**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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| **Form 10-K**                                                                                                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                |
| **ý****ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                           |
|                                                                                                                                                                                                                |
| **For  the Fiscal Year Ended December 31, 2003**                                                                                                                                                               |
|                                                                                                                                                                                                                |
| **or**                                                                                                                                                                                                              |
|                                                                                                                                                                                                                |
| **o****TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                            |
|                                                                                                                                                                                                                |
| **For the  Transition Period from                  to                ** |
|                                                                                                                                                                                                                |
| **Commission File  No. 333-59054-01**                                                                                                                                                                               |

# ** **

**Chevron Phillips Chemical Company LLC**

(Exact name of Registrant asspecified in its charter)

 
| **Delaware**                                                      |   | **73-1590261**                           |
|-------------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization)   |   | (I.R.S. Employer  Identification Number) |
|                                                              |   |                                     |
| **10001 Six Pines Drive****The Woodlands, TX 77380-1498**         |
| (Address of principal executive offices,  including zip code)     |
|                                                              |   |                                     |
| **(832) 813-4100**                                                |
| (Registrant’s telephone number,  including area code)        |
|                                                              |   |                                     |
| Securities registered pursuant  to Section 12(b) of the Act: |
| **None**                                                          |
|                                                              |   |                                     |
| Securities registered pursuant  to Section 12(g) of the Act: |
| **None**                                                          |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

**Yes  ****o****      No  ****ý**

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act).

 

**Yes  **o      **No  ****ý**

 

The aggregate market value of the voting and non-voting common equitystock held by non-affiliates of the registrant at June 30, 2003:

 

**None**

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

List hereunder the following documents ifincorporated by reference and the Part of the Form 10-K into which the documentis incorporated:

**None**

 

 

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TABLE OF CONTENTS

 
| **PART I**            |   |
|-----------------------|--------|
|                  |   |   |   |
| Items  1. and 2. |   | Business  and Properties | 2 |
| 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 | 17 |
| Item 6.               |   | Selected Financial Data | 18 |
| Item 7.               |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 19 |
| Item  7A.             |   | Quantitative and Qualitative Disclosures  About Market Risk | 33 |
| Item 8.               |   | Financial Statements and Supplementary Data | 34 |
| Item 9.               |   | Change in and Disagreements with  Accountants on Accounting and Financial Disclosure | 85 |
| Item  9A.             |   | Controls and Procedures | 85 |
|                  |   |   |   |
| **PART  III**         |   |
|                  |   |   |   |
| Item  10.             |   | Directors and Executive Officers of the  Registrant | 85 |
| Item  11.             |   | Executive Compensation | 87 |
| Item  12.             |   | Security  Ownership of Certain Beneficial Owners and Management | 91 |
| Item  13.             |   | Certain  Relationships and Related Transactions | 91 |
| Item  14.             |   | Principal  Accountant Fees and Services | 92 |
|                  |   |   |   |
| **PART IV**           |   |
|                  |   |   |   |
| Item  15.             |   | Exhibits,  Financial Statement Schedules and Reports on Form 8-K | 93 |

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

This annual report contains “forward-lookingstatements” within the meaning of the federal securities laws.  Such statements can generally be identifiedwith words and phrases such as “believes,” “expects,” “anticipates,” “should,”“estimates,” or other words and phrases of similar meaning.  Where Chevron Phillips Chemical Company LLC(CPChem) expresses an expectation or belief as to future events or results,there can be no assurance that the expectation or belief will result, beachieved or be accomplished.  Where anysuch forward-looking statement includes a statement of the assumptions or basesunderlying such forward-looking statement, CPChem believes such assumptions or bases to bereasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and thedifferences between assumed facts or bases and actual results can be material,depending on the circumstances.  Themore significant factors that, if erroneous, could cause actual results todiffer materially from those expressed include, among others: the timing andduration of periods of expansion and contraction within the chemicals business,plans for the construction, modernization, start-up or de-bottlenecking ofdomestic and foreign chemical plants, prices of feedstocks and products, forcemajeure events, accidents, labor relations, political risks, terrorist acts,war, changes in foreign and domestic laws, rules and regulations and theinterpretation and enforcement thereof, regulatory decisions relating to taxes,the environment and human resources, the global economy, results of financingefforts and overall financial market conditions.  All forward-looking statements in this annual report are qualifiedin their entirety by the cautionary statements contained in this section.  CPChem does not undertake to update, revise or correct any of theforward-looking information.

 

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**PART I**

 

**Items 1. and 2****.  Business and Properties**

 

Chevron Phillips Chemical Company LLC (CPChem), a limited liabilitycompany formed under Delaware law, manufactures and markets a wide range ofpetrochemicals on a worldwide basis through its subsidiaries and equityaffiliates, with manufacturing facilities located in the United States, PuertoRico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium.

 

On July 1, 2000, Chevron Corporation, now ChevronTexacoCorporation (ChevronTexaco), and Phillips Petroleum Company, nowConocoPhillips, combined their worldwide petrochemicals businesses, excludingChevronTexaco’s Oronite additives business, to form Chevron Phillips ChemicalCompany LLC.  ChevronTexaco andConocoPhillips (collectively, the “members” or the “owners”) each own 50% ofCPChem.

 

CPChem is governed by a Board of Directors, currently comprised of sixrepresentatives, under the terms of a limited liability company agreement.  ChevronTexaco and ConocoPhillips each havetwo voting representatives, and the chief executive officer and the chieffinancial officer of CPChem are non-voting representatives.  Certain major decisions and actions requirethe unanimous approval of the voting representatives.

 

CPChem previously sold certain debt securities pursuant to registrationstatements filed under the Securities Act of 1933, which subjected CPChem tothe reporting requirements of Section 15(d) of the Securities Exchange Actof 1934 (the “Act”).  These debtsecurities were not registered under Section 12 of the Act.  CPChem’s duty to file reports with the Securities and Exchange Commission(the “SEC”) was subsequently and automatically suspended under the Act.  However, CPChem has voluntarily continued to file quarterly, annual and otherperiodic reports with the SEC.  Thesereports are available to the public at no charge through CPChem’s website atwww.cpchem.com.

 

CPChem’s business is structured around three primary operatingsegments:  Olefins & Polyolefins,Aromatics & Styrenics, and Specialty Products.  For a list of the principal products of these segments, see thetables included in each segment’s discussion. See also “Part II – Item 8. Financial Statements and Supplementary Data– Note 17” for financial data by segment and geographic location.

 

***Olefins& Polyolefins***

 

This segment gathers, buys, sells and fractionates natural gas liquids,and manufactures and markets olefin products such as ethylene andpropylene.  This segment alsomanufactures and markets alpha olefins and polyolefin products such as normalalpha olefins (NAO), polyethylene, polypropylene and polyethylene pipe.  CPChem has five olefin and polyolefinproduction facilities located in Texas. CPChem also has nine domestic pipe facilities and one in Mexico, and onedomestic pipe fittings facility.  Inaddition, CPChem owns interests in a polypropylene facility located at thePasadena Plastics Complex in Texas (formerly known as the Houston ChemicalComplex), a high-density polyethylene plant located at CPChem’s Cedar Bayoufacility in Texas, polyethylene facilities in Singapore and China, and an ethylene,polyethylene and 1-hexene facility in Qatar.

 

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***Olefins& Polyolefins***

 
| **Product**                                  |   | **Approximate  Net Capacity** |   | **Primary Uses**                                                                                                                                                                                                                           |
|----------------------------------------------|--------|-------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |   | **(million lbs. per year)**   |   |                                                                                                                                                                                                                                       |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Ethylene                                     |   | 8,139                         | (1,2)  | Basic  building block for plastics and elastomers, and also a raw material for  chemicals used to make paints, detergents and antifreeze.                                                                                                  |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Polyethylene                                 |   | 5,940                         | (2,3)  | Thermoplastic polymer used in various applications, including:                                                                                                                                                                             |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
|                                         |   |                          |   | •     high-density polyethylene  (HDPE), which is a resin used to make detergent bottles, pails, plastic pipe  and conduit, shopping bags, geomembrane and film applications;                                     |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
|                                         |   |                          |   | •                  linear  low-density polyethylene (LLDPE), which is a resin used to make plastic film  and containers; and                     |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
|                                         |   |                          |   | •                  low-density  polyethylene (LDPE), which is a resin used to make plastic film, paper  coating, surgical gloves and containers. |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Polyethylene pipe, conduit and pipe fittings |   | 564                           |   | Used in a wide variety of industries such as electrical, energy, gas  distribution, geothermal, mining, municipal projects and telecommunications.                                                                                         |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Propylene                                    |   | 2,880                         |   | Basic building block for various fibers and plastics, such as  polypropylene, and used as a raw material for chemicals used to make paints,  detergents and resins.                                                                        |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Polypropylene                                |   | 486                           | (3)    | Thermoplastic polymer used in fibers, films, automobiles and  housewares.                                                                                                                                                                  |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Normal alpha olefins                         |   | 1,514                         | (2)    | A group of chemicals produced from ethylene and used in plasticizer  alcohols, polyethylene, surfactants and synthetic lubricants and additives.                                                                                           |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Polyalpha olefins                            |   | 104                           |   | Base stock for synthetic lubricants.                                                                                                                                                                                                       |
|                                         |   |                          |   |                                                                                                                                                                                                                                       |
| Acetylene black                              |   | 18                            |   | Carbon black resulting from the exothermic decomposition of acetylene  gas, used in batteries, magnetic tape, caulk, sealant, conductive paint and  ink, specialty silicone rubber and plastics, and explosives.                           |

 

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(1)          Includes 650 million pounds of idled capacityat the Sweeny facility in Old Ocean, Texas.

(2)          Includes CPChem’s share of the capacity ofQatar Chemical Company Ltd. (Q-Chem), an equity affiliate.  The Q-Chem complex is operating and is inthe final stages of performance testing.

(3)          Includes CPChem’s share of other equityaffiliates’ capacities.

 

3

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*Competition*.  Olefins and polyolefins are delivered intothe worldwide commodity markets. Competitive factors include price, product quality and performance,product deliverability and customer service. CPChem generally ranks within the top 10 ethylene and polyethyleneproducers worldwide based on published rated capacities.  Other major producers include Dow ChemicalCompany (Dow), Equistar Chemicals LP (Equistar), ExxonMobil Chemical Company(ExxonMobil), BP p.l.c. (BP) and Shell Chemical Company (Shell).  CPChem’s NAO technology allows it to producea wide range of hydrocarbon products that compete in many different markets,including comonomers for polyethylene, surfactants, drilling fluids andpolyalpha olefins.  Other significantproducers of NAO are BP, Shell and Sasol Ltd. Major producers of polyalpha olefins include BP and ExxonMobil.

 

*Distribution. *Depending on the particular product andlocation of the production facility, Olefins & Polyolefins products areshipped by railcar, ships, trucks, parcel tankers and CPChem and third- partypipelines.

 

**Ethylene**

 

By volume, ethylene is the most widely-consumed petrochemical productin the world, according to Chemical Market Associates, Inc.  Domestically, ethylene is produced atCPChem’s Sweeny facility in Old Ocean, Texas, at its Cedar Bayou facility inBaytown, Texas and at its Port Arthur, Texas facility.  Internationally, CPChem produces ethylenethrough its 49%-owned Q-Chem joint venture, located in Mesaieed, Qatar.  The Q-Chem complex is operating and is inthe final stages of performance testing. CPChem’s share of the combined ethylene capacity of its domestic andinternational facilities is approximately 8.1 billion pounds per year.

 

Polyethylene accounts for more than half of all global ethyleneconsumption.  Polyethylene end-usesinclude various nondurable applications such as soap packaging, householdchemicals packaging and other consumer packaging, and durable applications suchas pipe, fuel tanks and containers.

 

*Supply/Feedstock Sources.*  Ethylene can be produced from ethane,propane, butane, natural gasoline or certain refinery liquids such as naphthaand gas oil.  The two most commonethylene feedstocks are ethane, because of its high ethylene yield, andnaphtha, because of its availability and transportability.  Much of CPChem’s ethylene production isbased on ethane/propane feedstock, however certain domestic facilities havevarying degrees of flexibility to process propane, butane, and naphtha wheneconomics dictate.  The price of ethanetends to correlate with the price of natural gas, while the prices of the otherethylene feedstock slates tend to correlate with the price of crude oil.

 

CPChem has market-based purchase contracts with Duke Energy FieldServices, LLC (an affiliate of ConocoPhillips) and Dynegy Inc. (an affiliate ofChevronTexaco) which cover over 75% of CPChem’s anticipated domestic ethylenefeedstock needs.  The agreement withDuke Energy extends through December 31, 2014 and the agreement withDynegy extends through August 31, 2006. Contracts with other suppliers provide the remainder of feedstockneeds.  These contracts can be long-termor monthly, or daily contracts made on a spot basis.

 

*Marketing.***** CPChem uses approximately 75% of its domesticethylene in its production of polyethylene, NAO and styrene.  The remainder of domestic ethyleneproduction is sold on the merchant market, largely under long-termcontracts.  CPChem’s ethylene storagecapacity is approximately one billion pounds and is split between its Texascavern storage facilities in Clemens and Mont Belvieu.  All internationally produced ethylene isconsumed internally.

 

4

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**Polyethylene**

 

Domestically, polyethylene is produced at the Pasadena Plastics Complexand the Orange and Cedar Bayou facilities, all located in Texas.  Internationally, CPChem producespolyethylene through its joint venture facilities in Qatar, Singapore andJinshanwei, China.  CPChem’s share ofthe combined polyethylene capacity of its domestic and international facilitiesis approximately 5.9 billion pounds per year.

 

*Supply/FeedstockSources.*  Theprimary raw material for polyethylene production is ethylene, which typicallyrepresents the majority of polyethylene manufacturing costs.  CPChem produces ethylene in excess of its polyethylene productionrequirements.  Butene and1-hexene, also used in the production of polyethylene, are produced at theCedar Bayou facility.  The complex inQatar produces all of the ethylene and1-hexene required for its production ofpolyethylene.

 

*Marketing.** ***At December 31,2003, approximately 80% of CPChem’s net polyethylene capacity was located inthe United States, along the Texas Gulf Coast. CPChem markets almost all its production from this area in the UnitedStates, with the remainder exported to Canada, Mexico, Central and SouthAmerica, Europe and Asia.  Productionfrom CPChem’s plants in Singapore and China is marketed primarily in the FarEast.  CPChem acts as an agent for thesale of substantially all of Q-Chem’s production.  CPChem markets the polyethylene that is produced by Q-Chem tomarkets in Western Europe and Asia through its established marketing network.

 

CPChem’s largest polyethylene customer is its Performance Pipedivision.  This division manufactures polyethylenepipe, fittings and conduit in 10 plants located throughout the United Statesand one plant located in Mexico.

 

In addition, CPChem sells a significant amount of HDPE to customers whoare suppliers of bottles to large consumer product manufacturers, dairies andbottled water suppliers.  CPChem alsosupplies HDPE for rigid product applications such as pails, paint cans,margarine tubs and stadium cups. Durable applications include pipe, sheeting for landfill liners andautomotive fuel tanks.

 

LDPE and LLDPE products are sold mainly to flexible packagingsuppliers, who produce coated cardboard juice cartons, food packaging, plasticwrap, plastic bags and other products. Some customers also produce pallet stretch wrap and container liners.

 

**Propylene**

 

Propylene is a basic building block for various chemicals, plastics andfibers.  CPChem produces propylene atits Cedar Bayou, Port Arthur and Sweeny facilities.  The combined capacity of these facilities is approximately 2.9billion pounds per year.

 

*Supply/Feedstock Sources. *Approximatelyone-half of CPChem’s propylene is produced as a co-product of ethyleneproduction, the amount of which varies with the type of feedstock used.  The remainder of CPChem’s propyleneproduction comes from the processing of refinery-grade propylene, which isconverted into polymer-grade product. CPChem purchases approximately 30% of its refinery-grade propylene fromCPChem’s owners and the remainder from a variety of suppliers, both underlong-term and short-term contracts.

 

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*Marketing. *Polymer-gradepropylene is sold to major chemical manufacturers, the majority of which arepolypropylene producers.  Approximately25% of CPChem’s propylene is sold to Phillips Sumika Polypropylene Company(Phillips Sumika), a CPChem joint venture with production facilities located atthe Pasadena Plastics Complex. Propylene is also sold to external customers under long-term contractsand to international contract and spot customers through a third-party exportfacility located in Deer Park, Texas.

 

**Normal Alpha Olefins, Polyalpha Olefins**

 

All of CPChem’s domestic NAO is produced at the Cedar Bayoufacility.  Internationally, CPChemproduces 1-hexene, an NAO used as a comonomer in the production ofpolyethylene, through its Q-Chem joint venture in Qatar.  CPChem’s share of the combined capacity ofits domestic and international facilities is approximately 1.5 billion poundsper year of NAO, which currently represents approximately 15% of globalcapacity.

 

*Supply/FeedstockSources. *NAOis produced by processing ethylene. CPChem produces substantially all of the ethylene required in itsdomestic production of NAO.  CPChem’sethylene is produced at the Sweeny, Cedar Bayou and Port Arthur facilities.  CPChem’s joint venture in Qatar produces allof the ethylene required for its production of 1-hexene.  Polyalpha olefins are produced fromfractions of NAO produced at CPChem’s Cedar Bayou facility.

 

*Marketing. *CPChem sells NAOand polyalpha olefins primarily to other chemical companies who use them toproduce a broad range of intermediate products.  CPChem also uses a portion of its own production of NAO in themanufacturing of polyethylene and polyalpha olefins.  North America and Europe are the largest geographic markets forNAO and polyalpha olefins.

 

***Aromatics &Styrenics***

 

This segment manufactures and markets aromatics products such asbenzene, styrene, paraxylene and cyclohexane, and has the ability tomanufacture cumene at a plant that was idled in 2003.  This segment also manufactures and markets polystyrene as well asstyrene-butadiene copolymers (SBC) sold under the trademark K-Resin®.  Production facilities are located inMississippi, Louisiana, Texas, Ohio, Puerto Rico and China.  CPChem also owns an equity interest in anaromatics facility in Saudi Arabia and in a K-Resin® SBC facility inSouth Korea.

 

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***Aromatics &Styrenics***

 
| **Product**                                 |   | **Approximate  Net Capacity** |   | **Primary Uses**                                                                                                                                                                                                                             |
|---------------------------------------------|--------|-------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                        |   | **(million lbs. per year)**   |   |                                                                                                                                                                                                                                         |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Benzene                                     |   | 2,130                         | (1)    | An aromatic  primary building block chemical used in the production of ethylbenzene,  cumene and cyclohexane.                                                                                                                                |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Styrene                                     |   | 2,100                         |   | Aromatic monomer used to produce a wide variety of polymers with very  diverse end-uses that include packaging, automotive applications, electronic  parts, rubber products, paper, housewares, construction materials, carpeting  and toys. |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Polystyrene                                 |   | 990                           |   | Thermoplastic polymer used to make packing materials, cups, toys,  furniture and housewares.                                                                                                                                                 |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Paraxylene                                  |   | 1,715                         | (2)    | Used almost  exclusively to make terephthalic acid or dimethyl terephthalate intermediates  in the production of polyester and packaging resins such as polyethylene  terephthalate (PET).                                                   |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Cyclohexane                                 |   | 1,230                         | (1,3)  | Predominantly used in intermediates for the manufacture of nylon.                                                                                                                                                                            |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| K-Resin®  styrene-butadiene copolymers |   | 269                           | (1)    | A high  quality, clear polymer material used to make a variety of products including  medical components, toys, candy wrap, food packaging, cups and garment  hangers.                                                                       |
|                                        |   |                          |   |                                                                                                                                                                                                                                         |
| Cumene                                      |   | 1,100                         | (4)    | An intermediate used to produce phenol and acetone.                                                                                                                                                                                          |

 

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(1)          Includes CPChem’s share of an equityaffiliate’s capacity.

(2)          Includes 715 million pounds of capacity of aplant in Puerto Rico that is currently idled.

(3)          Includes the capacity of a new plant in PortArthur that commenced operations in February 2004, and excludes thecapacity of an existing plant in Port Arthur that was shut down.

(4)          Capacity of a plant in Port Arthur that iscurrently idled.

 

*Competition.*  Aromatics& Styrenics’ products are sold into global commodity markets.  Competitive factors include price, productquality and performance, product deliverability and customer service.  CPChem generally ranks within the top 10******producers andcompetes with other large producers including Dow, Equistar, ExxonMobil, BP andShell.

 

*Distribution. *Depending on the particular product andlocation of the production facility, Aromatics& Styrenics products are shipped by trucks, railcars, barges, shipsand pipelines.

 

**Benzene**

 

Domestically, benzene is produced at CPChem’s Pascagoula, Mississippifacility.  Internationally, CPChemproduces benzene through its joint venture facility in Al Jubail, Saudi Arabia.  CPChem’s share of the combined benzenecapacity of its domestic and international facilities is approximately 2.1billion pounds per year.  CPChem’s UDEXbenzene extraction unit at the Port Arthur facility was permanently closed inthe fourth quarter of 2003.  CPChem usesits proprietary Aromax® technology for most of its benzeneproduction.

 

*Supply/Feedstock Sources. *The two mainfeedstocks for benzene production are pyrolysis gasoline and reformate, both ofwhich are intermediate products of petroleum refining and petrochemicalplants.  These two feedstocks accountfor over 75% of benzene production worldwide. CPChem purchases benzene feedstocks from its owners’ refineries, locatedin proximity to CPChem’s benzene plants, and from various other sources.  In Saudi Arabia, CPChem’s 50%-owned affiliatehas a 30-year feedstock agreement with a producer that owns a refining complexlocated nearby.

 

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*Marketing. *CPChem is a net consumer of benzene in the GulfCoast region.  This allows CPChem to operateits benzene plants at full capacity, preserving a low-cost position, evenduring times of slack demand for derivatives. At CPChem’s joint venture plant in Saudi Arabia, approximately one-halfof the benzene produced is consumed by the joint venture’s cyclohexane plantlocated at the same facility.  Thebalance of benzene is sold on a term-contract basis.

 

**Styrene**

 

Styrene is produced at CPChem’s St. James, Louisiana facility, whichhas a capacity of approximately 2.1 billion pounds per year.

 

*Supply/FeedstockSources.** ***Styreneis made from benzene and ethylene. Almost all of the benzene used at CPChem’s styrene plant is producedinternally at CPChem’s Pascagoula facility, with the remainder acquired throughcontract purchases.  Ethylene issupplied to the St. James plant by a proprietary pipeline connected to theLouisiana grid system.  CPChem maintainsflexibility in ethylene supply through contract purchases, exchanges withCPChem’s Texas facilities and from spot purchases.

 

*Marketing. *CPChem currentlyconsumes approximately 600 million pounds of styrene annually at itspolystyrene plant in Marietta, Ohio and a smaller amount in its production ofK-Resin® SBC.  The balance ofproduction is sold in the merchant market. CPChem generally markets styrene in all regions of the world and sellsalmost all of its styrene production through short-term and long-term contracts.

 

**Polystyrene**

 

Polystyrene is produced at CPChem’s facilities in Marietta, Ohio andZhangjiagang, China.  The combinedpolystyrene capacity of these facilities is approximately 1.0 billion poundsper year.  Both plants have the abilityto make high impact polystyrene and general purpose polystyrene.

 

*Supply/FeedstockSources.** ***Polystyreneis manufactured primarily from styrene. The styrene consumed at Marietta is supplied by CPChem’s St. Jamesstyrene facility.  The China plant issupplied by styrene from the St. James plant and from third parties.

 

*Marketing. *CPChem sells avariety of grades of polystyrene to the packaging, food service, mediaenclosure and various other markets. Most of CPChem’s polystyrene business in the U.S. is conducted on aterm-contract basis, while business in China follows the local practice ofbeing conducted primarily in the spot market.

 

**Paraxylene**

 

CPChem has a production capacity of approximately 1.0 billion pounds ofparaxylene per year at its Pascagoula plant. Production at the Guayama, Puerto Rico plant, which has a capacity ofapproximately 715 million pounds of paraxylene per year, was idled in 2001 foreconomic reasons.  The plant wasreconfigured in 2003.

 

*Supply/FeedstockSources.***** Mixed xylenes are the feedstock for the production ofparaxylene.  Mixed xylenes are the endproduct of either reforming operations that are part of the motor fuels productionprocess in refineries, or the end product of the conversion of toluene, anotherintermediate refining product, into benzene and xylenes.  Mixed xylenes are available on the merchantmarket in the forms of both gasoline blending stocks and paraxylenefeedstocks.  CPChem purchases mixedxylenes from ChevronTexaco and other suppliers.  During periods of high paraxylene demand, mixed xylenes are alsopurchased on the spot market.

 

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*Marketing. *In North America, a few very largeconsumers buy most of the paraxylene available in the market.  CPChem currently sells its paraxyleneproduction to major producers of polyester in North America and Europe underlong-term contracts.

 

**Cyclohexane**

 

CPChemis the largest marketer of cyclohexane in the world.  This includes volumes produced at the Port Arthur and SaudiArabian plants, of which CPChem’s share of the combined cyclohexane capacity ofthe plants is approximately 1.2 billion pounds per year, as well as certainvolumes produced by ConocoPhillips for which CPChem has marketing rights.  In the first quarter of 2003, the SaudiArabian plant increased its gross capacity to 620 million pounds per year.  In February 2004, a new plant in PortArthur commenced operations.  Theexisting plant in Port Arthur was shut down. CPChem owns a 50% interest in the Saudi Arabian facility and has anobligation to market all of the cyclohexane exported from that facility.  In addition, CPChem has the exclusive rightto market the cyclohexane produced by ConocoPhillips at its Sweeny and Borger,Texas refineries.

 

*Supply/Feedstock Sources. *The raw materials for cyclohexane are benzene and hydrogen.  CPChem consumes more benzene than itproduces.  Remaining benzenerequirements are met through term contracts and spot purchases.  Hydrogen is currently obtained from CPChem’sPort Arthur facility and from other sources.

 

*Marketing. *Most of CPChem’s cyclohexane is soldin North America and Europe through sales contracts that are typicallylong-term arrangements.  CPChem also hasaccess to the Asian market through its joint venture plant in Saudi Arabia.

 

**K-Resin® Styrene-ButadieneCopolymer**

 

CPChem produces an SBC sold under the trademark K-Resin®.  Production comes from the Pasadena PlasticsComplex and CPChem’s K R Copolymer Co., Ltd. joint venture plant located inYochon, South Korea.  CPChem’s share ofthe combined K-Resin® SBC capacity of the facilities isapproximately 269 million pounds per year.

 

*Supply/FeedstockSources. *The main feedstocks for K-Resin®SBC are styrene and butadiene.  Fordomestic production, CPChem produces its own styrene feedstock at its St. Jamesfacility, and secures butadiene on a long-term contract basis from a singleproducer.  Other sources of butadiene areavailable if necessary.  In South Korea,feedstocks are secured through long-term contracts with a company in whichCPChem’s joint venture partner, Daelim Industrial Co., Ltd., has a 50%interest.

 

*Marketing. *CPChem conducts itsK-Resin® SBC marketing primarily by working with customers to createnew K-Resin® SBC applications, to improve existing applications andto improve customers’ processing capabilities. CPChem has a sales and technical support organization, comprised ofdirect representatives, and third-party agents and distributors, that is activein North America and internationally. Some product is sold under multi-year agreements.  The majority of K-Resin® SBC,however, is sold through individual purchase orders.

 

9

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***SpecialtyProducts***

 

This segment manufactures and markets a variety of specialty chemicalproducts, including organosulfur chemicals and high-performance polyphenylenesulfide (PPS) polymers and compounds sold under the trademark Ryton®.  Production and/or compounding facilities arelocated in Texas, Belgium and Singapore.

 
| **Product**                                                                                           |   | **Approximate  Net Capacity** |   | **Primary Uses**                                                                                                                                                                                                             |
|-------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                  |   | **(million lbs. per year)**   |   |                                                                                                                                                                                                                         |
|                                                                                                  |   |                          |   |                                                                                                                                                                                                                         |
| Ryton®  polyphenylene sulfide polymer and compounds                                              |   | 44                            |   | High-performance  engineering polymer used in electronic, automotive and appliance  applications.                                                                                                                            |
|                                                                                                  |   |                          |   |                                                                                                                                                                                                                         |
| High-purity  hydrocarbons and solvents                                                                |   | 140                           |   | High-purity  chemicals including performance-proven normal paraffins, cycloparaffins and  isoparaffins, including Soltrol® isoparaffin solvents, used in various  pharmaceutical, industrial and consumer applications. |
|                                                                                                  |   |                          |   |                                                                                                                                                                                                                         |
| Organosulfur  chemicals                                                                               |   | 270                           |   | Chemical  intermediates, primarily mercaptans, used in agricultural and pharmaceutical  intermediates and polymerization modifiers.                                                                                          |
|                                                                                                  |   |                          |   |                                                                                                                                                                                                                         |
| Performance  and reference fuels                                                                      |   | 120                           |   | Specialty  fuels for calibration standards and high-performance service, such as  automobile and boat racing.                                                                                                                |
|                                                                                                  |   |                          |   |                                                                                                                                                                                                                         |
| Drilling  specialty chemicals, including Soltex® additives and Soltex® Potassium  additives |   | 21                            |   | Additives  used in water-based drilling fluids for controlling unstable shale formations  and increasing hole lubricity during oil and gas well drilling.                                                                    |

 

*Competition. *Specialty chemicalproducts are characterized by smaller, niche markets with fewer producers.

 

*Distribution. *Depending on the particular product andlocation of the production facility, product is shipped by trucks, railcars,ships and airplanes.

 

**Specialty Chemicals**

 

Specialty chemicals consist of a variety of organosulfur chemicals,fine chemicals and other specialties. Volumes of any given product are not large when compared to the basiccommodity products like ethylene and polyethylene produced by CPChem’s otherbusiness segments.  However, in theaggregate, specialty chemicals can account for a significant portion of theearnings of the Specialty Products segment. Production facilities are located in Borger and Conroe, Texas, andTessenderlo, Belgium.

 

*Supply/FeedstockSources*. Specialty chemicals production depends on the availability of a numberof specialized streams of products and co-products that are the result of thepetroleum refining and petrochemical production processes.  Feedstocks include hydrogen sulfide, avariety of olefins and other hydrocarbon streams.  In many cases, CPChem acquires these feedstocks through long-termarrangements with its owners from facilities that are integrated withproduction facilities that CPChem owns.

 

10

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*Marketing. *Specialty chemicals are generally soldinto smaller, niche markets, as compared to other products produced or marketedby CPChem.  The number of suppliers andconsumers of any given product can be limited. As a result, many of CPChem’s products are sold under long-termcontracts.  Because both the customerand application bases are diverse, the specialty chemicals business isgenerally less cyclical than the commodity chemicals business.

 

Specialty chemicals are soldthrough CPChem’s global marketing network. This network provides sales, distribution and technical services tocustomers.

 

**Ryton**®**Polyphenylene Sulfide**

 

CPChem produces high-performance PPS polymers and compounds sold underthe trademark Ryton®. Compounds are combinations of Ryton® polymer and variousadditives, designed to have specific properties.  CPChem has an annual production capacity of approximately 22million pounds of Ryton® polymer at its Borger, Texas facility.  Substantially all Ryton® polymerproduced at the Borger facility is currently used by CPChem’s Singapore, LaPorte, Texas and Kallo-Beveren, Belgium facilities to produce Ryton®compounds.  The combined capacity of thefacilities is approximately 44 million pounds of Ryton® compoundsper year.  The Houston compoundingfacility in La Porte became operational in the first quarter of 2003.  Ryton® compounds are sold tothird parties.

 

*Supply/FeedstockSources. *Thefeedstocks for Ryton® polymer are substances such as caustic, sodiumhydrosulfide, paradichlorobenzene and other chemicals and solvents that aregenerally available in substantial quantities on the open market.  CPChem has a number of suppliers who providethese materials under either long-term or renewable contracts.  The materials used in the compoundingprocess are generally purchased at locations close to CPChem compoundingfacilities.

 

*Marketing*.  Ryton® PPS polymers and compoundsare sold through CPChem’s global marketing network.  CPChem’s compounding facilities are regionallylocated, enhancing global sales and distribution efforts.  The customer baseincludes component suppliers and appliance manufacturers.  Products are generally sold under one-year,renewable agreements.

 

11

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**Properties and Manufacturing Facilities**

 

CPChemcurrently leases the office space for its headquarters located in TheWoodlands, Texas and also owns or leases administrative, technical and salesoffice space in various other locations. CPChem has 32 manufacturing facilities located in eight countries.  The following table provides informationregarding principal manufacturing facilities, business segments served,principal products and approximate gross annual capacities at December 31,2003.

 
| **Facility / Location**                       |   | **Segment Served**        |   | **Product**                                     |   | **Approximate  Gross Capacity** |   |
|-----------------------------------------------|--------|---------------------------|--------|-------------------------------------------------|--------|---------------------------------|--------|
|                                          |   |                      |   |                                            |   | **(million lbs. per year)**     |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Pasadena Plastics Complex                     |   | Aromatics & Styrenics |   | K-Resin® SBC                               |   | 200                             |   |
| Pasadena, Texas                               |   | Olefins & Polyolefins |   | High-density polyethylene                       |   | 2,100                           |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Sweeny Facility                               |   | Olefins & Polyolefins |   | Ethylene                                        |   | 4,100                           | (1)    |
| Old Ocean, Texas                              |   | Olefins & Polyolefins |   | Propylene                                       |   | 1,100                           |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Borger Facility                               |   | Specialty Products        |   | Organosulfur chemicals                          |   | 200                             |   |
| Borger, Texas                                 |   | Specialty Products        |   | Ryton® PPS polymer                         |   | 22                              |   |
|                                          |   | Specialty Products        |   | Performance and reference fuels                 |   | 120                             |   |
|                                          |   | Specialty Products        |   | High-purity hydrocarbons and solvents           |   | 140                             |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Cedar Bayou Facility                          |   | Olefins & Polyolefins |   | Ethylene                                        |   | 1,750                           |   |
| Baytown, Texas                                |   | Olefins & Polyolefins |   | Propylene                                       |   | 1,000                           |   |
|                                          |   | Olefins & Polyolefins |   | Acetylene Black                                 |   | 18                              |   |
|                                          |   | Olefins & Polyolefins |   | NAO                                             |   | 1,465                           |   |
|                                          |   | Olefins & Polyolefins |   | Polyalpha olefins                               |   | 104                             |   |
|                                          |   | Olefins & Polyolefins |   | Linear-low, low- and high-density  polyethylene |   | 1,900                           |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Orange Chemical Facility  Orange, Texas       |   | Olefins & Polyolefins |   | High-density polyethylene                       |   | 900                             |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Port Arthur Facility                          |   | Olefins & Polyolefins |   | Ethylene                                   |   | 1,750                           |   |
| Port Arthur, Texas                            |   | Olefins & Polyolefins |   | Propylene                                       |   | 780                             |   |
|                                          |   | Aromatics & Styrenics |   | Cyclohexane                                     |   | 920                             | (2)    |
|                                          |   | Aromatics & Styrenics |   | Cumene                                          |   | 1,100                           | (3)    |
|                                          |   |                      |   |                                            |   |                            |   |
| Drilling Specialties  Conroe, Texas           |   | Specialty Products        |   | Drilling specialty chemicals                    |   | 21                              |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Houston Compounding Facility  La Porte, Texas |   | Specialty Products        |   | Ryton® PPS compounds                       |   | 15                              |   |
|                                          |   |                      |   |                                            |   |                            |   |
| St. James Facility  St. James, Louisiana      |   | Aromatics & Styrenics |   | Styrene                                         |   | 2,100                           |   |
|                                          |   |                      |   |                                            |   |                            |   |
| Pascagoula Facility                           |   | Aromatics & Styrenics |   | Paraxylene                                      |   | 1,000                           |   |
| Pascagoula, Mississippi                       |   | Aromatics & Styrenics |   | Benzene                                         |   | 1,540                           |   |

 

12

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| **Facility / Location**                                                        |   | **Segment Served**                                  |   | **Product**                                   |   | **Approximate  Gross Capacity** |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------|--------|---------------------------------|--------|
|                                                                           |   |                                                |   |                                          |   | **(million lbs. per year)**     |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Marietta Facility  Marietta, Ohio                                              |   | Aromatics & Styrenics                           |   | Polystyrene                                   |   | 770                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Puerto Rico Facility  Guayama, Puerto Rico                                     |   | Aromatics & Styrenics                           |   | Paraxylene                                    |   | 715                             | (3)    |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Performance Pipe Division  10 locations in the United States and one in Mexico |   | Olefins & Polyolefins                           |   | Polyethylene pipe, conduit and  pipe fittings |   | 564                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Plastics Compounds & Development Center                                    |   | Specialty Products                                  |   | Ryton® PPS compounds                     |   | 9                               |   |
| Singapore                                                                      |   |                                                |   |                                          |   |                            |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Zhangjiagang, China Facility  Zhangjiagang, China                              |   | Aromatics & Styrenics                           |   | Polystyrene                                   |   | 220                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Tessenderlo Chemicals Facility  Tessenderlo, Belgium                           |   | Specialty Products                                  |   | Organosulfur chemicals                        |   | 70                              |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Kallo Compounding Facility  Kallo-Beveren, Belgium                             |   | Specialty Products                                  |   | Ryton® PPS compounds                     |   | 20                              |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| **Joint Venture  Facilities:**                                                 |   |                                                |   |                                          |   |                            |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Qatar Chemical Company                                                         |   | Olefins & Polyolefins                           |   | Ethylene                                      |   | 1,100                           | (4)    |
| Ltd. (Q-Chem)                                                                  |   | Olefins & Polyolefins                           |   | High-density polyethylene                     |   | 1,000                           | (4)    |
| Mesaieed, Qatar                                                                |   | Olefins & Polyolefins                           |   | 1-hexene                                      |   | 100                             | (4)    |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Chevron Phillips Singapore

Chemicals (Private) Limited  Singapore             |   | Olefins & Polyolefins                           |   | High-density polyethylene                     |   | 860                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Shanghai Golden Phillips

Petrochemical Co., Ltd.  Jinshanwei, China           |   | Olefins & Polyolefins                           |   | High-density polyethylene                     |   | 300                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Phillips Sumika

Polypropylene Company  Pasadena, Texas                        |   | Olefins & Polyolefins                           |   | Polypropylene                                 |   | 810                             |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| Saudi Chevron

Phillips Company  Al Jubail, Saudi Arabia                       |   | Aromatics & Styrenics Aromatics & Styrenics |   | Benzene  Cyclohexane                          |   | 1,180  620                      |   |
|                                                                           |   |                                                |   |                                          |   |                            |   |
| K R Copolymer Co., Ltd.  Yochon, South Korea                                   |   | Aromatics & Styrenics                           |   | K-Resin® SBC                             |   | 115                             |   |

 

----

| (1) | Includes 650 million pounds of idled gross capacity.                                                                                                       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes the capacity of a new plant that commenced operations in  February 2004, and excludes the capacity of an existing plant that was  shut down. |
| (3) | Plant currently idled.                                                                                                                                     |
| (4) | Operating and in the final stages of performance testing.                                                                                                  |

 

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**Projects**

 

*Jubail Chevron Phillips Project.*  CPChem announced plans for the developmentof a 50%-owned joint venture project at Al Jubail, Saudi Arabia (the “JubailChevron Phillips project”).  Theproject, expected to cost approximately $1.1 billion in total, includes theconstruction of an integrated olefins, ethylbenzene and styrene monomerfacility on a site adjacent to the existing aromatics complex owned by SaudiChevron Phillips Company, a 50%-owned CPChem joint venture.  The project also includes the expansion ofSaudi Chevron Phillips Company’s benzene facility.  This additional benzene capacity will be used to providefeedstock for the new Jubail Chevron Phillips styrene facility.  Final approval of the project by CPChem’sboard of directors is expected to be requested in 2004, with operationalstart-up expected in 2007*. *Itis anticipated that the project will be financed through equity contributionsfrom the co-venturers and limited recourse loans from commercial banks andSaudi Arabian government agencies.

