION - CITGO is subject to the federal Clean Air Act ("CAA"), which includes the New Source Review ("NSR") program as well as the Title V air permitting program; the federal Clean Water Act, which includes the National Pollution Discharge Elimination System program; the Toxic Substances Control Act; and the federal Resource Conservation and Recovery Act and their equivalent state programs. CITGO believes it is in material compliance with the requirements of all of these environmental regulatory programs. CITGO does not have any material Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") liability because the former owners of many of CITGO's assets have by explicit contractual language assumed all or the material portion of CERCLA obligations related to those assets. This includes the Lake Charles refinery and the Lemont refinery. The U.S. refining industry is required to comply with increasingly stringent product specifications under the 1990 Clean Air Act Amendments for reformulated gasoline and low sulfur gasoline and diesel fuel that require additional capital and operating expenditures, and alters significantly the U.S. refining industry and the return realized on refinery investments. In addition, CITGO is subject to various other federal, state and local environmental laws and regulations that may require CITGO to take additional compliance actions and also actions to remediate the effects on the environment of prior disposal or release of petroleum, hazardous substances and other waste and/or pay for natural resource damages. Maintaining compliance with environmental laws and regulations could require significant capital expenditures and additional operating costs. Also, numerous other factors affect CITGO's plans with respect to environmental compliance and related expenditures. CITGO's accounting policy establishes environmental reserves as probable site restoration and remediation obligations become reasonably capable of estimation. Environmental liabilities are not discounted to their present value and are recorded without consideration of potential recoveries from third parties. Subsequent adjustments to estimates, to the extent required, will be made as more refined information becomes available. CITGO believes the amounts provided in its consolidated financial statements, as prescribed by generally accepted accounting principles, are adequate in light of probable and estimable liabilities and obligations. However, there can be no assurance that the actual amounts required to discharge alleged liabilities and obligations and to comply with applicable laws and regulations will not exceed amounts provided for or will not have a material adverse affect on CITGO's consolidated results of operations, financial condition and cash flows. In 1992, CITGO reached an agreement with the Louisiana Department of Environmental Quality ("LDEQ") to cease usage of certain surface impoundments at the Lake Charles refinery by 1994. A mutually acceptable closure plan was filed with the LDEQ in 1993. The remediation commenced in December 1993. CITGO is complying with a June 2002 LDEQ administrative order about the development and implementation of a corrective action or closure plan. CITGO and the former owner of the refinery are participating in the closure and sharing the related costs based on estimated contributions of waste and ownership periods. 12 CITGO's Corpus Christi, Texas refinery and current and former employees are being investigated by state and federal agencies for alleged criminal violations of federal environmental statutes and regulations, including the CAA and the Migratory Bird Act. CITGO is cooperating with the investigation. CITGO believes that it has defenses to any such charges. At this time, CITGO cannot predict the outcome of or the amount or range of any potential loss that would ensue from any such charges. In June 1999, CITGO and numerous other industrial companies received notice from the United States Environmental Protection Agency ("U.S. EPA") that the U.S. EPA believes these companies have contributed to contamination in the Calcasieu Estuary, near Lake Charles, Louisiana and are potentially responsible parties ("PRPs") under CERCLA. The U.S. EPA made a demand for payment of its past investigation costs from CITGO and other PRPs and since 1999 has been conducting a remedial investigation/feasibility study ("RI/FS") under its CERCLA authority. While CITGO disagrees with many of the U.S. EPA's earlier allegations and conclusions, CITGO and other industrial companies signed in December 2003, a Cooperative Agreement with the LDEQ on issues relative to the Bayou D'Inde tributary section of the Calcasieu Estuary, and the companies are proceeding with a Feasibility Study Work Plan. CITGO will continue to deal separately with the LDEQ on issues relative to its refinery operations on another section of the Calcasieu Estuary. The Company still intends to contest this matter if necessary. In January and July 2001, CITGO received notices of violation ("NOVs") from the U.S. EPA alleging violations of the CAA. The NOVs are an outgrowth of an industry-wide and multi-industry U.S. EPA enforcement initiative alleging that many refineries, electric utilities and other industrial sources modified air emission sources. Without admitting any violation CITGO reached a settlement with the United States and the states of Louisiana, Illinois, New Jersey, and Georgia. A Consent Decree was approved in the District court for the Southern District of Texas in January 2005. The Consent Decree requires the implementation of control equipment at CITGO's refineries and a Supplemental Environment Project at CITGO's Corpus Christi, Texas refinery. CITGO settled for $325 million which included a civil penalty of $3.6 million, split between the U.S. EPA and the states. CITGO accrued for the civil penalty during 2003 and paid it in February 2005. The capital costs will be incurred over a period of time, primarily between 2004 and 2009. 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 CITGO's Lemont, Illinois refinery. This matter has been consolidated with the matters described in the previous paragraph. In June 2002, a Consolidated Compliance Order and Notice of Potential Penalty was issued by the LDEQ alleging violations of the Louisiana air quality regulations at CITGO's Lake Charles, Louisiana refinery during 2001. The majority of the alleged violations related to the leak detection and repair program. This matter has been consolidated with the matters described in the second preceding paragraph. In October 2004, the New Jersey Natural Lands Trust voted to reject the donation by CITGO of a conservation easement covering the 365 acre Petty's Island, which is located in the Delaware River in Pennsauken, New Jersey and owned by CITGO. Petty's Island contains a CITGO closed petroleum terminal and other industrial facilities, but it is also the habitat for the bald eagle and other wildlife. The City of Pennsauken, through a private developer, wants to condemn Petty's Island through eminent domain and to redevelop Petty's Island into residential and commercial uses. The granting of the conservation easement would have mitigated the amount of remediation that CITGO would have to perform on Petty's Island. The ultimate outcome cannot be determined at this time. At March 31, 2005, CITGO's balance sheet included an environmental accrual of $66 million compared with $65 million at December 31, 2004. Results of operations reflect an increase in the accrual during 2005 due primarily to a revision of the Company's estimated share of costs related to two sites indicating higher costs offset in part, by spending on environmental projects. CITGO estimates that an additional loss of $30 million is reasonably possible in connection with environmental matters. 13 Various regulatory authorities have the right to conduct, and from time to time do conduct, environmental compliance audits or inspections of CITGO and its subsidiaries' facilities and operations. Those compliance audits or inspections have the potential to reveal matters that those authorities believe represent non-compliance in one or more respects with regulatory requirements and for which those authorities may seek corrective actions and/or penalties in an administrative or judicial proceeding. Based upon current information, CITGO does not believe that any such prior compliance audit or inspection or any resulting proceeding will have a material adverse effect on its future business and operating results, other than matters described above. Conditions which require additional expenditures may exist with respect to CITGO's various sites including, but not limited to, its operating refinery complexes, former refinery sites, 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 March 31, 2005, CITGO's petroleum commodity derivatives included exchange traded futures contracts, forward purchase and sale contracts, exchange traded and over-the-counter options and over-the-counter swaps. At March 31, 2005, the balance sheet captions prepaid expenses and other current assets and other current liabilities include $11 million and $20 million, respectively, related to the fair values of open commodity derivatives. GUARANTEES - As of March 31, 2005, the Company has guaranteed the debt of others in a variety of circumstances including letters of credit issued for an affiliate, bank debt of an equity investment, bank debt of customers, 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 ~~2004-~~2005 - 2006 Bank debt Equity investment 5,500 none Customers 1,~~729~~262 2006 Financing debt of customers Customer equipment acquisition ~~389~~191 ~~2004~~2005 - 2007 Equipment acquisition - NISCO 109,~~047~~038 2008 ------- Total $5048,~~646~~972 =======

