**Exhibit10.7**

 

 

**ANNUALINCENTIVE PLAN**

 

**OF**

 

**CHEVRONPHILLIPS CHEMICAL COMPANY LLC**

 

**(AsAmended and Restated Effective January 1, 2005)**

 

 

 

 

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**ANNUALINCENTIVE PLAN**

**OF**

**CHEVRONPHILLIPS CHEMICAL COMPANY LLC**

**(AsAmended and Restated Effective January 1, 2005)**

 

**TABLE OFCONTENTS**

 
| ** ** | ** **                                        | **Page** |
|------------|---------------------------------------------------|----------|
| 1.         | Interpretation and  Definitions                   | 1        |   |
| 2.         | Administration of Plan.                           | 5        |   |
| 3.         | Eligibility and  Participation                    | 5        |   |
| 4.         | AIP Awards .                                      | 6        |   |
| 5.         | Payment of AIP Awards                             | 7        |   |
| 6.         | Vesting and Forfeiture                            | 7        |   |
| 7.         | Amendment and  Discontinuance                     | 8        |   |
| 8.         | Recapitalization,  Merger, and Consolidation      | 8        |   |
| 9.         | General Provisions                                | 8        |   |
|       | Schedule A  “Administrative Procedures” | 10       |   |

 

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**ANNUALINCENTIVE PLAN**

**OF**

**CHEVRONPHILLIPS CHEMICAL COMPANY LLC**

**(AsAmended and Restated Effective January 1, 2005)**

 

**PURPOSE**

 

The purpose of thisamended and restated Annual Incentive Plan (the “Plan”) is to attract,motivate, and retain qualified management personnel by providing to them anannual incentive compensation plan that will provide competitive compensationopportunities similar to those of comparable companies in the chemicalindustry, align the interests of key management with the interests of theCompany’s owners, and assist the Company in achieving its goals of being thetop performer in each of its businesses.

 

The Plan is intended tobe a “bonus program” within the meaning of Labor Reg. § 2510.3-2(c) and,therefore, is not intended to be subject to the requirements of ERISA. It isalso intended to comply with the requirements of Section 409A of the InternalRevenue Code, as added by the American Jobs Creation Act of 2004 (“Section 409A”),to the extent such provisions apply.

 

The Plan was originallyestablished effective January 1, 2001.

 

The Plan is, except asotherwise set forth in the document, amended and restated effective January 1,2005.

 

# **1.**             Interpretationand Definitions

# ** **

(a)                                  General.

 

(1)           Interpretation.Unless a clear contrary intention appears, for purposes of construction of thisPlan and all related Plan Documents:

 

(i)            thesingular number includes the plural number and vice versa;

 

(ii)           referenceto any person includes such person’s successors and assigns but, if applicable,only if such successors and assigns are permitted by the Plan Documents, andreference to a person in a particular capacity excludes such person in anyother capacity or individually;

 

(iii)          referenceto any gender includes the other gender;

 

(iv)          referenceto any Plan Document or any other agreement, document or instrument means theapplicable Plan Document or such other agreement, document or instrument asamended or modified and in effect from time to time in accordance with theterms thereof;

 

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(v)           referenceto any law means such law as amended, modified, codified, replaced orreenacted, in whole or in part, and in effect from time to time, includingrules and regulations promulgated thereunder, and reference to any section orother provision of any law means that provision of such law from time to timein effect and constituting the substantive amendment, modification,codification, replacement or reenactment of such section or other provision;

 

(vi)          referencein any Plan Document to any article, section, appendix, schedule or exhibitmeans such article or section thereof or appendix, schedule or exhibit thereto;

 

(vii)         “hereunder”,“hereof”, and words of similar import shall be deemed references to a PlanDocument as a whole and not to any particular article, section or otherprovision thereof;

 

(viii)        “including”(and with the correlative meaning “include”) means including without limitingthe generality of any description preceding such term;

 

(ix)           “or”is not exclusive;

 

(x)            relativeto the determination of any period of time, “from” means “from and including”and “to” means “to but excluding;” and

 

(xi)           referencesto days, weeks, months, quarters and years are references to such periods asdetermined by the Gregorian calendar.

 

(2)           **Accounting Terms.**In each Plan Document, unless expresslyotherwise provided, accounting terms shall be construed and interpreted, andaccounting determinations and computations shall be made, in accordance withgenerally accepted accounting principles.