 

*Q-Chem II Projects. *CPChem and Qatar Petroleum announcedplans for the development of a second petrochemical project in Mesaieed, Qatar(Q-Chem II), designed to produce polyethylene and NAO on a site adjacent to thenewly-constructed Q-Chem complex.

 

In connection with the Q-Chem II joint venture, CPChem and QatarPetroleum entered into a separate agreement with Atofina and QatarPetrochemical Company, establishing a joint venture to develop an ethanecracker in northern Qatar at Ras Laffan Industrial City.

 

Final approval of the Q-Chem II projects by CPChem’s board of directorsis expected to be requested in 2005, with start-up expected in 2008.  Preliminary financing plans for the projectsinclude equity contributions from the co-venturers and limited recourse loansfrom commercial banks and export credit agencies.

 

**Employees**

 

Chevron Phillips Chemical Company LLC and its wholly-owned subsidiariesemployed 5,451 people at December 31, 2003.  Approximately 89% of the workforce was employed in North America,6% in Asia, 4% in Europe and 1% in the Middle East.  Some employees are subject to collective bargainingarrangements.  Overall, CPChem believesthat its relations with its employees are good.

 

**IntellectualProperty**

 

CPChem’sbusiness is, to a considerable extent, technology driven.  CPChem aggressively develops and protectsthe intellectual property necessary to conduct its operations via a combinationof patent, trademark, copyright and trade secret laws, as well asconfidentiality procedures and contractual provisions to protect itsintellectual property rights.  WhereCPChem does not possess a necessary technology, it obtains or licenses it fromthird parties.  CPChem owned or licensedfrom its owners the rights to approximately 3,000 patents and/or patentapplications in the United States and abroad at December 31, 2003.

 

CPChem oftengrants licenses to its technology to third parties.  Two of the more significant processes that it licenses areCPChem’s loop slurry polyethylene and Aromax® aromatics productionprocesses.  Licenses granted for theseprocesses typically provide for royalty payments from third parties based onthe actual or anticipated volume of product that they may produce, payable eitherin advance of production or as a “running royalty.”  The licenses for these processes generally provide that anytechnologies developed by the licensee related to such process shall belicensed to CPChem with the right to sublicense such developments to thirdparties.  This technique, common intechnology licensing, enhances CPChem’s ability to provide customers andlicensees with the most current technology available.

 

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CPChem relieson confidentiality agreements and contractual provisions to protect itstechnology that is provided to third parties in cases where the technology isnot patented or patentable.  CPChem’slicenses to third parties contain restrictions on disclosure.  Third parties are not allowed to inspect orphotograph facilities without permission, and even then only under closesupervision.  Contractors involved inthe detailed design or construction of CPChem’s or its licensees’ facilitiesare also required to execute nondisclosure agreements.  Appropriate actions are taken to preventthird parties from disclosing proprietary data, or otherwise using intellectualproperty, without proper authorization.

 

CPChem is theowner of numerous trademarks, including the Marlex®, Ryton®,Aromax® and K-Resin® trademarks, which are each used inconnection with CPChem’s businesses. Also, CPChem licenses its trade name on a nonexclusive basis from itsowners.  Appropriate actions are takento maintain, renew, protect and enforce CPChem’s trademarks to preventinfringement, dilution or misappropriation by third parties in the UnitedStates and abroad.

 

**Researchand Development**

 

CPChem hasscientists, process engineers and technical service experts at six****technical centers.  The Bartlesville, Oklahoma site providesbasic research, pilot plants and product development for polyethylene,specialty chemicals, Ryton® PPS polymers and compounds and K-Resin®SBC, and a plastics technical center for all polymer products.  The Kingwood, Texas technology centerfocuses on process engineering in support of all manufacturing as well as allphases of research and process development for aromatics, NAO, polyalphaolefins, oxygen scavenging polymers and specialty catalysts.  The technology center at Orange, Texasprovides a plastics technical center and technical services forpolyethylene.  Polystyrene research andtechnical services are located at Marietta, Ohio.  International technical support and product development areprovided by the Belgium and Singapore technical centers.

 

Research anddevelopment expense totaled $55 million in 2003, $47 million in 2002 and $60million in 2001.  Included in 2003results was a $9 million charge related to the permanent closure of a researchand technology pilot plant in Orange, Texas.

 

**EnvironmentalRegulation**

 

CPChem must complywith, and is subject to liability under, environmental laws and regulations inall the jurisdictions in which it conducts business.  Under some laws, CPChem may be subject to joint and severalliability regarding environmental contamination on or from properties that itpreviously owned or operated or currently owns or operates.  CPChem may also be subject to liability forcontaminated properties where it has disposed of or arranged for disposal ofhazardous substances, or where feedstocks or products that contained hazardoussubstances have been spilled or released. See “Part II – Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Risk and Other Factors That May AffectFuture Performance – Environmental, Health and Safety” for further discussion.

 

CPChem incurs,and expects to continue to incur, significant costs for capital improvementsand general compliance under applicable environmental laws, including costs toacquire, maintain and repair equipment dealing with pollution control.  By 2007, industrial facilities in the eightcounties in and around Houston, Texas, including certain facilities that CPChemowns, must comply with new nitrogen oxide (NOx) emission standards.  These new standards are being phased inbetween 2003 and 2007.  Modifications toexisting equipment and the installation of additional control equipment arerequired to meet these new NOx standards. CPChem expects that total capital expenditures of approximately $100million will be required during this period to comply with thesestandards.  CPChem investedapproximately $25 million of such capital expenditures in 2003.

 

15

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CPChemalso anticipates that new regulations will be issued concerning emissions ofhighly-reactive volatile organic compounds (HRVOCs).  While CPChem cannot assess the capital expenditure or operatingcost impacts at this time, CPChem believes that the expendituresrequired to comply with these anticipatednew regulations, as they are issued and become effective, will not havea material adverse effect on consolidated results of operations, financialposition or liquidity.

 

CPChem is aware that there is or may be soil or groundwatercontamination at some facilities and that remediation of soil and groundwatercontaminated with hazardous substances will be required.  Accrued costs for environmental liabilities,undiscounted, totaled $6 million at December 31, 2003 and $7 million atDecember 31, 2002.  There were noaccrued environmental costs associated with discontinued or sold operations,sites where CPChem had been named a potentially responsible party, orenvironmental litigation at December 31, 2003 or 2002.  Based on available information, CPChembelieves that the costs that may be incurred to investigate and remediate knowncontamination will not have a material adverse effect on consolidated resultsof operations, financial position or liquidity.

 

**InternationalOperations**

 

International operations are exposed to different political, economicand regulatory risks that are not faced by businesses that operate solely inthe United States.  CPChem hasoperations located outside the continental United States, with manufacturing facilitiesin Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico andBelgium.  Assets located outside of theU.S. as of December 31, 2003 totaled $1.127 billion and net sales fromnon-U.S. operations were $1.086 billion in 2003.  These international operations are subject to risks similar tothose affecting CPChem’s U.S. operations in addition to a number of otherrisks, including difficulties in enforcing contractual and intellectualproperty rights, and impositions or increases of withholding and other taxes onremittances and other payments by subsidiaries and affiliates.  Other risks include, but are not limited to,exposure to different legal standards, fluctuations in currency exchange rates,impositions or increases of investment and other restrictions by foreigngovernments, the requirements of a wide variety of foreign laws, political andeconomic instability, terrorist acts, war and difficulties in staffing andmanaging operations, particularly in remote locations.

 

**Item3.****  LegalProceedings**

 

**Governmental Agency Proceedings**

 

The following are descriptions of legal proceedings involvinggovernmental authorities under federal, state and local laws regulating thedischarge of materials into the environment.  While it is not possible topredict the outcome of an unresolved proceeding, if the proceedings describedbelow were decided adversely to CPChem, there would be no material adverseeffect on CPChem’s consolidated results of operations, financial position orliquidity.  Nevertheless, such proceedings are reported pursuant to theU.S. Securities and Exchange Commission’s regulations.

 

The U.S. Environmental Protection Agency (the “EPA”) and the TexasCommission on Environmental Quality (the “TCEQ”) jointly proposed a civilpenalty in connection with inspections conducted in 1999 and 2000 at CPChem’sBorger, Texas facility.  In August 2003, an Agreed Judgment wasentered, under which CPChem paid a civil penalty of $300,000 to the EPA, acivil penalty of $300,000 to the TCEQ and $25,000 for attorneys’ fees to the Stateof Texas.

 

16

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CPChem received a Notice of Enforcement Action from the TCEQ inJuly 2002, alleging air permit violations and violations related to leakdetection and repair issues noted during a March 2002 inspection ofCPChem’s Port Arthur, Texas facility. An Agreed Order was finalized in December 2003, under which CPChemagreed to a civil penalty of $134,850, split between a cash payment to the TCEQand the implementation of a supplemental environmental project.

 

CPChem is a party to certain agreements with ChevronTexaco andConocoPhillips relating to the operation of facilities where CPChem and eitherChevronTexaco or ConocoPhillips have common operations.  On December 17, 2002, the U.S.Department of Justice (the “DOJ”) notified ConocoPhillips of various allegedviolations of the National Pollutant Discharge Elimination System permit forits Sweeny, Texas facility.  The DOJasserts that these alleged violations occurred at various times during theperiod beginning January 1997 through July 2002.  ConocoPhillips and the DOJ have reached atentative agreement that will require ConocoPhillips to pay a civil penaltyand/or perform certain work valued at $700,000.  ConocoPhillips has advised CPChem that it may seek to recover aportion of any settlement from CPChem pursuant to an agreement relating to theoperation of common facilities at the Sweeny complex.

 

The EPA and the DOJ have informed CPChem that they are considering apossible civil enforcement action against CPChem related to an inspection ofCPChem’s Pasadena Plastics Complex in Pasadena, Texas, in mid-2000.  This potential action stems from allegedviolations of Section 112(r) of the Clean Air Act and related regulations,largely in connection with fires that occurred at the Pasadena facility’sK-Resin® SBC unit in June 1999 and March 2000.  The EPA and DOJ are seeking a proposedpenalty of $3 million.  CPChem disputesthis proposed action and penalty.  TheContribution Agreement under which CPChem was formed provides forConocoPhillips to indemnify CPChem for all liabilities associated with the 2000K-Resin® SBC unit fire. Accordingly, CPChem has advised ConocoPhillips that, in the event anyamounts are ultimately assessed against it relating to these allegedviolations, it may seek to recover a portion of the assessment fromConocoPhillips.

 

**OtherProceedings**

 

CPChem is aparty to a number of other legal proceedings that arose in the ordinary courseof business for which, in many instances, no provision has been made in thefinancial statements.  While the finaloutcome of these proceedings cannot be predicted with certainty, CPChembelieves that none of these proceedings, when resolved, will have a materialadverse effect on consolidated results of operations, financial position orliquidity.

 

**Item4.****  Submissionof Matters to a Vote of Security Holders**

 

None.

 

**PART II**

 

**Item5.****  Market ForRegistrant’s Common Equity and Related Stockholder Matters**

 

There is no established public trading marketfor the ownership interests of CPChem. See “Item 12. Security Ownership of Certain BeneficialOwners and Management” for a listing ofthe holders of ownership interests in CPChem.

 

17

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**Item6.****  SelectedFinancial Data**

 

The following selected financial data shouldbe read in conjunction with “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Item 8.Financial Statements and Supplementary Data.”

 

***Chevron PhillipsChemical Company LLC***

 
|              |   | **Years  ended December 31,** |       | **July 1,  2000  (inception) through  December 31, 2000** |       |
|-------------------|--------|------------------------------------|------------|---------------------------------------------------------------------|------------|
| **Millions**      |   | **2003**                           | ** ** | **2002**                                                            | ** ** | **2001** | ** ** |   |
| Net sales         |   | $                                  | 6,907      |                                                                | $          | 5,389 |   | $ | 5,871 |   | $ | 3,402 |   |
| Net income (loss) |   | 7                                  |       | (30                                                                 | )          | (480 | ) | (241 | ) |
|                   |        |                                    |            |                                                                     |            |  |  |  |  |  |  |  |  |

 
|                                    |   | **December 31,** |   |
|-----------------------------------------|--------|-----------------------|--------|
| **Millions**                            |   | **2003**              |   | **2002** |   | **2001** |   | **2000** |   |
| Total assets                            |   | $6,242                |   | $6,109 |   | $5,860 |   | $6,673 |   |
| Long-term debt, less current maturities |   | 1,189                 |   | 1,190 |   | 1,507 |   | 1,784 |   |
| Members’ preferred interests       |   | 250                   |   | 250 |   | — |   | — |   |

 

The following financial information ofPhillips Petroleum Company’s Chemicals Business and Chevron Chemical Company CChem Business (the businesses contributed to form Chevron Phillips ChemicalCompany LLC) is presented for informational purposes only.  The results of these contributed businessespresented, when combined, are not intended to and do not represent pro formaresults of Chevron Phillips Chemical Company LLC, nor do the resultsnecessarily reflect results that would have been achieved had the contributedbusinesses been combined for the periods presented.

 

***Phillips PetroleumCompany’s Chemicals Business***

 
| **Millions**      |   | **Six months  ended  June 30, 2000** |   | **Year ended  December 31, 1999** |   |
|-------------------|--------|-------------------------------------------|--------|----------------------------------------|--------|
| Net sales         |   | $                                         | 2,238  |                                   | $      | 3,117 |   |
| Net income (loss) |   | 84                                        |   | 147                                    |   |
|                   |        |                                           |        |                                        |        |  |  |

 
| **Millions**                            |   |   | ** ** | **December 31,  1999** | ** ** |
|-----------------------------------------|--------|--------|------------|-----------------------------|------------|
| Total assets                            |   |   |       | $                           | 3,214      |   |
| Long-term debt, less current maturities |   |   |       | —                      |       |
|                                         |        |        |            |                             |            |  |

 

***Chevron ChemicalCompany C Chem Business***

 
| **Millions**      |   | **Six months  ended  June 30, 2000** | ** ** | **Year ended  December 31, 1999** | ** ** |
|-------------------|--------|-------------------------------------------|------------|----------------------------------------|------------|
| Net sales         |   | $                                         | 1,834      |                                   | $          | 2,695 |   |
| Net income (loss) |   | 96                                        |       | 177                                    |       |
|                   |        |                                           |            |                                        |            |  |  |

 
| **Millions**                            |   |   | ** ** | **December 31,  1999** | ** ** |
|-----------------------------------------|--------|--------|------------|-----------------------------|------------|
| Total assets                            |   |   |       | $                           | 3,072      |   |
| Long-term debt, less current maturities |   |   |       | —                      |       |
|                                         |        |        |            |                             |            |  |

 

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**ITEM7.****  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

This Management’s Discussion and Analysis ofFinancial Condition and Results of Operations contains “forward-lookingstatements” within the meaning of the federal securities laws.  Such statements can generally be identifiedwith words and phrases such as “believes,” “expects,” “anticipates,” “should,”“estimates,” or other words and phrases of similar meaning.  Where Chevron Phillips Chemical Company LLC(CPChem) expresses an expectation or belief as to future events or results,there can be no assurance that the expectation or belief will result, beachieved or be accomplished.  Where anysuch forward-looking statement includes a statement of the assumptions or basesunderlying such forward-looking statement, CPChem believes such assumptions or bases to bereasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and thedifferences between assumed facts or bases and actual results can be material,depending on the circumstances.  Themore significant factors that, if erroneous, could cause actual results todiffer materially from those expressed include, among others: the timing andduration of periods of expansion and contraction within the chemicals business,plans for the construction, modernization, start-up or de-bottlenecking ofdomestic and foreign chemical plants, prices of feedstocks, energy andproducts, force majeure events, accidents, labor relations, political risks,terrorist acts, war, changes in foreign and domestic laws, rules andregulations and the interpretation and enforcement thereof, regulatorydecisions relating to taxes, the environment and human resources, the globaleconomy, results of financing efforts and overall financial market conditions.  All forward-looking statements in thisannual report are qualified in their entirety by the cautionary statementscontained in this section.  CPChemdoes not undertake to update, revise orcorrect any of the forward-looking information.

 

*Critical Accounting Policies*

 

The Securities and Exchange Commission first issued guidance inDecember 2001 suggesting companies provide additional disclosure andcommentary on those accounting policies considered most critical.  An accounting policy is deemed to be“critical” if it is important to a company’s results of operations andfinancial condition, and requires significant judgment and estimates on thepart of management in its application. The preparation of financial statements and related disclosures inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect amountsreported in financial statements and related disclosures.  Actual results could differ from theseestimates and assumptions.

 

CPChem believes that the estimates and assumptions used in connectionwith the amounts reported in its financial statements and related disclosuresare reasonable and made in good faith. CPChem further believes the following represents its most criticalaccounting policies.  For a summary ofall of CPChem’s significant accounting policies, see Part II - Item 8.Financial Statements and Supplementary Data – Note 2.

 

*Impairment of Assets–*****Long-lived assets used in operations areassessed for possible impairment when events or changes in circumstancesindicate a potential significant deterioration in future cash flows projectedto be generated by an asset group. Individual assets are grouped for impairment purposes at the lowestlevel for which there are identifiable cash flows that are largely independentof the cash flows of other groups of assets – generally at a product linelevel.  If, upon review, the sum of theprojected undiscounted pre-tax cash flows is less than the carrying value ofthe asset group, the carrying value is written down to estimated fairvalue.  Since there

 

19

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are usually no quoted market prices available to determine the fairvalues of CPChem’s long-lived assets, fair values of impaired assets areusually determined based on the present value of projected future cash flowsusing discount rates commensurate with the risks involved in the assetgroup.  Considerable amounts of judgmentby management are required, involving significant variables such as futureproduct demand and future product, feedstock and energy prices, in order toestimate projected future cash flows. Should the outlook for future projected cash flows change, materialcharges for impairments could occur.

 

*Inventories –*For U.S. operations, cost of product inventories is primarily determined usingthe dollar-value, last-in, first-out (LIFO) method.  The inventories are valued at the lower of cost or market,aggregated at the segment level. Lower-of-cost-or-market write-downs for LIFO-valued inventories aregenerally considered temporary. However, deterioration of market prices for prolonged periods of timecould result in write-downs determined to be permanent in nature.

 

*Contingencies –*****Asfacts concerning contingencies become known, CPChem reassesses its positionwith respect to accrued liabilities and other potential exposures.  Estimates that are particularly sensitive tofuture change include legal matters and contingent liabilities forenvironmental remediation.  Estimatedfuture costs related to legal matters are subject to change as events occur andas additional information becomes available during administrative andlitigation processes.  Estimated futureenvironmental remediation costs are subject to change due to such factors asthe unknown magnitude of cleanup costs, prospective changes in laws andregulations, the unknown timing and extent of remedial actions that may berequired and the determination of CPChem’s liability in proportion to otherresponsible parties.

 

**Results of Operations**

 

***Overview***

 

CPChem’s business, and the chemicals industry in general, is cyclicalin nature and is impacted by, among other things, the prices of raw materials,feedstocks and energy in general. CPChem is particularly impacted by the price of natural gas.  During periods of extreme natural gas pricevolatility and corresponding spikes in natural gas prices such as those seen inearly 2001 and 2003, CPChem is less able to recover such increased coststhrough product sales price increases than it could if there had been steady,sustained prices, even at elevated levels. Business is also affected by overall domestic and, to a lesser extent,global economic conditions, which drive consumer spending for durablegoods.  In addition, capacity expansionor contraction contributes to the cyclical and volatile nature of the commoditychemicals industry.

 

Depressed economic conditions continued to suppress CPChem’sprofitability in 2003.  Energy pricevolatility, particularly in the form of high U.S. natural gas prices earlier inthe year, resulted in higher feedstock costs and lower margins.  Despite this, CPChem’s focus on maintainingsafe, reliable operations, along with aggressively managing costs byrestructuring, idling or shutting down under-performing businesses or assets,led to improved results in 2003.

 

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|                                    |   | **Years  ended December 31,** |   |
|-----------------------------------------|--------|------------------------------------|--------|
| **Millions**                            |   | **2003**                           |   | **2002** |   | **2001** |   |
| Net sales                               |   | $                                  | 6,907  |   | $ | 5,389 |   | $ | 5,871 |   |
| Other revenues                          |   | 111                                |   | 84 |   | 139 |   |
| Total revenues                          |   | 7,018                              |   | 5,473 |   | 6,010 |   |
|                                    |   |                               |   |   |   |   |   |
| Cost of goods sold                      |   | 6,439                              |   | 4,986 |   | 5,733 |   |
| Other costs and expenses                |   | 503                                |   | 452 |   | 613 |   |
| Total costs and expenses                |   | 6,942                              |   | 5,438 |   | 6,346 |   |
|                                    |   |                               |   |   |   |   |   |
| Income (loss) before interest and taxes |   | 76                                 |   | 35 |   | (336 | ) |
| Interest expense, net                   |   | (64                                | )      | (59 | ) | (95 | ) |
| Income taxes                            |   | (5                                 | )      | (6 | ) | (49 | ) |
|                                    |   |                               |   |   |   |   |   |
| Net income (loss)                       |   | $                                  | 7      |   | $ | (30 | ) | $ | (480 | ) |

 

*2003 compared with 2002*

 

Earnings results improved for the second straight year.  Net income in 2003 was $7 million, comparedto a $30 million loss in 2002. Consolidated net sales revenues increased significantly in 2003 comparedwith 2002 as a result of higher overall sales prices.  Other revenues increased in 2003, primarily from higher equityearnings from affiliates, in particular, earnings from Saudi Chevron PhillipsCompany (Saudi Chevron Phillips). Unseasonably low U.S. natural gas inventory levels, the war in Iraq,geopolitical events in Venezuela and Nigeria, and SARS (severe acuterespiratory syndrome) in Asia, as well as other events experienced earlier inthe year, negatively influenced feedstock and energy costs, which offset mostof the benefit of higher sales prices. Other costs and expenses rose in 2003, which included charges forcertain legal settlements and accruals, workforce reductions and the closure ofa research and technology pilot plant.

 

*2002 compared with 2001*

 

Net loss was $30 million in 2002 compared with a net loss of $480million in 2001, representing an improvement of $450 million.  While net sales revenue declined on loweroverall sales prices, this was more than offset by lower cost of goods soldresulting from lower operating expenses, feedstock costs and energy prices.  In addition, cost of goods sold in 2001included a significant charge related to the permanent idling of the front endof an ethylene unit.  Other revenuesalso declined, as 2001 included a substantial benefit recorded in connectionwith the settlement of a business interruption insurance claim that was partiallyoffset by higher equity in earnings in 2002. Other costs and expenses decreased primarily on lower selling, generaland administrative costs, and decreased asset impairment charges.  Interest expense, net, declined on loweraverage debt balances and interest rates. Lower income taxes in 2002 were attributable to an increase in adeferred tax asset valuation allowance recorded in 2001.

 

***Income (loss) beforeinterest and taxes by segment***

 
| **Millions**                      |   | **Olefins  &  Polyolefins** |   | **Aromatics  &  Styrenics** |   | **Specialty  Products** |   | **Corporate  & Other** |   | **Consolidated** |   |
|-----------------------------------|--------|---------------------------------|--------|---------------------------------|--------|-------------------------|--------|----------------------------|--------|------------------|--------|
| Year ended December 31, 2003 |   | $                               | 41     |                            | $      | 27                      |   | $                          | 34     |             | $      | (26 | ) | $ | 76 |   |
| Year ended December 31, 2002 |   | 33                              |   | (13                             | )      | 40                      |   | (25                        | )      | 35               |   |
| Year ended December 31, 2001 |   | (166                            | )      | (172                            | )      | 31                      |   | (29                        | )      | (336             | )      |
|                                   |        |                                 |        |                                 |        |                         |        |                            |        |                  |        |  |  |  |  |  |

 

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Included in 2003 results were charges related to CPChem’s share ofcertain ChevronTexaco and ConocoPhillips legal settlements and accrualsrelating to CPChem’s facilities, asset retirements, a pilot plant closure,employee termination benefit costs related to workforce reductions and abenefit recorded as a result of a sales and use tax audit.  These and other similar types of net chargestotaled $36 million in the aggregate. See subsequent segment-level discussions for additional information.

 

Included in 2002 results were charges related to asset retirements andimpairments, the write-off of certain technology projects and a pension plancurtailment charge (included in Cost of Goods Sold).  Also included in 2002 results were benefits related to businessinterruption and property casualty insurance claim settlements and a benefitrecorded for the reduction of a customer claim accrual.  These and other similar types of net chargestotaled $30 million in the aggregate. See subsequent segment-level discussions for additional information.

 

Included in 2001 results were charges related to the permanent idlingof assets, asset impairments and retirements, costs associated with thecollapse of a styrene column, CPChem’s share of an asset impairment recorded byan equity affiliate and benefits recorded in connection with the settlement ofbusiness interruption insurance claims. These and other similar types of net charges totaled $153 million in theaggregate.  See subsequent segment-leveldiscussions for additional information.

 

***Olefins& Polyolefins***

 
|                                    |   | **Years  ended December 31,** |       |
|-----------------------------------------|--------|------------------------------------|------------|
| **Millions**                            |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income (loss) before interest and taxes |   | $                                  | 41         |   | $ | 33 |   | $ | (166 | ) |
|                                         |        |                                    |            |  |  |  |  |  |  |  |

 

*2003 compared with 2002*

 

Olefins & Polyolefins income before interest and taxes totaled $41million in 2003 compared with $33 million in 2002.  Higher overall sales prices and volumes more than offset higherfeedstock and energy costs.

 

Results in 2003 included $13 million of charges to Selling, General andAdministrative (SG&A) expense for the ChevronTexaco and ConocoPhillipslegal settlements and accruals relating to CPChem’s facilities, a $9 millioncharge to Research and Development depreciation related to the permanentclosure of the research and technology pilot plant facility in Orange, Texasand a $5 million net benefit resulting from the sales and use tax audit thatcovered the period from October 1993 through June 2000.  Also included in 2003 results were $10million of inventory valuation gains related to a reduction in certainLIFO-based inventories ($6 million in the third quarter and $4 million in thefourth quarter).

 

Results in 2002 included a $7 million charge for the write-off of twotechnology projects, a $4 million charge for the remainder of the accelerateddepreciation associated with the retirement in February 2002 of twopolyethylene particle loop reactors at the Orange facility and a benefitrelated to a reduction of a customer claim accrual.  Results in 2002 also included a $5 million impairment chargerelated to CPChem’s Colton, California polyethylene pipe facility.  The facility was written down to itsestimated net realizable value and was classified as an asset held for sale atDecember 31, 2003.  These and othersimilar types of net charges totaled $12 million in the aggregate in 2002.

 

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Results improved in 2003 compared with 2002, as higher earnings fromthe polyethylene, polypropylene, and polyethylene pipe product lines werepartially offset by lower earnings from ethylene and normal alpha olefins(NAO).  Average realized sales pricesand volumes were up across all the product lines.  The positive effects of these improvements in sales prices andvolumes were partially offset by higher feedstock and utility costs, which weredriven by significantly higher average natural gas prices, particularly in thefirst quarter.  Higher licensing incomealso contributed to the overall improvement in earnings.  Equity earnings from affiliates were downslightly in 2003.

 

*2002 compared with 2001*

 

Olefins & Polyolefins results improved $199 million in 2002compared with 2001.  Increased marginsin 2002 for polyethylene, natural gas liquids (NGLs), and polypropylene andpolyalpha olefins contributed to the improved results.  These improvements were partially offset bylower earnings from ethylene and polyethylene pipe.  Due to market conditions, certain units were idled and productionrates at others were reduced in 2001.

 

Included in 2001 results were $68 million of charges to depreciationexpense related to the permanent idling of the front end of an ethylene unit atthe Sweeny, Texas facility, $14 million of charges related to accelerateddepreciation associated with the planned permanent shutdown in 2002 of the twoparticle loop reactors at the Orange facility, $6 million of charges forthe retirement of the polyethylene developmental reactor unit at the PasadenaPlastics Complex in Pasadena, Texas, and charges for certain customer claimaccruals.  Also included was a $46million charge to Equity in Income (Loss) of Affiliates representing CPChem’sshare of an impairment charge recorded by Phillips Sumika Polypropylene Company(Phillips Sumika), an equity affiliate, adjusted for the difference between CPChem’scarrying value of its investment in Phillips Sumika and CPChem’s equity in itsnet assets.  These and other similartypes of net charges totaled $162 million in the aggregate in 2001.  Results in 2002 included $12 million ofsimilar types of charges described earlier.

 

Polyethylene margins increased in 2002 due to lower ethylene prices andlower energy costs, partially offset by lower sales prices.  NGL margins benefited from lower product andenergy costs, partially offset by lower sales prices.  Ethylene earnings were down in 2002, primarily due to lowermargins and volumes.  The margin impactwas the result of substantially lower sales prices in 2002 compared with 2001,partially offset by lower feedstock and energy prices.

 

***Aromatics &Styrenics***

 
|                                    |   | **Years  ended December 31,** |       |
|-----------------------------------------|--------|------------------------------------|------------|
| **Millions**                            |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income (loss) before interest and taxes |   | $                                  | 27         |   | $ | (13 | ) | $ | (172 | ) |
|                                         |        |                                    |            |  |  |  |  |  |  |  |

 

*2003 compared with 2002*

 

Aromatics & Styrenics income before interest and taxes totaled $27million in 2003 compared to a $13 million loss in 2002.  Higher sales revenues and equity earnings in2003 were partially offset by higher feedstock and utility costs.

 

Included in 2003 results was $10 million of accelerated depreciationrelated to the closure of the UDEX benzene extraction unit at the Port Arthur,Texas facility.  Also included was a $3million inventory valuation gain recognized in the fourth quarter related to areduction in certain LIFO-

 

23

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based inventories.  Results in2002 included a $12 million charge related to the retirement of obsoleteequipment at CPChem’s Pascagoula, Mississippi facility, a $5 million charge forthe retirement of equipment rendered obsolete as a result of the modernizationproject at the St. James, Louisiana styrene plant and a $6 million pension plancurtailment charge related to enhanced benefits granted to terminated employeesat CPChem’s facility in Guayama, Puerto Rico. Also included in 2002 results were $4million of accelerated depreciation related to the planned closure of the UDEXbenzene extraction unit at the Port Arthur facility and $9 million ofbenefits related to business interruption and property casualty insurance claimsettlements.  These and other similartypes of net charges totaled $18 million in the aggregate in 2002.

 

Results in 2002 also included a $25 million benefit related to the fullreversal of a lower-of-cost-or-market inventory reserve initially establishedin 2001.  The reserve was reversed as aresult of improved market conditions and prices.

 

Earnings were higher in 2003 compared with 2002, primarily the resultof higher earnings in the benzene, polystyrene, paraxylene and styrene productlines.  Significantly higher averagerealized sales prices for these product lines and increased sales volumes ofbenzene, paraxylene and styrene were partially offset by higher feedstock costsand energy prices, and costs associated with plant reconfiguration and otheractivities at the Puerto Rico plant. Equity earnings from Saudi Chevron Phillips more than doubled in 2003 asa result of record production and favorable benzene and cyclohexane marketconditions.  Lower equity earnings fromK R Copolymer Co. Ltd., an equity affiliate, and lower feedstock margins andhigher utility costs primarily drove results downward for the K-Resin®styrene-butadiene copolymer (SBC) product line.

 

CPChem’s cumene unit at the Port Arthurfacility was idled in the second quarter of 2003 and is expected to remain idleuntil market conditions improve.  Inaddition, the UDEX benzene extraction unit at that facility was permanentlyclosed in October 2003.

 

*2002 compared with 2001*

 

Results for Aromatics & Styrenics improved $159 million in 2002compared with 2001, as higher earnings from benzene and styrene were partiallyoffset by lower earnings from paraxylene operations.

 

Included in 2001 results was a $110 million benefit, recorded as OtherIncome, in connection with the settlement of a business interruption insuranceclaim associated with a March 2000 incident at the Pasadena PlasticsComplex K-Resin® SBC facility. Production of K-Resin® SBC was idled in March 2000 asthe result of an accident and fire at the plant.  The plant began a successful phased-in start-up in the fourthquarter of 2001 and the force majeure status of the plant was lifted in May2002.  Results in 2001 also includedcosts associated with a column collapse at the St. James facility inFebruary 2001 and a $42 million asset impairment charge related to thePuerto Rico facility.  The impairmentcharge was necessitated by the outlook for future margin conditions at thattime.  The present value of projectedfuture cash flows was used to determine fair value.  In addition, a $17 million charge to depreciation expense wasrecorded in December 2001 to permanently retire the benzene andcyclohexane plant assets in Puerto Rico. As a result, the workforce was reduced to a level necessary to supportonly the paraxylene operations at the facility once operations resume.  These and other similar types ofcharges/benefits resulted in a net benefit of $15 million in the aggregate in2001.  Results in 2002 included $18million of similar types of charges described earlier.

