<PAGE>   1
 
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549
 
                                   FORM 10-K
 
[X]               ANNUAL REPORT PURSUANT TO SECTION 13 0R 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the Fiscal Year Ended December 31, 1997
 
                                       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)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      73-1173881
       (State or other jurisdiction of            (I. R. S. Employer Identification No.)
       incorporation or organization)
</TABLE>
 
        ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
               (Address of principal executive office) (Zip Code)
 
                                 (918) 495-4000
              (Registrant's telephone number, including area code)
 
                                     N. A.
   (Former name, former address and former fiscal year, if changed since last
                                    report)
 
          Securities registered pursuant to Section 12(b) of the Act:
 
<TABLE>
<S>                                            <C>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
        7-7/8% Senior Notes, Due 2006                  New York Stock Exchange, Inc.
</TABLE>
 
        Securities registered pursuant to Section 12(g) of the Act: None
 
     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 [ ]
 
     The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore omitting (i) the information
otherwise required by Item 601 of Regulation S-K relating to a list of
subsidiaries of the registrant as permitted by General Instruction (I)(2)(b) and
(ii) certain information otherwise required by Item 11 of Form 10-K relating to
executive compensation as permitted by General Instruction (I)(2)(c).
 
     Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K: Not
Applicable
 
     Aggregate market value of the voting stock held by non-affiliates of the
registrant: Not Applicable
 
     Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
 
<TABLE>
<S>                                            <C>
        COMMON STOCK, $1.00 PAR VALUE                              1,000
                   (Class)                          (outstanding at December 31, 1997)
</TABLE>
 
                      DOCUMENTS INCORPORATED BY REFERENCE
                                      None
 
================================================================================
<PAGE>   2
 
                          CITGO PETROLEUM CORPORATION
 
                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                             PAGE
                                                                            -------
<S>            <C>                                                          <C>
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...............................       3
PART I
  Items 1. and 2. Business and Properties..................................       4
  Item 3.      Legal Proceedings...........................................      16
  Item 4.      Submission of Matters to a Vote of Security Holders.........      17
 
PART II
  Item 5.      Market for Registrant's Common Equity and Related
               Stockholder Matters.........................................      18
  Item 6.      Selected Financial Data.....................................      18
  Item 7.      Management's Discussion and Analysis of Financial Condition
                 and Results of Operations.................................      19
  Item 8.      Financial Statements and Supplementary Data.................      28
  Item 9.      Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure....................................      28
 
PART III
  Item 10.     Directors and Executive Officers of the Registrant..........      29
  Item 11.     Executive Compensation......................................      31
  Item 12.     Security Ownership of Certain Beneficial Owners and
               Management..................................................      31
  Item 13.     Certain Relationships and Related Transactions..............      31
 
PART IV
  Item 14.     Exhibits, Financial Statements and Reports on Form 8-K......      34
</TABLE>
 
                                        2
<PAGE>   3
 
                  FACTORS AFFECTING FORWARD LOOKING STATEMENTS
 
     This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the captions "Item 1 and 2 -- Business and
Properties" and "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to capital expenditures and
investments related to environmental compliance and strategic planning,
purchasing patterns of refined products and capital resources available to the
Company (as defined herein) are forward looking statements. In addition, when
used in this document, the words "anticipate," "estimate," "prospect" and
similar expressions are used to identify forward looking statements. Such
statements are subject to certain risks and uncertainties, such as increased
inflation, continued access to capital markets and commercial bank financing on
favorable terms, increases in regulatory burdens, changes in prices or demand
for the Company's products as a result of competitive actions or economic
factors and changes in the cost of crude oil, feedstocks, blending components or
refined products. Such statements are also subject to the risks of increased
costs in related technologies and such technologies producing anticipated
results. Should one or more of these risks or uncertainties, among others,
materialize, actual results may vary materially from those estimated,
anticipated or projected. Although CITGO believes that the expectations
reflected by such forward looking statements are reasonable based on information
currently available to the Company, no assurances can be given that such
expectations will prove to have been correct.
 
                                        3
<PAGE>   4
 
                                     PART I
 
                    ITEMS 1. AND 2. BUSINESS AND PROPERTIES
 
OVERVIEW
 
     CITGO Petroleum Corporation ("CITGO" or the "Company") is a direct
wholly-owned operating subsidiary of PDV America, Inc. ("PDV America"), 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 Republic of Venezuela. CITGO 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.
 
     CITGO's aggregate net interest in rated crude oil refining capacity is 693
thousand barrels per day ("MBPD"). The following table shows the capacity of
each U.S. refinery in which CITGO holds an interest and CITGO's share of such
capacity as of December 31, 1997.
 
                            CITGO REFINING CAPACITY
 
<TABLE>
<CAPTION>
                                                               TOTAL RATED           NET CITGO
                                                  CITGO           CRUDE              OWNERSHIP
                                    OWNER        INTEREST   REFINING CAPACITY   IN REFINING CAPACITY
                                --------------   --------   -----------------   --------------------
                                                   (%)           (MBPD)                (MBPD)
<S>                             <C>              <C>        <C>                 <C>
LOCATION
Lake Charles, LA..............      CITGO          100             320                  320
Corpus Christi, TX............      CITGO          100             150                  150
Paulsboro, NJ.................      CITGO          100              84                   84
Savannah, GA..................      CITGO          100              28                   28
Houston, TX(1)................  LYONDELL-CITGO      42             265                  111
                                                                   ---                  ---
Total Rated Refining Capacity
  as of December 31, 1997.....                                     847                  693
                                                                   ===                  ===
</TABLE>
 
---------------
 
(1) Initial interest acquired on July 1, 1993. CITGO's interest in
    LYONDELL-CITGO at December 31, 1997 approximates 42%. CITGO has an option,
    exercisable for 18 months from April 1, 1997 to increase for an additional
    investment, its participation interest up to a maximum of 50%. See "CITGO --
    Refining -- LYONDELL-CITGO". See also "Factors Affecting Forward Looking
    Statements".
 
                                        4
<PAGE>   5
 
     The following table shows aggregate refined product sales revenues and
volumes (excluding lubricants and waxes) of CITGO for the three years in the
period ended December 31, 1997.
 
                CITGO REFINED PRODUCT SALES REVENUES AND VOLUMES
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,        YEAR ENDED DECEMBER 31,
                                     ----------------------------    --------------------------
                                      1997       1996       1995      1997      1996      1995
                                     -------    -------    ------    ------    ------    ------
                                           ($ IN MILLIONS)                  (MM GALLONS)
<S>                                  <C>        <C>        <C>       <C>       <C>       <C>
LIGHT FUELS
  Gasoline.......................    $ 7,754    $ 7,451    $6,367    11,953    11,308    11,075
  Jet Fuel.......................      1,183      1,489     1,163     2,000     2,346     2,249
  Diesel/#2 fuel.................      2,439      2,312     1,356     4,288     3,728     2,730
ASPHALT..........................        398        257       238       749       569       503
Industrial Products and
  Petrochemicals.................      1,172        846       831     1,940     1,408     1,572
                                     -------    -------    ------    ------    ------    ------
  Total..........................    $12,946    $12,355    $9,955    20,930    19,359    18,129
                                     =======    =======    ======    ======    ======    ======
</TABLE>
 
     The following table shows CITGO's aggregate interest in refining capacity,
refinery input and product yield for the three years in the period ended
December 31, 1997.
 
                          CITGO REFINERY PRODUCTION(1)
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                       ---------------------------------------------------------
                                           1997(2)            1996(3)            1995(4)(6)
                                       ----------------   ----------------   -------------------
                                                 (MBPD, EXCEPT AS OTHERWISE INDICATED)
<S>                                    <C>       <C>      <C>       <C>      <C>          <C>
RATED REFINING CAPACITY(5)..........     693                606                   604
REFINERY INPUT
  Crude oil.........................     548      79.3%     488      80.3%        473      79.9%
  Other feedstocks..................     143      20.7%     120      19.7%        119      20.1%
                                         ---     ------     ---     ------     ------     ------
  Total.............................     691     100.0%     608     100.0%        592     100.0%
                                         ===     ======     ===     ======     ======     ======
PRODUCT YIELD
Light fuels
  Gasoline..........................     309      44.0%     269      44.0%        267      44.6%
  Jet Fuel..........................      66       9.4%      65      10.6%         61      10.2%
  Diesel/#2 fuel....................     112      15.9%     103      16.8%        101      16.9%
Asphalt.............................      42       6.0%      34       5.6%         32       5.4%
Industrial products and
  petrochemicals....................     174      24.7%     141      23.0%        137      22.9%
                                         ---     ------     ---     ------     ------     ------
  Total.............................     703     100.0%     612     100.0%        598     100.0%
                                         ===     ======     ===     ======     ======     ======
UTILIZATION OF RATED REFINING
  CAPACITY..........................                79%                81%                   78%
</TABLE>
 
---------------
 
(1) Includes all of CITGO refinery production, except as otherwise noted.
 
(2) Includes a weighted average of 34.44% of the Houston refinery for 1997.
 
(3) Includes a weighted average of 12.89% of the Houston refinery for 1996.
 
(4) Includes a weighted average of 11.45% of the Houston refinery for 1995.
 
(5) At year end.
 
(6) Does not include Paulsboro Unit 1 for 1995. See "CITGO-Refinery-Paulsboro
     Refinery".
 
                                        5
<PAGE>   6
 
COMPETITIVE NATURE OF THE PETROLEUM REFINING BUSINESS
 
     The petroleum refining industry is cyclical and highly volatile, reflecting
capital intensity with high fixed and low variable costs. Petroleum industry
operations and profitability are influenced by a large number of factors, over
some of which individual petroleum refining and marketing companies have little
control. Governmental regulations and policies, particularly in the areas of
taxation, energy and the environment, have a significant impact on petroleum
activities, regulating how companies conduct their operations and formulate
their products, and, in some cases, limiting their profits directly. The U.S.
petroleum refining industry has entered a period of consolidation in which a
number of former competitors have combined their operations. Demand for crude
oil and its products is largely driven by the health of local, and worldwide
economies, although weather patterns and taxation relative to other energy
sources also play significant parts. Generally, U.S. refiners compete for sales
on the basis of price and brand image and, in some product areas, product
quality.
 
     CITGO refines, markets and transports gasoline, diesel fuel, jet fuel,
petrochemicals, lubricants, refined waxes, asphalt and other refined products,
and markets gasoline through over 14,000 CITGO branded independently owned and
operated retail outlets located throughout the United States, primarily east of
the Rocky Mountains. CITGO also markets jet fuel primarily to airline customers.
A variety of lubricants and waxes are sold to independent marketers, mass
marketers and industrial customers. Petrochemicals and industrial products are
sold directly to various manufacturers and industrial companies throughout the
United States. Asphalt is marketed primarily to independent paving contractors.
 
  Refining
 
     CITGO produces its light fuels and petrochemicals primarily through its
Lake Charles and Corpus Christi refineries. Asphalt refining operations are
carried out through CITGO's Paulsboro and Savannah refineries.
 
     Lake Charles Refinery.  The Lake Charles refinery, located in Lake Charles,
Louisiana, was originally built in 1944 and since then has been continuously
upgraded. Today it is a modern, complex, high conversion refinery and is one of
the largest in the United States. It has a rated refining capacity of 320 MBPD
and is capable of processing large volumes of heavy crude oil into a flexible
slate of refined products, including significant quantities of high-octane
unleaded gasoline and, due to recent modifications, reformulated gasoline. The
Lake Charles refinery has a Solomon Process Complexity Factor of 17.0 (as
compared to an average of 13.8 for U.S. refineries in the most recently
available Solomon Associates, Inc. survey). The Solomon Process Complexity
Rating is an industry measure of a refinery's ability to produce higher
value-added products. A higher rating indicates a greater capability to produce
such products.
 
                                        6
<PAGE>   7
 
     The following table shows the rated refining capacity, refinery input and
product yield at the Lake Charles refinery for the three years in the period
ended December 31, 1997.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                  ------------------------------------------
                                                      1997           1996           1995
                                                  ------------   ------------   ------------
                                                    (MBPD, EXCEPT AS OTHERWISE INDICATED)
<S>                                               <C>   <C>      <C>   <C>      <C>   <C>
RATED REFINING CAPACITY(1).....................   320            320            320
REFINERY INPUT
  Crude Oil....................................   291    87.9%   274    85.1%   275    85.4%
  Other feedstocks.............................    40    12.1%    48    14.9%    47    14.6%
                                                  ---   ------   ---   ------   ---   ------
  Total........................................   331   100.0%   322   100.0%   322   100.0%
                                                  ===   ======   ===   ======   ===   ======
PRODUCT YIELD
Light fuels
  Gasoline.....................................   177    52.4%   164    50.3%   164    50.0%
  Jet Fuel.....................................    60    17.7%    62    19.0%    58    17.7%
  Diesel/#2 fuel...............................    45    13.3%    38    11.7%    42    12.8%
Petrochemicals and Industrial Products.........    56    16.6%    62    19.0%    64    19.5%
                                                  ---   ------   ---   ------   ---   ------
  Total........................................   338   100.0%   326   100.0%   328   100.0%
                                                  ===   ======   ===   ======   ===   ======
UTILIZATION OF RATED REFINING CAPACITY.........            91%            86%            86%
</TABLE>
 
---------------
 
(1) At year end.
 
     Approximately 63%, 67% and 64% of the total crude runs at the Lake Charles
refinery, in the years 1997, 1996 and 1995, respectively, consisted of crude oil
with an average API gravity of 24 degrees or less. Due to the complex processing
required to refine such crude oil, the Lake Charles refinery's economic crude
oil throughput capacity is approximately 290 MBPD which is approximately 90% of
its rated capacity of 320 MBPD.
 
     The Lake Charles refinery's Gulf Coast location provides it with access to
crude oil deliveries from multiple sources. Imported crude oil and feedstock
supplies are delivered by ship directly to the Lake Charles refinery, and
domestic crude oil supplies are delivered by pipeline and barge. In addition,
the refinery is connected by pipelines to the Louisiana Offshore Oil Port
("LOOP") and to terminal facilities in the Houston area through which it can
receive crude oil deliveries if the Lake Charles docks are temporarily
inaccessible. For delivery of refined products, the refinery is connected
through the Lake Charles Pipeline directly to the Colonial and Explorer
Pipelines, which are the major refined product pipelines supplying the northeast
and midwest regions of the United States, respectively. The refinery also uses
adjacent terminals and docks, which provide access for ocean tankers and barges.
 
     The Lake Charles refinery's main petrochemical products are propylene and
benzene. Propylene production was 6.0, 5.0 and 5.7 MBPD, and benzene production
was 3.8, 3.2 and 4.1 MBPD, in each case for the years 1997, 1996 and 1995,
respectively. Industrial products include sulphur, residual fuels and petroleum
coke.
 
     Located adjacent to the Lake Charles refinery is a lubricants refinery
operated by CITGO and owned by Cit-Con Oil Corporation ("Cit-Con"), which is
owned 65% by CITGO and 35% by Conoco, Inc. ("Conoco"). Primarily because of its
specific design, the Cit-Con refinery produces extremely high quality oils and
waxes, and is one of the few in the industry designed as a stand-alone
lubricants refinery. Subsequent to enhancements made in 1995, the refinery
currently has a rated capacity of 9.6 MBPD of base oils and 1.4 MBPD of wax, and
is one of the largest rated capacity paraffinic lubricants refineries in the
United States. For the years 1997, 1996 and 1995, utilization at the Cit-Con
refinery was 101%, 100%, and 101%, respectively, of its rated capacity.
Feedstocks are supplied 65% from CITGO's Lake Charles refinery and 35% from
Conoco's nearby refinery. Finished refined products are shared on the same pro
rata basis by CITGO and
 
                                        7
<PAGE>   8
 
Conoco. During 1997, new high efficiency lubricant base oil production capacity,
including a joint venture Conoco-Pennzoil plant, came on-stream creating a
surplus in lubricant base oil supply and diminishing base oil production
profitability. CITGO has evaluated Cit-Con's competitive position in light of
this new competition and believes that Cit-Con can continue to produce
attractive returns on capital employed if certain operating strategies are
followed. These strategies include maximizing the production of high value wax
and heavier base oils, strict control of operating expenses, and close
operational integration with CITGO's downstream finished lubricants marketing
program.
 
     Corpus Christi Refinery.  The Corpus Christi refinery complex consists of
the East and West Plants, located within five miles of each other in Corpus
Christi, Texas. Construction began on the East Plant in 1937, and it was
extensively reconstructed and modernized during the 1970's and 1980's. The West
plant was completed in 1983. The Corpus Christi refinery is an efficient and
highly complex facility, capable of processing high volumes of heavy crude oil
into a flexible slate of refined products, with a Solomon Process Complexity
Factor of 20.5 (as compared to an average 13.8 for U.S. refineries in the most
recently available Solomon Associates, Inc. survey).
 
     The following table shows rated refining capacity, refinery input and
product yield at the Corpus Christi refinery for the three years in the period
ended December 31, 1997.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                  ------------------------------------------
                                                      1997           1996           1995
                                                  ------------   ------------   ------------
                                                    (MBPD, EXCEPT AS OTHERWISE INDICATED)
<S>                                               <C>   <C>      <C>   <C>      <C>   <C>
RATED REFINING CAPACITY(1).....................   150            140            140
REFINERY INPUT
  Crude oil....................................   115    59.3%   133    66.8%   121    64.7%
  Other feedstocks.............................    79    40.7%    66    33.2%    66    35.3%
                                                  ---   ------   ---   ------   ---   ------
  Total........................................   194   100.0%   199   100.0%   187   100.0%
                                                  ===   ======   ===   ======   ===   ======
PRODUCT YIELD
Light fuels
  Gasoline.....................................    93    47.9%    93    47.0%    90    48.4%
  Diesel/#2 fuel...............................    45    23.2%    59    29.8%    53    28.5%
Petrochemicals and Industrial Products.........    56    28.9%    46    23.2%    43    23.1%
                                                  ---   ------   ---   ------   ---   ------
  Total........................................   194   100.0%   198   100.0%   186   100.0%
                                                  ===   ======   ===   ======   ===   ======
UTILIZATION OF RATED REFINING CAPACITY.........            77%            95%            86%
</TABLE>
 
---------------
 
(1) At year end.
 
     Corpus Christi crude runs during 1997 consisted of 100% heavy sour
Venezuelan crude. Crude oil supplies are delivered directly to the Corpus
Christi refinery through the Port of Corpus Christi. The decline in utilization
of rated refining capacity in 1997 as compared to 1996 is a result of a major
turnaround in 1997 and an increase in the rated refining capacity.
 
     CITGO operates the West plant under a sublease agreement (the "Sublease")
from Union Pacific Corporation ("Union Pacific"). The basic term of the Sublease
ends on January 1, 2004, but CITGO may renew the Sublease for successive renewal
terms through January 31, 2011. CITGO has the right to purchase the West Plant
from Union Pacific at the end of the basic term, the end of any renewal term, or
on January 31, 2011 at a nominal price.
 
     During the last several years, CITGO has increased the capacity of the
Corpus Christi refinery to produce petrochemical products. The Corpus Christi
refinery's main petrochemical products include cumene, cyclohexane, methyl
tertiary butyl ether ("MTBE") and aromatics (including benzene, toluene, and
xylene). The Company produces a significant quantity of cumene, an important
petrochemical product used in the engineered plastics market. The production of
xylene, a basic building block used in the manufacture of
 
                                        8
<PAGE>   9
 
consumer plastics, allows the refinery to take advantage of its reforming
capacity while staying within the gasoline specifications of the Clean Air Act
Amendments of 1990.
 
     Paulsboro Refinery.  The Paulsboro refinery, located in Paulsboro, New
Jersey, is an asphalt refinery. The Paulsboro refinery consists of Unit I, with
a rated capacity of 44 MBPD, and Unit II, with a rated capacity of 40 MBPD.
 
     Unit II, originally constructed in 1980 to produce asphalt from high
sulphur, heavy crude oil high in naphthenic acid, is a combination atmospheric
and vacuum distillation facility. The crude oil purchased by CITGO from PDVSA to
supply Unit II's crude oil requirements is particularly well suited for the
production of asphalt. Unit II produced an average of 21.0, 20.5 and 19.1 MBPD
of asphalt in the years 1997, 1996 and 1995, respectively, which accounted for
58% of Unit II's total production in each year. The remaining Unit II production
in 1997, 1996 and 1995 consisted of distillate products such as naphthas, marine
diesel oil and vacuum gas oils, which in the aggregate averaged approximately
14.4, 14.5 and 13.7 MBPD, respectively, in such years. Unit II crude oil runs
were 36, 35 and 33 MBPD, or a utilization rate of 90%, 88% and 83%, in 1997,
1996 and 1995, respectively.
 
     Unit I was constructed in 1979 primarily to process low sulphur, light
crude oil but has been modified to run heavier crudes such as Boscan. The unit
produces naphthas, diesel/#2 and #6 fuels and asphalt. Unit I is run primarily
when there is demand for toll processing of sweet crudes at attractive economics
and to produce asphalt. Crude oil runs for third party processing in 1997, 1996
and 1995 averaged 0.0, 0.0 and 2.1 MBPD, respectively, representing processing
utilization rates of 0%, 0% and 5%, respectively. In 1997, 1996 and 1995, 13.6,
3.4 and 2.6 MBPD of crude oil were run on Unit I for CITGO's own account,
producing 8.9, 2.4 and 1.9 MBPD of asphalt and 4.7, 0.9 and 0.8 MBPD of other
products, respectively.
 
     Savannah Refinery.  The Savannah Refinery, located near Savannah, Georgia,
is an asphalt refinery. CITGO acquired the Savannah Refinery on April 30, 1993.
The facility includes two crude distillation units, with a combined rated
capacity of 28 MBPD. The primary crude oil run by the refinery is Boscan.
 
     The units produced an average of 12.3, 11.4 and 10.5 MBPD of asphalt in the
years ended December 31, 1997, 1996 and 1995, respectively, which accounted for
75%, 76% and 77% of total production, in such years. An additional 4.1, 3.7 and
3.4 MBPD of production included naphthas and light, medium and heavy gas oils in
1997, 1996 and 1995, respectively. Total crude runs for the years 1997, 1996 and
1995 were 16.4, 15.1 and 13.7 MBPD, respectively, for utilization rates of 59%,
54% and 49%.
 
     LYONDELL-CITGO.  On July 1, 1993, subsidiaries of CITGO and Lyondell
Petrochemical Company ("Lyondell") executed definitive agreements with respect
to CITGO's investment in LYONDELL-CITGO, which owns and operates a sophisticated
265 MBPD refinery previously owned by Lyondell and located on the ship channel
in Houston, Texas. Through December 31, 1997, CITGO had invested approximately
$625 million (excluding reinvested earnings) in LYONDELL-CITGO. See
"Consolidated Financial Statements of CITGO -- Note 3". A refinery enhancement
project to increase the refinery's heavy crude oil high conversion capacity from
approximately 135 MBPD to 200 MBPD had an in-service date of March 1, 1997. The
crude oil processed by this refinery is supplied by PDVSA under a long-term
crude oil supply contract through the year 2017. CITGO purchases substantially
all of the refined products produced at this refinery under a long-term
contract. See "Consolidated Financial Statements of CITGO -- Note 5".
 
     CITGO's participation interest in LYONDELL-CITGO increased from
approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997, in
accordance with agreements between the owners concerning such interest. CITGO
has a one time option for 18 months from April 1, 1997, to increase, for an
additional investment, its participation interest to 50%.
 