In each case, if the debtor fails to meet its obligation, CITGO could be obligated to make the required payment. The Company has not recorded any amounts on the Company's balance sheet relating to these guarantees. In the event of debtor default on the letters of credit, CITGO has been indemnified by PDV Holding, Inc., the direct parent of PDV America, which is CITGO's direct parent. In the event of debtor default on the equity investment bank debt, CITGO has no recourse. In the event of debtor default on customer bank debt, CITGO generally has recourse to personal guarantees from principals or liens on property. In the event of debtor default on financing debt incurred by 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. 14 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. 9. RELATED PARTY TRANSACTIONS CITGO purchases approximately 40% of the crude oil processed in its refineries from subsidiaries of PDVSA under long-term supply agreements. These supply agreements extend through the year 2006 for the Lake Charles refinery, 2010 for the Paulsboro refinery, 2012 for the Corpus Christi refinery and 2013 for the Savannah refinery. CITGO and PDVSA are evaluating possible changes to certain provisions and conditions of these supply agreements, including the pricing mechanisms, volumes and term. If PDVSA and CITGO determine to pursue these changes and are able to successfully negotiate any related amendments to the supply agreements, the effectiveness of these amendments may require the consent of some of the holders of CITGO's outstanding debt. These crude supply agreements contain force majeure provisions that excuse the performance by either party of its obligations under the agreement under specified circumstances. Three affiliates entered into agreements to advance excess cash to the Company from time to time under demand notes for amounts of up to a maximum of $10 million with PDV Texas, Inc. ("PDV Texas"), $30 million with PDV America and $10 million with PDV Holding. The notes bear interest at rates equivalent to 30-day LIBOR plus 0.875% payable quarterly. At March 31, 2005, there was no outstanding balance on these notes. At December 31, 2004, the amounts outstanding on these notes were $7 million, $14 million and $5 million from PDV Texas, PDV America and PDV Holding, respectively. 15 10. EMPLOYEE BENEFIT PLANS COMPONENTS OF NET PERIODIC BENEFIT COST For the three months ended March 31:

PENSION BENEFITS OTHER BENEFITS ------------------------- ------------------------- 2005 2004 ~~2003~~2005 2004 ~~2003~~ (~~000S~~000s OMITTED) Service cost $ 5,~~743~~920 $ 45,~~975~~743 $ 2,~~285~~359 $ 2,~~200~~285 Interest cost 78,~~954~~303 7,~~332~~953 5,~~767~~922 5,~~556~~767 Expected return on plan assets (78,~~285~~124) (67,~~563~~286) (18) (18) Amortization of Transition Asset (125) (3811) - - Amortization of prior service cost (192) (193) (~~192~~124) (130) - Amortization of net loss 1,540 818 ~~806~~4,536 4,911 ~~12,537~~ ---------- ---------- ---------- ---------- Net periodic benefit cost $ 7,~~025~~442 $ 67,~~320~~024 $ 12,~~815~~675 $ 2012,~~275~~815 ========== ========== ========== ==========

EFFECT OF RECENT LEGISLATION ON OTHER BENEFITS COST In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("Medicare Reform") was signed into law. Medicare Reform introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a non-taxable federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In May 2004, the FASB Staff issued FASB Staff Position No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003". The Staff Position permits a sponsor to report the effects of Medicare Reform prospectively in the third quarter of 2004 or retrospectively to the measurement date following enactment of the legislation. CITGO has chosen to use the retrospective method to reflect Medicare Reform as of January 1, 2004. The effect of this legislation at that date was to reduce the benefit obligation by approximately $40 million. The service cost and interest cost components of that reduction total approximately $3 million. Under CITGO's accounting policy for recognizing actuarial gains, net periodic benefit cost for the quarter ended March 31, 2004 and the year ended December 31, 2004 was reduced $10 million and $40 million, respectively, related to this actuarial gain. The financial information for the three-month period ended March 31, 2004 has been adjusted to retrospectively reflect the $10 million reduction of benefit costs. EMPLOYER CONTRIBUTIONS CITGO expects to contribute $12 million to its pension plan in 2005. No contributions were made in the quarter ended March 31, 2005. 16 11. CORPORATE HEADQUARTERS RELOCATION In April 2004, CITGO announced its decision to move its corporate headquarters from Tulsa, Oklahoma to Houston, Texas. The transfer of approximately 700 positions from a total of approximately 1,000 positions in Tulsa began in August 2004. At March 31, 2005, approximately 475 positions have been transferred. The relocation is expected to be complete in July 2005. A summary of relocation costs follows