 

24

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Earnings from benzene improved in 2002 compared with 2001 primarily asa result of significantly higher sales prices and volumes, and lower operatingcosts in 2002.  Earnings from benzenealso benefited from significantly improved equity earnings from Saudi ChevronPhillips.  Styrene earnings improved in2002 due to higher production and sales volumes, and improved gross margins, asproduction at the St. James facility was restored in October 2001following the column collapse in February 2001.  Completion of a modernization project at the St. James plant in2002 also contributed to higher styrene production.  Styrene sales volumes and price levels also benefited from a highlevel of industry-wide plant outages in the styrene market in 2002.  Paraxylene results declined due to lowerfeedstock margins, primarily attributable to lower selling prices.  Cumene results declined as a result ofhigher product costs, partially offset by higher selling prices.

 

Results in 2002 included the reversal of a $25 millionlower-of-cost-or-market inventory reserve established in the fourth quarter of2001.  A similar reserve was notestablished at December 31, 2002 due to improved market conditions andprices.  Results also benefited in 2002from lower depreciation and operating expenses due to the impairment andsubsequent retirement of benzene and cyclohexane assets at the Puerto Ricofacility in December 2001.  Theshutdown of the motor fuels reformer at the Puerto Rico facility inMarch 2001 also contributed to improved results in 2002.

 

***Specialty Products***

 
|                                    |   | **Years  ended December 31,** |       |
|-----------------------------------------|--------|------------------------------------|------------|
| **Millions**                            |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income (loss) before interest and taxes |   | $                                  | 34         |   | $ | 40 |   | $ | 31 |   |
|                                         |        |                                    |            |  |  |  |  |  |  |  |

 

*2003 compared with 2002*

 

Income before interest and taxes for Specialty Products was $34 millionin 2003 compared with $40 million in 2002. Higher overall sales prices and volumes were more than offset by higherfeedstock and energy costs, and higher manufacturing and SG&A expense dueto the strength of the Euro.* *Lower earnings from Ryton®polyphenylene sulfide (PPS) polymers and compounds were partially offset byhigher earnings for Specialty Chemicals. Lowerearnings in 2003 from Ryton® PPS polymers and compounds were due to higher product costs andSG&A expense.  Improved earningsfrom Specialty Chemicals were attributable to higher sales prices and volumes, partially offset by increased productcosts and SG&A expense. Results in 2003 included a $2 million net benefit from the sales and usetax audit.  The Ryton® PPScompounding facility in LaPorte, Texas became operational in the first quarterof 2003.

 

*2002 compared with 2001*

 

Incomebefore interest and taxes for Specialty Products was $40 million in 2002compared with$31 millionin the prior year.  Higher earnings in2002 from Ryton® PPSpolymers and compounds were due to increased sales volumes and improvedmargins.  Lower earnings in 2002 fromSpecialty Chemicals were attributable to decreased sales prices and volumes,partially offset by lower feedstock costs.  Results in 2001 includeda $3 million benefit related to the settlement of a business interruptioninsurance claim associated with the March 2000 fire at the PasadenaPlastics Complex facility.

 

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***Corporate and Other***

 
|                                    |   | **Years  ended December 31,** |       |
|-----------------------------------------|--------|------------------------------------|------------|
| **Millions**                            |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Income (loss) before interest and taxes |   | $                                  | (26        | ) | $ | (25 | ) | $ | (29 | ) |
|                                         |        |                                    |            |  |  |  |  |  |  |  |

 

Income (loss) before interest and taxes for Corporate and Otherincluded employee termination benefit costs related to workforce reductionstotaling $11 million in 2003 and $9 million in 2001.  Results in 2002 included expenses related to a one-time chargefor certain other employee benefit costs and also included expenses incurred inconnection with the relocation of CPChem’s headquarters.

 

*Interest expense.*  Interest expense totaled $72 million in 2003compared with $66 million in 2002.  Theincrease resulted primarily from interest expense on $500 million of 5 3/8%notes issued in June 2002. Proceeds from the issuance were used to retire a portion of outstandingcommercial paper which carried significantly lower interest rates.  In addition, interest costs capitalized in2003 totaled $3 million as compared with $7 million in 2002.

 

Interest expense totaled $66 million in 2002 compared with $104 millionin 2001.  The decrease resulted mainlyfrom lower average debt balances and lower average interest rates, primarily onthe commercial paper and trade receivables securitization programs.  Interest rates under the commercial paperprogram averaged 2.20% during 2002 compared with 5.01% during 2001.

 

*Interest income.*  Interest income remained fairly constant at$8 million in 2003, $7 million in 2002 and $9 million in 2001.

* *

*Income Taxes.*  Income tax expense totaled $5 million in2003, $6 million in 2002 and $49 million in 2001.  CPChem is treated as a flow-through entity for federal income taxand for most state income tax purposes, whereby each member is taxable on itsrespective share of income and losses. However, CPChem is directly liable for federal and state income taxesand franchise taxes on certain separate legal entities and for any foreigntaxes incurred.

 

In 2001, CPChem increased its valuation allowance related to its PuertoRico subsidiary’s deferred tax assets by $44 million.  The increase in the valuation allowance, charged to income taxexpense, was necessitated, in part, by the ConocoPhillips merger with ToscoCorporation in September 2001, which triggered regulatory limitations onthe future utilization of the Puerto Rican subsidiary’s pre-merger net operatinglosses.  The valuation allowance wasalso increased as a result of a change in the outlook for future marginconditions at that time.

 

**Outlook**

 

The petrochemicals industry continues tofocus on improving margins and increasing sales volumes as the economy showssigns of recovery.  Various industryanalysts and consultants predict that while U.S. economic growth willaccelerate in 2004, U.S. commodity chemicals consumption will be driven byrecovery in the U.S. manufacturing sector, which is expected to generally lagthe overall economy.

 

Elevated and volatile energy and feedstock costs, along with anincrease in the geographic relocation of North American manufacturing todeveloping regions, is expected to moderate near-term North American chemicaldemand growth.  However, results fromCPChem’s Q-Chem I interest, as well as its Singapore and China operations, areexpected to benefit from the strength of China’s economic growth.

 

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CPChem is addressing prevailing market conditions by continuing safeand reliable operations, while at the same time focusing on furtherimprovements in operating efficiencies and cost management, including therestructuring, idling or shutting down of under-performing businesses orassets.

 

**Liquidity and Capital Resources**

 

Cash balances were $43 million at December 31, 2003 and $39million at December 31, 2002, of which $31 million and $30 million,respectively, was held by foreign subsidiaries.  CPChem’s objective is to minimize cash balances in its worldwideoperations while utilizing the commercial paper program for daily operatingrequirements.

 

*Operating Activities*

 

Cash provided by operating activities in 2003 totaled $280 million,compared with $335 million during 2002. The decrease in 2003 was driven primarily by a net increase of $14million in non-cash working capital in 2003, compared to an $82 million netdecrease in non-cash working capital in 2002. Higher earnings in 2003 partially offset the effect of the change innon-cash working capital.

 

Cash provided by operating activities in 2002 remained steady comparedwith the $332 million of cash provided by operating activities in 2001.  Operating activities in 2001 included $169million of net proceeds received from the settlement of a business interruptioninsurance claim associated with the March 2000 fire at the PasadenaPlastics Complex facility.

 

*Investing Activities*

 

Capital and investment expenditures

 
| **Millions**                      |   | **Olefins  &  Polyolefins** |   | **Aromatics  &  Styrenics** |   | **Specialty  Products** |   | **Corporate  &  Other** |   | **Consolidated** |   |
|-----------------------------------|--------|---------------------------------|--------|---------------------------------|--------|-------------------------|--------|-----------------------------|--------|------------------|--------|
| Year ended December 31, 2003 |   | $                               | 127    |                            | $      | 73                      |   | $                           | 17     |             | $      | 6 |   | $ | 223 |   |
| Year ended December 31, 2002 |   | 179                             |   | 103                             |   | 20                      |   | 12                          |   | 314              |   |
| Year ended December 31, 2001 |   | 134                             |   | 121                             |   | 17                      |   | 19                          |   | 291              |   |
|                                   |        |                                 |        |                                 |        |                         |        |                             |        |                  |        |  |  |  |  |  |

 

Capital and investment expenditures in 2003 included a $20 millionequity investment in Jubail Chevron Phillips Company, a 50%-owned joint venturewith facilities to be located in Al Jubail, Saudi Arabia.  See below for a discussion of the JubailChevron Phillips project.  Capital andinvestment expenditures in 2002 included a $45 million equity investment inPhillips Sumika.

 

In addition to the capital and investment expenditures shown above,CPChem subscribed to additional shares of and advanced Qatar Chemical CompanyLtd. (Q-Chem), a CPChem equity investment, a total of $103 million in2003.  CPChem advanced Q-Chem $210million in 2002.  No advances were madein 2001 and no shares of Q-Chem were subscribed to by CPChem in 2002 or2001.  See Part II - Item 8. FinancialStatements and Supplementary Data – Note 6 for a further discussion of Q-Chemand a discussion of a contingent funding commitment to Saudi Chevron PhillipsCompany, an equity affiliate of CPChem.

 

CPChem currently expects to invest a total of approximately $265 millionin capital and investment expenditures in 2004, excluding advances to and sharesubscriptions in Q-Chem.  It is expectedthat $175 million will be invested in Olefins & Polyolefins, $69 million inAromatics & Styrenics, and $14 million in Specialty Products, with theremainder to be spent at the corporate level. In addition, CPChem expects to subscribe to additional shares of and toadvance Q-Chem approximately $59 million in the aggregate in 2004.

 

27

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*Jubail Chevron Phillips Project.*  CPChem announced plans for the developmentof a 50%-owned joint venture project at Al Jubail, Saudi Arabia (the “JubailChevron Phillips project”).  Theproject, expected to cost approximately $1.1 billion in total, includes theconstruction of an integrated olefins, ethylbenzene and styrene monomerfacility on a site adjacent to the existing aromatics complex owned by SaudiChevron Phillips Company, a 50%-owned CPChem joint venture.  The project also includes the expansion ofSaudi Chevron Phillips Company’s benzene facility.  This additional benzene capacity will be used to providefeedstock for the new Jubail Chevron Phillips styrene facility.  Final approval of the project by CPChem’sboard of directors is expected to be requested in 2004, with operationalstart-up expected in 2007.  It isanticipated that the project will be financed through equity contributions fromthe co-ventures and limited recourse loans from commercial banks and SaudiArabian government agencies.

 

*Q-Chem II Projects. *CPChem and Qatar Petroleum announcedplans for the development of a second petrochemical project in Mesaieed, Qatar(Q-Chem II), designed to produce polyethylene and NAO on a site adjacent to thenewly-constructed Q-Chem complex.

 

In connection with the Q-Chem II joint venture, CPChem and QatarPetroleum entered into a separate agreement with Atofina and QatarPetrochemical Company, establishing a joint venture to develop an ethanecracker in northern Qatar at Ras Laffan Industrial City.

 

Final approval of the Q-Chem II projects by CPChem’s board of directorsis expected to be requested in 2005, with start-up expected in 2008.  Preliminary financing plans for the projectsinclude equity contributions from the co-venturers and limited recourse loansfrom commercial banks and export credit agencies.

 

*Financing Activities*

 

Cash provided by (used in) financing activities totaled $49 million in2003, $115 million in 2002 and $(113) million in 2001.  Cash provided by financing activities in 2003consisted primarily of $32 million of contributions from members and $18million of proceeds from the issuance of debt under a trade receivablessecuritization program and other short-term debt.  Commercial paper outstanding at December 31, 2003 remainedeven with amounts outstanding at December 31, 2002.  During 2002, commercial paper outstandingdecreased $808 million, primarily with proceeds from the issuance of $500million of 5 3/8% notes and from the sale of $250 million of Members’ PreferredInterests to ChevronTexaco and ConocoPhillips. During 2001, commercial paper outstanding decreased $783 million and anote payable to ChevronTexaco was repaid, mostly with proceeds from theissuance of $500 million of 7% notes and with $199 million received inconnection with the implementation of a trade receivables securitizationprogram.

 

Chevron Phillips Chemical Company LLC and its wholly-owned subsidiary,Chevron Phillips Chemical Company LP, jointly and severally issued $500 millionof senior unsecured 5 3/8% notes (the “5 3/8% notes”) on June 21, 2002 ina private placement.  The 5 3/8% notesare due in June 2007 and interest is payable semiannually.  The notes contain certain covenants, such aslimitations on liens, sale/leaseback transactions, sales of assets and businesscombinations, that CPChem does not consider to be restrictive to normaloperations.

 

28

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In accordance with obligations under the registration rights agreemententered into in connection with the notes, Chevron Phillips Chemical CompanyLLC and Chevron Phillips Chemical Company LP filed a joint registrationstatement on Form S-4 with the SEC to register exchange notes that have termssubstantially identical to the private placement notes, except that theexchange notes are freely tradeable. All of the holders of these private placement notes tendered their notesfor the registered exchange notes.

 

CPChem has a $400 million 364-day credit facility and a $400 millionthree-year credit facility with various banks that are used to provide backupcommitted credit for the commercial paper program.  The facilities expire on August 26, 2004 and August 28,2005, respectively.  The 364-day creditfacility provides that CPChem may, at its option, extend the date of repaymentby one year of any borrowings outstanding on August 26, 2004 under theagreement.  There were no borrowingsoutstanding under any of the current or prior credit agreements at December 31,2003 or 2002, nor were there any borrowings under any of the credit facilitiesduring 2003 or 2002.  CPChem borrowedfunds for one day on September 12, 2001 under a $900 million creditagreement that existed at the time. CPChem intends to replace the current 364-day credit agreement upon itsexpiration with a new credit facility and to replace the three-year creditfacility with a new multi-year facility.

 

CPChem had $300 million of short-term borrowings outstanding atDecember 31, 2003 under its trade receivables securitization program,secured by $459 million of trade receivables. The agreement allows CPChem to borrow up to $300 million for whichCPChem grants a security interest in certain of its trade receivables ascollateral for any amounts outstanding. The trade receivables securitization agreement expires on May 21,2004.  CPChem intends to request anextension of the expiration date of the current agreement to May 2005.

 

CPChem sold $250 million of Members’ Preferred Interests onJuly 1, 2002, purchased 50% each by ChevronTexaco and ConocoPhillips.  Preferred distributions are cumulative at 9%per annum and are payable quarterly from cash earnings, as defined in CPChem’sSecond Amended and Restated Limited Liability Company Agreement.  The securities have no stated maturity dateand are redeemable quarterly, in increments of $25 million, if CPChem’s ratioof debt to total capitalization reaches a stated level.  The Members’ Preferred Interests are alsoredeemable at the sole option of CPChem. There were no redemptions in 2003 or 2002, and no preferreddistributions had been paid though December 31, 2003.

 

Chevron Phillips Chemical Company LLC and Chevron Phillips ChemicalCompany LP, jointly and severally issued $500 million of senior unsecured 7%notes in March 2001 in a private placement.  The notes are due in March 2011 and interest is payablesemiannually.  Substantially all of theholders of the private placement notes tendered their notes for registeredexchange notes that have terms substantially identical to the private placementnotes, except that the exchange notes are freely tradeable.  The notes contain covenants identical to the5 3/8% notes sold in June 2002.

 

CPChem believes cash requirements over the next twelve months will befunded through a combination of cash on hand, cash flows from operations,commercial paper and/or future debt issuances. CPChem is not aware of any conditions that exist as of the date of thisreport that would cause any of its debt obligations to be in or at risk ofdefault.  In addition, CPChem does nothave any debt obligations whose maturities would be accelerated as the resultof a credit rating downgrade.

 

29

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*ContractualObligations*

 

Contractual obligations,including debt obligations, at December 31, 2003 were as follows:

 
|                                                                    |   | **Payments  Due** |   |
|-------------------------------------------------------------------------|--------|-------------------|--------|
| **Millions**                                                            |   | **Total**         |   | **2004** |   | **2005-2006** |   | **2007-2008** |   | **Thereafter** |   |
| Secured borrowings                                                      |   | $                 | 300    |   | $ | 300 |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial paper                                                        |   | 184               |   | — |   | — |   | — |   | 184 |   |
| Long-term debt                                                          |   | 1,000             |   | — |   | — |   | 500 |   | 500 |   |
| Other debt, including current portions                                  |   | 24                |   | 14 |   | 2 |   | 3 |   | 5 |   |
| Other long-term liabilities included in the  consolidated balance sheet |   | 69                |   | — |   | 35 |   | 3 |   | 31 |   |
| Operating lease obligations                                             |   | 220               |   | 27 |   | 46 |   | 66 |   | 81 |   |
| Purchase obligations                                                    |   | 2,707             |   | 964 |   | 1,306 |   | 209 |   | 228 |   |
| Total                                                                   |   | $                 | 4,504  |   | $ | 1,305 |   | $ | 1,389 |   | $ | 781 |   | $ | 1,029 |   |

 

See also Part II - Item8. Financial Statements and Supplementary Data – Note 9 for further discussionrelated to debt obligations and Note 14 for a discussion related to operatinglease obligations.

 

*SecuredBorrowings.*  Thisrepresents borrowings related to the accounts receivable securitizationprogram.

 

*CommercialPaper.*  The paymentdue period assumes that CPChem will maintain its current ability to re-issueexisting commercial paper obligations upon maturity.

 

*OtherLong-term Liabilities Included in the Consolidated Balance Sheet. *The amounts consistprimarily of obligations related to various employee benefit plans, notincluding pension plans.

 

*PurchaseObligations.*  Thisrepresents obligations to purchase goods or services which contain: fixed orminimum quantities to be purchased; fixed, minimum or variable priceprovisions; and the approximate timing of the transaction.  Estimated future market rates based onCPChem’s long-term forecast were used to calculate obligation amounts thatcontain variable price provisions. Obligations with no fixed or minimum purchase requirements for productor services were not included.

 

The above contractualobligations do not include CPChem’s funding under its pension plans.  Based on internal and actuarial assumptionsused in conjunction with the determination of future projected benefitobligations, it is estimated that annual funding of approximately $40 millioninto CPChem’s existing pension plans would be sufficient for the plans toachieve fully funded status over a 10 year planning horizon.  This level of funding would be in excess offuture expected minimum regulatory funding requirements.  Actual annual funding levels may differ fromthis estimate due to, among other things, economic conditions, actual pensionasset returns and changes in business plans.

 

*Off-BalanceSheet Arrangements*

 

An off-balance sheetarrangement is generally any transaction, agreement or other contractualarrangement involving an unconsolidated entity of a company under which suchcompany has (1) made certain guarantees, (2) a retained or a contingentinterest in assets transferred to an unconsolidated entity that providesfinancing, liquidity, market risk or credit risk support to the company, (3) anobligation under derivative instruments classified as equity or (4) anyobligation arising out of a material variable interest in an unconsolidatedentity that provides financing, liquidity, market risk or credit risk supportto the company, or that engages in leasing, hedging or

 

30

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research and developmentarrangements with the company.  Otherthan certain guarantees related to Q-Chem, CPChem has no material off-balancesheet arrangements of this nature.  SeePart II - Item 8. Financial Statements and Supplementary Data – Note 6 for adiscussion of certain guarantees related to Q-Chem.

 

**Other**

 

*Risk and OtherFactors That May Affect Future Performance*

 

*Cyclicality and Overcapacity in the Petrochemicals Business. *The petrochemicalsindustry is both cyclical and volatile. Historically, the industry has experienced periods of tight supply,resulting in increased prices and profit margins.  This is typically followed by periods of substantial capacityexpansion, resulting in oversupply and declining prices and profitmargins.  As a result of changes insupply and demand for products, changes in energy prices and changes in variousother economic conditions around the world, CPChem’s profit margins mayfluctuate, not only from year to year, but also from quarter to quarter.

 

*Feedstock costs and other external factors. *Due to the overall commodity nature ofmost of the products CPChem sells, market position cannot necessarily beprotected by product differentiation or by passing on cost increases tocustomers.  Accordingly, price increasesin raw materials and other costs may not correlate with changes in the pricesreceived for products.  Feedstock pricescan fluctuate widely for a variety of reasons, including changes in worldwideenergy prices, changes in availability or significant facility operatingproblems.  Other external factors thatcan cause volatility in feedstock prices, as well as demand for products,product prices and volumes, and margin deterioration, include general economicconditions, the level of business activity in industries that use CPChem’sproducts, competitors’ actions, domestic and international events andcircumstances, product and process technology changes, currency fluctuationsand governmental regulation in the United States and abroad.

 

Although CPChem gathers, transports and fractionates feedstocks to meeta portion of its demand and has long-term feedstock supply contracts withaffiliates of its owners and others, CPChem is still subject to volatilefeedstock prices.  Extreme pricevolatility, such as that experienced in early 2001 and 2003, can result in theneed to temporarily idle or curtail production units.

 

*Environmental, Health and Safety.*  The petrochemicals business is highlyregulated, subject to increasingly stringent laws and regulations addressingenvironmental, health and safety matters. Such matters include, but are not limited to, air pollutant emissions,discharge of treated wastewater, stormwater runoff, solid waste management,workplace safety, and contamination. Violations of these laws and regulationsoften result in monetary penalties and corrective action, but depending on theseverity of the violation, could result in substantial fines, criminalsanctions, permit revocation and/or facility shutdowns.

 

Under somelaws, including the Comprehensive Environmental Response, Compensation andLiability Act of 1980 (“Superfund”), the Resource Conservation and Recovery Actof 1976 and the laws of many states, CPChem may be subject to joint and severalliability regarding environmental contamination on or from properties that itpreviously owned or operated or currently owns or operates.  CPChem may also be subject to liability forcontaminated properties where it has disposed of or arranged for disposal ofhazardous substances, or where feedstocks or products that contained hazardoussubstances have been spilled or released. Depending on the circumstances, such liabilities may involve, forexample, investigation or clean-up costs, claims for damages to naturalresources or punitive damage claims.  Inaddition, CPChem may be the subject of third-party tort claims seekingcompensatory and punitive damages for alleged impacts on human health or theenvironment.  These liabilities andclaims could result in substantial costs to CPChem.

 

31

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CPChem incurs,and expects to continue to incur, significant costs for capital improvementsand general compliance under applicable environmental laws, including costs toacquire, maintain and repair equipment dealing with pollution control.  By 2007, industrial facilities in the eightcounties in and around Houston, Texas, including certain facilities that CPChemowns, must comply with new nitrogen oxide (NOx) emission standards.  These new standards are being phased inbetween 2003 and 2007.  Modifications toexisting equipment and the installation of additional control equipment arerequired to meet these new NOx standards. CPChem expects that total capital expenditures of approximately $100million will be required during this period to comply with thesestandards.  CPChem invested approximately$25 million of such capital expenditures in 2003.

 

CPChem alsoanticipates that new regulations will be issued concerning emissions ofhighly-reactive volatile organic compounds (HRVOCs).  While CPChem cannot assess the capital expenditure or operatingcost impacts at this time, CPChem believes that the expenditures required to complywith these anticipated new regulations, as they are issued and becomeeffective, will not have a material adverse effect on consolidated results ofoperations, financial position or liquidity.

 

In addition,new laws and regulations, the stricter enforcement of, or changes to, existinglaws and regulations, the discovery of previously unknown contamination or theimposition of new disposal or cleanup requirements could in the future requireCPChem to incur costs, or affect its production or revenues, in ways that couldhave a negative effect on its financial condition or results ofoperations.  Therefore, there can be noassurance that material capital expenditures, costs, or operating expensesbeyond those currently anticipated will not be required under applicableenvironmental, health, and safety laws and regulations, or that developmentswith respect to such laws and regulations, will not adversely affect productionor revenues.

 

There arerisks associated with the production of petrochemicals, such as operationalhazards and unforeseen interruptions caused by events beyond CPChem’scontrol.  These include accidents,breakdowns or failures of equipment or processes, acts of terrorism and othercatastrophic events.  These events canresult in injury or loss of life and extensive property or environmentaldamage.  In addition, the handling ofchemicals has the potential for serious impacts on human health and theenvironment.  Liabilities incurred andinterruptions in operations caused by these events have the potential tomaterially affect consolidated results of operations, financial position andliquidity.  While CPChem maintainsgeneral and business interruption insurance, insurance proceeds may not beadequate to fully cover substantial liabilities incurred, lost revenues orincreased expenses.

 

*InternationalOperations.* International operations are exposed to different political, economicand regulatory risks that are not faced by businesses that operate solely inthe United States.  A portion of CPChem’soperations are outside the continental United States, with manufacturingfacilities in existence in Puerto Rico, Singapore, China, South Korea, SaudiArabia, Qatar, Mexico and Belgium. Assets located outside of the U.S. as of December 31, 2003 totaled$1.127 billion and net sales from non-U.S. operations were $1.086 billion in2003.  These international operationsare subject to risks similar to those affecting CPChem’s U.S. operations inaddition to a number of other risks, including difficulties in enforcingcontractual and intellectual property rights, and impositions or increases ofwithholding and other taxes on remittances and other payments by subsidiariesand affiliates.  Other risks include,but are not limited to, exposure to different legal standards, impositions orincreases of investment and other demands by foreign governments, therequirements of a wide variety of foreign laws, political and economicinstability, and difficulties in staffing and managing operations, particularlyin remote locations.  In addition,terrorist acts, if directed at CPChem operations, could have a material adverseeffect on CPChem’s business.

 

32

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*Foreign CurrencyRisk. *Internationally,CPChem operates facilities in eight countries and sells product in many othercountries, resulting in transactions denominated in various currencies.  As such, CPChem is exposed to foreigncurrency risk to the extent there are devaluations and fluctuations in theexchange rates of the local currencies of those countries against the U.S.dollar and other foreign currencies which may adversely affect revenues andmargins.  The potential foreign currencytransaction gain or loss from a hypothetical 10% change in the exchange rates ofthose local currencies against the U.S. dollar at December 31, 2003 wasapproximately $11 million in the aggregate.

 

*Interest RateRisk. *BecauseCPChem’s commercial paper obligations have maturities of 90 days or less andare generally reissued upon maturity, the debt is considered variable-ratebased.  The secured debt issued inconnection with the accounts receivable securitization program is alsovariable-rate based.  A hypothetical 100basis point change (a one percentage point change) in the weighted averageinterest rates of the outstanding balances at December 31, 2003 of thesedebt instruments would impact interest expense by approximately $5 millionannually in the aggregate.

 

*Contingencies*

 

In the case of all known contingencies, CPChem records an undiscountedliability when the loss is probable and the amount can be reasonablyestimated.  These liabilities are notreduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probableinsurance or other third-party recoveries. Based on currently available information, CPChem believes it is remotethat future costs related to known contingent liabilities will exceed currentaccruals by an amount that would have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

See Part II - Item 8. Financial Statements and Supplementary Data –Note 12 for further discussion of contingencies.

 

*New AccountingPronouncements*

 

See Part II - Item 8. Financial Statements and Supplementary Data –Note 2 – “Accounting Pronouncements.”

 

**ITEM7A.****  Quantitativeand Qualitative Disclosures About Market Risk**

 

See Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations – “Other.”

 

33

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**ITEM8.****  FinancialStatements and Supplementary Data**

 

INDEX TO FINANCIAL STATEMENTS

 
| **Chevron Phillips  Chemical Company LLC**                                                                                                                                                             |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                                   |   |   |
| **Report of Independent  Auditors**                                                                                                                                                                    |   | **35** |
|                                                                                                                                                                                                   |   |   |
| **Consolidated  Statement of Operations for the years ended December 31, 2003, 2002 and  2001**                                                                                                   |   | **36** |
|                                                                                                                                                                                                   |   |   |
| **Consolidated Balance Sheet  at December 31, 2003 and 2002**                                                                                                                                     |   | **37** |
|                                                                                                                                                                                                   |   |   |
| **Consolidated  Statement of Members’ Capital for the years ended December 31, 2003,  2002 and 2001**                                                                                        |   | **38** |
|                                                                                                                                                                                                   |   |   |
| **Consolidated  Statement of Cash Flows for the years ended December 31, 2003, 2002 and  2001**                                                                                                   |   | **39** |
|                                                                                                                                                                                                   |   |   |
| **Notes to  Consolidated Financial Statements**                                                                                                                                                        |   | **40** |
|                                                                                                                                                                                                   |   |   |
| **Selected Quarterly  Financial Data (Unaudited)**                                                                                                                                                     |   | **71** |
|                                                                                                                                                                                                   |   |   |
| ***The following  financial statements are presented in accordance with the Securities and  Exchange Commission’s rules pertaining to equity affiliates deemed to be  “significant.”*** |
|                                                                                                                                                                                                   |
| ***Saudi Chevron  Phillips Company is an equity affiliate of CPChem.***                                                                                                                                |
|                                                                                                                                                                                                   |   |   |
| **Saudi Chevron  Phillips Company**                                                                                                                                                                    |   |   |
|                                                                                                                                                                                                   |   |   |
| Auditors’ Report                                                                                                                                                                                  |   | 72     |
|                                                                                                                                                                                                   |   |   |
| Balance Sheet at December 31, 2003, 2002  and 2001                                                                                                                                                     |   | 73     |
|                                                                                                                                                                                                   |   |   |
| Statement of Income for the years ended  December 31, 2003, 2002 and 2001                                                                                                                              |   | 74     |
|                                                                                                                                                                                                   |   |   |
| Statement of Cash Flows for the years ended  December 31, 2003, 2002 and 2001                                                                                                                          |   | 75     |
|                                                                                                                                                                                                   |   |   |
| Statement of Changes in Partners’ Equity  for the years ended December 31, 2003, 2002 and 2001                                                                                                    |   | 76     |
|                                                                                                                                                                                                   |   |   |
| Notes to the Financial Statements                                                                                                                                                                      |   | 77     |

 

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**Reportof Independent Auditors**

 

To the Board of Directors of Chevron Phillips Chemical Company LLC:

 

We have audited the accompanying consolidated balance sheets of ChevronPhillips Chemical Company LLC (the Company) as of December 31, 2003 and2002, and the related consolidated statements of operations, members’ capital,and cash flows for each of the three years in the period endedDecember 31, 2003.  Our audits alsoincluded the financial statement schedule listed in the Index at Item15(a).  These financial statements andschedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position of ChevronPhillips Chemical Company LLC at December 31, 2003 and 2002, and theconsolidated results of their operations and their cash flows for each of thethree years in the period ended December 31, 2003, in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Ernst & Young LLP

 

Houston, Texas

January 30, 2004

 

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**Chevron Phillips Chemical Company LLC**

Consolidated Statement of Operations

 
|                                                 |   | **Years  ended December 31,** |   |
|------------------------------------------------------|--------|------------------------------------|--------|
| **Millions**                                         |   | **2003**                           |   | **2002** |   | **2001** |   |
| Revenue                                              |   |                               |   |   |   |   |   |
| Net sales                                            |   | $                                  | 6,907  |   | $ | 5,389 |   | $ | 5,871 |   |
| Equity in income (loss) of affiliates, net           |   | 41                                 |   | 22 |   | (65 | ) |
| Other income                                         |   | 70                                 |   | 62 |   | 204 |   |
| Total revenue                                        |   | 7,018                              |   | 5,473 |   | 6,010 |   |
|                                                 |   |                               |   |   |   |   |   |
| Costs and Expenses                                   |   |                               |   |   |   |   |   |
| Cost of goods sold                                   |   | 6,439                              |   | 4,986 |   | 5,733 |   |
| Selling, general and administrative                  |   | 448                                |   | 399 |   | 509 |   |
| Asset impairments                                    |   | —                             |   | 6 |   | 44 |   |
| Research and development                             |   | 55                                 |   | 47 |   | 60 |   |
| Total costs and expenses                             |   | 6,942                              |   | 5,438 |   | 6,346 |   |
|                                                 |   |                               |   |   |   |   |   |
| Income (Loss) Before Interest and Taxes              |   | 76                                 |   | 35 |   | (336 | ) |
|                                                 |   |                               |   |   |   |   |   |
| Interest income                                      |   | 8                                  |   | 7 |   | 9 |   |
| Interest expense                                     |   | (72                                | )      | (66 | ) | (104 | ) |
|                                                 |   |                               |   |   |   |   |   |
| Income (Loss) Before Taxes                           |   | 12                                 |   | (24 | ) | (431 | ) |
|                                                 |   |                               |   |   |   |   |   |
| Income taxes                                         |   | (5                                 | )      | (6 | ) | (49 | ) |
|                                                 |   |                               |   |   |   |   |   |
| Net Income (Loss)                                    |   | 7                                  |   | (30 | ) | (480 | ) |
|                                                 |   |                               |   |   |   |   |   |
| Distributions on members’ preferred  interests  |   | (23                                | )      | (11 | ) | — |   |
|                                                 |   |                               |   |   |   |   |   |
| Income (Loss) Attributed to Members’  Interests |   | $                                  | (16    | ) | $ | (41 | ) | $ | (480 | ) |

 

See Notes to Consolidated FinancialStatements.

 

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**Chevron Phillips Chemical Company LLC**

Consolidated Balance Sheet

 
|                                        |   | **December 31,** |       |
|---------------------------------------------|--------|-----------------------|------------|
| **Millions**                                |   | **2003**              | ** ** | **2002** | ** ** |
| ASSETS                                      |   |
| Current assets                              |   |                  |       |   |   |
| Cash and cash equivalents                   |   | $                     | 43         |   | $ | 39 |   |
| Accounts receivable, net – trade       |   | 775                   |       | 746 |   |
| Accounts receivable, net – affiliates  |   | 87                    |       | 51 |   |
| Inventories                                 |   | 700                   |       | 702 |   |
| Other current assets                        |   | 31                    |       | 23 |   |
| Total current assets                        |   | 1,636                 |       | 1,561 |   |
|                                        |   |                  |       |   |   |
| Property, plant and equipment               |   | 7,744                 |       | 7,607 |   |
| Less: accumulated depreciation              |   | 3,880                 |       | 3,657 |   |
| Net property, plant and equipment           |   | 3,864                 |       | 3,950 |   |
|                                        |   |                  |       |   |   |
| Investments in and advances to affiliates   |   | 673                   |       | 515 |   |
| Other assets and deferred charges           |   | 69                    |       | 83 |   |
|                                        |   |                  |       |   |   |
| Total  Assets                               |   | $                     | 6,242      |   | $ | 6,109 |   |
|                                        |   |                  |       |   |   |
| LIABILITIES AND MEMBERS’ EQUITY        |   |
|                                        |   |                  |       |   |   |
| Current liabilities                         |   |                  |       |   |   |
| Accounts payable – trade               |   | $                     | 521        |   | $ | 488 |   |
| Accounts payable – affiliates          |   | 146                   |       | 108 |   |
| Accrued income and other taxes              |   | 54                    |       | 53 |   |
| Accrued salaries, wages and benefits        |   | 92                    |       | 84 |   |
| Secured borrowings and other debt           |   | 314                   |       | 294 |   |
| Other current liabilities                   |   | 57                    |       | 24 |   |
| Total current liabilities                   |   | 1,184                 |       | 1,051 |   |
|                                        |   |                  |       |   |   |
| Long-term debt                              |   | 1,189                 |       | 1,190 |   |
| Other liabilities and deferred credits      |   | 109                   |       | 117 |   |
|                                        |   |                  |       |   |   |
| Total liabilities                           |   | 2,482                 |       | 2,358 |   |
|                                        |   |                  |       |   |   |
| Members’ preferred interests           |   | 250                   |       | 250 |   |
|                                        |   |                  |       |   |   |
| Members’ capital                       |   | 3,478                 |       | 3,494 |   |
| Accumulated other comprehensive income      |   | 32                    |       | 7 |   |
|                                        |   |                  |       |   |   |
| Total  Liabilities and Members’ Equity |   | $                     | 6,242      |   | $ | 6,109 |   |

 

See Notes to Consolidated FinancialStatements.