 

(3)           **Conflict in Plan Documents.**If there is any conflict betweenany two or more Plan Documents, such Plan Documents shall be interpreted andconstrued, if possible, so as to avoid or minimize such conflict but, to theextent (and only to the extent) of such conflict, the Plan Document dealingmost specifically with the matter as to which there is a conflict shall prevailand control. If it cannot be determined which Plan Document deals mostspecifically with a matter as to which there is a conflict then the Plan shallprevail and control.

 

(b)           Definitions.

 

(1)           “AnnualIncentive Plan Award” or “AIP Award” means an award of cash made pursuant tothe Plan (or any prorated portion thereof).

 

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(2)           “Board”means the Board of Directors of the Company.

 

(3)           “BonusLevel Employee” means:

 

(i)            withrespect to Employees on the U.S. Dollar payroll of a Participating Employer,any regular, full-time Employee (including an Employee who is also a directoror an officer) who is a pay grade 90 or above; and

 

(ii)           withrespect to Employees who are not on a U.S. Dollar payroll, those Employees whoare employed within pay grades which are deemed by the Committee to beequivalent to grades 90 or above.

 

Notwithstanding anythingcontained in the Plan to the contrary, any person who, pursuant to a writtencontract with a Participating Employer that provides that he is an independentcontractor and not an Employee, shall be excluded from the definition of BonusLevel Employee and shall not be eligible to participate in the Plan during theperiod such written contract is in effect regardless of such person’sreclassification as an Employee for such period by the Internal Revenue Servicefor tax withholding purposes. If, during any period, a Participating Employerhas not treated an individual as an Employee and, for that reason, has notwithheld employment taxes with respect to that individual, then that individualshall not be a Bonus Level Employee for that period, even in the event that theindividual is determined, retroactively, to have been an Employee during all orany portion of that period.

 

(4)           “Chevron”means Chevron Corporation, or such entity as may be controlled by ChevronCorporation, that directly or indirectly holds a membership interest in theCompany.

 

(5)           “Committee”means the Compensation Committee of the Board.

 

(6)           “Company”means Chevron Phillips Chemical Company LLC and any successor entity.

 

(7)           “ConocoPhillips”means ConocoPhillips, or such entity as may be controlled by ConocoPhillips,that directly or indirectly holds a membership interest in the Company.

 

(8)           “Dateof Termination” means the date on which a Participant ceases to be an Employee.

 

(9)           “DeferredCompensation Plan” means the Chevron Phillips Chemical Company LP ExecutiveDeferred Compensation Plan.

 

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(10)         “Disability”means the Participant is eligible for, and is continuously receiving disabilityinsurance benefits under the Social Security Act or the Participating Employer’slong-term disability plan.

 

(11)         “Employee”means any employee of a Participating Employer.

 

(12)         “ERISA”means the Employee Retirement Income Security Act of 1974, as amended.

 

(13)         “Layoff”means termination of employment by reason of layoff pursuant to the ChevronPhillips Chemical Company LP’s severance program or similar program adopted bya Participating Employer.

 

(14)         “ParentCompany” means Chevron, ConocoPhillips, and their respective successors.

 

(15)         “Participant”means an Employee who has been designated as a participant pursuant to Section3.

 

(16)         “ParticipatingEmployer” means the Company and any direct or indirect subsidiary entity of theCompany which, with the Company’s consent, has adopted the Plan.

 

(17)         “Plan”means the Annual Incentive Plan of Chevron Phillips Chemical Company LLC.

 

(18)         “PlanDocument” means this Plan, any administrative procedures that may from time totime be adopted by the Committee (including Schedule A), and any other documentdefining the defining the rights and liabilities of any Participant.

 

(19)         “PlanYear” means a period of twelve (12) months beginning on January 1 of anycalendar year.

 

(20)         “Retirement”means a Participant’s Termination of Service in connection with the attainmentof any applicable early retirement age or normal retirement age as defined inthe Chevron Phillips Chemical Company LP Retirement Plan or any retirement planof any Participating Employer. A Participant whose Termination of Serviceoccurs while eligible to retire under any of such plans, but who does not electto immediately commence the receipt of benefits thereunder, shall neverthelessbe deemed to have retired under such plan for purposes of this Plan.

 

(21)         “Salary”means the annualized base rate of a Participant as of December 31 of the PlanYear with respect to which an AIP Award is made or, in the case of (i)Disability, the base rate of the Participant when he is placed on Disability or(ii) Termination of Service by reason of Retirement, Layoff, death, or transferto a Parent Company, the base rate of the Participant on his Date ofTermination.