  Crude Oil and Refined Product Purchases
 
     CITGO owns no crude oil reserves or production facilities, and must
therefore rely on purchases of crude oil and feedstocks for its refinery
operations. In addition, because CITGO's refinery operations do not produce
sufficient refined products to meet the demands of its branded marketers, CITGO
purchases refined products, primarily gasoline, from other refiners, including
LYONDELL-CITGO, PDV Midwest Refining, L.L.C.
                                        9
<PAGE>   10
 
("PDVMR") and Chalmette Refining, L.L.C. ("Chalmette"). See "Item 13. Certain
Relationships and Related Transactions".
 
     Crude Oil Purchases.  The following chart shows CITGO's purchases of crude
oil for the three years in the period ended December 31, 1997:
 
                           CITGO CRUDE OIL PURCHASES
 
<TABLE>
<CAPTION>
                         LAKE CHARLES, LA    CORPUS CHRISTI, TX     PAULSBORO, NJ         SAVANNAH, GA
                        ------------------   ------------------   ------------------   ------------------
                        1997   1996   1995   1997   1996   1995   1997   1996   1995   1997   1996   1995
                        ----   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----   ----
                              (MBPD)               (MBPD)               (MBPD)               (MBPD)
<S>                     <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>    <C>
SUPPLIERS
PDVSA................   130    142    150    117    130    122     49     39     35     14     17     14
PEMEX................    61     44     33      0      0      0      0      0      0      0      0      0
Occidental...........    40     43     43      0      0      0      0      0      0      0      0      0
Other Sources........    57     45     52      0      3      0      0      0      0      0      0      0
                        ---    ---    ---    ---    ---    ---    ---    ---    ---    ---    ---    ---
  Total..............   288    274    278    117    133    122     49     39     35     14     17     14
                        ===    ===    ===    ===    ===    ===    ===    ===    ===    ===    ===    ===
</TABLE>
 
     CITGO's largest supplier of crude oil is PDVSA, and CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of CITGO's refineries. See "Item 13 -- Certain
Relationships and Related Transactions". The following table shows the base and
incremental volumes of crude oil contracted for delivery and the volumes of
crude oil actually delivered under these contracts in the three years ended
December 31, 1997.
 
                  CITGO CRUDE OIL SUPPLY CONTRACTS WITH PDVSA
 
<TABLE>
<CAPTION>
                                                               VOLUMES OF CRUDE
                                                                OIL PURCHASED
                                         CONTRACT CRUDE       FOR THE YEAR ENDED
                                           OIL VOLUME            DECEMBER 31,       CONTRACT
                                      ---------------------   ------------------   EXPIRATION
                                      BASE   INCREMENTAL(1)   1997   1996   1995      DATE
                                      ----   --------------   ----   ----   ----   ----------
                                             (MBPD)                 (MBPD)           (YEAR)
<S>                                   <C>    <C>              <C>    <C>    <C>    <C>
LOCATION
Lake Charles, LA...................   120          50         115(2) 121(2) 125(2)    2006
Corpus Christi, TX.................   130          --         125(2) 130    122       2012
Paulsboro, NJ......................    30          --          35(2)  34(2)  35       2010
Savannah, GA.......................    12          --          12(2)  11(2)  14       2013
Houston, TX(3).....................   200          --         216    134    136       2017
</TABLE>
 
---------------
 
(1) The supply agreement for the Lake Charles refinery gives PDVSA the right to
     sell to CITGO incremental volumes up to the maximum amount specified in the
     table, subject to certain restrictions relating to the type of crude oil to
     be supplied, refining capacity and other operational considerations at the
     refinery.
 
(2) Volumes purchased under the supply agreements do not equal purchases from
     PDVSA shown in the previous table as a result of spot purchases or transfer
     between refineries.
 
(3) CITGO acquired a participation interest in LYONDELL-CITGO, the owner of the
     Houston refinery, on July 1, 1993. In connection with such transaction,
     LYONDELL-CITGO entered into a long-term crude oil supply agreement with
     PDVSA that provided for delivery volumes of 135 MBPD until the completion
     of a refinery enhancement project at which time the delivery volumes
     increased to from 200 MBPD to 230 MBPD.
 
                                       10
<PAGE>   11
 
     Most of the crude oil and feedstocks purchased by CITGO from PDVSA are
delivered on tankers owned by PDV Marina, S.A. ("PDV Marina"), a wholly-owned
subsidiary of PDVSA, or by other PDVSA subsidiaries. In 1997, 81% of the PDVSA
contract crude oil delivered to the Lake Charles and Corpus Christi refineries
was delivered on tankers operated by PDVSA subsidiaries.
 
     CITGO purchases additional crude oil under a 90-day evergreen agreement
with an affiliate of Petroleos Mexicanos ("PEMEX"). CITGO's refineries are
particularly well suited to refine PEMEX's Maya heavy, sour crude oil, which is
similar in many respects to several types of Venezuelan crude oil. Effective
January, 1995, the PEMEX crude contract was for 23 MBPD of Maya crude for the
first six months of 1995 and 17 MBPD for the last six months of 1995. Effective
January, 1996, PEMEX increased the crude contract to 27 MBPD of Maya crude which
increased to 35 MBPD effective July, 1996. Effective January 1, 1997, PEMEX
increased the crude contract to 52 MBPD of Maya crude. This contract also
includes 8 MBPD of Olmeca, light sour crude for 1995 and 10 MBPD for 1996 and
1997.
 
     CITGO is a party to a contract with an affiliate of Occidental Petroleum
Corporation ("Occidental") for the purchase of light, sweet crude oil to produce
lubricants. Purchases under this contract, which expires on August 31, 1998,
averaged 47 MBPD in 1997. CITGO also purchases sweet crude oil under
long-standing relationships with numerous other producers.
 
     Refined Product Purchases.  CITGO is required to purchase refined products
to supplement the production of the Lake Charles and Corpus Christi refineries
in order to meet demand of CITGO's marketing network. During 1997, CITGO's
shortage in gasoline production approximated 356 MBPD. However, due to
logistical needs, timing differences and product grade imbalances, CITGO
purchased approximately 518 MBPD of gasoline and sold into the spot market, or
to refined product traders or other refiners approximately 154 MBPD of gasoline.
The following table shows CITGO's purchases of refined products for the three
years in the period ended December 31, 1997.
 
                        CITGO REFINED PRODUCT PURCHASES
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                                -----------------------
                                                                1997     1996     1995
                                                                -----    -----    -----
                                                                                 (MBPD)
<S>                                                             <C>      <C>      <C>
LIGHT FUELS
  Gasoline..................................................     518      484      471
  Jet Fuel..................................................      74       92       87
  Diesel/#2 fuel............................................     190      153       90
                                                                 ---      ---      ---
  Total.....................................................     782      729      648
                                                                 ===      ===      ===
</TABLE>
 
     As of December 31, 1997, CITGO purchased substantially all of the refined
products, excluding petrochemicals, produced at the LYONDELL-CITGO refinery
under a long-term contract through the year 2017. LYONDELL-CITGO was a major
supplier in 1997 providing CITGO with 111 MBPD of gasoline, 68 MBPD of
distillate and 17 MBPD of jet fuel. See "-- Refining -- LYONDELL-CITGO".
 
     As of May 1, 1997, CITGO began purchasing, under a contract with a sixty
month term, substantially all of the refined products produced at the PDVMR
refinery. During the period of May 1 through December 31, 1997, the PDVMR
refinery provided CITGO with 84 MBPD of gasoline, 40 MBPD of distillate and 3
MBPD of jet fuel from this refinery.
 
     An affiliate of PDVSA entered into an agreement to acquire a 50 percent
equity interest in a refinery in Chalmette, Louisiana, in October, 1997 and has
assigned to CITGO its option to purchase up to 50 percent of the refined
products produced at the refinery through December 31, 1998 (see Consolidated
Financial Statements of CITGO -- Note 5). CITGO exercised this option on
November 1, 1997. For the period November 1 through December 31, 1997, CITGO
purchased 32 MBPD of gasoline, 24 MBPD of distillate and 10 MBPD of jet fuel.
 
                                       11
<PAGE>   12
 
  Marketing
 
     CITGO's major products are light fuels (including gasoline, jet fuel, and
diesel fuel), industrial products and petrochemicals, asphalt, and lubricants
and waxes. The following table shows revenue of each of these product categories
for the three years in the period ended December 31, 1997.
 
                      CITGO REFINED PRODUCT SALES REVENUES
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                       ------------------------------------------------------
                                             1997               1996               1995
                                       ----------------   ----------------   ----------------
                                           ($ IN MILLIONS, EXCEPT AS OTHERWISE INDICATED)
<S>                                    <C>       <C>      <C>       <C>      <C>       <C>
LIGHT FUELS.........................   $11,376    84.8%   $11,252    88.1%   $ 8,886    85.8%
Petrochemicals, Industrial Products
  and Other Products................     1,172     8.7%       846     6.6%       831     8.0%
Asphalt.............................       398     3.0%       257     2.0%       238     2.3%
Lubricants and Waxes................       467     3.5%       426     3.3%       404     3.9%
                                       -------   ------   -------   ------   -------   ------
  Total.............................   $13,413   100.0%   $12,781   100.0%   $10,359   100.0%
                                       =======   ======   =======   ======   =======   ======
</TABLE>
 
     Light Fuels.  CITGO markets gasoline, jet fuel and other distillates
through an extensive marketing network. The following table provides a breakdown
of the sales made by type of product for the three years in the period ended
December 31, 1997.
 
                             CITGO LIGHT FUEL SALES
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,       YEAR ENDED DECEMBER 31,
                                       --------------------------   ---------------------------
                                        1997      1996      1995     1997      1996      1995
                                       -------   -------   ------   -------   -------   -------
                                            ($ IN MILLIONS)                (MM GALLONS)
<S>                                    <C>       <C>       <C>      <C>       <C>       <C>
LIGHT FUELS
  Gasoline..........................   $ 7,754   $ 7,451   $6,367    11,953    11,308    11,075
  Jet Fuel..........................     1,183     1,489    1,163     2,000     2,346     2,249
  Diesel/#2 fuel....................     2,439     2,312    1,356     4,288     3,728     2,730
                                       -------   -------   ------   -------   -------   -------
  Total.............................   $11,376   $11,252   $8,886    18,241    17,382    16,054
                                       =======   =======   ======   =======   =======   =======
</TABLE>
 
     Gasoline sales accounted for 58%, 58% and 61% of CITGO's refined product
sales in the years 1997, 1996 and 1995, respectively. CITGO markets CITGO
branded gasoline through over 14,000 independently owned and operated CITGO
branded retail outlets (including 13,048 branded retail outlets owned and
operated by approximately 818 independent marketers and 1,798 7-Eleven(TM)
convenience stores) located throughout the United States, primarily east of the
Rocky Mountains. CITGO purchases gasoline to supply its marketing network, as
the gasoline production from the Lake Charles and Corpus Christi refineries was
only equivalent to approximately 47%, 49% and 53% of the volume of CITGO branded
gasoline sold in 1997, 1996 and 1995, respectively. See "-- Crude Oil and
Refined Product Purchases -- Refined Product Purchases".
 
     CITGO's strategy is to enhance the value of the CITGO brand in order to
obtain premium pricing for its products by appealing to consumer preference for
quality petroleum products and services. This is accomplished through a
commitment to quality, dependability and customer service to its independent
marketers, which constitute CITGO's primary distribution channel. The number of
independent marketer-owned or operated CITGO branded retail outlets has grown
significantly since 1986 when there were approximately 7,000 independently owned
and operated branded outlets, including 7-Eleven(TM) convenience stores, and has
increased approximately 2%, 3% and 7% in 1997, 1996 and 1995, respectively.
 
     In 1994, CITGO began offering to its marketers a program to enhance their
retail outlets with new card reader pumps. These pumps allow customers to pay
for their gasoline at the pumps with their credit cards
 
                                       12
<PAGE>   13
 
instead of going inside to pay. As of December 31, 1997, approximately 4,500
retail outlets had installed the card reader pumps.
 
     Sales to independent branded marketers typically are made under contracts
that range from three to seven years. Sales to 7-Eleven(TM) convenience stores
are made under a contract that extends through the year 2006. Under this
contract, CITGO arranges all transportation and delivery of motor fuels and
handles all product ordering. CITGO also acts as processing agent for the
purpose of facilitating and implementing orders and purchases from third-party
suppliers. CITGO receives a processing fee for such services.
 
     CITGO markets jet fuel directly to airline customers at 26 airports,
including such major hub cities as Atlanta, Chicago, Dallas/Fort Worth, New York
and Miami. Jet fuel sales volume to airline customers have decreased
approximately 16% in 1997 after increasing 6% and 2% in the years 1996 and 1995
respectively. The volume decrease in 1997 is due primarily to a change in focus
to selling only the Company's own production of jet fuel. The increases in 1996
and 1995 were due to higher levels of purchases by existing customers and sales
to new customers. Sales of bonded jet fuel, which are exempt from import duties
as well as certain state and local taxes, have decreased from 579 million
gallons in 1995 (accounting for 31% of total jet fuel sales volume to airline
customers) to 408 million gallons in 1997 (accounting for 24% of total jet fuel
sales volume to airline customers).
 
     Growth in wholesale rack sales to marketers has been the primary focus of
diesel/#2 marketing efforts. Such marketing efforts have resulted in increases
in wholesale rack sales volume from approximately 1,283 million gallons in 1995
to approximately 1,754 million gallons in 1997. The remaining diesel/#2 fuel
production is sold either in bulk through contract sales (primarily as heating
oil in the Northeast) or on a spot basis.
 
     CITGO's delivery of light fuels to its customers is accomplished in part
through 52 refined product terminals located throughout CITGO's primary market
territory. Of these terminals, 38 are wholly-owned by CITGO and 14 are jointly
owned. Sixteen of CITGO's product terminals have waterborne docking facilities,
which greatly enhance the flexibility of CITGO's logistical system. In addition,
CITGO operates nine terminals owned by PDVMR in the Midwest. Refined product
terminals owned or operated by CITGO provide a total capacity of approximately
24 million barrels. Also, CITGO has active exchange relationships with over 270
other refined product terminals, providing flexibility and timely response to
distribution needs.
 
     Petrochemicals and Industrial Products.  CITGO sells petrochemicals in bulk
to a variety of U.S. manufacturers as raw materials for finished goods. Sulphur
is sold to the U.S. and international fertilizer industry; cycle oils are sold
for feedstock processing and blending; natural gas liquids are sold to the U.S.
fuel and petrochemical industry; petroleum coke is sold primarily in
international markets, through a joint venture, for use as kiln and boiler fuel;
and residual fuel blendstocks are sold to a variety of fuel oil blenders and
customers. The majority of CITGO's cumene production is sold to Mount Vernon
Phenol Plant Partnership (see "Item 13. Certain Relationships and Related
Transactions"), a joint venture phenol production plant in which CITGO is a
limited partner. The phenol plant produces phenol and acetone for sale primarily
to the principal partner in the phenol plant for the production of plastics.
 
     Asphalt.  CITGO markets asphalt through 15 terminals located along the East
Coast, from Savannah, Georgia to Albany, New York. Asphalt is sold primarily to
independent contractors for use in the construction and resurfacing of roadways.
Demand for asphalt in the Northeastern U.S. declines substantially in the winter
months as a result of weather conditions.
 
     Lubricants and Waxes.  CITGO markets many different types, grades and
container sizes of lubricants and wax products, with the bulk of sales
consisting of automotive oil and lubricants and industrial lubricants. Other
major lubricant products include 2-cycle engine oil and automatic transmission
fluid.
 
     CITGO sells its finished lubricant products through three classes of trade:
(i) independent marketers that specialize in lubricant sales (representing 80%
of 1997 sales), (ii) mass merchandisers (representing 6% of 1997 sales) and
(iii) directly to large industrial end users (representing 14% of 1997 sales).
CITGO emphasizes sales to independent marketers in its lubricants marketing
because of the higher margins realized
 
                                       13
<PAGE>   14
 
from these sales. Large industrial end users include steel manufacturers for
industrial lubricants and automobile manufacturers for "original equipment"
quantities of automotive oils and fluids.
 
     CITGO markets the largest portion of its wax production as coating
materials for the corrugated container industry. CITGO also provides wax for the
manufacture of candles, drinking cups, waxed papers, and a variety of building
and rubber products.
 
  Pipeline Operations
 
     CITGO owns and operates 364 miles of crude oil pipeline systems and
approximately 1,100 miles of products pipeline systems. The crude oil pipelines
provide CITGO with access to gathering systems throughout major production areas
in Louisiana and Texas that provide the Lake Charles refinery with domestic
crude oil to supplement waterborne deliveries. CITGO also has joint equity
interests in three crude oil pipeline companies with a total of nearly 5,400
miles of pipeline plus equity interest in six refined product pipeline companies
with a total of approximately 8,000 miles of pipeline. CITGO's pipeline
interests provide it with access to substantial refinery feedstocks and reliable
transportation to refined product markets, as well as cash flows from dividends.
One of the refined product pipelines in which CITGO has an interest, Colonial
Pipeline, is the largest refined product pipeline in the United States
transporting gasoline, jet fuel and diesel/#2 fuel oil from the Gulf Coast to
the mid-Atlantic and eastern seaboard states.
 
     In early 1997, CITGO sold approximately 520 miles of crude gathering/trunk
lines in Texas and Louisiana.
 
  Employees
 
     CITGO and its subsidiaries have a total of approximately 5,300 employees,
approximately 1,900 of whom are covered by 17 union contracts. Approximately
1,700 of the union employees are employed in refining operations. The remaining
union employees are located primarily at a lubricant blending and packaging
plant and at other refined product terminals.
 
     Effective February 28, 1998, the stock of Petro-Chemical Transport, Inc.
("PCT"), a wholly owned subsidiary of CITGO, was sold. As a result of this sale,
approximately 420 employees were terminated. The operations of PCT were not
material to CITGO.
 
ENVIRONMENT AND SAFETY
 
  Environment
 
     Beginning in 1994, the U.S. refining industry was required to comply with
stringent product specifications under the 1990 Clean Air Act ("CAA") Amendments
for reformulated gasoline and low sulphur diesel fuel which necessitated
additional capital and operating expenditures, and altered significantly the
U.S. refining industry and the return realized on refinery investments. In
addition, numerous other factors affect the Company's plans with respect to
environmental compliance and related expenditures. See "Factors Affecting
Forward Looking Statements".
 
     In addition, the Company is subject to various federal, state and local
environmental laws and regulations which may require the Company to take action
to correct or improve the effects on the environment of prior disposal or
release of petroleum substances by the Company or other parties. Management
believes the Company is in compliance with these laws and regulations in all
material aspects. Maintaining compliance with environmental laws and regulations
in the future could require significant capital expenditures and additional
operating costs.
 
     In 1992, an agreement was reached between the Company and a former owner
concerning a number of environmental issues. Pursuant to this agreement, the
former owner will continue to share the costs of certain specific environmental
remediation and certain tort liability actions based on ownership periods and
specific terms of the agreement. Also in 1992, the Company reached an agreement
with a state agency to cease usage of certain surface impoundments at the
Company's Lake Charles refinery by 1994. A mutually acceptable
 
                                       14
<PAGE>   15
 
closure plan was filed with the state in 1993. The Company and such former owner
are participating in the closure and sharing the related costs based on
estimated contributions of waste and ownership periods. The remediation
commenced in December 1993. In 1997, the Company presented a proposal to a state
agency revising the 1993 closure plan. A ruling on this proposal is expected in
1998 and actual closure is expected to be completed during 2000.
 
     While CITGO is named as a potentially responsible party ("PRP") at a number
of "Superfund" sites, pursuant to a 1992 agreement, OXY, USA Inc. and Occidental
have agreed to indemnify CITGO with respect to Superfund damages where offsite
hazardous waste disposal occurred prior to September 1, 1983. Based on publicly
available information, CITGO believes that Occidental has the financial
capability to fulfill all of its responsibilities under this agreement.
Accordingly, CITGO believes that it's offsite liability exposure under the
Federal Superfund and similar state laws with respect to these sites is not
material. In addition, under the 1992 agreement, CITGO assumed responsibility
for certain other environmental contamination at certain terminal properties in
return for cash payments and other agreements.
 
     During 1994 and 1995, CITGO Asphalt Refining Company ("CARCO") received two
Notices of Violation ("NOV") and two Compliance Orders from the Environmental
Protection Agency ("EPA") relating to the operation of certain units at the
Paulsboro Refinery. A Consent Order resolving these issues was entered by a
federal court in February, 1997. Under the terms of the Consent Order, CARCO
paid a $1,230,000 penalty. The Consent Order terminated January 30, 1998.
 
     On September 30, 1996, CITGO received an NOV from the EPA, Washington,
D.C., alleging violations of the CAA in the Chicago-Gary-Lake County,
Illinois-Indiana-Wisconsin area, arising from the sale of gasoline that failed
to meet the applicable minimum or maximum oxygen content. A Settlement Agreement
resolving this matter was entered into with the EPA in December 1997. Under the
terms of the Settlement Agreement, CITGO paid a penalty of $15,869.
 
     CITGO's accounting policy establishes environmental reserves as probable
site restoration and remediation obligations become reasonably capable of
estimation. At December 31, 1997 and 1996, CITGO had approximately $49 million
and $56 million, respectively, of environmental accruals included in other
noncurrent liabilities. Based on currently available information, including the
continuing participation of former owners in remediation actions, CITGO
management believes that these accruals are sufficient to address its
environmental clean-up obligations.
 
     Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, CITGO's operating refinery
complexes, closed refineries, service stations and crude oil and petroleum
storage terminals. The amount of such future expenditures, if any, is
indeterminable.
 
     Increasingly stringent regulatory provisions periodically require
additional capital expenditures. During 1997, CITGO expended approximately $31.5
million for environmental and regulatory capital improvements in its operations.
Management currently estimates that CITGO will spend approximately $290 million
for environmental and regulatory capital projects over the five-year period
1998-2002. These estimates may vary due to a variety of factors. See "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources". See also "Factors Affecting
Forward Looking Statements".
 
  Safety
 
     Due to the nature of petroleum refining and distribution, CITGO is subject
to stringent occupational health and safety laws and regulations. CITGO
maintains comprehensive safety, training and maintenance programs. CITGO
believes that it is in substantial compliance with occupational health and
safety laws.
 
                                       15
<PAGE>   16
 
                           ITEM 3.  LEGAL PROCEEDINGS
 
     Various lawsuits and claims arising in the ordinary course of business are
pending against the Company. Included among these is litigation against CITGO by
a number of current and former employees and applicants on behalf of themselves
and a class of similarly situated persons asserting claims under federal and
state laws of racial discrimination in connection with the employment practices
at CITGO's Lake Charles refining complex; the plaintiffs seek injunctive relief
and monetary damages and have appealed the Court's denial of class
certification; the initial trials relating to this litigation are not currently
included in the trial docket.
 