 

37

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**Chevron Phillips Chemical Company LLC**

Consolidated Statement of Members’ Capital

 
| **Millions**                                        |   | **Members’  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** | ** ** |
|-----------------------------------------------------|--------|----------------------------|------------|------------------------------------------------------|--------|-----------|------------|
| Balance on December 31, 2000                   |   | $                          | 3,849      |                                                 | $      | (6        | )          | $ | 3,843 |   |
|                                                |   |                       |       |                                                 |   |      |       |
| Net income (loss)                                   |   | (480                       | )          | —                                               |   | (480      | )          |
| Foreign currency translation adjustments            |   | —                     |       | (10                                                  | )      | (10       | )          |
| Total comprehensive income (loss)                   |   |                       |       |                                                 |   | (490      | )          |
| Contributions from members                          |   | 101                        |       | —                                               |   | 101       |       |
| Distributions to members                            |   | (20                        | )          | —                                               |   | (20       | )          |
|                                                |   |                       |       |                                                 |   |      |       |
| Balance on December 31, 2001                   |   | 3,450                      |       | (16                                                  | )      | 3,434     |       |
|                                                |   |                       |       |                                                 |   |      |       |
| Net income (loss)                                   |   | (30                        | )          | —                                               |   | (30       | )          |
| Foreign currency translation adjustments            |   | —                     |       | 23                                                   |   | 23        |       |
| Total comprehensive income (loss)                   |   |                       |       |                                                 |   | (7        | )          |
| Contributions from members                          |   | 86                         |       | —                                               |   | 86        |       |
| Distributions on members’ preferred  interests |   | (11                        | )          | —                                               |   | (11       | )          |
| Other distributions to members                      |   | (1                         | )          | —                                               |   | (1        | )          |
|                                                |   |                       |       |                                                 |   |      |       |
| Balance on December 31, 2002                   |   | 3,494                      |       | 7                                                    |   | 3,501     |       |
|                                                |   |                       |       |                                                 |   |      |       |
| Net income (loss)                                   |   | 7                          |       | —                                               |   | 7         |       |
| Foreign currency translation adjustments            |   | —                     |       | 25                                                   |   | 25        |       |
| Total comprehensive income (loss)                   |   |                       |       |                                                 |   | 32        |       |
| Distributions on members’ preferred  interests |   | (23                        | )          | —                                               |   | (23       | )          |
|                                                |   |                       |       |                                                 |   |      |       |
| Balance on December 31, 2003                   |   | $                          | 3,478      |                                                 | $      | 32        |       | $ | 3,510 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

38

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**Chevron Phillips Chemical Company LLC**

Consolidated Statement of Cash Flows

 
|                                                                                           |   | **Years  ended December 31,** |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| **Millions**                                                                                   |   | **2003**                           |   | **2002** |   | **2001** |   |
| Cash Flows  From Operating Activities                                                          |   |                               |   |   |   |   |   |
| Net income (loss)                                                                              |   | $                                  | 7      |   | $ | (30 | ) | $ | (480 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows provided by operating activities |   |                               |   |   |   |   |   |
| Depreciation, amortization and retirements                                                     |   | 298                                |   | 291 |   | 381 |   |
| Asset impairments                                                                              |   | —                             |   | 6 |   | 44 |   |
| Deferred income taxes                                                                          |   | —                             |   | — |   | 44 |   |
| Undistributed equity in losses (income) of  affiliates, net                                    |   | (28                                | )      | (6 | ) | 67 |   |
| Changes in operating working capital                                                           |   | (14                                | )      | 82 |   | 240 |   |
| Other operating cash flow activity                                                             |   | 17                                 |   | (8 | ) | 36 |   |
| Net cash flows provided by operating  activities                                               |   | 280                                |   | 335 |   | 332 |   |
|                                                                                           |   |                               |   |   |   |   |   |
| Cash Flows  From Investing Activities                                                          |   |                               |   |   |   |   |   |
| Capital and investment expenditures                                                            |   | (223                               | )      | (314 | ) | (291 | ) |
| Investments in and advances to Qatar  Chemical Company Ltd. (Q-Chem)                           |   | (103                               | )      | (210 | ) | — |   |
| Decrease in other investments                                                                  |   | 1                                  |   | 2 |   | 27 |   |
| Net cash flows used in investing activities                                                    |   | (325                               | )      | (522 | ) | (264 | ) |
|                                                                                           |   |                               |   |   |   |   |   |
| Cash Flows  From Financing Activities                                                          |   |                               |   |   |   |   |   |
| Decrease in commercial paper, net                                                              |   | (1                                 | )      | (808 | ) | (783 | ) |
| Increase in secured borrowings, net                                                            |   | 10                                 |   | 91 |   | 199 |   |
| Decrease in note payable to member, net                                                        |   | —                             |   | — |   | (50 | ) |
| Proceeds from the issuance of other debt,  net                                                 |   | 8                                  |   | 500 |   | 509 |   |
| Proceeds from the issuance of members’  preferred interests                               |   | —                             |   | 250 |   | — |   |
| Contributions from members, net                                                                |   | 32                                 |   | 75 |   | 25 |   |
| Post-closing adjustments from (to) members,  net                                               |   | —                             |   | 7 |   | (13 | ) |
| Net cash flows provided by (used in)  financing activities                                     |   | 49                                 |   | 115 |   | (113 | ) |
|                                                                                           |   |                               |   |   |   |   |   |
| Net  Increase (Decrease) in Cash and Cash Equivalents                                          |   | 4                                  |   | (72 | ) | (45 | ) |
| Cash and Cash Equivalents at Beginning of  Period                                              |   | 39                                 |   | 111 |   | 156 |   |
| Cash and Cash Equivalents at End of Period                                                     |   | $                                  | 43     |   | $ | 39 |   | $ | 111 |   |
|                                                                                           |   |                               |   |   |   |   |   |
| Supplemental Disclosures of Cash Flow  Information                                             |   |                               |   |   |   |   |   |
| Changes in operating working capital                                                           |   |                               |   |   |   |   |   |
| Decrease (increase) in accounts receivable                                                     |   | $                                  | (100   | ) | $ | 3 |   | $ | 242 |   |
| Decrease (increase) in inventories                                                             |   | 13                                 |   | (54 | ) | 234 |   |
| Decrease (increase) in other current assets                                                    |   | (5                                 | )      | 1 |   | (3 | ) |
| Increase (decrease) in accounts payable                                                        |   | 70                                 |   | 142 |   | (333 | ) |
| Increase (decrease) in accrued income and  other taxes                                         |   | 1                                  |   | (4 | ) | 13 |   |
| Increase (decrease) in other current  liabilities                                              |   | 7                                  |   | (6 | ) | 87 |   |
| Total                                                                                          |   | $                                  | (14    | ) | $ | 82 |   | $ | 240 |   |
| Cash paid for interest                                                                         |   | $                                  | 70     |   | $ | 73 |   | $ | 88 |   |
| Cash paid for income taxes                                                                     |   | $                                  | 5      |   | $ | 7 |   | $ | 4 |   |

 

See Notes to Consolidated FinancialStatements.

 

39

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**Chevron Phillips Chemical Company LLC**

Notes toConsolidated Financial Statements

 

 

| **Index** |   |                                          |   | **Page** |
|-----------|--------|-----------------------------------------------|--------|----------|
| 1.        |   | Formation and Nature of Operations            |   | 40       |
| 2.        |   | Summary of Significant Accounting Policies    |   | 41       |
| 3.        |   | Transactions with Affiliates                  |   | 44       |
| 4.        |   | Business Interruption Insurance Settlement    |   | 45       |
| 5.        |   | Inventories                                   |   | 45       |
| 6.        |   | Investments  in and Advances to Affiliates    |   | 46       |
| 7.        |   | Property,  Plant and Equipment                |   | 49       |
| 8.        |   | Environmental  Liabilities                    |   | 49       |
| 9.        |   | Debt                                          |   | 50       |
| 10.       |   | Members’  Preferred Interests            |   | 51       |
| 11.       |   | Guarantees,  Commitments and Indemnifications |   | 52       |
| 12.       |   | Contingencies                                 |   | 53       |
| 13.       |   | Credit  Risk                                  |   | 54       |
| 14.       |   | Operating  Leases                             |   | 54       |
| 15.       |   | Benefit  Plans                                |   | 54       |
| 16.       |   | Taxes                                         |   | 58       |
| 17.       |   | Segment  and Geographic Information           |   | 59       |
| 18.       |   | Fair  Values of Financial Instruments         |   | 62       |
| 19.       |   | Consolidating  Financial Statements           |   | 63       |

 

Note 1.          Formationand Nature of Operations

 

On July 1, 2000, Chevron Corporation, now ChevronTexacoCorporation (ChevronTexaco), and Phillips Petroleum Company, nowConocoPhillips, combined their worldwide petrochemicals businesses, excludingChevronTexaco’s Oronite additives business, into a new company, ChevronPhillips Chemical Company LLC.  Thecompany, through its subsidiaries and equity affiliates, manufactures andmarkets a wide range of petrochemicals on a worldwide basis, with manufacturingfacilities in the United States, Puerto Rico, Singapore, China, South Korea,Saudi Arabia, Qatar, Mexico and Belgium. Chevron Phillips Chemical Company LLC is a limited liability companyformed under Delaware law, owned 50% each by ChevronTexaco and ConocoPhillips(collectively, the “members”).

 

The company is governed by a Board of Directors, currently comprised ofsix representatives, under the terms of a limited liability companyagreement.  ChevronTexaco andConocoPhillips each have two voting representatives, and the chief executiveofficer and the chief financial officer of the company are non-votingrepresentatives.  Certain majordecisions and actions require the unanimous approval of the votingrepresentatives.

 

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Note 2.          Summaryof Significant Accounting Policies

# ** **

*Basis of Financial Statements –* Theaccompanying consolidated financial statements include the accounts of ChevronPhillips Chemical Company LLC and its wholly-owned subsidiaries (collectively,“CPChem”).  All significant intercompanyinvestments, accounts and transactions have been eliminated inconsolidation.  Investments inaffiliates in which CPChem has 20% to 50% of the voting control are accountedfor using the equity method.  Othersecurities and investments, if any, are carried at the lower of cost ormarket.  Certain amounts for priorperiods have been reclassified in order to conform to the current reportingpresentation.

 

*Estimates, Risks and Uncertainties –* Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect amounts reported in the financial statements andaccompanying notes.  Actual results maydiffer from these estimates and assumptions.

 

Accounts receivable is shown net of a $7 million allowance forestimated non-recoverable amounts at both December 31, 2003 andDecember 31, 2002.

 

There are varying degrees of risk and uncertainty in each of thecountries in which CPChem operates. CPChem insures its business and assets against material insurable riskin a manner it deems appropriate. Because of the diversity of its operations, CPChem believes any lossincurred from an uninsured event in any one business or country, other than aterrorist act directed at CPChem operations, would not have a material adverseeffect on operations as a whole.

 

*Revenue Recognition –*CPChem follows theguidance provided by the Securities and Exchange Commission (SEC) StaffAccounting Bulletin No. 104, “Revenue Recognition.”  Sales of petrochemicals, natural gas liquids and other items,including by-products, are recorded when title passes to the customer.  Revenues from royalties for licensedtechnology are recorded as the associated services are rendered when royaltiesare paid in advance, and as volumes are produced by the licensee when royaltiesare paid based on a licensee’s production. Sales are presented net of discounts and allowances.  Freight costs billed to customers arerecorded as a component of revenue.

 

*Cash and Cash Equivalents –* Cash equivalentsare highly liquid, short-term investments readily convertible to known amountsof cash that have original maturities of three months or less from date ofpurchase.

 

*Inventories –* For U.S. operations, cost ofproduct inventories is primarily determined using the dollar-value, last-in,first-out (LIFO) method.  Theinventories are valued at the lower of cost or market, aggregated at thesegment level.  Lower-of-cost-or-marketwrite-downs for LIFO-valued inventories are generally consideredtemporary.  For operations outside theUnited States, product inventories are valued using a combination of thefirst-in, first-out (FIFO) and weighted average methods.  Materials and supplies inventories arecarried at average cost.

 

*Property, Plant and Equipment –*****Property,plant and equipment (PP&E) is stated at cost.  PP&E is comprised of assets, defined as property units, withan economic life beyond one year. Initial contributions of PP&E from ChevronTexaco and ConocoPhillipswere recorded at their book values. Asset categories are used to compute depreciation and amortization usingthe straight-line method over the associated estimated future useful lives.

 

41

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*Impairment of Assets –*****Long-lived assets used inoperations are assessed for possible impairment when events or changes incircumstances indicate a potential significant deterioration in future cashflows projected to be generated by an asset group.  Individual assets are grouped for impairment purposes at thelowest level for which there are identifiable cash flows that are largelyindependent of the cash flows of other groups of assets – generally at aproduct line level.

 

If, upon review, the sum of the projected undiscounted pre-tax cashflows is less than the carrying value of the asset group, the carrying value iswritten down to estimated fair value. The fair values of impaired assets are determined based on quoted marketprices in active markets, if available, or on the present value of projectedfuture cash flows using discount rates commensurate with the risks involved inthe asset group.

 

The expected future cash flows used for impairment reviews and relatedfair value calculations are based on projected production volumes, salesvolumes, prices and costs, considering available information at the date ofreview.

 

*Maintenance and Repairs –*****Maintenance and repaircosts, including turnaround costs of major producing units, that are notconsidered to be significant improvements are expensed as incurred.

 

*Research and Development Costs –*****Researchand development costs are expensed as incurred.

 

*Property Dispositions –*****Assets that are no longer inservice and for which there is no contemplated future use by CPChem are retired.  When assets are retired or sold, the assetcost and related accumulated depreciation are eliminated, with any gain or lossreflected in income.

 

*Environmental Costs –* Environmentalexpenditures are expensed or capitalized as appropriate, depending on futureeconomic benefit.  Expenditures thatrelate to an existing condition caused by past operations and that do not havefuture economic benefit are expensed. Liabilities for expenditures are recorded on an undiscounted basis whenenvironmental assessments or claims are probable and the costs can bereasonably estimated.  Expenditures thatcreate future benefits or that contribute to future revenue generation arecapitalized.

 

*Capitalization of Interest**–*Interestcosts incurred to finance projects of at least $75 million and that are longerthan one year in duration, and interest costs associated with investments inequity affiliates that have their planned principal operations underconstruction, are capitalized until commercial production begins.  Capitalized interest is amortized over thelife of the associated asset. Unamortized capitalized interest totaled $44 million at bothDecember 31, 2003 and December 31, 2002.  Interest costs capitalized during 2003 totaled $3 million, whichconsisted of interest costs associated with CPChem’s investment in QatarChemical Company Ltd. (Q-Chem). Interest costs capitalized during 2002 totaled $7 million, including $5million associated with the investment in Q-Chem.  No interest costs were capitalized during 2001.

 

*Income Taxes –*****CPChem is treated as aflow-through entity for federal income tax and for most state income taxpurposes whereby each member is taxable on its respective share of income andloss.  However, CPChem is directlyliable for federal and state income taxes and franchise taxes on certainseparate legal entities and for any foreign taxes incurred.  CPChem follows the liability method ofaccounting for these income taxes.

 

*Accounting Pronouncements*– Effective January 1, 2003, CPChem adopted Statement of Financial Accounting Standards (SFAS) No.143, “Accounting for Asset Retirement Obligations,” which addresses theaccounting and reporting requirements for legal obligations associated with theretirement of long-lived assets.  Thisstandard requires that a liability for an

 

42

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assetretirement obligation, measured at fair value, be recognized in the period inwhich it is incurred if a reasonable estimate of fair value isdeterminable.  That initial fair valueis capitalized as part of the carrying amount of the long-lived asset and issubsequently depreciated.  The liabilityis adjusted each reporting period for accretion, with a charge to results ofoperations.  Implementation of thisstandard did not have a material impact on consolidated results of operations,financial position or liquidity.

 

Also effective January 1, 2003, CPChem adopted SFAS No. 146,“Accounting for Costs Associated With Exit or Disposal Activities,” whichrequires that a liability for costs associated with an exit or disposalactivity be recognized when the liability occurs, and that the liability bemeasured initially at fair value.  Theliability is adjusted each reporting period for accretion, with a charge toresults of operations.  Implementationof this standard did not have a material impact on consolidated results ofoperations, financial position or liquidity.

 

In November 2002, theFinancial Accounting Standards Board (FASB) issued InterpretationNo. 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (FINNo. 45).  For guarantees issued ormodified on or after January 1, 2003, FIN No. 45 requires a guarantorto recognize, at the inception of a new guarantee or at the modification of anexisting guarantee, a liability for the fair value of the obligation undertakenin issuing the guarantee.  FINNo. 45 also expands the disclosures required to be made by a guarantorabout its obligations under guarantees issued prior to January 1,2003.  Implementation of FIN No. 45 waseffective immediately upon its release. There were no issuances of new guarantees or modifications of existingguarantees by CPChem in 2003 that fell within the scope of FIN No. 45.  Implementation of FIN No. 45 had no impacton consolidated results of operations, financial position or liquidity.

 

In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity,” which establishes standards for how anissuer classifies and measures certain financial instruments thathave characteristics of both aliability and of equity.  Generally,it requires that an issuer classifysuch a financialinstrument as a liability because the financial instrument embodies an obligation of the issuer.  ForCPChem, the provisions of SFAS No. 150 are effective January 1, 2004. Because CPChemcurrently has no financial instruments outstanding that fall within the scope ofthis new standard, CPChem believes that implementation of this standardwill not have a material impact on consolidated results of operations,financial position or liquidity.

 

FASB issued Interpretation No. 46 (revised December 2003),“Consolidation of Variable Interest Entities,” (FIN No. 46(R)) which providesguidance as to when a company is required to include in its financialstatements the assets, liabilities and activities of a variable interest entity(a “VIE”).  A VIE is generally acorporation, partnership, trust, or any other legal structure used for businesspurposes that either does not have equity investors with voting rights or thathas equity investors that do not provide sufficient financial resources for theentity to support its activities.  FINNo. 46(R) requires a VIE to be consolidated by a company if that company issubject to a majority of the risk of loss from the activities of the VIE or isentitled to receive a majority of the residual returns of the VIE.  FIN No. 46(R) also requires disclosuresabout VIEs that are not required to be consolidated by a company, but in whichthe company has a significant variable interest.  The consolidation requirements of FIN No. 46(R) apply immediatelyto VIEs created after December 31, 2003, and for CPChem, which isconsidered to be a nonpublic entity as it relates to FIN No. 46(R), theconsolidation requirements will apply to pre-existing VIEs effectiveJanuary 1, 2005.  CPChem believesthat FIN No.46(R) will not requirethe consolidation of any existing VIE into CPChem’s consolidated financial statements.

 

43

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FASBissued SFAS No. 132 (revised 2003), “Employers’ Disclosures About Pension andOther Postretirement Benefits,” (SFAS No. 132(R)).  This pronouncement, which replaces the original SFAS No. 132,retains the disclosure requirements contained in SFAS No. 132 and requirescertain additional disclosures about pension and other postretirement benefitplans, including the disclosure of certain information in interim financialstatements.  The annual disclosurerequirements of SFAS No. 132(R) for CPChem are effective for its financialstatements issued as of December 31, 2003.  The interim period disclosure requirements for CPChem areeffective for all interim financial statements issued after December 31,2003.

 

InDecember 2003, the SEC released Staff Accounting Bulletin No. 104,“Revenue Recognition,” (SAB No. 104), which revises or rescinds portions ofpreviously issued interpretive guidance included in the SEC’s Topic 13 of thecodification of staff accounting bulletins. SAB No. 104 contains guidance consistent with other currentauthoritative accounting guidance and SEC rules and regulations.  CPChem adopted SAB No. 104 effective uponits release.  Implementation ofSAB No. 104 did not have any impact on consolidated results of operations,financial position or liquidity.

 

Note 3.          Transactionswith Affiliates

 

Significant transactions with affiliated parties were as follows:

 
|                                      |   | **Years  ended December 31,** |   |
|-------------------------------------------|--------|------------------------------------|--------|
| **Millions**                              |   | **2003**                           |   | **2002** |   | **2001** |   |
| Net sales (a)                             |   | $                                  | 858    |   | $ | 662 |   | $ | 799 |   |
| Other income                              |   | 28                                 |   | 32 |   | 22 |   |
| Cost of goods sold (b,c)                  |   | 1,622                              |   | 1,189 |   | 1,310 |   |
| Selling, general and administrative (c,d) |   | 26                                 |   | 27 |   | 64 |   |
| Interest income                           |   | 7                                  |   | 5 |   | 2 |   |
|                                           |        |                                    |        |  |  |  |  |  |  |  |

 

----

(a)          CPChem sells ethylene residue gas toConocoPhillips’ crude oil refining operations; specialty chemicals, alphaolefin products and aromatics and styrenics by-products to ChevronTexaco; andfeedstocks and various services to non-consolidated equity companies, all at pricesthat approximate market.

 

(b)         ConocoPhillips sells CPChem natural gasliquids feedstocks for olefins products and provides common facility servicessuch as steam generation, waste and water treatment, and warehousefacilities.  CPChem purchases feedstocksfrom ChevronTexaco for CPChem’s Aromax® and paraxylene units atPascagoula, Mississippi.  In addition,ChevronTexaco provides common facility and manufacturing services at CPChem’sPascagoula facility.

 

(c)          ConocoPhillips and ChevronTexaco provide variousservices to CPChem under services agreements, including engineeringconsultation, research and development, laboratory services, security services,procurement services and pipeline operating services.

 

(d)         Amounts include billings in 2003 and 2002 toQatar Chemical Company Ltd. (Q-Chem), an equity affiliate, credited to expense.

 

The K-Resin® styrene-butadiene copolymer (SBC) plant, whilestill owned by ConocoPhillips’, was idled in March 2000 due to afire.  Under the contribution agreement,upon formation of CPChem, ConocoPhillips agreed to indemnify CPChem for allphysical loss or damage to the facility. In addition, ConocoPhillips advanced CPChem $70 million in 2000.  Pursuant to the agreement, a certain portionof the advance was re-characterized as a member contribution each

 

44

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month until the plant met a pre-established production threshold.  Accordingly, $35 million of the advance wasrecorded as Member Contributions during the six months ended December 31,2000 and the remaining $35 million was recorded as Member Contributions during2001.  During 2002, ConocoPhillipscontributed $38 million as a result of K-Resin® SBC plant productionthreshold shortfalls.  In addition,ConocoPhillips agreed to make a member contribution of $22 million tocompensate for the failure to meet pre-established K-Resin® SBCearnings targets.  This contribution wasrecorded as a receivable from an affiliate at December 31, 2002, and wassubsequently received by CPChem in 2003.

 

CPChem borrowed $50 million from ChevronTexaco in December 2000and an additional $50 million in February 2001 under a $100 million creditagreement.  Both borrowings were repaidin March 2001 with a portion of the proceeds from the issuance of privateplacement notes, and the credit agreement with ChevronTexaco was terminated.

 

Note 4.          Business Interruption InsuranceSettlement

 

An agreement was reached in 2001 among ConocoPhillips and variousinsurers to settle the business interruption insurance claim associated withthe March 2000 fire at CPChem’s (formerly ConocoPhillips’) PasadenaPlastics Complex K-Resin® styrene-butadiene copolymer plant.  After adjusting for previously accruedclaims, in 2001, CPChem recognized $113 million in Other Income ($110 millionin Aromatics & Styrenics and $3 million in Specialty Products) inconnection with the settlement.  Inaddition, ConocoPhillips agreed in 2002 to reimburse CPChem an additional $5million related to the incident.  Thiswas recorded as Other Income in the fourth quarter of 2002 and was included inreceivables from affiliates at December 31, 2002. The reimbursement wasreceived by CPChem in 2003.

 

Note 5.          Inventories

 

Inventories were as follows:

 
|                          |   | **December 31,** |   |
|-------------------------------|--------|-----------------------|--------|
| **Millions**                  |   | **2003**              |   | **2002** |   |
| LIFO inventories              |   |                  |   |   |   |
| Olefins & Polyolefins     |   | $                     | 288    |   | $ | 332 |   |
| Aromatics & Styrenics     |   | 136                   |   | 150 |   |
| Specialty Products            |   | 49                    |   | 48 |   |
| Total LIFO inventories        |   | 473                   |   | 530 |   |
| Non-LIFO inventories          |   |                  |   |   |   |
| Olefins & Polyolefins     |   | 78                    |   | 52 |   |
| Aromatics & Styrenics     |   | 53                    |   | 37 |   |
| Specialty Products            |   | 44                    |   | 35 |   |
| Total non-LIFO inventories    |   | 175                   |   | 124 |   |
| Materials, supplies and other |   | 52                    |   | 48 |   |
| Total inventories             |   | $                     | 700    |   | $ | 702 |   |

 

The excess of replacement cost over book value of product inventoriesvalued under the LIFO method was $194 million at December 31, 2003 and$147 million at December 31, 2002. In 2003, CPChem recorded $13million of inventory valuation gains ($10 million in Olefins & Polyolefins and$3 million in Aromatics & Styrenics) related to reductions in certain LIFO-basedinventories.

 

45

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Note 6.          Investments in andAdvances to Affiliates

 

CPChem’s investments in its affiliates are accounted for using theequity method.  These affiliates arealso engaged in the manufacturing and marketing of petrochemicals.  The carrying amounts of these investmentswere as follows:

 
|                                                    |   |          |   | **December 31,** |   |
|---------------------------------------------------------|--------|---------------|--------|-----------------------|--------|
| **Millions**                                            |   | **Ownership** |   | **2003**              |   | **2002** |   |
| Qatar Chemical Company Ltd. (Q-Chem)                    |   | 49%           |   | $                     | 296    |   | $ | 206 |   |
| Saudi Chevron Phillips Company                          |   | 50%           |   | 194                   |   | 148 |   |
| Chevron Phillips Singapore Chemicals  (Private) Limited |   | 50%           |   | 48                    |   | 49 |   |
| Phillips Sumika Polypropylene Company                   |   |    60%*  |   | 53                    |   | 49 |   |
| K R Copolymer Co., Ltd.                                 |   | 60%           |   | 42                    |   | 45 |   |
| Shanghai Golden Phillips Petrochemical  Company Limited |   | 40%           |   | 20                    |   | 18 |   |
| Jubail Chevron Phillips Company                         |   | 50%           |   | 20                    |   | — |   |
| Total investments                                       |   |          |   | $                     | 673    |   | $ | 515 |   |

 

----

*  Profit/loss sharingpercentage.

 

Dividends received from equity investments totaled $13 million in 2003,$16 million in 2002 and $2 million in 2001. Phillips Sumika Polypropylene Company (Phillips Sumika) and K RCopolymer Co., Ltd. are not consolidated because CPChem does not have votingcontrol of these entities.

 

***Qatar ChemicalCompany Ltd. (Q-Chem)***

 

Qatar Chemical Company Ltd. (Q-Chem), a joint venture company, was formedin 1998 to develop a world-scale petrochemical complex in Qatar in the MiddleEast.  The complex, which is operatingand is in the final stages of performance testing, produces ethylene,polyethylene and 1-hexene.  Q-Chem fullyutilized the $750 million available under its 1999 senior bank financingagreement for the construction of the complex. CPChem is required to fund any remaining construction costs, initialworking capital requirements, and certain operating and debt service reservefund requirements through advances under a subordinated loan agreement withQ-Chem.

 

CPChem advanced Q-Chem $85 million in 2003 and $210 million in 2002under the subordinated loan agreement. No advances were made during 2001. Advances bear interest at market-based rates and are to be repaid fromcash available after the payment of debt obligations on Q-Chem’s $750 millionsenior bank debt and before the payment of any dividends to the co-venturers,subject to certain financial tests.  Theadvances are subordinate to Q-Chem’s senior bank debt.  Under the terms of the agreement, CPChemexpects to advance Q-Chem approximately $40 million in 2004.  The obligation to make advances under the subordinatedloan agreement will terminate upon completion of the facilities, as defined inthe bank financing agreements.

 

Under the terms of a bank financing completion guarantee, the bankshave the right to demand funds from each Q-Chem co-venturer, on a pro ratabasis, to cover the debt service requirements of Q-Chem that are due afterAugust 1, 2003 until project completion. Furthermore, if the project is not completed by August 31, 2004,the banks have the right to demand repayment of all outstanding principal andinterest from each co-venturer on a pro rata basis.  This date may be extended for up to one year due to events offorce majeure.  CPChem subscribed to $18million of additional shares of Q-Chem in 2003 to fund its 49% share of thedebt service requirements of 

 

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Q-Chem that were due in the second half of 2003.  CPChem expects to subscribe to approximately$19 million of additional shares in 2004 until project completion and testingare achieved, which is expected to occur by August 31, 2004.  After the project is completed, the bankfinancing is non-recourse with respect to the co-venturers, with the exceptionof the contingent obligations described below.

 

After the project is completed, CPChem has agreed to provide up to $75million of loans to Q-Chem if there is insufficient cash to pay the minimumdebt service amount on the bank financing. CPChem believes it is unlikely that funding under this support agreementwill be required.

 

CPChem also agreed to provide loans to Q-Chem for a period of up to 33months following commencement of commercial operation as defined in the bankfinancing agreements if there is insufficient cash to pay the target debtservice amount.  These loans are limitedto an amount not greater than lost operating margins resulting from salesvolumes being less than design capacity. CPChem believes that any funding required under this support agreementis unlikely to have a material adverse effect on CPChem’s consolidated resultsof operations, financial position or liquidity.

 

CPChem’s rights under the subordinated loanagreement and the other contingent loan agreements related to Q-Chem describedabove are subordinate to Q-Chem’s senior bank debt. Security interests in the notes related to such loans have been grantedto the banks to support the terms of subordination.

 

CPChem entered into an agency agreement with Q-Chem to act as an agentfor the sale of substantially all of Q-Chem’s production.  CPChem has also entered into an offtake andcredit risk agreement with Q-Chem, under which CPChem is required to purchase,at market prices, specified amounts of production if CPChem fails to sell thatproduct under the terms of the agency agreement.  CPChem has no exposure to price risk for volumes it may be obligatedto purchase under the terms of the offtake agreement.  The offtake and credit risk agreement expires upon the earlier ofthe repayment in full by Q-Chem of its outstanding bank financing, scheduled tomature in 2012, or any refinancing thereof. CPChem expects that it will be able to sell all the production under theterms of the agency agreement.

 

Should the Q-Chem 1-hexene unit fail to operate as designed, CPChem hasguaranteed to compensate Q-Chem for any economic loss of diverting surplusethylene not used to produce 1-hexene to the high-density polyethyleneunits.  Given the current performance ofthe 1-hexene unit, CPChem believes the risk of the 1-hexene unit failing tooperate as designed is remote.

 

Q-Chemis considered to be a VIE under the provisions of FIN No. 46(R).  CPChem does not have majority voting controlover Q-Chem, and therefore records its 49% share of Q-Chem’s operating resultsusing the equity method.  CPChem’smaximum exposure to loss per FIN No. 46(R) was $643 million at December 31,2003.  This amount represents the totalof CPChem’s carrying value of its investment in Q-Chem, advances and relatedinterest receivable from Q-Chem under the subordinated loan agreement andCPChem’s pro rata share of Q-Chem’s outstanding bank financing and associatedaccrued interest.  CPChem believes therisk of incurring any substantial portion of the stated maximum exposure toloss is remote.  Nonetheless, CPChem’smaximum exposure to loss is presented as required by FIN No. 46(R).

 

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Summarized financial information of Q-Chem, shown at 100%, follows:

 

*Qatar ChemicalCompany Ltd. (Q-Chem)*

 
|                              |   | **Years  ended December 31,** |       |
|-----------------------------------|--------|------------------------------------|------------|
| **Millions**                      |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenues                          |   | $                                  | 74         |   | $ | — |   | $ | — |   |
| Income (loss) before income taxes |   | (41                                | )          | (22 | ) | (10 | ) |
| Net income (loss)                 |   | (41                                | )          | (22 | ) | (10 | ) |
|                                   |        |                                    |            |  |  |  |  |  |  |  |

 
|                   |   | **December 31,** | ** ** |
|------------------------|--------|-----------------------|------------|
|                   |   | **2003**              |       | **2002** | ** ** | **2001** | ** ** |
| Current assets         |   | $                     | 109        |   | $ | 20 |   | $ | 3 |   |
| Noncurrent assets      |   | 941                   |       | 940 |   | 810 |   |
| Current liabilities    |   | 82                    |       | 19 |   | 63 |   |
| Noncurrent liabilities |   | 996                   |       | 964 |   | 751 |   |
|                        |        |                       |            |  |  |  |  |  |  |  |

 

***Saudi ChevronPhillips Company***

 

Saudi Chevron Phillips Company (Saudi Chevron Phillips) is a jointventure company that owns facilities in Al Jubail, Saudi Arabia which producebenzene and cyclohexane.  Saudi ChevronPhillips was financed with loans from commercial banks and a Saudi Arabiangovernmental agency.  The loans arepayable in semiannual installments and mature in 2008.  Chevron Phillips Chemical Company LLC andthe Saudi Arabian co-venturer each have a several obligation of up to $25million to fund debt service requirements in the event Saudi Chevron Phillipshas insufficient cash to pay debt service requirements.  In addition, the subsidiary of ChevronPhillips Chemical Company LLC which directly owns the 50% interest in Saudi ChevronPhillips, along with the other co-venturer, have each also guaranteed theirrespective 50% share of certain loans payable by Saudi Chevron Phillips to aSaudi Arabian governmental agency. Chevron Phillips Chemical Company LLC is not a party to this guarantee.  These loans totaled $96 million (gross) atDecember 31, 2003.

 

Under the terms of a sales and marketing agreement that runs through2026, CPChem is obligated to purchase, at market prices, 100% of productionfrom the plant less any quantities sold by Saudi Chevron Phillips in the MiddleEast.  CPChem has no exposure to pricerisk for volumes it may be obligated to purchase under the terms of theagreement.  CPChem believes it isunlikely that any funding under the debt service obligation will be requiredand also believes that it will continue to be able to sell all the productionrequired under the terms of the sales and marketing agreement.

 

CPChem believes it is unlikely that any funding under the debt serviceobligation will be required and also believes that it will continue to be ableto sell all the production required under the terms of the sales and marketingagreement.

 

***Other equityinvestments***

 

Summarized aggregate financial information for all other equityinvestments, excluding Saudi Chevron Phillips, shown at 100%, follows:

 

*Other investments*

 
|                              |   | **Years  ended December 31,** |       |
|-----------------------------------|--------|------------------------------------|------------|
| **Millions**                      |   | **2003**                           | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenues                          |   | $                                  | 657        |   | $ | 598 |   | $ | 599 |   |
| Income (loss) before income taxes |   | 13                                 |       | 26 |   | (156 | ) |
| Net income (loss)                 |   | 10                                 |       | 22 |   | (160 | ) |
|                                   |        |                                    |            |  |  |  |  |  |  |  |

 
|                   |   | **December 31,** | ** ** |
|------------------------|--------|-----------------------|------------|
|                   |   | **2003**              |       | **2002** | ** ** | **2001** | ** ** |
| Current assets         |   | $                     | 195        |   | $ | 185 |   | $ | 174 |   |
| Noncurrent assets      |   | 357                   |       | 336 |   | 343 |   |
| Current liabilities    |   | 104                   |       | 101 |   | 173 |   |
| Noncurrent liabilities |   | 90                    |       | 105 |   | 123 |   |
|                        |        |                       |            |  |  |  |  |  |  |  |

 

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The preceding information includes a $137 million impairment chargerecorded by Phillips Sumika in 2001. CPChem recorded a $46 million charge in 2001 as Equity in Net Loss ofAffiliates representing its share of the impairment charge, adjusted for thedifference between CPChem’s carrying value of its investment in Phillips Sumikaand CPChem’s equity in its net assets.

 

Note 7.          Property, Plant andEquipment

 

Property, plant and equipment was as follows:

 
|                                          |   | **December 31,** |   |
|-----------------------------------------------|--------|-----------------------|--------|
| **Millions**                                  |   | **2003**              |   | **2002** |   |
| Olefins & Polyolefins                     |   | $                     | 4,966  |   | $ | 4,820 |   |
| Aromatics & Styrenics                     |   | 2,048                 |   | 2,065 |   |
| Specialty Products                            |   | 568                   |   | 529 |   |
| Other                                         |   | 162                   |   | 193 |   |
| Gross property, plant and equipment, at  cost |   | 7,744                 |   | 7,607 |   |
| Accumulated depreciation                      |   | 3,880                 |   | 3,657 |   |
| Net property, plant and equipment             |   | $                     | 3,864  |   | $ | 3,950 |   |

 

Approximately $6.3 billion of gross property, plant and equipment atDecember 31, 2003 consisted of chemical plant assets depreciated onestimated useful lives of approximately 25 years.  Other non-plant items, such as furniture, fixtures, buildings andautomobiles, have estimated useful lives ranging from 5 to 45 years, with aweighted average of 28 years. Assets under construction totaled $167 million atDecember 31, 2003 and $189 million at December 31, 2002.

 

Asset impairment charges totaling $6 million were recorded in 2002,consisting primarily of a $5 million charge related to CPChem’s Colton,California polyethylene pipe facility, part of the Olefins & Polyolefinssegment.  The facility, written down toits estimated net realizable value, is classified as an asset held for sale andis included in Other Current Assets.

