**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

##### **Washington, D.C. 20549**

 

----

 

###### **Form10-K**

 

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

##### **For the Fiscal Year Ended December 31, 2004**

 

**or**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

# **Forthe Transition Period from          to          **

 

# **CommissionFile No. 333-59054-01**

 

###### **ChevronPhillips Chemical Company LLC**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **73-1590261**                           |
|------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification Number) |

##### ** **

##### **10001Six Pines Drive**

**The Woodlands, TX 77380-1498**

(Address of principal executive offices, including zipcode)

 

**(832)813-4100**

(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to Section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

# **None**

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

**Yes ****o    No ****ý**

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

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

 

**Yes ****o    No ****ý**

 

The aggregate marketvalue of the voting and non-voting common equity stock held by non-affiliatesof the registrant at June 30, 2004:

# **None**

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

Listhereunder the following documents if incorporated by reference and the Part ofthe Form 10-K into which the document is incorporated:

# **None**

 

 

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TABLE OF CONTENTS

 
| **PART I**           |       |
|----------------------|------------|
| ** **           |       |
| Items 1. and 2. |       | Business and  Properties | 2 |
| Item 3.              |       | Legal Proceedings | 15 |
| Item  4.             |       | Submission  of Matters to a Vote of Security Holders | 16 |
|                 |       |   |   |
| **PART II**          | ** ** |
| ** **           | ** ** |
| Item  5.             |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 17 |
| Item 6.              |       | Selected Financial  Data | 17 |
| Item 7.              |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 18 |
| Item 7A.             |       | Quantitative  and Qualitative Disclosures About Market Risk | 30 |
| Item 8.              |       | Financial  Statements and Supplementary Data | 31 |
| Item 9.              |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure | 104 |
| Item 9A.             |       | Controls  and Procedures | 104 |
| Item 9B.             |       | Other  Information | 104 |
|                 |       |   |   |
| **PART  III**        | ** ** |
|                 | ** ** |
| Item 10.             |       | Directors  and Executive Officers of the Registrant | 104 |
| Item 11.             |       | Executive  Compensation | 106 |
| Item 12.             |       | Security  Ownership of Certain Beneficial Owners and Management | 111 |
| Item 13.             |       | Certain  Relationships and Related Transactions | 111 |
| Item 14.             |       | Principal  Accounting Fees and Services | 112 |
|                 |       |   |   |
| **PART IV**          | ** ** |
|                 | ** ** |
| Item 15.             |       | Exhibits  and Financial Statement Schedules | 113 |

 

**CAUTIONARY STATEMENTS REGARDINGFORWARD-LOOKING INFORMATION**

 

This annual reportcontains “forward-looking statements” within the meaning of the federalsecurities laws.  Such statements cangenerally be identified with 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 orbases to be reasonable and to be made in good faith.  Assumed facts or bases almost always varyfrom actual results, and the differences between assumed facts or bases andactual results can be material, depending on the circumstances.  Significant assumptions that, if erroneous,could cause actual results to differ materially from those expressed relate tothe following factors, among others: the timing and duration of periods ofexpansion and contraction within the chemicals business; plans for theconstruction, modernization, start-up or de-bottlenecking of domestic andforeign chemical plants; prices of feedstocks, energy and products; force majeureevents; 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 and riskfactors in this annual report are qualified in their entirety by the cautionarystatements contained herein.  CPChem doesnot undertake to update, revise or correct any of the forward-lookinginformation.

 

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# **PART I**

 

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

 

Chevron PhillipsChemical Company LLC, a limited liability company formed under Delaware law,manufactures and markets a wide range of petrochemicals on a worldwide basisthrough its subsidiaries and equity affiliates, with manufacturing facilitieslocated in the United States, Puerto Rico, Singapore, China, South Korea, SaudiArabia, Qatar, Mexico and Belgium.  ChevronTexacoCorporation (ChevronTexaco) and ConocoPhillips (collectively, the “members” orthe “owners”) each own 50% of CPChem.

 

CPChem is governedby a Board of Directors, currently comprised of six representatives, under theterms of a limited liability company agreement. ChevronTexaco and ConocoPhillips each have two voting representatives,and the chief executive officer and the chief financial officer of CPChem arenon-voting representatives.  Certainmajor decisions and actions require the approval of the Board ofDirectors.  All decisions and actions ofthe Board of Directors require the approval of at least one representative ofboth ChevronTexaco and ConocoPhillips.

 

CPChem previouslysold certain debt securities pursuant to registration statements filed underthe Securities Act of 1933, which subjected CPChem to the reportingrequirements of Section 15(d) of the Securities Exchange Act of 1934 (the “Act”).  These debt securities were not registeredunder Section 12 of the Act.  CPChem’sduty to file reports with the Securitiesand Exchange Commission (the “SEC”) was subsequently and automaticallysuspended under the Act.  However, CPChem has voluntarily continued to filequarterly, annual and other periodic reports with the SEC.  These reports are available to the public atno charge through CPChem’s website at www.cpchem.com.

 

CPChem’s businessis structured around three primary operating segments:  Olefins & Polyolefins, Aromatics &Styrenics, and Specialty Products.  For alist of the principal products of these segments, see the tables included ineach segment’s discussion.  See also “PartII – Item 8. Financial Statements and Supplementary Data – Note 16” forfinancial data by segment and geographic location.  Capacity information is presented in thisreport as of December 31, 2004 unless otherwise indicated.

 

***Olefins & Polyolefins***

 

# **Thissegment gathers, buys, sells and fractionates natural gas liquids, andmanufactures and markets olefin products such as ethylene and propylene.  This segment also manufactures and marketsalpha olefins and polyolefin products such as normal alpha olefins (NAO),polyethylene, polypropylene and polyethylene pipe.  CPChem has five olefin and/or 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, a high-density polyethylene plant locatedat CPChem’s Cedar Bayou facility in Texas, polyethylene facilities in Singaporeand China, and an ethylene, polyethylene and 1-hexene facility in Qatar.  The acetylene black plant at CPChem’s CedarBayou facility in Baytown, Texas was permanently idled in 2004.**

 

2

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***Olefins & Polyolefins***

 
| **Product**                                  | ** ** | **Approximate****Net Capacity** | ** ** | **Primary Uses**                                                                                                                                                                                             |
|----------------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                         |       | **(million pounds 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                                 |       | 6,110                           | (2)        | 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 and detergents.                                                  |
|                                         |       |                            |       |                                                                                                                                                                                                         |
| Polypropylene                                |       | 486                             | (2)        | Thermoplastic polymer used in fibers, films,  automobiles and housewares.                                                                                                                                    |
|                                         |       |                            |       |                                                                                                                                                                                                         |
| Normal alpha olefins                         |       | 1,534                           | (2)        | A group of chemicals produced from ethylene and used  in plasticizer alcohols, polyethylene, surfactants and synthetic lubricants  and additives.                                                            |
|                                         |       |                            |       |                                                                                                                                                                                                         |
| Polyalphaolefins                             |       | 104                             |       | Base stock for synthetic lubricants.                                                                                                                                                                         |

 

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(1)          Includes 650 millionpounds of idled capacity at the Sweeny facility in Old Ocean, Texas.

(2)          Includes CPChem’s shareof equity affiliates’ capacities.

 

*Competition*.  Olefins and polyolefins are delivered into theworldwide commodity markets.  Competitivefactors include price, product quality and performance, product deliverabilityand customer service.  CPChem generallyranks within the top ten ethylene and polyethylene producers worldwide based onpublished rated capacities.  Other majorproducers include Dow Chemical Company (Dow), Equistar Chemicals LP (Equistar),ExxonMobil Chemical Company (ExxonMobil), BP p.l.c. (BP) and Shell ChemicalCompany (Shell).  CPChem’s NAO technologyallows it to produce a wide range of hydrocarbon products that compete in manydifferent markets.  Other significantproducers of NAO are BP, Shell and Sasol Ltd. Major producers of polyalphaolefins (PAO) include BP and ExxonMobil.

 

*Distribution. *Depending on the particularproduct and location of the production facility, Olefins & Polyolefinsproducts are shipped by trucks, railcars, barges, parcel tankers, ships andCPChem and third-party pipelines.

 

3

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**Ethylene**

 

By volume,ethylene is the most widely consumed petrochemical product in the world,according to Chemical Market Associates, Inc., a company that specializes inpetrochemical industry data and consulting services.  Domestically, ethylene is produced at CPChem’sSweeny facility in Old Ocean, Texas, at its Cedar Bayou facility in Baytown,Texas and at its Port Arthur, Texas facility. Internationally, CPChem produces ethylene through its 49%-owned jointventure, Qatar Chemical Company Ltd. (Q-Chem), located in Mesaieed, Qatar.  CPChem’s share of the combined ethylenecapacity of its domestic and international facilities is approximately 8.1billion pounds per year.

 

*Supply/FeedstockSources.*  Ethylene canbe produced from ethane, propane, butane, natural gasoline or certain refineryliquids such as naphtha and gas oil.  Thetwo most common ethylene feedstocks are ethane, because of its high ethyleneyield, and naphtha, because of its availability and transportability.  Much of CPChem’s ethylene production is basedon ethane/propane feedstock, however certain domestic facilities have varyingdegrees of flexibility to process propane, butane, and naphtha when economicsdictate.  The price of ethane tends tocorrelate with the price of natural gas, while the prices of the other ethylenefeedstock slates tend to correlate more with the price of crude oil.

 

CPChem hasmarket-based purchase contracts with Duke Energy Field Services, LLC (anaffiliate of ConocoPhillips) and Dynegy Inc. (an affiliate of ChevronTexaco)which cover over 75% of CPChem’s expected domestic ethylene feedstockneeds.  The agreement with Duke Energyextends through December 31, 2014 and the agreement with Dynegy extends throughAugust 31, 2007.  Contracts with othersuppliers provide the remainder of feedstock needs.  These contracts can be long-term or monthly,or daily contracts made on a spot basis.

 

*Marketing.***** Polyethylene accounts for more than one-halfof all global ethylene consumption. CPChem uses approximately 80% of its domestic ethylene in its productionof polyethylene, NAO and styrene.  Theremainder of domestic ethylene production is sold on the merchant market,largely under long-term contracts. CPChem’s ethylene storage capacity is approximately one billion poundsat its Texas cavern storage facilities in Clemens and Mont Belvieu.  All ethylene produced internationally isconsumed internally.

 

**Polyethylene**

 

Domestically, polyethylene is produced at the Pasadena Plastics Complexand the Orange and Cedar Bayou facilities,all located in Texas.  Internationally,CPChem produces polyethylene through its joint venture facilities in Qatar,Singapore and Jinshanwei, China. CPChem’s share of the combined polyethylene capacity of its domestic andinternational facilities is approximately 6.1 billion pounds per year.

 

*Supply/Feedstock Sources.*  The primary raw material for polyethyleneproduction is ethylene, which typically represents the majority of polyethylenemanufacturing costs.  CPChem produces ethylene in excess of itspolyethylene production requirements.  Buteneand 1-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 the production ofpolyethylene at that location.

 

*Marketing.** ***At December 31, 2004,approximately 80% of CPChem’s net polyethylene capacity was located in theUnited States, along the Texas Gulf Coast. CPChem markets most of 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 polyethylene production.  The polyethylene is sold to areas in WesternEurope, Africa and Asia through CPChem’s established marketing network.

 

4

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CPChem’s largestpolyethylene customer is its Performance Pipe division.  This division manufactures polyethylene pipe,fittings and conduit in ten plants located throughout the United States and oneplant located in Mexico.

 

In addition,CPChem sells a significant amount of HDPE to customers who are suppliers ofbottles to large consumer product manufacturers, dairies and bottled watersuppliers.  CPChem also supplies HDPE forrigid product applications such as pails, paint cans, margarine tubs andstadium cups.  Durable applicationsinclude pipe, sheeting for landfill liners and automotive fuel tanks.

 

LDPE and LLDPEproducts are sold mainly to flexible packaging suppliers, who produce coatedcardboard juice cartons, food packaging, plastic wrap, plastic bags and otherproducts.  Some customers also producepallet stretch wrap and container liners.

 

**Propylene**

 

CPChem produces propylene at its Cedar Bayou, Port Arthur and Sweenyfacilities.  The combined propylenecapacity of these facilities is approximately 2.9 billion pounds per year.

 

*Supply/FeedstockSources. *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 undershort-term and long-term contracts.

 

*Marketing. *Polymer-grade propylene issold to major chemical manufacturers, the majority of which are polypropyleneproducers.  Approximately 25% of CPChem’spropylene is sold to Phillips Sumika Polypropylene Company, a CPChem jointventure with production facilities located at the Pasadena PlasticsComplex.  Propylene is also sold toexternal customers under long-term contracts and on the spot market, and tointernational contract and spot customers through a third-party export facilitylocated in Deer Park, Texas.

 

**AlphaOlefins**

 

All of CPChem’sdomestic NAO is produced at the Cedar Bayou facility.  Internationally, CPChem produces 1-hexene, anNAO used as a comonomer in the production of polyethylene, through its jointventure in Qatar.  CPChem’s share of thecombined NAO capacity of its domestic and international facilities isapproximately 1.5 billion pounds per year.

 

*Supply/Feedstock Sources. *CPChem converts ethyleneinto NAO using a proprietary CPChem process. CPChem produces substantially all of the ethylene required in itsdomestic production of NAO.  Ethylene isproduced 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.  PAO is produced from fractions of NAOproduced at the Cedar Bayou facility.

 

*Marketing. *CPChemsells NAO and PAO primarily to other chemical companies who use them to producea broad range of intermediate products. CPChem also uses a portion of its own production of NAO in themanufacturing of polyethylene and PAO. North America and Europe are the largest geographic markets for NAO andPAO.

 

5

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# ***Aromatics & Styrenics***

# ** **

This segment manufacturesand markets aromatics products such as benzene, styrene, paraxylene andcyclohexane, and has the ability to manufacture cumene at a plant that iscurrently idled.  This segment alsomanufactures and markets polystyrene as well as styrene-butadiene copolymers(SBC) sold under the trademark K-Resin®.  Production facilities are located inMississippi, Louisiana, Texas, Ohio, Puerto Rico and China.  CPChem also owns equity interests in anaromatics facility in Saudi Arabia and in a K-Resin® SBC facility in South Korea.

 
| **Product**                                | ** ** | **Approximate****Net Capacity** | ** ** | **Primary Uses**                                                                                                                                                                                                                             |
|--------------------------------------------|------------|---------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                       |       | **(million pounds 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 a variety of products, including packaging materials, cups and  media enclosures.                                                                                                                        |
|                                       |       |                            |       |                                                                                                                                                                                                                                         |
| Paraxylene                                 |       | 1,715                           |       | 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)        | Predominantly used in  intermediates for the manufacture of nylon.                                                                                                                                                                           |
|                                       |       |                            |       |                                                                                                                                                                                                                                         |
| K-Resin® styrene-butadiene copolymers |       | 269                             | (2)        | A high quality, clear copolymer material used to  make a variety of products including medical components, toys, candy wrap,  food packaging, cups and garment hangers.                                                                      |
|                                       |       |                            |       |                                                                                                                                                                                                                                         |
| Cumene                                     |       | 1,100                           | (3)        | An intermediate used to  produce phenol and acetone.                                                                                                                                                                                         |

 

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(1)          Includes CPChem’s shareof an equity affiliate’s capacity.

(2)          Excludes 70 million pounds of idled capacity at the Pasadena PlasticsComplex.

(3)          Capacity of a plant inPort Arthur that is currently 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 particularproduct and location of the production facility, Aromatics & Styrenics products are shipped by trucks,railcars, barges, ships and pipelines.

 

**Benzene**

 

Domestically,benzene is produced at CPChem’s Pascagoula, Mississippi facility.  Internationally, CPChem produces benzenethrough 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 uses itsproprietary Aromax® technology for its benzene production.

 

6

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*Supply/FeedstockSources. *The two mainfeedstocks for benzene production are pyrolysis gasoline and reformate, both ofwhich are intermediate products of petroleum refining and petrochemicalplants.  These two feedstocks account forover 75% of benzene production worldwide. Domestically, CPChem purchases benzene feedstocks from its owners’refineries, located in proximity to CPChem’s benzene plants, and from variousother sources.  In Saudi Arabia, CPChem’s50%-owned affiliate has a long-term feedstock agreement with a producer thatowns a refining complex located nearby.

 

*Marketing. *CPChem is a net consumer ofbenzene in the U.S. Gulf Coast region. This allows CPChem to routinely operate its benzene plant at fullcapacity, preserving a low-cost position, even during times of reduced demandfor derivatives.  At CPChem’s jointventure plant in Saudi Arabia, approximately one-half of the benzene producedis consumed by the joint venture’s cyclohexane plant located at the same facility.  The balance of benzene is sold under short-and long-term contracts.

 

**Styrene**

 

Styrene isproduced at CPChem’s St. James, Louisiana facility, which has a capacity ofapproximately 2.1 billion pounds per year.

 

*Supply/Feedstock Sources.** ***Styrene is made frombenzene and ethylene.  Most of thebenzene used at CPChem’s styrene plant is produced internally at CPChem’sPascagoula facility, with the remainder acquired through contract purchases.  Ethylene is supplied to the St. James plantby a proprietary pipeline connected to the Louisiana grid system.  CPChem maintains flexibility in ethylenesupply through long-term contract purchases, exchanges with CPChem’s Texasfacilities and spot purchases.

 

*Marketing. *CPChemcurrently consumes approximately 625 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 isproduced at CPChem’s facilities in Marietta, Ohio and Zhangjiagang, China.  The combined polystyrene capacity of thesefacilities is approximately 1.0 billion pounds per year.  Both plants have the ability to producehigh-impact and general purpose polystyrene.

 

*Supply/Feedstock Sources.** ***Polystyrene ismanufactured primarily from styrene.  Thestyrene consumed at Marietta is normally supplied by CPChem’s St. James styrenefacility.  The China plant is supplied bystyrene from the St. James plant and from third parties.

 

*Marketing. *CPChemsells a variety of grades of polystyrene. Most of CPChem’s polystyrene business in the U.S. is conducted on ashort- and long-term contract basis, while business in China follows the localpractice of being conducted primarily in the spot market.

 

**Paraxylene**

 

CPChem has aproduction capacity of approximately 1.0 billion pounds of paraxylene per yearat its Pascagoula plant.  The Guayama,Puerto Rico plant, which has a capacity of approximately 715 million pounds ofparaxylene per year, became operational in 2003 after being idled in 2001 foreconomic reasons.

 

7

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*Supply/Feedstock Sources.***** Mixed xylenes are the feedstock for theproduction of paraxylene.  Mixed xylenesare the end product of either reforming operations that are part of the motorfuels production process in refineries, or the end product of the conversion oftoluene, another intermediate refining product, into benzene and xylenes.  Mixed xylenes are available on the merchantmarket in the forms of both gasoline blending stocks and paraxylene feedstocks.  CPChem purchases mixed xylenes from its ownersand other suppliers on a contract basis. During periods of high paraxylene demand, mixed xylenes are alsopurchased on the spot market.

 

*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, and also sells into the Asian market periodically.

 

**Cyclohexane**

 

CPChemis the largest marketer of cyclohexane in the world.  This includes volumes produced at the PortArthur and Saudi Arabian plants, of which CPChem’s share of the combinedcyclohexane capacity is approximately 1.2 billion pounds per year, as well ascertain volumes produced by ConocoPhillips for which CPChem has marketingrights.  In February 2004, a new plant inPort Arthur 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/FeedstockSources. *The raw materials for cyclohexane are benzeneand hydrogen.  CPChem consumes morebenzene than it produces.  Remainingbenzene requirements are met through short- and long-term contracts and spotpurchases.  Hydrogen is currentlyobtained from CPChem’s Port Arthur facility and outside 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-Butadiene Copolymer**

 

CPChem produces anSBC 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 feedstocksfor K-Resin® SBC are styrene and butadiene.  CPChem can produce its own styrene feedstockat its St. James facility for domestic production, and secures butadiene on along-term contract basis from a single producer.  Other sources of butadiene are available ifnecessary.  In South Korea, feedstocksare secured through long-term contracts with a company in which CPChem’s jointventure partner, Daelim Industrial Co., Ltd., has a 50% interest.

 

*Marketing. *CPChemconducts its K-Resin® SBC marketing primarily by working withcustomers to create new K-Resin® SBC applications, to improveexisting applications and to improve customers’ processing capabilities.  CPChem has a sales and technical supportorganization, comprised of direct representatives, and third-party agents anddistributors, that is active in North America and internationally.  Some product is sold under multi-yearagreements.  The majority of K-Resin®SBC, however, is sold based on individual purchase orders.

 

8

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***Specialty Products***

 

This segmentmanufactures and markets a variety of specialty chemical products, includingorganosulfur chemicals, solvents, catalysts, drilling chemicals, miningchemicals and high-performance polyphenylene sulfide polymers and compoundssold under the trademark Ryton®. Production and/or compounding facilities are located in Texas, Belgiumand Singapore.

 
| **Product**                                                                                          | ** ** | **Approximate****Net Capacity** | ** ** | **Primary Uses**                                                                                                                                                                                                             |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                 |       | **(million pounds per year)**   |       |                                                                                                                                                                                                                         |
|                                                                                                 |       |                            |       |                                                                                                                                                                                                                         |
| Ryton® polyphenylene sulfide polymer and  compounds                                             |       | 44                              |       | High-performance engineering polymers and compounds  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. *Specialtychemical products are characterized by smaller, niche markets with fewerproducers as compared with other CPChem products.

 

*Distribution. *Depending on the particularproduct and location of the production facility, product is shipped by trucks,railcars and ships.