~~PENSION~~Expected ~~BENEFITS~~Amount ~~OTHER~~Cumulative ~~BENEFITS~~Total Incurred Amount Amount 1st Quarter 2005 Incurred -------- ----------- ----- ----------~~----~~ ~~2004 2003 2004 2003~~ (~~000S~~$ ~~OMITTED~~in millions) ~~Service~~Relocation ~~cost~~costs $ ~~17,229~~32 $ ~~14,925~~4 $ ~~6,855~~20 $Severance ~~6,600~~and ~~Interest~~related ~~cost~~costs ~~23,862~~ 21~~,996~~ ~~17,301~~2 ~~16,668~~15 ~~Expected~~Property ~~return~~and onleasehold ~~plan~~improvements ~~assets~~37 (4 21~~,855)~~ ~~(19,689) (54) (54) Amortization of Transition Asset (36) (114)~~ - - ~~Amortization of prior service cost (579) (576) (390)~~ - ~~Amortization of net (gain) loss 2,454 2,418 14,734 37,611~~ -----~~---~~ --------- -------- --~~------~~ ~~Net~~Total ~~periodic benefit cost~~ $ ~~21,075~~90 $ ~~18,960~~10 $ ~~38,446~~56 ~~$ 60,825~~ ======== ========= ======== ==~~======~~

Relocation costs and severance and related costs are included in CITGO's condensed consolidated statement of income and comprehensive income as a component of the caption selling, general and administrative expense. Costs related to property and leasehold improvements are included in CITGO's condensed consolidated balance sheet as a component of the caption property, plant and equipment. An accrual of $2 million related to property, leasehold improvements and relocation costs is included in CITGO's condensed consolidated balance sheet as a component of the caption current liabilities other. 12. OTHER INFORMATION In mid-March 2005, representatives of a special commission of the Venezuelan National Assembly (the "VNA Commission") visited CITGO's Houston, Texas offices for the purpose of interviewing several CITGO employees as part of an inquiry that the VNA Commission had been charged with conducting. CITGO has not received any direct statements from the VNA Commission describing the scope of their inquiry. CITGO understands from the interviewed employees that the questions were directed at the rationale for, and analysis underlying, note financings that CITGO completed in 2003 and 2004, the relocation of its corporate headquarters to Houston, Texas, and several minor transactions. The questions did not identify any unlawful or unrecorded activities, and CITGO is not aware of any such activities. CITGO is cooperating with the VNA Commission. Shortly following the VNA Commission's visit, a CITGO employee sent a memorandum to both CITGO's auditors and the SEC referencing the VNA Commission and other matters. CITGO was not aware of any improper activities, but engaged counsel to investigate the employee's allegations. The report of the independent counsel has been delivered to the Audit Committee of CITGO. The independent counsel investigation did not find any evidence of any acts or omissions that could have resulted in material misstatements in any of CITGO's previously issued financial statements, nor did they find evidence that would bring into question the veracity of representations made by management to CITGO's independent auditors in connection with prior audits of CITGO's financial statements, or in the answers to questionnaires previously submitted by CITGO's managers to its Controller and General Auditor in connection with any prior issuance of financial statements. They did not find any evidence of any other acts or omissions by CITGO in violation of federal securities laws; however, they took note of, but did not address matters that were the subject of, pending internal reviews. These reviews involve payments beginning in 1999, a portion of which were made for the benefit of the Venezuelan Government which owns PDVSA, CITGO's ultimate parent entity. The aggregate amount of such payments is not believed to be significant. CITGO is reviewing those payments as well as their compliance with applicable law. 17 13. CAPITAL PROJECT DEFERRAL The Company periodically reviews investment decisions based on market conditions, availability of supply, and optimization of investments and synergies with other CITGO sites. As the result of such a review, the Company has decided to indefinitely defer a capital project at its Corpus Christi refinery related to production of ultra low sulfur diesel fuel. Accordingly, results for the three months ended March 31, 2005 include, in cost of sales, a charge against income of approximately $29 million to write off the costs incurred to date on the project. Approximately $20 million in work in process assets were removed from net, property, plant and equipment, and approximately $9 million was included in other current liabilities for additional expenses and cancellation charges. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW This discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements included elsewhere in this report. We generated net income of $112 million on total revenue of $8.7 billion in the quarter ended March 31, 2005 compared to net income of $42 million on total revenue of $6.7 billion for the same period last year. (See "Gross margin"). CRITICAL ACCOUNTING POLICIES AND ESTIMATES We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. We direct your attention to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Form 10-K annual report for our fiscal year ended December 31, 2004, for a discussion of the estimates and judgments necessary in our accounting for environmental expenditures, litigation and injury claims, health care costs and pensions. 19 RESULTS OF OPERATIONS

~~Expected~~THREE ~~Amount~~MONTHS ~~Cumulative~~INCREASE ~~Total~~ENDED ~~Incurred~~MARCH ~~Amount~~31, ~~Amount~~(DECREASE) ~~this~~2005 ~~Quarter~~2004 ~~Incurred~~FROM 2004 (DOLLARS IN MILLIONS) --------- --------- --- --------------- (Net sales $ 8,487 $ 6,580 $ 1,907 Sales to affiliates 103 75 28 --------- --------- ---------- 8,590 6,655 1,935 29% --------- --------- ---------- Equity in ~~millions~~earnings of affiliates 52 46 6 Other income (expense), ~~Relocation~~net ~~costs~~10 $- 2710 $--------- 7--------- $---------- 78,652 ~~Severance~~6,701 1,951 29% --------- --------- ---------- Cost of sales and ~~related~~operating ~~costs~~expenses 218,383 36,533 31,850 ~~Property~~Selling, general and ~~infrastructure~~administrative ~~costs~~expenses 3380 71 9 Interest expense, excluding capital lease 17 32 (15) Capital lease interest charge 1 1 - --------- --------- ---------- ~~Total~~8,481 6,637 1,844 28% --------- --------- ---------- Income before income taxes 171 64 107 Income taxes 59 22 37 --------- --------- ---------- Net income $ 81112 $ 1142 $ 1170 167% ========= ========= ========== Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 6.26 $ 6.22 $ 0.04 1% Average CITGO price per gallon of gasoline (2) $ 1.36 $ 1.08 $ 0.28 26% Average CITGO cost per barrel of crude oil (3) $ 42.09 $ 30.73 $ 11.36 37%