 

CPChem recorded before-tax asset impairment charges totaling $44million in 2001.  Of these charges, $42million was related to the Puerto Rico facility, part of the Aromatics &Styrenics segment, as a result of the outlook for future margin conditions atthat time.  The present value ofprojected future cash flows was used to determine fair value.  The remaining $2 million of impairmentcharges was related to a polyethylene pipe manufacturing facility that is partof the Olefins & Polyolefins segment.

 

In addition to the impairment charges previously described, CPChemrecorded $104 million of charges during 2001 as depreciation expense, includedas a component of Cost of Goods Sold, for permanent shutdowns in 2001 of anethylene unit at Sweeny, cyclohexane and benzene units in Puerto Rico, and apolyethylene developmental reactor at the Pasadena Plastics Complex, as well asaccelerated depreciation associated with the planned permanent shutdown inFebruary 2002 of two polyethylene particle loop reactors at theOrange facility.

 

Note 8.          EnvironmentalLiabilities

 

CPChem is subject to federal, state and local environmental laws andregulations that may result in obligations to mitigate or remove the effects onthe environment of the placement, storage, disposal or release of certainchemical, mineral and petroleum substances at its sites.  Accrued environmental liabilities (notdiscounted) totaled $6 million at December 31, 2003 and $7 million atDecember 31, 2002.  There were noaccrued environmental costs associated with discontinued or sold operations.

 

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Note 9.          Debt

 

Long-term debt, net of applicable debt discounts, as shown on theconsolidated balance sheet was as follows:

 

|                      |   | **December 31,** |   |
|---------------------------|--------|-----------------------|--------|
| **Millions**              |   | **2003**              |   | **2002** |   |
| 7% notes due 2011         |   | $                     | 500    |   | $ | 500 |   |
| 5 3/8% notes due 2007     |   | 500                   |   | 500 |   |
| Commercial paper          |   | 184                   |   | 185 |   |
| Other                     |   | 10                    |   | 10 |   |
| Subtotal                  |   | 1,194                 |   | 1,195 |   |
| Unamortized debt discount |   | (5                    | )      | (5 | ) |
| Total long-term debt      |   | $                     | 1,189  |   | $ | 1,190 |   |

 

In addition to the information presented, CPChem had borrowingsoutstanding totaling $300 million at December 31, 2003 and $290 million atDecember 31, 2002 under a trade receivables securitization agreement.  These borrowings are classified asshort-term and were secured by $459 million and $393 million of tradereceivables, respectively.  Theagreement allows CPChem to borrow up to $300 million for which CPChem grants asecurity interest in certain of its trade receivables as collateral for anyamounts outstanding.  Borrowings underthe agreement are reduced or security interests in new trade receivables aregranted as the receivables are collected by CPChem.  The trade receivables securitization agreement expires on May 21,2004.  CPChem intends to request an extension of the expiration date ofthe current agreement to May 2005.  Theinterest rate of borrowings outstanding under the agreement was 1.38% atDecember 31, 2003 and 1.40% at December 31, 2002, and averaged 1.21%in 2003, 1.78% in 2002 and 3.28% in 2001. The trade receivables securitization program began in May 2001.  Proceeds from the initial borrowing wereused to reduce outstanding commercial paper obligations.

 

In June 2002, Chevron Phillips Chemical Company LLC and itswholly-owned subsidiary, Chevron Phillips Chemical Company LP, jointly andseverally issued $500 million of senior unsecured 5 3/8% notes (the “5 3/8%notes”) in a private placement.  The 53/8% notes mature in 2007 and interest is payable semiannually.  In March 2001, Chevron PhillipsChemical Company LLC and Chevron Phillips Chemical Company LP jointly andseverally issued $500 million of senior unsecured 7% notes (the “7% notes”) ina private placement.  These notes maturein 2011 and interest is also payable semiannually.  Both the 5 3/8% notes and the 7% notes contain certain covenants,such as limitations on liens, sale/leaseback transactions, sales of assets andbusiness combinations, which CPChem does not consider to be restrictive to normaloperations.  Proceeds from both debtissuances were used to retire a portion of outstanding commercial paperobligations and for general corporate purposes.  In addition, a portion of the proceeds from the 7% notes was usedto repay notes payable to ChevronTexaco.

 

In accordance with obligations under the registration rights agreemententered into in connection with the issuances of the 5 3/8% notes and the7% notes, Chevron Phillips Chemical Company LLC and Chevron Phillips ChemicalCompany LP filed joint registration statements on Form S-4 with the SEC toregister exchange notes that had terms substantially identical to the 5 3/8%notes and the 7% notes, except that the exchange notes are freelytradeable.  All of the 5 3/8% notes weretendered for registered exchange notes and substantially all of the 7% noteswere also tendered.

 

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Notes issued under CPChem’s commercial paper program are in the tier-2commercial paper market with maturities of 90 days or less.  These commercial paper borrowings areclassified as Long-Term Debt since CPChem’s intent is to refinance or replacethe obligations on a long-term basis and CPChem has the option to extend thedate of repayment by one year of any borrowings outstanding on August 26,2004 under the 364-day credit agreement described below, which serves as backupcommitted credit.  The weighted averageinterest rate of commercial paper borrowings outstanding was 1.07% atDecember 31, 2003 and 1.45% at December 31, 2002, and averaged 1.24%in 2003, 2.20% in 2002 and 5.01% in 2001.

 

CPChem has a $400 million 364-day credit facility and a $400 millionthree-year credit facility with various banks that are used to provide backupcommitted credit for the commercial paper program.  The facilities expire on August 26, 2004 and August 28,2005, respectively.  The 364-day creditfacility provides that CPChem may, at its option, extend the date of repaymentby one year of any borrowings outstanding on August 26, 2004 under theagreement.  The agreements containcovenants and events of default typical of bank revolving credit facilities,such as restrictions on liens.  Theagreements also contain a provision requiring the maintenance of ownership ofCPChem by ChevronTexaco and ConocoPhillips of at least 50% in theaggregate.  Provisions under theseagreements are not considered restrictive to normal operations.  The rates of interest of both existingagreements vary, depending on market rates and CPChem’s long-term debt rating.  There were no borrowings outstanding underany of the current or prior credit agreements at December 31, 2003 or2002, nor were there any borrowings under any of the credit facilities during2003 or 2002.  CPChem borrowed funds forone day on September 12, 2001 under a $900 million credit agreement thatexisted at the time.  CPChem intends toreplace the current 364-day credit agreement upon its expiration with a newcredit facility and to replace the three-year credit facility with a newmulti-year facility.

 

CPChem borrowed $50 million from ChevronTexaco in December 2000and an additional $50 million in February 2001 under a $100 million creditagreement.  Both borrowings were repaidin March 2001 with a portion of the proceeds from the issuance of the 7%notes, and the credit agreement with ChevronTexaco was terminated.

 

CPChem is not aware of any conditions that exist as of the date of thisreport that would cause any of its debt obligations to be in or at risk ofdefault.  In addition, CPChem does not haveany debt obligations whose maturities would be accelerated as the result of acredit rating downgrade.

 

Note 10.    Members’ Preferred Interests

 

On July 1, 2002, CPChem sold $250 million of Members’ PreferredInterests, purchased 50% each by ChevronTexaco and ConocoPhillips.  Proceeds were used to retire a portion ofoutstanding commercial paper obligations. Preferred distributions are cumulative at 9% per annum and are payablequarterly from cash earnings, as defined in CPChem’s Second Amended and RestatedLimited Liability Company Agreement. The securities have no stated maturity date and are redeemablequarterly, in increments of $25 million, if CPChem’s ratio of debt to totalcapitalization reaches a stated level. The Members’ Preferred Interests are also redeemable at the sole optionof CPChem.  There were no redemptions in2003 or 2002, and no preferred distributions were paid throughDecember 31, 2003.  Accrued preferreddistributions payable totaled $34 million at December 31, 2003 (includedin Other Current Liabilities) and $11 million at December 31, 2002(included in Other Liabilities and Deferred Credits).

 

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Note 11.    Guarantees, Commitments andIndemnifications

 

*Guarantees*

 

CPChem’s headquarters building is leased under a synthetic leaseagreement entered into in 2002.  Asynthetic lease is a lease that qualifies as an operating lease for financialaccounting purposes and as a capital lease for tax accounting purposes.  The lease contains a fixed price purchaseoption and a residual guarantee.  Thepurchase option price was considered to be the fair market value of thebuilding at the inception of the lease. If CPChem does not exercise the purchase option upon the expiration ofthe lease in 2007, CPChem has an obligation to pay the lessor the shortfall, ifany, in the proceeds realized from the sale of the building to a third partyrelative to the purchase option price, not to exceed $27 million.  CPChem is entitled to receive any proceedsfrom the sale of the building that are in excess of the purchase optionprice.  While it is not possible topredict with certainty the amount, if any, that CPChem would be required to payor be entitled to receive should the building be sold to a third party upon theexpiration of the lease, CPChem believes that the amount paid or received wouldnot be material to consolidated results of operations, financial position orliquidity.

 

See Note 6 for a discussion of certain guarantees related to Q-Chem andSaudi Chevron Phillips.

 

*Commitments*

 

See Note 14 for a discussion of commitments under non-cancelableoperating leases.

 

*Indemnifications*

 

As part of CPChem’s ongoing business operations and consistent withgenerally accepted and recognized industry practice, CPChem enters intonumerous agreements with other parties which apportion future risks between theparties to the transaction or relationship governed by the agreements.  One method of apportioning risk is theinclusion of provisions requiring one party to indemnify the other partyagainst losses that might be incurred in the future.  Many of CPChem’s agreements, including technology licenseagreements, contain indemnities that require CPChem to perform certain acts, suchas defending certain licensees against patent infringement claims of others, asa result of the occurrence of a triggering event or condition.

 

The nature of these indemnity obligations are diverse and numerous andeach has different terms, business purposes, and triggering events or conditions.  Consistent with customary business practice,any particular indemnity obligation incurred is the result of a negotiatedtransaction or contractual relationship for which CPChem has accepted a certainlevel of risk in return for a financial or other type of benefit.  In addition, the indemnities in eachagreement vary widely in their definitions of both the triggering event and theresulting obligation, which is contingent upon that triggering event.

 

With regard to indemnifications, CPChem’s risk management philosophy isto limit risk in any transaction or relationship to the maximum extentreasonable in relation to commercial and other considerations.  Before accepting any indemnity obligation,consideration is given to, among other things, the remoteness of thepossibility that the triggering event will occur, the potential costs toperform under any resulting indemnity obligation, possible actions to reducethe likelihood of a triggering event or to reduce the costs of performing underthe indemnity obligation, whether CPChem is indemnified by an unrelated thirdparty, insurance coverage that may be available to offset the cost of theindemnity obligation, and the benefits from the transaction or relationship.

 

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Because many of CPChem’s indemnity obligations are not limited induration or potential monetary exposure, CPChem cannot reasonably calculate themaximum potential amount of future payments that could possibly be paid underthe indemnity obligations stemming from all of CPChem’s existingagreements.  In the case of all knowncontingencies, however, CPChem records an undiscounted liability when the lossis probable and the amount can be reasonably estimated.

 

CPChem is not aware of the occurrence of any triggering event orcondition that would have a material adverse impact on consolidated results ofoperations, financial position or liquidity as a result of an indemnityobligation arising as a result of such triggering event or condition.

 

Note 12.    Contingencies

 

In the case of all known contingencies, CPChem records an undiscountedliability when the loss is probable and the amount can be reasonablyestimated.  These liabilities are notreduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probableinsurance or other third-party recoveries. Based on currently available information, CPChem believes it is remotethat future costs related to known contingent liabilities will exceed currentaccruals by an amount that would have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

As facts concerning contingencies become known, CPChem reassesses itsposition with respect to accrued liabilities and other potentialexposures.  Estimates that areparticularly sensitive to future change include legal matters and contingentliabilities for environmental remediation. Estimated future environmental remediation costs are subject to changedue to such factors as the unknown magnitude of cleanup costs, prospectivechanges in laws and regulations, the unknown timing and extent of remedialactions that may be required and the determination of CPChem’s liability inproportion to other responsible parties. Estimated future costs related to legal matters are subject to change asevents occur and as additional information becomes available duringadministrative and litigation processes.

 

CPChem is a party to a number of legal proceedings that arose in theordinary course of business for which, in many instances, no provision has beenmade in the financial statements.  Whilethe final outcome of these proceedings cannot be predicted with certainty,CPChem believes that none of these proceedings, when resolved, will have amaterial adverse effect on consolidated results of operations, financialposition or liquidity.

 

*Electricity Deregulation*

 

Legislation for electricity deregulation for the ERCOT (ElectricityReliability Council of Texas) area of Texas was enacted in 1999, which providedretail electricity customers a choice in selecting electricity providerseffective January 1, 2002.  Thislegislation also allows the utilities to request, from the Public UtilityCouncil of Texas (the “PUCT”), reimbursement for the cost of certain strandedassets, environmental expenditures and other costs.  Certain utilities are scheduled to file claims in 2004 forreimbursement of such stranded costs. If some or all of the utilities’ claims for reimbursement are approvedby the PUCT, CPChem will be one of the thousands of ratepayers in therespective utilities’ service areas who would receive a monthly charge added toits electricity costs over an extended period of time to pay for suchreimbursement.  Depending upon theamount of the claims that are approved by the PUCT, the cumulative amount ofcharges added to the electricity bills of certain of CPChem’s facilities overthat period of time could be substantial. However, it is currently anticipated that the amount of additionalmonthly costs that are ultimately charged to CPChem will not have a materialadverse effect on consolidated results of operations, financial position orliquidity of CPChem.

 

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Note 13.    Credit Risk

 

Financial instruments that potentially subject CPChem to concentrationsof credit risk consist primarily of cash equivalents and tradereceivables.  Cash equivalents arecomprised of bank accounts and short-term investments with several financialinstitutions that have high credit ratings. CPChem’s policy for short-term investments both diversifies and limitsits exposure to credit risk.  Tradereceivables are dispersed among a broad customer base, both domestic andforeign, which results in limited concentrations of credit risk.  CPChem also maintains and follows creditpolicies and procedures that minimize credit risk and exposures.  Letters of credit are utilized when customerfinancial strength is considered insufficient.

 

Note 14.    Operating Leases

 

CPChem leases tank and hopper rail cars, office buildings and otherfacilities and equipment.  Totaloperating lease rental charges were $44 million in 2003, $48 million in 2002and $62 million in 2001.  Aggregatefuture minimum lease payments under non-cancelable leases at December 31,2003 totaled $27 million, $25 million, $21 million, $50 million and $16 millionin the years 2004 through 2008, respectively, and $81 million thereafter.  Included in aggregate minimum lease paymentsin 2007 is CPChem’s maximum exposure of $27 million under the contingentobligation associated with the lease agreement for CPChem’s headquartersbuilding.

 

Note 15.    Benefit Plans

 

The majority of CPChem employees are former employees of ChevronTexacoor ConocoPhillips.  Certain CPChembenefit plans provide that employees who were former employees of ChevronTexacoor ConocoPhillips receive enhanced benefits, including credit for service whileemployees of ChevronTexaco or ConocoPhillips.

 

*Pension and Other Postretirement Health Care*

 

CPChem’s retirement plan is a defined benefit plan that covers mostU.S.-based employees.  Eligibleemployees automatically participate in the plan and begin accruing benefitsfrom January 1, 2001 or their first day of employment if employed afterthat date.  Eligible employees becomefully vested in their retirement benefits after five years of service withCPChem, including prior service with ChevronTexaco or ConocoPhillips or theiraffiliates.  Retirement benefits arebased on two types of credits: a career average pay benefit and a variableannuity account benefit.  Both benefitsare based on an employee’s compensation over the years and the number of yearsthat an employee is qualified to receive benefit credits.  Pension costs are accrued and charged toexpense on a current basis.

 

CPChem also offers health care benefits to eligible employees, mostlyU.S.-based, upon their retirement.  Aretiree flexible spending account is established by CPChem for eligibleretirees and is established by CPChem at the time of retirement based on yearsof service times a fixed dollar amount and marital status.  Retirees may use funds in their account topurchase medical and/or dental coverage from CPChem or from private health careplans, or to pay eligible out-of-pocket health care expenses.  Retirees’ flexible spending accounts earninterest upon inception at market-based rates. Any changes in future health care cost rates for retirees would notimpact future CPChem earnings as health care benefits for retirees are solelybased on years of service and marital status.

 

A January 1 measurement date is used in the determination ofpension and other postretirement net periodic benefit costs.  A December 31 measurement date is usedin the determination of pension and other postretirement benefit obligationsand plan assets.

 

Included in the pension plan tables presented is an unfundedsupplemental retirement plan covering key executives.  The purpose of the plan is to provide compensating benefits tothose

 

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employees affected by federally-mandated limits on eligiblecompensation levels contained in CPChem’s normal retirement plan.  The benefit obligation associated with thisplan was $17 million at December 31, 2003 and $5 million atDecember 31, 2002.  Also includedare separate pension plans for employees of the Puerto Rico and Belgiumfacilities, and employees of certain bargaining units within the PerformancePipe division of CPChem.

 

Net periodic benefit costs for pension and other postretirementbenefits included the following:

 
|                                            |   | **Pension  Benefits** |   | **Other  Benefits** |   |
|-------------------------------------------------|--------|-----------------------|--------|---------------------|--------|
| **Millions**                                    |   | **2003**              |   | **2002**            |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Service cost benefits earned during the  year   |   | $                     | 21     |                | $      | 18 |   | $ | 16 |   | $ | 3 |   | $ | 2 |   | $ | 2 |   |
| Interest cost on projected benefit  obligations |   | 17                    |   | 16                  |   | 14 |   | 5 |   | 4 |   | 3 |   |
| Expected return on plan assets                  |   | (9                    | )      | (4                  | )      | (4 | ) | — |   | — |   | — |   |
| Amortization of prior service costs             |   | 12                    |   | 12                  |   | 12 |   | 3 |   | 3 |   | 3 |   |
| Net actuarial gain                              |   | 1                     |   | (3                  | )      | (1 | ) | 1 |   | — |   | — |   |
| Plan amendment                                  |   | —                |   | 6                   |   | — |   | — |   | — |   | — |   |
| Net periodic benefit cost                       |   | $                     | 42     |                | $      | 45 |   | $ | 37 |   | $ | 12 |   | $ | 9 |   | $ | 8 |   |

 

The pension and other postretirement benefit plans’ funded status andrelated amounts follow:

 
|                                            |   | **December 31,  2003** |   | **December 31,  2002** |   |
|-------------------------------------------------|--------|-----------------------------|--------|-----------------------------|--------|
| **Millions**                                    |   | **Pension  Benefits**       |   | **Other  Benefits**         |   | **Pension  Benefits** |   | **Other  Benefits** |   |
| Change in Benefit Obligation                    |   |                        |   |                        |   |   |   |   |   |
| Benefit obligation at beginning of year         |   | $                           | 271    |                        | $      | 62 |   | $ | 219 |   | $ | 51 |   |
| Service cost                                    |   | 21                          |   | 3                           |   | 18 |   | 2 |   |
| Interest cost                                   |   | 17                          |   | 5                           |   | 16 |   | 4 |   |
| Actuarial loss                                  |   | 17                          |   | 6                           |   | 25 |   | 6 |   |
| Foreign currency exchange loss                  |   | 2                           |   | —                      |   | 1 |   | — |   |
| Benefits paid                                   |   | (7                          | )      | (1                          | )      | (12 | ) | (1 | ) |
| Curtailment loss                                |   | —                      |   | —                      |   | (1 | ) | — |   |
| Plan amendment                                  |   | —                      |   | —                      |   | 5 |   | — |   |
| Benefit obligation at end of year               |   | 321                         |   | 75                          |   | 271 |   | 62 |   |
| Change in Plan Assets                           |   |                        |   |                        |   |   |   |   |   |
| Fair value of plan assets at beginning of  year |   | 101                         |   | —                      |   | 64 |   | — |   |
| Actual return on plan assets                    |   | 20                          |   | —                      |   | (5 | ) | — |   |
| Employer contributions                          |   | 34                          |   | 13                          |   | 52 |   | 1 |   |
| Foreign currency exchange gain                  |   | 3                           |   | —                      |   | 2 |   | — |   |
| Benefits paid                                   |   | (7                          | )      | (1                          | )      | (12 | ) | (1 | ) |
| Fair value of plan assets at end of year        |   | 151                         |   | 12                          |   | 101 |   | — |   |
| Funded Status of Plan                           |   |                        |   |                        |   |   |   |   |   |
| Excess obligation                               |   | (170                        | )      | (63                         | )      | (170 | ) | (62 | ) |
| Unrecognized net actuarial loss                 |   | 42                          |   | 13                          |   | 35 |   | 8 |   |
| Unrecognized transition obligation              |   | 1                           |   | —                      |   | 1 |   | — |   |
| Unrecognized prior service cost                 |   | 117                         |   | 34                          |   | 129 |   | 37 |   |
| Total recognized                                |   | $                           | (10    | )                           | $      | (16 | ) | $ | (5 | ) | $ | (17 | ) |
|                                            |   |                        |   |                        |   |   |   |   |   |
| Components of Total Recognized                  |   |                        |   |                        |   |   |   |   |   |
| Intangible asset                                |   | $                           | 24     |                        | $      | — |   | $ | 35 |   | $ | — |   |
| Accrued pension liability                       |   | (34                         | )      | (16                         | )      | (40 | ) | (17 | ) |
| Total recognized                                |   | $                           | (10    | )                           | $      | (16 | ) | $ | (5 | ) | $ | (17 | ) |

 

55

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CPChem expects to fund approximately $39 million to its pension plansand $10 million to its other postretirement benefits plans in 2004.

 

The accumulated benefit obligation for all pension plans was $180million at December 31, 2003 and $135 million at December 31,2002.  Certain information for pensionplans with accumulated benefit obligations in excess of plan assets follows:

 
|                           |   | **December 31,** |   |
|--------------------------------|--------|-----------------------|--------|
| **Millions**                   |   | **2003**              |   | **2002** |   |
| Projected benefit obligation   |   | $                     | 300    |   | $ | 253 |   |
| Accumulated benefit obligation |   | 165                   |   | 124 |   |
| Fair value of plan assets      |   | 133                   |   | 87 |   |
|                                |        |                       |        |  |  |  |  |

 

CPChem’s investment strategy with respect topension plan assets is to maintain a diversified portfolio of domestic andinternational equities, fixed income securities, real estate-backedsecurities and cashequivalents.  Target asset allocations are chosen based on an analysis ofthe historical returnsand volatilities ofvarious asset classes.  The plan investments are rebalanced periodicallyto maintain the target asset allocation.  Rates of return for theinvestment funds comprising each asset class are monitored quarterly againstbenchmarks and peer fund results.

 

Asset allocations for CPChem’s pension plans, along with targetallocations for 2004, follow:

 
|         |   | **Target  Allocation** |       | **Plan  Assets  at December 31,** |       |
|--------------|--------|------------------------|------------|----------------------------------------|------------|
| **Category** |   | **2004**               | ** ** | **2003**                               | ** ** | **2002** | ** ** |
| Equity       |   | 50                     | %          | 45                                     | %          | 32 | % |
| Debt         |   | 40                     | %          | 36                                     | %          | 36 | % |
| Real estate  |   | 5                      | %          | 8                                      | %          | 5 | % |
| Other        |   | 5                      | %          | 11                                     | %          | 27 | % |
| Total        |   | 100                    | %          | 100                                    | %          | 100 | % |

 

Weighted average rate assumptions used in determining estimated benefitobligations were as follows:

 
|                                    |   | **December 31,  2003** |   | **December 31,  2002** |       |
|-----------------------------------------|--------|-----------------------------|--------|-----------------------------|------------|
|                                    |   | **Pension  Benefits**       |   | **Other  Benefits**         | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|                                    |   |                        |   |                        |       |   |   |   |   |
| Discount rate                           |   | 6.0                         | %      | 6.0                         | %          | 6.5 | % | 6.5 | % |
| Expected return on plan assets          |   | 8.0                         |   | —                      |       | 8.0 |   | — |   |
| Rate of increase in compensation levels |   | 4.0                         |   | —                      |       | 4.0 |   | — |   |

 

Weighted average rate assumptions used in determining periodic benefitcosts for pension and other postretirement benefits follow:

 
|                                    |   | **2003**              |   | **2002**            |   | **2001**              |   |
|-----------------------------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|--------|
|                                    |   | **Pension  Benefits** |   | **Other  Benefits** |   | **Pension  Benefits** |   | **Other  Benefits** |   | **Pension  Benefits** |   | **Other  Benefits** |   |
| Discount rate                           |   | 6.5                   | %      | 6.5                 | %      | 7.3                   | %      | 7.3 | % | 7.5 | % | 7.5 | % |
| Expected return on plan assets          |   | 8.0                   |   | —              |   | 8.0                   |   | — |   | 10.0 |   | — |   |
| Rate of increase in compensation levels |   | 4.0                   |   | —              |   | 4.0                   |   | — |   | 4.0 |   | — |   |

 

56

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The long-term rates of return on pension assets were developed through,among other things, analysis of historical market returns for the plans’investment classes and current market conditions.

 

The determination of CPChem’s projected benefit obligations for itspension plans affects the amounts of related expense recorded in the currentperiod and also impacts the level and timing of contributions into the plans.  Due to the specialized nature of thesecalculations, CPChem utilizes outside actuarial firms to assist in thecalculation of these obligations.  Anactuarial determination of projected benefit obligations and company contributionrequirements involves significant estimates regarding future unknown events,which include estimated future rates of return on pension plan assets, discountrates applied to pension plan obligations, estimated employee retirement datesand salary levels at retirement, and mortality rates.  Estimates of these future unknown events are judgmentallydetermined based on factors such as, among other things, historical returns onpension plan assets and outside actuarial advice.  However, a 1% decrease in the estimated future returns on pensionplan assets or a 1% decrease in the discount rates applied to pension plansobligations would not have a material adverse effect on consolidated results ofoperations, financial position or liquidity.

 

*Contribution Plans*

 

Defined contribution plans are available for most employees, wherebyCPChem matches a percentage of the employee’s contribution.  CPChem’s contributions to the plans areexpensed and funded on a current basis, and totaled $13 million in each of theyears 2003, 2002 and 2001.

 

*Stock-Based Compensation*

 

CPChem currently does not utilize any stock-based employee compensationplans, as defined in SFAS No. 123, “Accounting for Stock-Based Compensation.”

 

*Termination Benefits*

 

In 2001, termination benefit costs totaling $7 million were recorded toSelling, General and Administrative (SG&A) expense and costs totaling $1million were recorded to Cost of Goods Sold. Termination benefit costs totaling $12 million in 2003 were recorded toSG&A.  The announced workforcereductions affected 242 employees at various locations in 2001 and 196employees at various locations in 2003. Termination benefit costs payable follows:

 

|                   |   | **Millions** |   |
|------------------------|--------|--------------|--------|
| December 31, 2000 |   | $            | — |   |
| Additions              |   | 8            |   |
| Payments               |   | (2           | )      |
| December 31, 2001 |   | 6            |   |
| Additions              |   | —       |   |
| Payments               |   | (6           | )      |
| December 31, 2002 |   | —       |   |
| Additions              |   | 12           |   |
| Payments               |   | (4           | )      |
| December 31, 2003 |   | $            | 8      |   |

 

57

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Note 16.    Taxes

 

CPChem is treated as a flow-through entity for federal income tax andfor most state income tax purposes, whereby each member is taxable on itsrespective share of income and loss. However, CPChem is directly liable for federal and state income taxesand franchise taxes on certain separate legal entities and for any foreigntaxes incurred.  CPChem has a U.S. subsidiaryoperating in Puerto Rico that is subject to U.S. federal income tax, but hasbeen granted an exemption from certain Puerto Rico taxes, including incometaxes.  All Puerto Rico tax exemptionsrelated to this subsidiary expire in 2017. Limited tax incentives, in the form of reduced income tax rates, alsoexist in South Korea, China, Singapore, Saudi Arabia and Qatar.  CPChem is subject to state income tax incertain jurisdictions.

 

The components of income (loss) before taxes follow:

 
|                             |   | **Years  ended December 31,** |   |
|----------------------------------|--------|------------------------------------|--------|
| **Millions**                     |   | **2003**                           |   | **2002** |   | **2001** |   |
| Domestic                         |   | $                                  | (98    | ) | $ | (138 | ) | $ | (496 | ) |
| Foreign                          |   | 110                                |   | 114 |   | 65 |   |
| Total income (loss) before taxes |   | $                                  | 12     |   | $ | (24 | ) | $ | (431 | ) |

 

The components of income tax expense follow:

 
|                     |   | **Years  ended December 31,** |   |
|--------------------------|--------|------------------------------------|--------|
| **Millions**             |   | **2003**                           |   | **2002** |   | **2001** |   |
| Federal                  |   |                               |   |   |   |   |   |
| Current                  |   | $                                  | — |   | $ | (1 | ) | $ | — |   |
| Deferred                 |   | —                             |   | — |   | 44 |   |
| State – current     |   | —                             |   | 1 |   | — |   |
| Foreign – current   |   | 5                                  |   | 6 |   | 5 |   |
| Total income tax expense |   | $                                  | 5      |   | $ | 6 |   | $ | 49 |   |

 

Deferred income tax assets and liabilities follow:

 
|                                           |   | **December 31,** |   |
|------------------------------------------------|--------|-----------------------|--------|
| **Millions**                                   |   | **2003**              |   | **2002** |   |
| Deferred income tax assets – federal      |   | $                     | 190    |   | $ | 181 |   |
| Valuation allowance                            |   | (190                  | )      | (181 | ) |
| Total                                          |   | —                |   | — |   |
| Deferred income tax liabilities – foreign |   | (1                    | )      | (2 | ) |
| Net deferred income tax assets  (liabilities)  |   | $                     | (1     | ) | $ | (2 | ) |

 

At December 31, 2003 and 2002, the deferred tax assets of CPChem’sPuerto Rico subsidiary were fully offset by valuation allowances.  A valuation allowance was initiallyestablished in 2000 to reduce the deferred tax assets of the subsidiary’s netoperating loss carryforwards and tax depreciation differences to amounts thatwould more likely than not be realized at that time.  The valuation allowance was subsequently increased during 2001 sothat the subsidiary’s total deferred tax assets were fully offset by valuationallowances.  Approximately $44 millionof this increase related to the deferred tax asset balance at December 31,2000.  The increase in 2001, charged toincome tax expense, was necessitated, in part, by the ConocoPhillips mergerwith Tosco Corporation in September 2001, which triggered regulatorylimitations on the future utilization of the Puerto Rico subsidiary’spre-merger net operating losses.  Thevaluation allowance was also increased in 2001 as a result of a change in theoutlook for future margin conditions at that time.

 

58

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In 2002, the valuation allowance was increased to $181 million, and in2003 was increased to $190 million, primarily to offset recognition of taxbenefits associated with continued losses. Uncertainties that may affect therealization of these assets include tax law changes and the futureprofitability of operations.

 

Net deferred income tax assets and liabilities related to thefollowing:

 
|                                          |   | **December 31,** |   |
|-----------------------------------------------|--------|-----------------------|--------|
| **Millions**                                  |   | **2003**              |   | **2002** |   |
| Deferred income tax assets                    |   |                  |   |   |   |
| Loss carryforward (expires 2011-2021)         |   | $                     | 162    |   | $ | 144 |   |
| Depreciation and amortization                 |   | 23                    |   | 31 |   |
| Other                                         |   | 5                     |   | 6 |   |
| Gross deferred income tax assets              |   | 190                   |   | 181 |   |
| Valuation allowance                           |   | (190                  | )      | (181 | ) |
| Deferred income tax assets                    |   | —                |   | — |   |
| Deferred tax liabilities – foreign       |   | (1                    | )      | (2 | ) |
| Net deferred income tax assets  (liabilities) |   | $                     | (1     | ) | $ | (2 | ) |

 

Note 17.    Segment and GeographicInformation

 

CPChem’s reporting structure is based on the grouping of similarproducts, resulting in three operating segments – Olefins & Polyolefins(O&P), Aromatics & Styrenics (A&S), and Specialty Products.

 

*Olefins & Polyolefins* – This segmentgathers, buys, sells and fractionates natural gas liquids, and manufactures andmarkets olefin products such as ethylene and propylene.  This segment also manufactures and marketsalpha olefins and polyolefin products such as normal alpha olefins,polyethylene, polypropylene and polyethylene pipe.  CPChem has five olefin and polyolefin production facilitieslocated in Texas.  CPChem also has ninedomestic pipe facilities and one in Mexico, and one domestic pipe fittingsfacility.  In addition, CPChem ownsinterests in a polypropylene facility located at the Pasadena Plastics Complexin Texas, a high-density polyethylene plant located at CPChem’s Cedar Bayoufacility in Texas, an ethylene, polyethylene and 1-hexene facility in Qatar,and polyethylene facilities in Singapore and China.

 

*Aromatics & Styrenics* – This segmentmanufactures and markets aromatics products such as benzene, styrene,paraxylene, cyclohexane and cumene. This segment also manufactures and markets polystyrene andstyrene-butadiene copolymers sold under the trademark K-Resin®.  Production facilities are located inMississippi, Louisiana, Texas, Ohio, Puerto Rico and China.  CPChem also owns an equity interest in anaromatics facility in Saudi Arabia and in a K-Resin® SBC facility inSouth Korea.

 

*Specialty Products* – This segment manufacturesand markets a variety of specialty chemical products, including organosulfurchemicals and high-performance polyphenylene sulfide polymers and compoundssold under the trademark Ryton®. Production facilities are located in Texas, Belgium and Singapore.

 

“Corporate and Other” (Other) includes items not directly attributableto CPChem’s operating segments. Interest expense and income are generally retained within Corporate, asare charges related to domestic workforce reductions.

 

Financial information follows. Inter-segment transactions are billed at prevailing market rates.