 

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(22)         “Terminationof Service” occurs when a Participant ceases to serve as an Employee for anyreason.

 

# **2.**             Administrationof the Plan

 

(a)           ThePlan shall be administered by the Committee.

 

(b)           Notwithstandingany other provision of the Plan, the Plan shall be interpreted, operated andadministered in a manner consistent with Section 409A.

 

(c)           TheCommittee may establish, from time to time and at any time, subject to thelimitations of the Plan as set forth herein, such rules and regulations andamendments and supplements thereto, as it deems necessary to comply withapplicable law and for the proper administration of the Plan.

 

(d)           TheCommittee’s interpretation and construction of the provisions of the Plan andrules and regulations adopted by the Committee shall be final. No member of theCommittee or the Board shall be liable for any action taken, or determinationmade, in respect of the Plan in good faith.

 

(e)           The membersof the Committee may retain counsel, employ agents, and provide for suchclerical, accounting and consulting services as they may require in carryingout the provisions of the Plan; and may allocate among themselves or delegateto other persons all or such portion of their duties under the Plan as they, intheir sole discretion, shall decide. Each member of the Committee and eachmember of the Board shall be fully justified in relying upon or acting in goodfaith upon any opinion, report, or information furnished in connection with thePlan by any accountant, counsel, or other specialist so retained (includingfinancial officers of the Company, whether or not such persons are Participantsin the Plan).

 

(f)            ThisPlan may be adopted by such subsidiary entities of the Company as the Board orCommittee may approve, whereupon such entities shall become ParticipatingEmployers.

 

**3.****                                      Eligibilityand Participation**

 

(a)           Except asotherwise provided herein, all regular, full time Employees who are Bonus LevelEmployees as of January 1 of the Plan Year shall be Participants in the Plan.

 

(b)           Notwithstandinganything contained in the Plan Documents to the contrary, the Committee mayfrom time to time select additional Employees or classes of Employees forparticipation in the Plan, and may direct that specific Bonus Level Employees,or classes of Bonus Level Employees be removed from participation. Any suchdetermination may be made at any time prior to the payment of AIP Awards withrespect to any Plan Year, and may be made with respect to participation duringall or any part of any Plan Year.

 

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(c)           If,during a Plan Year, a regular, full-time Employee is promoted to a pay grade of90 or above, the Employee will become a Participant in the Plan, and will beeligible for an AIP Award for said Plan Year. Such AIP Award will be proratedfor the period which begins on the date of promotion and ends as of the end ofthe applicable Plan Year in question. If, during a Plan Year, an individual ishired as an Employee in a pay grade of 90 or above, the Employee will become aParticipant in the Plan, and will be eligible for an AIP Award for said PlanYear. Such AIP Award will be prorated for the period which begins on the date ofemployment and ends as of the end of the applicable Plan Year. If, during aPlan Year, a Participant is demoted to a pay grade lower than 90, his AIP Awardfor said Plan Year will be prorated for the period which begins on the firstday of the applicable Plan Year and ends on the effective date of the Employee’sdemotion.

 

If during the Plan Year aParticipant transfers between pay grade levels for Bonus Level Employee, hisAIP Award will be determined by: Dividing the number of months in each paygrade level by 12. Multiplying each quotient by the corresponding targetpercentage for the pay grade as set forth in Paragraph 1 of Schedule A. The AIPAward for which the Participant will be considered is the sum of the products. Inthis regard, the Participant will receive credit for each month based on thegrade level in which the Participant resides on the first day of each month.

 

# **4.**             AIPAwards

 

(a)           Assoon as practicable following the beginning of each Plan Year, the Committeeshall (1) make such determinations as it may deem appropriate with respect tothe selection of Participants for such Plan Year; and (2) establish target AIPAwards for each Participant which will be measured as a percentage of theParticipant’s Salary based upon the Participant’s grade level, as moreparticularly described in the Administrative Procedures document, attachedhereto as ScheduleA.

 

At the end of each PlanYear, the Committee shall evaluate the Company’s performance based uponperformance measures approved by the Committee at the beginning of theapplicable Plan Year under the Company’s Employee Incentive Program (“EIP”) todetermine what percentage of the Participant’s AIP Award target amount will beawarded the Participant. The percentage may range from 0% to 200%.

 

Any resultant AIP Awardmay be further adjusted as a result of the application of the provisions inSection 4(b) or by the Committee in its sole and absolute discretion whether inindividual cases or in the aggregate.

