The supply and demand fundamentals of the domestic refining industry have improved since the 1990s and are expected to remain favorable as the growth in demand for refined products continues to exceed increases in refining capacity. Over the next two decades, the EIA projects that U.S. demand for refined products will grow at an average of 1.5% per year compared to total domestic refining capacity growth of only 1.3% per year. Approximately 83.3% of the projected demand growth is expected to come from the increased consumption of light refined products (including gasoline, diesel, jet fuel and liquefied petroleum gas), which are more difficult and costly to produce than heavy refined products (including asphalt and carbon black oil).

According to the EIA, between 1981 and 2004, refinery utilization increased from 69% to 93%. The trend toward improving utilization levels has been driven by several factors, including the fact that no new major refineries have been built in the U.S. since 1976, demand for refined products continues to increase, many small refineries have been closed and permitting requirements have constrained refiners’ ability to increase capacity. Over the next 20 years, the EIA projects that utilization will remain high relative to historic levels, ranging from 92% to 95% of design capacity.

Although refining margins (which are the difference between the per barrel prices for refined products and the cost of crude oil) have been volatile over the short-term due to storage levels, seasonal demand, refinery outages and extreme weather conditions, longer-term averages have steadily increased over the last 10 years as a result of the improving fundamentals for the refining industry.

In 1993, the Company entered into an operating agreement with Chevron under which Chevron physically and operationally combined its North Refinery assets with its South Refinery. Twenty-four underground pipelines and numerous other modifications were built by Chevron to physically connect the two facilities. This refinery integration allowed Chevron to shut down certain of its underperforming units and begin utilizing and sharing the assets of the South Refinery. In addition, certain underperforming units of the South Refinery were idled in favor of using the North Refinery assets.

Electricity is supplied to the Company’s refinery by El Paso Electric Company via two separate feeders to both the north and south sides of its refinery. The Company’s refinery’s operations can continue at 100 percent of capacity with just one feeder in service to each side. The Company has an electrical power curtailment plan to conserve power in the event of a partial outage. In addition, the Company has multiple small, automatic-starting emergency generators to supply electricity for essential lighting and controls as well as various uninterruptible power supply systems located at several units throughout its refinery to continue power supply to process computers and controls in the event of a power outage.

Outside of the El Paso market, which is supplied via a product terminal, the Company provides refined products to other major regional markets, including Tucson, Phoenix, Albuquerque and Juarez. Supply to these markets is achieved through pipeline systems that are linked to the Company’s refinery. Product distribution to Arizona is delivered via the Kinder Morgan East Line, which connects the Company’s refinery to product terminals in Tucson and Phoenix. The Company also utilizes two pipelines owned by Chevron to ship product: the first originates at the Company’s refinery and terminates in Albuquerque, and the second runs from El Paso to Juarez. A final pipeline provides diesel to the Union Pacific railway in El Paso.

The Company sells a variety of refined products to its diverse customer’s base. The Company also purchases additional refined products from other refiners to supplement supply to its customers. These products are the same grade as the products that it currently manufactures. The Company produces both low-sulfur and high-sulfur diesel fuel. Low-sulfur diesel fuel is predominantly used for on-road transportation purposes, such as automobile travel and long-haul trucking. High-sulfur diesel fuel is sold for off-road uses such as railroad transportation and mining.

Cost of sales were $1.3 billion for the six months ended June 30, 2005, compared to $833.8 billion for the six months ended June 30, 2004, an increase of $506.4 billion, or 60.7%.

Selling, general and administrative expenses were $9.7 billion for the six months ended June 30, 2005, compared to $7.3 billion for the six months ended June 30, 2004, an increase of $2.4 billion, or 32.9%.

Depreciation and amortization for the six months ended June 30, 2005, was $2.9 billion, compared to $1.9 billion for the six months ended June 30, 2004.

Net income was $64.2 billion for the six months ended June 30, 2005, compared to $38.5 billion for the same period in 2004, an increase of $25.7 billion, or 66.8%.