 

59

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| **Millions**                                         |   | **O&P** |   | **A&S** |   | **Specialty  Products** |   | **Other and  Eliminations** |   | **Consolidated** |   |
|------------------------------------------------------|--------|-------------|--------|-------------|--------|-------------------------|--------|-----------------------------|--------|------------------|--------|
| *Year ended  December 31, 2003*                 |   |        |   |        |   |                    |   |                        |   |             |   |
| Net sales – external                            |   | $           | 4,079  |        | $      | 2,437                   |   | $                           | 391    |             | $      | — |   | $ | 6,907 |   |
| Net sales – inter-segment                       |   | 272         |   | 144         |   | 1                       |   | (417                        | )      | —           |   |
| Equity in income (loss) of affiliates                |   | (14         | )      | 55          |   | —                  |   | —                      |   | 41               |   |
| Other income                                         |   | 53          |   | 12          |   | 5                       |   | —                      |   | 70               | (a)    |
| Total revenue                                        |   | 4,390       |   | 2,648       |   | 397                     |   | (417                        | )      | 7,018            |   |
| Operating and selling costs                          |   | 4,167       |   | 2,528       |   | 342                     |   | (393                        | )      | 6,644            | (b)    |
| Depreciation and amortization                        |   | 182         |   | 93          |   | 21                      |   | 2                           |   | 298              | (c)    |
| Income (loss) before interest & taxes            |   | 41          |   | 27          |   | 34                      |   | (26                         | )      | 76               |   |
| Interest income (expense), net                       |   | 6           |   | 1           |   | —                  |   | (71                         | )      | (64              | )      |
| Income tax benefit (expense)                         |   | —      |   | —      |   | (5                      | )      | —                      |   | (5               | )      |
| Net income (loss)                                    |   | 47          |   | 28          |   | 29                      |   | (97                         | )      | 7                |   |
| Distributions on members’  preferred interests  |   | —      |   | —      |   | —                  |   | (23                         | )      | (23              | )      |
| Income (loss) attributed to  members’ interests |   | $           | 47     |        | $      | 28                      |   | $                           | 29     |             | $      | (120 | ) | $ | (16 | ) |
|                                                 |   |        |   |        |   |                    |   |                        |   |             |   |
| *Year ended  December 31, 2002*                 |   |        |   |        |   |                    |   |                        |   |             |   |
| Net sales – external                            |   | $           | 3,211  |        | $      | 1,825                   |   | $                           | 353    |             | $      | — |   | $ | 5,389 |   |
| Net sales – inter-segment                       |   | 263         |   | 124         |   | 1                       |   | (388                        | )      | —           |   |
| Equity in income (loss) of affiliates                |   | (10         | )      | 32          |   | —                  |   | —                      |   | 22               |   |
| Other income                                         |   | 39          |   | 22          |   | 1                       |   | —                      |   | 62               | (d)    |
| Total revenue                                        |   | 3,503       |   | 2,003       |   | 355                     |   | (388                        | )      | 5,473            |   |
| Operating and selling costs                          |   | 3,284       |   | 1,926       |   | 296                     |   | (365                        | )      | 5,141            | (e)    |
| Depreciation and amortization                        |   | 180         |   | 90          |   | 19                      |   | 2                           |   | 291              | (f)    |
| Asset impairments                                    |   | 6           |   | —      |   | —                  |   | —                      |   | 6                | (g)    |
| Income (loss) before interest & taxes            |   | 33          |   | (13         | )      | 40                      |   | (25                         | )      | 35               |   |
| Interest income (expense), net                       |   | 5           |   | 1           |   | —                  |   | (65                         | )      | (59              | )      |
| Income tax benefit (expense)                         |   | 2           |   | (1          | )      | (7                      | )      | —                      |   | (6               | )      |
| Net income (loss)                                    |   | 40          |   | (13         | )      | 33                      |   | (90                         | )      | (30              | )      |
| Distributions on members’  preferred interests  |   | —      |   | —      |   | —                  |   | (11                         | )      | (11              | )      |
| Income (loss) attributed to  members’ interests |   | $           | 40     |        | $      | (13                     | )      | $                           | 33     |             | $      | (101 | ) | $ | (41 | ) |
|                                                 |   |        |   |        |   |                    |   |                        |   |             |   |
| *Year ended  December 31, 2001*                 |   |        |   |        |   |                    |   |                        |   |             |   |
| Net sales – external                            |   | $           | 3,793  |        | $      | 1,708                   |   | $                           | 370    |             | $      | — |   | $ | 5,871 |   |
| Net sales – inter-segment                       |   | 204         |   | 137         |   | 1                       |   | (342                        | )      | —           |   |
| Equity in income (loss) of affiliates                |   | (76         | )      | 11          |   | —                  |   | —                      |   | (65              | )(h)   |
| Other income                                         |   | 40          |   | 160         |   | 4                       |   | —                      |   | 204              | (i)    |
| Total revenue                                        |   | 3,961       |   | 2,016       |   | 375                     |   | (342                        | )      | 6,010            |   |
| Operating and selling costs                          |   | 3,863       |   | 2,047       |   | 326                     |   | (315                        | )      | 5,921            | (j)    |
| Depreciation and amortization                        |   | 262         |   | 99          |   | 18                      |   | 2                           |   | 381              | (k)    |
| Asset impairments                                    |   | 2           |   | 42          |   | —                  |   | —                      |   | 44               | (l)    |
| Income (loss) before interest & taxes            |   | (166        | )      | (172        | )      | 31                      |   | (29                         | )      | (336             | )      |
| Interest income (expense), net                       |   | —      |   | 3           |   | —                  |   | (98                         | )      | (95              | )      |
| Income tax benefit (expense)                         |   | 1           |   | (44         | )      | (6                      | )      | —                      |   | (49              | )(m)   |
| Net income (loss)                                    |   | $           | (165   | )           | $      | (213                    | )      | $                           | 25     |             | $      | (127 | ) | $ | (480 | ) |

 

60

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The following charges or benefits were related to items such as assetsretirements and plant closures, asset impairments, business interruption andproperty casualty insurance claim settlements, employee severance costs,pension plan curtailments and other items of that nature.

 

(a)          Includes a $10 million benefit related to asales and use tax audit - $7 million in O&P and $3 million in SpecialtyProducts.

(b)         Includes $27 million of charges, mostlyrelated to legal settlements and accruals, and employee severance costs - $16million in O&P, $10 million in Other and $1 million in Specialty Products.

(c)          Includes $19 million in asset retirements andplant closures - $10 million in A&S and $9 million in O&P.

(d)         Includes $9 million of benefits in A&Srelated to business interruption and property casualty insurance claimsettlements.

(e)          Includes $6 million of net charges, primarilyrelated to a pension curtailment charge in A&S.  Also includes a benefit for the reversal of certain customerclaim accruals, offset by the write-off of two technology projects in O&P.

(f)            Includes $28 million of net charges relatedto asset retirements - $21 million in A&S and $7 million in O&P.

(g)         Includes a $5 million charge related to apolyethylene pipe facility (O&P).

(h)         Includes $43 million of net charges, mostlyCPChem’s share (O&P) of an impairment charge recorded by an equityaffiliate.

(i)             Includes $117 million of net benefits,primarily a $113 million net benefit recorded in connection with the settlementof a business interruption insurance claim ($110 million in A&S and $3million in Specialty Products).

(j)             Includes $72 million of various netcharges - $30 million in O&P, $34 million in A&S and $8 million inOther.

(k)          Includes $111 million of net charges,primarily accelerated depreciation and asset retirements totaling $86 millionin O&P and $24 million in A&S.

(l)             The $44 million impairment charge relatesmostly to Puerto Rico assets.

(m)       Includes a $44 million charge for an increase inthe valuation allowance for deferred tax assets in A&S.

 
| **Millions**                         |   | **O&P** |   | **A&S** |   | **Specialty  Products** |   | **Other** |   | **Consolidated** |   |
|--------------------------------------|--------|-------------|--------|-------------|--------|-------------------------|--------|-----------|--------|------------------|--------|
| Investments/advances to affiliates   |   |        |   |        |   |                    |   |      |   |             |   |
| December 31, 2003               |   | $           | 418    |        | $      | 255                     |   | $         | — |             | $      | — |   | $ | 673 |   |
| December 31, 2002               |   | 322         |   | 193         |   | —                  |   | —    |   | 515              |   |
|                                 |   |        |   |        |   |                    |   |      |   |             |   |
| Total assets                         |   |        |   |        |   |                    |   |      |   |             |   |
| December 31, 2003               |   | 3,746       |   | 1,849       |   | 496                     |   | 151       |   | 6,242            |   |
| December 31, 2002               |   | 3,620       |   | 1,815       |   | 468                     |   | 206       |   | 6,109            |   |
|                                 |   |        |   |        |   |                    |   |      |   |             |   |
| Capital and investment expenditures* |   |        |   |        |   |                    |   |      |   |             |   |
| Year ended December 31, 2003    |   | 127         |   | 73          |   | 17                      |   | 6         |   | 223              |   |
| Year ended December 31, 2002    |   | 179         |   | 103         |   | 20                      |   | 12        |   | 314              |   |
| Year ended December 31, 2001    |   | 134         |   | 121         |   | 17                      |   | 19        |   | 291              |   |
|                                      |        |             |        |             |        |                         |        |           |        |                  |        |  |  |  |  |  |

 

----

* Excludesinvestments in and advances to Q-Chem of $103 million in 2003 and $210 millionin 2002.

 

61

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Geographic information was as follows. Net sales were determined based on location of the operation generatingthe sale.

 
| **Millions**                              |   | **United  States** |   | **Foreign  Countries** |   | **Total** |   |
|-------------------------------------------|--------|--------------------|--------|------------------------|--------|-----------|--------|
| Net sales - external                      |   |               |   |                   |   |      |   |
| Year ended December 31, 2003         |   | $                  | 5,821  |                   | $      | 1,086     |   | $ | 6,907 |   |
| Year ended December 31, 2002         |   | 4,675              |   | 714                    |   | 5,389     |   |
| Year ended December 31, 2001         |   | 5,307              |   | 564                    |   | 5,871     |   |
|                                      |   |               |   |                   |   |      |   |
| Investments in and advances to affiliates |   |               |   |                   |   |      |   |
| December 31, 2003                    |   | 53                 |   | 620                    |   | 673       |   |
| December 31, 2002                    |   | 49                 |   | 466                    |   | 515       |   |
|                                      |   |               |   |                   |   |      |   |
| Property, plant and equipment, net        |   |               |   |                   |   |      |   |
| December 31, 2003                    |   | 3,699              |   | 165                    |   | 3,864     |   |
| December 31, 2002                    |   | 3,812              |   | 138                    |   | 3,950     |   |
|                                           |        |                    |        |                        |        |           |        |  |  |  |

 

Foreign currency transaction gains (losses) were $5 million in 2003, $7million in 2002 and $(2) million in 2001.

 

Note 18.    Fair Values of FinancialInstruments

 

The carrying amounts of cash and cash equivalents, trade and affiliatedreceivables, and trade and affiliated payables approximate fair values.  The carrying amount of secured borrowingsoutstanding also approximates fair value due to the short-term nature of theborrowings.  The carrying amount ofcommercial paper outstanding also approximates fair value due to the variableinterest rate feature.  The carryingamount of other long-term debt outstanding was $1.005 billion at bothDecember 31, 2003 and December 31, 2002, with fair values of $1.096billion and $1.092 billion, respectively, based on quoted market prices.

 

62

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Note 19.    Consolidating FinancialStatements

 

Consolidating financial statements follow.  This information is presented in accordance with the SEC’s rulesand regulations as they relate to the debt jointly and severally issued byChevron Phillips Chemical Company LLC (the “LLC”) and Chevron Phillips ChemicalCompany LP (the “LP”).  See Note 9 forfurther discussion.

 

The LLC is the non-operating parent holding company.  The LP is the primary U.S. operatingcompany.  “Other Entities” isprincipally comprised of foreign operations and the holding companies that havedirect ownership of the LP.  Theseconsolidating financial statements were prepared using the equity method ofaccounting for investments.

 

Chevron Phillips Chemical Company LLCConsolidating Statement of OperationsFor the Year ended December 31, 2003

 
| **Millions**                                         |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|------------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Revenue                                              |   |    |   |   |   |                |   |             |   |      |   |
| Net sales                                            |   | $       | — |   | $      | 6,103               |   | $                | 1,247  |      | $      | (443 | ) | $ | 6,907 |   |
| Equity in income of affiliates                       |   | 86      |   | 7      |   | 14                  |   | (66              | )      | 41        |   |
| Other income                                         |   | —  |   | 77     |   | 75                  |   | (82              | )      | 70        |   |
| Total revenue                                        |   | 86      |   | 6,187  |   | 1,336               |   | (591             | )      | 7,018     |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Costs and Expenses                                   |   |    |   |   |   |                |   |             |   |      |   |
| Cost of goods sold                                   |   | —  |   | 5,695  |   | 1,152               |   | (408             | )      | 6,439     |   |
| Selling, general and administrative                  |   | —  |   | 472    |   | 93                  |   | (117             | )      | 448       |   |
| Research and development                             |   | —  |   | 55     |   | —              |   | —           |   | 55        |   |
| Total costs and expenses                             |   | —  |   | 6,222  |   | 1,245               |   | (525             | )      | 6,942     |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Interest & Taxes            |   | 86      |   | (35    | )      | 91                  |   | (66              | )      | 76        |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Interest income                                      |   | —  |   | 14     |   | 9                   |   | (15              | )      | 8         |   |
| Interest expense                                     |   | (79     | )      | (1     | )      | (7                  | )      | 15               |   | (72       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Taxes                           |   | 7       |   | (22    | )      | 93                  |   | (66              | )      | 12        |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income taxes                                         |   | —  |   | — |   | (5                  | )      | —           |   | (5        | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Net Income (Loss)                                    |   | 7       |   | (22    | )      | 88                  |   | (66              | )      | 7         |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Distributions on members’ preferred  interests  |   | (23     | )      | — |   | —              |   | —           |   | (23       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Attributed to Members’  Interests |   | $       | (16    | )      | $      | (22                 | )      | $                | 88     |      | $      | (66 | ) | $ | (16 | ) |

 

63

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year ended December 31, 2002

 
| **Millions**                                         |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|------------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Revenue                                              |   |    |   |   |   |                |   |             |   |      |   |
| Net sales                                            |   | $       | — |   | $      | 4,830               |   | $                | 855    |      | $      | (296 | ) | $ | 5,389 |   |
| Equity in income (loss) of affiliates                |   | 45      |   | (17    | )      | (43                 | )      | 37               |   | 22        |   |
| Other income                                         |   | —  |   | 102    |   | 111                 |   | (151             | )      | 62        |   |
| Total revenue                                        |   | 45      |   | 4,915  |   | 923                 |   | (410             | )      | 5,473     |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Costs and Expenses                                   |   |    |   |   |   |                |   |             |   |      |   |
| Cost of goods sold                                   |   | —  |   | 4,487  |   | 771                 |   | (272             | )      | 4,986     |   |
| Selling, general and administrative                  |   | —  |   | 465    |   | 109                 |   | (175             | )      | 399       |   |
| Asset impairments                                    |   | —  |   | 5      |   | 1                   |   | —           |   | 6         |   |
| Research and development                             |   | —  |   | 47     |   | —              |   | —           |   | 47        |   |
| Total costs and expenses                             |   | —  |   | 5,004  |   | 881                 |   | (447             | )      | 5,438     |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Interest & Taxes            |   | 45      |   | (89    | )      | 42                  |   | 37               |   | 35        |   |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Interest income                                      |   | —  |   | 19     |   | 5                   |   | (17              | )      | 7         |   |
| Interest expense                                     |   | (75     | )      | (1     | )      | (7                  | )      | 17               |   | (66       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Taxes                           |   | (30     | )      | (71    | )      | 40                  |   | 37               |   | (24       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income taxes                                         |   | —  |   | (1     | )      | (5                  | )      | —           |   | (6        | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Net Income (Loss)                                    |   | (30     | )      | (72    | )      | 35                  |   | 37               |   | (30       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Distributions on members’ preferred  interests  |   | (11     | )      | — |   | —              |   | —           |   | (11       | )      |
|                                                 |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Attributed to Members’  Interests |   | $       | (41    | )      | $      | (72                 | )      | $                | 35     |      | $      | 37 |   | $ | (41 | ) |

 

64

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year ended December 31, 2001

 
| **Millions**                              |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|-------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Revenue                                   |   |    |   |   |   |                |   |             |   |      |   |
| Net sales                                 |   | $       | — |   | $      | 5,583               |   | $                | 1,086  |      | $      | (798 | ) | $ | 5,871 |   |
| Equity in income (loss) of affiliates     |   | (385    | )      | (44    | )      | (339                | )      | 703              |   | (65       | )      |
| Other income                              |   | —  |   | 256    |   | 62                  |   | (114             | )      | 204       |   |
| Total revenue                             |   | (385    | )      | 5,795  |   | 809                 |   | (209             | )      | 6,010     |   |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Costs and Expenses                        |   |    |   |   |   |                |   |             |   |      |   |
| Cost of goods sold                        |   | —  |   | 5,495  |   | 1,029               |   | (791             | )      | 5,733     |   |
| Selling, general and administrative       |   | —  |   | 581    |   | 49                  |   | (121             | )      | 509       |   |
| Asset impairments                         |   | —  |   | — |   | 44                  |   | —           |   | 44        |   |
| Research and development                  |   | —  |   | 60     |   | —              |   | —           |   | 60        |   |
| Total costs and expenses                  |   | —  |   | 6,136  |   | 1,122               |   | (912             | )      | 6,346     |   |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Interest & Taxes |   | (385    | )      | (341   | )      | (313                | )      | 703              |   | (336      | )      |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Interest income                           |   | 2       |   | 4      |   | 5                   |   | (2               | )      | 9         |   |
| Interest expense                          |   | (97     | )      | (3     | )      | (6                  | )      | 2                |   | (104      | )      |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Income (Loss) Before Taxes                |   | (480    | )      | (340   | )      | (314                | )      | 703              |   | (431      | )      |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Income taxes                              |   | —  |   | (1     | )      | (48                 | )      | —           |   | (49       | )      |
|                                      |   |    |   |   |   |                |   |             |   |      |   |
| Net Income (Loss)                         |   | $       | (480   | )      | $      | (341                | )      | $                | (362   | )         | $      | 703 |   | $ | (480 | ) |

 

65

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Balance Sheet

December 31, 2003

 
| **Millions**                                   |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Current assets                                 |   |    |   |   |   |                |   |             |   |      |   |
| Cash and cash equivalents                      |   | $       | — |   | $      | 12                  |   | $                | 31     |      | $      | — |   | $ | 43 |   |
| Accounts receivable, net                       |   | 203     |   | 436    |   | 698                 |   | (475             | )      | 862       |   |
| Inventories                                    |   | —  |   | 565    |   | 135                 |   | —           |   | 700       |   |
| Other current assets                           |   | 1       |   | 24     |   | 6                   |   | —           |   | 31        |   |
| Total current assets                           |   | 204     |   | 1,037  |   | 870                 |   | (475             | )      | 1,636     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Property, plant and equipment, net             |   | —  |   | 3,538  |   | 326                 |   | —           |   | 3,864     |   |
| Investments in and advances to affiliates      |   | 5,841   |   | 66     |   | 5,402               |   | (10,636          | )      | 673       |   |
| Other assets and deferred charges              |   | 22      |   | 1,156  |   | 26                  |   | (1,135           | )      | 69        |   |
| Total Assets                                   |   | $       | 6,067  |   | $      | 5,797               |   | $                | 6,624  |      | $      | (12,246 | ) | $ | 6,242 |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Current liabilities                            |   |    |   |   |   |                |   |             |   |      |   |
| Accounts payable                               |   | $       | 10     |   | $      | 755                 |   | $                | 377    |      | $      | (475 | ) | $ | 667 |   |
| Secured borrowings and other debt              |   | —  |   | 1      |   | 313                 |   | —           |   | 314       |   |
| Other current liabilities                      |   | 45      |   | 141    |   | 17                  |   | —           |   | 203       |   |
| Total current liabilities                      |   | 55      |   | 897    |   | 707                 |   | (475             | )      | 1,184     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Long-term debt                                 |   | 1,179   |   | 10     |   | —              |   | —           |   | 1,189     |   |
| Other liabilities and deferred credits         |   | 1,105   |   | 108    |   | 31                  |   | (1,135           | )      | 109       |   |
| Total liabilities                              |   | 2,339   |   | 1,015  |   | 738                 |   | (1,610           | )      | 2,482     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Members’ preferred interests              |   | 250     |   | — |   | —              |   | —           |   | 250       |   |
| Members’ capital                          |   | 3,478   |   | 4,782  |   | 5,854               |   | (10,636          | )      | 3,478     |   |
| Accumulated other comprehensive  income (loss) |   | —  |   | — |   | 32                  |   | —           |   | 32        |   |
| Total Liabilities and Members’ Equity     |   | $       | 6,067  |   | $      | 5,797               |   | $                | 6,624  |      | $      | (12,246 | ) | $ | 6,242 |   |

 

66

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Balance Sheet

December 31, 2002

 
| **Millions**                                   |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Current assets                                 |   |    |   |   |   |                |   |             |   |      |   |
| Cash and cash equivalents                      |   | $       | — |   | $      | 9                   |   | $                | 30     |      | $      | — |   | $ | 39 |   |
| Accounts receivable, net                       |   | 232     |   | 370    |   | 636                 |   | (441             | )      | 797       |   |
| Inventories                                    |   | —  |   | 593    |   | 109                 |   | —           |   | 702       |   |
| Other current assets                           |   | 2       |   | 18     |   | 3                   |   | —           |   | 23        |   |
| Total current assets                           |   | 234     |   | 990    |   | 778                 |   | (441             | )      | 1,561     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Property, plant and equipment, net             |   | —  |   | 3,659  |   | 291                 |   | —           |   | 3,950     |   |
| Investments in and advances to affiliates      |   | 5,688   |   | 71     |   | 5,216               |   | (10,460          | )      | 515       |   |
| Other assets and deferred charges              |   | 23      |   | 995    |   | 22                  |   | (957             | )      | 83        |   |
| Total Assets                                   |   | $       | 5,945  |   | $      | 5,715               |   | $                | 6,307  |      | $      | (11,858 | ) | $ | 6,109 |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Current liabilities                            |   |    |   |   |   |                |   |             |   |      |   |
| Accounts payable                               |   | $       | 57     |   | $      | 727                 |   | $                | 253    |      | $      | (441 | ) | $ | 596 |   |
| Secured borrowings and other debt              |   | —  |   | 1      |   | 293                 |   | —           |   | 294       |   |
| Other current liabilities                      |   | 12      |   | 134    |   | 15                  |   | —           |   | 161       |   |
| Total current liabilities                      |   | 69      |   | 862    |   | 561                 |   | (441             | )      | 1,051     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Long-term debt                                 |   | 1,180   |   | 10     |   | —              |   | —           |   | 1,190     |   |
| Other liabilities and deferred credits         |   | 952     |   | 93     |   | 29                  |   | (957             | )      | 117       |   |
| Total liabilities                              |   | 2,201   |   | 965    |   | 590                 |   | (1,398           | )      | 2,358     |   |
|                                           |   |    |   |   |   |                |   |             |   |      |   |
| Members’ preferred interests              |   | 250     |   | — |   | —              |   | —           |   | 250       |   |
| Members’ capital                          |   | 3,494   |   | 4,750  |   | 5,710               |   | (10,460          | )      | 3,494     |   |
| Accumulated other comprehensive  income (loss) |   | —  |   | — |   | 7                   |   | —           |   | 7         |   |
| Total Liabilities and Members’ Equity     |   | $       | 5,945  |   | $      | 5,715               |   | $                | 6,307  |      | $      | (11,858 | ) | $ | 6,109 |   |

 

67

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical CompanyLLC

Consolidating Statement of Cash Flows

For the Year ended December 31, 2003

 
| **Millions**                                                                                   |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Cash Flows From Operating Activities                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Net income (loss)                                                                              |   | $       | 7      |   | $      | (22                 | )      | $                | 88     |      | $      | (66 | ) | $ | 7 |   |
| Adjustments to reconcile net income (loss)  to net cash flows provided by operating activities |   |    |   |   |   |                |   |             |   |      |   |
| Depreciation,  amortization and retirements                                                    |   | —  |   | 281    |   | 17                  |   | —           |   | 298       |   |
| Undistributed  equity in losses (income) of affiliates, net                                    |   | (79     | )      | (7     | )      | (1                  | )      | 59               |   | (28       | )      |
| Changes in  operating working capital                                                          |   | (3      | )      | 65     |   | (76                 | )      | —           |   | (14       | )      |
| Other  operating cash flow activity                                                            |   | 163     |   | (145   | )      | (1                  | )      | —           |   | 17        |   |
| Net cash  flows provided by  operating activities                                              |   | 88      |   | 172    |   | 27                  |   | (7               | )      | 280       |   |
|                                                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Investing Activities                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Capital and investment expenditures                                                            |   | —  |   | (169   | )      | (54                 | )      | —           |   | (223      | )      |
| Investments in and advances to Qatar  Chemical Company Ltd. (Q-Chem)                           |   | —  |   | — |   | (103                | )      | —           |   | (103      | )      |
| Decrease (increase) in other investments                                                       |   | (119    | )      | 1      |   | —              |   | 119              |   | 1         |   |
| Net cash flows used in  investing activities                                                   |   | (119    | )      | (168   | )      | (157                | )      | 119              |   | (325      | )      |
|                                                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Financing Activities                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Decrease in commercial paper, net                                                              |   | (1      | )      | — |   | —              |   | —           |   | (1        | )      |
| Increase in secured borrowings, net                                                            |   | —  |   | — |   | 10                  |   | —           |   | 10        |   |
| Increase (decrease) in other debt, net                                                         |   | —  |   | (1     | )      | 9                   |   | —           |   | 8         |   |
| Contributions from parents/members, net                                                        |   | 32      |   | — |   | 112                 |   | (112             | )      | 32        |   |
| Net cash flows provided by (used in)  financing activities                                     |   | 31      |   | (1     | )      | 131                 |   | (112             | )      | 49        |   |
|                                                                                           |   |    |   |   |   |                |   |             |   |      |   |
| Net Increase in Cash and Cash Equivalents                                                      |   | —  |   | 3      |   | 1                   |   | —           |   | 4         |   |
| Cash and Cash Equivalents at Beginning  of Year                                                |   | —  |   | 9      |   | 30                  |   | —           |   | 39        |   |
| Cash and Cash Equivalents at End of Year                                                       |   | $       | — |   | $      | 12                  |   | $                | 31     |      | $      | — |   | $ | 43 |   |

 

68

----

 

Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical CompanyLLC

Consolidating Statement of Cash Flows

For the Year ended December 31, 2002

 
| **Millions**                                                                                             |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Cash Flows From Operating Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Net income (loss)                                                                                        |   | $       | (30    | )      | $      | (72                 | )      | $                | 35     |      | $      | 37 |   | $ | (30 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows provided by (used in) operating activities |   |    |   |   |   |                |   |             |   |      |   |
| Depreciation, amortization and retirements                                                               |   | —  |   | 275    |   | 16                  |   | —           |   | 291       |   |
| Asset impairments                                                                                        |   | —  |   | 5      |   | 1                   |   | —           |   | 6         |   |
| Undistributed equity in losses (income) of  affiliates, net                                              |   | (5      | )      | 24     |   | 57                  |   | (82              | )      | (6        | )      |
| Changes in operating working capital                                                                     |   | (20     | )      | 251    |   | (149                | )      | —           |   | 82        |   |
| Other operating cash flow activity                                                                       |   | 261     |   | (254   | )      | (15                 | )      | —           |   | (8        | )      |
| Net cash flows provided by  (used in) operating activities                                               |   | 206     |   | 229    |   | (55                 | )      | (45              | )      | 335       |   |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Investing Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Capital and investment expenditures                                                                      |   | —  |   | (292   | )      | (22                 | )      | —           |   | (314      | )      |
| Advances to Qatar Chemical Company Ltd.  (Q-Chem)                                                        |   | —  |   | — |   | (210                | )      | —           |   | (210      | )      |
| Decrease (increase) in other investments                                                                 |   | (228    | )      | 2      |   | —              |   | 228              |   | 2         |   |
| Net cash flows used in  investing activities                                                             |   | (228    | )      | (290   | )      | (232                | )      | 228              |   | (522      | )      |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Financing Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Decrease in commercial paper, net                                                                        |   | (808    | )      | — |   | —              |   | —           |   | (808      | )      |
| Increase in secured borrowings, net                                                                      |   | —  |   | — |   | 91                  |   | —           |   | 91        |   |
| Increase (decrease) in other debt, net                                                                   |   | 498     |   | (1     | )      | 3                   |   | —           |   | 500       |   |
| Proceeds from the issuance of members’  preferred interests                                         |   | 250     |   | — |   | —              |   | —           |   | 250       |   |
| Contributions from parents/members, net                                                                  |   | 75      |   | — |   | 183                 |   | (183             | )      | 75        |   |
| Post-closing adjustments from members                                                                    |   | 7       |   | — |   | —              |   | —           |   | 7         |   |
| Net cash flows provided by  (used in) financing activities                                               |   | 22      |   | (1     | )      | 277                 |   | (183             | )      | 115       |   |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Net Decrease in Cash and  Cash Equivalents                                                               |   | —  |   | (62    | )      | (10                 | )      | —           |   | (72       | )      |
| Cash and Cash Equivalents at  Beginning of Year                                                          |   | —  |   | 71     |   | 40                  |   | —           |   | 111       |   |
| Cash and Cash Equivalents at End of Year                                                                 |   | $       | — |   | $      | 9                   |   | $                | 30     |      | $      | — |   | $ | 39 |   |

 

69

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Note 19. Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical CompanyLLC

Consolidating Statement of Cash Flows

For the Year ended December 31, 2001

 
| **Millions**                                                                                             |   | **LLC** |   | **LP** |   | **Other  Entities** |   | **Eliminations** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|---------------------|--------|------------------|--------|-----------|--------|
| Cash Flows From Operating Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Net income (loss)                                                                                        |   | $       | (480   | )      | $      | (341                | )      | $                | (362   | )         | $      | 703 |   | $ | (480 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows provided by (used in) operating activities |   |    |   |   |   |                |   |             |   |      |   |
| Depreciation, amortization and retirements                                                               |   | —  |   | 328    |   | 53                  |   | —           |   | 381       |   |
| Asset impairments                                                                                        |   | —  |   | 2      |   | 42                  |   | —           |   | 44        |   |
| Deferred income taxes                                                                                    |   | —  |   | — |   | 44                  |   | —           |   | 44        |   |
| Undistributed equity in losses of  affiliates, net                                                       |   | 493     |   | 44     |   | 341                 |   | (811             | )      | 67        |   |
| Changes in operating working capital                                                                     |   | (31     | )      | 529    |   | (258                | )      | —           |   | 240       |   |
| Other operating cash flow activity                                                                       |   | 584     |   | (451   | )      | (97                 | )      | —           |   | 36        |   |
| Net cash flows provided by (used in)  operating activities                                               |   | 566     |   | 111    |   | (237                | )      | (108             | )      | 332       |   |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Investing Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Capital and investment expenditures                                                                      |   | —  |   | (281   | )      | (10                 | )      | —           |   | (291      | )      |
| Decrease (increase) in investments                                                                       |   | (242    | )      | 2      |   | (128                | )      | 395              |   | 27        |   |
| Net cash flows used in  investing activities                                                             |   | (242    | )      | (279   | )      | (138                | )      | 395              |   | (264      | )      |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Cash Flows From Financing Activities                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Decrease in commercial paper, net                                                                        |   | (783    | )      | — |   | —              |   | —           |   | (783      | )      |
| Increase in secured borrowings, net                                                                      |   | —  |   | — |   | 199                 |   | —           |   | 199       |   |
| Decrease in notes payable to member, net                                                                 |   | (50     | )      | — |   | —              |   | —           |   | (50       | )      |
| Proceeds from the issuance of other debt                                                                 |   | 497     |   | 12     |   | —              |   | —           |   | 509       |   |
| Contributions from parents/members, net                                                                  |   | 25      |   | 152    |   | 135                 |   | (287             | )      | 25        |   |
| Post-closing adjustments to members                                                                      |   | (13     | )      | — |   | —              |   | —           |   | (13       | )      |
| Net cash flows provided by (used in)  financing activities                                               |   | (324    | )      | 164    |   | 334                 |   | (287             | )      | (113      | )      |
|                                                                                                     |   |    |   |   |   |                |   |             |   |      |   |
| Net Decrease in Cash and Cash Equivalents                                                                |   | —  |   | (4     | )      | (41                 | )      | —           |   | (45       | )      |
| Cash and Cash Equivalents at  Beginning of Year                                                          |   | —  |   | 75     |   | 81                  |   | —           |   | 156       |   |
| Cash and Cash Equivalents at End of Year                                                                 |   | $       | — |   | $      | 71                  |   | $                | 40     |      | $      | — |   | $ | 111 |   |

 

70

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Chevron Phillips Chemical CompanyLLC

Selected Quarterly Financial Data

(Unaudited)

 

| **Millions**   |   | **Net Sales** |   | **Income  (Loss)  Before Interest  and Taxes** |   | **Net Income  (Loss)** |   |
|----------------|--------|---------------|--------|------------------------------------------------|--------|------------------------|--------|
| **2003**       |   |          |   |                                           |   |                   |   |
| First quarter  |   | $             | 1,796  |                                           | $      | (66                    | )      | $ | (82 | ) |
| Second quarter |   | 1,701         |   | 52                                             |   | 35                     |   |
| Third quarter  |   | 1,702         |   | 43                                             |   | 25                     |   |
| Fourth quarter |   | 1,708         |   | 47                                             |   | 29                     |   |
| Total          |   | $             | 6,907  |                                           | $      | 76                     |   | $ | 7 |   |
|           |   |          |   |                                           |   |                   |   |
| **2002**       |   |          |   |                                           |   |                   |   |
| First quarter  |   | $             | 1,147  |                                           | $      | (5                     | )      | $ | (22 | ) |
| Second quarter |   | 1,387         |   | 26                                             |   | 11                     |   |
| Third quarter  |   | 1,429         |   | 19                                             |   | 1                      |   |
| Fourth quarter |   | 1,426         |   | (5                                             | )      | (20                    | )      |
| Total          |   | $             | 5,389  |                                           | $      | 35                     |   | $ | (30 | ) |

 

Income (loss) before interest and taxes in 2003 included net charges(credits) of $7 million, $21 million, $9 million and $(1) million in the firstthrough the fourth quarters, respectively, related to asset retirements andplant closures, employee severance costs, legal settlements and accruals, abenefit related to a sales and use tax audit, and other items of that nature.

 

Income (loss) before interest and taxes in 2002 included net charges(credits) of $10 million, $26 million and $(6) million in the first, third andfourth quarters, respectively, related to asset impairments and retirements,business interruption and property casualty insurance claim settlements,pension plan curtailments and other items of that nature.

 

See Part I – Item 7. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and “Notes to Consolidated FinancialStatements” for further discussions.

 

71

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**AUDITORS’REPORT TO THE PARTNERS OFSAUDI CHEVRON PHILLIPS COMPANY LIMITED**

 

We have audited theaccompanying balance sheet of Saudi Chevron Phillips Company Limited, expressed in UnitedStates Dollars, as of 31 December 2003 and the related statements of income,cash flows and changes in partners’ equity for the year then ended. Thesefinancial statements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit inaccordance with generally accepted auditing standards. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, thefinancial position of Saudi Chevron Phillips Company Limited as of 31 December 2003and the results of its operations and its cash flows for the years then endedin conformity with accounting standards generally accepted in the Kingdom ofSaudi Arabia.

 

 
| Ernst &  Young            |
|-------------------------------|
| Certified  Public Accountants |
|                          |
| Alkhobar,  Saudi Arabia       |
| 23 February  2004             |

 

72

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Saudi Chevron Phillips CompanyLimited

BALANCE SHEET

As At 31 December 2003

 
|                                |   | **Note** |   | **2003**           |        | **2002**           |    | **2001**           |    |
|-------------------------------------|--------|----------|--------|--------------------|-------------|--------------------|---------|--------------------|---------|
|                                |   |     |   | **US $ ‘000** |        | **US $ ‘000** |    | **US $ ‘000** |    |
| **ASSETS EMPLOYED**                 |   |     |   |               |        |               |    |               |    |
|                                |   |     |   |               |        |               |    |               |    |
| **PROPERTY, PLANT AND EQUIPMENT**   |   | 3        |   | ** **         | **469,625** |               | 498,021 |               | 520,792 |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **DEFERRED CHARGES**                |   | 4        |   | ** **         | **18,804**  |               | 22,110  |               | 25,364  |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **CURRENT ASSETS**                  |   |     |   |               |        |               |    |               |    |   |
| Inventories                         |   | 5        |   | ** **         | **60,185**  |               | 50,953  |               | 40,750  |   |
| Accounts receivable and prepayments |   | 6        |   | ** **         | **57,955**  |               | 34,400  |               | 26,850  |   |
| Bank balances and cash              |   |     |   |               | **78,833**  |               | 30,716  |               | 40,377  |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **196,973** |               | 116,069 |               | 107,977 |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **CURRENT LIABILITIES**             |   |     |   |               |        |               |    |               |    |   |
| Accounts payable and accruals       |   | 8        |   | ** **         | **46,013**  |               | 43,329  |               | 32,725  |   |
| Short term loans                    |   | 12       | (a)    |               | **—**  |               | —  |               | 37,500  |   |
| Current portion of term loans       |   | 12       |   | ** **         | **40,693**  |               | 40,000  |               | 36,000  |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **86,706**  |               | 83,329  |               | 106,225 |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **NET CURRENT ASSETS**              |   |     |   |               | **110,267** |               | 32,740  |               | 1,752   |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **598,696** |               | 552,871 |               | 547,908 |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **FUNDS EMPLOYED**                  |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               |        |               |    |               |    |   |
| **PARTNERS’ EQUITY**           |   |     |   |               |        |               |    |               |    |   |
| Capital                             |   | 10       |   | ** **         | **162,667** |               | 162,667 |               | 162,667 |   |
| Statutory reserve                   |   | 11       |   | ** **         | **17,731**  |               | 6,519   |               | 2,111   |   |
| Retained earnings                   |   |     |   |               | **124,700** |               | 43,691  |               | 4,024   |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **305,098** |               | 212,877 |               | 168,802 |   |
| **NON CURRENT LIABILITIES**         |   |     |   |               |        |               |    |               |    |   |
| Term loans                          |   | 12       |   | ** **         | **201,905** |               | 248,969 |               | 288,548 |   |
| Subordinated partners’ loans   |   | 13       |   | ** **         | **89,834**  |               | 89,834  |               | 89,834  |   |
| Employees’ terminal benefits   |   |     |   |               | **1,859**   |               | 1,191   |               | 724     |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **293,598** |               | 339,994 |               | 379,106 |   |
|                                |   |     |   |               |        |               |    |               |    |   |
|                                |   |     |   |               | **598,696** |               | 552,871 |               | 547,908 |   |

 

The attached notes 1 to 16 formpart of these financial statements.