     In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against UNO-VEN to assert claims against
CITGO, PDVSA, PDV America, PDVMR, and Unocal pursuant to Section 301 of the
Labor Management Relations Act ("LMRA"). This complaint alleges that CITGO and
the other defendants constitute a single employer, joint employers or alter-egos
for purposes of the LMRA, and are therefore bound by the terms of a collective
bargaining agreement between UNO-VEN and Local 7-517 covering certain production
and maintenance employees at a Lemont, Illinois, petroleum refinery. On May 1,
1997, in a transaction involving the former partners of UNO-VEN, the Lemont
refinery was acquired by PDVMR. Pursuant to an operating agreement with PDVMR,
CITGO became the operator of the Lemont refinery, and employed the substantial
majority of employees previously employed by UNO-VEN pursuant to its initial
terms and conditions of employment, but did not assume the existing labor
agreement. The union seeks compensation for monetary differences in medical,
pension and other benefits between the CITGO and UNO-VEN plans and reinstatement
of all of the UNO-VEN benefit plans. The union also seeks to require CITGO to
abide by the terms of the collective bargaining agreement between the union and
UNO-VEN. The trial of this case currently is set for July 1998.
 
     On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected units
were shut down for repair and were returned to full service in early August
1997. The Company has property damage and business interruption insurance which
related to this event. As a result, the property damage and business
interruption did not have a material adverse effect on the Company's financial
condition or results of operations. There are presently five lawsuits against
the Company pending in federal and state courts in Corpus Christi, Texas,
alleging property damages, personal injury and punitive damages allegedly
arising from the incident and other similar lawsuits have been threatened.
Approximately 6,000 individual claims have been received by the Company
allegedly arising from the incident.
 
     A class action lawsuit is pending against the Company and other operators
and owners of nearby industrial facilities which was filed in state court in
Corpus Christi, Texas in 1993 on behalf of property owners in the vicinity of
these facilities. The certification of this case as a class action in 1995 was
appealed to the Texas Supreme Court and a decision is pending. This lawsuit
asserts property damage claims and diminution in property values allegedly
resulting from environmental contamination in the air, soil, and groundwater,
occasioned by ongoing operations of the Company's Corpus Christi refinery and
the respective industrial facilities of the other defendants. Two related
personal injury and wrongful death lawsuits were filed in 1996 and are in
preliminary stages of discovery at this time. In 1997 the Company signed an
agreement to settle the property damage class action lawsuit for approximately
$17.3 million which included the purchase of approximately 290 properties in an
adjacent neighborhood. Of this amount, $15.7 was expensed in 1997. CITGO
submitted a settlement proposal to the court. The court appointed a guardian to
review the proposed settlement terms. Subsequently, the Texas Supreme Court
decided to hear the Company's appeal of the trial court's class certification
order. This decision raised questions whether the trial court had authority to
proceed with the settlement. Additionally, the trial court sought to impose
additional conditions upon the settlement which were unacceptable to the
Company. For these reasons, the Company opposed the approval and enforcement of
the settlement agreement as proposed to be revised and enforcement has now been
stayed pending a ruling by the Texas Supreme Court. If the settlement agreement
is enforced, the Company could be liable for the full settlement amount of $17.3
million. CITGO is pursuing an independent program to purchase the properties
which were the subject of the purchase provisions of the settlement agreement.
                                       16
<PAGE>   17
 
     In June 1997, CITGO settled litigation with a contractor who had claimed
additional compensation for sludge removal and treatment at CITGO's Lake
Charles, Louisiana, refinery. The settlement did not have a material effect on
CITGO's financial position or results of operations. CITGO believes that it has
no further exposures to losses related to this matter.
 
     In July 1997, the Texas Natural Resources Conservation Commission ("TNRCC")
issued a Preliminary Report and Petition alleging that CITGO Refining and
Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's rules relating to
operating a hazardous waste management unit without permit and recommended a
penalty of $699,200. CITGO Refining disagrees with these allegations and the
proposed penalties and is negotiating with the TNRCC to settle this matter.
 
     The Company is vigorously contesting or pursuing, as applicable, such
lawsuits and claims and believes that its positions are sustainable. The Company
has recorded accruals for losses it considers to be probable and reasonable
estimable. However, due to uncertainties involved in litigation, there are
cases, including the significant matters noted above, in which the outcome is
not reasonably predictable, and the losses, if any, are not reasonably
estimable. If such lawsuits and claims were to be determined in a manner adverse
to the Company, and in amounts in excess of the Company's accruals, it is
reasonably possible that such determinations could have a material adverse
effect on the Company's results of operations in a given reporting period. The
term "reasonably possible" is used herein to mean that the chance of a future
transaction or event occurring is more than remote but less than likely.
However, based upon management's current assessments of these lawsuits and
claims and that provided by counsel in such matters, and the capital resources
available to the Company, management of the Company believes that the ultimate
resolution of these lawsuits and claims would not exceed by a material amount,
the aggregate of the amounts accrued in respect of such lawsuits and claims and
the insurance coverages available to the Company and, therefore, should not have
a material adverse effect on the Company's financial condition, results of
operations or liquidity.
 
          ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     Not Applicable.
 
                                       17
<PAGE>   18
 
                                    PART II
 
                 ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY
                        AND RELATED STOCKHOLDER MATTERS
 
     The Company's common stock is not publicly traded. All of the Company's
common stock is held by PDV America, a Delaware corporation whose ultimate
parent is PDVSA. The Company and PDV America are parties to a tax allocation
agreement which is designed to provide PDV America with sufficient cash to pay
its consolidated income tax liabilities. In April 1996, $12.7 million due from
CITGO to PDV America under this tax allocation agreement for the tax years 1992
through 1994 was reclassified and accounted for as a noncash contribution of
capital. In December 1996, $0.8 million due from PDV America to CITGO under this
tax allocation agreement for the 1995 tax year was reclassified and accounted
for as a noncash dividend. In December 1997, $10 million due from PDV America to
CITGO under this tax allocation agreement for the 1996 tax year was reclassified
and accounted for as a noncash dividend. In January 1998, CITGO declared and
paid a dividend of $110 million to PDV America.
 
                        ITEM 6.  SELECTED FINANCIAL DATA
 
     The following table sets forth certain selected historical consolidated
financial and operating data of CITGO as of the end of and for each of the five
years in the period ended December 31, 1997. The following table should be read
in conjunction with the consolidated financial statements of CITGO as of
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, included in Item 8, which have been audited by Deloitte &
Touche LLP, independent auditors. The audited consolidated financial statements
of CITGO for each of the five years in the period ended December 31, 1997, have
been prepared on the basis of United States generally accepted accounting
principles. The consolidated financial statements of CITGO at December 31, 1995,
1994 and 1993, and for the years ended December 31, 1994 and 1993, not
separately presented herein, have been audited.
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------
                                                1997      1996     1995(2)    1994     1993(1)
                                               -------   -------   -------   -------   -------
                                                            (DOLLARS IN MILLIONS)
<S>                                            <C>       <C>       <C>       <C>       <C>
INCOME STATEMENT DATA
Sales.......................................   $13,591   $12,952   $10,522   $ 9,247   $ 9,107
Equity in earnings of affiliates............        64        21        34        29        30
Net revenues................................    13,645    12,969    10,553     9,269     9,134
Income before extraordinary items and
  cumulative effect of accounting change....       207       127       136       191       162
Extraordinary gain (charge)(3)..............        --        --         4        (2)       --
Cumulative effect of accounting change(4)...        --        --        --        (4)       --
Net income..................................       207       127       140       185       162
RATIO OF EARNINGS TO FIXED CHARGES(5).......      3.23x     2.49x     2.76x     3.85x     3.71x
BALANCE SHEET DATA
Total assets................................   $ 5,412   $ 5,630   $ 4,924   $ 4,440   $ 3,866
Long-term debt (excluding current
  portion)(6)...............................     1,275     1,599     1,301     1,160     1,074
Total debt(7)...............................     1,386     1,759     1,432     1,283     1,121
Shareholder's equity........................     2,081     1,870     1,732     1,577     1,350
</TABLE>
 
---------------
 
(1) Includes operations of the Savannah asphalt refinery since April 30, 1993.
 
(2) Includes operations of Cato Oil & Grease since May 1, 1995.
 
(3) Represents extraordinary gain (or charges) for the early extinguishment of
     debt (net of related income tax provision of $2 million and income tax
     benefit of $1 million) in 1995 and 1994, respectively.
 
                                       18
<PAGE>   19
 
(4) Represents the cumulative effect of the accounting change to Statement of
     Financial Accounting Standards ("SFAS") No. 112, "Employers' Accounting for
     Post-Employment Benefits" in 1994 (net of related income tax benefits of $3
     million).
 
(5) For the purpose of calculating the ratio of earnings to fixed charges,
     "earnings" consist of income before income taxes and cumulative effect of
     accounting charges plus fixed charges (excluding capitalized interest),
     amortization of previously capitalized interest and certain adjustments to
     equity in income of affiliates. "Fixed charges" include interest expense,
     capitalized interest, amortization of debt issuance costs and a portion of
     operating lease rent expense deemed to be representative of interest.
 
(6) Includes long-term debt to third parties and capital lease obligations.
 
(7) Includes short-term bank loans, current portion of capital lease obligations
     and long-term debt, long-term debt and capital lease obligations.
 
                 ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     The following discussion of the financial condition and results of
operations of CITGO should be read in conjunction with the consolidated
financial statements of CITGO included elsewhere herein.
 
     Petroleum industry operations and profitability are influenced by a large
number of factors, some of which individual petroleum refining and marketing
companies cannot entirely control. Governmental regulations and policies,
particularly in the areas of taxation, energy and the environment, have a
significant impact on petroleum activities, regulating how companies conduct
their operations and formulate their products, and, in some cases, limiting
their profits directly. Demand for crude oil and refined products is largely
driven by the condition of local and worldwide economies, although weather
patterns and taxation relative to other energy sources also play a significant
part. CITGO's consolidated operating results are affected by these industry-
specific factors and by company-specific factors, such as the success of
wholesale marketing programs and refinery operations.
 
     The earnings and cash flows of companies engaged in the refining and
marketing business in the United States are primarily dependent upon producing
and selling quantities of refined products at margins sufficient to cover fixed
and variable costs. The refining and marketing business is characterized by high
fixed costs resulting from the significant capital outlays associated with
refineries, terminals and related facilities. This business is also
characterized by substantial fluctuations in variable costs, particularly costs
of crude oil, feedstocks and blending components, and in the prices realized for
refined products. Crude oil and refined products are commodities whose price
levels are determined by market forces beyond the control of CITGO.
 
     In general, prices for refined products are significantly influenced by the
price of crude oil, feedstocks and blending components. Although an increase or
decrease in the price for crude oil, feedstocks and blending components
generally results in a corresponding increase or decrease in prices for refined
products, generally there is a lag in the realization of the corresponding
increase or decrease in prices for refined products. The effect of changes in
crude oil prices on CITGO's consolidated operating results therefore depends in
part on how quickly refined product prices adjust to reflect these changes. A
substantial or prolonged increase in crude oil prices without a corresponding
increase in refined product prices, a substantial or prolonged decrease in
refined product prices without a corresponding decrease in crude oil prices, or
a substantial or prolonged decrease in demand for refined products could have a
significant negative effect on the Company's earnings and cash flows including
inventory valuation adjustments. CITGO purchases a significant amount of its
crude oil requirements from PDVSA under long-term supply agreements (expiring in
the years 2006 through 2013). These supply agreements are designed to reduce the
volatility of earnings and cash flows from CITGO's refining operations by
providing a relatively stable level of gross margin on crude oil supplied by
PDVSA. This supply represented approximately 61 percent of the crude oil
processed in refineries operated by CITGO in the year ended December 31, 1997.
However, CITGO also purchases significant volumes of refined products to
 
                                       19
<PAGE>   20
 
supplement the production from its refineries to meet marketing demands and to
resolve logistical issues. CITGO's earnings and cash flows are also affected by
the cyclical nature of petrochemical prices. Inflation was not a significant
factor in the operations of CITGO during the three years ended December 31,
1997. As a result of these factors, the earnings and cash flows of CITGO may
experience substantial fluctuations.
 
     Effective January, 1, 1992, the supply agreements between PDVSA and CITGO
with respect to the Lake Charles, Corpus Christi and Paulsboro refineries were
modified to reduce the price levels to be paid by CITGO by a fixed amount per
barrel of crude oil purchased from PDVSA. Such reductions were intended to
defray CITGO's costs of certain environmental compliance expenditures. This
modification resulted in a decrease in the cost of crude oil purchased under
these agreements of approximately $70 million per year for the years 1992
through 1994 as compared to the amount that would otherwise have been payable
thereunder. This modification was to expire at December 31, 1996; however, in
1995, PDVSA and CITGO agreed to adjust this modification so that the 1992 fixed
amount per barrel would be reduced and the adjusted modification would not
expire until December 31, 1999. The effect of this adjustment to the original
modification was to increase the cost of crude oil purchased under these
agreements by approximately $22 million and $44 million in 1995 and 1996,
respectively, as compared to the amount that would otherwise have been payable
thereunder based on the original modification (resulting in a net decrease of
approximately $48 million and $26 million in 1995 and 1996, respectively, from
the amount otherwise payable under the agreement prior to the 1992 original
modification.) In 1997, the effect of the adjustments to the original
modifications was to reduce the price of crude oil purchased from PDVSA by
approximately $25 million. The Company anticipates that the effect of the
adjustments to the original modifications will be to reduce the price of crude
oil purchased from PDVSA under these agreements by approximately $25 million per
year in 1998 and 1999, in each case as compared to the original modification and
without giving effect to any other factors that may affect the price payable for
crude oil under these agreements. Due to the pricing formula under the supply
agreements, the aggregate price actually paid for crude oil purchased from PDVSA
under these agreements in each of these years will depend primarily upon the
current prices for refined products and certain actual costs of CITGO. These
estimates are also based on the assumption that CITGO will purchase the base
volumes of crude oil under the agreements.
 
     In July 1997 the Company's senior management implemented a Transformation
Program designed to ensure that numerous expense controls, business information
systems and business efficiency initiatives underway are effectively coordinated
to achieve desired results. Included in this program are reviews of the
Company's business units, assets, strategies, and business processes. These
combined actions include expected personnel reductions (the "Separation
Programs"). The cost of the Separation Programs is approximately $22 million for
the year ended December 31, 1997. In addition, as part of the Transformation
Program, the first phase of Systems, Applications and Products in Data
Processing ("SAP") implementation, which includes the Company's financial
reporting systems, went into production on January 1, 1998. Additional SAP
modules are to be implemented throughout 1998 and 1999.
 
                                       20
<PAGE>   21
 
     The following table summarizes the sources of CITGO's sales revenues and
volumes.
 
                        CITGO SALES REVENUES AND VOLUMES
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,        YEAR ENDED DECEMBER 31,
                                    -----------------------------    --------------------------
                                     1997       1996       1995       1997      1996      1995
                                    -------    -------    -------    ------    ------    ------
                                           ($ IN MILLIONS)                  (MM GALLONS)
<S>                                 <C>        <C>        <C>        <C>       <C>       <C>
Gasoline........................    $ 7,754    $ 7,451    $ 6,367    11,953    11,308    11,075
Jet fuel........................      1,183      1,489      1,163     2,000     2,346     2,249
Diesel/#2 fuel..................      2,439      2,312      1,356     4,288     3,728     2,730
Petrochemicals, industrial
  products and other products...      1,172        846        831     1,940     1,408     1,572
Asphalt.........................        398        257        238       749       569       503
Lubricants and waxes............        467        426        404       239       220       215
                                    -------    -------    -------    ------    ------    ------
  Total refined product sales...    $13,413    $12,781    $10,359    21,169    19,579    18,344
Other sales.....................        178        171        163        --        --        --
                                    -------    -------    -------    ------    ------    ------
  Total sales...................    $13,591    $12,952    $10,522    21,169    19,579    18,344
                                    =======    =======    =======    ======    ======    ======
</TABLE>
 
     The following table summarizes CITGO's cost of sales and operating
expenses.
 
                   CITGO COST OF SALES AND OPERATING EXPENSES
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                -----------------------------
                                                                 1997       1996       1995
                                                                -------    -------    -------
                                                                       ($ IN MILLIONS)
<S>                                                             <C>        <C>        <C>
Crude oil...................................................    $ 2,917    $ 3,053    $ 2,428
Refined products............................................      7,634      7,139      5,504
Intermediate feedstocks.....................................      1,152      1,000        898
Refining and manufacturing costs............................        819        801        755
Other operating costs and expenses and inventory changes....        498        498        481
                                                                -------    -------    -------
  Total cost of sales and operating expenses................    $13,020    $12,491    $10,066
                                                                =======    =======    =======
</TABLE>
 
RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
 
     Sales revenues and volumes.  Sales increased by $639 million, representing
a 5% increase from 1996 to 1997. The increase was due to an increase in sales
volumes of 8% partially offset by a decrease in average sales prices of 3%.
Sales volumes of light fuels (gasoline, diesel/2 fuel and jet fuel), excluding
bulk sales made for logistical reasons, were up 7% from 1996 to 1997 and their
average unit price decreased $0.02. Gasoline sales volumes increased primarily
due to successful marketing efforts, including the net addition of approximately
335 new independently owned CITGO branded outlets since December 31, 1996, as
well as additional marketers obtained through the transaction relating to the
UNO-VEN Company (see "Item 13. Certain Relationships and Related Transactions").
Petrochemical sales volume rose 30% from 1996 to 1997. This increase, combined
with an average increase in unit prices of $0.02, resulted in a 33% increase in
petrochemical sales revenue from 1996 to 1997. Petrochemical sales volumes
increased primarily due to the increased production of xylene, refinery grade
propylene and polymer grade propylene due to favorable economics. Industrial
products sales volumes increased 40% and average unit prices increased $0.03 for
a 48% increase in industrial products sales revenue from 1996 to 1997. The
increase in industrial products sales volumes was due to the availability of
product for sale from the PDVMR refinery. Asphalt sales revenue increased 55%
from 1996 to 1997. The increase was primarily due to increases in sales volumes,
up 32% from 1996 to 1997 and an 18% increase in sales price. The increase in
asphalt sales volume is due primarily to the Company's efforts in production and
marketing to take advantage of Sun Oil Company's withdrawal from the
 
                                       21
<PAGE>   22
 
East Coast asphalt market. Lubricants and wax sales revenue increased 10% from
1996 to 1997 due to increases in both sales price and volume.
 
     Equity in earnings (losses) of affiliates.  Equity in earnings of
affiliates increased by approximately $43 million, or 205% from $21 million in
1996 to $64 million in 1997. This increase was due primarily to a $43 million
increase in CITGO's equity earnings of LYONDELL-CITGO. This increase was due
primarily to the change in CITGO's interest in LYONDELL-CITGO which increased
from approximately 13% at December 31, 1996 to approximately 42% on April 1,
1997 and the improvement in LYONDELL-CITGO's operations since completion of its
refinery enhancement project during the first quarter of 1997 (See Consolidated
Financial Statements of CITGO -- Note 5).
 
     Other income (expense).  Other income (expense) was $(10.5) million for the
year ended December 31, 1997 as compared to $(4.2) million for the same period
in 1996. The 1997 amount includes $8.7 million in loss reserves on a lubricants
plant and retail properties, a $5.8 million write off of a capital project, $5.8
million in fees related to the sale of trade accounts, notes and credit card
receivables in June and November 1997 and a $2.6 million write off of
miscellaneous assets. These items were offset by a net $8.3 million property
insurance recovery relating to the Corpus Christi alkylation unit fire during
the third quarter, a $3.1 million net management fee charged to PDVMR over the
year and a $1.3 million gain on the sale of pipeline assets in the first quarter
of 1997.
 
     Cost of sales and operating expenses.  Cost of sales and operating expenses
increased by $529 million, or 4% from 1996 to 1997. Lower crude oil purchases in
1997 as compared to 1996 resulted from a 7% decrease in crude oil prices in 1997
as compared to 1996, and a 3% decrease in purchased volumes in 1997 as compared
to 1996. Higher intermediate feedstock purchases were attributable to an 18%
increase in volumes purchased, partially offset by 2% decrease in prices.
Refinery production was higher in 1997 than 1996; however, due to the increased
sales volumes mentioned above, refined product purchases increased 7%. The
increase in refined product purchases includes a 10% increase in volumes offset
by 3% lower refined product prices. The increases in refining and manufacturing
costs are due primarily to increased costs of purchased fuel and electricity at
CITGO's Lake Charles refinery.
 
     CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. The refined
product purchases represented 59% and 57% of cost of sales for the years 1997
and 1996, respectively. These refined product purchases included purchases from
LYONDELL-CITGO, PDVMR and Chalmette. CITGO estimates that margins on purchased
products, on average, are lower than margins on produced products due to the
fact that CITGO can only receive the marketing portion of the total margin
received on the produced refined products. However, purchased products are not
segregated from CITGO produced products and margins may vary due to market
conditions and other factors beyond the Company's control. As such, it is
difficult to measure the effects on profitability of changes in volumes of
purchased products. CITGO anticipates its purchased product requirements will
continue to increase, in volume and as a percentage of refined products sold, in
order to meet marketing demands, although in the near term, other than normal
refinery turnaround maintenance, CITGO does not anticipate operational actions
or market conditions which might cause a material change in anticipated
purchased product requirements; however, there could be events beyond the
control of CITGO which impact the volume of refined products purchased. See also
"Factors Affecting Forward Looking Statements".
 
     Gross margin.  The gross margin for 1997 was $571 million, or 4.2%,
compared to $461 million, or 3.6% for 1996. Gross margins in 1997 were
positively affected by high crude runs during periods of strong refining margins
as well as asphalt and petrochemical activities (in each case, as discussed
above).
 
     Selling, general and administrative expenses.  Selling, general and
administrative expenses increased $35 million, or 21%, due primarily to
increased selling expenses in 1997 including the effect of the change in focus
of the Company's marketing programs initiated in April 1996 and increases in
several other areas including purchasing, administrative services, information
systems, corporate executive, credit card and other charges, none of which
increased more than $6 million individually, but in the aggregate increased
approximately $30 million for the year.
 
                                       22
<PAGE>   23
 
     Interest expense.  Interest expense increased $11.5 million from 1996 to
1997. The increase was primarily due to the public debt and certain industrial
revenue bonds which were outstanding for the entire year in 1997 compared to
only a partial year during 1996 and CITGO's revolving bank loan which had a
higher outstanding balance during most of 1997 as compared to 1996.
 
     Income taxes.  CITGO's provision for income taxes in 1997 was $91 million,
representing an effective tax rate of 31%. In 1996, CITGO's provision for income
taxes was $70 million, representing an effective tax rate of 36%. The decrease
is due primarily to the favorable resolution of a significant tax issue related
to environmental expenditures with the Internal Revenue Service in the second
quarter of 1997. The decrease was partially offset by the recording of a
valuation allowance related to a capital loss carryforward that will more likely
than not expire in 1998.
 
     Net income.  Net income was $207 million for 1997 compared to $127 million
for 1996.
 
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
 
     Sales revenues and volumes.  Sales increased by $2,430 million,
representing a 23% increase from 1995 to 1996. The increase was due to an
increase in sales volumes of 7% and an average increase in sales prices of 16%.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet fuel), excluding
bulk sales made for logistical reasons, were up 10% from 1995 to 1996 and their
average unit price increased $0.10. Gasoline sales volumes increased primarily
due to successful marketing efforts, including the net addition of approximately
470 new independently owned CITGO branded outlets since December 31, 1995.
Petrochemical sales volume rose 14% from 1995 to 1996. This increase, combined
with an average decrease in unit prices of $0.16, resulted in a 3% decrease in
petrochemical sales revenue from 1995 to 1996. Industrial products sales volumes
decreased 31% and average unit prices increased $0.02 for a 27% decrease in
industrial products sales revenue from 1995 to 1996. Asphalt sales revenue
increased 8% from 1995 to 1996. The increase was primarily due to increases in
sales volumes. Lubricants and wax sales revenue increased 5% from 1995 to 1996
due to increases in both sales price and volume.
 