 

**SpecialtyChemicals**

 

Specialtychemicals consist of a variety of organosulfur chemicals, fine chemicals andother specialties.  Volumes of any givenproduct are not large when compared to the basic commodity products likeethylene and polyethylene.  However, inthe aggregate, 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/Feedstock Sources*.  Specialty chemicals production depends on theavailability of a number of specialized streams of products and co-productsthat are the result of the petroleum refining and petrochemical productionprocesses.  Feedstocks include hydrogensulfide, a variety of olefins and other hydrocarbon streams.  In many cases, CPChem acquires thesefeedstocks through long-term arrangements with its owners from facilities thatare integrated with production facilities that CPChem owns.

 

9

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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 customer andapplication bases are diverse, the specialty chemicals business is generallyless cyclical than the commodity chemicals business.

 

Specialty chemicals are sold through CPChem’s global marketingnetwork.  This network provides sales,distribution and technical services to customers.

 

**Ryton**®**Polyphenylene Sulfide**

 

CPChem produceshigh-performance polyphenylene sulfide (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 ofapproximately 22 million pounds of Ryton® polymer at its Borger,Texas facility.  Substantially all Ryton®polymer produced at the Borger facility is currently used to produce Ryton®compounds at CPChem’s compounding facility in La Porte, Texas, its plasticscompounds and development center in Singapore and its Kallo compoundingfacility in Kallo-Beveren, Belgium.  Thecombined capacity of the facilities is approximately 44 million pounds of Ryton®compounds per year.  Ryton®compounds are sold to third parties.

 

*Supply/Feedstock Sources. *The feedstocks for Ryton®polymer are substances such as caustic, sodium hydrosulfide,paradichlorobenzene and other chemicals and solvents that are generallyavailable in substantial quantities on the open market.  CPChem has a number of suppliers who providethese materials under either long-term or renewable contracts.  The additives used in the compounding processare generally purchased at locations close to CPChem’s compounding facilities.

 

*Marketing*.  Ryton® PPS polymers and compoundsare sold through CPChem’s global marketing network.  CPChem’scompounding facilities are regionally located, enhancing global sales anddistribution efforts.  Thecustomer base includes component suppliers and appliance manufacturers.  Products are generally sold under one-year,renewable agreements.

 

10

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**Propertiesand Manufacturing Facilities**

 

CPChem currently leases the office space for itsheadquarters located in The Woodlands, Texas and also owns or leasesadministrative, technical and sales office space in various otherlocations.  CPChem has 32 manufacturingfacilities located in eight countries. The following table provides information regarding principalmanufacturing facilities, business segments served, principal products andapproximate gross annual capacities at December 31, 2004. 

 
| **Facility / Location**                        | ** ** | **Segment Served**         | ** ** | **Product**                                     | ** ** | **Approximate   Gross Capacity** |       |
|------------------------------------------------|------------|----------------------------|------------|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | ** **                 | ** ** | ** **                                      | ** ** | **(million pounds per year)**    | ** ** |
|                                           |       |                       |       |                                            |       |                             |       |
| Pasadena Plastics  Complex                     |       | Aromatics & Styrenics  |       | K-Resin® SBC                               |       | 200                              | (1)        |
| Pasadena,  Texas                               |       | Olefins &  Polyolefins |       | High-density  polyethylene                      |       | 2,240                            |       |
|                                           |       |                       |       |                                            |       |                             |       |
| Sweeny Facility                                |       | Olefins &  Polyolefins |       | Ethylene                                        |       | 4,100                            | (2)        |
| 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 |       | Normal alpha olefins                            |       | 1,485                            |       |
|                                           |       | Olefins &  Polyolefins |       | Polyalphaolefins                                |       | 104                              |       |
|                                           |       | Olefins &  Polyolefins |       | Linear-low,  low- and high-density polyethylene |       | 1,900                            |       |
|                                           |       |                       |       |                                            |       |                             |       |
| Orange  Chemical Facility  Orange, Texas       |       | Olefins &  Polyolefins |       | High-density  polyethylene                      |       | 930                              |       |
|                                           |       |                       |       |                                            |       |                             |       |
| Port Arthur Facility                           |       | Olefins &  Polyolefins |       | Ethylene                                        |       | 1,750                            |       |
| Port  Arthur, Texas                            |       | Olefins &  Polyolefins |       | Propylene                                       |       | 780                              |       |
|                                           |       | Aromatics &  Styrenics |       | Cyclohexane                                     |       | 920                              |       |
|                                           |       | 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                            |       |

 

11

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| **Facility / Location**                                                          | ** ** | **Segment Served**                                   | ** ** | **Product**                                    | ** ** | **Approximate  Gross Capacity** |       |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                       | ** ** | ** **                                           | ** ** | ** **                                     | ** ** | **(million pounds per year)**   | ** ** |
|                                                                             |       |                                                 |       |                                           |       |                            |       |
| Marietta  Facility  Marietta, Ohio                                               |       | Aromatics  & Styrenics                           |       | Polystyrene                                    |       | 770                             |       |
|                                                                             |       |                                                 |       |                                           |       |                            |       |
| Puerto  Rico Facility  Guayama, Puerto Rico                                      |       | Aromatics  & Styrenics                           |       | Paraxylene                                     |       | 715                             |       |
|                                                                             |       |                                                 |       |                                           |       |                            |       |
| Performance  Pipe Division  Ten 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                           |       |
| Ltd.  (Q-Chem)                                                                   |       | Olefins  & Polyolefins                           |       | High-density  polyethylene                     |       | 1,000                           |       |
| Mesaieed,  Qatar                                                                 |       | Olefins  & Polyolefins                           |       | 1-hexene                                       |       | 100                             |       |
|                                                                             |       |                                                 |       |                                           |       |                            |       |
| 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)          Excludes 70 millionpounds of idled capacity.

(2)          Includes 650 millionpounds of idled capacity.

(3)          Plant currently idled.

 

12

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**Projects**

 

*JCPProject.*  JubailChevron Phillips Company (JCP), a 50%-owned joint venture company with SaudiIndustrial Investment Group (SIIG), was formed in 2003 to develop an integratedstyrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility, to be built on a site adjacentto the existing aromatics complex owned by Saudi Chevron Phillips Company(SCP), an equity affiliate, will include feed fractionation, an olefinscracker, and ethylbenzene and styrene monomer processing units.  Construction of the JCP facility will be inconjunction with an expansion of SCP’s benzene plant, together called “the JCPProject.”  Construction began in thefourth quarter of 2004 and operational start-up is anticipated in late 2007.  It is estimated that project completion, asdefined in the JCP Project’s financing agreements, will be achieved in thefirst half of 2008.  The project will befinanced through equity contributions and subordinated loans from theco-venturers, in proportion to their equal ownership interests, and limitedrecourse loans from commercial banks and two Saudi Arabian governmentalagencies.  Financial closing of theestimated $1.2 billion JCP Project occurred in July 2004.

 

*Q-ChemII Projects. *CPChemand Qatar Petroleum announced plans in 2001 for the development of a secondpetrochemical project in Mesaieed, Qatar (Q-Chem II), designed to producepolyethylene and NAO on a site adjacent to the existing Q-Chem complex.

 

In connection withthe Q-Chem II joint venture, CPChem and Qatar Petroleum entered into a separateagreement in 2002 with Atofina (now Total Petrochemical) and QatarPetrochemical Company, establishing a joint venture to develop an ethanecracker in northern Qatar at Ras Laffan Industrial City.

 

Request for finalapproval of the Q-Chem II projects by CPChem’s board of directors is expectedin 2005, with start-up anticipated in 2008. Preliminary financing plans for the projects include equitycontributions from the co-venturers and limited recourse loans from commercialbanks and an export credit agency.

 

**Employees**

 

Chevron PhillipsChemical Company LLC and its wholly owned subsidiaries employed approximately5,300 people at December 31, 2004.  About89% of the workforce was employed in North America, 6% in Asia, 4% in Europe and1% in the Middle East.  Almost one-fourthof all employees are covered under collective bargaining agreements, and ofthose covered, approximately 160 employees are subject to collective bargainingagreements that will expire by December 31, 2005.  Overall, CPChem believes that its relationswith its employees are good.

 

**Intellectual Property**

 

CPChem’s business is, to a considerable extent,technology driven.  CPChem aggressivelydevelops and protects the intellectual property necessary to conduct itsoperations via a combination of patent, trademark, copyright and trade secretlaws, as well as confidentiality procedures and contractual provisions.  Where CPChem does not possess a necessarytechnology, it obtains or licenses it from third parties.  CPChem owned or licensed from its owners therights to approximately 2,800 patents and/or patent applications in the UnitedStates and abroad at December 31, 2004.

 

CPChem periodicallygrants licenses to its technology to third parties.  Two of the more significant processes that itlicenses are CPChem’s loop slurry polyethylene and Aromax® aromaticsproduction processes.  Licenses grantedfor these processes typically provide for royalty payments from third partiesbased on the actual or anticipated volume of product that they may produce,payable either in advance of production or as a “running royalty.”  The licenses for these processes generallyprovide that any technologies developed by the licensee related to such processshall be licensed to CPChem with the right to sublicense such developments tothird parties.  This technique, common intechnology licensing, enhances CPChem’s ability to provide customers andlicensees with the most current technology available.

 

13

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CPChem relies on confidentiality agreements andcontractual provisions to protect its technology that is provided to thirdparties.  CPChem’s licenses to thirdparties contain restrictions on disclosure, and contractors involved in thedetailed design or construction of CPChem’s or its licensees’ facilities arerequired to execute nondisclosure agreements. Third parties are not allowed to inspect or photograph facilitieswithout permission, and even then only under close supervision.  Appropriate actions are taken to preventthird parties from disclosing proprietary data, or otherwise using intellectualproperty, without proper authorization.

 

CPChem is the owner of numerous trademarks, includingthe Marlex®, Ryton®, Aromax® and K-Resin®trademarks, which are each used in connection with CPChem’s businesses.  Also, CPChem licenses its trade name on anonexclusive basis from its owners. Appropriate actions are taken to maintain, renew, protect and enforceCPChem’s trademarks to prevent infringement, dilution or misappropriation bythird parties in the United States and abroad.

 

**Research and Development**

 

CPChem has scientists, process engineers and technicalservice experts at six****technicalcenters.  The Bartlesville, Oklahoma siteprovides basic 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 center focuseson process engineering in support of all manufacturing as well as all phases ofresearch and process development for aromatics, NAO, PAO, oxygen scavengingpolymers and specialty catalysts.  Thetechnology center at Orange, Texas provides a plastics technical center andtechnical services for polyethylene. Polystyrene research and technical services are located at Marietta,Ohio.  International technical supportand product development are provided by the Belgium and Singapore technicalcenters.

 

Research and development expense totaled $42 millionin 2004, $55 million in 2003 and $47 million in 2002.  Included in 2003 expense was a $9 millioncharge related to the permanent closure of a research and technology pilotplant in Orange, Texas.

 

**Environmental Regulation**

 

CPChem must comply with, and is subject to liabilityunder, environmental laws and regulations in the jurisdictions in which itconducts business.  Under some laws,CPChem may be subject to joint and several liability regarding environmentalcontamination on or from properties that it previously owned or operated orcurrently owns or operates.  CPChem mayalso be subject to liability for contaminated properties where it has disposedof or arranged for disposal of hazardous substances, or where feedstocks orproducts that contained hazardous substances have been accidentally spilled orreleased.  See “Part II – Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Risk and Other Factors That May Affect Future Performance –Environmental, Health and Safety” for further discussion.

 

CPChem incurs, andexpects to continue to incur, significant costs for capital improvements andgeneral 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.  To date, CPChem has investedapproximately $75 million ($30 million in 2004) of such expenditures.

 

14

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In addition, new regulations were issued in 2004concerning emissions of highly reactive volatile organic compounds(HRVOCs).  CPChem expects that totalcapital expenditures of approximately $20 million will be required to complywith the monitoring aspects of these regulations.  CPChem invested approximately $2 million ofsuch capital expenditures in 2004.  WhileCPChem cannot determine if additional expenditures will be required untilmonitoring capabilities are in place, CPChem currently believes that additionalexpenditures required, if any, will not have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

CPChem is aware that there is or may be soil orgroundwater contamination at some facilities and that remediation of soil andgroundwater contaminated with hazardous substances will be required.  Undiscounted accrued environmentalliabilities totaled $6 million at both December 31, 2004 and 2003.  There were no accrued environmental costsassociated with discontinued or sold operations, sites where CPChem had beennamed a potentially responsible party, or environmental litigation at December31, 2004 or 2003.  Based on availableinformation, CPChem believes that the costs that may be incurred to investigateand remediate known contamination will not have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

**International Operations**

 

International operationsare exposed to different political, economic and regulatory risks that are notfaced by businesses that operate solely in the United States.  Some of CPChem’s operations, includingcertain of its equity affiliates, are outside the continental United States,with manufacturing facilities in Puerto Rico, Singapore, China, South Korea,Saudi Arabia, Qatar, Mexico and Belgium. Domestic assets totaled $5.341 billion as of December 31, 2004 and netsales from domestic operations were $7.754 billion in 2004.  Assets located outside of the U.S. as ofDecember 31, 2004 totaled $1.531 billion and net sales from non-U.S. operationswere $1.484 billion in 2004.  Asset andnet sales calculations were determined based on location of the operation.  CPChem’s international operations are subjectto risks similar to those affecting its U.S. operations in addition to a numberof other risks, including difficulties in enforcing contractual andintellectual property rights, and impositions or increases of withholding andother taxes on remittances 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.

 

**Item 3.  Legal Proceedings**

 

**Governmental Agency Proceedings**

 

The following aredescriptions of reportable legal proceedings involving governmental authoritiesunder federal, state and local laws regulating the discharge of materials intothe environment.  While it is not possible to predict with certainty theoutcome of an unresolved proceeding, if the proceedings described below were decidedadversely to CPChem, CPChem expects that there would be no material adverseeffect on consolidated results of operations, financial position orliquidity.  Nevertheless, such proceedings are reported pursuant to theSEC’s regulations.

 

CPChem is a party tocertain agreements with ChevronTexaco and ConocoPhillips relating to theoperation of facilities at which CPChem and either ChevronTexaco orConocoPhillips have common operations. In December 2002, the U.S. Department of Justice (the “DOJ”) notifiedConocoPhillips of various alleged violations of the National PollutantDischarge Elimination System permit at its Sweeny,

 

15

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Texas facility.  The DOJ asserts that these alleged violationsoccurred at various times during the period beginning January 1997 through July2002.  On September 30, 2004 and October4, 2004, the DOJ filed papers evidencing the parties’ agreement to resolve thematter through the payment of a civil penalty and performance of a SupplementalEnvironmental Project (SEP) for a combined value of $700,000.  ConocoPhillips has advised CPChem that it isseeking a portion of the assessment from CPChem pursuant to an agreementrelating to the operation of common facilities at the Sweeny complex.

 

The U.S.Environmental Protection Agency (the “EPA”) and the DOJ previously informedCPChem that they were considering a civil enforcement action against CPChemrelated to inspections performed in mid-2000 of CPChem’s facility in Pasadena,Texas.  This civil enforcement actionstemmed from alleged violations of Section 112(r) of the Clean Air Act andrelated regulations, largely in connection with fires that occurred at thePasadena facility’s K-Resin® styrene-butadiene copolymer (SBC) unitin 1999 and 2000.  On September 27, 2004,CPChem reached an agreement with the EPA and the DOJ to resolve the matter fora $1.8 million civil penalty and performance of SEPs with a value of $1.2million.  The Contribution Agreementunder which CPChem was formed provides that ConocoPhillips shall indemnifyCPChem for liabilities associated with the 2000 K-Resin® SBC unitfire.  Accordingly, ConocoPhillipsreimbursed CPChem for its agreed portion of the settlement.

 

In July and August 2004, the TexasCommission for Environmental Quality (the “TCEQ”) conducted an annual aircompliance inspection at CPChem’s facility in Port Arthur, Texas.  Byletter dated December 30, 2004, the TCEQ issued a Notice of Enforcement letterto CPChem with a proposed Agreed Order and recommended penalty amount of$420,036, which CPChem is disputing.  Theenforcement matter and corresponding penalty are for alleged violations ofstate and federal reporting and record keeping requirements, fugitive emissionsmonitoring requirements, permit-by-rule requirements and three emission events.

 

In late 2001, CPChemreceived a Notice of Violation (NOV) from the Texas Natural ResourceConservation Commission, now the TCEQ, following an inspection of the solidwaste management program at CPChem’s Cedar Bayou facility in Baytown,Texas.  The NOV pertained to thehistorical management of an on-site impoundment.  CPChem agreed to conduct an investigation ofthe unit and, in late June 2004, completed the investigation.  The investigation characterized the contentsof the impoundment and identified a small groundwater plume, adjacent to andunrelated to the operation of the impoundment. In November 2004, CPChem and TCEQ representatives agreed to move forwardon addressing the groundwater plume. TCEQ and CPChem are presently in discussions regarding the finaldisposition of the impoundment and the management of the materials containedwithin the impoundment.

 

**OtherProceedings**

 

CPChem is a party to anumber of other legal proceedings that arose in the ordinary course of businessfor which, in many instances, no provision has been made in the financialstatements.  While the final outcome ofthese proceedings cannot be predicted with certainty, CPChem believes that noneof these proceedings, when resolved, will have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

**Item 4.  Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

16

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# **PART II**

 

**Item 5.  Market For Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

 

There is no established public trading market for the ownership interestsof CPChem.  See “Item 12. SecurityOwnership of Certain Beneficial Owners and Management” for a listing of the holders of ownership interests in CPChem.

 

**Item 6.  Selected Financial Data**

 

The following selected financial data should be read in conjunction with“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” and “Item 8. Financial Statements and SupplementaryData.”

 

***Chevron PhillipsChemical Company LLC***

 
| ** **         | ** ** | **Years ended December 31,** | ** ** | **July 1, 2000  (inception) through  December 31, 2000** | ** ** |
|--------------------|------------|------------------------------|------------|----------------------------------------------------------|------------|
| ** **         |
| **Millions**       | ** ** | **2004**                     | ** ** | **2003**                                                 | ** ** | **2002** | ** ** | **2001** | ** ** | ** ** |
| Net sales          |       | $                            | 9,238      |                                                     | $          | 6,907 |   | $ | 5,389 |   | $ | 5,871 |   | $ | 3,402 |   |
| Net income  (loss) |       | 626                          |       | 7                                                        |       | (30 | ) | (480 | ) | (241 | ) |
|                    |            |                              |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------|------------|
| **Millions**                             | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| Total assets                             |       | $                | 6,872      |   | $ | 6,242 |   | $ | 6,109 |   | $ | 5,860 |   | $ | 6,673 |   |
| Long-term debt,  less current maturities |       | 1,390            |       | 1,189 |   | 1,190 |   | 1,507 |   | 1,784 |   |
| Members’  preferred interests       |       | 75               |       | 250 |   | 250 |   | — |   | — |   |
|                                          |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following financial information of Phillips Petroleum Company’sChemicals Business and Chevron Chemical Company C Chem Business (the businessescontributed to form Chevron Phillips Chemical Company LLC) is presented forinformational purposes only.  The resultsof these contributed businesses presented, when combined, are not intended toand do not represent pro forma results of Chevron Phillips Chemical CompanyLLC, nor do the results necessarily reflect results that would have beenachieved had the contributed businesses been combined for the periodspresented.

 

 

***Phillips Petroleum Company’s Chemicals Business***

 
| **Millions** | ** ** | **Six months ended  June 30, 2000** | ** ** |
|--------------|------------|------------------------------------------|------------|
| Net  sales   |       | $                                        | 2,238      |   |
| Net  income  |       | 84                                       |       |
|              |            |                                          |            |  |

 

***Chevron Chemical Company C Chem Business***

 
| **Millions** | ** ** | **Six months ended  June 30, 2000** | ** ** |
|--------------|------------|------------------------------------------|------------|
| Net  sales   |       | $                                        | 1,834      |   |
| Net  income  |       | 96                                       |       |
|              |            |                                          |            |  |

 

17

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**Item 7****. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*Critical Accounting Policies*

 

An accounting policy is deemed to be “critical” if it is important to acompany’s results of operations and financial condition, and requiressignificant judgment and estimates on the part of management in itsapplication.  The preparation offinancial statements and related disclosures in conformity with U.S. generallyaccepted accounting principles requires management to make estimates andassumptions that affect certain amounts reported in the financial statementsand related disclosures.  Actual resultscould differ from these estimates 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 represent its most criticalaccounting policies.  For a summary ofall of CPChem’s significant accounting policies, see Part II - Item 8. FinancialStatements and Supplementary Data – Note 2.

 

*Impairment of Assets* – Long-livedassets used in operations are assessed for possible impairment when events orchanges in circumstances indicate a potential significant deterioration infuture cash flows projected to be generated by an asset group.  Individual assets are grouped for impairmentpurposes at the lowest level for which there are identifiable cash flows thatare largely independent of the cash flows of other groups of assets – generallyat a product line level.  If, uponreview, the sum of the projected undiscounted pre-tax cash flows is less thanthe carrying value of the asset group, the carrying value is written down toestimated fair value.  Since there areusually no quoted market prices available to determine the fair values ofCPChem’s long-lived assets, fair values of impaired assets are usuallydetermined based on the present value of projected future cash flows usingdiscount rates commensurate with the risks involved in the asset group.  This area often requires management to makecomplex and subjective judgments, involving significant variables such as assetlives, future product demand, and future product, feedstock and energy pricesin order to estimate projected future cash flows.  Should the outlook for projected cash flowschange unfavorably, material charges for impairments could occur.