(1) The Gulf Coast 3/2/1 crack spread is used as a benchmark for gauging changes in refining industry margins based upon a hypothetical yield from a barrel of crude oil. It is calculated as the value of two-thirds barrel of gasoline plus one-third barrel of distillate minus one barrel of crude (West Texas Intermediate or "WTI"). Heavy crude refiners also evaluate the light/heavy crude spread (WTI minus Maya). The sum of these benchmarks is the heavy crack spread. During the first quarter of 2005, the heavy crack spread was $17.08 per barrel versus $9.45 per barrel during the first quarter of 2004. The values used to calculate the Gulf Coast 3/2/1 crack spread and the heavy crack spread are obtained from Platts using an average of daily prices for the three-month period ended March 31, 2005 and 2004 (excluding weekends and holidays). (2) The average price per gallon of gasoline is based on CITGO gasoline sales revenue divided by CITGO gasoline sales volume. See the "CITGO Sales Revenues and Volumes" table that follows. (3) The average cost per barrel of crude oil is based on CITGO's crude oil cost divided by CITGO refinery crude inputs. See the "CITGO Cost of Sales and Operating Expenses" table that follows. 20 Sales revenues and volumes. Sales increased $1.9 billion, or approximately 29%, in the three-month period ended March 31, 2005 as compared to the same period in 2004. This increase was primarily due to an increase in average sales price of 32%. The following table summarizes the sources of our sales revenues and sales volumes for the three-month periods ended March 31, 2005 and 2004: CITGO SALES REVENUES AND VOLUMES

THREE MONTHS ~~ENDED~~THREE ~~INCREASE NINE~~ MONTHS ENDED ~~INCREASE~~ENDED ~~SEPTEMBER~~MARCH 3031, ~~(DECREASE)~~MARCH ~~SEPTEMBER 30~~31, ~~(DECREASE) 2004 2003 FROM 2003 2004 2003 FROM 2003~~ ---------- --------~~---~~ ---------------- -----~~-------~~ ~~----------~~2005 ~~---------------~~2004 ~~(DOLLARS~~2005 IN2004 ~~MILLIONS) Net sales $ 8,749 $ 6,431 $ 2,318 $ 23,293 $ 18,595 $ 4,698 Sales to affiliates 130 72 58 307 304 3~~ -------~~---~~ -------~~----~~ --------~~----~~ ---------~~---~~ ~~----------~~($ ~~--------- 8,879 6,503 2,376 37% 23,600 18,899 4,701 25% ---------- ----------- ------------ ------------ ---------- --------- Equity~~ in ~~earnings of affiliates 71 35 36 166 80 86 Insurance recoveries - 2 (2~~millions) ~~- 146~~ (~~146)~~Gallons ~~Other~~in ~~income (expense~~millions), ~~net~~Gasoline 2$ ~~1 1 2 17 (15) ---------- ----------- ------------ ------------ ---------- --------- 8~~4,~~952~~327 ~~6,541~~$ 23,~~411~~724 ~~37% 23~~3,~~768~~181 193,~~142~~439 ~~4,626~~Jet ~~24%~~fuel ~~----------~~855 ~~-----------~~588 ~~------------~~607 ~~------------~~598 ~~----------~~Diesel/#2 ~~---------~~fuel ~~Cost of sales and operating expenses 8,532 6,267~~ 2,~~265~~118 221,~~793~~408 181,~~284~~524 ~~4,509 Selling, general and administrative expense 78 81 (3) 219 218~~ 1 ~~Interest expense~~,497 ~~excluding~~Asphalt ~~capital~~119 ~~lease~~105 29166 31165 ~~(2)~~Petrochemicals 99and 87industrial 12products ~~Capital~~974 ~~lease~~656 ~~interest~~722 ~~charge~~668 1Lubricants 1and -waxes 2175 4152 ~~(2)~~67 ~~----------~~64 -------~~----~~ -------~~-----~~ -----~~-------~~ -----~~-----~~ ~~---------~~Total refined product sales 8,~~640~~568 6,~~380~~633 26,~~260~~267 ~~35% 23~~6,~~113~~431 ~~18,593~~Other ~~4,520~~sales ~~24%~~22 ~~----------~~22 -------~~----~~ -------~~-----~~ -----~~-------~~ -----~~-----~~ ~~---------~~Total ~~Income~~sales ~~before income taxes 312 161 151 655 549 106 Income taxes 107 58 49 225 198 27 ---------- ----------- ------------ ------------ ---------- --------- Net income~~ $ ~~205~~8,590 $ ~~103~~6,655 $6,267 ~~102~~6,431 ~~99% $ 430 $ 351 $ 79 23%~~ =======~~===~~ =======~~====~~ =====~~=======~~ ============ ========== ========= Gulf Coast 3/2/1 crack spread ($ per bbl) (1) $ 6.16 $ 5.21 $ 0.95 18% $ 7.12 $ 4.75 $ 2.37 50% Average price per gallon of gasoline (2) $ 1.28 $ 0.98 $ 0.30 31% $ 1.22 $ 0.95 $ 0.27 28% Average cost per barrel of crude oil (3) $ 37.46 $ 26.76 $ 10.70 40% $ 34.45 $ 27.15 $ 7.30 27%

Equity in earnings of affiliates. The table below shows the changes during the three months ended March 31, 2005 compared to the same period in 2004 in the equity in earnings of affiliates. The increase in LYONDELL-CITGO's earnings in the first quarter of 2005 as compared to the same period in 2004 was due primarily to higher margins on crude oil refining and aromatics.

THREE MONTHS ~~NINE MONTHS THREE MONTHS NINE MONTHS~~ ENDED ~~ENDED~~MARCH ~~ENDED ENDED SEPTEMBER 30~~31, ~~SEPTEMBER~~INCREASE ~~30, SEPTEMBER 30, SEPTEMBER 30,~~ -------------- ------~~----------~~ ~~-------------~~(DECREASE) ~~----------------~~2005 2004 ~~2003~~OVER 2004 ~~2003 2004 2003 2004 2003~~ ------ --~~----~~ ------- --~~-----~~ ------ ----- ~~------- ------~~ ($ in millions) ~~(Gallons~~LYONDELL-CITGO in$ ~~millions)~~43 ~~Gasoline~~ $~~4,866~~ ~~$3,831~~35 $~~13,303~~ ~~$10,727~~8 ~~3,791~~Pipeline ~~3,918~~investments 10~~,889~~ ~~11,272~~10 ~~Jet~~- ~~fuel~~Other ~~692 513~~ (1~~,882~~) 1~~,451~~ ~~564 640 1,736 1,734 Diesel/#~~(2) fuel 1,773 1,173 4,594 4,043 1,488 1,479 4,396 4,762 Asphalt 334 238 723 514 422 331 983 689 Petrochemicals and industrial products 1,012 570 2,503 1,653 789 662 2,214 1,915 Lubricants and waxes 188 157 517 448 77 67 214 194 ------ --~~----~~ ------- --~~-----~~ ----- ----- ~~------ ------~~ Total ~~refined~~$ ~~product~~52 ~~sales~~$ ~~8,865~~46 ~~6,482 23,522 18,836 7,131 7,097 20,432 20,566 Other sales 14 20 78 63 ------ ------ ------- ------- ----- ----- ------ ------ Total sales~~ $~~8,879~~ $6~~,502~~ ~~$23,600 $18,899 7,131 7,097 20,432 20,566~~ ====== ==~~====~~ ======= ==~~=====~~ ===== ====~~= ====== ======~~