     Equity in earnings (losses) of affiliates.  Equity in earnings of
affiliates decreased by approximately $13 million, or 38% from $34 million in
1995 to $21 million in 1996. This decrease was due primarily to a $13 million
decrease in equity earnings of LYONDELL-CITGO. Almost all of the shortfall in
LYONDELL-CITGO's earnings was due to lower fuels margins, lower aromatics
prices, higher natural gas prices, operating problems in the first half of the
year and the impact of the expansion project startup on existing operations.
 
     Cost of sales and operating expenses.  Cost of sales and operating expenses
increased by $2,425 million, or 24% from 1995 to 1996. Higher crude oil
purchases in 1996 as compared to 1995 resulted from a 22% increase in crude oil
prices in 1996 as compared to 1995, or approximately $3.21 per barrel which
includes approximately $0.13 per barrel related to the 1995 adjustments of the
PDVSA crude and feedstock supply agreements discussed in the overview, and a 3%
increase in volumes in 1996 as compared to 1995. Higher intermediate feedstock
purchases were attributable to a 20% increase in prices, partially offset by 7%
decrease in volumes purchased. Refinery production was higher in 1996 than 1995;
however, due to the increased sales volumes mentioned above, refined product
purchases increased 30%. The increase in refined product purchases includes a
13% increase in volumes and 15% higher refined product prices. The increases in
refining and manufacturing costs are due primarily to increased costs of
purchased fuel and electricity at CITGO's Lake Charles and Corpus Christi
refineries as well as the additional manufacturing costs related to the
lubricants plant acquired in May 1995.
 
     CITGO purchases refined products to supplement the production from its
refineries to meet marketing demands and resolve logistical issues. The refined
product purchases represented 55% and 57% of cost of sales for the years 1995
and 1996, respectively. CITGO estimates that margins on purchased products, on
average, are lower than margins on produced products due to the fact that CITGO
can only receive the marketing portion of the total margin received on the
produced refined products. However, purchased products are not segregated from
CITGO produced products and margins may vary due to market conditions and other
factors beyond the Company's control. As such, it is difficult to measure the
effects on profitability of changes in volumes of purchased products. CITGO
anticipates its purchased product requirements will continue to
                                       23
<PAGE>   24
 
increase, in volume and as a percentage of refined products sold, in order to
meet marketing demands, although in the near term, other than normal refinery
turnaround maintenance, CITGO does not anticipate operational actions or market
conditions which might cause a material change in anticipated purchased product
requirements; however, there could be events beyond the control of CITGO which
impact the volume of refined products purchased. See also "Factors Affecting
Forward Looking Statements".
 
     Gross margin.  The gross margin for 1996 was $461 million, or 3.6%,
compared to $456 million, or 4.3% for 1995. Gross margins in 1996 were adversely
affected by refinery operations in the first quarter, the scheduled
modifications to the pricing provisions in the crude and feedstock supply
agreements, the decline in petrochemical profitability, increased volumes of
refined products purchased as a percentage of sales volume and increased costs
of purchased fuel and electricity at the refineries throughout the year (in each
case, as discussed above).
 
     Selling, general and administrative expenses.  Selling, general and
administrative expenses increased $4 million, or 2%, due primarily to increases
in salaries and benefits and increased marketing expenses in 1996 including the
effect of the change in focus of the Company's marketing programs initiated in
April 1996. The primary program in effect through March 1996 was designed to
increase the number of branded outlets and improve CITGO's overall image.
Accordingly, costs were and continue to be expensed as incurred. The program
initiated in April 1996 primarily focuses on defending market share and
increasing volumes sold to existing marketers by providing an incentive which is
earned over time. The accounting for the new program recognizes the program
expenses when the incentives are earned.
 
     Interest expense.  Interest expense increased $7.4 million from 1995 to
1996. The increase was primarily due to increased borrowings offset by a
slightly lower weighted average interest rate on indebtedness.
 
     Income taxes.  CITGO's provision for income taxes in 1996 was $70 million,
representing an effective tax rate of 36%. In 1995, CITGO's provision for income
taxes was $80 million, representing an effective tax rate of 37%.
 
     Net income.  Net income was $127 million for 1996. Net income of $140
million for 1995 included an after-tax extraordinary gain of $3.4 million on
early extinguishment of debt.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     For the year ended December 31, 1997, CITGO's net cash provided by
operating activities totaled approximately $647 million, primarily reflecting
$207 million of net income, $211 million of depreciation and amortization, and
the net effect of other items of $229 million. The more significant changes in
other items included the decrease in accounts receivable, including receivables
from affiliates, of approximately $332 million, the decrease in accounts payable
and other current liabilities, including payables to affiliates, of
approximately $149 million and the increase of other assets of approximately $75
million. The decrease in accounts receivable is due primarily to the sale of
$125 million of trade accounts receivable in June 1997 and the sale of $150
million in credit card receivables in November 1997, proceeds of which were used
primarily to make payments on the revolving bank loan. The decrease in accounts
payable is related primarily to a reduction in the payable related to crude oil
and refined products purchased. The increase of other assets is due primarily to
a long-term receivable from PDVMR (see "Item 13. Certain Relationships and
Related Transactions").
 
     Net cash used in investing activities in 1997 totaled $294 million
consisting primarily of capital expenditures of $244 million, investments in
LYONDELL-CITGO of $46 million and a loan to LYONDELL-CITGO of $16.5 million.
 
     During the same period, consolidated net cash used in financing activities
totaled approximately $356 million comprised primarily of $215 million of net
repayments on revolving bank loans, $50 million net repayments on short term
bank loans, $59 million of net repayments on private placement senior notes, $29
million of net repayments on a term loan, a capital contribution of $20 million
from PDV America and a $6 million dividend to PDV America.
 
                                       24
<PAGE>   25
 
     CITGO currently estimates that its capital expenditures for the years 1998
through 2002 will total approximately $1.4 billion. These include:
 
          CITGO ESTIMATED CAPITAL EXPENDITURES -- 1998 THROUGH 2002(1)
 
<TABLE>
<S>                                                             <C>
Strategic...................................................    $  646 million
Maintenance.................................................       441 million
Regulatory/Environmental....................................       290 million
                                                                --------------
  Total.....................................................    $1,377 million
                                                                ==============
</TABLE>
 
---------------
 
(1) These estimates may change as future regulatory events unfold. See "Factors
    Affecting Forward Looking Statements".
 
     As of December 31, 1997, the Company and its subsidiaries had an aggregate
of $1,257 million of indebtedness outstanding that matures on various dates
through the year 2026. As of December 31, 1997, the Company's contractual
commitments to make principal payments on this indebtedness were $98.2 million,
$211.5 million and $47.1 million for 1998, 1999 and 2000, respectively. The
Company's bank credit facility consists of a $58.8 million term loan, payable in
quarterly installments of principal and interest through December 1999, and a
$675 million revolving credit facility maturing in December 1999, of which $135
million was outstanding at December 31, 1997. Cit-Con has a separate credit
agreement under which $28.6 million was outstanding at December 31, 1997. The
Company's other principal indebtedness consists of (i) $199.7 million in senior
notes issued in 1996, (ii) $260 million in senior notes issued pursuant to a
master shelf agreement with an insurance company, (iii) $235 million in senior
notes issued in 1991, (iv) $218.3 million in obligations related to tax exempt
bonds issued by various governmental units, and (v) $118 million in obligations
related to taxable bonds issued by a governmental unit. See Note 11 to
Consolidated Financial Statements.
 
     As of December 31, 1997, capital resources available to CITGO included cash
on hand, available borrowing capacity of $540 million under CITGO's revolving
credit facility and $212 million in unused availability under uncommitted
short-term borrowing facilities with various banks. Additionally, the remaining
$400 million from CITGO's shelf registration with the Securities and Exchange
Commission for $600 million of debt securities may be offered and sold from time
to time. See "Item 14b. Reports on Form 8-K". CITGO management believes that it
has sufficient capital resources to carry out planned capital spending programs,
including regulatory and environmental projects in the near term, and to meet
currently anticipated future obligations as they arise. CITGO periodically
evaluates other sources of capital in the marketplace and anticipates long-term
capital requirements will be satisfied with current capital resources and future
financing arrangements, including the issuance of debt securities. The Company's
ability to obtain such financing will depend on numerous factors, including
market conditions and the perceived creditworthiness of the Company at that
time. See "Factors Affecting Forward Looking Statements".
 
     CITGO's debt instruments contain certain covenants that, depending upon the
level of the Company's capitalization and earnings, could impose limitations on
the Company for paying dividends, incurring additional debt, placing liens on
property, and selling fixed assets. The Company was in compliance with the debt
covenants at December 31, 1997.
 
     CITGO is a member of the PDV America consolidated Federal income tax
return. CITGO has a tax allocation agreement with PDV America which is designed
to provide PDV America with sufficient cash to pay its consolidated income tax
liabilities. See Note 1 and Note 5 of the Notes to Consolidated Financial
Statements included in Item 14a.
 
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS
 
     In 1995, 1996 and 1997 the Company used commodity and financial instrument
derivatives to manage defined commodity price and interest rate risks which
arose out of the Company's core activities. The
 
                                       25
<PAGE>   26
 
Company had only limited involvement with other derivative financial instruments
and did not use them for trading purposes. Beginning in 1998, the Company is
reevaluating its use of derivative commodity and financial instruments,
therefore non-hedging activity may increase.
 
     The Company enters into petroleum futures contracts, options and other over
the counter commodity derivatives, primarily to hedge a portion of the price
risk associated with crude oil and refined products. In order for a transaction
to qualify for hedge accounting, the Company requires that the item to be hedged
exposes the Company to price risk and that the commodity contract reduces that
risk and is designated as a hedge. The high correlation between price movements
of a product and the commodity contract in that product is well demonstrated in
the petroleum industry and, generally, the Company relies on those historical
relationships and on periodic comparisons of market price changes to price
changes of futures and options contracts accounted for as hedges. Gains or
losses on contracts which qualify as hedges are recognized when the related
inventory is sold or the hedged transaction is consummated. Changes in the
market value of commodity derivatives which are not hedges are recorded as gains
or losses in the period in which they occur.
 
     The Company also enters into various interest rate swap and cap agreements
to manage its risk related to interest rate changes on its debt. Premiums paid
for purchased interest rate swap and cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are included in
other assets. The interest rate differentials received or paid by the Company
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place, or are recognized immediately if the hedged
borrowings are no longer held.
 
     The Company's commodity derivatives are generally entered into through
major brokerage houses and traded on national exchanges and can be settled in
cash or through delivery of the commodity. Such contracts generally qualify for
hedge accounting and correlate to market price movements of crude oil and
refined products. Resulting gains and losses, therefore, will generally be
offset by gains and losses on the Company's hedged inventory or future purchases
and sales. The Company's derivative commodity activity is closely monitored by
management and contract periods are generally less than 30 days. Unrealized and
deferred gains and losses on these contracts at December 31, 1997 and 1996, and
the effects on cost of sales and pretax earnings for 1997, 1996 and 1995 were
not material. At times during 1996 and 1995, the Company entered into commodity
derivatives activities that were not related to the hedging program discussed
above. This activity and its results were not material in 1996 or 1995. There
was no such activity in 1997.
 
     CITGO has entered into the following interest rate swap agreements to
reduce the impact of interest rate changes on its variable interest rate debt:
 
                      CITGO INTEREST RATE SWAP AGREEMENTS
 
<TABLE>
<CAPTION>
                                                                           NOTIONAL PRINCIPAL AMOUNT
                                            EXPIRATION       FIXED RATE    --------------------------
          VARIABLE RATE INDEX                  DATE             PAID          1997           1996
          -------------------             ---------------    ----------    -----------    -----------
                                                                                      (000'S OMITTED)
<S>                                       <C>                <C>           <C>            <C>
One-month LIBOR........................   September 1998       4.85%        $ 25,000       $ 25,000
One-month LIBOR........................   November 1998        5.09%          25,000         25,000
One-month LIBOR........................   May 2000             6.28%          25,000         25,000
J.J. Kenny.............................   May 2000             4.72%          25,000         25,000
J.J. Kenny.............................   February 2005        5.30%          12,000         12,000
J.J. Kenny.............................   February 2005        5.27%          15,000         15,000
J.J. Kenny.............................   February 2005        5.49%          15,000         15,000
                                                                            --------       --------
                                                                            $142,000       $142,000
                                                                            ========       ========
</TABLE>
 
     The fair value of the interest rate swap agreements in place at December
31, 1997, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account
 
                                       26
<PAGE>   27
 
current interest rates, was an unrealized loss of $2.9 million. In connection
with the determination of said fair market value, CITGO considers the
creditworthiness of the counterparties, but no adjustment was determined to be
necessary as a result.
 
     Interest expense includes $0.8 million, $1.1 million, and $0.1 million in
1997, 1996 and 1995, respectively, related to interest paid on these agreements.
During 1995, the Company converted $25 million of variable rate debt to fixed
rate borrowings and terminated the interest rate swap agreement matched to the
variable rate debt. Other income in 1995 included a $2.4 million gain related to
the termination of this interest rate swap agreement. There were no transactions
of this type in 1996 or 1997.
 
     During 1995, the Company entered into a 9 percent interest rate cap
agreement with a notional amount of $25 million, a reference rate of three-month
LIBOR and an expiration date of February, 1997. The effect of this agreement was
not material in 1997, 1996 or 1995.
 
     Neither CITGO nor the counterparties are required to collateralize their
obligations under these derivative commodity and financial instruments. CITGO is
exposed to credit loss in the event of nonperformance by the counterparties to
these agreements, but has no off-balance-sheet credit risk of accounting loss
for the notional amounts. CITGO does not anticipate nonperformance by the
counterparties, which consist primarily of major financial institutions at
December 31, 1997.
 
NEW ACCOUNTING STANDARDS
 
     Environmental expenditures that relate to current or future revenues are
expensed or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations and do not contribute to current or future
revenue generation are expensed. Liabilities are recorded when environmental
assessments and/or cleanups are probable and the costs can be reasonably
estimated. Environmental liabilities are not discounted to their present value.
Subsequent adjustments to estimates, to the extent required, may be made as more
refined information becomes available. Effective January 1, 1997, the Company
adopted Statement of Position 96-1 -- "Environmental Remediation Liabilities"
("SOP 96-1"). The statement provides guidance on environmental liabilities and
disclosures. The adoption of SOP 96-1 did not have a material effect on the
consolidated financial position or results of operations of CITGO.
 
     Effective for the Company's year ended December 31, 1997, CITGO adopted
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
About Capital Structure" ("SFAS No. 129"). SFAS No. 129 establishes standards
for disclosing information about the Company's capital structure. The adoption
of this standard related to disclosure within the financial statements and did
not have a material effect on the Company's financial statements.
 
     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") which is effective for the Company's fiscal year ending
December 31, 1998. The statement addresses the reporting and display of
comprehensive income and its components. The Company does not currently believe
adoption of SFAS No. 130 will result in material differences between
comprehensive income and net income.
 
     In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"),which is effective for the fiscal year ending December 31,
1998. SFAS No. 131 modifies current segment reporting requirements and
establishes, for public companies, criteria for reporting disclosures about a
company's products and services, geographic areas and major customers in annual
and interim financial statements. The Company is unable to determine the full
extent of disclosure changes that may result from adoption of SFAS No. 131
because of the potential for change as a result of the Company's Transformation
Program (see the Consolidated Financial Statements of CITGO -- Note 12), which
began in July 1997.
 
     In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132") which is effective for the Company's
fiscal year ending December 31, 1998. The statement revises current employers'
disclosure
 
                                       27
<PAGE>   28
 
requirements for pensions and other postretirement benefits. It does not change
the measurement or recognition of those plans.
 
YEAR 2000 COMPLIANCE
 
     The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
 
     CITGO is replacing major elements of its information systems by
implementing Systems, Applications and Products in Data Processing ("SAP"). The
first phase of SAP implementation, which included the financial reporting
systems, was brought into production on January 1, 1998. Additional SAP modules
will be implemented throughout 1998 and 1999. The total estimated cost of the
SAP implementation is approximately $111 million, which includes software,
hardware, reengineering and change management. Costs incurred relating to this
project are either capitalized or expensed as incurred in accordance with
generally accepted accounting principles. Management has determined that SAP is
an appropriate solution to the Year 2000 Compliance issue related to the systems
on which SAP is implemented.
 
     CITGO estimates that $1 million will be spent in 1998 and 1999 to address
the Year 2000 Compliance issue by testing, upgrading or replacing its
information systems which will not be replaced by SAP. In addition,
approximately $3 million will be spent in 1998 and 1999 to determine the nature
and cost of upgrades or replacements necessary to address the Year 2000 issue in
equipment other than information systems and to assess the extent to which the
Company is vulnerable to any third party Year 2000 Compliance issues. These
efforts are led by a CITGO team supplemented by external resources. The cost to
upgrade and or replace such equipment and to address any third party Year 2000
Compliance issues is not known at this time. Although management believes
solutions and alternatives to the Year 2000 issue in these systems will be
identified, there is no guarantee that the systems which will not be replaced by
SAP and other equipment will all be Year 2000 compliant before the end of 1999.
This could result in a system failure or disruptions of operations which may
have a material adverse effect on the Company. Further, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be upgraded or replaced on a timely basis, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
 
              ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and the Independent Auditors' Report are included in Item 14a of this
report. The Quarterly results of Operations are reported in Note 17 of the Notes
to Consolidated Financial Statements included in Item 14a.
 
                     ITEM 9.  CHANGES IN AND DISAGREEMENTS
            WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
     None.
 
                                       28
<PAGE>   29
 
                                    PART III
 
          ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The directors and executive officers of CITGO as of December 31, 1997 are
as follows:
 
<TABLE>
<CAPTION>
                   NAME                     AGE                     POSITION
                   ----                     ---                     --------
<S>                                         <C>   <C>
Luis Urdaneta.............................  56    Chairman of the Board and Director
David J. Tippeconnic......................  57    President, Chief Executive Officer and
                                                  Director
Roberto V. Mandini........................  57    Executive Vice President and Director
Ezra C. Hunt..............................  46    Senior Vice President and
                                                  Chief Financial Officer
W. A. DeVore..............................  49    Senior Vice President, Marketing
Remigio Fernandez.........................  62    Director
Eduardo Lopez Quevedo.....................  56    Director
Alonso Velasco............................  56    Director
</TABLE>
 
     Directors are elected to serve until their successors are duly elected and
qualified. Executive officers are appointed by and serve at the discretion of
the Board of Directors.
 
     The only standing committee of the Company's Board of Directors is the
Audit Committee. The Audit Committee is comprised of Messrs. Fernandez, Lopez
Quevedo and Velasco.
 
     Set forth below are the biographies of each of the Company's directors and
executive officers.
 
     Luis Urdaneta, Chairman of the Board and Director.  Mr. Urdaneta has been a
Vice President of PDVSA since March 1994. Prior to such time, he was a Vice
President of Lagoven, a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from
February 1992 to February 1994; the President of Carbozulia, the coal subsidiary
of PDVSA from 1986 to 1992; a Director of Pequiven, the petrochemical subsidiary
of PDVSA from January 1985 to 1986; a Director of Intevep, the research and
development subsidiary of PDVSA from January 1985 to 1986; a Director of
Bariven, a subsidiary of PDVSA engaged in materials purchasing for U.S. and
European operations, from January 1985 to 1986; the General Refining Manager of
Lagoven, a subsidiary of PDVSA engaged in the exploration, production, refining
and retailing of crude, products, gas and LPG, in 1984; and the Manager of Amuay
Refinery, from 1981 to 1983.
 
     David J. Tippeconnic, President, Chief Executive Officer and Director.  Mr.
Tippeconnic has been President and Chief Executive Officer of CITGO and a member
of the Owners Committee of LYONDELL-CITGO since July 1997. Prior to such time,
he was President and Chief Executive Officer of The UNO-VEN Company. Prior to
joining UNO-VEN, he served 33 years with Phillips Petroleum Company, holding
various operating positions before being named Vice President, Human Resources.
He was later named Senior Vice President, Planning and Technology, and then
Executive Vice President of Phillips Petroleum Company and President of the
Phillips 66 Company, the refining, marketing, transportation and chemicals
division of the company. He was also a member of the Board of Directors of
Phillips Petroleum Company.
 
     Roberto V. Mandini, Executive Vice President and Director.  Mr. Mandini has
been Executive Vice President since January 1995 and has been a member of the
Owners Committee of LYONDELL-CITGO and President of PDVMR since January 1998.
Prior to such time, he was Chief Executive Officer and Chairman of the Board of
Directors of Corpoven S.A., a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from
December 1986 to December 1994. Mr. Mandini was also Executive Vice President of
Corpoven S.A. from June 1986 to December 1986, Executive Vice President of
Meneven S.A., a company that was merged into Corpoven in 1986, from
 
                                       29
<PAGE>   30
 
January 1985 to June 1986, a member of the Board of Directors of Lagoven S.A., a
subsidiary of PDVSA engaged in the exploration, production, refining and
retailing of crude, products, gas and LPG, from 1981 to 1985, and Producing
Function Coordinator with PDVSA from 1980 to 1981.
 
     Ezra C. Hunt, Senior Vice President and Chief Financial Officer.  Mr. Hunt
has been Senior Vice President and Chief Financial Officer of CITGO since July
1997. He was formerly Senior Vice President and Chief Financial Officer,
Commercial Specialty Programs, for TIG Insurance, Irving, Texas. Prior to
joining TIG Insurance, he served 20 years with Atlantic Richfield Company.
During that time, he held various positions, including Vice President,
Centralized Dallas Operations; Vice President, Finance, ARCO Oil and Gas; and
Controller, ARCO Alaska.
 
     W. A. DeVore, Senior Vice President, Marketing.  Mr. DeVore has been Senior
Vice President, Marketing since November 1997. Prior to such time, he was
Marketing Vice President of The UNO-VEN Company from 1995 to 1997. Mr. DeVore
held positions in marketing and chemicals general management at Phillips
Petroleum Company.
 
     Remigio Fernandez, Director.  Mr. Fernandez has been a member of the Board
of Directors of PDVSA since March 1996. Prior to such time, he was the Managing
Director of PDV(UK), PDVSA's representative office for Europe, from September
1994 to March 1996; the Chairman of the Managing Board and Chief Executive
Officer of PDV Europa B.V., the PDVSA affiliate responsible for investments and
other commercial activities in Europe, from February 1991 to August 1994; the
President and Chief Executive Officer of Interven S.A., the affiliate then in
charge of PDVSA's overseas investments, from May 1986 to January 1991; a member
of PDVSA's Board of Directors from September 1983 to April 1986; a member of the
Board of Directors of Lagoven S.A., a subsidiary of PDVSA engaged in the
exploration, production, refining and retailing of crude, products, gas and LPG,
from December 1977 to August 1983. Mr. Fernandez currently also serves as
President of PROESCA, a PDVSA affiliate engaged in specialty products obtained
from refinery streams; as a member of the Board of Directors of Interven
Venezuela, S.A., the PDVSA affiliate responsible for monitoring overseas
investments; and as Chairman of the Shareholders' Committee of Ruhr Oel GmbH, a
German joint venture between PDVSA and Veba Oel, engaged in petroleum refining
and distribution, a position he has held since 1983. He has also been Chairman
and Vice-Chairman of the Board of Directors of AB Nynas Petroleum, a
Swedish-based joint venture of PDVSA and Neste Oy, engaged in the production and
marketing of asphalt and naphthenic lubricants in Europe, from 1991 through
1996; the Chairman of the Board of Directors of Champlin Refining and Chemicals,
formerly a PDVSA wholly-owned refining and distribution company, now owned by
CITGO, from 1988 through 1990; and was previously a member of CITGO's Board of
Directors from 1986 to 1988.
 