 

*Inventories* – For U.S.operations, cost of product inventories is primarily determined using thedollar-value, last-in, first-out (LIFO) method. These inventories are valued at the lower of cost or market, aggregatedat a 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 time could result inwrite-downs determined to be permanent in nature.

 

Contingencies – As facts concerning contingent liabilities becomeknown, CPChem reassesses its position with respect to accrued liabilities andother potential exposures.  Estimatesthat are particularly sensitive to future change include legal matters andcontingent liabilities for environmental remediation.  Estimated future environmental remediationcosts are subject to change due to such factors as the unknown magnitude ofcleanup costs, prospective changes in laws and regulations, the unknown timingand extent of remedial actions that may be required and the determination ofCPChem’s liability in proportion to those of other responsible parties.  Estimated future costs related to legalmatters are subject to change as events occur and as additional informationbecomes available.

 

18

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**Results of Operations**

 

***Overview***

 

CPChem’s business, and the chemicals industry in general, is cyclicalin nature and is impacted by, among other things, product demand and the pricesof raw materials, feedstocks and energy in general.  CPChem is particularly impacted by the pricesof natural gas and natural gas liquids (NGLs). During periods of extreme natural gas and NGL price volatility andcorresponding spikes in natural gas and NGL prices such as those seen in recentyears, CPChem is less able to recover such increased costs through productsales price increases than it could if there had been steady, sustained prices,even at elevated levels.  Business isalso affected by overall domestic and global economic conditions, which driveconsumer spending for durable goods.  In addition,capacity expansions or contractions contribute to the cyclical and volatilenature of the commodity chemicals industry. 

 

CPChem’s 2004 results improved on higher volumes and margins, due inpart to healthier U.S. economic conditions and an upward trend in industryoperating rates.  Equity earnings fromCPChem’s foreign affiliates also improved. Overall, sales price increases outpaced the rise in feedstock costs andhigh energy costs.  In addition, CPChem’scontinued focus on safety and operational reliability, along with aggressivemanagement of costs and assets, contributed to increased profitability in 2004.

 

***CondensedConsolidated Statement of Operations***

 
| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **Millions**                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                            |       | $                            | 9,238      |   | $ | 6,907 |   | $ | 5,389 |   |
| Equity in income  of affiliates, net |       | 218                          |       | 41 |   | 22 |   |
| Other revenues                       |       | 102                          |       | 70 |   | 62 |   |
| Total revenues                       |       | 9,558                        |       | 7,018 |   | 5,473 |   |
| Cost of goods  sold                  |       | 8,373                        |       | 6,439 |   | 4,986 |   |
| Other costs and  expenses            |       | 478                          |       | 503 |   | 452 |   |
| Income before  interest and taxes    |       | 707                          |       | 76 |   | 35 |   |
| Net interest  expense                |       | (66                          | )          | (64 | ) | (59 | ) |
| Income taxes                         |       | (15                          | )          | (5 | ) | (6 | ) |
| Net income  (loss)                   |       | $                            | 626        |   | $ | 7 |   | $ | (30 | ) |

 

*2004 compared with 2003*

 

Net income in 2004 was $626 million, representing a $619 millionimprovement over the $7 million of net income recorded in 2003.  Consolidated net sales revenue rose significantlyin 2004 on higher overall sales prices and volumes.  Equity earnings from affiliates improved,primarily on improved results from Saudi Chevron Phillips Company (SCP) andQatar Chemical Company Ltd. (Q-Chem). Cost of Goods Sold rose in the 2004 period, attributable to increasedfeedstock costs and higher sales volumes.

 

*2003 compared with 2002*

 

Net income in 2003 was $7 million, compared to a $30 million loss in2002.  Consolidated net sales revenuesincreased in 2003 compared with 2002 as a result of higher overall salesprices.  Other revenues increased in2003, primarily from higher equity earnings from affiliates, in particular,earnings from SCP.  Unseasonably low U.S.natural gas inventory levels, the war in Iraq, geopolitical events in Venezuelaand Nigeria, and SARS (severe acute respiratory syndrome)

 

19

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in Asia, as well asother events experienced early in 2003, negatively influenced feedstock andenergy costs, which offset most of the benefit of higher sales prices. Othercosts and expenses rose in 2003, which included charges for certain legalsettlements and accruals, workforce reductions and the closure of a researchand technology pilot plant.

 

***Income (Loss) Before Interest and Taxes bySegment***

 
| **Millions**                 | ** ** | **Olefins &  Polyolefins** | ** ** | **Aromatics &  Styrenics** | ** ** | **Specialty  Products** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------|------------|
| Year ended December 31, 2004 |       | $                              | 428        |                           | $          | 251                     |       | $                          | 58         |             | $          | (30 | ) | $ | 707 |   |
| Year ended December 31, 2003 |       | 41                             |       | 27                             |       | 34                      |       | (26                        | )          | 76               |       |
| Year ended December 31, 2002 |       | 33                             |       | (13                            | )          | 40                      |       | (25                        | )          | 35               |       |
|                              |            |                                |            |                                |            |                         |            |                            |            |                  |            |  |  |  |  |  |

 

Included in 2004results were $9 million of gains on the sale of certain assets. Included in2003 results were charges related to CPChem’s share of certain ChevronTexacoand ConocoPhillips legal settlements and accruals relating to CPChem’sfacilities, asset retirements, a pilot plant closure, employee terminationbenefit costs related to workforce reductions and a benefit recorded as aresult of a sales and use tax audit. These and other similar types of netcharges totaled $36 million in the aggregate in 2003. See subsequentsegment-level discussions for additional information.

 

Included in 2002results were charges related to asset retirements and impairments, thewrite-off of certain technology projects and a pension plan curtailment charge(included in Cost of Goods Sold). Also included in 2002 results were benefits relatedto business interruption and property casualty insurance claim settlements anda benefit recorded for the reduction of a customer claim accrual. These andother similar types of net charges totaled $30 million in the aggregate. Seesubsequent segment-level discussions for additional information.

 

***Olefins & Polyolefins***

 
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| **Millions**                     | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income before interest and taxes |       | $                            | 428        |   | $ | 41 |   | $ | 33 |   |
|                                  |            |                              |            |  |  |  |  |  |  |  |

 

*2004 compared with 2003*

 

Olefins & Polyolefinsincome before interest and taxes totaled $428 million in 2004, compared with$41 million in 2003, primarily driven by improved margins and sales volumes.

 

Resultsin 2004 included a $4 million gain on the sale of assets. Results in 2003included $13 million of charges to Selling, General and Administrative(SG&A) expense for the ChevronTexaco and ConocoPhillips legal settlementsand accruals relating to CPChem’s facilities, a $9 million charge to Researchand Development depreciation related to the permanent closure of the researchand technology pilot plant facility in Orange, Texas and a $5 million netbenefit resulting from the sales and use tax audit that covered the period fromOctober 1993 through June 2000.

 

Olefins & Polyolefinsincome before interest and taxes improved $387 million in 2004 compared with2003, driven primarily by higher earnings from the olefins and polyethyleneproduct lines. Higher revenues from increased sales prices and volumes werepartially offset by higher feedstock costs. Equity earnings from affiliatesalso increased significantly in 2004, largely from improved results of Q-Chem. Earningsin 2004 and 2003 included gains of $4 million and $10 million, respectively, relatedto reductions in certain LIFO-valued inventories.

 

20

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*2003 compared with 2002*

 

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

 

Results in 2002included a $7 million charge for the write-off of two technology projects, a $4million charge for the remainder of the accelerated depreciation associatedwith the retirement in February 2002 of two polyethylene particle loop reactorsat the Orange facility and a benefit related to a reduction of a customer claimaccrual. Results in 2002 also included a $5 million impairment charge relatedto the Colton, California polyethylene pipe facility. The remaining assets ofthe facility were written down to their estimated net realizable value andsubsequently sold during 2004. These and other similar types of net chargestotaled $12 million in the aggregate in 2002. Results in 2003 included $17million of similar types of net charges described earlier.

 

Resultsimproved in 2003 compared with 2002, as higher earnings from the polyethylene,polypropylene, and polyethylene pipe product lines were partially offset bylower earnings from olefins and normal alpha olefins. Average realized sales pricesand volumes were up across all the product lines. The positive effects of theseimprovements in sales prices and volumes were partially offset by higherfeedstock and utility costs, which were driven by significantly higher averagenatural gas prices, particularly in the first quarter of 2003. Highertechnology licensing income also contributed to the overall improvement inearnings. Equity earnings from affiliates were down slightly in 2003.

 

***Aromatics & Styrenics***

 
| ** **                              | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Millions**                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income (loss) before interest and taxes |       | $                            | 251        |   | $ | 27 |   | $ | (13 | ) |
|                                         |            |                              |            |  |  |  |  |  |  |  |

 

*2004 compared with 2003*

 

Aromatics& Styrenics income before interest and taxes totaled $251 million in 2004compared with $27 million in the prior year. The improvement in results wasdriven primarily by higher earnings from the benzene product line.

 

Includedin 2004 results was a $5 million net gain on the sale of assets. Included in2003 results was $10 million of accelerated depreciation related to the closureof the UDEX benzene extraction unit at the Port Arthur, Texas facility.

 

Results in 2004 for Aromatics & Styrenics improved $224 millioncompared with 2003, primarily from higher benzene earnings, includingsignificantly higher equity earnings from SCP. Improved results in the 2004period were also partially attributable to the actions taken in 2003 to closethe UDEX unit and idle the Port Arthur cumene plant. Sales revenues increasedacross all product lines as a result of higher sales prices, partially offsetby lower sales volumes in benzene and paraxylene, and higher feedstock costs inmost product lines. Benzene sales volumes were lower in 2004 as a result of the2003 closure of the UDEX unit. Earnings in 2003 included a $3 million gain relatedto reductions in certain LIFO-valued inventories.

 

21

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*2003 compared with 2002*

 

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

 

Resultsin 2002 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 the Puerto Rico facility. Also included in 2002 results were $4 million ofaccelerated depreciation related to the closure of the UDEX benzene extractionunit and $9 million of benefits related to business interruption and propertycasualty insurance claim settlements. These and other similar types of netcharges totaled $18 million in the aggregate in 2002. Results in 2003 included$10 million of accelerated depreciation described earlier.

 

Results in 2002also included a $25 million benefit related to the reversal of alower-of-cost-or-market inventory reserve initially established in 2001. Thereserve was reversed as a result of improved market conditions and prices.

 

Earnings werehigher in 2003 compared with 2002, primarily the result of higher earnings inthe benzene, polystyrene, paraxylene and styrene product lines. Significantlyhigher average realized sales prices for these product lines and increasedsales volumes of benzene, paraxylene and styrene were partially offset byhigher feedstock costs and energy prices, and costs associated with plantreconfiguration and other activities at the Puerto Rico facility. Equityearnings from SCP more than doubled in 2003 as a result of higher productionand favorable benzene and cyclohexane market conditions. Lower earnings from KR 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.

 

During 2003, CPChem’s cumene unit at the Port Arthurfacility was idled and the UDEX benzene extraction unit at the facility waspermanently closed.

 

***Specialty Products***

 
| ** **                       | ** ** | **Years ended December 31,** | ** ** |
|----------------------------------|------------|------------------------------|------------|
| **Millions**                     | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income before interest and taxes |       | $                            | 58         |   | $ | 34 |   | $ | 40 |   |
|                                  |            |                              |            |  |  |  |  |  |  |  |

 

*2004 compared with 2003*

 

SpecialtyProducts income before interest and taxes was $58 million in 2004 compared with$34 million in 2003, as earnings from both Specialty Chemicals and Ryton®polyphenylene sulfide (PPS) polymers and compounds increased. Earnings fromRyton® PPS polymers and compounds rose primarily on higher salesvolumes, partially offset by higher feedstock costs. Earnings from SpecialtyChemicals increased as a result of higher sales volumes and prices, partiallyoffset by increased feedstock costs primarily due to the higher sales volumes. Resultsfor Specialty Products in 2003 included a $2 million net benefit from the salesand use tax audit.

 

22

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*2003 compared with 2002*

 

Incomebefore interest and taxes for Specialty Products was $34 million in 2003compared with $40 million in 2002. Lower earnings from Ryton® PPSpolymers and compounds were partially offset by higher earnings for SpecialtyChemicals. Lower earnings in 2003 from Ryton® PPS polymers and compoundswere due to higher product costs and SG&A expense. Improved earnings fromSpecialty Chemicals were attributable to higher sales prices and volumes,partially offset by increased product costs and SG&A expense. Results in2003 included a $2 million net benefit from the sales and use tax audit. TheRyton® PPS compounding facility in LaPorte, Texas became operationalin the first quarter of 2003.

 

***Corporate and Other***

 
| ** **                              | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| **Millions**                            | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Income (loss) before interest and taxes |       | $                            | (30        | ) | $ | (26 | ) | $ | (25 | ) |
|                                         |            |                              |            |  |  |  |  |  |  |  |

 

Corporateand Other reported a loss before interest and taxes of $30 million in 2004compared with a loss of $26 million in 2003. The reduction in earnings wasprimarily due to higher employee benefit and incentive plan expenses in 2004. Resultsin 2003 included employee termination benefit costs related to workforcereductions totaling $11 million. Results in 2002 included expenses related to aone-time charge for certain other employee benefit costs and also included expensesincurred in connection with the relocation of CPChem’s headquarters.

 

***Interest expense.*** Interest expensetotaled $75 million in 2004, $72 million in 2003 and $66 million in 2002. Theincrease in 2004 was attributable to higher interest rates on CPChem’svariable-rate based debt. The increase in 2003 resulted primarily from interestexpense on $500 million of 5 3/8% notes issued in June 2002. Proceeds from theissuance were used to retire a portion of outstanding commercial paper whichcarried significantly lower interest rates. In addition, interest costscapitalized in 2003 totaled $3 million as compared with $7 million in 2002.

 

***Interest income.*** Interestincome totaled $9 million in 2004, $8 million in 2003 and $7 million in 2002.

 

***Income Taxes.*** Income tax expensetotaled $15 million in 2004, $5 million in 2003 and $6 million in 2002. Theincrease in 2004 was due to taxes on foreign income. 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 andlosses. However, CPChem is directly liable for federal and state income taxesand franchise taxes on certain separate legal entities and for any foreigntaxes incurred.

 

**Outlook**

 

CPChem continuesto maintain its focus on safety, operational reliability, improving margins andincreasing sales volumes as the global economy improves. While higher salesvolumes and prices bolstered CPChem’s earnings in 2004, escalating feedstockand fuel costs, driven by persistently high energy prices, are limiting marginimprovements for most products. Results from CPChem’s joint ventures in theMiddle East have been strong due in part to good market conditions andfavorable local feedstock costs.

 

Various industryanalysts have recently noted that improving global chemical demand, lowinventories and capacity limitations are providing support for product priceincreases. Furthermore, the view of these analysts is that such conditions willlikely continue through 2006.

 

23

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**Liquidity and Capital Resources**

 

Cash balances were$63 million at December 31, 2004 and $43 million at December 31, 2003, of which$48 million and $31 million, respectively, was held by foreign subsidiaries. Theincrease in cash held by foreign subsidiaries was due to higher amounts of cashheld for investment in the JCP project. CPChem’s objective is to minimize cashbalances in its worldwide operations while utilizing the commercial paperprogram for its daily operating requirements.

 

*OperatingActivities*

 

Cash provided byoperating activities in 2004 totaled $459 million, compared with $280 millionduring 2003. The increase reflected significantly higher earnings in 2004partially offset by a larger net increase in non-cash working capital over thetwo years. Cash from operations for 2004 was negatively impacted by a $235million increase in non-cash working capital, while the increase for 2003 was$14 million.

 

Cash provided byoperating activities in 2003 totaled $280 million, compared with $335 millionduring 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 partiallyoffset the effect of the change in non-cash working capital.

 

*InvestingActivities*

 

Capital andinvestment expenditures

 
| **Millions**                 | ** ** | **Olefins &  Polyolefins** | ** ** | **Aromatics &  Styrenics** | ** ** | **Specialty  Products** | ** ** | **Corporate &  Other** | ** ** | **Consolidated** | ** ** |
|------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------|------------|
| Year ended December 31, 2004 |       | $                              | 138        |                           | $          | 44                      |       | $                          | 12         |             | $          | 7 |   | $ | 201 |   |
| Year ended December 31, 2003 |       | 127                            |       | 73                             |       | 17                      |       | 6                          |       | 223              |       |
| Year ended December 31, 2002 |       | 179                            |       | 103                            |       | 20                      |       | 12                         |       | 314              |       |
|                              |            |                                |            |                                |            |                         |            |                            |            |                  |            |  |  |  |  |  |

 

Capital andinvestment expenditures for Aromatics & Styrenics in 2004 and 2003,respectively, included a $4 million advance and a $20 million equity investmentin Jubail Chevron Phillips Company, a 50%-owned joint venture with facilitiesto be located in Al Jubail, Saudi Arabia. See below for a discussion of the JCPproject. Capital and investment expenditures for Olefins & Polyolefins in2002 included a $45 million equity investment in Phillips Sumika PolypropyleneCompany.

 

In addition to thecapital and investment expenditures shown above for Olefins & Polyolefins,CPChem subscribed to additional shares of and advanced Qatar Chemical CompanyLtd. (Q-Chem), a CPChem equity investment, a total of $28 million in 2004, $103million in 2003 and $210 million in 2002. See Part II - Item 8. FinancialStatements and Supplementary Data – Note 5 for a further discussion of Q-Chem.

 

CPChem currentlyexpects to invest a total of approximately $245 million in capital andinvestment expenditures in 2005. It is expected that $133 million will beinvested in Olefins & Polyolefins, $81 million in Aromatics &Styrenics, and $23 million in Specialty Products, with the remainder to bespent at the corporate level. Included in estimated 2005 capital and investmentexpenditures are $45 million in investments in and advances towards the JCPProject.

 

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*JCPProject.* Jubail Chevron Phillips Company (JCP), a jointventure company, was formed in 2003 to develop an integrated styrene facilityin Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility to be builton a site adjacent to the existing aromatics complex owned by SCP will includefeed fractionation, an olefins cracker, and ethylbenzene and styrene monomerprocessing units. Construction of the JCP facility will be in conjunction withan expansion of SCP’s benzene plant, together called “the JCP Project.” Constructionbegan in the fourth quarter of 2004 and operational start-up is anticipated inlate 2007. It is estimated that project completion, as defined in the JCPProject’s financing agreements, will be achieved in the first half of 2008. Theproject will be financed through equity contributions and subordinated loansfrom the co-venturers, in proportion to their equal ownership interests, andlimited recourse loans from commercial banks and two Saudi Arabian governmentalagencies. Financial closing of the estimated $1.2 billion JCP Project occurredin July 2004.

 

*Q-ChemII Projects.*CPChemand Qatar Petroleum announced plans in 2001 for the development of a secondpetrochemical project in Mesaieed, Qatar (Q-Chem II), designed to producepolyethylene and NAO on a site adjacent to the existing Q-Chem complex.

 

In connection withthe Q-Chem II joint venture, CPChem and Qatar Petroleum entered into a separateagreement in 2002 with Atofina (now Total Petrochemical) and QatarPetrochemical Company, establishing a joint venture to develop an ethanecracker in northern Qatar at Ras Laffan Industrial City.

 

Request for finalapproval of the Q-Chem II projects by CPChem’s board of directors is expectedin 2005, with start-up anticipated in 2008. Preliminary financing plans for theprojects include equity contributions from the co-venturers and limitedrecourse loans from commercial banks and an export credit agency.

 

*FinancingActivities*

 

Cash provided by(used in) financing activities totaled $(260) million in 2004, $49 million in2003 and $115 million in 2002. Commercial paper balances outstanding increased$201 million during 2004, while secured borrowings under the accounts receivablesecuritization program decreased $100 million. Also included in 2004 financingactivities were $175 million of voluntary redemptions of members’ preferredinterests, $55 million of distributions on members’ preferred interests and$118 million of distributions to members to fund the members’ estimated federaland state income tax liabilities attributable to CPChem. Activities in 2003included $32 million of contributions from members and a $17 million netincrease in debt. During 2002, commercial paper outstanding decreased $808million, primarily with proceeds from the issuance of $500 million of 5 3/8% notesand from the sale of $250 million of members’ preferred interests.

 

OnJuly 30, 2004, CPChem entered into an $800 million five-year credit facility withvarious banks that provides committed credit support for CPChem’s commercialpaper program. Effective with the closing of the new credit facility, CPChemterminated its existing $400 million 364-day and $400 million three-year creditfacilities. There were no borrowings under any of the current or prior creditfacilities during 2004, 2003 or 2002.

 

Notesissued under CPChem’s commercial paper program are in the tier-2 commercialpaper market with maturities of 90 days or less. These borrowings totaled $385million at December 31, 2004 and were classified as Long-Term Debt since CPChem’sintent is to refinance or replace the obligations on a long-term basis andCPChem has an $800 million credit commitment in effect with a remaining termthat exceeds one year.

 

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CPChemhad $200 million of short-term borrowings outstanding at December 31, 2004under its trade receivables securitization program. The agreement allows forborrowings up to $300 million for which CPChem grants a security interest incertain of its trade receivables as collateral for any amounts outstanding. Thetrade receivables securitization agreement expires on May 17, 2005. CPChemintends to request an extension of the expiration date of the current agreementto May 2006.

 

In 2002, CPChemsold $250 million of members’ preferred interests, purchased 50% each byChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire aportion of outstanding commercial paper obligations. In 2004, CPChemvoluntarily redeemed $175 million of members’ preferred interests and paid $55million of distributions on members’ preferred interests. There were noredemptions or preferred distributions paid in 2003 or 2002. It is currentlyanticipated that the remaining $75 million of outstanding members’ preferredinterests will be redeemed during 2005.