21 Cost of sales and operating expenses. The following table summarizes our cost of sales and operating expenses for the three-month periods ended March 31, 2005 and 2004: CITGO COST OF SALES AND OPERATING EXPENSES

THREE MONTHS ~~NINE MONTHS~~ ENDED ~~ENDED~~MARCH ~~SEPTEMBER 30~~31, ~~INCREASE SEPTEMBER 30, INCREASE~~ -------------- ~~(DECREASE)~~ ----------~~---~~ ~~(DECREASE)~~2005 2004 ~~2003 OVER 2003 2004 2003 OVER 2003~~ ---- ---- --~~-------~~ ---- ---- --~~-------~~ ($ in millions) ~~LYONDELL-CITGO~~Crude $oil 58 $ 262,681 $ 321,633 $Refined ~~134~~products $4,529 573,774 $Intermediate 77feedstocks ~~Pipeline~~758 ~~investments~~701 10Refining 10and -manufacturing 29costs 26370 3363 Other 3operating ~~(1)~~costs 4and 3expenses ~~(3)~~45 662 --------- -~~----~~ ------ ----~~---~~ ~~----- -----~~ Total $cost 71of $sales 35and $operating 36expenses $ ~~166~~8,383 $ 806,533 ~~$ 86~~ ========= =~~====~~ ====== ====~~=== ===== =====~~

We purchase refined products to supplement the production from our refineries in order to meet marketing demands and to optimize distribution. Refined product purchases represented 54% and 58% of total cost of sales and operating expenses for the first quarter of 2005 and 2004, respectively. Margins on purchased products, on average, are lower than margins on refinery produced products because refinery produced products benefit from the whole supply chain upgrade and purchased refined products do not. However, purchased products are not segregated from our produced products and margins may vary due to market conditions and other factors beyond our control. In the near term, other than normal refinery turnaround maintenance, we do not anticipate operational actions or market conditions which might cause a material change in anticipated purchased product requirements; however, there could be events beyond our control which impact the volume of refined products purchased. (See also "Factors Affecting Forward Looking Statements".) The Company periodically reviews investment decisions based on market conditions, availability of supply, and optimization of investments and synergies with other CITGO sites. As the result of such a review, the Company has decided to indefinitely defer a capital project at its Corpus Christi refinery related to production of ultra low sulfur diesel fuel. Accordingly, results for the three months ended March 31, 2005 include a charge against income of approximately $29 million to write off the costs incurred to date on the project. In addition, the deferral of the project will reduce previously estimated capital expenditures by approximately $183 million over the five-year period from 2005 through 2009. Gross margin. Gross margin increased approximately 1.4 cents per gallon in the quarter ended March 31, 2005 compared to the same period in 2004. Gross margin for the quarter ended March 31, 2005 was approximately 3.3 cents per gallon compared to gross margin of approximately 1.9 cents per gallon for the same period in 2004. Revenue per gallon for the first quarter 2005 increased approximately 32% compared to the first quarter 2004. Cost of sales and operating expenses per gallon for the quarter ended March 31, 2005 increased approximately 32% compared to the same period in 2004. A change in the price of crude oil, feedstocks and blending products generally results in a corresponding change in the sales price of refined products. The impact of changes in crude oil and feedstock prices on our consolidated income before taxes depends, in part, on how quickly refined product prices are adjusted to reflect these changes in feedstock costs. 22 Our 74% increase in gross margin per gallon for the first quarter of 2005 versus the first quarter of 2004 compares to the 81% increase in the industry heavy crack spread over the same period. In the first quarter of 2004 we did not capture the full benefit of improved industry margins due to the heavy turnaround activities at our fuels refineries during that quarter. Selling, general and administrative expenses. Selling, general and administrative expenses increased $9 million, or 13% from $71 million in the first quarter of 2004 to $80 million in the first quarter of 2005. The increase is primarily a result of the decision to relocate the corporate headquarters. Additionally, the selling, general and administrative expenses in the first quarter of 2004 were reduced by the subsidy allowed under Medicare Reform (see Note 10 of the Notes to the Condensed Consolidated Financial Statements). Interest expense. Interest expense, including capital lease interest charge, decreased $15 million in the three-month period ended March 31, 2005 as compared to the same period in 2004. The decrease in interest expense for the quarter reflects the retirement of the senior secured term loan during the second quarter of 2004 and the redemption in October 2004 of approximately $543 million of our 11-3/8% notes due 2011. LIQUIDITY AND CAPITAL RESOURCES The following summarizes cash flows during the three-month periods ended March 31, 2005 and 2004:

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~NINE~~March ~~MONTHS ENDED SEPTEMBER 30~~31, ~~SEPTEMBER 30,~~ ------------------ -~~--------------------~~ ~~2004~~2005 ~~2003~~ 2004 ~~2003~~ ---- ---- ---- ---- ($ in millions) ~~Crude~~Net ~~oil~~cash $provided ~~2,502~~by/(used $in): ~~1,724~~Operating activities $ ~~6,417~~349 $ ~~5,110~~209 ~~Refined~~Investing ~~products~~activities ~~4,749~~$ ~~3,577~~(100) 12,830 10,409 Intermediate feedstocks 739 481 1,991 1,420 Refining and manufacturing costs 378 323 1,123 963 Other operating costs and expenses 164 162 432 382 ------- ------- -------- ---------- Total cost of sales and operating expenses $ ~~8,532~~(75) $Financing ~~6,267~~activities $ ~~22,793~~(28) $ ~~18,284 ======= ======= ======== ==========~~(9)

Cash Provided by Operating Activities Consolidated net cash provided by operating activities totaled approximately $349 million for the three-month period ended March 31, 2005. Operating cash flows were derived primarily from net income of $112 million, depreciation and amortization of $96 million, distributions in excess of equity in earnings of affiliates of $25 million, decrease in deferred taxes of $27 million, asset retirements of $20 million and changes in operating assets and liabilities of $120 million. The more significant changes in operating assets and liabilities include an increase in current liabilities and income taxes payable and a decrease in inventories, offset in part, by an increase in notes and accounts receivable. 23 Cash Used in Investing Activities Net cash used in investing activities in the three month period ended March 31, 2005 totaled $100 million consisting primarily of capital expenditures of $82 million. These capital expenditures consisted of:

~~Nine~~Three Months Ended ~~September~~March 3031, 2005 ------------------- ~~2004 2003 ---- ----~~ ($ in millions) ~~Net~~Regulatory ~~cash~~requirements ~~provided by/(used in): Operating activities~~ $ ~~697~~36 $Maintenance ~~846~~capital ~~Investing~~projects ~~activities~~16 $Strategic ~~(242)~~capital $expenditures ~~(332)~~30 ~~Financing~~------- ~~activities~~Total $capital ~~(187)~~expenditures $ ~~(416)~~82 =======

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" in our Form 10-K for the year ended December 31, 2004 for additional information concerning projected capital expenditures. Cash Used in Financing Activities Net cash used in financing activities totaled $28 million for the three-month period ended March 31, 2005, consisting primarily of the payment of $26 million on loans from affiliates. As of March 31, 2005, capital resources available to us included cash on hand totaling $244 million generated by operations and other sources, and available borrowing capacity under our committed bank facilities of $254 million. On October 22, 2004, we issued $250 million aggregate principal amount of our 6% unsecured senior notes due October 15, 2011. On that date, we used the net proceeds from that note issue, together with cash on hand, to repurchase approximately $543 million aggregate principal amount of our 11-3/8% senior notes due 2011 that had been tendered to us in accordance with a tender offer we made for those notes. We also received the necessary consents of the holders of those notes to amend the indenture governing those notes to remove substantially all of the restrictive covenants and specified events of default. Our various debt instruments require maintenance of a specified minimum net worth and impose restrictions on our ability to: - incur additional debt unless we meet specified interest coverage and debt to capitalization ratios; - place liens on our property, subject to specified exceptions; - sell assets, subject to specified exceptions; - make restricted payments, including dividends, repurchases of capital stock and specified investments; and - merge, consolidate or transfer assets. We are in compliance with the covenants under our debt financing arrangements at March 31, 2005. 24 Upon the occurrence of a change of control of our Company, as defined in the indenture governing our 6% senior notes due 2011, coupled with a rating decline on these notes, the holders of those notes have the right to require us to repurchase them at a price equal to 101% of the principal amount plus accrued interest. In addition, our bank credit agreements and the reimbursement agreements governing various of the letters of credit issued to provide liquidity support for our tax-exempt bonds provide that, unless lenders holding two-thirds of the commitments thereunder otherwise agree, a change in control of our Company, as defined in those agreements, will constitute a default under those credit agreements. Various of our debt agreements, including the agreements governing the Private Placement Senior Notes and the Master Shelf Agreement Senior Notes and the reimbursement agreements relating to various letters of credit that provide liquidity support for our tax-exempt bonds, contain provisions requiring that we equally and ratably secure those instruments if we issue secured debt other than as permitted by those instruments. We believe that we will have sufficient resources to carry out planned capital spending programs, including regulatory and environmental projects in the near term, and to meet currently anticipated future obligations and other planned expenditures as they arise. We periodically evaluate other sources of capital in the marketplace and anticipate that long-term capital requirements will be satisfied with current capital resources and future financing arrangements. Our ability to obtain such financing will depend on numerous factors, including market conditions, compliance with existing debt covenants and the perceived creditworthiness of the Company at that time. See also "Factors Affecting Forward Looking Statements." Three of our affiliates entered into agreements to advance excess cash to us from time to time under demand notes. These notes provide for maximum amounts of $10 million from PDV Texas, $30 million from PDV America and $10 million from PDV Holding. At March 31, 2005 there was no outstanding balance on these notes. At December 31, 2004, the amounts outstanding on these notes were $7 million, $14 million and $5 million from PDV Texas, PDV America and PDV Holding, respectively. As of March 31, 2005, CITGO had an effective shelf registration with the SEC under which it could have publicly offered up to $400 million principal amount of debt securities. Due to CITGO's current credit ratings, the shelf registration statement is not presently available. Our debt ratings, as currently assessed by the three major debt rating agencies, are as follows:

Nine Months Ended September 30, 2004 ------------------ ($ in millions) Regulatory requirements $ 76 Maintenance capital projects 64 Strategic capital expenditures 87 ----- Total capital expenditures $ 227 =====

On March 17, 2005, we established an accounts receivable sales facility. This facility allows the non-recourse sale of specified accounts receivable to independent third parties. A maximum of $350 million in accounts receivable may be sold at any one time. As of March 31, 2005, no receivables had been sold under this facility. Our debt instruments do not contain any covenants that trigger increased costs or burdens as a result of an adverse change in our securities ratings. However, certain of our guarantee agreements, which support approximately $33 million letters of credit of PDV Texas, an affiliate, require us to cash collateralize the applicable letters of credit upon a reduction of our credit rating below a stated level. We believe that we have adequate liquidity from existing sources to support our operations for the foreseeable future. 25 NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 defines variable interest entities and how an enterprise should assess its interests in a variable interest entity to decide whether to consolidate that entity. In December 2003, the FASB issued a revision of FIN 46 (FIN 46R), primarily to clarify the required accounting for investments in variable interest entities. This standard replaces FIN 46. For CITGO, which meets the definition of a nonpublic enterprise for purposes of applying FIN 46R, application is required immediately for variable interest entities created after December 31, 2003 and for variable interest entities in which an interest is acquired after that date, and to all entities that are subject to FIN 46R by January 1, 2005. The interpretation requires certain minimum disclosures with respect to variable interest entities in which an enterprise holds significant variable interest but which it does not consolidate. FIN 46R may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company's adoption of FIN 46R, effective January 1, 2005, had no impact on the financial position or results of operations for the quarter ended March 31, 2005. In March 2005, the FASB issued Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"), which clarifies the application of FASB Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). FIN 47 clarifies (i) that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated; and (ii) when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. Retrospective application for interim financial information is permitted but is not required. The Company has not determined the impact on its financial position or results of operations that may result from the application of FIN 47. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1, "Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" ("FSP FAS 109-1"). The American Jobs Creation Act introduces a special 9% tax deduction on qualified production activities. FSP FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with FASB Statement No. 109. The Company does not expect the adoption of this new tax provision to have a material impact on its consolidated financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Introduction. CITGO has exposure to price fluctuations of crude oil and refined products as well as fluctuations in interest rates. Management has defined certain benchmarks consistent with its preferred risk profile for the environment in which the Company operates and finances its assets. CITGO does not attempt to manage the price risk related to all of its inventories of crude oil and refined products. As a result, at March 31, 2005, CITGO was exposed to the risk of broad market price declines with respect to a substantial portion of its crude oil and refined product inventories. As of March 31, 2005, CITGO's total crude and refined products inventory was 50 million barrels. Aggregate commodity derivative positions entered into for price risk management purposes at that date totaled 0.8 million barrels. The following disclosures do not attempt to quantify the price risk associated with such commodity inventories. 26 Commodity Instruments. CITGO balances its crude oil and petroleum product supply/demand and manages a portion of its price risk by entering into petroleum commodity derivatives. Generally, CITGO's risk management strategies qualified as hedges through December 31, 2000. Effective January 1, 2001, the Company's policy is to elect hedge accounting only under limited circumstances involving derivatives, with initial terms of 90 days or greater and notional amounts of $25 million or greater. At March 31, 2005, none of the Company's commodity derivatives were accounted for as hedges. NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT MARCH 31, 2005