     Eduardo Lopez Quevedo, Director.  Mr. Lopez Quevedo has been a member of
the Board of Directors of CITGO since 1995. Mr. Lopez Quevedo has been Chief
Executive Officer and a member of the Board of Directors of Interven Venezuela,
S.A., a subsidiary of PDVSA engaged in the monitoring of PDVSA's investments in
the United States and Europe, since 1995 and 1994, respectively. Prior to such
time, Mr. Lopez Quevedo was Chief Executive Officer and Chairman of the Board of
Directors of Maraven, S.A., a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from 1992 to
1994; Executive Vice President of Maraven, S.A. from 1990 to 1992; Executive
Vice President of Interven Venezuela, S.A. from 1988 to 1990; Executive Vice
President of Corpoven, S.A., a subsidiary of PDVSA engaged in the exploration,
production, refining and retailing of crude, products, gas and LPG, from 1986 to
1988; Chief Executive Officer and Chairman of the Board of Directors Cevegas,
S.A., an industrial gas company in Venezuela, from 1986 to 1988; a member of the
Board of Directors of Lagoven, S.A., a subsidiary of PDVSA engaged in the
exploration, production, refining and retailing of crude, products, gas and LPG,
from 1985 to 1986; a member of the Board of Directors of Corpoven, S.A. from
1978 to 1985; the Supply and Marketing Coordinator of PDVSA from 1977 to 1978;
and a member of the Board of Directors of Llanoven, S.A., the successor of Mobil
Oil Company de Venezuela, from 1975 to 1977. Currently, Mr. Lopez Quevedo is
also the Chairman of the Board of Directors of AB Nynas Petroleum (Sweden); a
member of the Shareholder Committee of Ruhr Oel GmbH (Germany); and the Chairman
of the Management Board of PDV Europa, B.V. (The Netherlands).
 
                                       30
<PAGE>   31
 
     Alonso Velasco, Director.  Mr. Velasco has been a member of the Board of
Directors of CITGO and a member of the Management Committee of PDVMR since May
1997. He has also been a director of PDV America since 1991 and President, Chief
Executive and Financial Officer since 1993. Mr. Velasco was Control and Finance
Coordinator of PDVSA from 1991 until March 1994, at which time he was appointed
a director of PDVSA. Between 1987 and 1991, he was director of Interven, S.A.,
an affiliate of PDVSA.
 
     In 1997, Messrs. William J. Beckert, Senior Vice President, Operations;
Lawrence H. Brittain, Jr., Senior Vice President, Marketing, Light Oils and
Lubricants; and Ralph S. Cunningham, President, Chief Executive Officer and
Director, retired.
 
                        ITEM 11.  EXECUTIVE COMPENSATION
 
     The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore omitting certain information
otherwise required by Item 11 of Form 10-K relating to executive compensation as
permitted by General Instruction (I)(2)(c).
 
    ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Not applicable.
 
            ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Certain members of the Board of Directors of CITGO are also directors or
executive officers of PDVSA.
 
     CITGO has entered into several transactions with PDVSA or other affiliates
of PDVSA, including crude oil and feedstock supply agreements, agreements for
the purchase of refined products and transportation agreements. These crude oil
supply agreements require PDVSA to supply minimum quantities of crude oil and
other feedstocks to CITGO for a fixed period, usually 20 to 25 years. The supply
agreements differ somewhat for each entity and each CITGO refinery but generally
incorporate formula prices based on the market value of a slate of refined
products deemed to be produced for each particular grade of crude oil or
feedstock, less (i) certain deemed refining costs; (ii) certain actual costs,
including transportation charges, import duties and taxes; and (iii) a deemed
margin, which varies according to the grade of crude oil or feedstock delivered.
Under each supply agreement, deemed margins and deemed costs are adjusted
periodically by a formula primarily based on the rate of inflation. Because
deemed operating costs and the slate of refined products deemed to be produced
for a given barrel of crude oil or other feedstock do not necessarily reflect
the actual costs and yields in any period, the actual refining margin earned by
a purchaser under the various supply agreements will vary depending on, among
other things the efficiency with which such purchaser conducts its operations
during such period. These supply agreements are designed to reduce the inherent
earnings volatility of the refining and marketing operations of CITGO. Prior to
1995, certain costs were used in the CITGO supply agreement formulas,
aggregating approximately $70 million per year, which were to cease being
deductible after 1996. Commencing in the third quarter of 1995, a portion of
such deductions were deferred from 1995 and 1996 to the years 1997 through 1999.
As a result of the deferral, crude oil costs for 1995 increased by approximately
$22 million, which is included in cost of sales and operating expenses, and
increased approximately $44 million for the year 1996 under these agreements. In
1997, the effect of the adjustments to the original modifications was to reduce
the price of crude oil purchased from PDVSA by approximately $25 million. The
Company anticipates that the effect of the adjustments to the original
modifications will be to reduce the price of crude oil purchased from PDVSA
under these agreements by approximately $25 million per year in 1998 and 1999,
in each case as compared to the original modification and without giving effect
to any other factors that may affect the price payable for crude oil under these
agreements. Due to the pricing formula under the supply agreements, the
aggregate price actually paid for crude oil purchased from PDVSA under these
agreements in each of these years will depend primarily upon the current prices
for refined products and certain actual costs of CITGO. These estimates are also
based
 
                                       31
<PAGE>   32
 
on the assumption that CITGO will purchase the base volumes of crude oil under
the agreements. See also "Factors Affecting Forward Looking Statements".
 
     LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") is a Texas limited
liability company which owns and operates a 265 MBPD refinery in Houston, Texas.
LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and Lyondell
Petrochemical Company ("Lyondell"), referred to as the owners. CITGO contributed
cash during the years 1993 through 1997 for a participation interest and other
commitments related to LYONDELL-CITGO's refinery enhancement project, and
Lyondell contributed the Houston refinery and related assets for the remaining
participation interest. The refinery enhancement project to increase the
refinery's heavy crude oil high conversion capacity was substantially completed
at the end of 1996 with an in-service date of March 1, 1997. The heavy crude oil
processed by the Houston refinery is supplied by PDVSA under a long-term crude
oil supply contract through the year 2017, and CITGO purchases substantially all
of the refined products produced at the Houston refinery under a long-term
contract (see the Consolidated Financial Statements of CITGO -- Note 5).
 
     CITGO's participation interest in LYONDELL-CITGO increased from
approximately 13% at December 31, 1996 to approximately 42% on April 1, 1997, in
accordance with agreements between the owners concerning such interest. CITGO
has a one time option for 18 months from April 1, 1997, to increase, for an
additional investment, its participation interest to 50%.
 
     CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The notes bear
interest at market rates and are due July 1, 2003. These notes are included in
other assets at December 31, 1997.
 
     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.
 
     On May 1, 1997, PDV America and Union Oil Company of California ("Unocal")
closed a transaction relating to The UNO-VEN Company ("UNO-VEN"). The
transaction transferred certain assets and liabilities to PDV Midwest Refining,
L.L.C. ("PDVMR"), a subsidiary of PDV America, in liquidation of PDV America's
50% ownership interest in UNO-VEN. The assets include a refinery in Lemont,
Illinois, as well as product distribution terminals and retail sites located in
the Midwest. CITGO operates these facilities and purchases the products produced
at the refinery (see the Consolidated Financial Statements of CITGO -- Note 2
and Note 5). A portion of the crude oil processed by PDVMR is supplied by PDVSA
under a long-term crude supply contract.
 
     An affiliate of PDVSA entered into an agreement to acquire a 50% equity
interest in a refinery in Chalmette, Louisiana ("Chalmette"), in October 1997
and has assigned to CITGO its option to purchase up to 50% of the refined
products produced at the refinery through December 31, 1998 (see the
Consolidated Financial Statements of CITGO -- Note 5). CITGO exercised this
option on November 1, 1997, and is acquiring approximately 66 MBPD of refined
products from the refinery, approximately one-half of which is gasoline.
 
     Under such long-term supply agreements and refined product purchase
agreements, CITGO and LYONDELL-CITGO purchased approximately $2 billion and $0.9
billion respectively, of crude oil, feedstocks and refined products at market
related prices from PDVSA in 1997. At December 31, 1997, $138 million was
included in CITGO's current payable to affiliates as a result of these
transactions.
 
     The Company also purchases refined products from various other affiliates
including LYONDELL-CITGO, PDVMR and Chalmette, under various supply contracts.
These agreements incorporate various formula prices based on published market
prices and other factors. Such purchases totaled $2.8 billion, $1.6 billion and
$1.4 billion for 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, $59 million and $38 million, respectively, were included in payables to
affiliates as a result of these transactions.
 
                                       32
<PAGE>   33
 
     CITGO had refined product, feedstock and crude oil and other product sales
of $221 million to affiliates, including the Mount Vernon Phenol Plant
Partnership and LYONDELL-CITGO, in 1997. At December 31, 1997, $23 million was
included in Due from affiliates as a result of these transactions.
 
     Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and termination value due under the lease of the
Corpus Christi Refinery West Plant facilities. See "Consolidated Financial
Statements -- Note 15".
 
     The Company and PDV America are parties to a tax allocation agreement which
is designed to provide PDV America with sufficient cash to pay its consolidated
income tax liabilities. In April 1996, $12.7 million due from CITGO to PDV
America under this tax allocation agreement, for the tax years 1992 through
1994, was reclassified and accounted for as a contribution of capital. In
December 1996, $0.8 million due from PDV America to CITGO under this tax
allocation agreement, for the 1995 tax year, was reclassified and accounted for
as a noncash dividend. In 1997, $10 million due from PDV America under this tax
allocation agreement, for the year 1996, was classified and accounted for as a
noncash dividend. In the event that CITGO should cease to be part of the
consolidated federal income tax return, any amounts included in shareholder's
equity under this agreement are required to be paid to PDV America. Current
amounts payable to PDV America, under this agreement, of $9.7 million, $12
million and $12.2 million are included in other current liabilities at December
31, 1997, 1996 and 1995, respectively.
 
                                       33
<PAGE>   34
 
                                    PART IV
 
        ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
 
a.   CERTAIN DOCUMENTS FILED AS PART OF THIS REPORT
 
     (1) Financial Statements:
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Independent Auditors' Report................................  F-2
Consolidated Balance Sheets at December 31, 1997 and 1996...  F-3
Consolidated Statements of Income for the years ended
  December 31, 1997, 1996 and 1995..........................  F-4
Consolidated Statements of Shareholder's Equity for the
  years ended December 31, 1997, 1996 and 1995..............  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1996 and 1995..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
     (2) Exhibits:
 
The Exhibit Index in part c. below lists the exhibits that are filed as part of,
or incorporated by reference into, this report.
 
b.   REPORTS ON FORM 8-K
 
     A Form 8-K was filed with the Securities and Exchange Commission on
November 18, 1997 in regard to the fact that on October 28, 1997, CITGO
Petroleum Corporation entered into a Selling Agency Agreement with Salomon
Brothers Inc. and Chase Securities Inc. providing for the sale of up to $235
million in aggregate principal amount of notes in tranches from time to time by
the Company under a Medium Term Note Program. Any tranche of notes could have a
maturity ranging from nine months to 30 years from the date of issuance and
could bear interest at a fixed rate or at a fluctuating rate based on one of
several possible indices. The Medium Term Note Program was established under the
shelf registration of $600 million in aggregate principal amount of debt
securities pursuant to the Registration Statement (333-3226) declared effective
by the Securities and Exchange Commission on May 17, 1996.
 
                                       34
<PAGE>   35
 
c.   EXHIBITS
 
<TABLE>
<C>                <S>
    *3.1           Certificate of Incorporation, Certificate of Amendment of
                   Certificate of Incorporation and By-laws of CITGO Petroleum
                   Corporation.
    *4.1           Indenture, dated as of May 1, 1996, between CITGO Petroleum
                   Corporation and the First National Bank of Chicago, relating
                   to the 7 7/8% Senior Notes due 2006 of CITGO Petroleum
                   Corporation.
    *4.2           Form of Senior Note (included in Exhibit 4.1).
  **10.1           Crude Supply Agreement between CITGO Petroleum Corporation
                   and Petroleos de Venezuela, S.A., dated as of September 30,
                   1986.
  **10.2           Supplemental Crude Supply Agreement dated as of September
                   30, 1986 between CITGO Petroleum Corporation and Petroleos
                   de Venezuela, S.A.
  **10.3           Crude Oil and Feedstock Supply Agreement dated as of March
                   31, 1987 between Champlin Refining Company and Petroleos de
                   Venezuela, S.A.
  **10.4           Supplemental Crude Oil and Feedstock Supply Agreement dated
                   as of March 31, 1987 between Champlin Refining Company and
                   Petroleos de Venezuela, S.A.
  **10.5           Contract for the Purchase/Sale of Boscan Crude Oil dated as
                   of June 2, 1993 between Tradecal, S.A. and CITGO Asphalt
                   Refining Company.
  **10.6           Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
                   Crude Oil dated December 28, 1990 among Maraven, S.A.,
                   Lagoven, S.A. and Seaview Oil Company.
  **10.7           Sublease Agreement dated as of March 31, 1987 between
                   Champlin Petroleum Company, Sublessor, and Champlin Refining
                   Company, Sublease.
  **10.8           Operating Agreement dated as of May 1, 1984 among Cit-Con
                   Oil Corporation, CITGO Petroleum Corporation and Conoco,
                   Inc.
  **10.9           Amended and Restated Limited Liability Company Regulations
                   of LYONDELL-CITGO Refining Company, Ltd., dated July 1,
                   1993.
  **10.10          Contribution Agreement between Lyondell Petrochemical
                   Company and LYONDELL-CITGO Refining Company, Ltd. and
                   Petroleos de Venezuela, S.A.
  **10.11          Crude Oil Supply Agreement between LYONDELL-CITGO Refining
                   Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993.
  **10.12          Supplemental Supply Agreement dated as of May 5, 1993
                   between LYONDELL-CITGO Refining Company, Ltd. and Petroleos
                   de Venezuela, S.A.
  **10.13          Tax Allocation Agreement dated as of June 24, 1993 among PDV
                   America, Inc., VPHI Midwest, Inc., CITGO Petroleum
                   Corporation and PDV USA, Inc., as amended.
  **10.14          CITGO Credit Facility.
   *10.15(i)       First Amendment to the Second Amended and Restated Senior
                   Term Loan Agreement, by and between CITGO Petroleum
                   Corporation and Bank of America National Trust and Savings
                   Association et al, dated as of February 15, 1994.
   *10.15(ii)      Second Amendment to Second Amended and Restated Senior Term
                   Loan Agreement by and among CITGO Petroleum Corporation and
                   Bank of America Illinois et al, dated as of October 21,
                   1994.
   *10.15(iii)     First Amendment to the Second Amended and Restated Senior
                   Revolving Credit Facility Agreement by and among CITGO
                   Petroleum Corporation and Bank of America National Trust and
                   Savings Association et al, dated as of February 15, 1994.
   *10.15(iv)      Second Amendment to Second Amended and Restated Senior
                   Revolving Credit Facility Agreement by and among CITGO
                   Petroleum Corporation and Bank of America Illinois et al,
                   dated as of October 21, 1994.
</TABLE>
 
                                       35
<PAGE>   36
<TABLE>
<C>                <S>
   *10.16          Master Shelf Agreement (1994) by and between Prudential
                   Insurance Company of America and CITGO Petroleum Corporation
                   ($100,000,000), dated March 4, 1994.
   *10.17(i)       Letter Agreement by and between the Company and Prudential
                   Insurance Company of America, dated March 4, 1994.
   *10.17(ii)      Letter Amendment No. 1 to Master Shelf Agreement with
                   Prudential Insurance Company of America, dated November 14,
                   1994.
  **10.18          CITGO Senior Debt Securities(1991) Agreement.
   *10.19          CITCON Credit Agreement between CITCON Oil Corporation and
                   The Chase Manhattan Bank N.A., as Agent, dated as of April
                   30, 1992.
   *10.20(i)       First Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of June 30, 1992.
   *10.20(ii)      Second Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of March 31, 1994.
   *10.20(iii)     Third Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of June 10, 1994.
 ***10.21          Selling Agency Agreement dated as of October 28, 1997 among
                   CITGO Petroleum Corporation, Salomon Brothers Inc. and Chase
                   Securities Inc.
    12.1           Computation of Ratio of Earnings to Fixed Charges.
    23.1           Consent of Independent Auditors
    27             Financial Data Schedule (filed electronically only).
</TABLE>
 
---------------
 
  *  Previously filed in connection with the Registrant's Report on Form 10,
     Commission file number 1-14380.
 
 **  Incorporated by reference to the Registration Statement on Form F-1 of PDV
     America, Inc. (No. 33-63742).
 
***  Incorporated by reference to the Registrant's Report on Form 8-K filed with
     the Commission on November 18, 1997.
 
                                       36
<PAGE>   37
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) 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
 
                                          By:       /s/ R. M. BRIGHT
                                            ------------------------------------
                                                        R. M. Bright
                                                Controller (Chief Accounting
                                                           Officer)
Date: March 26, 1998
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                 SIGNATURES                                    TITLE                        DATE
                 ----------                                    -----                        ----
<C>                                            <S>                                     <C>
            By: /s/ LUIS URDANETA              Chairman of the Board and Director      March 26, 1998
  ----------------------------------------
                Luis Urdaneta
 
        By: /s/ DAVID J. TIPPECONNIC           President, Chief Executive Officer and  March 26, 1998
  ----------------------------------------     Director
            David J. Tippeconnic
 
         By: /s/ ROBERTO V. MANDINI            Executive Vice President and Director   March 26, 1998
  ----------------------------------------
             Roberto V. Mandini
 
            By: /s/ EZRA C. HUNT               Senior Vice President and               March 26, 1998
  ----------------------------------------     Chief Financial Officer
                Ezra C. Hunt
 
            By: /s/ W. A. DEVORE               Senior Vice President, Marketing        March 26, 1998
  ----------------------------------------
                W. A. DeVore
 
          By: /s/ REMIGIO FERNANDEZ            Director                                March 26, 1998
  ----------------------------------------
              Remigio Fernandez
 
        By: /s/ EDUARDO LOPEZ QUEVEDO          Director                                March 26, 1998
  ----------------------------------------
            Eduardo Lopez Quevedo
 
           By: /s/ ALONSO VELASCO              Director                                March 26, 1998
  ----------------------------------------
               Alonso Velasco
</TABLE>
 
                                       37
<PAGE>   38
 
                          CITGO PETROLEUM CORPORATION
 
                       CONSOLIDATED FINANCIAL STATEMENTS
 
               as of December 31, 1997 and 1996, and for Each of
             the Three Years in the Period Ended December 31, 1997
                        and Independent Auditors' Report
 
                                       F-1
<PAGE>   39
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholder of
CITGO Petroleum Corporation:
 
     We have audited the accompanying consolidated balance sheets of CITGO
Petroleum Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of CITGO Petroleum Corporation and
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
 
Tulsa, Oklahoma
February 13, 1998
 
                                       F-2
<PAGE>   40
 
                          CITGO PETROLEUM CORPORATION
 
                          CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                 1997         1996
                                                              ----------   ----------
<S>                                                           <C>          <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $   24,363   $   26,856
  Accounts receivable, net..................................     657,864    1,004,098
  Due from affiliates.......................................      23,498       27,738
  Inventories...............................................     857,598      833,191
  Prepaid expenses and other................................       9,658       21,626
                                                              ----------   ----------
          Total current assets..............................   1,572,981    1,913,509
PROPERTY, PLANT AND EQUIPMENT -- Net........................   2,849,262    2,786,703
RESTRICTED CASH.............................................       6,920        9,369
INVESTMENTS IN AFFILIATES...................................     813,923      790,576
OTHER ASSETS................................................     168,949      129,972
                                                              ----------   ----------
                                                              $5,412,035   $5,630,129
                                                              ==========   ==========
                        LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
  Short-term bank loans.....................................  $    3,000   $   53,000
  Accounts payable..........................................     469,556      530,505
  Payables to affiliates....................................     197,852      275,375
  Taxes other than income...................................     180,143      200,863
  Other.....................................................     240,270      219,648
  Current portion of long-term debt.........................      95,240       95,240
  Current portion of capital lease obligation...............      13,140       11,778
                                                              ----------   ----------
          Total current liabilities.........................   1,199,201    1,386,409
LONG-TERM DEBT..............................................   1,158,528    1,468,738
CAPITAL LEASE OBLIGATION....................................     116,586      129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.................     199,765      183,370
OTHER NONCURRENT LIABILITIES................................     205,533      194,802
DEFERRED INCOME TAXES.......................................     423,242      370,117
MINORITY INTEREST...........................................      28,337       26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY:
  Common stock -- $1.00 par value, 1,000 shares authorized,
     issued and outstanding.................................           1            1
  Additional capital........................................   1,255,009    1,235,009
  Retained earnings.........................................     825,833      635,326
                                                              ----------   ----------
          Total shareholder's equity........................   2,080,843    1,870,336
                                                              ----------   ----------
                                                              $5,412,035   $5,630,129
                                                              ==========   ==========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-3
<PAGE>   41
 
                          CITGO PETROLEUM CORPORATION
 
                       CONSOLIDATED STATEMENTS OF INCOME
                EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                         1997           1996           1995
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
REVENUES:
  Net sales.........................................  $13,369,808    $12,762,453    $10,311,890
  Sales to affiliates...............................      221,495        189,607        210,270
                                                      -----------    -----------    -----------
                                                       13,591,303     12,952,060     10,522,160
  Equity in earnings of affiliates..................       64,460         21,481         33,530
  Other income (expense), net.......................      (10,535)        (4,178)        (2,985)
                                                      -----------    -----------    -----------
                                                       13,645,228     12,969,363     10,552,705
                                                      -----------    -----------    -----------
COST OF SALES AND EXPENSES:
  Cost of sales and operating expenses (including
     purchases of $4,791,307, $4,001,471, and
     $3,321,128 from affiliates)....................   13,019,754     12,491,003     10,066,012
  Selling, general and administrative expenses......      200,777        166,108        162,260
  Interest expense, excluding capital lease.........      109,895         97,171         88,655
  Capital lease interest charge.....................       15,597         16,818         17,913
  Minority interest.................................        1,706          1,013          1,993
                                                      -----------    -----------    -----------
                                                       13,347,729     12,772,113     10,336,833
                                                      -----------    -----------    -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...      297,499        197,250        215,872
INCOME TAXES........................................       90,955         70,281         79,528
                                                      -----------    -----------    -----------
INCOME BEFORE EXTRAORDINARY ITEM....................      206,544        126,969        136,344
EXTRAORDINARY GAIN, early extinguishment of debt,
  net of related income taxes of $2,160.............           --             --          3,380
                                                      -----------    -----------    -----------
NET INCOME..........................................  $   206,544    $   126,969    $   139,724
                                                      ===========    ===========    ===========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-4
<PAGE>   42
 