 

CPChem believescash requirements over the next twelve months will be funded through acombination of cash on hand, cash flows from operations and commercial paper. CPChemis not aware of any conditions that exist as of the date of this report thatwould cause any of its debt obligations to be in or at risk of default. Inaddition, CPChem does not have any debt obligations whose maturities would beaccelerated as the result of a credit rating downgrade.

 

*ContractualObligations*

 

Contractualobligations, including debt obligations, at December 31, 2004 were as follows:

 
| ** **                                                              | ** ** | ** ** | ** ** | **Payments Due** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| **Millions**                                                            | ** ** | **Total**  | ** ** | **2005**         | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **Thereafter** | ** ** |
| Secured borrowings                                                      |       | $          | 200        |             | $          | 200 |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial paper                                                        |       | 385        |       | —           |       | — |   | 385 |   | — |   |
| Long-term debt                                                          |       | 1,000      |       | —           |       | 500 |   | — |   | 500 |   |
| Other debt, including current portions                                  |       | 9          |       | 1                |       | 2 |   | 3 |   | 3 |   |
| Other long-term liabilities included in the  consolidated balance sheet |       | 65         |       | —           |       | 38 |   | 16 |   | 11 |   |
| Operating lease obligations                                             |       | 209        |       | 25               |       | 72 |   | 31 |   | 81 |   |
| Purchase obligations                                                    |       | 3,513      |       | 1,352            |       | 1,820 |   | 171 |   | 170 |   |
| Total                                                                   |       | $          | 5,381      |             | $          | 1,578 |   | $ | 2,432 |   | $ | 606 |   | $ | 765 |   |

 

See also Part II -Item 8. Financial Statements and Supplementary Data – Note 8 for furtherdiscussion related to debt obligations and Note 13 for a discussion related tooperating lease obligations.

 

*SecuredBorrowings.* This represents borrowings related to theaccounts receivable securitization program that provides committed creditsupport for the commercial paper program.

 

*CommercialPaper.* The payments due period corresponds with theexpiration date of the $800 million bank credit facility that providescommitted credit support for the commercial paper program.

 

*OtherLong-term Liabilities Included in the Consolidated Balance Sheet.*Theamounts consist primarily of obligations related to various employee benefitplans, excluding pension plans.

 

26

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*PurchaseObligations.* This represents obligations to purchase goods orservices which contain: fixed or minimum quantities to be purchased; fixed,minimum or variable price provisions; and the approximate timing of thetransaction. Estimated future market rates based on CPChem’s long-term forecastwere used to calculate obligation amounts that contain variable priceprovisions. Obligations with no fixed or minimum purchase requirements forproduct or services were not included.

 

The abovecontractual obligations do not include CPChem’s anticipated funding under itspension plans. Based on internal and actuarial assumptions used in conjunctionwith the determination of future projected benefit obligations, it is estimatedthat annual funding of approximately $35 million into CPChem’s existing pensionplans would be sufficient for the plans to achieve fully funded status over aten year planning horizon. This level of funding would be in excess of futureexpected minimum regulatory funding requirements. Actual annual funding levelsmay differ from this estimate due to, among other things, economic conditions,actual pension asset returns and changes in business plans.

 

*Off-BalanceSheet Arrangements*

 

An off-balancesheet arrangement 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, including a contingent obligation, under derivative instrumentsclassified as equity or (4) any obligation, including a contingent obligation,arising out of a material variable interest in an unconsolidated entity thatprovides financing, liquidity, market risk or credit risk support to thecompany, or that engages in leasing, hedging or research and developmentarrangements with the company. Other than certain guarantees related to itsequity affiliates and a residual guarantee related to a lease, CPChem has nomaterial off-balance sheet arrangements of this nature. See Part II - Item 8.Financial Statements and Supplementary Data – Note 5 for a discussion ofcertain guarantees related to CPChem’s equity affiliates and Note 10 for adiscussion of the residual guarantee.

 

**Other**

 

*OtherFactors That May Affect Future Performance*

 

*Cyclicalityand Overcapacity in the Petrochemicals Business.*The petrochemicals industry is both cyclicaland volatile. Historically, the industry has experienced periods of tightsupply, resulting in increased prices and profit margins. This is typicallyfollowed by periods of substantial capacity expansion, resulting in oversupplyand declining prices and profit margins. As a result of changes in supply anddemand for products, changes in energy prices and changes in various othereconomic conditions around the world, CPChem’s sales volumes and profit marginsmay fluctuate, not only from year to year, but also from quarter to quarter.

 

*FeedstockCosts and Other External Factors.*Due to the overall commodity nature of most of the products CPChemsells, market position cannot necessarily be protected by productdifferentiation or by passing on cost increases to customers. Accordingly,price increases in raw materials and other costs may not correlate with changesin the prices received for products. Feedstock prices can fluctuate widely fora variety of reasons, including changes in worldwide energy prices, changes inavailability or significant facility operating problems. Other external factorsthat can cause volatility in feedstock prices, as well as demand for products,product 

 

27

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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.

 

AlthoughCPChem gathers, transports and fractionates feedstocks to meet a portion of itsdemand and has long-term feedstock supply contracts with affiliates of itsowners and others, CPChem is still subject to volatile feedstock prices. Extremeprice volatility, such as that experienced in early 2001 and 2003, can resultin the need to temporarily idle or curtail production units.

 

*Environmental,Health and Safety.* Thepetrochemicals business is highly regulated, subject to increasingly stringentlaws and regulations addressing environmental, health and safety matters. Suchmatters include, but are not limited to, air pollutant emissions, discharges oftreated wastewater, stormwater runoff, solid waste management, workplacesafety, and contamination. Violations of these laws and regulations oftenresult 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 some laws, includingthe Comprehensive Environmental Response, Compensation and Liability Act of1980 (“Superfund”), the Resource Conservation and Recovery Act of 1976 and thelaws of many states, CPChem may be subject to joint and several liabilityregarding environmental contamination on or from properties that it previouslyowned or operated or currently owns or operates. CPChem may also be subject toliability for contaminated properties where it has disposed of or arranged fordisposal of hazardous substances, or where feedstocks or products thatcontained hazardous substances have been spilled or released. Depending on thecircumstances, such liabilities may involve, for example, investigation orclean-up costs, claims for damages to natural resources or punitive damageclaims. In addition, CPChem may be the subject of third-party tort claimsseeking compensatory and punitive damages for alleged impacts on human healthor the environment. These liabilities and claims could result in substantialcosts to CPChem.

 

CPChem incurs, and expectsto continue to incur, significant costs for capital improvements and generalcompliance under applicable environmental laws, including costs to acquire, maintainand repair equipment dealing with pollution control. By 2007, industrialfacilities in the eight counties in and around Houston, Texas, includingcertain facilities that CPChem owns, must comply with new nitrogen oxide (NOx)emission standards. These new standards are being phased in between 2003 and2007. Modifications to existing equipment and the installation of additionalcontrol equipment are required to meet these new NOx standards. CPChem expectsthat total capital expenditures of approximately $100 million will be requiredduring this period to comply with these standards. To date, CPChem has investedapproximately $75 million ($30 million in 2004) of such expenditures.

 

In addition, new regulationswere issued in 2004 concerning emissions of highly reactive volatile organiccompounds (HRVOCs). CPChem expects that total capital expenditures ofapproximately $20 million will be required to comply with the monitoringaspects of these regulations. CPChem invested $2 million of such capital expendituresin 2004. While CPChem cannot determine if additional expenditures will berequired until monitoring capabilities are in place, CPChem currently believesthat additional expenditures required, if any, will not have a material adverseeffect on consolidated results of operations, financial position or liquidity.

 

28

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New laws and regulations, the stricter enforcement of,or changes to, existing laws and regulations, the discovery of previouslyunknown contamination or the imposition of new disposal or cleanup requirementscould in the future require CPChem to incur costs, or affect its production orrevenues, in ways that could have a negative effect on its financial conditionor results of operations. Therefore, there can be no assurance that materialcapital expenditures, costs, or operating expenses beyond those currentlyanticipated will not be required under applicable environmental, health, andsafety laws and regulations, or that developments with respect to such laws andregulations, will not adversely affect production or revenues.

 

There are risks associatedwith the production of petrochemicals, such as operational hazards andunforeseen interruptions caused by events beyond CPChem’s control. Theseinclude accidents, breakdowns or failures of equipment or processes, acts ofterrorism and other catastrophic events. These events can result in injury orloss of life and extensive property or environmental damage. In addition, thehandling of chemicals has the potential for serious impacts on human health andthe environment. Liabilities incurred and interruptions in operations caused bythese events have the potential to materially affect consolidated results ofoperations, financial position and liquidity. While CPChem maintains generaland business interruption insurance, insurance proceeds may not be adequate tofully cover substantial liabilities incurred, lost revenues or increasedexpenses.

 

*InternationalOperations.* Internationaloperations are exposed to different political, economic and regulatory risksthat are not faced by businesses that operate solely in the United States. Someof CPChem’s operations, including certain of its equity affiliates, are outsidethe continental United States, with manufacturing facilities in Puerto Rico,Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Domesticassets totaled $5.341 billion as of December 31, 2004 and net sales fromdomestic operations were $7.754 billion in 2004. Assets located outside of theU.S. as of December 31, 2004 totaled $1.531 billion and net sales from non-U.S.operations were $1.484 billion in 2004. Asset and net sales calculations weredetermined based on location of the operation. CPChem’s 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 todifferent legal standards, impositions or increases of investment and otherdemands by foreign governments, the requirements of a wide variety of foreignlaws, political and economic instability, and difficulties in staffing andmanaging operations, particularly in remote locations. In addition, terroristacts, if directed at CPChem operations, could have a material adverse effect onCPChem’s business.

 

*ForeignCurrency Risk.*Internationally,CPChem operates facilities in eight countries and sells product in many othercountries, resulting in transactions denominated in various currencies. Assuch, CPChem is exposed to foreign currency risk to the extent there aredevaluations and fluctuations in the exchange rates of the local currencies ofthose countries against the U.S. dollar and other foreign currencies which mayadversely affect revenues and margins. The potential foreign currencytransaction gain (or loss) from a hypothetical 10% decrease (or increase) inthe value of the U.S. dollar relative to those local currencies wasapproximately $11 million in the aggregate at December 31, 2004.

 

*InterestRate Risk.*Because CPChem’s commercial paper obligations havematurities of 90 days or less and are generally reissued upon maturity, thedebt is considered variable-rate based. The secured debt issued in connectionwith the accounts receivable securitization program is also variable-rate based.A hypothetical 100 basis point change (a one percentage point change) in theweighted average interest rates of the outstanding balances at December 31,2004 of these debt instruments would impact interest expense by approximately$6 million annually in the aggregate.

 

29

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*Contingencies*

 

In the case ofknown contingent liabilities, CPChem records an undiscounted liability when aloss is probable and the amount can be reasonably estimated. These liabilitiesare not reduced for potential insurance recoveries. If applicable, undiscountedreceivables are recorded for probable insurance or other third-partyrecoveries. Based on currently available information, CPChem believes it isremote that future costs related to known contingent liabilities will exceedcurrent accruals by an amount that would have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

See Part II - Item8. Financial Statements and Supplementary Data – Note 11 for further discussionof contingencies.

 

*NewAccounting Pronouncements*

 

See Part II - Item8. Financial Statements and Supplementary Data – Note 2 – “AccountingPronouncements.”

 

**Item 7A****.Quantitative and QualitativeDisclosures About Market Risk**

 

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

 

30

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**Item 8**.    Financial Statements and SupplementaryData

 

**INDEXTO FINANCIAL STATEMENTS**

 

**ChevronPhillips Chemical Company LLC**

 
| ** **                                                                                                                                                                                             | ** ** | **Page**   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Report of Independent Registered  Public Accounting Firm**                                                                                                                                           | ** ** | **32**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Consolidated  Statement of Operations for the years ended December 31, 2004, 2003 and 2002**                                                                                                         | ** ** | **33**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Consolidated Balance Sheet at December  31, 2004 and 2003**                                                                                                                                          | ** ** | **34**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Consolidated  Statement of Members’ Capital for the years ended December 31, 2004, 2003 and  2002**                                                                                             | ** ** | **35**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Consolidated  Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002**                                                                                                         | ** ** | **36**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Notes to  Consolidated Financial Statements**                                                                                                                                                        | ** ** | **37**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Selected Quarterly  Financial Data (Unaudited)**                                                                                                                                                     | ** ** | **67**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| ***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**                                                                                                                                                                    |       |       |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Auditors’ Report**                                                                                                                                                                              | ** ** | **68**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Balance Sheet at December 31, 2004, 2003  and 2002**                                                                                                                                                 | ** ** | **69**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Income for the years  ended December 31, 2004, 2003 and 2002**                                                                                                                          | ** ** | **70**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Cash Flows for the  years ended December 31, 2004, 2003 and 2002**                                                                                                                      | ** ** | **71**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Changes in  Partners’ Equity for the years ended December 31, 2004, 2003 and 2002**                                                                                                | ** ** | **72**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Notes to the Financial  Statements**                                                                                                                                                                 | ** ** | **73**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Qatar Chemical Company Ltd. (Q-Chem)**                                                                                                                                                               |       |       |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Report of the Auditors**                                                                                                                                                                             | ** ** | **82**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Auditors' Report**                                                                                                                                                                                   | ** ** | **83**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Balance Sheet at December 31, 2004, 2003  and 2002**                                                                                                                                                 | ** ** | **84**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Income for the years  ended December 31, 2004, 2003 and 2002**                                                                                                                          | ** ** | **85**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Changes in  Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002**                                                                                            | ** ** | **86**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Statement of Cash Flows for the  years ended December 31, 2004, 2003 and 2002**                                                                                                                      | ** ** | **87**     |
| ** **                                                                                                                                                                                             | ** ** | ** ** |
| **Notes to the  Financial Statements**                                                                                                                                                                 | ** ** | **88**     |

 

31

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### **Report ofIndependent**RegisteredPublic Accounting Firm

 

Tothe Board of Directors of Chevron Phillips Chemical Company LLC:

 

We have audited theaccompanying consolidated balance sheets of Chevron Phillips Chemical CompanyLLC (the Company) as of December 31, 2004 and 2003, and the relatedconsolidated statements of operations, members’ capital, and cash flows foreach of the three years in the period ended December 31, 2004. Our audits alsoincluded the financial statement schedule listed in the Index at Item 15(a). Thesefinancial statements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits. The financial statements of QatarChemical Company Ltd. (Q-Chem), (a joint venture company in which the Companyhas a 49% interest), as of December 31, 2004 and for the year then ended havebeen audited by other auditors whose report has been furnished to us; insofaras our opinion on the consolidated financial statements relates to the amountsincluded for Q-Chem, it is based solely on their report. In the consolidatedfinancial statements, the Company’s investment in Q-Chem is stated at $387million at December 31, 2004 and the Company’s equity in the net income of Q-Chemis stated at $57 million for the year then ended.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes considerationof internal control over financial reporting as a basis for designing auditprocedures that are appropriate in the circumstances, but not for the purposeof expressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Chevron Phillips ChemicalCompany LLC at December 31, 2004 and 2003, and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2004, in conformity with U.S. generally accepted accountingprinciples. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

Ernst& Young LLP

 

Houston,Texas

February14, 2005

 

32

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**Chevron Phillips Chemical Company LLC**

##### **Consolidated Statement ofOperations**

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| **Millions**                                         | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenue                                              |       |                         |       |   |   |   |   |
| Net sales                                            |       | $                            | 9,238      |   | $ | 6,907 |   | $ | 5,389 |   |
| Equity in income of affiliates, net                  |       | 218                          |       | 41 |   | 22 |   |
| Other income                                         |       | 102                          |       | 70 |   | 62 |   |
| Total revenue                                        |       | 9,558                        |       | 7,018 |   | 5,473 |   |
|                                                 |       |                         |       |   |   |   |   |
| Costs and Expenses                                   |       |                         |       |   |   |   |   |
| Cost of goods sold                                   |       | 8,373                        |       | 6,439 |   | 4,986 |   |
| Selling, general and administrative                  |       | 436                          |       | 448 |   | 399 |   |
| Asset impairments                                    |       | —                       |       | — |   | 6 |   |
| Research and development                             |       | 42                           |       | 55 |   | 47 |   |
| Total costs and expenses                             |       | 8,851                        |       | 6,942 |   | 5,438 |   |
|                                                 |       |                         |       |   |   |   |   |
| Income Before Interest and Taxes                     |       | 707                          |       | 76 |   | 35 |   |
|                                                 |       |                         |       |   |   |   |   |
| Interest income                                      |       | 9                            |       | 8 |   | 7 |   |
| Interest expense                                     |       | (75                          | )          | (72 | ) | (66 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Income (Loss) Before Taxes                           |       | 641                          |       | 12 |   | (24 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Income taxes                                         |       | (15                          | )          | (5 | ) | (6 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Net Income (Loss)                                    |       | 626                          |       | 7 |   | (30 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Distributions on members’ preferred  interests  |       | (21                          | )          | (23 | ) | (11 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Income (Loss) Attributed to Members’  Interests |       | $                            | 605        |   | $ | (16 | ) | $ | (41 | ) |

 

See Notes to ConsolidatedFinancial Statements.

 

33

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**Chevron Phillips Chemical Company LLC**

##### **Consolidated Balance Sheet**

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Millions**                                    | ** ** | **2004**         | ** ** | **2003** | ** ** |
| ASSETS                                          |       |             |       |   |   |
| Current assets                                  |       |             |       |   |   |
| Cash and cash equivalents                       |       | $                | 63         |   | $ | 43 |   |
| Accounts receivable, net – trade           |       | 1,140            |       | 775 |   |
| Accounts receivable, net – affiliates      |       | 126              |       | 87 |   |
| Inventories                                     |       | 784              |       | 700 |   |
| Other current assets                            |       | 43               |       | 31 |   |
| Total current assets                            |       | 2,156            |       | 1,636 |   |
|                                            |       |             |       |   |   |
| Property, plant and equipment                   |       | 7,903            |       | 7,744 |   |
| Less: accumulated depreciation                  |       | 4,135            |       | 3,880 |   |
| Net property, plant and equipment               |       | 3,768            |       | 3,864 |   |
|                                            |       |             |       |   |   |
| Investments in and advances to affiliates       |       | 893              |       | 673 |   |
| Other assets and deferred charges               |       | 55               |       | 69 |   |
|                                            |       |             |       |   |   |
| Total Assets                                    |       | $                | 6,872      |   | $ | 6,242 |   |
|                                            |       |             |       |   |   |
| LIABILITIES  AND MEMBERS’ EQUITY           |       |             |       |   |   |
|                                            |       |             |       |   |   |
| Current liabilities                             |       |             |       |   |   |
| Accounts payable – trade                   |       | $                | 665        |   | $ | 521 |   |
| Accounts payable – affiliates              |       | 219              |       | 146 |   |
| Accrued income and other taxes                  |       | 60               |       | 54 |   |
| Accrued salaries, wages and benefits            |       | 102              |       | 92 |   |
| Secured borrowings and other debt               |       | 201              |       | 314 |   |
| Other current liabilities and deferred  credits |       | 94               |       | 57 |   |
| Total current liabilities                       |       | 1,341            |       | 1,184 |   |
|                                            |       |             |       |   |   |
| Long-term debt                                  |       | 1,390            |       | 1,189 |   |
| Other liabilities and deferred credits          |       | 91               |       | 109 |   |
|                                            |       |             |       |   |   |
| Total liabilities                               |       | 2,822            |       | 2,482 |   |
|                                            |       |             |       |   |   |
| Members’ preferred interests               |       | 75               |       | 250 |   |
|                                            |       |             |       |   |   |
| Members’ capital                           |       | 3,925            |       | 3,478 |   |
| Accumulated other comprehensive income          |       | 50               |       | 32 |   |
|                                            |       |             |       |   |   |
| Total Liabilities and Members’ Equity      |       | $                | 6,872      |   | $ | 6,242 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

34

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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, 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                                          |       | 7                          |       | —                                              |       | 7         |       |   |
| Foreign currency translation adjustments            |       | —                     |       | 25                                                  |       | 25        |       |   |
| Total comprehensive income                          |       |                       |       |                                                |       | 32        |       |   |
| Distributions on members’ preferred interests  |       | (23                        | )          | —                                              |       | (23       | )          |   |
|                                                |       |                       |       |                                                |       |      |       |   |
| Balance on December 31, 2003                        |       | 3,478                      |       | 32                                                  |       | 3,510     |       |   |
|                                                |       |                       |       |                                                |       |      |       |   |
| Net income                                          |       | 626                        |       | —                                              |       | 626       |       |   |
| Foreign currency translation adjustments            |       | —                     |       | 21                                                  |       | 21        |       |   |
| Minimum pension liability adjustments               |       | —                     |       | (3                                                  | )          | (3        | )          |   |
| Total comprehensive income                          |       |                       |       |                                                |       | 644       |       |   |
| Distributions on members’ preferred  interests |       | (21                        | )          | —                                              |       | (21       | )          |   |
| Other distributions to members                      |       | (158                       | )          | —                                              |       | (158      | )          |   |
|                                                |       |                       |       |                                                |       |      |       |   |
| Balance on December 31, 2004                        |       | $                          | 3,925      |                                                | $          | 50        |       | $      | 3,975 |   |
|                                                     |            |                            |            |                                                     |            |           |            |        |  |  |  |  |  |

 

**SeeNotes to Consolidated Financial Statements**.

 