~~MATURITY~~ NUMBER OF CONTRACT MARKET ~~COMMODITY DERIVATIVE DATE~~ CONTRACTS VALUE VALUE(3) MATURITY --------- -- --------- --------- COMMODITY DERIVATIVE DATE Long/(Short) Asset/(Liability) --------- ---------- ------------ ------------ ~~Long/(Short) Asset/(Liability)~~ ---------------------- ($ in millions) No Lead Gasoline (1) ~~Listed~~Futures ~~Put Options~~ Purchased ~~2004~~2005 ~~225~~910 $ -60.3 $ -63.6 ~~Listed~~Futures ~~Put Options~~ Sold ~~2004~~2005 (~~450~~1,010) $ -(60.6) $ -(64.5) ~~Listed Call Options Purchased 2004 200 $ - $ -~~ Forward Purchase Contracts ~~2004~~2005 32,~~967~~184 $ ~~216~~96.30 $ ~~216~~98.81 Forward Sales Contracts ~~2004~~2005 (2,~~365~~107) $ (~~131~~119.78) $ (~~132~~126.25) Distillates (1) Futures Purchased ~~2004~~2005 ~~938~~973 $ 4560.06 $ 5466.60 Futures Purchased ~~2005~~2006 ~~1,159~~78 $ 524.76 $ ~~63.~~5.3 Futures Sold ~~2004~~2005 (~~150~~820) $ (852.05) $ (855.76) OTC Swaps (Pay Fixed / Receive Float) (4) 2005 666 $ - $ 3.5 OTC Swaps (Pay Float / Receive Fixed) (4) 2005 (426) $ - $ (2.0) Forward Purchase Contracts ~~2004~~2005 ~~1,352~~857 $ 7842.27 $ 8045.21 Forward Sale Contracts ~~2004~~2005 (21,~~521~~532) $ (~~133~~53.38) $ (~~143~~63.5) Forward Sale Contracts ~~2005~~2006 (~~1,153~~78) $ (544.98) $ (645.4) Crude Oil (1) Futures Purchased 2005 860 $ 46.7 $ 47.6 Futures Sold 2005 (830) $ (45.0) $ (46.0) Listed Call Options Purchased 2005 200 $ - $ 0.2 Listed Call Options Sold 2005 (200) $ - $ (0.1) Listed Put Options Purchased ~~2004~~2005 ~~600~~120 $ - $ 0.31 Listed Put Options Sold ~~2004~~2005 (~~400~~320) $ - $ -(0.1) Forward Purchase Contracts ~~2004~~2005 ~~336~~1,589 $ 1319.47 $ 1419.14 Forward Sale Contracts ~~2004~~2005 (~~270~~344) $ (1219.51) $ (1319.42) Natural Gas (2) Futures Purchased ~~2004~~2005 2428 $ 12.51 $ 12.71 Listed ~~Call~~Put Options Purchased ~~2004~~2005 ~~100~~10 $ - $ - ~~Listed Put Options Sold 2004 (100) $ - $ -~~

---------- (1) Thousands of barrels (2) Ten-thousands of mmbtu (3) Based on actively quoted prices. (4) Floating price based on market index designated in contract; fixed price agreed upon at date of contract. 27 NON TRADING COMMODITY DERIVATIVES OPEN POSITIONS AT MARCH 31, 2004

~~MATURITY~~ NUMBER OF CONTRACT MARKET ~~COMMODITY DERIVATIVE DATE~~ CONTRACTS VALUE VALUE(4) MATURITY --------- -- --------- --------- COMMODITY DERIVATIVE DATE Long/(Short) Asset/(Liability) --------- --- -------- ------------ ~~Long/(Short) Asset/(Liability)~~ ------------ ---------------------- ($ in millions) No Lead Gasoline (1) Futures Purchased ~~2003~~2004 ~~452~~175 $ ~~14.~~8.3 $ 158.3 Futures Sold ~~2003~~2004 (~~450~~175) $ (148.73) $ (158.23) Listed Call Options Purchased 2004 200 $ - $ 0.6 Forward Purchase Contracts ~~2003~~2004 62,~~745~~800 $ ~~223~~128.85 $ ~~223~~134.15 Forward ~~Sale~~Sales Contracts ~~2003~~2004 (51,~~203~~691) $ (~~174~~77.36) $ (~~171~~81.17) Distillates (1) Futures Purchased ~~2003~~2004 ~~1,551~~641 $ 4921.9 $ 5124.80 Futures Purchased ~~2004~~2005 ~~1,457~~47 $ 451.56 $ 471.37 Futures Sold ~~2003~~2004 (75225) $ (28.5) $ (28.5) OTC ~~Call~~Swaps ~~Options~~(Pay ~~Purchased~~Fixed/Receive ~~2003~~Float)(3) 122004 $175 - $ - ~~OTC Put Options Purchased 2003 12~~ $ ~~- $~~ (0.1) OTC ~~Call~~Swaps ~~Options~~(Pay ~~Sold~~Float/Receive ~~2003~~Fixed)(3) 2004 (12175) $ - $ (0.1) ~~OTC~~Forward ~~Put~~Purchase ~~Options~~Contracts ~~Sold~~2004 ~~2003~~915 ~~(12)~~ $ -34.5 $ -34.5 ~~OTC~~Forward ~~Swaps~~Sale ~~(Pay~~Contracts ~~Fixed/Receive~~2004 ~~Float)~~(3872) ~~2003 3~~ $ ~~- $ - Forward Purchase Contracts 2003 675 $ 21~~(32.28) $ 21(33.86) Forward Sale Contracts ~~2003~~2005 (~~965~~54) $ (312.40) $ (312.90) Crude Oil (1) ~~OTC~~Futures ~~Swaps~~Purchased ~~(Pay~~2004 ~~Fixed/Receive~~300 ~~Float)(3) 2003 900~~ $ -10.3 $ 010.15 ~~OTC~~Futures ~~Swaps~~Sold ~~(Pay~~2004 ~~Float/Receive Fixed)~~(3300) ~~2003~~$ (~~1,100~~9.6) $ ~~- $ 0~~(9.28) Forward Purchase Contracts ~~2003~~2004 ~~1,550~~473 $ 4016.27 $ 4315.09 Forward Sale Contracts ~~2003~~2004 (~~1,032~~741) $ (2826.38) $ (2925.95) Natural Gas (2) Listed Call Options Purchased ~~2003~~2004 ~~100~~136 $ - $ 0.5 Listed Call Options Sold 2004 (91) $ - $ - Listed Put Options Sold ~~2003~~2004 (~~100~~60) $ - $ -