                          CITGO PETROLEUM CORPORATION
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
                EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                          COMMON STOCK                                    TOTAL
                                        ----------------    ADDITIONAL    RETAINED    SHAREHOLDER'S
                                        SHARES    AMOUNT     CAPITAL      EARNINGS       EQUITY
                                        ------    ------    ----------    --------    -------------
<S>                                     <C>       <C>       <C>           <C>         <C>
BALANCE, JANUARY 1, 1995..............     1       $ 1      $1,207,345    $369,437     $1,576,783
  Net income..........................    --        --              --     139,724        139,724
  Capital contributions received from
     Parent...........................    --        --          15,000          --         15,000
                                          --       ---      ----------    --------     ----------
BALANCE, DECEMBER 31, 1995............     1         1       1,222,345     509,161      1,731,507
  Net income..........................    --        --              --     126,969        126,969
  Noncash capital contributions
     received from Parent.............    --        --          12,664          --         12,664
  Noncash dividend to Parent..........    --        --              --        (804)          (804)
                                          --       ---      ----------    --------     ----------
BALANCE, DECEMBER 31, 1996............     1         1       1,235,009     635,326      1,870,336
  Net income..........................    --        --              --     206,544        206,544
  Capital contributions received from
     Parent...........................    --        --          20,000          --         20,000
  Noncash dividend to Parent..........    --        --              --     (10,037)       (10,037)
  Dividend to Parent..................    --        --              --      (6,000)        (6,000)
                                          --       ---      ----------    --------     ----------
BALANCE, DECEMBER 31, 1997............     1       $ 1      $1,255,009    $825,833     $2,080,843
                                          ==       ===      ==========    ========     ==========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-5
<PAGE>   43
 
                          CITGO PETROLEUM CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1997        1996        1995
                                                              ---------   ---------   ---------
<S>                                                           <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income................................................  $ 206,544   $ 126,969   $ 139,724
  Adjustments to reconcile net income to net cash provided
    by operating activities:
    Depreciation and amortization...........................    210,790     189,063     164,570
    Provision for losses on accounts receivable.............     17,827      13,275       9,070
    Deferred income taxes...................................     60,617       4,612      16,957
    Distributions in excess of (less than) equity in
     earnings (losses) of affiliates........................     27,282       9,677      (4,490)
    (Gain) from early extinguishment of debt................         --          --      (3,380)
    Other adjustments.......................................      7,997       2,577       3,652
    Changes in operating assets and liabilities, net of
     investment in subsidiary in 1995:
      Accounts receivable and due from affiliates...........    332,240    (198,080)    (77,412)
      Inventories...........................................    (24,407)    (47,916)      2,212
      Prepaid expenses and other current assets.............      4,477       6,434       4,766
      Accounts payable and other current liabilities........   (148,608)    225,288     133,110
      Other assets..........................................    (74,709)    (83,858)    (68,114)
      Other liabilities.....................................     27,158      17,325       9,685
                                                              ---------   ---------   ---------
        Total adjustments...................................    440,664     138,397     190,626
                                                              ---------   ---------   ---------
        Net cash provided by operating activities...........    647,208     265,366     330,350
                                                              ---------   ---------   ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures......................................   (243,875)   (437,743)   (314,225)
  Proceeds from sales of property, plant and equipment......     12,295       3,923         843
  Decrease (increase) in restricted cash....................      2,449      (8,111)     41,629
  Investments in LYONDELL-CITGO Refining Company Ltd........    (45,635)   (142,638)   (178,875)
  Loans to LYONDELL-CITGO Refining Company Ltd..............    (16,509)         --          --
  Investments in subsidiary and advances to other
    affiliates..............................................     (2,442)        (10)    (46,805)
                                                              ---------   ---------   ---------
        Net cash used in investing activities...............   (293,717)   (584,579)   (497,433)
                                                              ---------   ---------   ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net (repayments of) proceeds from short-term bank loans...    (50,000)     28,000     (28,500)
  Net (repayments of) borrowings from revolving bank loan...   (215,000)     60,000      95,000
  Payments on term bank loan................................    (29,412)    (29,412)     (7,353)
  Payments on private placement senior notes................    (58,685)    (58,685)    (47,321)
  Proceeds from issuance of senior notes....................         --     199,694          --
  Proceeds from master shelf agreement......................         --          --     100,000
  Proceeds from issuance of taxable bonds...................         --     120,000          --
  Proceeds from issuance of tax-exempt bonds................         --      25,000      90,700
  Payments on tax-exempt bonds..............................         --          --     (40,237)
  Payments of capital lease obligations.....................    (11,778)    (11,248)     (9,011)
  (Repayments) borrowings of other debt.....................     (5,109)     (7,143)      2,397
  Capital contributions received from Parent (PDV
    America)................................................     20,000          --      15,000
  Dividend to Parent (PDV America)..........................     (6,000)         --          --
                                                              ---------   ---------   ---------
        Net cash provided by (used in) financing
        activities..........................................   (355,984)    326,206     170,675
                                                              ---------   ---------   ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............  $  (2,493)  $   6,993   $   3,592
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..............     26,856      19,863      16,271
                                                              ---------   ---------   ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD....................  $  24,363   $  26,856   $  19,863
                                                              =========   =========   =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest, net of amounts capitalized....................  $ 126,879   $ 120,532   $  97,788
                                                              =========   =========   =========
    Income taxes, net of refunds of $3,682 in 1995..........  $  41,807   $  54,939   $  64,437
                                                              =========   =========   =========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
  Noncash capital contribution from Parent (PDV America)....  $      --   $  12,664   $      --
                                                              =========   =========   =========
  Noncash dividend to Parent (PDV America)..................  $ (10,037)  $    (804)  $      --
                                                              =========   =========   =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-6
<PAGE>   44
 
                          CITGO PETROLEUM CORPORATION
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997
 
1. SIGNIFICANT ACCOUNTING POLICIES
 
     Description of Business -- CITGO Petroleum Corporation ("CITGO") is a
subsidiary of PDV America, Inc. ("PDV America"), an indirect wholly owned
subsidiary of Petroleos de Venezuela, S.A. ("PDVSA"), the national oil company
of the Republic of Venezuela.
 
     CITGO manufactures or refines and markets quality transportation fuels as
well as lubricants, refined waxes, petrochemicals, asphalt and other industrial
products. CITGO owns and operates two modern, highly complex crude oil
refineries (Lake Charles, Louisiana, and Corpus Christi, Texas) and two asphalt
refineries (Paulsboro, New Jersey, and Savannah, Georgia) with a combined
aggregate rated crude oil refining capacity of 527 thousand barrels per day
("MBPD"). CITGO also owns a minority interest in LYONDELL-CITGO Refining Company
Ltd., a limited liability company that owns and operates a refinery in Houston,
Texas, with a rated crude oil refining capacity of 265 MBPD. CITGO also operates
a 153 MBPD refinery in Lemont, Illinois, owned by PDV Midwest Refining L.L.C.
CITGO's assets also include a 65 percent owned lubricant and wax plant,
pipelines and equity interests in pipeline companies and petroleum storage
terminals.
 
     CITGO's transportation fuel customers include primarily CITGO branded
wholesale marketers, convenience stores and airlines located primarily east of
the Rocky Mountains. Lubricants are sold to independent marketers, mass
marketers and industrial customers, and petrochemical feedstocks and industrial
products are sold to various manufacturers and industrial companies throughout
the United States.
 
     Principles of Consolidation -- The consolidated financial statements
include the accounts of CITGO and its subsidiaries (collectively referred to as
the "Company"). All subsidiaries are wholly owned except for Cit-Con Oil
Corporation ("Cit-Con"), which is 65 percent owned. All material intercompany
transactions and accounts have been eliminated.
 
     The Company's investments in affiliates are accounted for by the equity
method. The excess of the investments over the equity in the underlying net
assets of the affiliates is amortized on a straight-line basis over 40 years,
which is based upon the estimated useful lives of the affiliates' assets.
 
     Estimates, Risks and Uncertainties -- The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
 
     CITGO is sensitive to domestic and international political, legislative,
regulatory and legal environments. Significant changes in the prices or
availability of crude oil and refined products could have a significant impact
on CITGO's results of operations for any particular year.
 
     Revenue Recognition -- Revenue is recognized upon transfer of title to
products sold, based upon the terms of delivery.
 
     Supply and Marketing Activities -- The Company engages in the buying and
selling of crude oil to supply its refineries. The net results of this activity
are recorded in cost of sales. The Company also engages in the buying and
selling of refined products to facilitate the marketing of its refined products.
The results of this activity are recorded in cost of sales and sales.
 
     Refined product exchange transactions that do not involve the payment or
receipt of cash are not accounted for as purchases or sales. Any resulting
volumetric exchange balances are accounted for as inventory in accordance with
the Company's last-in, first-out ("LIFO") inventory method. Exchanges that are
settled through payment or receipt of cash are accounted for as purchases or
sales.
 
                                       F-7
<PAGE>   45
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Excise Taxes -- The Company collects excise taxes on sales of gasoline and
other motor fuels. Excise taxes of approximately $3.2 billion, $2.7 billion, and
$2.2 billion were collected from customers and paid to various governmental
entities in 1997, 1996, and 1995, respectively. Excise taxes are not included in
sales.
 
     Cash and Cash Equivalents -- Cash and cash equivalents consist of
highly-liquid short-term investments and bank deposits with initial maturities
of three months or less.
 
     Restricted Cash -- Restricted cash represents highly-liquid, short-term
investments held in trust accounts in accordance with a tax-exempt bond
agreement. Funds are released solely for financing environmental facilities as
defined in the bond agreements.
 
     Inventories -- Crude oil and refined product inventories are stated at the
lower of cost or market and cost is primarily determined using the LIFO method.
Materials and supplies are valued primarily using the average cost method.
 
     Property, Plant and Equipment -- Property, plant and equipment is reported
at cost, less accumulated depreciation. Depreciation is based upon the estimated
useful lives of the related assets using the straight-line method. Depreciable
lives are generally as follows: buildings and leaseholds -- 10 to 24 years;
machinery and equipment -- 5 to 24 years; and vehicles -- 3 to 10 years.
 
     Upon disposal or retirement of property, plant and equipment, the cost and
related accumulated depreciation are removed from the accounts and any resulting
gain or loss is recognized in income.
 
     The Company capitalizes interest on projects when construction takes
considerable time and entails major expenditures. Such interest is allocated to
property, plant and equipment and amortized over the estimated useful lives of
the related assets. Capitalized interest totaled $7 million, $12 million, and $5
million in 1997, 1996, and 1995, respectively.
 
     The Company periodically evaluates the carrying values of its property,
plant and equipment and other long-lived assets for circumstances which may
indicate impairment.
 
     Commodity and Interest Rate Derivatives -- The Company uses commodity and
financial instrument derivatives to manage defined commodity price and interest
rate risks arising out of the Company's core activities. The Company has only
limited involvement with other derivative financial instruments and does not use
them for trading purposes.
 
     The Company enters into petroleum futures contracts, options and other over
the counter commodity derivatives, primarily to hedge a portion of the price
risk associated with crude oil and refined products. In order for a transaction
to qualify for hedge accounting, the Company requires that the item to be hedged
exposes the Company to price risk and that the commodity contract reduces that
risk and is designated as a hedge. The high correlation between price movements
of a product and the commodity contract in that product is well demonstrated in
the petroleum industry and, generally, the Company relies on those historical
relationships and on periodic comparisons of market price changes to price
changes of futures and options contracts accounted for as hedges. Gains or
losses on contracts which qualify as hedges are recognized when the related
inventory is sold or the hedged transaction is consummated. Changes in the
market value of commodity derivatives which are not hedges are recorded as gains
or losses in the period in which they occur.
 
     The Company also enters into various interest rate swap and cap agreements
to manage its risk related to interest rate changes on its debt. Premiums paid
for purchased interest rate swap and cap agreements are amortized to interest
expense over the terms of the agreements. Unamortized premiums are included in
other assets. The interest rate differentials received or paid by the Company
related to these agreements are recognized as adjustments to interest expense
over the term of the agreements. Gains or losses on terminated swap agreements
are either amortized over the original term of the swap agreement if the hedged
borrowings remain in place, or are recognized immediately if the hedged
borrowings are no longer held.
 
                                       F-8
<PAGE>   46
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Refinery Maintenance -- Costs of major refinery turnaround maintenance are
charged to operations over the estimated period between turnarounds. Turnaround
periods range approximately from one to seven years. Unamortized costs are
included in other assets. Amortization of refinery turnaround costs is included
in depreciation and amortization expense. Amortization was $49 million, $53
million, and $43 million for 1997, 1996, and 1995, respectively. Ordinary
maintenance is expensed as incurred.
 
     Environmental Expenditures -- Environmental expenditures that relate to
current or future revenues are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations and
do not contribute to current or future revenue generation are expensed.
Liabilities are recorded when environmental assessments and/or cleanups are
probable and the costs can be reasonably estimated. Environmental liabilities
are not discounted to their present value. Subsequent adjustments to estimates,
to the extent required, may be made as more refined information becomes
available. Effective January 1, 1997, the Company adopted Statement of Position
96-1 -- "Environmental Remediation Liabilities" ("SOP 96-1"). The statement
provides guidance on environmental liabilities and disclosures. The adoption of
SOP 96-1 did not have a material effect on the consolidated financial position
or results of operations of CITGO.
 
     Income Taxes -- The Company is included in the consolidated U.S. Federal
income tax return filed by PDV America. The Company's current and deferred
income tax expense has been computed on a stand-alone basis using an asset and
liability approach.
 
     Capital Structure -- Effective for the Company's year ended December 31,
1997, CITGO adopted Statement of Financial Accounting Standards No. 129,
"Disclosure of Information About Capital Structure" ("SFAS No. 129"). SFAS No.
129 establishes standards for disclosing information about the Company's capital
structure. The adoption of this standard related to disclosure within the
financial statements and did not have a material effect on the Company's
financial statements.
 
     Comprehensive Income -- In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") which is effective for the
Company's fiscal year ending December 31, 1998. The statement addresses the
reporting and display of comprehensive income and its components. The Company
does not currently believe adoption of SFAS No. 130 will result in material
differences between comprehensive income and net income.
 
     Segments -- In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise and Related
Information" which is effective for the fiscal year ending December 31, 1998.
SFAS No. 131 modifies current segment reporting requirements and establishes,
for public companies, criteria for reporting disclosures about a company's
products and services, geographic areas and major customers in annual and
interim financial statements. The Company is unable to determine the full extent
of disclosure changes that may result from adoption of SFAS No. 131 because of
the potential for change as a result of the Company's Transformation Program
(Note 12), which began in July 1997.
 
2. REFINERY AGREEMENTS
 
     On May 1, 1997, PDV America and Union Oil Company of California ("Unocal")
closed a transaction relating to The UNO-VEN Company ("UNO-VEN"). The
transaction transferred certain assets and liabilities to PDV Midwest Refining,
L.L.C. ("PDVMR"), a subsidiary of PDV America, in liquidation of PDV America's
50 percent ownership interest in UNO-VEN. The assets include a 153 MBPD refinery
in Lemont, Illinois, as well as eleven product distribution terminals and 89
retail sites located in the Midwest. CITGO operates these facilities and
purchases the products produced at the refinery (Note 5).
 
                                       F-9
<PAGE>   47
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     An affiliate of PDVSA entered into an agreement to acquire a 50 percent
equity interest in a refinery in Chalmette, Louisiana ("Chalmette"), in October,
1997 and has assigned to CITGO its option to purchase up to 50 percent of the
refined products produced at the refinery through December 31, 1998 (Note 5).
CITGO exercised this option on November 1, 1997, and is acquiring approximately
80 MBPD of refined products from the refinery, approximately one-half of which
is gasoline.
 
3. INVESTMENT IN LYONDELL-CITGO REFINING COMPANY LTD.
 
     LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO") is a Texas limited
liability company which owns and operates a 265 MBPD refinery in Houston, Texas.
LYONDELL-CITGO was formed in 1993 by subsidiaries of CITGO and Lyondell
Petrochemical Company ("Lyondell"), referred to as the owners. CITGO has
contributed cash during the years 1993 through 1997 for a participation interest
and other commitments related to LYONDELL-CITGO's refinery enhancement project
and Lyondell contributed the Houston refinery and related assets for the
remaining participation interest. The refinery enhancement project to increase
the refinery's heavy crude oil high conversion capacity was substantially
completed at the end of 1996 with an in-service date of March 1, 1997. The heavy
crude oil processed by the Houston refinery is supplied by a subsidiary of PDVSA
under a long-term crude oil supply contract through 2017, and CITGO purchases
substantially all of the refined products produced at the Houston refinery under
a long-term contract (Note 5).
 
     CITGO's participation interest in LYONDELL-CITGO increased from 13% at
December 31, 1996 to approximately 42% on April 1, 1997, in accordance with
agreements between the owners concerning such interest. CITGO has a one time
option for 18 months from April 1, 1997, to increase, for an additional
investment, its participation interest to 50%.
 
     CITGO loaned $16.5 million to LYONDELL-CITGO during 1997. The notes bear
interest at market rates and are due July 1, 2003. These notes are included in
other assets at December 31, 1997.
 
     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. Information on CITGO's
investment in LYONDELL-CITGO follows:
 
<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                     --------    --------    --------
                                                             (000'S OMITTED)
<S>                                                  <C>         <C>         <C>
Investment at December 31..........................  $630,060    $604,729    $460,360
Participation interest at December 31..............        42%         13%         12%
Equity in net income...............................  $ 44,429    $  1,254    $ 14,142
Distributions received.............................  $ 64,734    $     --    $     --
Notes receivable...................................  $ 16,509    $     --    $     --
</TABLE>
 
4. ACQUISITION OF BUSINESS
 
     On May 1, 1995, the Company purchased Cato Oil & Grease ("Cato"). Cato is
primarily engaged in the manufacture and distribution of lubricants. The results
of operations of Cato are included in the accompanying financial statements
since the date of acquisition. Proforma results of operations for this business
are not
 
                                      F-10
<PAGE>   48
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
material to the Company's consolidated statement of income. The total cost of
this acquisition was $46.8 million which was allocated as follows:
 
<TABLE>
<S>                                                           <C>
Property, plant and equipment...............................  $27,000,000
Inventory...................................................    8,643,000
Accounts receivable.........................................    6,144,000
Other assets (net)..........................................    5,018,500
                                                              -----------
                                                              $46,805,500
                                                              ===========
</TABLE>
 
5. RELATED PARTY TRANSACTIONS
 
     The Company purchases approximately two-thirds of the crude oil processed
in Company 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. The Company purchased $2 billion,
$2.4 billion, and $1.9 billion of crude oil, feedstocks and other products from
wholly owned subsidiaries of PDVSA in 1997, 1996, and 1995, respectively, under
these and other purchase agreements.
 
     The crude oil supply contracts incorporate formula prices based on the
market value of a number of refined products deemed to be produced from each
particular crude oil, less (i) certain deemed refining costs adjustable for
inflation, (ii) certain actual costs, including transportation charges, import
duties and taxes and (iii) a deemed margin, which varies according to the grade
of crude oil. Effective January 1, 1992, the supply agreements with respect to
CITGO's Lake Charles, Corpus Christi and Paulsboro refineries were modified to
reduce the price levels to be paid by CITGO by a fixed amount per barrel of
crude oil purchased from PDVSA. Such reductions were intended to defray CITGO's
costs of certain environmental compliance expenditures. This modification
resulted in a decrease in the cost of crude oil purchased under these agreements
of approximately $70 million per year for the years 1992 through 1994 as
compared to the amount that would otherwise have been payable thereunder. This
modification was to expire at December 31, 1996; however, in the third quarter
of 1995, PDVSA and CITGO agreed to adjust this modification so that the 1992
fixed amount per barrel would be reduced and the adjusted modification would not
expire until December 31, 1999. The impact of this adjustment was an increase in
crude cost of $44 million for 1996 and $22 million for 1995, over what would
otherwise have been payable under the original 1992 modification. The effect of
the adjustments to the original modifications reduced the price of crude oil
purchased from PDVSA under these agreements by $25 million in 1997 and is
anticipated by management to also reduce the cost by approximately $25 million
in 1998 and 1999, in each case without giving effect to any other factors that
may affect the price payable for crude oil under these agreements. Due to the
pricing formula under the supply agreements, the aggregate price actually paid
for crude oil purchased from PDVSA under these agreements in each of these years
will depend primarily upon the then current prices for refined products and
certain actual costs of CITGO. These estimates are also based on the assumption
that CITGO will purchase the base volumes of crude oil under the agreements. At
December 31, 1997 and 1996, $138 million and $237 million, respectively, were
included in payables to affiliates as a result of these transactions.
 
     The Company also purchases refined products from various other affiliates
including LYONDELL-CITGO, PDVMR and Chalmette, under long-term contracts. These
agreements incorporate various formula prices based on published market prices
and other factors. Such purchases totaled $2.8 billion, $1.6 billion and $1.4
billion for 1997, 1996, and 1995, respectively. At December 31, 1997 and 1996,
$59 million and $38 million, respectively, were included in payables to
affiliates as a result of these transactions.
 
     The Company had refined product, feedstock, and other product sales to
affiliates of $221 million, $190 million, and $210 million in 1997, 1996, and
1995, respectively. The Company also sold crude oil to affiliates of $3 million,
$64 million and $32 million in 1997, 1996 and 1995, respectively. At December
31,
 
                                      F-11
<PAGE>   49
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
1997 and 1996, $23 million and $28 million, respectively, were included in due
from affiliates as a result of these and related transactions.
 
     Pursuant to the operating agreement with PDVMR (Note 2), on May 1, 1997,
CITGO became the operator of the Lemont refinery, and employed a substantial
number of employees previously employed by UNO-VEN and as a result, CITGO
assumed a liability for postretirement benefits other than pensions (Note 12) of
approximately $27 million related to those employees. A corresponding amount due
from PDVMR is included in other assets at December 31, 1997, pending final
determination of the method of settlement by the Parent company. CITGO charges
PDVMR a management fee which covers payroll expenses, including pension and
benefit costs incurred for the former UNO-VEN hourly and salaried employees, and
for various other support services. Such reimbursement charges totaled $43
million for 1997.
 
     Under a separate guarantee of rent agreement, PDVSA has guaranteed payment
of rent, stipulated loss value and terminating value due under the lease of the
Corpus Christi refinery facilities described in Note 15.
 
     The Company and PDV America are parties to a tax allocation agreement which
is designed to provide PDV America with sufficient cash to pay its consolidated
income tax liabilities. In 1996, $12.7 million due from CITGO to PDV America
under this tax allocation agreement for the tax years 1992 through 1994 was
reclassified and accounted for as a noncash contribution of capital. In December
1996, $0.8 million due from PDV America to CITGO under this tax allocation
agreement for the 1995 tax year was reclassified and accounted for as a noncash
dividend. In 1997, $10 million due from PDV America under this tax allocation
agreement for the year 1996 was classified and accounted for as a noncash
dividend. In the event that CITGO should cease to be part of the consolidated
federal income tax return, any amounts included in shareholder's equity under
this agreement are required to be paid to PDV America. Current amounts payable
to PDV America under this agreement of $9.7 million and $12 million are included
in other current liabilities at December 31, 1997 and 1996, respectively.
 