 

(b)           Notwithstandinganything contained in the Plan Documents to the contrary, in the event that anyParticipant engages in any activity which the Committee judges to bedetrimental to any Participating Employer, or otherwise fails to perform hisobligations as a regular, full-time Employee, the Committee may cancel orreduce the AIP Award in whole or in part at any time prior to payment of theAIP Award.

 

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**5.****             Payment of AIP Awards**

 

(a)           AIPAwards for Plan Year 2004 were paid in a lump sum between January 1, 2005 andMarch 15, 2005. AIP Awards for Plan Years beginning on or after January 1, 2005will be paid in a lump sum on March 22 of the Plan Year following the end ofthe Plan Year to which the AIP Award relates; provided, however, that if apayment date occurs on a Saturday,Sunday or bank holiday, payment will be made the next following business day.

 

(b)           Ifa Participant is eligible to participate in the Deferred Compensation Plan,then the Participant may voluntarily elect to defer receipt of his AIP Awardand to cause such amount to be credited to his account with the DeferredCompensation Plan. The rules and procedures governing the Deferred CompensationPlan, including Section 409A, shall govern and be binding upon any Participantswho elect to make such deferrals.

 

**6.****             Vesting and Forfeiture**

 

(a)           Exceptas otherwise provided in the Plan Documents, a Participant will be vested inhis AIP Award if the Participant is a regular, full time Employee on the dateof payment of the AIP Award.

 

(b)           Ifa Participant becomes Disabled or has a Termination of Service due toRetirement, Layoff, transfer to a Parent Company, or death prior to the date ofpayment of the AIP Award, the Participant shall be vested in his AIP Award whenthe Participant is placed on Disability or on his Date of Termination, asapplicable, in which event the AIP Award payable to the Participant for suchPlan Year shall be prorated. For this purpose, the proration period will beginon January 1 of such Plan Year and will end (1) when the Participant is placeon Disability or on the Participant’s Date of Termination, as applicable, or(2) December 31 of such Plan Year, whichever occurs first. Any amount payableby reason of a Participant’s death shall be paid to such Participant’s estate orto such other individuals or entities as the Committee shall direct. If aParticipant terminates employment with the Participating Employer for anyreason other than Retirement, Layoff, transfer to a Parent Company, or death,the Participant’s AIP Award and all rights hereunder shall be forfeited.

 

(c)           Notwithstandingthe foregoing, in the event a Participant: (1) takes a leave of absence fromthe Company for personal reasons or as a result of entry into the Armed Forcesof the United States, or (2) terminates employment for reasons which, in thejudgment of the Committee, are deemed to be special circumstances, theCommittee may consider such circumstances and may take such action (to theextent consistent with Section 409A) as it may deem appropriate under thecircumstances, including extending the rights of a Participant to continueparticipation in the Plan beyond his Date of Termination; provided in no eventmay participation be extended beyond the term of the Plan Year in question.

 

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**7.****             Amendment or Discontinuance**

 

The Company may at anytime and from time to time, without the consent of the Participants, alter,amend, revise, suspend, or discontinue the Plan in whole or in part. TheCommittee may amend Schedule A at any time and from time to time. Any suchamendments may be made effective with respect to any Plan Year and with respectto any AIP Awards which, as of the date of the amendment, have not becomepayable.

 

# **8.**             Recapitalization,Merger, and Consolidation

 

The existence ofthis Plan and the AIP Awards granted hereunder shall not affect in any way theright or power of the Company or those entities holding membership interests inthe Company to make or authorize any or all adjustments, reorganizations, orother changes in the Company’s capital structure and its business, or anymerger or consolidation of the Company, or the dissolution or liquidation ofthe Company, or any sale or transfer of all or part of its assets or business,or any other corporate act or proceeding, whether of a similar character orotherwise.

 

# **9.**             GeneralProvisions

 

(a)           AIP Awardsshall be nontransferable and nonassignable, except that any such AIP Awards maybe transferred (1) by testamentary instrument or by the laws of descent anddistribution, or (2) to such individual or entity as the Committee maydesignate in the event of a Participant’s death.

 

(b)           Theestablishment of the Plan shall not confer any legal rights upon any Employeeor other person to continued employment, nor shall it interfere with the rightof any Participating Employer (which right is hereby reserved) to discharge anyEmployee and to treat****him****without regard to the effect which that treatment mighthave upon him****as a Participant or potentialParticipant.

 

(c)           Neitherthe adoption of this Plan nor any action of the Board or the Committee shall bedeemed to give any person any right to receive an AIP Award or any other rightsexcept otherwise specifically provided herein.