 

73

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Saudi Chevron Phillips CompanyLimited

STATEMENT OF INCOME

Year Ended 31 December 2003

 
|                                   |   | **Note** |   | **2003**   |               | **2002**   |               | **2001**   |               |
|----------------------------------------|--------|----------|--------|------------|--------------------|------------|--------------------|------------|--------------------|
|                                   |   |     |   |       | **US $ ‘000** |       | **US $ ‘000** |       | **US $ ‘000** |   |
|                                   |   |     |   | ** ** |               | ** ** |               | ** ** |               | ** ** |
| Sales                                  |   |     |   |       | **392,131**        | ** ** | 309,976            |       | 217,557            |   |
| Cost of sales                          |   |     |   |       | **(269,333**       | **)**      | (252,641           | )          | (216,088           | ) |
|                                   |   |     |   |       |               |       |               |       |               |   |
| **GROSS PROFIT**                       |   |     |   |       | **122,798**        | ** ** | 57,335             |       | 1,469              |   |
|                                   |   |     |   |       |               | ** ** |               |       |               |   |
| **EXPENSES**                           |   |     |   |       |               | ** ** |               |       |               |   |
| Selling and distribution               |   | 14       |   |       | **(1,880**         | **)**      | (2,089             | )          | (830               | ) |
| Amortisation of deferred charges       |   | 4        |   |       | **(3,306**         | **)**      | (3,254             | )          | (1,518             | ) |
|                                   |   |     |   |       |               |       |               |       |               |   |
| **INCOME (LOSS) FROM MAIN OPERATIONS** |   |     |   |       | **117,612**        | ** ** | 51,992             |       | (879               | ) |
|                                   |   |     |   |       |               | ** ** |               |       |               |   |
| Income from bank deposits              |   |     |   |       | **335**            | ** ** | 425                |       | 1,690              |   |
| Loss on sale of equipment              |   |     |   |       | **(435**           | **)**      | —             |       | —             |   |
| Financial charges                      |   | 15       |   |       | **(5,397**         | **)**      | (8,342             | )          | (15,787            | ) |
|                                   |   |     |   |       |               |       |               |       |               |   |
| **NET INCOME (LOSS) FOR THE YEAR**     |   |     |   |       | **112,115**        | ** ** | 44,075             |       | (14,976            | ) |

 

The attached notes 1 to 16 formpart of these financial statements.

 

74

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Saudi Chevron Phillips CompanyLimited

STATEMENT OF CASH FLOWS

Year Ended 31December 2003

 
|                                                 |   | **2003**           |       | **2002**           |   | **2001**           |   |
|------------------------------------------------------|--------|--------------------|------------|--------------------|--------|--------------------|--------|
|                                                 |   | **US $ ‘000** |       | **US $ ‘000** |   | **US $ ‘000** |   |
| **OPERATING ACTIVITIES**                             |   |               | ** ** |               |   |               |   |
| Net income (loss) for the year                       |   | **112,115**        | ** ** | 44,075             |   | (14,976            | )      |
| Adjustments  for:                                    |   |               | ** ** |               |   |               |   |
| Depreciation                                         |   | **29,797**         | ** ** | 29,182             |   | 29,512             |   |
| Amortisation                                         |   | **3,306**          | ** ** | 3,254              |   | 1,518              |   |
| Employees’ terminal benefits, net               |   | **668**            | ** ** | 467                |   | 262                |   |
| Income from bank deposits                            |   | **(335**           | **)**      | (425               | )      | (1,690             | )      |
| Financial charges                                    |   | **5,397**          | ** ** | 8,342              |   | 15,787             |   |
| Loss on sale of equipment                            |   | **435**            | ** ** | —             |   | —             |   |
|                                                 |   |               |       |               |   |               |   |
|                                                 |   | **151,383**        |       | 84,895             |   | 30,413             |   |
| Changes in operating assets and liabilities          |   |               | ** ** |               |   |               |   |
| Receivables                                          |   | **(23,555**        | **)**      | (7,587             | )      | 47,148             |   |
| Inventories                                          |   | **(9,232**         | **)**      | (10,203            | )      | (1,330             | )      |
| Payables                                             |   | **3,016**          | ** ** | 10,885             |   | (18,266            | )      |
|                                                 |   |               |       |               |   |               |   |
| Cash from operations                                 |   | **121,612**        | ** ** | 77,990             |   | 57,965             |   |
|                                                 |   |               | ** ** |               |   |               |   |
| Financial charges paid                               |   | **(5,729**         | **)**      | (8,623             | )      | (18,327            | )      |
|                                                 |   |               |       |               |   |               |   |
| Net cash from operating activities                   |   | **115,883**        | ** ** | 69,367             |   | 39,638             |   |
|                                                 |   |               | ** ** |               |   |               |   |
| **INVESTING ACTIVITIES**                             |   |               | ** ** |               |   |               |   |
| Purchase of property, plant and equipment            |   | **(1,871**         | **)**      | (6,411             | )      | (2,189             | )      |
| Deferred charges incurred                            |   | **—**         | ** ** | —             |   | (2,858             | )      |
| Proceeds from sale of equipment                      |   | **35**             | ** ** | —             |   | —             |   |
| Income from bank deposits                            |   | **335**            | ** ** | 462                |   | 1,941              |   |
|                                                 |   |               |       |               |   |               |   |
| Net cash used in investing activities                |   | **(1,501**         | **)**      | (5,949             | )      | (3,106             | )      |
|                                                 |   |               |       |               |   |               |   |
| **FINANCING ACTIVITIES**                             |   |               | ** ** |               |   |               |   |
| Repayment of term loans                              |   | **(46,371**        | **)**      | (73,500            | )      | (62,433            | )      |
| Proceeds from term loans                             |   | **—**         | ** ** | 421                |   | 13,481             |   |
| Dividends paid                                       |   | **(19,894**        | **)**      | —             |   | —             |   |
|                                                 |   |               |       |               |   |               |   |
| Net cash used in financing activities                |   | **(66,265**        | **)**      | (73,079            | )      | (48,952            | )      |
|                                                 |   |               |       |               |   |               |   |
| **INCREASE (DECREASE) IN BANK BALANCES AND CASH**    |   | **48,117**         | ** ** | (9,661             | )      | (12,420            | )      |
|                                                 |   |               |       |               |   |               |   |
| Bank balances and cash at the beginning of  the year |   | **30,716**         | ** ** | 40,377             |   | 52,797             |   |
|                                                 |   |               |       |               |   |               |   |
| **BANK BALANCES AND CASH AT THE END OF THE YEAR**    |   | **78,833**         | ** ** | 30,716             |   | 40,377             |   |

 

The attached notes 1 to 16 formpart of these financial statements.

 

75

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Saudi Chevron Phillips CompanyLimited

STATEMENT OF CHANGES INPARTNERS’ EQUITY

Year Ended 31 December 2003

 
|                            |   | **Capital**        |       | **Statutory  reserve** |       | **Retained  earnings** |       | **Total**          |       |
|---------------------------------|--------|--------------------|------------|------------------------|------------|------------------------|------------|--------------------|------------|
|                            |   | **US $ ‘000** |       | **US $ ‘000**     |       | **US $ ‘000**     |       | **US $ ‘000** |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Balance at 31 December 2000     |   | 162,667            |       | 2,111                  |       | 19,000                 |       | 183,778            |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Net loss for the year           |   | —             |       | —                 |       | (14,976                | )          | (14,976            | )          |
|                            |   |               |       |                   |       |                   |       |               |       |
| Provision for zakat (note 9)    |   | —             |       | —                 |       | (749                   | )          | (749               | )          |
|                            |   |               |       |                   |       |                   |       |               |       |
| Zakat reimbursable by partners  |   | —             |       | —                 |       | 749                    |       | 749                |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Balance at 31 December 2001     |   | 162,667            |       | 2,111                  |       | 4,024                  |       | 168,802            |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Net income for the year         |   | —             |       | —                 |       | 44,075                 |       | 44,075             |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Provision for zakat (note 9)    |   | —             |       | —                 |       | (870                   | )          | (870               | )          |
|                            |   |               |       |                   |       |                   |       |               |       |
| Zakat reimbursable by partners  |   | —             |       | —                 |       | 870                    |       | 870                |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Transfer to statutory reserve   |   | —             |       | 4,408                  |       | (4,408                 | )          | —             |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Balance at 31 December 2002     |   | 162,667            |       | 6,519                  |       | 43,691                 |       | 212,877            |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Net income for the year         |   | —             |       | —                 |       | 112,115                |       | 112,115            |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Provision for zakat (note 9)    |   | —             |       | —                 |       | (1,097                 | )          | (1,097             | )          |
|                            |   |               |       |                   |       |                   |       |               |       |
| Zakat reimbursable by partners  |   | —             |       | —                 |       | 1,097                  |       | 1,097              |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Transfer to statutory reserve   |   | —             |       | 11,212                 |       | (11,212                | )          | —             |       |
|                            |   |               |       |                   |       |                   |       |               |       |
| Dividends paid                  |   | —             |       | —                 |       | (19,894                | )          | (19,894            | )          |
|                            |   |               |       |                   |       |                   |       |               |       |
| **Balance at 31 December 2003** |   | **162,667**        | ** ** | **17,731**             | ** ** | **124,700**            | ** ** | **305,098**        | ** ** |

 

The attached notes 1 to 16 formpart of these financial statements.

 

76

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Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS

31 December 2003

 

**1              ACTIVITIES**

** **

The company is a LimitedLiability Company registered in Jubail - Saudi Arabia under CommercialRegistration number 2055003839 dated 22 Safar 1417H, corresponding to 8 July1996 with a branch in Jubail under Commercial Registration number2055003839/001. The company was established to develop, construct and operate apetrochemical plant in Al Jubail, Saudi Arabia, to produce aromatics, solventsand Cyclo-Hexane. It is owned 50% by Saudi and 50% by non-Saudi partners.

 

**2              SIGNIFICANT ACCOUNTING POLICIES**

** **

The financial statements have been prepared in accordancewith accounting standards generally accepted in the Kingdom of SaudiArabia.  The significant accountingpolicies adopted are as follows:

 

***Accountingconvention***

The financial statements are prepared under the historicalcost convention.

 

***Fixed assets/depreciation***

All property, plant andequipment are recorded at cost. The cost of property, plant and equipment isdepreciated on a straight line basis over the estimated useful lives of theassets.

 

***Deferred charges/amortisation***

Deferred charges comprise totalpre-production costs net of pre-production income, and Saudi IndustrialDevelopment Fund (SIDF) loan appraisal fees and are amortised in equal annualinstalments from the date of commencement of commercial production over theestimated period of benefit.

 

***Inventories***

Inventories are stated at thelower of cost and market value.  Cost isdetermined as follows:

 
| Raw  materials, spares and catalysts | • | purchase  cost on a weighted average basis.                                                            |
|--------------------------------------|--------|--------------------------------------------------------------------------------------------------------|
|                                 |   |                                                                                                   |
| Finished  goods                      | • | cost of  direct materials and labour plus attributable overheads based on a normal  level of activity. |

 

***Zakat and income tax***

Zakat and income tax areprovided for in accordance with Saudi Arabian fiscal regulations.  The provision is charged   to retained earnings. Reimbursements by thepartners of such zakat and income tax are credited to retained earnings.

 

***Employees’ terminal benefits***

Provision is made for amounts payable to comply with theSaudi Arabian labour law applicable to employees’ accumulated periods ofservice at the balance sheet date.

 

***Sales***

Sales represent the invoiced value of goods supplied by thecompany during the year net of marketing costs.

 

***Foreign currencies***

Transactions in foreign currencies are recorded in US Dollarsat the rate ruling at the date of the transaction.  Monetary assets and liabilities denominated in foreign currenciesare retranslated at the rate of exchange ruling at the balance sheet date.  All differences are taken to the statementof income.

 

***Expenses***

Selling and distributionexpenses comprise expenses that specifically relate to the delivery ofproducts. All other period expenses, with the exception of amortisation ofdeferred charges and financial charges, are classified as cost of sales.

 

77

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**3              PROPERTY, PLANT AND EQUIPMENT**

** **

Theestimated useful lives of the assets for the calculation of depreciation are asfollows:

 
| Office buildings               |   | 20 years   |
|--------------------------------|--------|------------|
| Plant and equipment            |   | 6-20 years |
| Furniture and office equipment |   | 8-10 years |
| Motor vehicles                 |   | 4 years    |

 
|                         |   | **Office  buildings** |       | **Plant and  equipment** |       | **Furniture  and office  equipment** |       | **Motor  vehicles** |       | **Construction  work in  progress** |       | **Total  2003**    |       | **Total****2002**  |       | **Total  2001**       |       |
|------------------------------|--------|-----------------------|------------|--------------------------|------------|--------------------------------------|------------|---------------------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------|------------|
|                         |   | **US $ ‘000**    |       | **US $ ‘000**       |       | **US $ ‘000**                   |       | **US $ ‘000**  |       | **US $ ‘000**                  |       | **US $ ‘000** |       | **US $ ‘000** |       | **US $****‘000** |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               |       |               |       |                  |       |
| Cost:                        |   |                  |       |                     |       |                                 |       |                |       |                                |       |               |       |               |       |                  |       |
| At the beginning of the year |   | 18,848                |       | 555,380                  |       | 4,576                                |       | 1,138               |       | 6,355                               |       | **586,297**        | ** ** | 579,886            |       | 577,697               |       |
| Additions                    |   | —                |       | —                   |       | —                               |       | —              |       | 1,871                               |       | **1,871**          | ** ** | 6,411              |       | 2,189                 |       |
| Disposals                    |   | —                |       | (585                     | )          | —                               |       | (159                | )          | —                              |       | **(744**           | **)**      | —             |       | —                |       |
| Transfers                    |   | —                |       | 6,094                    |       | 60                                   |       | —              |       | (6,154                              | )          | **—**         | ** ** | —             |       | —                |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| At the end of the year       |   | 18,848                |       | 560,889                  |       | 4,636                                |       | 979                 |       | 2,072                               |       | **587,424**        | ** ** | 586,297            |       | 579,886               |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| Depreciation:                |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| At the beginning of the year |   | 2,776                 |       | 81,929                   |       | 2,636                                |       | 935                 |       | —                              |       | **88,276**         | ** ** | 59,094             |       | 29,582                |       |
| Charge for the year          |   | 942                   |       | 28,236                   |       | 546                                  |       | 73                  |       | —                              |       | **29,797**         | ** ** | 29,182             |       | 29,512                |       |
| Disposals                    |   | —                |       | (115                     | )          | —                               |       | (159                | )          | —                              |       | **(274**           | **)**      | —             |       | —                |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| At the end of the year       |   | 3,718                 |       | 110,050                  |       | 3,182                                |       | 849                 |       | —                              |       | **117,799**        | ** ** | 88,276             |       | 59,094                |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| Net book amounts:            |   |                  |       |                     |       |                                 |       |                |       |                                |       |               | ** ** |               |       |                  |       |
| **At 31 December 2003**      |   | **15,130**            | ** ** | **450,839**              | ** ** | **1,454**                            | ** ** | **130**             | ** ** | **2,072**                           | ** ** | **469,625**        | ** ** |               | ** ** |                  | ** ** |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               |       |               |       |                  |       |
| At 31 December 2002          |   | 16,072                |       | 473,451                  |       | 1,940                                |       | 203                 |       | 6,355                               |       |               |       | 498,021            |       |                  |       |
|                         |   |                  |       |                     |       |                                 |       |                |       |                                |       |               |       |               |       |                  |       |
| At 31 December 2001          |   | 16,067                |       | 500,938                  |       | 2,448                                |       | 103                 |       | 1,236                               |       |               |       |               |       | 520,792               |       |

 

The buildings and plant andequipment are situated on land leased from the Royal Commission for Jubail andYanbu.  The lease is initially for aperiod of 30 years commencing from 20 Rajab 1417H (corresponding to 1 December1996) and is renewable for further periods thereafter.

 

All property, plant andequipment are mortgaged to the Saudi Industrial Development Fund as securityfor certain term loans (note 12). Finance charges of US $ 18.9 million (2002and 2001: US $ 18.9 million) incurred during construction phase in respect ofthe loan facilities disclosed in note 12, are included in plant and equipment.

 

Construction work in progressrepresents the cost incurred on certain civil and mechanical projects currentlyunder construction.

 

78

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**4              DEFERRED CHARGES**

 
|                                                                                                                                                                                                                                                                                                                                                      |   | **2003**           |       | **2002**           |       | **2001**           |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|--------------------|------------|--------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                      |   | **US $ ‘000** |       | **US $ ‘000** |       | **US $ ‘000** |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| Costs:                                                                                                                                                                                                                                                                                                                                                    |   |               |       |               |       |               |       |
| At the beginning of the year                                                                                                                                                                                                                                                                                                                              |   | **31,545**         | ** ** | 31,545             |       | 28,687             |       |
| Additions                                                                                                                                                                                                                                                                                                                                                 |   | **—**         | ** ** | —             |       | 2,858              |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               | ** ** |               |       |               |       |
| At the end of the year                                                                                                                                                                                                                                                                                                                                    |   | **31,545**         | ** ** | 31,545             |       | 31,545             |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               | ** ** |               |       |               |       |
| Amortisation:                                                                                                                                                                                                                                                                                                                                             |   |               | ** ** |               |       |               |       |
| At the beginning of the year                                                                                                                                                                                                                                                                                                                              |   | **9,435**          | ** ** | 6,181              |       | 4,663              |       |
| Provided during the year                                                                                                                                                                                                                                                                                                                                  |   | **3,306**          | ** ** | 3,254              |       | 1,518              |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               | ** ** |               |       |               |       |
| At the end of the year                                                                                                                                                                                                                                                                                                                                    |   | **12,741**         | ** ** | 9,435              |       | 6,181              |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               | ** ** |               |       |               |       |
| Net book amount                                                                                                                                                                                                                                                                                                                                           |   | **18,804**         | ** ** | 22,110             |       | 25,364             |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| Deferred  charges consist of pre-production costs of US $ 22.2 million (2002 and 2001:  US $ 22.2 million) and appraisal fees on the SIDF and commercial loans of US  $ 9.3 million (2002 and 2001: US $ 9.3 million).                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                      |
| In order to  comply with the SOCPA’s standard on “Intangible Assets”, with effect from 1  January 2003, the company reduced the pre-production costs amortisation  period of ten years. The balance is now being amortised over 7 years. The  financial impact of this change in estimate on these financial statements is  insignificant. |
|                                                                                                                                                                                                                                                                                                                                                      |
| Appraisal  fees on the SIDF and commercial loans are amortised over the period of the  related loans (9 years).                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| **5              INVENTORIES**                                                                                                                                                                                                                                                           |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   | **2003**           |       | **2002**           | ** ** | **2001**           | ** ** |
|                                                                                                                                                                                                                                                                                                                                                      |   | **US $‘000**  |       | **US $‘000**  | ** ** | **US $‘000**  | ** ** |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| Goods in transit                                                                                                                                                                                                                                                                                                                                          |   | **—**         |       | 7,675              |       | —             |       |
| Raw materials                                                                                                                                                                                                                                                                                                                                             |   | **1,953**          |       | 441                |       | 1,083              |       |
| Finished goods                                                                                                                                                                                                                                                                                                                                            |   | **17,602**         |       | 4,972              |       | 11,464             |       |
| Spares                                                                                                                                                                                                                                                                                                                                                    |   | **3,566**          |       | 3,071              |       | 2,825              |       |
| Catalyst                                                                                                                                                                                                                                                                                                                                                  |   | **37,064**         |       | 34,794             |       | 25,378             |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   | **60,185**         |       | 50,953             |       | 40,750             |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| **6              ACCOUNTS  RECEIVABLE AND PREPAYMENTS**                                                                                                                                                                                                                                  |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   | **2003**           |       | **2002**           | ** ** | **2001**           | ** ** |
|                                                                                                                                                                                                                                                                                                                                                      |   | **US $‘000**  |       | **US $‘000**  | ** ** | **US $‘000**  | ** ** |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
| Trade accounts receivable                                                                                                                                                                                                                                                                                                                                 |   | **37,638**         |       | 24,400             |       | 18,424             |       |
| Amounts due from partners (notes 7 and 9)                                                                                                                                                                                                                                                                                                                 |   | **2,026**          |       | 920                |       | 1,169              |       |
| Amount due from an affiliate (notes 7)                                                                                                                                                                                                                                                                                                                    |   | **12,391**         |       | 4,105              |       | 4,166              |       |
| Other receivables                                                                                                                                                                                                                                                                                                                                         |   | **3,614**          |       | 3,215              |       | 1,428              |       |
| Prepaid expenses                                                                                                                                                                                                                                                                                                                                          |   | **2,286**          |       | 1,760              |       | 1,663              |       |
|                                                                                                                                                                                                                                                                                                                                                      |   |               |       |               |       |               |       |
|                                                                                                                                                                                                                                                                                                                                                      |   | **57,955**         |       | 34,400             |       | 26,850             |       |

 

Four customers account for theentire trade accounts receivable balance as at 31 December 2003 (2002 and 2001:three customers).

 

79

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**7              RELATEDPARTY TRANSACTIONS AND BALANCES**

** **

Purchases amounting toapproximately US $ 3.2 million were made from the foreign partner’s parentcompany and its affiliates during 2003 (2002: approximately US $ 11.4 millionand 2001 approximately US $ 9.4 million).

 

Approximately 38% (2002:approximately 31% and 2001 approximately 22%) of the company’s sales are madethrough a marketing affiliate of the foreign partner under a marketingagreement. Upon delivery of the product to the marketing affiliate, sales arerecorded at provisional prices approved by the Board. The provisional pricesare subsequently adjusted to actual selling prices, as received by the marketerfrom its customers, after deducting shipping, distribution and selling costs,and a marketing fee (in accordance with the above marketing contract) to coverall other marketing expenses. Adjustments are recorded on a quarterly basis asthey are reported by the marketer and become known to the company.

 

The prices and terms of thetransactions are approved by the management. Amounts due from partners and anaffiliate and amounts payable to affiliates are shown under notes 6 and 8,respectively.

 

In addition, subordinated loansfrom the partners are disclosed in note 13 to these financial statements.

 

**8              ACCOUNTSPAYABLE AND ACCRUALS**

 
|                               |   | **2003**           |   | **2002**           |   | **2001**           |   |
|------------------------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                               |   | **US $ ‘000** |   | **US $ ‘000** |   | **US $ ‘000** |   |
|                               |   |               |   |               |   |               |   |
| Trade accounts payable             |   | **19,434**         |   | 17,122             |   | 10,056             |   |
| Amounts due to affiliates (note 7) |   | **4,672**          |   | 10,537             |   | 6,082              |   |
| Zakat payable (note 9)             |   | **1,410**          |   | 870                |   | 437                |   |
| Accrued expenses                   |   | **20,497**         |   | 14,800             |   | 16,150             |   |
|                               |   |               |   |               |   |               |   |
|                               |   | **46,013**         |   | 43,329             |   | 32,725             |   |

 

**9              ZAKATAND INCOME TAX**

** **

**a)             Zakat**

** **

**Charge for the year**

** **

The zakat charge relating tothe Saudi partner consists of:

 
|                         |   | **2003**           |       | **2002**           |   | **2001**           |   |
|------------------------------|--------|--------------------|------------|--------------------|--------|--------------------|--------|
|                         |   | **US $ ‘000** |       | **US $ ‘000** |   | **US $ ‘000** |   |
|                         |   |               |       |               |   |               |   |
| Current year provision       |   | **1,410**          | ** ** | 870                |   | 437                |   |
| Adjustment for previous year |   | **(313**           | **)**      | —             |   | 312                |   |
|                         |   |               | ** ** |               |   |               |   |
| Charge for the year          |   | **1,097**          | ** ** | 870                |   | 749                |   |

 

80

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**9**              **ZAKATAND INCOME TAX (continued)**

 

The Saudi partner’s currentyear provision is based on his share as follows:

 
|                                     |   | **2003**           |       | **2002**           |   | **2001**           |   |
|------------------------------------------|--------|--------------------|------------|--------------------|--------|--------------------|--------|
|                                     |   | **US $ ‘000** |       | **US $ ‘000** |   | **US $ ‘000** |   |
|                                     |   |               | ** ** |               |   |               |   |
| Equity                                   |   | **96,492**         | ** ** | 84,401             |   | 91,888             |   |
| Opening provisions and other adjustments |   | **166,811**        | ** ** | 189,764            |   | 207,422            |   |
| Book value of long term assets           |   | **(264,529**       | **)**      | (261,600           | )      | (274,490           | )      |
|                                     |   |               | ** ** |               |   |               |   |
|                                     |   | **(1,226**         | **)**      | 12,565             |   | 24,820             |   |
|                                     |   |               | ** ** |               |   |               |   |
| Zakatable profit (loss) for the year     |   | **56,392**         | ** ** | 22,271             |   | (7,357             | )      |
|                                     |   |               | ** ** |               |   |               |   |
| Zakat base                               |   | **56,392**         | ** ** | 34,836             |   | 17,463             |   |

 

The differences between the financial and the zakatableprofit/loss are due mainly to adjustments for certain costs/claims based on therelevant fiscal regulations.

 

The adjustment for previousyear relates to the difference between provision made in the books on aprovisional basis and the amount calculated and included in the final zakatdeclaration for the preceding year.

 

**Movementsin provision during the year**

 

The movement in the zakatprovision was as follows:

 
|                     |   | **2003**           |       | **2002**           |   | **2001**           |   |
|--------------------------|--------|--------------------|------------|--------------------|--------|--------------------|--------|
|                     |   | **US $ ‘000** |       | **US $ ‘000** |   | **US $ ‘000** |   |
|                     |   |               |       |               |   |               |   |
| At the beginning of year |   | **870**            | ** ** | 437                |   | 420                |   |
| Provided during the year |   | **1,097**          | ** ** | 870                |   | 749                |   |
| Payments during the year |   | **(557**           | **)**      | (437               | )      | (732               | )      |
|                     |   |               | ** ** |               |   |               |   |
| At the end of year       |   | **1,410**          | ** ** | 870                |   | 437                |   |

 

**b)             Income tax**

 

Under the provisions of the Foreign Capital Investment Code,the non-Saudi partner is exempt from income tax on its share of income for tenyears from the date of commencement of commercial production (1 March 2000).The non-Saudi partner’s cumulative share of net income since the commencementof the tax holiday is USD 82 million (2002: SR 25.6 million).

 

**Status of assessments**

 

For the period ended 31 December 1997 and the year ended 31December 1998, the Department of Zakat and Income Tax (DZIT) raised assessmentswith additional zakat, tax and delay fine liabilities of USD 0.4 millionand  USD 2.8 million respectively. Thecompany has filed an appeal against the DZIT’s assessments with the PreliminaryAppeals Committee. Management is confident that the committee’s decision willbe in favour of the company. Accordingly no provision for the additionalliabilities, as assessed by DZIT, has been made in the books as at 31 December2003.The zakat and income tax assessments for the yearsended 31 December 1999 to 2002 have not yet been received by the company.

 

**10           CAPITAL**

** **

Capital is divided into 6,100,000 shares of US $ 26.67 (100Saudi Riyals) each (2002 and 2001: 6,100,000 shares).

 

81

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**11           STATUTORYRESERVE**

** **

As required by Saudi Arabian Regulations for Companies, 10% ofthe net income for the year has been transferred to a statutoryreserve. The company may resolve to discontinue such transfers when the reservetotals 50% of the capital. The reserve is not available for distribution.

 

**12           TERMLOANS**

 
|                   |   | **2003**           |       | **2002**           |   | **2001**           |   |
|------------------------|--------|--------------------|------------|--------------------|--------|--------------------|--------|
|                   |   | **US $ ‘000** |       | **US $ ‘000** |   | **US $ ‘000** |   |
|                   |   |               | ** ** |               |   |               |   |
| Consortium- Tranche A  |   | **146,189**        | ** ** | 170,000            |   | 190,000            |   |
| SIDF                   |   | **96,409**         | ** ** | 118,969            |   | 134,548            |   |
|                   |   |               | ** ** |               |   |               |   |
|                   |   | **242,598**        | ** ** | 288,969            |   | 324,548            |   |
|                   |   |               | ** ** |               |   |               |   |
| Less: Current portion: |   |               | ** ** |               |   |               |   |
| Consortium- Tranche A  |   | **20,000**         | ** ** | 20,000             |   | 20,000             |   |
| SIDF                   |   | **20,693**         | ** ** | 20,000             |   | 16,000             |   |
|                   |   |               | ** ** |               |   |               |   |
|                   |   | **40,693**         | ** ** | 40,000             |   | 36,000             |   |
|                   |   |               | ** ** |               |   |               |   |
|                   |   | **201,905**        | ** ** | 248,969            |   | 288,548            |   |

 

----

a)             The company hasterm loan facilities from a consortium of banks (the consortium). The term loanfacilities consist of US $ 200 million for Tranche A, US $ 50 million forTranche B1 and US $ 25 million for Tranche B2. Tranche A, which is provided tofinance non-working capital project costs, and is repayable in fourteen halfyearly instalments increasing from US $ 10 million to US $ 20 million.Repayment commenced on 25 October 2001 with the final instalment due on 25April 2008. Tranches B1 and B2 are revolving credit facilities and may beutilised any time during the repayment period of Tranche A and rolled overuntil the due date of the repayment of the final instalment of Tranche A. Theloans are secured by assignment of receipts from all material and significantcontracts, a mortgage on certain liquid assets, second charge on the company’sproperty, plant and equipment and a negative pledge over the partners’ sharesin the company. The facilities are subject to commission at LIBOR plus 1% (2002and 2001: same terms and conditions).

 

Amounts duewithin 12 months from the balance sheet date are shown as current liabilities.

 

b)            The company also hasterm loan facilities totalling US $ 151 million (2002 and 2001: US $ 151million) with the SIDF of which US $ 150 million (2002 and 2001: US $ 150million) has been drawn down as at the balance sheet date.  The loans are secured by a mortgage on thecompany’s property, plant and equipment and corporate guarantees from thepartners. The loans carry appraisal fees which are being amortised over theterm of the loans (note 4) and are repayable in fifteen half yearly instalmentsof varying amounts increasing from US $ 7.5 million to US $ 14.4 million (2002and 2001: same terms and conditions). Repayment commenced on 1 Safar 1422H(corresponding to 25 April 2001), with the final instalment due on 15 Safar1429H (corresponding to 23 February 2008).

 

Amounts duewithin 12 months from the balance sheet date are shown as current liabilities.

 

**13           SUBORDINATEDPARTNERS’ LOANS**

** **

Subordinated partners’ loansare commission free and repayable after the term loans disclosed in note 12have been paid in full.

 

82

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Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**14           SELLING ANDDISTRIBUTION EXPENSES**

 
|               |   | **2003**           |   | **2002**           |   | **2001**           |   |
|--------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|               |   | **US $ ‘000** |   | **US $ ‘000** |   | **US $ ‘000** |   |
|               |   |               |   |               |   |               |   |
| Inspection charges |   | **1,880**          |   | 2,089              |   | 830                |   |

 

**15           FINANCIAL CHARGES**

 
|                       |   | **2003**           |   | **2002**           |   | **2001**           |   |
|----------------------------|--------|--------------------|--------|--------------------|--------|--------------------|--------|
|                       |   | **US $ ‘000** |   | **US $ ‘000** |   | **US $ ‘000** |   |
|                       |   |               |   |               |   |               |   |
| Term loans borrowing costs |   | **4,009**          |   | 6,973              |   | 14,455             |   |
| Bank charges               |   | **1,388**          |   | 1,369              |   | 1,332              |   |
|                       |   |               |   |               |   |               |   |
|                       |   | **5,397**          |   | 8,342              |   | 15,787             |   |

** **

**16       OTHER INFORMATION**

** **

***a) Estimated future aggregate amortisationexpense***

 

The estimated aggregateamortisation expense during the next five years would be US $ 3.306 million perannum (same as in 2003) as no more deferred charges are expected to be incurredduring the next five years.

 

***b) Related party transactions***

 

The amounts of the company’ssales made through a marketing affiliate of the foreign partner as described innote 7 were 2003: US $ 150.5 million,2002: US $ 96.07 million and 2001: US $ 47.64 million.

 

***c) Source of raw materials***

 

The companypurchases all of its raw materials primarily from one supplier in the Kingdomof Saudi Arabia.

 

***d) Term loans maturities***

 

Following arethe combined aggregate amounts of next five years’ maturities of the term loansstated under note 12 to the financial statements: 

 
|   |   | **US $ ‘000** |   |
|--------|--------|--------------------|--------|
|   |   |               |   |
| 2004   |   | 40,693             |   |
| 2005   |   | 53,893             |   |
| 2006   |   | 63,605             |   |
| 2007   |   | 60,054             |   |
| 2008   |   | 24,353             |   |

** **

***e) Dividends paid***

 

Cash dividendsduring the year were of US $ 19.9 million (2002 and 2001: Nil) and constitute12.23% of the capital and US $ 3.26 per share.

 

***f) Deferred taxation***

 

There is nodeferred tax liability or asset as at the balance sheet date because the amountof tax, if any, is reimbursable by the non-Saudi partner who is enjoying a taxholiday as mentioned under note 9 to the financial statements.

 

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Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIALSTATEMENTS - continued

31 December 2003

 

**16           OTHER INFORMATION (continued)**

 

***g) Fair value***

 

The fairvalues of the company’s financial assets and liabilities approximate their bookvalues.

 

***h)******Employees’ terminal benefits***

 

Provision for employees’ terminal benefits is made foramounts payable to comply with the Saudi Arabian labour law applicable toemployees’ accumulated periods of service at the balance sheet date andtherefore, does not require actuarial calculation.

 

***i) Statement of cash flows***

 

Statement ofcash flows as presented in the financial statements complies with theInternational Accounting Standard on “Cash Flow Statements”.

 

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**Item9.****  Change inand Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item9A.****  Controlsand Procedures**

 

As of the end of the period covered by this report, and with theparticipation of management, CPChem’s Chief Executive Officer and ChiefFinancial Officer carried out an evaluation of the effectiveness of the designand operation of CPChem’s disclosure controls and procedures (as defined inSecurities Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer have concluded that CPChem’sdisclosure controls and procedures are effective in providing them with timelymaterial information that is required to be disclosed in reports CPChem filesunder Section 13 or 15(d) of the Securities Exchange Act.  There were no changes in CPChem’s internalcontrol over financial reporting (as defined in Securities Exchange Act Rules13a-15(f) and 15d-15(f)) that occurred during the period covered by this reportthat have materially affected, or are reasonably likely to materially affect,CPChem’s internal control over financial reporting.

 

**PARTIII**

 

**Item 10.****  Directors and Executive Officers of theRegistrant**

 

*Directors and Officers.*  Directors, executive officers and certainother officers of Chevron Phillips Chemical Company LLC are set forth in thefollowing table:

 
| **Name**               |   | **Age** |   | **Position**                                                                        |
|------------------------|--------|---------|--------|-------------------------------------------------------------------------------------|
| James L. Gallogly      |   | 51      |   | President and Chief Executive Officer; Non-voting Director                          |
| Greg G. Maxwell        |   | 47      |   | Senior Vice President, Chief Financial Officer and Controller;  Non-voting Director |
| Greg C. Garland        |   | 46      |   | Senior Vice President, Planning & Specialty Products                            |
| J. Mike Parker         |   | 57      |   | Senior Vice President, Aromatics & Styrenics                                    |
| Rick L. Roberts        |   | 49      |   | Senior Vice President, Manufacturing                                                |
| Tim G. Taylor          |   | 50      |   | Senior Vice President, Olefins & Polyolefins                                    |
| Joe M. McKee           |   | 53      |   | Vice President and Treasurer                                                        |
| Craig B. Glidden       |   | 46      |   | Vice President, General Counsel and Secretary                                       |
| Patricia E. Yarrington |   | 47      |   | Class C Director                                                                    |
| Gary G. Yesavage       |   | 51      |   | Class C Director                                                                    |
| John E. Lowe           |   | 45      |   | Class P Director                                                                    |
| Jim W. Nokes           |   | 57      |   | Class P Director                                                                    |

 

***James L. Gallogly:***  Mr. Gallogly has been President and ChiefExecutive Officer, and has served as a non-voting director, since the inceptionof CPChem in July 2000.  Hepreviously served as Senior Vice President of Chemicals for Phillips PetroleumCompany (Phillips), a position he accepted in 1999.  From 1998 to 1999, he was Vice President for Olefins andPolyolefins for Phillips.