---------- (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. 28 Debt Related Instruments. We have fixed and floating U.S. currency denominated debt. At March 31, 2005, our primary exposures were to LIBOR and floating rates on tax exempt bonds. We manage the risk related to interest rates by using both fixed and floating rates. For interest rate swaps, all of which expired in February 2005, the table below presents notional amounts and interest rates by expected (contractual) maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts. NON TRADING INTEREST RATE DERIVATIVES OPEN POSITIONS AT MARCH 31, 2004

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

Changes in the fair value of these agreements were recorded in other income (expense) in the first quarter of 2004 with the offset recorded in the balance sheet caption other current liabilities at March 31, 2004. There were no interest rate swap agreements in place at March 31, 2005. 29 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 MARCH 31, 2005

EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE ------------------- --------------- ------------- -- ------------- ---------------- ($ in millions) ($ in millions) ~~2004~~2005 $ 11 9.30% $ - - ~~2005 11 9.30% - -~~ 2006 201 8.10% - - 2007 50 8.94% 12 5.5853% 2008 25 7.17% 20 5.8673% 2009 50 7.22% - - Thereafter ~~745~~403 106.4077% ~~215~~360 76.0862% -----~~-----~~ ----- ----- ---- Total $ ~~1,043~~740 97.7936% $ ~~247~~392 6.9154% =====~~=====~~ ===== ===== ==== Fair Value $ ~~1,229~~749 $ ~~247~~392 =====~~=====~~ =====

DEBT OBLIGATIONS AT MARCH 31, 2004

EXPECTED FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE EXPECTED MATURITIES RATE DEBT INTEREST RATE RATE DEBT INTEREST RATE ------------------- --------------- ------------- -- ------------- ---------------- ($ in millions) ($ in millions) ~~2003~~2004 $ 11 9.30% $ - - ~~2004 31 8.02% - -~~ 2005 11 9.30% - - 2006 201 8.10% 200 75.4122% 2007 50 8.94% -12 -5.42% 2008 25 7.17% 20 5.72% Thereafter ~~770~~745 10.3040% ~~178~~190 97.3903% ------~~---~~ ----- ------ ---- Total $ 1,~~074~~043 9.7479% $ ~~378~~422 86.3407% ======~~===~~ ===== ====== ==== Fair Value $ 1,~~166~~257 $ ~~378~~422 ======~~===~~ ======

30 ITEM 4. CONTROLS AND PROCEDURES During the first quarter of 2005, the Company's management, including the principal executive officer and principal financial officer, evaluated the Company's disclosure controls and procedures related to the recording, processing, summarization and reporting of information in the Company's periodic reports that it files with the Securities and Exchange Commission ("SEC"). These disclosure controls and procedures have been designed to ensure that (a) material information relating to the Company, including its consolidated subsidiaries, is made known to the Company's management, including these officers, by other employees of the Company and its subsidiaries as appropriate to allow timely decisions regarding required disclosure, and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the SEC's rules and forms. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Also, the Company does not control or manage certain of its unconsolidated entities and thus its access and ability to apply its disclosure controls and procedures to entities that it does not control or manage are more limited than is the case for the subsidiaries it controls and manages. Accordingly, as of March 31, 2005, these officers (principal executive officer and principal financial officer) concluded that the Company's disclosure controls and procedures were effective to accomplish their objectives. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 31 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The required information is incorporated by reference into Part II of this Report from the information under the subheadings "Litigation and Injury Claims" and "Environmental Compliance and Remediation" in Note 8 of the Notes to the Condensed Consolidated Financial Statements included in Part I of this Report. ITEM 6. EXHIBITS (a) Exhibits Certifications Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 as to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 filed by the following officers: 31.1 Filed by Felix Rodriguez, President and Chief Executive Officer. 31.2 Filed by Larry E. Krieg, Vice President Finance and Chief Financial Officer. Certifications Pursuant to Section 1350 of Chapter 63 of Title 18 United States Code as to the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 filed by the following officers: 32.1 Filed by Felix Rodriguez, President and Chief Executive Officer. 32.2 Filed by Larry E. Krieg, Vice President Finance and Chief Financial Officer. 32 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: May 16, 2005 /s/ Paul Largess ------------------------------------- Paul Largess Controller, Chief Accounting Officer 33 INDEX TO EXHIBITS 31.1 Filed by Felix Rodriguez, President and Chief Executive Officer. 31.2 Filed by Larry E. Krieg, Vice President Finance and Chief Financial Officer. 32.1 Filed by Felix Rodriguez, President and Chief Executive Officer. 32.2 Filed by Larry E. Krieg, Vice President Finance and Chief Financial Officer. 34

Exhibits Description -------- ----------- 31.1 Filed by Luis Marin, President and Chief Executive Officer. 31.2 Filed by Larry E. Krieg, Vice President Finance (chief financial officer). 32.1 Filed by Luis Marin, President and Chief Executive Officer. 32.2 Filed by Larry E. Krieg, Vice President Finance (chief financial officer).

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