 

(d)           TheCompany shall have the right to deduct from all amounts hereunder paid in cash,any federal, state, local, or other taxes required by law to be withheld withrespect to such payments.

 

(e)           THEVALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN, ANY PLAN DOCUMENTS, AND ANYACTIONS TAKEN OR RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITHTHE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMEDWITHIN SUCH STATE.

 

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(f)            TheCompany will require any successor (whether direct or indirect, by purchase,merger, consolidation or otherwise) to all or substantially all of the businessand/or assets of the Company, expressly to assume and agree to perform theCompany’s obligations under this Plan in the same manner and to the same extentthat the Company would be required to perform them if no such succession hadtaken place.

 

(g)           ThePlan shall be unfunded. Neither the Company, any Participating Employer, theCommittee, nor the Board shall be required to segregate any assets or secureany liability that may at any time exist under the Plan.

 

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IN WITNESS WHEREOF, Chevron Phillips ChemicalCompany LLC by its duly authorized officer(s), has caused the Plan to beamended and restated on the 24 day of February, 2006.

 

 
| **Chevron Phillips Chemical Company LLC** |
|-------------------------------------------|
|                                      |
| By:                                       | */s/ James  L. Gallogly* |
|                                      |
| Title:                                    |  President and Chief Executive Officer |
|                                           |  |  |

 

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**SCHEDULE A**

 

**Administrative Procedures**

 

**1.****              TargetAIP Awards**

 

The following target AIPAward schedule shall apply to Participants in the Plan for the Plan Year 2005and for subsequent Plan Years unless changed by the Company or the Committee:

 

 

| **Grade Level** | ** ** | **Target  (% of Salary at 12/31 of Plan Year)** | ** ** |
|----------------------|------------|------------------------------------------------------------------------------------|------------|
|                 |       |                                                                               |       |
| 99                   |       |                                                                               | 80         | % |   |
|                 |       |                                                                               |       |   |   |
| 98                   |       |                                                                               | 60         | % |   |
|                 |       |                                                                               |       |   |   |
| 97                   |       |                                                                               | 55         | % |   |
|                 |       |                                                                               |       |   |   |
| 96                   |       |                                                                               | 50         | % |   |
|                 |       |                                                                               |       |   |   |
| 95                   |       |                                                                               | 45         | % |   |
|                 |       |                                                                               |       |   |   |
| 94                   |       |                                                                               | 40         | % |   |
|                 |       |                                                                               |       |   |   |
| 93                   |       |                                                                               | 35         | % |   |
|                 |       |                                                                               |       |   |   |
| 92                   |       |                                                                               | 30         | % |   |
|                 |       |                                                                               |       |   |   |
| 91                   |       |                                                                               | 27.5       | % |   |
|                 |       |                                                                               |       |   |   |
| 90                   |       |                                                                               | 22.5       | % |   |

 

**2.****              Assignment to AwardUnits**

 

The Company has established Award Units for purposes of the EIPapplicable to Employees generally. Each Participant shall be deemed to be amember of the Award Unit through which such individual would participate in theEIP if such individual were not a Participant in this Plan.

 

**3.****              Calculation of AIPAwards**

 

The AIP Award payable toeach Participant shall be determined under the following formula:

 
| AIP Award | = | S * T * X/7% |
|-----------|---|--------------|

 

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| Where: |
|--------|
|   |   |
| S      | is the Participant’s  Salary; |
|   |   |
| T      | is the Participant’s  target AIP Award, determined under Paragraph 1 above; and |
|   |   |
| X      | is  the percentage of EIP Target paid to Employees in the Award Unit to which the  Participant is assigned. |

 

The above calculation mayresult in an AIP Award ranging from 0% up to 200% of the target AIP Award.

 

**4.****             Performanceand Other Adjustments**

 

In the case of the ChiefExecutive Officer (“CEO”) or other Participants who, in the Committee’sjudgment, do not provide services to a single Strategic Business Unit,Facility, Technology Group or Staff, the Committee shall make a specialdetermination as to the manner in which any such individual’s AIP Award shallbe calculated.

 

In the event theCommittee determines that an individual Participant or group of Participantshas made contributions to the success of the Company which deserve specialrecognition, the Committee may provide for such enhancement of the AIP Awardspayable to them as the Committee may deem appropriate. Conversely, if theCommittee determines that an individual Participant or group of Participantshas failed to make such contribution as would have been justified byapplication of the formula described in Paragraph 3 above, the Committee mayreduce or cancel the AIP Award payable to any such Participant.

 

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