6. ACCOUNTS RECEIVABLE
 
<TABLE>
<CAPTION>
                                                                1997         1996
                                                              --------    ----------
                                                                 (000'S OMITTED)
<S>                                                           <C>         <C>
Trade.......................................................  $571,947    $  770,069
Credit card.................................................    45,896       203,329
Other.......................................................    62,474        48,406
                                                              --------    ----------
                                                               680,317     1,021,804
Allowance for uncollectible accounts........................   (22,453)      (17,706)
                                                              --------    ----------
                                                              $657,864    $1,004,098
                                                              ========    ==========
</TABLE>
 
     Sales are made primarily on account, based on pre-approved unsecured credit
terms established by CITGO management, except sales to airlines, which are made
primarily on a prepaid basis. The Company also has a proprietary credit card
program and a Companion VISA bank card program which allow retail consumers to
purchase fuel and convenience items at CITGO branded outlets. Allowances for
uncollectible accounts are established based on several factors which include,
but are not limited to, analysis of specific customers, historical trends,
current economic conditions and other information.
 
     Effective June 27, 1997, and November 19, 1997, the Company established two
new limited purpose subsidiaries, CITGO Funding Corporation and CITGO Funding
Corporation II, which entered into agreements to sell, on an ongoing basis and
without recourse, up to a maximum of $125 million of trade accounts receivable
and $150 million of credit card receivables at any one point in time. These
agreements have a minimum term of one year expiring in June, 1998 and November,
1998, respectively, and are renewable for successive one-year terms by mutual
agreement. Fees and expenses related to the agreements were recorded
 
                                      F-12
<PAGE>   50
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
as other expense and were $5.8 million for the year ended December 31, 1997.
Proceeds of approximately $275 million from the initial sales were used
primarily to make payments on the Company's revolving bank loan.
 
7. INVENTORIES
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
                                                                (000'S OMITTED)
<S>                                                           <C>         <C>
Refined product.............................................  $662,061    $616,527
Crude oil...................................................   138,049     165,564
Materials and supplies......................................    57,488      51,100
                                                              --------    --------
                                                              $857,598    $833,191
                                                              ========    ========
</TABLE>
 
     At December 31, 1997, replacement costs approximated LIFO carrying values.
As of December 31, 1996, replacement costs exceeded LIFO carrying values by
approximately $294 million.
 
8. PROPERTY, PLANT AND EQUIPMENT
 
<TABLE>
<CAPTION>
                                                                 1997          1996
                                                              ----------    ----------
                                                                  (000'S OMITTED)
<S>                                                           <C>           <C>
Land........................................................  $  112,746    $  113,158
Buildings and leaseholds....................................     478,912       439,998
Machinery and equipment.....................................   2,851,396     2,421,458
Vehicles....................................................      41,952        42,977
Construction in process.....................................     119,106       373,006
                                                              ----------    ----------
                                                               3,604,112     3,390,597
Accumulated depreciation and amortization...................    (754,850)     (603,894)
                                                              ----------    ----------
                                                              $2,849,262    $2,786,703
                                                              ==========    ==========
</TABLE>
 
     Depreciation expense for 1997, 1996, and 1995 was $161 million, $136
million, and $122 million, respectively.
 
     In 1997 the Company incurred property damages from a fire at the Company's
Corpus Christi, Texas, refinery (Note 14). As a result, the Company capitalized
$14.5 million of replacement machinery and equipment. Other income (expense)
includes $9.4 million of insurance recoveries related to this event.
 
     Other income (expense) includes gains and losses on disposals and
retirements of property, plant and equipment. Such net losses were approximately
$14 million, $2 million, and $4 million, in 1997, 1996, and 1995, respectively.
 
9. INVESTMENTS IN AFFILIATES
 
     In addition to LYONDELL-CITGO, the Company's investments in affiliates
consist of equity interests of 6.8 to 50 percent in joint interest pipelines and
terminals, including a 13.98 percent interest in Colonial Pipeline Company; a
49.5 percent partnership interest in Nelson Industrial Steam Company ("NISCO"),
which is a qualified cogeneration facility; and a 49 percent partnership
interest in Mount Vernon Phenol Plant. The carrying value of these investments
exceeded the Company's equity in the underlying net assets by approximately $155
million and $160 million at December 31, 1997 and 1996, respectively.
 
     Due to various financing and capital transactions and net losses, at
December 31, 1997 and 1996, NISCO had a partnership deficit. At December 31,
1997 and 1996, CITGO's share of this deficit, as a general partner,
 
                                      F-13
<PAGE>   51
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
was $49.6 million and $47 million, respectively, which is included in other
noncurrent liabilities in the accompanying consolidated balance sheets.
 
     Information on the Company's investments, including LYONDELL-CITGO,
follows:
 
<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                     --------    --------    --------
                                                             (000'S OMITTED)
<S>                                                  <C>         <C>         <C>
Company's investments in affiliates (excluding
  NISCO)...........................................  $813,923    $790,576    $650,360
Company's equity in net income (losses) of
  affiliates.......................................    64,460      21,481      33,530
Dividends and distributions received from
  affiliates.......................................    91,742      31,157      29,040
</TABLE>
 
     Selected financial information provided by the affiliates is summarized as
follows:
 
<TABLE>
<CAPTION>
                                                    1997          1996          1995
                                                 ----------    ----------    ----------
                                                            (000'S OMITTED)
<S>                                              <C>           <C>           <C>
Summary of financial position:
  Current assets...............................  $  511,848    $  543,692    $  547,479
  Noncurrent assets............................   2,830,568     2,859,091     2,345,695
  Current liabilities..........................     627,296       697,046       596,723
  Noncurrent liabilities.......................   2,025,709     1,999,276     1,659,729
Summary of operating results:
  Revenues.....................................  $4,076,429    $4,158,684    $3,900,653
  Gross profit.................................     628,559       475,227       574,103
  Net income...................................     371,006       242,434       344,817
</TABLE>
 
10. SHORT-TERM BANK LOANS
 
     As of December 31, 1997, the Company has established $215 million of
uncommitted, unsecured, short-term borrowing facilities with various banks.
Interest rates on these facilities are determined daily based upon the Federal
funds' interest rates, and maturity options vary up to 30 days. The weighted
average interest rates actually incurred in 1997, 1996, and 1995 were 5.9
percent, 5.7 percent, and 6.2 percent, respectively. The Company had $3 million
and $53 million of borrowings outstanding under these facilities at December 31,
1997 and 1996, respectively.
 
                                      F-14
<PAGE>   52
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
11. LONG-TERM DEBT
 
<TABLE>
<CAPTION>
                                                                 1997         1996
                                                              ----------   ----------
                                                                  (000'S OMITTED)
<S>                                                           <C>          <C>
Revolving bank loan.........................................  $  135,000   $  350,000
Term bank loan..............................................      58,823       88,235
Shelf registration:
  7.875% Senior Notes, $200 million face amount, due 2006...     199,745      199,715
Private Placement:
  8.75% Series A Senior Notes due 1998......................      18,750       37,500
  9.03% Series B Senior Notes due 2001......................     114,286      142,857
  9.30% Series C Senior Notes due 2006......................     102,273      113,637
Master Shelf Agreement:
  8.55% Senior Notes due 2002...............................      25,000       25,000
  8.68% Senior Notes due 2003...............................      50,000       50,000
  7.29% Senior Notes due 2004...............................      20,000       20,000
  8.59% Senior Notes due 2006...............................      40,000       40,000
  8.94% Senior Notes due 2007...............................      50,000       50,000
  7.17% Senior Notes due 2008...............................      25,000       25,000
  7.22% Senior Notes due 2009...............................      50,000       50,000
Tax-Exempt Bonds:
  Pollution control revenue bonds due 2004..................      15,800       15,800
  Port facilities revenue bonds due 2007....................      11,800       11,800
  Louisiana wastewater facility revenue bonds due 2023......       3,020        3,020
  Louisiana wastewater facility revenue bonds due 2024......      20,000       20,000
  Louisiana wastewater facility revenue bonds due 2025......      40,700       40,700
  Gulf Coast solid waste facility revenue bonds due 2025....      50,000       50,000
  Gulf Coast solid waste facility revenue bonds due 2026....      50,000       50,000
  Port of Corpus Christi sewage and solid waste disposal
     revenue bonds due 2026.................................      25,000       25,000
  Louisiana wastewater facility revenue bonds due 2026......       2,000           --
Taxable Louisiana wastewater facility revenue bonds due
  2026......................................................     118,000      120,000
Cit-Con bank credit agreement...............................      28,571       35,714
                                                              ----------   ----------
                                                               1,253,768    1,563,978
Current portion of long-term debt...........................     (95,240)     (95,240)
                                                              ----------   ----------
                                                              $1,158,528   $1,468,738
                                                              ==========   ==========
</TABLE>
 
     Revolving and Term Bank Loans -- The Company's credit agreement with
various banks consists of a $125 million term loan and a $675 million revolving
loan. The term loan is unsecured, has various interest rate options (year-end
rate of 6.6 percent and 6.8 percent at December 31, 1997 and 1996,
respectively), and principal amounts are payable in quarterly installments. The
revolving loan is unsecured, has various borrowing maturities and interest rate
options (year-end rate of 6.9 percent and 6.7 percent at December 31, 1997 and
1996, respectively), and is committed through December 31, 1999.
 
     Shelf Registration -- In April 1996, the Company filed a registration
statement with the Securities and Exchange Commission relating to the shelf
registration of $600 million of debt securities that may be offered and sold
from time to time. In May 1996, the registration became effective and CITGO sold
a tranche of debt securities with an aggregate offering price of $200 million.
On October 28, 1997, the Company entered into a Selling Agency Agreement with
Salomon Brothers Inc. and Chase Securities Inc. providing for the sale of up
 
                                      F-15
<PAGE>   53
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
to an additional $235 million in aggregate principal amount of notes in tranches
from time to time by the Company under the shelf registration.
 
     Private Placement -- At December 31, 1997, the Company has outstanding
approximately $235 million of privately placed, unsecured Senior Notes.
Principal amounts are payable in annual installments commencing in November,
1995 for the Series A and Series B Notes and in November, 1996 for the Series C
Notes. Interest is payable semi-annually in May and November.
 
     Master Shelf Agreement -- At December 31, 1997, the Company has outstanding
$260 million of privately-placed senior notes under an unsecured Master Shelf
Agreement with an insurance company. The notes have various fixed interest rates
and maturities.
 
     Covenants -- The various agreements above contain certain covenants that,
depending upon the level of the Company's capitalization and earnings, could
impose limitations on the Company for paying dividends, incurring additional
debt, placing liens on property, and selling fixed assets. The Company was in
compliance with the debt covenants at December 31, 1997.
 
     Tax-Exempt Bonds -- Through state entities, the Company has issued $27.6
million of industrial development bonds for certain Lake Charles port facilities
and pollution control equipment and $190.7 million of environmental revenue
bonds to finance a portion of the Company's environmental facilities at its Lake
Charles and Corpus Christi refineries and at the LYONDELL-CITGO refinery. These
bonds are secured by letters of credit. The bonds bear interest at various
floating rates which ranged from 3.7 percent to 5.2 percent at December 31,
1997, and 4.1 percent to 5.1 percent at December 31, 1996.
 
     During 1995, the Company repurchased approximately $47 million of the
Louisiana Revenue Bonds due in 2023 at a discount, resulting in an extraordinary
gain of approximately $3.4 million, net of related income taxes of approximately
$2.2 million.
 
     Taxable Louisiana Revenue Bonds -- Through a state entity, the Company has
issued and currently outstanding $118 million of taxable environmental revenue
bonds to finance a portion of the Company's environmental facilities at its Lake
Charles refinery. Such bonds are secured by a letter of credit and have a
floating interest rate which was 5.8 percent and 5.5 percent at December 31,
1997 and 1996, respectively. At the option of the Company and upon the
occurrence of certain specified conditions, all or any portion of such taxable
bonds may be converted to tax-exempt bonds. At December 31, 1997, $2 million of
the original $120 million bonds had been converted to tax-exempt bonds.
 
     Cit-Con Bank Credit Agreement -- The Cit-Con bank credit agreement consists
of a term loan collateralized by throughput agreements of the owner companies.
The loan contains various interest rate options (weighted average effective
rates of 6.5 percent and 6.3 percent at December 31, 1997 and 1996,
respectively), and requires quarterly principal payments through December 2001.
 
     Debt Maturities -- Future maturities of long-term debt as of December 31,
1997, are: 1998 -- $95.2 million, 1999 -- $211.5 million, 2000 -- $47.1 million,
2001 -- $47.1 million, 2002 -- $36.4 million and $816.4 million thereafter.
 
                                      F-16
<PAGE>   54
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Interest Rate Swap and Cap Agreements -- The Company has entered into the
following interest rate swap agreements to reduce the impact of interest rate
changes on its variable interest rate debt:
 
<TABLE>
<CAPTION>
                                                                   NOTIONAL PRINCIPAL AMOUNT
                                     EXPIRATION      FIXED RATE    --------------------------
       VARIABLE RATE INDEX              DATE            PAID          1997           1996
       -------------------           ----------      ----------    -----------    -----------
                                                                        (000'S OMITTED)
<S>                                <C>               <C>           <C>            <C>
One-month LIBOR..................  September 1998      4.85%        $ 25,000       $ 25,000
One-month LIBOR..................  November 1998       5.09%          25,000         25,000
One-month LIBOR..................  May 2000            6.28%          25,000         25,000
J. J. Kenny......................  May 2000            4.72%          25,000         25,000
J. J. Kenny......................  February 2005       5.30%          12,000         12,000
J. J. Kenny......................  February 2005       5.27%          15,000         15,000
J. J. Kenny......................  February 2005       5.49%          15,000         15,000
                                                                    --------       --------
                                                                    $142,000       $142,000
                                                                    ========       ========
</TABLE>
 
     Interest expense includes $0.8 million, $1.1 million, and $0.1 million in
1997, 1996, and 1995, respectively, related to interest paid on these
agreements. During 1995, the Company converted $25 million of variable rate debt
to fixed rate borrowings and terminated the interest rate swap agreement matched
to the variable rate debt. Other income in 1995 included a $2.4 million gain
related to the termination of this interest rate swap agreement.
 
12. EMPLOYEE BENEFIT PLANS
 
     Employee Savings -- The Company sponsors three qualified defined
contribution retirement and savings plans covering substantially all eligible
salaried and hourly employees. Participants make voluntary contributions to the
plans and the Company makes contributions, including matching of employee
contributions, based on plan provisions. The Company charged $19 million, $16
million, and $16 million to operations related to its contributions to these
plans for the years 1997, 1996, and 1995, respectively.
 
     Pension Benefits -- The Company sponsors three qualified noncontributory
defined benefit pension plans, two of which cover eligible hourly employees and
one of which covers eligible salaried employees. The Company also sponsors three
nonqualified defined benefit plans for certain eligible employees. The qualified
plans' assets include corporate securities and shares in a fixed income mutual
fund, two collective funds and a short-term investment fund. The nonqualified
plans are not funded.
 
     The Company's policy is to fund the qualified pension plans in accordance
with applicable laws and regulations and not to exceed the tax deductible
limits. The nonqualified plans are funded as necessary to pay retiree benefits.
The plan benefits for each of the qualified pension plans are primarily based on
an employee's years of plan service and compensation as defined by each plan.
 
     The Company's net periodic pension costs for these plans included the
following components:
 
<TABLE>
<CAPTION>
                                                       1997        1996        1995
                                                     --------    --------    --------
                                                             (000'S OMITTED)
<S>                                                  <C>         <C>         <C>
Service cost -- benefits earned during the year....  $ 15,759    $ 13,356    $ 11,498
Interest cost on projected benefit obligation......    14,246      12,787      11,496
Actual return on plan assets.......................   (42,727)    (24,645)    (34,784)
Net amortization and deferral......................    25,818      10,068      23,777
                                                     --------    --------    --------
Net periodic pension cost..........................  $ 13,096    $ 11,566    $ 11,987
                                                     ========    ========    ========
</TABLE>
 
                                      F-17
<PAGE>   55
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes the funded status of these plans and the
related amounts recognized in the Company's consolidated balance sheets:
 
<TABLE>
<CAPTION>
                                                  1997                        1996
                                        -------------------------   -------------------------
                                        OVERFUNDED   UNDERFUNDED    OVERFUNDED   UNDERFUNDED
                                        QUALIFIED    NONQUALIFIED   QUALIFIED    NONQUALIFIED
                                          PLANS         PLANS         PLANS         PLANS
                                        ----------   ------------   ----------   ------------
                                             (000'S OMITTED)             (000'S OMITTED)
<S>                                     <C>          <C>            <C>          <C>
Plan assets at fair value.............  $ 221,261      $     --     $ 184,236      $     --
Actuarial present value of benefit
  obligation:
  Vested benefits.....................   (137,532)      (15,910)     (114,259)      (13,643)
  Nonvested benefits..................    (21,647)          (68)      (18,569)          (85)
                                        ---------      --------     ---------      --------
Accumulated benefit obligation........   (159,179)      (15,978)     (132,828)      (13,728)
Effect of projected long-term
  compensation increases..............    (58,121)         (208)      (46,140)         (380)
                                        ---------      --------     ---------      --------
Total projected benefit obligation
  ("PBO").............................   (217,300)      (16,186)     (178,968)      (14,108)
                                        ---------      --------     ---------      --------
     Plan assets in excess of (less
       than) PBO......................  $   3,961      $(16,186)    $   5,268      $(14,108)
                                        =========      ========     =========      ========
Pension liability recognized in the
  Company's consolidated balance
  sheets..............................  $ (37,976)     $(15,978)    $ (27,974)     $(13,728)
Amounts not recognized:
  Prior service costs.................      1,533        (1,719)        1,731        (1,956)
  Net gain at date of adoption........      1,548            --         1,816            --
  Net amount resulting from plan
     experience and changes in
     actuarial assumptions............     38,856        (2,607)       29,695        (1,582)
  Additional minimum liability........         --         4,118            --         3,158
                                        ---------      --------     ---------      --------
     Funded status as of year end.....  $   3,961      $(16,186)    $   5,268      $(14,108)
                                        =========      ========     =========      ========
</TABLE>
 
     The underfunded plans relate to plans in which the plan assets at fair
value are exceeded by the accumulated benefit obligation.
 
     Following are the significant assumptions used in determining the costs and
funded status of these plans:
 
<TABLE>
<CAPTION>
                                                              1997    1996    1995
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Discount rate:
  Pension costs.............................................  7.5%    7.5%    8.0%
  Benefit obligations.......................................  7.0%    7.5%    7.5%
Rate of long-term compensation increase:
  Pension costs.............................................  5.0%    5.0%    5.0%
  Benefit obligations.......................................  5.0%    5.0%    5.0%
Expected long-term rate of return on assets.................  9.0%    8.5%    8.5%
</TABLE>
 
     Postretirement Benefits Other Than Pensions -- In addition to pension
benefits, the Company also provides certain health care and life insurance
benefits for eligible salaried and hourly employees at retirement. These
benefits are subject to deductibles, copayment provisions and other limitations
and are primarily funded on a pay as you go basis. The Company reserves the
right to change or to terminate the benefits at any time.
 
                                      F-18
<PAGE>   56
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following sets forth the funded status of the accumulated
postretirement benefit obligation reconciled with amounts reported in the
Company's consolidated balance sheets:
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
                                                                (000'S OMITTED)
<S>                                                           <C>         <C>
Accumulated postretirement benefit obligation ("APBO"):
  Retirees..................................................  $ 60,958    $ 45,793
  Fully eligible active employees...........................    45,533      38,955
  Other active employees....................................    73,915      64,402
                                                              --------    --------
          Total APBO........................................   180,406     149,150
Trust assets at fair value..................................       889         843
                                                              --------    --------
APBO in excess of trust assets..............................   179,517     148,307
Plus unrecognized net gain..................................    23,948      38,763
                                                              --------    --------
Postretirement benefit liability recognized in the Company's
  consolidated balance sheets includes $3.7 million in other
  current liabilities in 1997 and 1996......................  $203,465    $187,070
                                                              ========    ========
</TABLE>
 
     The Company's net periodic postretirement benefit cost (credit) included
the following components:
 
<TABLE>
<CAPTION>
                                                        1997       1996        1995
                                                      --------    -------    --------
                                                              (000'S OMITTED)
<S>                                                   <C>         <C>        <C>
Service cost -- benefits earned during the year.....  $  6,786    $ 7,047    $  5,819
Interest cost on APBO...............................    12,359     11,982      12,089
Actual return on trust assets.......................       (47)       (50)        (43)
Other -- amortization of unrecognized net gain......   (27,581)        --     (21,603)
                                                      --------    -------    --------
Net periodic postretirement benefit cost (credit)...  $ (8,483)   $18,979    $ (3,738)
                                                      ========    =======    ========
</TABLE>
 
     The amortization of unrecognized net gain (or loss) is due to changes in
the APBO resulting from experience different from that assumed and from changes
in assumptions. Gains (or losses) are recognized as a component of net
postretirement benefit cost by the amount the beginning of year unrecognized net
gain (or loss) exceeds 7.5 percent of the APBO. Increases in the per capita
costs of covered health care benefits of 8.0 percent, 10.0 percent, and 11.0
percent were assumed for 1997, 1996, and 1995, respectively, gradually
decreasing to a 5.5 percent ultimate rate by the year 2002. Increasing the
assumed health care cost trend rates by one percentage point in each future year
would increase the accumulated postretirement benefit obligation as of December
31, 1997, by $32.4 million and increase the aggregate of the service cost and
interest cost components of net periodic postretirement benefit cost for 1997 by
$4.0 million. Discount rates of 7.5 percent, 7.5 percent, and 8.0 percent for
1997, 1996, and 1995, respectively, were used to determine the net periodic
postretirement cost. Discount rates of 7.0 percent and 7.5 percent for 1997 and
1996, respectively, were used to determine the APBO.
 
     Employee Separation Programs -- During 1997, the Company's senior
management implemented a Transformation Program designed to ensure that numerous
expense control, business information systems and business efficiency
initiatives underway are effectively coordinated to achieve desired results.
Included in this program are reviews of the Company's business units, assets,
strategies, and business processes. These combined actions include expected
personnel reductions (the "Separation Programs"). The cost of the Separation
Programs is approximately $22 million for the year ended December 31, 1997.
 
                                      F-19
<PAGE>   57
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
13. INCOME TAXES
 
     The provisions for income taxes are comprised of the following:
 
<TABLE>
<CAPTION>
                                                         1997       1996       1995
                                                        -------    -------    -------
                                                               (000'S OMITTED)
<S>                                                     <C>        <C>        <C>
Current:
  Federal.............................................  $28,277    $63,056    $57,435
  State...............................................    2,061      2,613      5,136
                                                        -------    -------    -------
                                                         30,338     65,669     62,571
Deferred..............................................   60,617      4,612     16,957
                                                        -------    -------    -------
                                                        $90,955    $70,281    $79,528
                                                        =======    =======    =======
</TABLE>
 
     The Federal statutory tax rate differs from the effective tax rate due to
the following:
 
<TABLE>
<CAPTION>
                                                             1997      1996      1995
                                                             ----      ----      ----
<S>                                                          <C>       <C>       <C>
Federal statutory tax rate.................................  35.0%     35.0%     35.0%
State taxes, net of Federal benefit........................   2.2%      2.9%      3.2%
Dividend exclusions........................................  (2.6)%    (3.8)%    (3.3)%
Tax settlement.............................................  (5.4)%      --%       --%
Other......................................................   1.4%      1.5%      1.9%
                                                             ----      ----      ----
Effective tax rate.........................................  30.6%     35.6%     36.8%
                                                             ====      ====      ====
</TABLE>
 
     The effective tax rate for 1997 decreased due primarily to the favorable
resolution of a significant tax issue related to environmental expenditures with
the Internal Revenue Service in 1997. The decrease was partially offset by the
recording of a valuation allowance related to a capital loss carryforward that
will more likely than not expire in 1998.
 