35

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** **

**Chevron Phillips Chemical Company LLC**

##### **Consolidated Statement of CashFlows**

 
| ** **                                                                                     | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Millions**                                                                                   | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Cash Flows From Operating Activities                                                           |       |                         |       |   |   |   |   |
| Net income (loss)                                                                              |       | $                            | 626        |   | $ | 7 |   | $ | (30 | ) |
| Adjustments to reconcile net income (loss)  to net cash flows provided by operating activities |       |                         |       |   |   |   |   |
| Depreciation, amortization and retirements                                                     |       | 281                          |       | 298 |   | 291 |   |
| Asset impairments                                                                              |       | —                       |       | — |   | 6 |   |
| Undistributed equity in income of  affiliates, net                                             |       | (197                         | )          | (28 | ) | (6 | ) |
| Changes in operating working capital                                                           |       | (235                         | )          | (14 | ) | 82 |   |
| Other operating cash flow activity                                                             |       | (16                          | )          | 17 |   | (8 | ) |
| Net cash flows provided by operating  activities                                               |       | 459                          |       | 280 |   | 335 |   |
|                                                                                           |       |                         |       |   |   |   |   |
| Cash Flows From Investing Activities                                                           |       |                         |       |   |   |   |   |
| Capital and investment expenditures                                                            |       | (201                         | )          | (223 | ) | (314 | ) |
| Investments in and advances to Qatar  Chemical Company Ltd. (Q-Chem)                           |       | (28                          | )          | (103 | ) | (210 | ) |
| Advance repayment from Saudi Chevron  Phillips Company                                         |       | 32                           |       | — |   | — |   |
| Proceeds from the sale of assets                                                               |       | 18                           |       | 1 |   | 2 |   |
| Net cash flows used in investing activities                                                    |       | (179                         | )          | (325 | ) | (522 | ) |
|                                                                                           |       |                         |       |   |   |   |   |
| Cash Flows From Financing Activities                                                           |       |                         |       |   |   |   |   |
| Increase (decrease) in commercial paper,  net                                                  |       | 201                          |       | (1 | ) | (808 | ) |
| Increase (decrease) in secured borrowings,  net                                                |       | (100                         | )          | 10 |   | 91 |   |
| Increase (decrease) in other debt, net                                                         |       | (13                          | )          | 8 |   | 500 |   |
| Proceeds from the issuance of members’  preferred interests                               |       | —                       |       | — |   | 250 |   |
| Redemptions of members’ preferred interests                                               |       | (175                         | )          | — |   | — |   |
| Distributions on members’ preferred  interests                                            |       | (55                          | )          | — |   | — |   |
| Contributions from members                                                                     |       | —                       |       | 32 |   | 76 |   |
| Other distributions to members                                                                 |       | (118                         | )          | — |   | (1 | ) |
| Post-closing adjustments from members                                                          |       | —                       |       | — |   | 7 |   |
| Net cash flows provided by (used in)  financing activities                                     |       | (260                         | )          | 49 |   | 115 |   |
|                                                                                           |       |                         |       |   |   |   |   |
| Net Increase (Decrease) in Cash and Cash  Equivalents                                          |       | 20                           |       | 4 |   | (72 | ) |
| Cash and Cash Equivalents at Beginning of  Period                                              |       | 43                           |       | 39 |   | 111 |   |
| Cash and Cash Equivalents at End of Period                                                     |       | $                            | 63         |   | $ | 43 |   | $ | 39 |   |
|                                                                                           |       |                         |       |   |   |   |   |
| *Supplemental Disclosures of Cash Flow  Information*                                           |       |                         |       |   |   |   |   |
| Changes in operating working capital                                                           |       |                         |       |   |   |   |   |
| Decrease (increase) in accounts receivable                                                     |       | $                            | (408       | ) | $ | (100 | ) | $ | 3 |   |
| Decrease (increase) in inventories                                                             |       | (77                          | )          | 13 |   | (54 | ) |
| Decrease (increase) in other current assets                                                    |       | (13                          | )          | (5 | ) | 1 |   |
| Increase in accounts payable                                                                   |       | 216                          |       | 70 |   | 142 |   |
| Increase (decrease) in accrued income and  other taxes                                         |       | 6                            |       | 1 |   | (4 | ) |
| Increase (decrease) in other current  liabilities                                              |       | 41                           |       | 7 |   | (6 | ) |
| Total                                                                                          |       | $                            | (235       | ) | $ | (14 | ) | $ | 82 |   |
| Cash paid for interest                                                                         |       | $                            | 70         |   | $ | 70 |   | $ | 73 |   |
| Cash paid for income taxes                                                                     |       | $                            | 18         |   | $ | 5 |   | $ | 7 |   |

 

See Notes toConsolidated Financial Statements.

 

36

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**Chevron Phillips Chemical Company LLC**

##### **Notes to Consolidated FinancialStatements**

 

| **Index** | ** ** | ** **                                    | **Page** |
|-----------|------------|-----------------------------------------------|----------|
| 1.        |       | Nature  of Operations                         | 37       |
| 2.        |       | Summary  of Significant Accounting Policies   | 37       |
| 3.        |       | Transactions with  Affiliates                 | 40       |
| 4.        |       | Inventories                                   | 41       |
| 5.        |       | Investments  in and Advances to Affiliates    | 42       |
| 6.        |       | Property, Plant  and Equipment                | 45       |
| 7.        |       | Environmental  Liabilities                    | 46       |
| 8.        |       | Debt                                          | 46       |
| 9.        |       | Members’  Preferred Interests            | 47       |
| 10.       |       | Guarantees,  Commitments and Indemnifications | 47       |
| 11.       |       | Contingent Liabilities                        | 48       |
| 12.       |       | Credit Risk                                   | 49       |
| 13.       |       | Operating Leases                              | 50       |
| 14.       |       | Benefit Plans                                 | 50       |
| 15.       |       | Taxes                                         | 54       |
| 16.       |       | Segment  and Geographic Information           | 55       |
| 17.       |       | Fair  Values of Financial Instruments         | 58       |
| 18.       |       | Consolidating  Financial Statements           | 59       |

 

Note 1.   Nature of Operations

 

ChevronPhillips Chemical Company LLC, through its subsidiaries and equity affiliates,manufactures and markets a wide range of petrochemicals on a worldwide basis,with manufacturing facilities in the United States, Puerto Rico, Singapore,China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Chevron PhillipsChemical Company LLC is a limited liability company formed under Delaware law,owned 50% each by ChevronTexaco Corporation (ChevronTexaco) and ConocoPhillips,collectively, the “members.”

 

Thecompany is governed by a Board of Directors, currently comprised of sixrepresentatives, under the terms of a limited liability company agreement. ChevronTexacoand ConocoPhillips each have two voting representatives, and the chiefexecutive officer and the chief financial officer of the company are non-votingrepresentatives. Certain major decisions and actions require the approval ofthe Board of Directors. All decisions and actions of the Board of Directorsrequire the approval of at least one representative of both ChevronTexaco andConocoPhillips.

 

Note 2.   Summary of SignificantAccounting Policies

 

*Basis of Financial Statements –*The accompanying consolidated financialstatements include the accounts of Chevron Phillips Chemical Company LLC andits wholly owned subsidiaries (collectively, “CPChem”). All significantintercompany investments, accounts and transactions have been eliminated inconsolidation. Investments in affiliates in which CPChem has 20% to 50% of thevoting control are accounted for using the equity method. Other securities andinvestments are carried at the lower of cost or market. Certain amounts forprior periods have been reclassified in order to conform to the currentreporting presentation.

 

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*Estimates, Risks and Uncertainties –*The preparation of financial statements inconformity with U.S. generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect certain amountsreported in the financial statements and accompanying notes. Actual resultscould differ from these estimates and assumptions.

 

Accountsreceivable is shown net of a $7 million allowance for estimated non-recoverableamounts at both December 31, 2004 and 2003.

 

Thereare varying degrees of risk and uncertainty in each of the countries in whichCPChem operates. CPChem insures its business and assets against materialinsurable risks in a manner it deems appropriate. Because of the diversity ofits operations, CPChem believes any loss incurred from an uninsured event inany one business or country, other than a terrorist act directed at CPChemoperations, would not have a material adverse effect on operations as a whole.

 

*Revenue Recognition –*CPChem follows the guidance provided by the Securities and ExchangeCommission (SEC) Staff Accounting Bulletin No. 104, “Revenue Recognition.” Salesof petrochemicals, natural gas liquids and other items, including by-products,are recorded when title passes to the customer. Revenues from royalties forlicensed technology are recorded as the associated services are rendered whenroyalties are paid in advance, and as volumes are produced by the licensee whenroyalties are paid based on a licensee’s production. Sales are presented net ofdiscounts and allowances. Freight costs billed to customers are recorded as acomponent of revenue.

 

In February 2005, the SECprovided guidance regarding the disclosure of the accounting for “buy/sell”arrangements.  In limited and infrequentsituations, to facilitate the procurement of feedstock or to otherwise manageits feedstock supply chain, CPChem enters into buy/sell agreements with thesame counterparty.  These transactionsare reflected on a gross basis in the consolidated statement of operations.  The amounts associated with thesetransactions are not material to Net Sales or Cost of Goods Sold as reported inthe consolidated statement of operations.

 

*Cash and Cash Equivalents –* Cash equivalents are highly liquid, short-term investments readilyconvertible to known amounts of cash that have original maturities of threemonths or less from date of purchase.

 

*Inventories –*For U.S. operations, cost of product inventories is primarily determined usingthe dollar-value, last-in, first-out (LIFO) method. These inventories arevalued at the lower of cost or market, aggregated at a segment level. Lower-of-cost-or-marketwrite-downs for LIFO-valued inventories are generally considered temporary. Foroperations outside the United States, product inventories are valued using acombination of the first-in, first-out (FIFO) and weighted average methods. Materialsand supplies inventories are carried at average cost.

 

*Property, Plant and Equipment –*****Property, plant andequipment is stated at cost. Property, plant and equipment is comprised ofassets, defined as property units, with an initial expected economic lifebeyond one year. Asset categories are used to compute depreciation andamortization using the straight-line method over the associated estimatedfuture useful lives.

 

*Impairment of Assets –*****Long-lived assetsused in operations are assessed for possible impairment when events or changesin circumstances indicate a potential significant deterioration in future cashflows projected to be generated by an asset group. Individual assets aregrouped for impairment purposes at the lowest level for which there areidentifiable cash flows that are largely independent of the cash flows of othergroups of assets – generally at a product line level.

 

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If,upon review, the sum of the projected undiscounted pre-tax cash flows is lessthan the carrying value of the asset group, the carrying value is written downto estimated fair value. The fair values of impaired assets are usuallydetermined based on the present value of projected future cash flows usingdiscount rates commensurate with the risks involved in the asset group, asquoted market prices in active markets are generally not available.

 

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.

 

*Maintenanceand Repairs –*****Maintenanceand repair costs, including turnaround costs of major producing units, areexpensed as incurred.

 

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

 

*Property Dispositions –*****Assets that are nolonger in service and for which there is no contemplated future use by CPChemare retired. When assets are retired or sold, the asset cost and relatedaccumulated depreciation are eliminated, with any gain or loss reflected inincome.

 

*EnvironmentalCosts –* Environmental expenditures are expensed orcapitalized as appropriate, depending on future economic benefit. Expendituresthat relate to an existing condition caused by past operations and that do nothave future economic benefit are expensed. Liabilities for expenditures arerecorded on an undiscounted basis when environmental assessments or claims areprobable and the costs can be reasonably estimated. Expenditures that createfuture benefits or that contribute to future revenue generation arecapitalized.

 

*Capitalizationof Interest* –**Interest costsincurred to finance projects of at least $75 million and that are longer thanone year in duration, and interest costs associated with investments in equityaffiliates that have their planned principal operations under construction, arecapitalized until commercial production begins. Capitalized interest is amortizedover the life of the associated asset. Unamortized capitalized interest totaled$42 million at December 31, 2004 and $44 million at December 31, 2003. Interestcosts capitalized in 2004 totaled $1 million. Interest costs capitalized in2003 totaled $3 million and in 2002 totaled $7 million, both of which wereprimarily associated with CPChem’s investment in Qatar Chemical Company Ltd.(Q-Chem).

 

*IncomeTaxes –*****CPChem istreated as a flow-through entity for federal income tax and for most stateincome tax purposes whereby each member is taxable on its respective share ofincome and loss. However, CPChem is directly liable for federal and stateincome taxes and franchise taxes on certain separate legal entities, and forany foreign taxes incurred. CPChem follows the liability method of accountingfor these income taxes.

 

*AccountingPronouncements* –Effective January 1, 2004, CPChem adopted Statement of Financial AccountingStandards (SFAS) No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity,” which establishes standardsfor how an issuer classifies and measures certain financial instruments thathave characteristics of both a liability and of equity. Generally, it requiresthat an issuer classify such financial instruments as liabilities because they embodyan obligation of the issuer. Because CPChem has no financial instruments outstandingthat fall within the scope of this new standard, implementation of thisstandard did not have an impact on consolidated results of operations,financial position or liquidity. CPChem’s outstanding preferred members’interests currently do not fall within the scope of this standard because theycontain redemption provisions that create a conditional, rather than mandatory,obligation of CPChem. In the event that CPChem’s ratio of debt to totalcapitalization reaches a stated level, a portion of the outstanding preferredmembers’ interests will be reclassified as a liability.

 

39

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The Financial AccountingStandards Board (FASB) issued Interpretation No. 46 (revised December2003), “Consolidation of Variable Interest Entities,” (FIN No. 46(R)) whichprovides guidance 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 a corporation, partnership, trust, or any otherlegal structure used for business purposes that either does not have equityinvestors with voting rights or that has equity investors that do not providesufficient financial resources for the entity to support its activities.  FIN No. 46(R) requires a VIE to beconsolidated by a company if that company is subject to a majority of the riskof loss from the activities of the VIE or is entitled to receive a majority ofthe residual returns of the VIE.  FIN No.46(R) also requires disclosures about VIEs that are not required to beconsolidated by a company, but in which the company has a significant variableinterest.  The consolidation requirementsof FIN No. 46(R) apply immediately to VIEs created after December 31,2003, and for CPChem, which is considered to be a nonpublic entity as itrelates to FIN No. 46(R), the consolidation requirements applied to pre-existingVIEs effective January 1, 2005.  CPChem believes that FIN No. 46(R) will not require theconsolidation of any existing VIE into CPChem’s consolidated financial statements.

 

InNovember 2004, FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARBNo. 43, Chapter 4.”  The statement amends the guidance inAccounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs and spoilage, requiring that such costs be recognized ascurrent-period charges.  It also requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities.  For CPChem, the provisions of SFAS No. 151are effective January 1, 2006.  CPChembelieves that implementation of this standard will not have a material impacton consolidated results of operations, financial position or liquidity.

 

In December 2004, FASBissued SFAS No. 153, “Exchanges of Non-Monetary Assets, an Amendment of APBOpinion No. 29.”  The guidancein Accounting Principles Board (APB) Opinion No. 29, “Accounting forNon-Monetary Transactions,” is based on the principle that exchanges ofnon-monetary assets should be measured based on the fair value of the assetsexchanged, with certain exceptions.  Thisstatement amends APB Opinion No. 29 to eliminate the exception for non-monetaryexchanges of similar productive assets and replaces it with a general exceptionfor exchanges of non-monetary assets that do not have commercialsubstance.  A non-monetary exchange doesnot have commercial substance if the future cash flows of the entity are not expected to change significantly as a resultof the exchange.  For CPChem, theprovisions of SFAS No. 153 are effective July 1, 2005.  CPChem believes that implementation of thisstandard will not have a material impact on consolidated results of operations,financial position or liquidity.

 

Note 3.**         **Transactions withAffiliates

 

Significant transactionswith affiliated parties, including equity affiliates, were as follows:

 
| ** **                                 | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| **Millions**                               | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales (a)                              |       | $                            | 1,158      |   | $ | 858 |   | $ | 662 |   |
| Other income                               |       | 45                           |       | 28 |   | 32 |   |
| Cost of goods  sold (b,c)                  |       | 2,489                        |       | 1,622 |   | 1,189 |   |
| Selling, general  and administrative (c,d) |       | 23                           |       | 26 |   | 27 |   |
|                                            |            |                              |            |  |  |  |  |  |  |  |

 

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(a)          CPChemsells ethylene residue gas to ConocoPhillips’ crude oil refining operations;specialty chemicals, alpha olefin products and aromatics and styrenicsby-products to ChevronTexaco; and feedstocks and various services tonon-consolidated equity companies, all at prices that approximate market.

 

(b)         CPChempurchases various feedstocks from ChevronTexaco and ConocoPhillips, and alsopurchases finished product from non-consolidated equity companies.  In addition, ChevronTexaco and ConocoPhillipsprovide CPChem certain common facility and manufacturing services at some ofCPChem’s facilities.

 

(c)          ConocoPhillipsand ChevronTexaco provide various services to CPChem under services agreements,including engineering consultation, research and development, laboratoryservices, security services, procurement services and pipeline operatingservices.

 

(d)         Amountsinclude billings in 2004, 2003 and 2002 to Qatar Chemical Company Ltd. (Q-Chem),an equity affiliate, credited to expense.

 

The K-Resin® styrene-butadiene copolymer(SBC) plant at the Pasadena Plastics Complex in Pasadena, Texas, while stillowned by ConocoPhillips, was idled in March 2000 due to a fire. Thecontribution agreement that was entered into upon the formation of CPChemcontained certain provisions related to pre-established K-Resin® SBCplant earnings and production targets. In accordance with those provisions,ConocoPhillips made member contributions of $22million in 2003 and $38 million in 2002.

 

See also Note 9 for a discussion of members’ preferredinterests and Note 15 for a discussion of tax distributions to members.

 

# **Note 4.**          Inventories

 

Inventories were asfollows:

 

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| **Millions**                   | ** ** | **2004**         | ** ** | **2003** | ** ** |
| LIFO inventories               |       |             |       |   |   |
| Olefins &  Polyolefins     |       | $                | 267        |   | $ | 288 |   |
| Aromatics &  Styrenics     |       | 169              |       | 136 |   |
| Specialty  Products            |       | 48               |       | 49 |   |
| Total LIFO  inventories        |       | 484              |       | 473 |   |
| Non-LIFO  inventories          |       |             |       |   |   |
| Olefins &  Polyolefins     |       | 111              |       | 78 |   |
| Aromatics &  Styrenics     |       | 91               |       | 53 |   |
| Specialty  Products            |       | 47               |       | 44 |   |
| Total non-LIFO  inventories    |       | 249              |       | 175 |   |
| Materials,  supplies and other |       | 51               |       | 52 |   |
| Total  inventories             |       | $                | 784        |   | $ | 700 |   |

 

The excess of replacementcost over book value of product inventories valued under the LIFO method was$396 million at December 31, 2004 and $194 million at December 31, 2003.

 

CPChem recorded $4million of gains in 2004 (Olefins & Polyolefins) and $13 million of gains in2003 ($10 million in Olefins & Polyolefins and $3 million in Aromatics& Styrenics) related to reductions in certain LIFO-valued inventories.

 

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# **Note5.**          Investments in and Advances to Affiliates

 

CPChem’s investments inits affiliates are accounted for using the equity method.  These affiliates are also engaged in themanufacturing and marketing of petrochemicals. The carrying amounts of these investments were as follows:

 
| ** **                                              | ** ** | ** **    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|------------------|------------|
| **Millions**                                            | ** ** | **Ownership** | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Qatar Chemical  Company Ltd. (Q-Chem)                   |       | 49%           |       | $                | 387        |   | $ | 296 |   |
| Saudi Chevron  Phillips Company                         |       | 50%           |       | 303              |       | 194 |   |
| Jubail Chevron  Phillips Company                        |       | 50%           |       | 27               |       | 20 |   |
| Chevron Phillips  Singapore Chemicals (Private) Limited |       | 50%           |       | 58               |       | 48 |   |
| Phillips Sumika  Polypropylene Company                  |       | 60%*          |       | 52               |       | 53 |   |
| K R Copolymer  Co., Ltd.                                |       | 60%           |       | 42               |       | 42 |   |
| Shanghai Golden  Phillips Petrochemical Company Limited |       | 40%           |       | 24               |       | 20 |   |
| Total  investments                                      |       |          |       | $                | 893        |   | $ | 673 |   |

 

----

* Profit/losssharing percentage.

 

Dividends received fromequity affiliates totaled $21 million in 2004, $13 million in 2003 and $16million in 2002.  CPChem’s members’capital at December 31, 2004 included $69 million of undistributed netearnings (losses) from equity affiliates and $(128) million at December 31,2003.

 

Phillips SumikaPolypropylene Company and K R Copolymer Co., Ltd. are not consolidated becauseCPChem does not have voting control of these entities.

 

*QatarChemical Company Ltd. (Q-Chem)*

 

Qatar Chemical CompanyLtd. (Q-Chem), a joint venture company, was formed in 1998 to develop a petrochemicalcomplex in Qatar.  The complex achievedproject completion, as defined in Q-Chem’s $750 million senior bank financingagreement, on September 16, 2004.  Uponproject completion, CPChem’s obligations to advance funds under itssubordinated loan agreement with Q-Chemwere terminated.  In addition, thecompletion guarantees under Q-Chem’s senior bank financing wereterminated and the bank financing became non-recourse with respect to theco-venturers.  Prior to achieving projectcompletion, as required under the subordinated loan agreement, CPChem advancedQ-Chem $85 million in 2003 and $210 million in 2002.  No advances were made in 2004.  In addition, as required by the completionguarantees, CPChem subscribed to $28 million of additional shares of Q-Chem in2004 and $18 million of shares in 2003 to fund its ownership share of theperiodic debt service payments of Q-Chem. No shares were subscribed to in 2002.