 

***Greg G. Maxwell:***  Mr. Maxwell has been Senior Vice President,Chief Financial Officer and Controller, and has served as a non-votingdirector, since August 2003.  FromJuly 2000 to August 2003, Mr. Maxwell was Vice President andController.  From 1998 toJuly 2000, he served as General Auditor for Phillips.

 

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***Greg C. Garland:***  Mr. Garland has been Senior Vice President,Planning & Specialty Products of CPChem since October 2001.  From July 2000 to October 2001,Mr. Garland was the Senior Vice President, Planning & Strategic Transactions.  From 1997 to July 2000, he served asGeneral Manager, Qatar/Middle East for Phillips.

 

***J. Mike Parker:***  Mr. Parker has been Senior Vice President,Aromatics & Styrenics of CPChem since October 2001.  From July 2000 to October 2001,Mr. Parker was Senior Vice President of Aromatics.  He served Chevron Chemical Company LLC (Chevron Chemical) asGeneral Manager, Olefins & Plastics, from 1999 to July 2000.  From 1998 to 1999, he was General Managerfor BTX/Styrene at Chevron Chemical.

 

***Rick L. Roberts:***  Mr. Roberts has been Senior Vice President,Manufacturing of CPChem since October 2001.  From July 2000 to October 2001, Mr. Roberts was VicePresident of Manufacturing for Olefins & Polyolefins.  Prior to the formation of CPChem, he servedChevron Chemical as Plant Manager at Cedar Bayou.  From 1994 to 1999, he was Manager of the Chevron U.S.A. Inc.refinery in Hawaii.

 

***Tim G. Taylor:***  Mr. Taylor has been Senior Vice President,Olefins & Polyolefins of CPChem since July 2000.  He served Phillips as Polyolefins Managerfrom 1999 to July 2000.  Beforebeing named to that position, Mr. Taylor was Worldwide Manager for Polyethylenefrom 1997 to 1999.

 

***Joe M. McKee:***  Mr. McKee has been Vice President andTreasurer for CPChem since July 2000. Prior to assuming his current position, he served as Finance Manager forthe Americas Division of Phillips Exploration and Production, a position towhich he was appointed in 1993.

 

***Craig B. Glidden:***  Mr. Glidden has been Vice President, GeneralCounsel and Secretary for CPChem since July 2000.  In 1996, Mr. Glidden founded the law firm ofGlidden Partners LLP and was managing partner of the firm until joining CPChemin 2000.

 

***Patricia E.Yarrington:*** Ms. Yarrington was elected a director of CPChem on July 31,2001.  She currently serves as VicePresident, Policy, Government and Public Affairs at ChevronTexaco Corporation(ChevronTexaco), a position to which she was named in 2002.  Ms. Yarrington previously servedChevronTexaco as Vice President, Strategic Planning, a position to which shewas appointed upon the formation of ChevronTexaco in 2001.  She served in a similar position, VicePresident of Strategic Planning, with Chevron Corporation prior to the mergerof Chevron Corporation and Texaco Inc., which she assumed in August 2000.  In 1998, she was appointed President ofChevron Canada Ltd.

 

***Gary G. Yesavage:***  Mr. Yesavage was elected a director ofCPChem on June l, 2003.  Hecurrently serves as General Manager of the Chevron Products Company El Segundorefinery, a position to which he was appointed in 1999.  Mr. Yesavage previously served as GeneralManager, Global Manufacturing, Supply and Procurement for the Oronite AdditivesDivision of Chevron Chemical Company and as General Manager, Supply Chain forthe U.S. Chemicals Division of Chevron Chemical Company.

 

***John E. Lowe:*** Mr. Lowe has served as a director of CPChemsince its inception in July 2000. He currently serves as Executive Vice President, Planning, Strategy andCorporate Affairs for ConocoPhillips, a position to which he was appointed in2002.  Mr. Lowe previously served as SeniorVice President, Corporate Strategy and Development for Phillips, a position towhich he was appointed in 2001, and as Senior Vice President of Planning andStrategic Transactions in 2000.  In1999, he served as Vice President, Planning and Strategic Transactions andManager of Strategic Growth Projects for Phillips.  From 1997 to 1999, he was Supply Chain Manager in Refining,Marketing and Transportation for Phillips. Mr. Lowe serves as a Director of Duke Energy Field Services, LLC.

 

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***Jim W. Nokes:*** Mr. Nokes was elected a director of CPChem onOctober 24, 2002.  He currentlyserves as Executive Vice President, Refining, Marketing, Supply andTransportation for ConocoPhillips, a position to which he was appointed in2002.  Mr. Nokes previously servedConoco Inc. (Conoco) as Executive Vice President, Worldwide Refining,Marketing, Supply and Transportation, a position to which he was named in 1999.  Prior to 1999, he served as President ofNorth American refining and marketing for Conoco.

 

*Audit Committee Financial Expert.*  CPChem’s Board of Directors has designatedMr. Lowe as the “audit committee financial expert” of the Audit Committee ofthe Board of Directors (the “Audit Committee”).  Mr. Lowe is not considered to be “independent” as defined in theapplicable SEC rules and regulations.

 

*Code of Ethics. *CPChem has adopted a code of ethics thatapplies to its principal executive officer and principal financialofficers.  A copy of this code is availableto any person upon request and at no charge. Requests should be directed to the Office of the General Counsel atCPChem’s principal executive office at the address and phone number as shown onthe cover of this report.

 

**Item11.****  ExecutiveCompensation**

 

**SummaryCompensation Table**

 

The table below provides informationregarding compensation earned by CPChem’s Chief Executive Officer and the nextfour most highly compensated executive officers for the year ended December 31,2003 (collectively, the “named executive officers”).  Information for the named executive officers is also presentedfor the years ended December 31, 2002 and 2001.

 
|                              |   |     |   | **Annual  Compensation** |    | **Long-term  Compensation** |   |                    |   |
|-----------------------------------|--------|----------|--------|--------------------------|---------|-----------------------------|--------|-------------------------|--------|
| **Name and Principal Position**   |   | **Year** |   | **Salary**               |    | **Bonus**                   |   | **Awards  Options (a)** |   | **Payouts  LTIP (b)** |   | **All Other  Compensation (c)** |   |
| James L. Gallogly                 |   | 2003     |   | $                        | 483,750 |                        | $      | 309,200                 |   | — |   | $ | 410,000 |   | $ | 24,503 |   |
| President and                     |   | 2002     |   | 460,648                  |    | 333,700                     |   | 55,000                  |   | 850,000 |   | 23,367 |   |
| Chief Executive Officer           |   | 2001     |   | 438,471                  |    | 212,182                     |   | 59,108                  |   | 850,000 |   | 14,425 |   |
|                              |   |     |   |                     |    |                        |   |                    |   |   |   |   |   |
| Greg C. Garland                   |   | 2003     |   | 279,107                  |    | 157,618                     |   | —                  |   | 122,000 |   | 14,071 |   |
| Senior Vice President,            |   | 2002     |   | 262,752                  |    | 113,488                     |   | 18,200                  |   | 330,000 |   | 13,125 |   |
| Planning & Specialty Products |   | 2001     |   | 237,016                  |    | 114,296                     |   | 17,607                  |   | 311,686 |   | 7,496 |   |
|                              |   |     |   |                     |    |                        |   |                    |   |   |   |   |   |
| J. Mike Parker                    |   | 2003     |   | 253,095                  |    | 119,884                     |   | —                  |   | 126,300 |   | 12,860 |   |
| Senior Vice President,            |   | 2002     |   | 242,688                  |    | 99,723                      |   | 17,000                  |   | 250,000 |   | 12,349 |   |
| Aromatics & Styrenics         |   | 2001     |   | 232,749                  |    | 80,699                      |   | 18,218                  |   | 250,000 |   | 7,438 |   |
|                              |   |     |   |                     |    |                        |   |                    |   |   |   |   |   |
| Tim G. Taylor                     |   | 2003     |   | 291,284                  |    | 126,994                     |   | —                  |   | 175,600 |   | 14,797 |   |
| Senior Vice President,            |   | 2002     |   | 279,177                  |    | 118,372                     |   | 23,400                  |   | 320,000 |   | 14,244 |   |
| Olefins & Polyolefins         |   | 2001     |   | 268,125                  |    | 94,421                      |   | 25,339                  |   | 361,280 |   | 8,579 |   |
|                              |   |     |   |                     |    |                        |   |                    |   |   |   |   |   |
| Craig B. Glidden                  |   | 2003     |   | 298,637                  |    | 113,915                     |   | —                  |   | 149,200 |   | 15,162 |   |
| Vice President,                   |   | 2002     |   | 285,851                  |    | 160,974                     |   | 19,900                  |   | 210,000 |   | 14,535 |   |
| General Counsel & Secretary   |   | 2001     |   | 273,650                  |    | 162,747                     |   | 21,530                  |   | 200,000 |   | 8,658 |   |
|                                   |        |          |        |                          |         |                             |        |                         |        |  |  |  |  |  |  |  |  |

 

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(a)   Under provisions contained in CPChem’samended and restated Long-Term Incentive Plan, in 2003, all Phantom ShareOption holders exchanged options that they were awarded for performance cyclesbeginning in 2001 and 2002 for retroactive Relative Performance (RP) awardseffective for the same 2001 and 2002 performance cycles.  The target amounts of the retroactive RPawards were equal to the target amounts of the respective Phantom Share Optionsawarded for the 2001 and 2002 performance cycles, and for the above namedexecutive officers were as follows: Mr. Gallogly - $557,700 (2001) and $479,800(2002); Mr. Garland - $166,100 (2001) and $158,700 (2002); Mr. Parker -$171,900 (2001) and $148,100 (2002); Mr. Taylor - $239,100 (2001) and $204,400(2002); and Mr. Glidden - $203,100 (2001) and $173,900 (2002).  See “Long-Term Incentive Plans” for adiscussion of the RP awards and Strategic Performance (SP) awards.

 

(b)   Information for 2003 represents SP awardsearned in 2003 for the completed 2001-2003 performance cycle that will be paidin 2004.  As of the date of this report,amounts earned and payable for the 2001-2003 performance cycle under the RPawards had not been determined and are not included in the table.  Information presented for 2002 and 2001represent awards that were paid in 2003 and 2002, respectively, under CPChem’sSpecial Synergy Incentive Plan (SSIP). The SSIP expired on June 30, 2002.

 

(c)   During 2003, Messrs. Gallogly, Garland,Parker, Taylor and Glidden received company contributions to their savings planaccounts of $23,725, $13,628, $12,447, $14,322 and $14,676, respectively, andlife insurance premiums of $778, $443, $413, $475 and $486, respectively, werepaid on their behalf.  During 2002,those officers received company contributions to their savings plan accounts of$22,589, $12,707, $11,936, $13,769 and $14,049, respectively, and lifeinsurance premiums of $778, $418, $413, $475 and $486, respectively, were paidon their behalf.  During 2001, thoseofficers received company contributions to their savings plan accounts of$13,774, $7,113, $7,055, $8,137 and $8,210, respectively, and life insurancepremiums of $651, $383, $383, $442 and $448, respectively, were paid on theirbehalf.

 

**OptionGrants and Options Exercised During 2003**

 

There were no options topurchase securities of CPChem granted during 2003 nor were any such optionsoutstanding as of December 31, 2003.

 

**Long-TermIncentive Plans**

 

In 2003, CPChem’sLong-Term Incentive Plan (LTIP) for selected key employees was retroactivelyamended and restated effective January 1, 2001.  Prior to the amendment and restatement of the LTIP, participantswere eligible for two types of awards: Phantom Share Options and Target Awards.  The LTIP, as amended and restated, currently provides for twodifferent types of awards:  RelativePerformance (RP) awards and Strategic Performance (SP) awards.  Effective for performance cycles beginningon or after January 1, 2003, grants of Phantom Share Options and Target Awardsare no longer available under the LTIP.

 

Under provisionscontained in the amended and restated LTIP, in 2003, all Phantom Share Optionholders exchanged options that they were awarded for performance cyclesbeginning in 2001 and 2002 for retroactive RP awards effective for the same2001 and 2002 performance cycles.  Thetarget amounts of the retroactive RP awards were equal to the target amounts ofthe respective Phantom Share Options awarded. In addition, all persons eligible for Target Awards exchanged their eligible2001 and 2002 Target Awards for retroactive SP awards effective for the same2001 and 2002 performance cycles.  Thetarget amounts of the retroactive SP awards were equal to the target amounts ofthe respective Target Awards awarded for the 2001 and 2002 performancecycles.  The Compensation Committee ofthe Board of Directors of CPChem (the “Compensation Committee”) has the solediscretion to determine which employees receive RP and SP awards.

 

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The CompensationCommittee sets target RP and SP award amounts for a performance cycle at thetime the annual RP and SP awards are granted to eligible employees.  RP awards are generally based on changes inCPChem’s financial performance as compared to a group of comparable companiesas selected by the Compensation Committee. SP awards are based on CPChem’s strategic performance as compared todefined strategic objectives as selected by the Compensation Committee.  Amounts granted under each type of award, payableonly in cash, are determined at the end of each performance cycle, which istypically three years.  The CompensationCommittee has the sole discretion to determine the amounts payable, if any,under each type of award.

 

**LTIPAwards in 2003**

 
|              |   | **Award  Type** |       | **Target  Award** |       | **Performance  Period Until  Payout** | ** ** | **Estimated  Future Payouts  Under Non-Stock-Price-Based Plans** |   |
|-------------------|--------|-----------------|------------|-------------------|------------|---------------------------------------|------------|------------------------------------------------------------------|--------|
| **Name**          |   | **Threshold**   | ** ** | **Target**        | ** ** | **Maximum**                           | ** ** |
| James L. Gallogly |   | RP              |       | $                 | 510,600    |                                  | 12/31/2005 |                                                             | $      | — |   | $ | 510,600 |   | $ | 1,021,200 |   |
|              |   | SP              |       | 510,600           |       | 12/31/2005                            |       | —                                                           |   | 510,600 |   | 1,021,200 |   |
|              |   |            |       |              |       |                                  |       |                                                             |   |   |   |   |   |
| Greg C. Garland   |   | RP              |       | 169,800           |       | 12/31/2005                            |       | —                                                           |   | 169,800 |   | 339,600 |   |
|              |   | SP              |       | 169,800           |       | 12/31/2005                            |       | —                                                           |   | 169,800 |   | 339,600 |   |
|              |   |            |       |              |       |                                  |       |                                                             |   |   |   |   |   |
| J. Mike Parker    |   | RP              |       | 155,200           |       | 12/31/2005                            |       | —                                                           |   | 155,200 |   | 310,400 |   |
|              |   | SP              |       | 155,200           |       | 12/31/2005                            |       | —                                                           |   | 155,200 |   | 310,400 |   |
|              |   |            |       |              |       |                                  |       |                                                             |   |   |   |   |   |
| Tim G. Taylor     |   | RP              |       | 214,400           |       | 12/31/2005                            |       | —                                                           |   | 214,400 |   | 428,800 |   |
|              |   | SP              |       | 214,400           |       | 12/31/2005                            |       | —                                                           |   | 214,400 |   | 428,800 |   |
|              |   |            |       |              |       |                                  |       |                                                             |   |   |   |   |   |
| Craig B. Glidden  |   | RP              |       | 183,400           |       | 12/31/2005                            |       | —                                                           |   | 183,400 |   | 366,800 |   |
|              |   | SP              |       | 183,400           |       | 12/31/2005                            |       | —                                                           |   | 183,400 |   | 366,800 |   |
|                   |        |                 |            |                   |            |                                       |            |                                                                  |        |  |  |  |  |  |  |  |  |

 

**PensionPlans**

 

*Retirement Plan*

 

CPChem’s retirement plan is adefined benefit plan and applies to most U.S.-based employees.  Eligible employees automatically participatein the plan and began accruing benefits from January 1, 2001 or their first dayof employment if employed after that date. Eligible employees become fully vested in their retirement benefitsafter five years of service with CPChem, including prior service withConocoPhillips or ChevronTexaco or their affiliates.  The CPChem retirement benefit consists of two components: acareer average pay benefit and a variable annuity benefit.  For the career average pay benefit, eachyear employees receive an annual credit equal to 1% of eligible compensationfor that year.  Discretionary upgradesto increase the career average pay benefit may be made as often as every threeyears provided CPChem’s performance metrics support the additional cost.  The variable annuity benefit is the secondcomponent of the CPChem retirement plan and is made up of a monthly creditequal to 1% of each eligible employee’s compensation for that month.  Additional credits may be made, at thediscretion of CPChem’s Board of Directors, at rates ranging from 0% to 10% ofthe total amount in each eligible employee’s variable annuity account.  Upon retirement, the accrued benefit may bepaid as a lump sum payment or converted to a monthly benefit.  If a lump sum payment is elected, thatpayment may be rolled over to an individual retirement account or individualretirement annuity of another employer’s plan.

 

Ifan employee leaves CPChem for any reason prior to retirement and is vested, theaccrued benefit may either be paid out at that time in accordance with theoptions described above or remain in the plan until the individual’s early ornormal retirement date, at which time the accrued benefit may be paid out as a

 

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lump sum or converted to amonthly benefit.  Eligible employeesthat came to CPChem from either ChevronTexaco or ConocoPhillips on January 1,2001 will receive an adjustment to their retirement benefit.  This adjustment will ensure that anemployee’s retirement benefit will not be adversely affected as a result ofthat employee’s ceasing to accumulate service credit under either owner’spension plan.

 

*Supplemental Executive Retirement Plan*

 

The supplemental executiveretirement plan applies to designated officers and key executives who receive aretirement benefit under the retirement plan and who have had the amount ofthat benefit reduced due to required limitations under the Internal RevenueCode, or by reason of deferral of compensation under CPChem’s executive deferredcompensation plan.  The eligibleemployee’s benefit under this plan is equal to the difference between (a) theamount the employee would have received under the retirement plan withoutregard to the limitations imposed by the Internal Revenue Code and the amountsdeferred by the employee under CPChem’s executive deferred compensation plan,and (b) the amount of the employee’s retirement benefit payable under theretirement plan.

 

The payment options underthe supplemental executive retirement plan are generally the same as thoseoffered under the CPChem retirement plan.

 

*Estimated Retirement Benefits*

 

The estimated annualbenefits payable upon retirement at normal retirement age (defined in theretirement plans as age 65) for each of the named executive officers are asfollows:

 
| **Name**          |   | **Estimated  Annual  Retirement Benefits** |    |
|-------------------|--------|--------------------------------------------|---------|
| James L. Gallogly |   | $                                          | 238,875 |   |
| Greg C. Garland   |   | 155,001                                    |    |
| J. Mike Parker    |   | 121,647                                    |    |
| Tim G. Taylor     |   | 124,861                                    |    |
| Craig B. Glidden  |   | 104,999                                    |    |
|                   |        |                                            |         |  |

 

**DirectorCompensation**

 

Neither the Class C norClass P directors of CPChem receive any additional compensation for theirservice as directors.

 

**EmploymentAgreements**

 

None of the named executiveofficers have employment agreements with CPChem.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Mr. Lowe, who currentlyserves as Executive Vice President, Planning, Strategy and Corporate Affairsfor ConocoPhillips, has served as a voting member of the Compensation Committeesince December 2000.  Mr. Darald W.Callahan served as a voting member of the Compensation Committee from December2000 until June 1, 2003, when he resigned as a Class C Director of CPChem’sBoard of Directors in advance of his retirement from ChevronTexaco.  Ms. Yarrington, who currently serves as VicePresident, Policy, Government and Public Affairs at ChevronTexaco, has servedas a Compensation Committee voting member since June 1, 2003.  None of the aforementioned directors hasserved as an officer or employee of CPChem or any of its subsidiaries.  Mr. Gallogly has served as a non-votingmember since December 2000.  During2003, Ms. Sherry Richard served as a non-voting member until her resignationfrom CPChem on June 24, 2003.  Mr. DonF. Kremer, Vice President, Human Resources, has served as a non-voting membersince September 15, 2003.

 

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**Item12.****  SecurityOwnership of Certain Beneficial Owners and Management**

 

CPChem is a limited liability company, wholly owned by ChevronTexacoand ConocoPhillips, either directly or indirectly through their wholly-ownedsubsidiaries.  ChevronTexaco’s ownershipinterest is held entirely by Chevron U.S.A. Inc., its wholly-ownedsubsidiary.  ConocoPhillips’ ownershipinterest is held by ConocoPhillips Company, WesTTex 66 Pipeline Company,Phillips Chemical Holdings Company and Phillips Petroleum InternationalCorporation, all wholly-owned subsidiaries of ConocoPhillips.  The following information is given withrespect to the Owners’ interests in CPChem as of the date of this annual report.

 
| **Name and Address of Owner**                                                             |   | **Title of Class** |   | **Percentage of  Ownership** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------------|--------|
| Chevron U.S.A. Inc.  6001 Bollinger Canyon Road  San Ramon, California 94583              |   | Class C            |   | 50.0                         | %      |
|                                                                                      |   |               |   |                         |   |
| ConocoPhillips Company  600 North Dairy Ashford  Houston, TX 77079                        |   | Class P            |   | 38.0                         | %      |
|                                                                                      |   |               |   |                         |   |
| Phillips Petroleum International  Corporation  600 North Dairy Ashford  Houston, TX 77079 |   | Class P            |   | 9.5                          | %      |
|                                                                                      |   |               |   |                         |   |
| WesTTex 66 Pipeline Company  600 North Dairy Ashford  Houston, TX 77079                   |   | Class P            |   | 2.1                          | %      |
|                                                                                      |   |               |   |                         |   |
| Phillips Chemical Holdings Company  600 North Dairy Ashford  Houston, TX 77079            |   | Class P            |   | 0.4                          | %      |

 

**Item13.****  CertainRelationships and Related Transactions**

 

All of therelated transactions described below are on terms substantially no morefavorable than those that would have been agreed upon with third parties on anarm’s-length basis.

 

*Services Agreements. *CPChemis a party to agreements with ChevronTexaco and ConocoPhillips, under whichthey provide CPChem with personnel, equipment and technology primarily forresearch, technology development, laboratory services, and engineering andproject management support. ChevronTexaco and ConocoPhillips charge CPChem for these servicesaccording to the rates agreed upon in these services agreements.  CPChem has also entered into otheragreements with affiliates of ChevronTexaco and ConocoPhillips that cover theprovision of additional services including, but not limited to, security,procurement and pipeline operating services.

 

*Intellectual Property Agreements. *In connection with the formation of thecompany, CPChem entered into a Tradename License Agreement with ChevronTexacoand ConocoPhillips, a General Trademark Assignment Agreement withConocoPhillips, and separate Intellectual Property Agreements with eachassigning or exclusively licensing rights to certain intellectual propertyowned by ChevronTexaco and ConocoPhillips.

 

*Common Facility Operating Agreements and Supply Agreements. *CPChem is a partyto Common Facilities Operating Agreements with ConocoPhillips and ChevronTexacorelated to the operation of the chemical facilities located within or neartheir refineries at Sweeny, Borger and Pascagoula.  CPChem is also a party to supply agreements with ConocoPhillipsand ChevronTexaco under which CPChem purchases various products produced inthese refineries, and ConocoPhillips and ChevronTexaco purchase variousproducts that CPChem produces in its chemical facilities.

 

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*Feedstock Agreements. *CPChemis a party to agreements with each of ConocoPhillips, Duke Energy FieldServices, LLC (an affiliate of ConocoPhillips) and Dynegy Inc. (an affiliate ofChevronTexaco) under which they supply CPChem with certain natural gas liquidfeedstocks.  CPChem is also a party toagreements with ConocoPhillips and ChevronTexaco under which it supplies olefinproducts.

 

*Sales Agency Agreements. *CPChemis a party to sales agency agreements with ConocoPhillips under which itmarkets and sells certain chemical products produced by ConocoPhillips at itsBorger and Sweeny refineries.

 

*Polyethylene Pipe*.  CPChem’s Performance Pipe division sells polyethylene pipe toChevronTexaco and ConocoPhillips.

 

*Specialty Products.*  CPChem’s Specialty Chemicals division sells specialty andreference fuels, gas odorants, sulfiding agents and extractive solvents toConocoPhillips, ChevronTexaco and Duke Energy Field Services, LLC.

 

See Part II - Item 8. Financial Statements and Supplementary Data –Note 4 for information regarding aggregate amounts paid in transactions withaffiliated parties.

 

**Item14.****  PrincipalAccountant Fees and Services**

 

*Fees.*  Aggregate fees for professional servicesrendered by CPChem’s independent auditor, Ernst & Young LLP, were asfollows:

 

|                   |   | **Years  ended December 31,** |    |
|------------------------|--------|------------------------------------|---------|
| **Dollars**            |   | **2003**                           |    | **2002** |   |
| Audit fees (a)         |   | $                                  | 598,200 |   | $ | 663,887 |   |
| Audit-related fees (b) |   | 131,200                            |    | 173,439 |   |
| Tax fees (c)           |   | 105,343                            |    | 394,283 |   |
| All other fees (d)     |   | —                             |    | 9,427 |   |
| Total fees billed      |   | $                                  | 834,743 |   | $ | 1,241,036 |   |

 

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(a)          Audit fees represent fees billed forprofessional services rendered for the audits of CPChem’s annual consolidatedfinancial statements, statutory audits of CPChem’s subsidiaries, quarterlyreviews of CPChem’s consolidated financial statements, reviews of documentsfiled with the SEC, registration statements and comfort letters.

 

(b)         Audit-related fees represent fees billed forprofessional services rendered for audits of employee benefit plans, attestservices and accounting consultations.

 

(c)          Tax fees represent fees billed forprofessional services rendered for tax planning, tax advice and tax compliance.

 

(d)   Otherfees in 2002 include actuarial services and consultations on matters pertainingto information technology and human resources. These services were performed prior to the July 30, 2002 enactment ofthe Sarbanes-Oxley Act of 2002.

 

CPChem and its Audit Committee are committed to ensuring theindependence of its independent auditor as related to CPChem.  As such, it is CPChem’s policy that allengagements of Ernst & Young LLP by CPChem be pre-approved by the AuditCommittee.  Since May 6, 2003, the datethat the pre-approval requirements of the SEC became effective, there was onetax engagement of Ernst & Young LLP initiated without obtainingpre-approval from the Audit Committee. The engagement was for services costing $1,894, which representedapproximately 5% of tax fees billed and less than 1% of total fees billedduring

 

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the period May 6, 2003 through December 31, 2003.  Such services were not recognized by CPChemat the time of the engagement to be non-audit services and the Audit Committeewas promptly notified of the engagement. The Audit Committee subsequently approved the engagement well in advanceof the completion of the audit of CPChem’s 2003 consolidated financialstatements.

 

**PART IV**

 

**Item15.****  Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 

(a)(1)                    The financial statements listed inthe Index to Financial Statements on page 34 are filed as part of this annualreport.

 

(a)(2)                    The following schedule ispresented as required.  All otherschedules are omitted because the information is not applicable, not requiredor has been furnished in the Consolidated Financial Statements or Notesthereto.

 

Chevron Phillips Chemical Company LLC

Schedule II – Valuation and QualifyingAccounts

 
| **Millions**                      |   | **Allowance  for Doubtful  Accounts** |   | **Deferred  Income  Tax Valuation  Allowance (a)** |   |
|-----------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
| Balance on December 31, 2000 |   | $                                     | 3      |                                               | $      | 92 |   |
| Additions (b)                     |   | 6                                     |   | 83                                                 |   |
| Deductions (c)                    |   | (3                                    | )      | —                                             |   |
| Balance on December 31, 2001 |   | 6                                     |   | 175                                                |   |
| Additions (b)                     |   | 4                                     |   | 6                                                  |   |
| Deductions (c)                    |   | (3                                    | )      | —                                             |   |
| Balance on December 31, 2002 |   | 7                                     |   | 181                                                |   |
| Additions (b)                     |   | 4                                     |   | 9                                                  |   |
| Deductions (c)                    |   | (4                                    | )      | —                                             |   |
| Balance on December 31, 2003 |   | $                                     | 7      |                                               | $      | 190 |   |

 

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(a)          Additions were generally offset by taxbenefits of related losses.

(b)         Charged to expense.

(c)          Receivables written off less recoveries, ifany.

 

(a)(3)                    The exhibits listed in the Index ofExhibits on pages 95 and 96 are filed as part of this annual report.

 

(b)                                 There were no Reportson Form 8-K filed during the quarter ended December 31, 2003.

 

# **SIGNATURES**

# ** **

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

|                      |   | CHEVRON PHILLIPS CHEMICAL COMPANY LLC |
|---------------------------|--------|---------------------------------------|
|                      |   |                                  |
| Date:  March 2, 2004 |   |                                  | */s/ Greg G. Maxwell* |   |
|                      |   |                                  | Greg G. Maxwell |   |
|                      |   |                                  | Senior Vice President, |   |
|                      |   |                                  | Chief Financial Officer and Controller |   |
|                           |        |                                       |  |  |  |  |

 

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Each person whose signature appears below hereby constitutes andappoints James L. Gallogly and Greg G. Maxwell and each of them, the true andlawful attorneys-in-fact and agents of the undersigned, with full power ofsubstitution and resubstitution, for and in the name, place and stead of theundersigned, in any and all capacities, to sign any and all amendments to thisAnnual Report on Form 10-K, and to file the same, with all exhibits thereto,and all other documents in connection therewith, with the Securities andExchange Commission, and hereby grants to such attorneys-in-fact and agents,and each of them, full power and authority to do and perform each and every actand anything necessary to be done, as fully to all intents and purposes as theundersigned might or could do in person, hereby ratifying and confirming allthat said attorneys-in-fact and agents, or any of them, or their or hissubstitute, or substitutes, may lawfully do or cause to be done by virtuehereof.

 

Pursuant to the requirements of the Securities Act of 1934, this reporthas been signed below by the following persons on behalf of the Registrant andin the capacities and on the dates indicated.

 
| **Signature**                |   | **Title**                              |   | **Date**      |   |
|------------------------------|--------|----------------------------------------|--------|---------------|--------|
|                         |   |                                   |   |          |
| */s/ James L. Gallogly*      |   | President and Chief Executive Officer  |   | March 2, 2004 |
| James L. Gallogly            |   |                                   |   |          |
|                         |   |                                   |   |          |
|                         |   |                                   |   |          |
| */s/ Greg G. Maxwell*        |   | Senior Vice President,                 |   | March 2, 2004 |
| Greg G. Maxwell              |   | Chief Financial Officer and Controller |   |          |
|                         |   |                                   |   |          |
|                         |   |                                   |   |          |
| */s/ John E. Lowe*           |   | Director                               |   | March 2, 2004 |
| John E. Lowe                 |   |                                   |   |          |
|                         |   |                                   |   |          |
|                         |   |                                   |   |          |
| */s/ Jim W. Nokes*           |   | Director                               |   | March 2, 2004 |
| Jim W. Nokes                 |   |                                   |   |          |
|                         |   |                                   |   |          |
|                         |   |                                   |   |          |
| */s/ Patricia E. Yarrington* |   | Director                               |   | March 2, 2004 |
| Patricia E. Yarrington       |   |                                   |   |          |
|                         |   |                                   |   |          |
|                         |   |                                   |   |          |
| */s/ Gary G. Yesavage*       |   | Director                               |   | March 2, 2004 |
| Gary G. Yesavage             |   |                                   |   |          |
|                              |        |                                        |        |               |        |  |

 

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**Supplemental Information to be Furnished withReports Filed Pursuant to Section 15(d) of the Securities Exchange Act of1934 by Registrants which have not Registered Securities Pursuant toSection 12 of the Securities Exchange Act of 1934:**

 

No annual report to security holders covering the Registrant’s lastfiscal year has been sent to the Registrant’s security holders and no proxystatement, form of proxy or other proxy soliciting material has been sent tomore than ten of the Registrant’s security holders with respect to any annualor other meeting of security holders. No such report or proxy material is expected to be furnished to securityholders subsequent to the filing of this Annual Report on Form 10-K.

 

**INDEX OF EXHIBITS**

 
| **Exhibit No.** |   | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.1            |   | Certificate of Formation of Chevron Phillips Chemical Company LLC,  dated May 23, 2000 (Exhibit No. 3.1 to CPChem’s Registration Statement on  Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.2            |   | Certificate of Limited Partnership of Chevron Phillips Chemical  Company LP, dated April 26, 2000 (Exhibit No. 3.2 to CPChem’s  Registration Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.3            |   | Certificate of Amendment to Certificate of Limited Partnership of  Chevron Phillips Chemical Company LP, dated May 23, 2000 (Exhibit No. 3.3 to  CPChem’s Registration Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.4            |   | Second Amended and Restated Limited Liability Company Agreement of  Chevron Phillips Chemical Company LLC, dated July 1, 2002, by and  between ChevronTexaco Corporation, Phillips Petroleum Company, Chevron U.S.A.  Inc., Phillips Chemical Holding Company, WesTTex 66 Pipeline Company and  Phillips Petroleum International Corporation (Exhibit No. 3.4 to CPChem’s  Registration Statement on Form S-4 dated August 6, 2002). |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *3.5            |   | Agreement of Limited Partnership of Chevron Phillips Chemical Company  LP, dated April 26, 2000 (Exhibit No. 3.5 to CPChem’s Registration  Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *4.1            |   | Indenture, dated as of March 19, 2001 between Chevron Phillips  Chemical Company LLC and Chevron Phillips Chemical Company LP, as Issuers,  and The Bank of New York as Trustee (Exhibit No. 4.1 to CPChem’s Registration  Statement on Form S-4 dated April 16, 2001).                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.1           |   | Contribution Agreement by and among Phillips Petroleum Company,  Chevron Corporation and Chevron Phillips Chemical Company LLC, dated May 23,  2000 (Exhibit No. 10.1 to CPChem’s Registration Statement on Form S-4/A dated  May 10, 2001).                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.2           |   | Letter Agreement dated July 5, 2001, amending the Contribution  Agreement, dated May 23, 2000, between Chevron Corporation, Phillips  Petroleum Company and Chevron Phillips Chemical Company LLC (Exhibit No. 10.1  to CPChem’s Quarterly Report on Form 10-Q for the quarter ended June 30,  2001).                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.3           |   | Letter  Agreement dated February 24, 2003, amending the Contribution Agreement,  dated May 23, 2000, between Chevron Corporation, Phillips Petroleum Company  and Chevron Phillips Chemical Company LLC (Exhibit No. 10.3 to  CPChem’s Annual Report on Form 10-K for the year ended December 31,  2002).                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| *10.4           |   | Chevron Phillips Chemical Company LP Executive Deferred Compensation  Plan, effective January 1, 2001 (Exhibit No. 10.2 to CPChem’s  Registration Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                       |

 

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| *10.5  |   | Chevron Phillips Chemical Company LP Supplemental Executive  Retirement Plan  (Exhibit No. 10.3 to  CPChem’s Registration Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                                                                                      |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.6  |   | Chevron Phillips Chemical Company LLC Long-Term Incentive Plan (as  Amended and Restated Effective January 1, 2001) (Exhibit No. 10.2 to  CPChem’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003).                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.7  |   | Chevron Phillips Chemical Company LLC Annual Incentive Plan (Exhibit  No. 10.6 to CPChem’s Annual Report on Form 10-K for the year ended  December 31, 2001).                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.8  |   | 364-Day Credit Agreement among Chevron Phillips Chemical Company LLC  and Chevron Phillips Chemical Company LP, as Borrowers, and Barclays Bank  Plc, The Royal Bank of Scotland Plc, The Bank of Nova Scotia, The Bank of  Tokyo-Mitsubishi Ltd., Sumitomo Mitsui Banking Corporation and certain  lenders from time to time thereto, dated as of August 28, 2003 (Exhibit  No. 10.1 to CPChem’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *10.9  |   | Three-Year Credit Agreement among Chevron Phillips Chemical Company  LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Barclays Bank  Plc, The Royal Bank of Scotland Plc, The Bank of Tokyo-Mitsubishi Ltd.,  Sumitomo Mitsui Banking Corporation and certain lenders from time to time  thereto, dated as of August 29, 2002 (Exhibit No. 4.2 to CPChem’s  Quarterly Report on Form 10-Q for the quarter ended September 30, 2002).                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 21.2   |   | Powers of Attorney (included in signature pages).                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 31.2   |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                  |

 

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* Incorporated by reference as indicated.

 

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