     Deferred income taxes reflect the net tax effects of (i) temporary
differences between the financial and tax bases of assets and liabilities, and
(ii) loss and tax credit carryforwards. The tax effects of significant items
comprising the Company's net deferred tax liability as of December 31, 1997 and
1996, are as follows:
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
                                                                (000'S OMITTED)
<S>                                                           <C>         <C>
Deferred tax liabilities:
  Property, plant and equipment.............................  $480,696    $420,415
  Inventories...............................................    90,270      72,308
  Investments in affiliates.................................    81,855      72,971
  Other.....................................................    34,138      30,758
                                                              --------    --------
                                                               686,959     596,452
                                                              --------    --------
Deferred tax assets:
  Postretirement benefit obligations........................    72,412      76,325
  Employee benefit accruals.................................    34,229      27,365
  Alternative minimum tax credit carryforwards..............    67,432      51,322
  Marketing and promotional accruals........................    19,139      23,236
  Other.....................................................    73,697      58,771
                                                              --------    --------
                                                               266,909     237,019
                                                              --------    --------
  Net deferred tax liability (of which $3,192 and $10,684
     are included in current assets at December 31, 1997 and
     1996, respectively)....................................  $420,050    $359,433
                                                              ========    ========
</TABLE>
 
                                      F-20
<PAGE>   58
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997, the Company has capital loss carryforwards of $13.8
million, $9.6 million of which expire in 1998, $0.4 million of which expire in
2000, $2.3 million of which expire in 2001 and $1.5 million of which expire in
2002. At December 31, 1997, a valuation allowance of $1.4 million has been
established related to the carryforward.
 
     The Company's alternative minimum tax credit carryforwards are available to
offset regular Federal income taxes in future years without expiration, subject
to certain alternative minimum tax limitations.
 
14. COMMITMENTS AND CONTINGENCIES
 
     Litigation and Injury Claims -- Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. The Company is
vigorously contesting or pursuing, as applicable, such lawsuits and claims and
believes that its positions are sustainable. The Company has recorded accruals
for losses it considers to be probable and reasonably estimable. However, due to
uncertainties involved in litigation, there are cases, including the significant
matters noted below, in which the outcome is not reasonably predictable, and the
losses, if any, are not reasonably estimable. If such lawsuits and claims were
to be determined in a manner adverse to the Company, and in amounts in excess of
the Company's accruals, it is reasonably possible that such determinations could
have a material adverse effect on the Company's results of operations in a given
reporting period. The term "reasonably possible" is used herein to mean that the
chance of a future transaction or event occurring is more than remote but less
than likely. However, based upon management's current assessments of these
lawsuits and claims and that provided by counsel in such matters, and the
capital resources available to the Company, management of the Company believes
that the ultimate resolution of these lawsuits and claims would not exceed by a
material amount, the aggregate of the amounts accrued in respect of such
lawsuits and claims and the insurance coverages available to the Company and,
therefore, should not have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
 
     Included among these lawsuits and claims is litigation against CITGO by a
number of current and former employees and applicants on behalf of themselves
and a class of similarly situated persons asserting claims under federal and
state laws of racial discrimination in connection with the employment practices
at CITGO's Lake Charles refining complex; the plaintiffs seek injunctive relief
and monetary damages and have appealed the Court's denial of class
certification; the initial trials relating to this litigation are not currently
included in the trial docket.
 
     In a case currently pending in the United States District Court for the
Northern District of Illinois, Oil Chemical and Atomic Workers, Local 7-517
("Local 7-517") amended its complaint against UNO-VEN to assert claims against
CITGO, PDVSA, PDV America., PDVMR, and Unocal pursuant to Section 301 of the
Labor Management Relations Act ("LMRA"). This complaint alleges that CITGO and
the other defendants constitute a single employer, joint employers or alter-egos
for purposes of the LMRA, and are therefore bound by the terms of a collective
bargaining agreement between UNO-VEN and Local 7-517 covering certain production
and maintenance employees at a Lemont, Illinois, petroleum refinery. On May 1,
1997, in a transaction involving the former partners of UNO-VEN, the Lemont
refinery was acquired by PDVMR. Pursuant to an operating agreement with PDVMR,
CITGO became the operator of the Lemont refinery, and employed the substantial
majority of employees previously employed by UNO-VEN pursuant to its initial
terms and conditions of employment, but did not assume the existing labor
agreement. The union seeks compensation for monetary differences in medical,
pension and other benefits between the CITGO and UNO-VEN plans and reinstatement
of all of the UNO-VEN benefit plans. The union also seeks to require CITGO to
abide by the terms of the collective bargaining agreement between the union and
UNO-VEN.
 
     On May 12, 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. There were no reports of serious personal injuries. Affected units
were shut down for repair and were returned to full service in early August,
1997. The Company has property damage, business interruption and general
liability
                                      F-21
<PAGE>   59
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
insurance which related to this event. As a result, the property damage and
business interruption did not have a material adverse effect on the Company's
financial condition or results of operations. There are presently five lawsuits
against the Company pending in federal and state courts in Corpus Christi,
Texas, alleging property damages, personal injury and punitive damages allegedly
arising from the incident and other similar lawsuits have been threatened.
Approximately 6,000 individual claims have been received by the Company
allegedly arising from the incident.
 
     Additionally, there is a class action lawsuit pending against the Company
and other operators and owners of nearby industrial facilities which was filed
in state court in Corpus Christi, Texas, in 1993 on behalf of property owners in
the vicinity of these facilities. The certification of this case as a class
action in 1995 was appealed by CITGO and other parties. This lawsuit asserts
property damage claims and diminution in property values allegedly resulting
from environmental contamination in the air, soil, and groundwater, occasioned
by ongoing operations of the Company's Corpus Christi refinery and the
respective industrial facilities of the other defendants. Two related personal
injury and wrongful death lawsuits were filed in 1996 and are in preliminary
stages of discovery at this time. In 1997 the Company signed an agreement to
settle the property damage class action lawsuit for approximately $17.3 million
which included the purchase of approximately 290 properties in an adjacent
neighborhood. Of this amount, $15.7 million was expensed in 1997.
 
     CITGO submitted a settlement proposal to the court. The court appointed a
guardian to review the proposed settlement terms. Subsequently, the Texas
Supreme Court decided to hear the Company's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
the Company. For these reasons, the Company opposed the approval and enforcement
of the settlement agreement as proposed to be revised and enforcement has now
been stayed pending a ruling by the Texas Supreme Court. If the settlement
agreement is enforced, the Company could be liable for the full settlement
amount of $17.3 million. CITGO is pursuing an independent program to purchase
the properties which were the subject of the purchase provisions of the
settlement agreement.
 
     In June 1997, CITGO settled litigation with a contractor who had claimed
additional compensation for sludge removal and treatment at CITGO's Lake
Charles, Louisiana, refinery. The settlement did not have a material effect on
CITGO's financial position or results of operations. CITGO believes that it has
no further exposures to losses related to this matter.
 
     Environmental Compliance and Remediation -- The Company is subject to
various federal, state and local environmental laws and regulations which may
require the Company to take action to correct or improve the effects on the
environment of prior disposal or release of petroleum substances by the Company
or other parties. Management believes the Company is in compliance with these
laws and regulations in all material aspects. Maintaining compliance with
environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
 
     In 1992, the Company reached an agreement with a state agency to cease
usage of certain surface impoundments at the Company's Lake Charles refinery by
1994. A mutually acceptable closure plan was filed with the state in 1993. The
Company and a former owner are participating in the closure and sharing the
related costs based on estimated contributions of waste and ownership periods.
The remediation commenced in December 1993. In 1997, the Company presented a
proposal to a state agency revising the 1993 closure plan. A ruling on this
proposal is expected in 1998 and actual closure is expected to be completed
during 2000.
 
     In 1992, an agreement was reached between the Company and a former owner
concerning a number of environmental issues. The agreement consisted, in part,
of payments to the Company totaling $46 million. The former owner will continue
to share the costs of certain specific environmental remediation and certain
tort liability actions based on ownership periods and specific terms of the
agreement.
 
                                      F-22
<PAGE>   60
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1997 and 1996, the Company had $48.7 million and $56
million, respectively, of environmental accruals included in other noncurrent
liabilities. Based on currently available information, including the continuing
participation of former owners in remediation actions, management believes these
accruals are adequate. Conditions which would require additional expenditures
may exist for various Company sites including, but not limited to, the Company's
operating refinery complexes, former refinery sites, service stations and crude
oil and petroleum product storage terminals. The amount of such future
expenditures, if any, is indeterminable.
 
     Capital Expenditures -- The Company's anticipated capital expenditures,
excluding the investments in LYONDELL-CITGO, for the five-year period 1998 to
the year 2002 total approximately $1.4 billion (unaudited). The expenditures
include environmental and regulatory capital projects as well as strategic
capital expenditures. At December 31, 1997, authorized expenditures on
incomplete capital projects totaled approximately $109 million.
 
     Supply Agreements -- CITGO purchases the crude oil processed at its
refineries and also purchases refined products to supplement the production from
its refineries to meet marketing demands and resolve logistical issues. In
addition to supply agreements with various affiliates (Note 5), the Company has
various other crude oil, refined product and feedstock purchase agreements with
unaffiliated entities with terms ranging from monthly to annual renewal. The
Company believes these sources of supply are reliable and adequate for its
current requirements.
 
     Throughput Agreements -- The Company has throughput agreements with certain
pipeline affiliates (Note 9). These throughput agreements may be used to secure
obligations of the pipeline affiliates. Under these agreements, the Company may
be required to provide its pipeline affiliates with additional funds through
advances against future charges for the shipping of petroleum products. The
Company currently ships on these pipelines and has not been required to advance
funds in the past. At December 31, 1997, the Company has no fixed and
determinable, unconditional purchase obligations under these agreements.
 
     Marine Spill Response Arrangements -- During the third quarter of 1995, the
Company entered into a contract with National Response Corporation for marine
oil removal services capability and terminated its relationship with the
previous provider of that service. The Company paid a cancellation fee of
approximately $16 million, which is included in cost of sales and operating
expenses in 1995.
 
     Commodity Derivative Activity -- The Company's commodity derivatives are
generally entered into through major brokerage houses and traded on national
exchanges and can be settled in cash or through delivery of the commodity. Such
contracts generally qualify for hedge accounting and correlate to market price
movements of crude oil and refined products. Resulting gains and losses,
therefore, will generally be offset by gains and losses on the Company's hedged
inventory or future purchases and sales. The Company's derivative commodity
activity is closely monitored by management and contract periods are generally
less than 30 days. Unrealized and deferred gains and losses on these contracts
at December 31, 1997 and 1996 and the effects on cost of sales and pretax
earnings for 1997, 1996, and 1995 were not material. At times during 1996 and
1995, the Company entered into commodity derivatives activities that were not
related to the hedging program discussed above. This activity and its results
were not material in 1996 or 1995. There was no such activity in 1997.
 
     Other Credit and Off-Balance Sheet Risk Information as of December 31,
1997 -- The Company has guaranteed approximately $12 million of debt of certain
CITGO marketers and an affiliate. Such debt is substantially collateralized by
assets of these entities. The Company has outstanding letters of credit totaling
approximately $366 million, which includes $346 million related to the Company's
tax-exempt and taxable revenue bonds (Note 11). The Company has also acquired
surety bonds totaling $42 million primarily due to requirements of various
government entities. The Company does not expect liabilities to be incurred
related to such guarantees, letters of credit or surety bonds.
 
                                      F-23
<PAGE>   61
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Neither the Company nor the counterparties are required to collateralize
their obligations under interest rate swaps or caps or over-the-counter
derivative commodity agreements. The Company is exposed to credit loss in the
event of nonperformance by the counterparties to these agreements, but has no
off-balance sheet risk of accounting loss for the notional amounts. The Company
does not anticipate nonperformance by the counterparties, which consist
primarily of major financial institutions, as of December 31, 1997.
 
     Management considers the market risk to the Company related to its
commodity and interest rate derivatives to be insignificant during the periods
presented.
 
15. LEASES
 
     The Company leases certain of its Corpus Christi refinery facilities under
a long-term lease. The basic term of the lease expires on January 1, 2004;
however, the Company may renew the lease until January 31, 2011, the date of its
purchase option. Capitalized costs included in property, plant and equipment
related to the leased assets were approximately $209 million at December 31,
1997 and 1996. Accumulated amortization related to the leased assets was
approximately $94 million and $86 million at December 31, 1997 and 1996,
respectively. Amortization is included in depreciation expense.
 
     The Company also has various noncancelable operating leases, primarily for
product storage facilities, office space, computer equipment and vehicles. Rent
expense on all operating leases totaled $39 million in 1997, and $33 million in
1996 and 1995. Future minimum lease payments for the capital lease and
noncancelable operating leases are as follows:
 
<TABLE>
<CAPTION>
                                                     CAPITAL     OPERATING
                       YEAR                           LEASE        LEASE       TOTAL
                       ----                          --------    ---------    --------
                                                              (000'S OMITTED)
<S>                                                  <C>         <C>          <C>
1998...............................................  $ 27,375    $ 27,900     $ 55,275
1999...............................................    27,375      21,229       48,604
2000...............................................    27,375      18,336       45,711
2001...............................................    27,375      16,491       43,866
2002...............................................    27,375      15,794       43,169
Thereafter.........................................    63,375      17,286       80,661
                                                     --------    --------     --------
          Total minimum lease payments.............   200,250    $117,036     $317,286
                                                                 ========     ========
Amount representing interest.......................   (70,524)
                                                     --------
Present value of minimum lease payments............   129,726
Current portion....................................    13,140
                                                     --------
                                                     $116,586
                                                     ========
</TABLE>
 
16. FAIR VALUE INFORMATION
 
     The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
 
                                      F-24
<PAGE>   62
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The carrying amounts of cash and cash equivalents and restricted cash
approximate fair values because of the short maturity of these instruments. The
carrying amounts and estimated fair values of the Company's other financial
instruments are as follows:
 
<TABLE>
<CAPTION>
                                              1997                        1996
                                    ------------------------    ------------------------
                                     CARRYING        FAIR        CARRYING        FAIR
                                      AMOUNT        VALUE         AMOUNT        VALUE
                                    ----------    ----------    ----------    ----------
                                        (000'S OMITTED)             (000'S OMITTED)
<S>                                 <C>           <C>           <C>           <C>
LIABILITIES:
  Short-term bank loans...........  $    3,000    $    3,000    $   53,000    $   53,000
  Long-term debt..................   1,253,768     1,296,940     1,563,978     1,600,118
DERIVATIVE AND OFF-BALANCE SHEET
  FINANCIAL INSTRUMENTS --
  UNREALIZED LOSSES:
  Interest rate swap agreements...          --        (2,925)           --        (1,093)
  Guarantees of debt..............          --           (59)           --           (60)
  Letters of credit...............          --        (1,748)           --        (1,741)
  Surety bonds....................          --          (119)           --          (100)
</TABLE>
 
     Short-term bank loans and long-term debt -- The fair value of short-term
bank loans and long-term debt is based on interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities.
 
     Interest rate swap and cap agreements -- The fair value of these agreements
is based on the estimated amount that the Company would receive or pay to
terminate the agreements at the reporting dates, taking into account current
interest rates and the current creditworthiness of the counterparties.
 
     Guarantees, letters of credit and surety bonds -- The estimated fair value
of contingent guarantees of third-party debt, letters of credit and surety bonds
is based on fees currently charged for similar one-year agreements or on the
estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting dates.
 
     The fair value estimates presented herein are based on pertinent
information available to management as of the reporting dates. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date, and current
estimates of fair value may differ significantly from the amounts presented
herein.
 
                                      F-25
<PAGE>   63
                          CITGO PETROLEUM CORPORATION
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
17. QUARTERLY RESULTS OF OPERATIONS -- UNAUDITED
 
     The following is a summary of the quarterly results of operations for the
years ended December 31, 1997 and 1996 (in thousands):
 
<TABLE>
<CAPTION>
                                         1ST QTR.     2ND QTR.     3RD QTR.     4TH QTR.
                                        ----------   ----------   ----------   ----------
<S>                                     <C>          <C>          <C>          <C>
1997
Sales.................................  $3,262,726   $3,430,087   $3,555,825   $3,342,665
                                        ==========   ==========   ==========   ==========
Cost of sales and operating
  expenses............................  $3,177,759   $3,261,419   $3,343,417   $3,237,159
                                        ==========   ==========   ==========   ==========
Net income............................  $   12,825   $   72,710   $   92,345   $   28,664
                                        ==========   ==========   ==========   ==========
1996
Sales.................................  $2,607,195   $3,333,996   $3,310,456   $3,700,413
                                        ==========   ==========   ==========   ==========
Cost of sales and operating
  expenses............................  $2,521,851   $3,228,540   $3,186,413   $3,554,199
                                        ==========   ==========   ==========   ==========
Net income............................  $   14,800   $   31,229   $   33,739   $   47,201
                                        ==========   ==========   ==========   ==========
</TABLE>
 
18. SUBSEQUENT EVENT
 
     On January 26, 1998, a cash dividend of $110 million was paid to PDV
America.
 
                                   * * * * *
 
                                      F-26
<PAGE>   64
 
                                                COMMISSION FILE NUMBER 001-14380
================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                      ------------------------------------
 
                                    EXHIBITS
 
                                   FILED WITH
 
                                   FORM 10-K
 
                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  For the fiscal year ended December 31, 1997
 
                      ------------------------------------
 
                          CITGO PETROLEUM CORPORATION
 
             (Exact name of registrant as specified in its charter)
 
================================================================================
<PAGE>   65
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
    EXHIBITS
    --------
<C>                <S>
    *3.1           Certificate of Incorporation, Certificate of Amendment of
                   Certificate of Incorporation and By-laws of CITGO Petroleum
                   Corporation.
    *4.1           Indenture, dated as of May 1, 1996, between CITGO Petroleum
                   Corporation and the First National Bank of Chicago, relating
                   to the 7 7/8% Senior Notes due 2006 of CITGO Petroleum
                   Corporation.
    *4.2           Form of Senior Note (included in Exhibit 4.1).
  **10.1           Crude Supply Agreement between CITGO Petroleum Corporation
                   and Petroleos de Venezuela, S.A., dated as of September 30,
                   1986.
  **10.2           Supplemental Crude Supply Agreement dated as of September
                   30, 1986 between CITGO Petroleum Corporation and Petroleos
                   de Venezuela, S.A.
  **10.3           Crude Oil and Feedstock Supply Agreement dated as of March
                   31, 1987 between Champlin Refining Company and Petroleos de
                   Venezuela, S.A.
  **10.4           Supplemental Crude Oil and Feedstock Supply Agreement dated
                   as of March 31, 1987 between Champlin Refining Company and
                   Petroleos de Venezuela, S.A.
  **10.5           Contract for the Purchase/Sale of Boscan Crude Oil dated as
                   of June 2, 1993 between Tradecal, S.A. and CITGO Asphalt
                   Refining Company.
  **10.6           Restated Contract for the Purchase/Sale of Heavy/Extra Heavy
                   Crude Oil dated December 28, 1990 among Maraven, S.A.,
                   Lagoven, S.A. and Seaview Oil Company.
  **10.7           Sublease Agreement dated as of March 31, 1987 between
                   Champlin Petroleum Company, Sublessor, and Champlin Refining
                   Company, Sublease.
  **10.8           Operating Agreement dated as of May 1, 1984 among Cit-Con
                   Oil Corporation, CITGO Petroleum Corporation and Conoco,
                   Inc.
  **10.9           Amended and Restated Limited Liability Company Regulations
                   of LYONDELL-CITGO Refining Company, Ltd., dated July 1,
                   1993.
  **10.10          Contribution Agreement between Lyondell Petrochemical
                   Company and LYONDELL-CITGO Refining Company, Ltd. and
                   Petroleos de Venezuela, S.A.
  **10.11          Crude Oil Supply Agreement between LYONDELL-CITGO Refining
                   Company, Ltd. and Lagoven, S.A. dated as of May 5, 1993.
  **10.12          Supplemental Supply Agreement dated as of May 5, 1993
                   between LYONDELL-CITGO Refining Company, Ltd. and Petroleos
                   de Venezuela, S.A.
  **10.13          Tax Allocation Agreement dated as of June 24, 1993 among PDV
                   America, Inc., VPHI Midwest, Inc., CITGO Petroleum
                   Corporation and PDV USA, Inc., as amended.
  **10.14          CITGO Credit Facility.
   *10.15(i)       First Amendment to the Second Amended and Restated Senior
                   Term Loan Agreement, by and between CITGO Petroleum
                   Corporation and Bank of America National Trust and Savings
                   Association et al, dated as of February 15, 1994.
   *10.15(ii)      Second Amendment to Second Amended and Restated Senior Term
                   Loan Agreement by and among CITGO Petroleum Corporation and
                   Bank of America Illinois et al, dated as of October 21,
                   1994.
   *10.15(iii)     First Amendment to the Second Amended and Restated Senior
                   Revolving Credit Facility Agreement by and among CITGO
                   Petroleum Corporation and Bank of America National Trust and
                   Savings Association et al, dated as of February 15, 1994.
</TABLE>
<PAGE>   66
 
<TABLE>
<CAPTION>
    EXHIBITS
    --------
<C>                <S>
   *10.15(iv)      Second Amendment to Second Amended and Restated Senior
                   Revolving Credit Facility Agreement by and among CITGO
                   Petroleum Corporation and Bank of America Illinois et al,
                   dated as of October 21, 1994.
   *10.16          Master Shelf Agreement (1994) by and between Prudential
                   Insurance Company of America and CITGO Petroleum Corporation
                   ($100,000,000), dated March 4, 1994.
   *10.17(i)       Letter Agreement by and between the Company and Prudential
                   Insurance Company of America, dated March 4, 1994.
   *10.17(ii)      Letter Amendment No. 1 to Master Shelf Agreement with
                   Prudential Insurance Company of America, dated November 14,
                   1994.
  **10.18          CITGO Senior Debt Securities(1991) Agreement.
   *10.19          CITCON Credit Agreement between CITCON Oil Corporation and
                   The Chase Manhattan Bank N.A., as Agent, dated as of April
                   30, 1992.
   *10.20(i)       First Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of June 30, 1992.
   *10.20(ii)      Second Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of March 31, 1994.
   *10.20(iii)     Third Amendment to the CITCON Credit Agreement, between
                   CITCON Oil Corporation and The Chase Manhattan Bank
                   (National Association), dated as of June 10, 1994.
 ***10.21          Selling Agency Agreement dated as of October 28, 1997 among
                   CITGO Petroleum Corporation, Salomon Brothers Inc. and Chase
                   Securities Inc.
    12.1           Computation of Ratio of Earnings to Fixed Charges.
    23.1           Consent of Independent Auditors
    27             Financial Data Schedule (filed electronically only).
</TABLE>
 
---------------
 
  *  Previously filed in connection with the Registrant's Report on Form 10,
     Commission file number 1-14380.
 
 **  Incorporated by reference to the Registration Statement on Form F-1 of PDV
     America, Inc. (No. 33-63742).
 
***  Incorporated by reference to the Registrant's Report on Form 8-K filed with
     the Commission on November 18, 1997.