 

CPChem has agreed toprovide up to $75 million of loans to Q-Chem if there is insufficient cash topay the minimum debt service payments on the bank financing.  CPChem believes it is unlikely that fundingunder this support agreement will be required.

 

CPChem also agreed toprovide loans to Q-Chem through December 2006 if there is insufficient cash tomake Q-Chem’s target debt service payments. These loans are limited to the amount of lost operating marginsresulting from sales volumes being less than design capacity, or the actualcash deficiency, whichever is less. 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.

 

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CPChem’srights under the subordinated loan agreement and the other contingent loan agreementsrelated to Q-Chem previously described are subordinate to Q-Chem’s senior bankdebt.  Security interests in the notesrelated to such loans have been granted to the banks to support the terms ofsubordination.  Advances to Q-Chem,including accrued interest, under the subordinated loan agreement totaled $310million at December 31, 2004 and $303 million at December 31, 2003.

 

CPChem entered into anagency agreement with Q-Chem to act as an agent for the sale of substantiallyall of Q-Chem’s production.  CPChem hasalso entered into an offtake and credit risk agreement with Q-Chem, under whichCPChem is required to purchase, at market prices, specified amounts ofproduction if CPChem fails to sell that product under the terms of the agencyagreement.  CPChem has no exposure toprice risk for volumes it may be obligated to purchase under the terms of theofftake agreement.  The offtake andcredit risk agreement expires upon the earlier of the repayment in full byQ-Chem of its outstanding bank financing, currently scheduled to mature in2012, or any refinancing thereof.  CPChemexpects that it will be able to sell all the production under the terms of theagency agreement.

 

CPChemrecords its 49% share of Q-Chem’s operating results using the equitymethod.  Q-Chem is considered to be a VIEunder the provisions of FIN No. 46(R). CPChem’s maximum exposure to loss per FIN No. 46(R) was $387 million atDecember 31, 2004.  This amountrepresents CPChem’s carrying value of itsinvestment in and advances to Q-Chem, including accrued interest.

 

*SaudiChevron Phillips Company*

 

Saudi Chevron Phillips Company (SCP), a joint venturecompany that owns an aromatics complex in Al Jubail, Saudi Arabia, was originallyfinanced with loans from commercial banks and a Saudi Arabian governmentalagency.  In July 2004, SCP refinanced itscommercial bank loans, and as a result, CPChem’s contingent obligation to fundup to $25 million of SCP’s debt service payments was terminated.  The subsidiary of Chevron Phillips ChemicalCompany LLC which directly owns the 50% interest in SCP, along with the otherco-venturer, have each guaranteed their respective 50% share of certain loans toSCP from a Saudi Arabian governmental agency for the duration of theloans.  Chevron Phillips Chemical CompanyLLC is not a direct party to this guarantee. These loans totaled $69 million (gross) at December 31, 2004.  CPChem believes it is unlikely that fundingunder this guarantee will be required. SCP is not considered to be a VIE under the provisions of FIN No. 46(R).

 

Under the terms of asales and marketing agreement that runs through 2026, CPChem is obligated topurchase, at market prices, 100% of production from the plant less any quantitiessold by SCP in the Middle East.  CPChemhas no exposure to price risk for volumes it may be obligated to purchase andbelieves that it will continue to be able to sell all the purchased productionrequired under the terms of the sales and marketing agreement.

 

*JubailChevron Phillips Company*

 

Jubail Chevron Phillips Company (JCP), a joint venturecompany, was formed in 2003 to develop an integrated styrene facility in AlJubail, Saudi Arabia.  The 1.6billion-pound-per-year facility, to be built on a site adjacent to the existingaromatics complex owned by SCP, will include feed fractionation, an olefinscracker, and ethylbenzene and styrene monomer processing units.  Construction of the JCP facility will be inconjunction with an expansion of SCP’s benzene plant, together called “the JCPProject.”  Construction began in thefourth quarter of 2004 and operational start-up is anticipated in late2007.  It is estimated that projectcompletion, as defined in the JCP Project’s financing agreements, will beachieved in the first half of 2008.  JCPis not considered to be a VIE under the provisions of FIN No. 46(R).

 

43

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The project will be financed through equitycontributions and subordinated loans from the co-venturers, in proportion totheir equal ownership interests, and limited recourse loans from commercialbanks and two Saudi Arabian governmental agencies (collectively, called “seniordebt”).  Principal and accrued interestoutstanding under the commercial bank loans totaled $50 million at December 31,2004.  Principal and accrued interestoutstanding under loans from one of the governmental agencies totaled $42million at December 31, 2004, while no amounts were outstanding under the loanagreements with the second governmental agency.

 

Financial closing of theestimated $1.2 billion JCP Project occurred in July 2004.  Effective with the financial closing andinitial borrowings related to the JCP Project, the following commitments andguarantees were granted.

 

Under the terms of thecommercial bank facilities, funding available from the senior debt is limitedto 75% of the estimated project costs, as defined.  The JCP co-venturers are obligated to eachfund their respective 50% share of the remaining estimated project cost for theJCP Project through equity contributionsand/or subordinated loans.  In addition,the co-venturers are obligated to each fund their respective 50% share, throughequity contributions and/or subordinated loans, of any project cost incurred inexcess of the estimated project cost and of any project cost not funded bysenior debt.  These funding obligationsterminate upon achieving project completion.

 

Certain bridge loanguarantees obligate the JCP co-venturers to each repay their respective 50%share of certain commercial bank loans to JCP and SCP if the loans from thesecond Saudi Arabian governmental agency are not available for borrowings oneyear after financial closing of the commercial loan facilities.

 

Under the terms of completionguarantees, the commercial bank lenders and the first Saudi Arabiangovernmental agency have the right to demand from each JCP Project co-venturer,on a pro rata basis, funds to cover the debt service requirements associatedwith the JCP Project that are due after March 31, 2009 until projectcompletion.  Furthermore, if the projectis not completed by March 31, 2010, the commercial bank lenders and the firstSaudi Arabian governmental agency have the right to demand from eachco-venturer, on a pro rata basis, repayment of all outstanding principal andinterest.

 

The subsidiary of CPChemwhich directly owns the 50% interest in JCP, along with the other co-venturer,have each guaranteed their respective 50% share of certain loans payable by JCPto the second Saudi Arabian governmental agency for the duration of theloans.  Chevron Phillips Chemical CompanyLLC is not a direct party to this guarantee.

 

In addition to the aboveguarantees, CPChem guaranteed payment to a contractor for certain construction costsof the project, limited to a maximum of $103 million. The guarantee remains ineffect until payment for those construction costs is made.  CPChem also granted a guarantee related tothe delivery of stated amounts of JCP’s styrene monomer production to a JCPcustomer, limited to a maximum of $8 million. This guarantee terminates upon the achievement of commercial productionof styrene by JCP.

 

The total carrying amountof liabilities recorded, discounted and weighted for probability, for theaforementioned guarantees related to the JCP Project totaled $4 million atDecember 31, 2004.  The liabilities wererecorded as Other Liabilities and Deferred Credits, with an offsetting increaseto Investments.  CPChem believes it isunlikely that performance under any of the guarantees will be required.  However, should such performance be required,CPChem believes it would not have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

44

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*Equity Investments’Financial Information*

 

##### **In accordance with the Securities and Exchange Commission’srules pertaining to equity investments that are deemed to be “significant,”summarized financial information for CPChem’s equity investments, shown at100%, follows:**

 
| ** **                         | ** ** | **Qatar Chemical**           | ** ** | **Saudi Chevron**            | ** ** |
|------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **Company Ltd. (Q-Chem)**    | ** ** | **Phillips Company**         | ** ** |
| ** **                         | ** ** | **Years ended December 31,** | ** ** | **Years ended December 31,** | ** ** |
| **Millions**                       | ** ** | **2004**                     | ** ** | **2003**                     | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues                           |       | $                            | 324        |                         | $          | 73 |   | $ | — |   | $ | 665 |   | $ | 392 |   | $ | 310 |   |
| Income (loss)  before income taxes |       | 129                          |       | (40                          | )          | (22 | ) | 304 |   | 115 |   | 47 |   |
| Net income  (loss)                 |       | 117                          |       | (40                          | )          | (22 | ) | 304 |   | 115 |   | 47 |   |
|                                    |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current assets          |       | $                | 265        |             | $          | 111 |   | $ | 22 |   | $ | 388 |   | $ | 197 |   | $ | 116 |   |
| Noncurrent  assets      |       | 880              |       | 940              |       | 937 |   | 460 |   | 475 |   | 504 |   |
| Current  liabilities    |       | 110              |       | 104              |       | 62 |   | 137 |   | 87 |   | 83 |   |
| Noncurrent  liabilities |       | 889              |       | 974              |       | 920 |   | 135 |   | 294 |   | 340 |   |
|                         |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **All Others**               | ** ** |
|-----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **in the Aggregate**         | ** ** |
| ** **                  | ** ** | **Years ended December 31,** | ** ** |
| **Millions**                | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Revenues                    |       | $                            | 951        |   | $ | 682 |   | $ | 628 |   |
| Income before  income taxes |       | 33                           |       | 13 |   | 27 |   |
| Net income                  |       | 28                           |       | 10 |   | 23 |   |
|                             |            |                              |            |  |  |  |  |  |  |  |

 
| ** **              | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------|------------|
| ** **              | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current assets          |       | $                | 295        |   | $ | 196 |   | $ | 188 |   |
| Noncurrent  assets      |       | 412              |       | 357 |   | 340 |   |
| Current  liabilities    |       | 134              |       | 105 |   | 98 |   |
| Noncurrent  liabilities |       | 191              |       | 90 |   | 109 |   |
|                         |            |                  |            |  |  |  |  |  |  |  |

 

Note 6.          Property, Plant and Equipment

 

Property, plantand equipment was as follows:

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------|------------|
| **Millions**                                  | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Olefins &  Polyolefins                    |       | $                | 5,086      |   | $ | 4,966 |   |
| Aromatics &  Styrenics                    |       | 2,060            |       | 2,048 |   |
| Specialty  Products                           |       | 589              |       | 568 |   |
| Other                                         |       | 168              |       | 162 |   |
| Gross property,  plant and equipment, at cost |       | 7,903            |       | 7,744 |   |
| Accumulated  depreciation                     |       | 4,135            |       | 3,880 |   |
| Net property,  plant and equipment            |       | $                | 3,768      |   | $ | 3,864 |   |

 

Approximately $6.4billion of gross property, plant and equipment at December 31, 2004 consistedof chemical plant assets depreciated on estimated useful lives of approximately25 years.  Other non-plant items, such asfurniture, fixtures, buildings and automobiles, have

 

45

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estimated useful livesranging from 5 to 45 years, with a weighted average of 27 years. Assets underconstruction totaled $136 million at December 31, 2004 and $167 million atDecember 31, 2003.

 

Asset impairment chargestotaling $6 million were recorded in 2002, consisting primarily of a $5 millioncharge related to CPChem’s Colton, California polyethylene pipe facility, whichwas part of the Olefins & Polyolefinssegment.  The remaining assets of thefacility, which were written down to a $1 million estimated netrealizable value, were classified as assets held for sale and were included inOther Current Assets at December 31, 2003. The assets were sold during 2004.

 

Note 7.          Environmental Liabilities

 

CPChem is subject tofederal, state and local environmental laws and regulations that may result inobligations to mitigate or remove the effects on the environment of theplacement, storage, disposal or release of certain chemical, mineral andpetroleum substances at its sites. Undiscounted accrued environmental liabilities totaled $6 millionat both December 31, 2004 and 2003. There were no accrued environmental costs associated with discontinuedor sold operations.

 

Note 8.          Debt

 

Long-term debt, net ofapplicable debt discounts, was as follows:

 
| ** **                 | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------|------------|
| **Millions**               | ** ** | **2004**         | ** ** | **2003** | ** ** |
| 7% notes due  2011         |       | $                | 500        |   | $ | 500 |   |
| 5 3/8% notes due  2007     |       | 500              |       | 500 |   |
| Commercial paper           |       | 385              |       | 184 |   |
| Other                      |       | 9                |       | 10 |   |
| Subtotal                   |       | 1,394            |       | 1,194 |   |
| Unamortized debt  discount |       | (4               | )          | (5 | ) |
| Total long-term  debt      |       | $                | 1,390      |   | $ | 1,189 |   |

 

In addition to the information presented, CPChem hadsecured borrowings outstanding totaling $200 million at December 31, 2004 and$300 million at December 31, 2003 under a trade receivables securitizationagreement.  These borrowings areclassified as short-term and were secured by $665 million and $459 million oftrade receivables, respectively.  The agreementallows CPChem to borrow up to $300 million for which CPChem grants a securityinterest in certain of its trade receivables as collateral for any amountsoutstanding.  Borrowings under theagreement are reduced or security interests in new trade receivables aregranted as the receivables are collected by CPChem.  The trade receivables securitizationagreement expires on May 17, 2005.  CPChem intends to request an extension of theexpiration date of the current agreement to May 2006.  The interest rate of borrowingsoutstanding under the agreement was 2.20% at December 31, 2004 and 1.07% atDecember 31, 2003, and averaged 1.37% in 2004, 1.21% in 2003 and 1.63% in 2002.

 

In 2002, Chevron PhillipsChemical Company LLC and its wholly owned subsidiary, Chevron Phillips ChemicalCompany LP, jointly and severally issued $500 million of senior unsecured 5 3/8%notes.  The notes mature in 2007 andinterest is payable semiannually.  In2001, Chevron Phillips Chemical Company LLC and Chevron Phillips ChemicalCompany LP jointly and severally issued $500 million of senior unsecured 7% notes.  These notes mature in 2011 and interest isalso payable semiannually.  Both seriesof notes contain certain covenants, such as limitations on liens,sale/leaseback transactions, sales of assets and business combinations, whichCPChem does not consider to be restrictive to normal operations.

 

46

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Notes issued under CPChem’scommercial paper program are in the tier-2 commercial paper market withmaturities of 90 days or less.  Thesecommercial paper borrowings are classified as Long-Term Debt since CPChem’sintent is to refinance or replace the obligations on a long-term basis andCPChem has a committed backup credit facility in effect.  The weighted average interest rate ofcommercial paper borrowings outstanding was 2.35% at December 31, 2004 and1.07% at December 31, 2003, and averaged 1.54% in 2004, 1.23% in 2003 and2.02% in 2002.

 

On July 30, 2004, CPChementered into an $800 million five-year credit facility with various banks thatprovides committed credit support for the commercial paper program.  Effective with the closing of the new creditfacility, CPChem terminated the existing $400million 364-day and $400 million three-year credit facilities.  The current agreement contains covenants andevents of default typical of bank revolving credit facilities, such asrestrictions on liens.  The agreementalso contains a provision requiring the maintenance of ownership of CPChem byChevronTexaco and ConocoPhillips of at least 50% in the aggregate.  Provisions under this agreement are notconsidered to be restrictive to normal operations.  There were no borrowings under any of thecurrent or prior credit facilities during 2004, 2003 or 2002.

 

CPChem is not aware ofany conditions that exist as of the date of this report that would cause any ofits debt obligations to be in or at risk of default.  In addition, CPChem does not have any debtobligations whose maturities would be accelerated as the result of a creditrating downgrade.

 

Note 9.          Members’ Preferred Interests

 

On July 1, 2002, CPChemsold $250 million of members’ preferred interests, purchased 50% each byChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire a portion of outstandingcommercial paper obligations.  Preferreddistributions are cumulative at 9% per annum and are payable quarterly fromcash earnings, as defined in CPChem’s Second Amended and Restated LimitedLiability Company Agreement.  Thesecurities have no stated maturity date and are mandatorily redeemable quarterly,in increments of $25 million, if CPChem’s ratio of debt to total capitalizationreaches a stated level.  Members’preferred interests are also redeemable at CPChem’s option.

 

In 2004, CPChemvoluntarily redeemed $175 million of members’ preferred interests and paid $55million of distributions on members’ preferred interests.  There were no redemptions or preferred distributions paid in 2003 or2002.  Accrued preferreddistributions payable, included in Other Current Liabilities and DeferredCredits, totaled $34 million at December 31, 2003.  There were no accrued preferred distributionspayable at December 31, 2004.

 

Note 10.    Guarantees, Commitments and Indemnifications

 

*Guarantees*

 

CPChem’s headquartersbuilding is leased under a synthetic lease agreement entered into in 2002.  A synthetic lease is a lease that qualifies asan operating lease for financial accounting purposes and as a capital lease forfederal tax purposes.  The lease containsa fixed price purchase option and a residual guarantee.  The purchase option price was considered tobe the fair market value of the building at the inception of the lease.  If CPChem does not extend the lease orexercise the purchase option upon the expiration of the lease in 2007, CPChemhas an obligation to pay the lessor the shortfall, if any, in the proceedsrealized from the sale of the building to a third party relative to thepurchase 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.

 

47

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See Note 5 for adiscussion of certain guarantees related to Q-Chem, SCP and JCP.

 

*Commitments*

 

See Note 13 for adiscussion of commitments under non-cancelable operating leases.

 

*Indemnifications*

 

As part of CPChem’s ongoing business operations andconsistent with generally accepted and recognized industry practice, CPChementers into numerous agreements with other parties which apportion future risksbetween the parties to the transaction or relationship governed by theagreements.  One method of apportioningrisk is the inclusion of provisions requiring one party to indemnify the otherparty against losses that might be incurred in the future.  Many of CPChem’s agreements, includingtechnology license agreements, contain indemnities that require CPChem toperform certain acts, such as defending certain licensees against patentinfringement claims of others, as a result of the occurrence of a triggeringevent or condition.

 

The nature of these indemnity obligations are diverseand numerous and each has different terms, business purposes, and triggeringevents or conditions.  In addition, theindemnities in each agreement vary widely in their definitions of both thetriggering event and the resulting obligation, which is contingent upon thattriggering event.  Because many of CPChem’sindemnity obligations are not limited in duration or potential monetaryexposure, CPChem cannot reasonably calculate the maximum potential amount offuture payments that could possibly be paid under the indemnity obligationsstemming from all of CPChem’s existing agreements.  In the case of known contingent liabilities,however, CPChem records an undiscounted liability when a loss is probable andthe amount can be reasonably estimated.

 

CPChem is not aware of the occurrence of anytriggering event or condition that would have a material adverse impact onconsolidated results of operations, financial position or liquidity as a resultof an indemnity obligation arising from such triggering event or condition.

 

Note 11.    Contingent Liabilities

 

In the case of knowncontingent liabilities, CPChem records an undiscounted liability when a loss isprobable and the amount can be reasonably estimated.  These liabilities are not reduced forpotential insurance recoveries.  If applicable,undiscounted receivables are recorded for probable insurance or otherthird-party recoveries.  Based oncurrently available information, CPChem believes it is remote that future costsrelated to known contingent liabilities will exceed current accruals by anamount that would have a material adverse effect on consolidated results ofoperations, financial position or liquidity.

 

As facts concerningcontingent liabilities become known, CPChem reassesses its position withrespect to accrued liabilities and other potential exposures.  Estimates that are particularly sensitive tofuture change include legal matters and contingent liabilities forenvironmental remediation.  Estimatedfuture environmental remediation costs are subject to change due to suchfactors as the unknown magnitude of cleanup costs, prospective changes in lawsand regulations, the unknown timing and extent of remedial actions that may berequired and the determination of CPChem’s liability in proportion to those ofother responsible parties.  Estimatedfuture costs related to legal matters are subject to change as events occur andas additional information becomes available.

 

48

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CPChem is a party tocertain asbestos lawsuits for which the financial responsibility between CPChemand ConocoPhillips is disputed.  CPChem and ConocoPhillips are attemptingto resolve where the financial responsibility for these lawsuits rests. In the meantime, ConocoPhillips is managing and defending these lawsuits. In the event the financial responsibility for these lawsuits is ultimatelydetermined to rest with CPChem, CPChem may be required to record a charge tooperations that could be material to the period reported.

 

CPChem is a party to anumber of other legal proceedings that arose in the ordinary course of businessfor which, in many instances, no provision has been made in the financialstatements.  While the final outcome ofthese proceedings cannot be predicted with certainty, CPChem believes that noneof these proceedings, when resolved, will have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

*ElectricityDeregulation*

 

Legislation for electricity deregulation for theElectricity Reliability Council of Texas (ERCOT) area was enacted in 1999,allowing retail electricity consumers to choose electricity providers effectiveJanuary 1, 2002.  This legislation alsoallows utilities to file an application with the Public Utility Commission ofTexas (PUCT) for determination and reimbursement of costs, if any, associatedwith the implementation of this legislation. Included in these costs are certain environmental expenses and costsassociated with stranded assets. Stranded asset costs are those associated with the utility assetdevaluation that may have occurred due to the legislation.  Once determined, these costs are paid byelectricity consumers under PUCT-mandated procedures.

 

CenterPoint Energy Houston Electric LLC (CenterPoint),which previously provided electricity to CPChem’s Cedar Bayou manufacturingfacility and its Kingwood research center, both located in Texas, filed itsapplication for such determination with the PUCT on March 31, 2004.  A number of consumers and organizationsrepresenting consumers intervened in the PUCT proceedings to object to certainclaims in CenterPoint’s application.  InNovember of 2004, the PUCT denied the amount of CenterPoint’s request andentered an order for a recovery of approximately one-half of that amount.  Both sides are appealing the decision.

 

If it is determined that CenterPoint is entitled torecover some or all of the costs claimed in its application, CPChem would receive a monthly charge added to itselectricity cost over an extended period of time to pay for suchreimbursement.  Based on the statedamounts of CenterPoint’s application and the PUCT’s subsequent order, it iscurrently anticipated that the additional monthly cost to CPChem that isapproved by the PUCT, when finalized, would not have a material adverse effecton consolidated results of operations, financial position or liquidity.

 

Note 12.    Credit Risk

 

Financial instrumentsthat potentially subject CPChem to concentrations of credit risk consistprimarily of cash equivalents and trade receivables.  Cash equivalents are currently comprised ofbank accounts and short-term investments with several financial institutionsthat have high credit ratings.  CPChem’spolicy for short-term investments both diversifies and limits its exposure tocredit risk.  Trade receivables aredispersed among a broad customer base, both domestic and foreign, which resultsin limited concentrations of credit risk. CPChem also maintains and follows credit policies and procedures thatminimize credit risk and exposures. Letters of credit are sometimes utilized when a customer’s financialstrength is considered to be insufficient.

 

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# **Note 13.**    OperatingLeases

 

CPChem leases tank andhopper railcars, office buildings and certain other facilities andequipment.  Total operating lease rentalexpense was $44 million in both 2004 and 2003, and $48 million in 2002.  Aggregate future minimum lease payments undernon-cancelable leases at December 31, 2004 totaled $25 million, $22 million,$50 million, $17 million and $14 million in the years 2005 through 2009,respectively, and $81 million thereafter. Included in aggregate future minimum lease payments in 2007 is CPChem’smaximum exposure of $27 million under thecontingent obligation associated with the lease agreement for CPChem’sheadquarters building.

 

# **Note 14.**    Benefit Plans

 

The majority of CPChememployees are former employees of ChevronTexaco or ConocoPhillips.  Certain CPChem benefit plans provide thatemployees who were former employees of ChevronTexaco or ConocoPhillips receiveenhanced benefits, including credit for service while employees ofChevronTexaco or ConocoPhillips.

 

*Pensionand Other Postretirement Health Care*

 

CPChem’s retirement planis a defined benefit plan that covers most U.S.-based employees.  Eligible employees automatically participatein the plan and begin 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 withChevronTexaco or ConocoPhillips or their affiliates.  Retirement benefits are based on two types ofcredits: a career average pay benefit and a variable annuity account benefit.  Both benefits are based on an employee’scompensation over the years and the number of years that an employee isqualified to receive benefit credits.

 

CPChem also offers healthcare benefits to eligible employees, mostly U.S.-based, upon theirretirement.  A retiree flexible spendingaccount is established by CPChem for eligible retirees at the time ofretirement based on years of service times a fixed dollar amount and maritalstatus.  Retirees may use funds in theiraccount to purchase medical and/or dental coverage from CPChem or from privatehealth care plans, 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 measurementdate is used in the determination of pension and other postretirement netperiodic benefit costs.  A December 31measurement date is used in the determination of pension and otherpostretirement benefit obligations and plan assets.

 

Included in the pensionplan tables presented is an unfunded supplemental retirement plan covering keyexecutives.  The purpose of the plan isto provide compensating benefits to those employees affected by federallymandated limits on eligible compensation levels contained in CPChem’s normalretirement plan.  The benefit obligationassociated with this plan was $20 million at December 31, 2004 and $17 millionat December 31, 2003.  Also included areseparate pension plans for employees of the Puerto Rico and Belgium facilities,and employees of certain bargaining units within the Performance Pipe divisionof CPChem.

 

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Net periodic benefit costs for pension and otherpostretirement benefits included the following:

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Millions**                                    | ** ** | **2004**             | ** ** | **2003**           | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Service cost  benefits earned during the year   |       | $                    | 22         |               | $          | 21 |   | $ | 18 |   | $ | 2 |   | $ | 3 |   | $ | 2 |   |
| Interest cost on  projected benefit obligations |       | 18                   |       | 17                 |       | 16 |   | 3 |   | 5 |   | 4 |   |
| Expected return  on plan assets                 |       | (12                  | )          | (9                 | )          | (4 | ) | (1 | ) | — |   | — |   |
| Amortization of  prior service costs            |       | 12                   |       | 12                 |       | 12 |   | 3 |   | 3 |   | 3 |   |
| Net actuarial  gain                             |       | 1                    |       | 1                  |       | (3 | ) | — |   | 1 |   | — |   |
| Plan amendment                                  |       | —               |       | —             |       | 6 |   | — |   | — |   | — |   |
| Net periodic  benefit cost                      |       | $                    | 41         |               | $          | 42 |   | $ | 45 |   | $ | 7 |   | $ | 12 |   | $ | 9 |   |

 

The pension and otherpostretirement benefit plans’ funded status and related amounts follow:

 
| ** **                                      | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Millions**                                    | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits**   | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Change in  Benefit Obligation                   |       |                  |       |                  |       |   |   |   |   |
| Benefit  obligation at beginning of year        |       | $                     | 321        |                  | $          | 75 |   | $ | 271 |   | $ | 62 |   |
| Service cost                                    |       | 22                    |       | 2                     |       | 21 |   | 3 |   |
| Interest cost                                   |       | 18                    |       | 3                     |       | 17 |   | 5 |   |
| Actuarial loss                                  |       | 1                     |       | 15                    |       | 17 |   | 6 |   |
| Foreign currency  exchange loss                 |       | 2                     |       | —                |       | 2 |   | — |   |
| Plan amendment                                  |       | —                |       | (1                    | )          | — |   | — |   |
| Benefits paid                                   |       | (6                    | )          | (2                    | )          | (7 | ) | (1 | ) |
| Benefit  obligation at end of year              |       | 358                   |       | 92                    |       | 321 |   | 75 |   |
|                                            |       |                  |       |                  |       |   |   |   |   |
| Change in Plan  Assets                          |       |                  |       |                  |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | 151                   |       | 12                    |       | 101 |   | — |   |
| Actual return on  plan assets                   |       | 17                    |       | 2                     |       | 20 |   | — |   |
| Employer  contributions                         |       | 56                    |       | 14                    |       | 34 |   | 13 |   |
| Foreign currency  exchange gain                 |       | 1                     |       | —                |       | 3 |   | — |   |
| Benefits paid                                   |       | (6                    | )          | (2                    | )          | (7 | ) | (1 | ) |
| Fair value of  plan assets at end of year       |       | 219                   |       | 26                    |       | 151 |   | 12 |   |
|                                            |       |                  |       |                  |       |   |   |   |   |
| Funded Status of  Plan                          |       |                  |       |                  |       |   |   |   |   |
| Excess  obligation                              |       | (139                  | )          | (66                   | )          | (170 | ) | (63 | ) |
| Unrecognized net  actuarial loss                |       | 37                    |       | 22                    |       | 42 |   | 13 |   |
| Unrecognized  transition obligation             |       | 1                     |       | —                |       | 1 |   | — |   |
| Unrecognized  prior service cost                |       | 105                   |       | 31                    |       | 117 |   | 34 |   |
| Total recognized                                |       | $                     | 4          |                  | $          | (13 | ) | $ | (10 | ) | $ | (16 | ) |
|                                            |       |                  |       |                  |       |   |   |   |   |
| Components of  Total Recognized                 |       |                  |       |                  |       |   |   |   |   |
| Prepaid asset                                   |       | $                     | 12         |                  | $          | — |   | $ | — |   | $ | — |   |
| Intangible asset                                |       | 5                     |       | —                |       | 24 |   | — |   |
| Accrued liability                               |       | (16                   | )          | (13                   | )          | (34 | ) | (16 | ) |
| Accumulated  comprehensive loss                 |       | 3                     |       | —                |       | — |   | — |   |
| Total recognized                                |       | $                     | 4          |                  | $          | (13 | ) | $ | (10 | ) | $ | (16 | ) |

 

CPChemexpects to fund approximately $50 million to its pension plans and $6 millionto its other postretirement benefits plans in 2005.

 

51

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Theaccumulated benefit obligation for all pension plans was $222 million atDecember 31, 2004 and $180 million at December 31, 2003.  Certain information for pension plans withaccumulated benefit obligations in excess of plan assets at December 31, 2004follows:

 
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| **Millions**                    | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Projected  benefit obligation   |       | $                | 42         |   | $ | 37 |   |
| Accumulated  benefit obligation |       | 33               |       | 29 |   |
| Fair value of  plan assets      |       | 18               |       | 19 |   |
|                                 |            |                  |            |  |  |  |  |

 

CPChem’sinvestment strategy with respect to pension plan assets is to maintain adiversified portfolio of domestic and international equities, fixed incomesecurities, real estate-backed securities and cash equivalents.  Targetasset allocations are chosen based on an analysis of the historical returns andvolatilities of various asset classes.  The plan investments areperiodically rebalanced to maintain the target asset allocation. Rates of return for the investment funds comprising each asset class aremonitored quarterly against benchmarks and peer fund results.

 

Assetallocations for CPChem’s pension plans, along with target allocations for 2005,follow:

 
| ** **   | ** ** | **Target  Allocation** | ** ** | **Plan Assets  at December 31,** | ** ** |
|--------------|------------|------------------------|------------|----------------------------------|------------|
| **Category** | ** ** | **2005**               | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| Equity       |       | 50                     | %          | 43                               | %          | 45 | % |
| Debt         |       | 35                     |       | 34                               |       | 36 |   |
| Real estate  |       | 10                     |       | 8                                |       | 8 |   |
| Other        |       | 5                      |       | 15                               |       | 11 |   |
| Total        |       | 100                    | %          | 100                              | %          | 100 | % |

 

Weighted average rateassumptions used in determining estimated benefit obligations were as follows:

 
| ** **                               | ** ** | **December 31,**      | ** ** | **December 31,**    | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                               | ** ** | **2004**              | ** ** | **2003**            | ** ** |
| ** **                               | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Discount rate                            |       | 5.8                   | %          | 5.8                 | %          | 6.0 | % | 6.0 | % |
| Expected return  on plan assets          |       | 8.0                   |       | —              |       | 8.0 |   | — |   |
| Rate of increase  in compensation levels |       | 4.0                   |       | —              |       | 4.0 |   | — |   |

 

Weighted average rateassumptions used in determining periodic benefit costs for pension and otherpostretirement benefits follow:

 
| ** **                               | ** ** | **2004**              | ** ** | **2003**            | ** ** | **2002**              | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                               | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Discount rate                            |       | 6.0                   | %          | 6.0                 | %          | 6.5                   | %          | 6.5 | % | 7.3 | % | 7.3 | % |
| Expected return  on plan assets          |       | 8.0                   |       | —              |       | 8.0                   |       | — |   | 8.0 |   | — |   |
| Rate of increase  in compensation levels |       | 4.0                   |       | —              |       | 4.0                   |       | — |   | 4.0 |   | — |   |

 

52

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The expected return onplan assets were developed through, among other things, analysis of historicalmarket returns for the plans’ investment classes and current market conditions.

 

The determination ofCPChem’s projected benefit obligations for its pension plans affects theamounts of related expense recorded in the current period and also impacts thelevel 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 companycontribution requirements involves significant estimates regarding futureunknown events, which include estimated future rates of return on pension planassets, discount rates applied to pension plan obligations, estimated employeeretirement dates and salary levels at retirement, and mortality rates.  Estimates of these future unknown events arejudgmentally determined based on factors such as, among other things,historical returns on pension plan assets and outside actuarial advice.  However, a 1% decrease in the estimatedfuture returns on pension plan assets or a 1% decrease in the discount ratesapplied to pension plan obligations would not have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

Itis anticipated that benefit payments, which reflect expected future service,will be paid as follows:

 

| **Millions** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|--------------|------------|-----------------------|------------|---------------------|------------|
| 2005         |       | $                     | 13         |                | $          | 2 |   |
| 2006         |       | 15                    |       | 3                   |       |
| 2007         |       | 18                    |       | 3                   |       |
| 2008         |       | 22                    |       | 4                   |       |
| 2009         |       | 27                    |       | 5                   |       |
| 2010-2014    |       | 222                   |       | 55                  |       |
|              |            |                       |            |                     |            |  |  |

 

*ContributionPlans*

 

Defined contributionplans are available for most employees, whereby CPChem matches a percentage ofthe employee’s contribution.  CPChem’scontributions to the plans are expensed andfunded on a current basis, and totaled $17 million in 2004 and $13 million ineach of 2003 and 2002.

 

*Share-BasedCompensation*

 

CPChem currently does notutilize any share-based employee compensation plans.

 

*TerminationBenefits*

 

Terminationbenefit costs totaling $12 million were recorded to Selling, General andAdministrative expense in 2003.  Theannounced workforce reductions affected 196 employees at various locations.

 

53

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Termination benefit costspayable follows:

 

| ** **         | ** ** | **Millions** | ** ** |
|--------------------|------------|--------------|------------|
| December 31,  2001 |       | $            | 6          |   |
| Additions          |       | —       |       |
| Payments           |       | (6           | )          |
| December 31,  2002 |       | —       |       |
| Additions          |       | 12           |       |
| Payments           |       | (4           | )          |
| December 31,  2003 |       | 8            |       |
| Additions          |       | 2            |       |
| Payments           |       | (6           | )          |
| December 31,  2004 |       | $            | 4          |   |

 

Note 15.    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 directly liablefor federal and state income taxes and franchise taxes on certain separatelegal entities, and for any foreign taxes incurred.

 

CPChem has a U.S.subsidiary operating in Puerto Rico that is subject to U.S. federal income tax,but has been granted an exemption from certain Puerto Rico taxes, includingincome taxes.  All Puerto Rico taxexemptions related to this subsidiary expire in 2017.  Limited tax incentives, in the form ofreduced income tax rates, also exist in South Korea, China, Singapore, SaudiArabia and Qatar.  CPChem is subject tostate income tax in certain jurisdictions.

 

CPChem is required tomake quarterly distributions to its members in amounts representing theliability for combined federal and state income taxes calculated at specifiedrates based on CPChem’s estimate of federal taxable income.  In 2004, CPChem made $118 million of taxdistributions to its members.  Inaddition, a $39 million tax distribution was accrued in Other CurrentLiabilities and Deferred Credits at December 31, 2004 and will be paid in thefirst quarter of 2005.

 

Thecomponents of income (loss) before taxes follow:

 
| ** **                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------|------------|------------------------------|------------|
| **Millions**                      | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Domestic                          |       | $                            | 301        |   | $ | (98 | ) | $ | (138 | ) |
| Foreign                           |       | 340                          |       | 110 |   | 114 |   |
| Total income  (loss) before taxes |       | $                            | 641        |   | $ | 12 |   | $ | (24 | ) |

 

Thecomponents of income tax expense follow:

 
| ** **                | ** ** | **Years ended December 31,** | ** ** |
|---------------------------|------------|------------------------------|------------|
| **Millions**              | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2002** | ** ** |
| Federal –  current   |       | $                            | —     |   | $ | — |   | $ | (1 | ) |
| State – current      |       | —                       |       | — |   | 1 |   |
| Foreign –  current   |       | 15                           |       | 5 |   | 6 |   |
| Total income tax  expense |       | $                            | 15         |   | $ | 5 |   | $ | 6 |   |

 

54

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Deferred income taxassets and liabilities follow:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Millions**                                    | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Deferred income  tax assets – federal      |       | $                | 191        |   | $ | 190 |   |
| Valuation  allowance                            |       | (191             | )          | (190 | ) |
| Total                                           |       | —           |       | — |   |
| Deferred income  tax liabilities – foreign |       | (1               | )          | (1 | ) |
| Net deferred  income tax liability              |       | $                | (1         | ) | $ | (1 | ) |

 

At December 31, 2004 and2003, the deferred tax assets of CPChem’s Puerto Rico subsidiary were fullyoffset by valuation allowances.  Avaluation allowance was established to reduce the deferred tax assets of thesubsidiary’s net operating loss carryforwards and tax depreciation differencesto amounts that would more likely than not be realized.  Uncertainties that may affect the realizationof these assets include tax law changes and the future profitability ofoperations.

 

Net deferred income taxassets and liabilities related to the following:

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------|------------|
| **Millions**                             | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Deferred income  tax assets              |       |             |       |   |   |
| Loss  carryforward (expires 2011- 2024)  |       | $                | 171        |   | $ | 162 |   |
| Depreciation and  amortization           |       | 15               |       | 23 |   |
| Other                                    |       | 5                |       | 5 |   |
| Gross deferred  income tax assets        |       | 191              |       | 190 |   |
| Valuation  allowance                     |       | (191             | )          | (190 | ) |
| Deferred income  tax assets              |       | —           |       | — |   |
| Deferred tax  liabilities – foreign |       | (1               | )          | (1 | ) |
| Net deferred  income tax liability       |       | $                | (1         | ) | $ | (1 | ) |

 

Note 16.    Segment and Geographic Information

 

CPChem’s reportingstructure is based on the grouping of similar products, resulting in threeoperating segments – Olefins & Polyolefins (O&P), Aromatics &Styrenics (A&S), and  SpecialtyProducts.

 

*Olefins & Polyolefins*– This segment gathers, buys, sells and fractionates natural gas liquids, andmanufactures and markets 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/or polyolefinproduction facilities located in Texas, nine domestic pipe facilities and onedomestic pipe fittings facility.  CPChemalso has one pipe facility in Mexico.  Inaddition, CPChem owns interests in a polypropylene facility located at thePasadena Plastics Complex in Texas, a high-density polyethylene plant locatedat CPChem’s Cedar Bayou facility in Texas, an ethylene, polyethylene and1-hexene facility in Qatar, and polyethylene facilities in Singapore and China.

 

*Aromatics & Styrenics*– This segment manufactures and markets aromatics products such as benzene,styrene, paraxylene and cyclohexane. This segment also manufactures and markets polystyrene as well asstyrene-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.

 

55

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*Specialty Products*– This segment manufactures and markets a variety of specialty chemicalproducts, including organosulfur chemicals and high-performance polyphenylenesulfide polymers and compounds sold under the trademark Ryton®.  Production facilities are located in Texas,Belgium and Singapore.

 

“Corporate and Other”(Other) includes items not directly attributable to CPChem’s operatingsegments.  Interest expense, certaincharges for employee incentive plans and charges related to domestic workforcereductions are generally retained within Other.

 

Financial informationfollows.  Inter-segment transactions arebilled at prevailing market rates.

 
| **Millions**                                         | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|
| *Year ended December 31, 2004*                       | ** ** | ** **  | ** ** | ** **  | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** |
| Net sales –  external                           |       | $           | 5,574      |        | $          | 3,187                   |       | $                           | 477        |             | $          | — |   | $ | 9,238 |   |
| Net sales –  inter-segment                      |       | 295         |       | 1           |       | 2                       |       | (298                        | )          | —           |       |
| Equity in income  of affiliates                      |       | 73          |       | 145         |       | —                  |       | —                      |       | 218              |       |
| Other income                                         |       | 76          |       | 24          |       | 2                       |       | —                      |       | 102              | (a)        |
| Total revenue                                        |       | 6,018       |       | 3,357       |       | 481                     |       | (298                        | )          | 9,558            |       |
| Operating and  selling costs                         |       | 5,416       |       | 3,023       |       | 400                     |       | (269                        | )          | 8,570            |       |
| Depreciation and  amortization                       |       | 174         |       | 83          |       | 23                      |       | 1                           |       | 281              |       |
| Income (loss)  before interest & taxes           |       | 428         |       | 251         |       | 58                      |       | (30                         | )          | 707              |       |
| Interest income  (expense), net                      |       | 7           |       | 1           |       | —                  |       | (74                         | )          | (66              | )          |
| Income tax  benefit (expense)                        |       | (5          | )          | (3          | )          | (7                      | )          | —                      |       | (15              | )          |
| Net income  (loss)                                   |       | 430         |       | 249         |       | 51                      |       | (104                        | )          | 626              |       |
| Distributions on  members’ preferred interests  |       | —      |       | —      |       | —                  |       | (21                         | )          | (21              | )          |
| Income (loss)  attributed to members’ interests |       | $           | 430        |        | $          | 249                     |       | $                           | 51         |             | $          | (125 | ) | $ | 605 |   |
|                                                 |       |        |       |        |       |                    |       |                        |       |             |       |
| *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               | (b)        |
| Total revenue                                        |       | 4,390       |       | 2,648       |       | 397                     |       | (417                        | )          | 7,018            |       |
| Operating and  selling costs                         |       | 4,167       |       | 2,528       |       | 342                     |       | (393                        | )          | 6,644            | (c)        |
| Depreciation and  amortization                       |       | 182         |       | 93          |       | 21                      |       | 2                           |       | 298              | (d)        |
| 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 | ) |
|                                                 |       |        |       |        |       |                    |       |                        |       |             |       |   |   |   |   |   |

 

56

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| **Millions**                                         | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|
| *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               | (e)        |
| Total revenue                                        |       | 3,503       |       | 2,003       |       | 355                     |       | (388                        | )          | 5,473            |       |
| Operating and  selling costs                         |       | 3,284       |       | 1,926       |       | 296                     |       | (365                        | )          | 5,141            | (f)        |
| Depreciation and  amortization                       |       | 180         |       | 90          |       | 19                      |       | 2                           |       | 291              | (g)        |
| Asset  impairments                                   |       | 6           |       | —      |       | —                  |       | —                      |       | 6                | (h)        |
| 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 | ) |

 

Thefollowing charges or benefits were related to items such as asset retirementsand plant closures, asset impairments, business interruption and propertycasualty insurance claim settlements, employee severance costs, pension plancurtailments and other items of that nature.

 

(a)          Includes a $9 million benefit related to the saleof assets - $5 million in A&S and $4 million in O&P.

(b)         Includes a $10 million benefit related to a salesand use tax audit - $7 million in O&P and $3 million in Specialty Products.

(c)          Includes $27 million of charges, mostly related to legal settlementsand accruals, and employee severance costs - $16 million in O&P, $10 million in Other and $1 millionin Specialty Products.

(d)         Includes $19 million inasset retirements and plant closures - $10 million in A&S and $9 million in O&P.

(e)          Includes $9 million of benefits in A&S related to businessinterruption and property casualty insurance claim settlements.

(f)            Includes $6 million ofnet charges, primarily related to a pension curtailment charge in A&S.  Also includes a benefit for the reversal of certain customer claim accruals, offset bythe write-off of two technology projects in O&P.

(g)         Includes $28 million ofnet charges related to asset retirements - $21 million in A&S and $7million in O&P.

(h)         Includes a $5 millioncharge related to a polyethylene pipe facility (O&P).

 

57

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| **Millions**                              | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|-----------|------------|------------------|------------|
| Investments in and advances to affiliates |       |        |       |        |       |                    |       |      |       |             |       |
| December 31,  2004                        |       | $           | 520        |        | $          | 373                     |       | $         | —     |             | $          | — |   | $ | 893 |   |
| December 31,  2003                        |       | 418         |       | 255         |       | —                  |       | —    |       | 673              |       |
|                                      |       |        |       |        |       |                    |       |      |       |             |       |
| Total assets                              |       |        |       |        |       |                    |       |      |       |             |       |
| December 31,  2004                        |       | 4,108       |       | 2,125       |       | 508                     |       | 131       |       | 6,872            |       |
| December 31,  2003                        |       | 3,746       |       | 1,849       |       | 496                     |       | 151       |       | 6,242            |       |
|                                      |       |        |       |        |       |                    |       |      |       |             |       |
| Capital and  investment expenditures*     |       |        |       |        |       |                    |       |      |       |             |       |
| Year ended  December 31, 2004             |       | 138         |       | 44          |       | 12                      |       | 7         |       | 201              |       |
| Year ended  December 31, 2003             |       | 127         |       | 73          |       | 17                      |       | 6         |       | 223              |       |
| Year ended  December 31, 2002             |       | 179         |       | 103         |       | 20                      |       | 12        |       | 314              |       |
|                                           |            |             |            |             |            |                         |            |           |            |                  |            |  |  |  |  |  |

 

----

*      Excludesinvestments in and advances to Q-Chem (O&P) of $28 million in 2004, $103million in 2003 and $210 million in 2002.

 

Geographicinformation was as follows.  Net saleswere determined based on location of the operation generating the sale.  

 
| **Millions**                               | ** ** | **United  States** | ** ** | **Foreign  Countries** | ** ** | **Total** | ** ** |
|--------------------------------------------|------------|--------------------|------------|------------------------|------------|-----------|------------|
| Net sales -  external                      |       |               |       |                   |       |      |       |
| Year ended  December 31, 2004              |       | $                  | 7,754      |                   | $          | 1,484     |       | $ | 9,238 |   |
| Year ended  December 31, 2003              |       | 5,821              |       | 1,086                  |       | 6,907     |       |
| Year ended  December 31, 2002              |       | 4,675              |       | 714                    |       | 5,389     |       |
|                                       |       |               |       |                   |       |      |       |
| Investments in  and advances to affiliates |       |               |       |                   |       |      |       |
| December 31,  2004                         |       | 52                 |       | 841                    |       | 893       |       |
| December 31,  2003                         |       | 53                 |       | 620                    |       | 673       |       |
|                                       |       |               |       |                   |       |      |       |
| Property, plant  and equipment, net        |       |               |       |                   |       |      |       |
| December 31,  2004                         |       | 3,586              |       | 182                    |       | 3,768     |       |
| December 31,  2003                         |       | 3,699              |       | 165                    |       | 3,864     |       |
|                                            |            |                    |            |                        |            |           |            |  |  |  |

 

Foreign currencytransaction gains were $5 million in both 2004 and 2003, and $7 million in2002.

 

Note 17.    Fair Values of Financial Instruments

 

The carrying amounts ofcash and cash equivalents, trade and affiliated receivables, and trade and affiliatedpayables approximate fair values.  Thecarrying amount of secured borrowings outstanding also approximates fair valuedue to the short-term nature of the borrowings. The carrying amount of commercial paper outstanding also approximatesfair value due to the variable interest ratefeature.  The carrying amount of otherlong-term debt outstanding at both December 31, 2004 and 2003 was $1.005billion, with fair values of $1.094 billion and $1.096 billion, respectively,based on quoted market prices.

 

58

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Note 18.    Consolidating Financial Statements

 

Consolidating financialstatements follow.  This information ispresented in accordance with SEC rules and regulations as they relate to thedebt jointly and severally issued by Chevron Phillips Chemical Company LLC andChevron Phillips Chemical Company LP.

 

The LLC is thenon-operating parent holding company. The LP is the primary U.S. operating company.  “Other Entities” is principally comprised offoreign operations and the holding companies that have direct ownership of theLP.  These consolidating financialstatements were prepared using the equity method of accounting for investments.

 

Chevron PhillipsChemical Company LLC

Consolidating Statement of Operations

Forthe Year ended December 31, 2004

 
| **Millions**                                        | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Revenue                                             |       |    |       |   |       |                |       |             |       |      |       |
| Net sales                                           |       | $       | —     |   | $          | 8,144               |       | $                | 1,688      |      | $          | (594 | ) | $ | 9,238 |   |
| Equity in income  of affiliates                     |       | 716     |       | 4      |       | 591                 |       | (1,093           | )          | 218       |       |
| Other income                                        |       | —  |       | 85     |       | 83                  |       | (66              | )          | 102       |       |
| Total revenue                                       |       | 716     |       | 8,233  |       | 2,362               |       | (1,753           | )          | 9,558     |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Costs and  Expenses                                 |       |    |       |   |       |                |       |             |       |      |       |
| Cost of goods  sold                                 |       | —  |       | 7,399  |       | 1,529               |       | (555             | )          | 8,373     |       |
| Selling, general  and administrative                |       | —  |       | 444    |       | 97                  |       | (105             | )          | 436       |       |
| Research and  development                           |       | —  |       | 42     |       | —              |       | —           |       | 42        |       |
| Total costs and  expenses                           |       | —  |       | 7,885  |       | 1,626               |       | (660             | )          | 8,851     |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income Before  Interest & Taxes                 |       | 716     |       | 348    |       | 736                 |       | (1,093           | )          | 707       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Interest income                                     |       | —  |       | 26     |       | 9                   |       | (26              | )          | 9         |       |
| Interest expense                                    |       | (90     | )          | (1     | )          | (10                 | )          | 26               |       | (75       | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income Before  Taxes                                |       | 626     |       | 373    |       | 735                 |       | (1,093           | )          | 641       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income taxes                                        |       | —  |       | (2     | )          | (13                 | )          | —           |       | (15       | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Net Income                                          |       | 626     |       | 371    |       | 722                 |       | (1,093           | )          | 626       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Distributions on  members’ preferred interests |       | (21     | )          | — |       | —              |       | —           |       | (21       | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income  Attributed to Members’ Interests       |       | $       | 605        |   | $          | 371                 |       | $                | 722        |      | $          | (1,093 | ) | $ | 605 |   |

 

59

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Note 18.  Consolidating Financial Statements(continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year endedDecember 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      |       | 17                  |       | (69              | )          | 41        |       |
| Other  income                                        |       | —  |       | 80     |       | 75                  |       | (85              | )          | 70        |       |
| Total  revenue                                       |       | 86      |       | 6,190  |       | 1,339               |       | (597             | )          | 7,018     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Costs  and Expenses                                  |       |    |       |   |       |                |       |             |       |      |       |
| Cost  of goods sold                                  |       | —  |       | 5,695  |       | 1,152               |       | (408             | )          | 6,439     |       |
| Selling,  general and administrative                 |       | —  |       | 472    |       | 96                  |       | (120             | )          | 448       |       |
| Research  and development                            |       | —  |       | 55     |       | —              |       | —           |       | 55        |       |
| Total  costs and expenses                            |       | —  |       | 6,222  |       | 1,248               |       | (528             | )          | 6,942     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Before Interest & Taxes           |       | 86      |       | (32    | )          | 91                  |       | (69              | )          | 76        |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Interest  income                                     |       | —  |       | 14     |       | 9                   |       | (15              | )          | 8         |       |
| Interest  expense                                    |       | (79     | )          | (1     | )          | (7                  | )          | 15               |       | (72       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Before Taxes                          |       | 7       |       | (19    | )          | 93                  |       | (69              | )          | 12        |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  taxes                                        |       | —  |       | — |       | (5                  | )          | —           |       | (5        | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Net  Income (Loss)                                   |       | 7       |       | (19    | )          | 88                  |       | (69              | )          | 7         |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Distributions  on members’ preferred interests  |       | (23     | )          | — |       | —              |       | —           |       | (23       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Attributed to Members’ Interests |       | $       | (16        | )      | $          | (19                 | )          | $                | 88         |      | $          | (69 | ) | $ | (16 | ) |

 

60

----

 

Note 18.  Consolidating Financial Statements(continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year ended December31, 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    | )          | (41                 | )          | 35               |       | 22        |       |
| Other  income                                        |       | —  |       | 104    |       | 111                 |       | (153             | )          | 62        |       |
| Total  revenue                                       |       | 45      |       | 4,917  |       | 925                 |       | (414             | )          | 5,473     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Costs  and Expenses                                  |       |    |       |   |       |                |       |             |       |      |       |
| Cost  of goods sold                                  |       | —  |       | 4,487  |       | 771                 |       | (272             | )          | 4,986     |       |
| Selling,  general and administrative                 |       | —  |       | 465    |       | 111                 |       | (177             | )          | 399       |       |
| Asset  impairments                                   |       | —  |       | 5      |       | 1                   |       | —           |       | 6         |       |
| Research  and development                            |       | —  |       | 47     |       | —              |       | —           |       | 47        |       |
| Total  costs and expenses                            |       | —  |       | 5,004  |       | 883                 |       | (449             | )          | 5,438     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Before Interest & Taxes           |       | 45      |       | (87    | )          | 42                  |       | 35               |       | 35        |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Interest  income                                     |       | —  |       | 19     |       | 5                   |       | (17              | )          | 7         |       |
| Interest  expense                                    |       | (75     | )          | (1     | )          | (7                  | )          | 17               |       | (66       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Before Taxes                          |       | (30     | )          | (69    | )          | 40                  |       | 35               |       | (24       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  taxes                                        |       | —  |       | (1     | )          | (5                  | )          | —           |       | (6        | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Net  Income (Loss)                                   |       | (30     | )          | (70    | )          | 35                  |       | 35               |       | (30       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Distributions  on members’ preferred interests  |       | (11     | )          | — |       | —              |       | —           |       | (11       | )          |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Income  (Loss) Attributed to Members’ Interests |       | $       | (41        | )      | $          | (70                 | )          | $                | 35         |      | $          | 35 |   | $ | (41 | ) |

 

61

----

 

Note 18.  Consolidating Financial Statements(continued)

** **

**ChevronPhillips Chemical Company LLC**

Consolidating Balance Sheet

December 31, 2004

 
| **Millions**                                    | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Current  assets                                 |       |    |       |   |       |                |       |             |       |      |       |
| Cash  and cash equivalents                      |       | $       | —     |   | $          | 15                  |       | $                | 48         |      | $          | — |   | $ | 63 |   |
| Accounts  receivable, net                       |       | 16      |       | 945    |       | 1,013               |       | (708             | )          | 1,266     |       |
| Inventories                                     |       | —  |       | 601    |       | 183                 |       | —           |       | 784       |       |
| Other  current assets                           |       | 2       |       | 34     |       | 7                   |       | —           |       | 43        |       |
| Total  current assets                           |       | 18      |       | 1,595  |       | 1,251               |       | (708             | )          | 2,156     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Property,  plant and equipment, net             |       | —  |       | 3,453  |       | 315                 |       | —           |       | 3,768     |       |
| Investments  in and advances to affiliates      |       | 5,496   |       | 32     |       | 4,968               |       | (9,603           | )          | 893       |       |
| Other  assets and deferred charges              |       | 20      |       | 32     |       | 31                  |       | (28              | )          | 55        |       |
| Total  Assets                                   |       | $       | 5,534      |   | $          | 5,112               |       | $                | 6,565      |      | $          | (10,339 | ) | $ | 6,872 |   |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Current  liabilities                            |       |    |       |   |       |                |       |             |       |      |       |
| Accounts  payable                               |       | $       | 100        |   | $          | 710                 |       | $                | 782        |      | $          | (708 | ) | $ | 884 |   |
| Secured  borrowings and other debt              |       | —  |       | 1      |       | 200                 |       | —           |       | 201       |       |
| Other  current liabilities and deferred credits |       | 50      |       | 181    |       | 25                  |       | —           |       | 256       |       |
| Total  current liabilities                      |       | 150     |       | 892    |       | 1,007               |       | (708             | )          | 1,341     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Long-term  debt                                 |       | 1,381   |       | 9      |       | —              |       | —           |       | 1,390     |       |
| Other  liabilities and deferred credits         |       | 3       |       | 85     |       | 31                  |       | (28              | )          | 91        |       |
| Total  liabilities                              |       | 1,534   |       | 986    |       | 1,038               |       | (736             | )          | 2,822     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Members’  preferred interests              |       | 75      |       | — |       | —              |       | —           |       | 75        |       |
| Members’  capital                          |       | 3,925   |       | 4,127  |       | 5,476               |       | (9,603           | )          | 3,925     |       |
| Accumulated  other comprehensive income (loss)  |       | —  |       | (1     | )          | 51                  |       | —           |       | 50        |       |
| Total  Liabilities and Members’ Equity     |       | $       | 5,534      |   | $          | 5,112               |       | $                | 6,565      |      | $          | (10,339 | ) | $ | 6,872 |   |

 

62

----

 

Note 18.  Consolidating Financial Statements(continued)

** **

**ChevronPhillips 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     |       | 437    |       | 694                 |       | (472             | )          | 862       |       |
| Inventories                                     |       | —  |       | 565    |       | 135                 |       | —           |       | 700       |       |
| Other  current assets                           |       | 1       |       | 24     |       | 6                   |       | —           |       | 31        |       |
| Total  current assets                           |       | 204     |       | 1,038  |       | 866                 |       | (472             | )          | 1,636     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Property,  plant and equipment, net             |       | —  |       | 3,538  |       | 326                 |       | —           |       | 3,864     |       |
| Investments  in and advances to affiliates      |       | 5,841   |       | 66     |       | 5,407               |       | (10,641          | )          | 673       |       |
| Other  assets and deferred charges              |       | 22      |       | 1,160  |       | 26                  |       | (1,139           | )          | 69        |       |
| Total  Assets                                   |       | $       | 6,067      |   | $          | 5,802               |       | $                | 6,625      |      | $          | (12,252 | ) | $ | 6,242 |   |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Current  liabilities                            |       |    |       |   |       |                |       |             |       |      |       |
| Accounts  payable                               |       | $       | 6          |   | $          | 755                 |       | $                | 378        |      | $          | (472 | ) | $ | 667 |   |
| Secured  borrowings and other debt              |       | —  |       | 1      |       | 313                 |       | —           |       | 314       |       |
| Other  current liabilities and deferred credits |       | 45      |       | 141    |       | 17                  |       | —           |       | 203       |       |
| Total  current liabilities                      |       | 51      |       | 897    |       | 708                 |       | (472             | )          | 1,184     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Long-term  debt                                 |       | 1,179   |       | 10     |       | —              |       | —           |       | 1,189     |       |
| Other  liabilities and deferred credits         |       | 1,109   |       | 108    |       | 31                  |       | (1,139           | )          | 109       |       |
| Total  liabilities                              |       | 2,339   |       | 1,015  |       | 739                 |       | (1,611           | )          | 2,482     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Members’  preferred interests              |       | 250     |       | — |       | —              |       | —           |       | 250       |       |
| Members’  capital                          |       | 3,478   |       | 4,787  |       | 5,854               |       | (10,641          | )          | 3,478     |       |
| Accumulated  other comprehensive income         |       | —  |       | — |       | 32                  |       | —           |       | 32        |       |
| Total  Liabilities and Members’ Equity     |       | $       | 6,067      |   | $          | 5,802               |       | $                | 6,625      |      | $          | (12,252 | ) | $ | 6,242 |   |

 

63

----

 

Note 18.  Consolidating Financial Statements (continued)

** **

**ChevronPhillips Chemical Company LLC**

Consolidating Statement of Cash Flows

For the Year endedDecember 31, 2004

 
| **Millions**                                                                                       | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Cash  Flows From Operating Activities                                                              |       |    |       |   |       |                |       |             |       |      |       |
| Net  income                                                                                        |       | $       | 626        |   | $          | 371                 |       | $                | 722        |      | $          | (1,093 | ) | $ | 626 |   |
| Adjustments  to reconcile net income to net cash flows provided by (used in) operating  activities |       |    |       |   |       |                |       |             |       |      |       |
| Depreciation,  amortization and retirements                                                        |       | —  |       | 259    |       | 22                  |       | —           |       | 281       |       |
| Undistributed  equity in income of affiliates, net                                                 |       | (668    | )          | (4     | )          | (112                | )          | 587              |       | (197      | )          |
| Changes  in operating working capital                                                              |       | 279     |       | (468   | )          | (46                 | )          | —           |       | (235      | )          |
| Other  operating cash flow activity                                                                |       | (1,106  | )          | 1,099  |       | (9                  | )          | —           |       | (16       | )          |
| Net  cash flows provided by (used in) operating activities                                         |       | (869    | )          | 1,257  |       | 577                 |       | (506             | )          | 459       |       |
|                                                                                               |       |    |       |   |       |                |       |             |       |      |       |
| Cash  Flows From Investing Activities                                                              |       |    |       |   |       |                |       |             |       |      |       |
| Capital  and investment expenditures                                                               |       | —  |       | (163   | )          | (38                 | )          | —           |       | (201      | )          |
| Investments  in and advances to Q-Chem                                                             |       | —  |       | — |       | (28                 | )          | —           |       | (28       | )          |
| Advance  repayment from SCP                                                                        |       | —  |       | — |       | 32                  |       | —           |       | 32        |       |
| Proceeds  from the sale of assets                                                                  |       | —  |       | 6      |       | 12                  |       | —           |       | 18        |       |
| Decrease  in other investments                                                                     |       | 1,016   |       | — |       | 637                 |       | (1,653           | )          | —    |       |
| Net  cash flows provided by (used in) investing activities                                         |       | 1,016   |       | (157   | )          | 615                 |       | (1,653           | )          | (179      | )          |
|                                                                                               |       |    |       |   |       |                |       |             |       |      |       |
| Cash  Flows From Financing Activities                                                              |       |    |       |   |       |                |       |             |       |      |       |
| Increase  in commercial paper, net                                                                 |       | 201     |       | — |       | —              |       | —           |       | 201       |       |
| Decrease  in secured borrowings, net                                                               |       | —  |       | — |       | (100                | )          | —           |       | (100      | )          |
| Decrease  in other debt, net                                                                       |       | —  |       | (1     | )          | (12                 | )          | —           |       | (13       | )          |
| Redemptions  of members’ preferred interests                                                  |       | (175    | )          | — |       | —              |       | —           |       | (175      | )          |
| Distributions  on members’ preferred interests                                                |       | (55     | )          | — |       | —              |       | —           |       | (55       | )          |
| Other  distributions to parents/members, net                                                       |       | (118    | )          | (1,096 | )          | (1,063              | )          | 2,159            |       | (118      | )          |
| Net  cash flows used in financing activities                                                       |       | (147    | )          | (1,097 | )          | (1,175              | )          | 2,159            |       | (260      | )          |
|                                                                                               |       |    |       |   |       |                |       |             |       |      |       |
| Net  Increase in Cash and Cash Equivalents                                                         |       | —  |       | 3      |       | 17                  |       | —           |       | 20        |       |
| Cash  and Cash Equivalents at Beginning of Year                                                    |       | —  |       | 12     |       | 31                  |       | —           |       | 43        |       |
| Cash  and Cash Equivalents at End of Year                                                          |       | $       | —     |   | $          | 15                  |       | $                | 48         |      | $          | — |   | $ | 63 |   |

 

64

----

 

Note 18.  Consolidating Financial Statements(continued)

** **

**ChevronPhillips Chemical Company LLC**

Consolidating Statement of Cash Flows

For the Year endedDecember 31, 2003

 
| **Millions**                                                                                    | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Cash  Flows From Operating Activities                                                           |       |    |       |   |       |                |       |             |       |      |       |
| Net  income (loss)                                                                              |       | $       | 7          |   | $          | (19                 | )          | $                | 88         |      | $          | (69 | ) | $ | 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 income of affiliates, net                                              |       | (79     | )          | (7     | )          | (4                  | )          | 62               |       | (28       | )          |
| Changes  in operating working capital                                                           |       | (5      | )          | 64     |       | (73                 | )          | —           |       | (14       | )          |
| Other  operating cash flow activity                                                             |       | 165     |       | (147   | )          | (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 Q-Chem                                                          |       | —  |       | — |       | (103                | )          | —           |       | (103      | )          |
| Proceeds  from the sale of assets                                                               |       | —  |       | 1      |       | —              |       | —           |       | 1         |       |
| Increase  in other investments                                                                  |       | (119    | )          | — |       | —              |       | 119              |       | —    |       |
| 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 |   |

 

65

----

 

Note 18.  Consolidating Financial Statements(continued)

** **

**ChevronPhillips Chemical Company LLC**

Consolidating Statement of Cash Flows

For the Year endedDecember 31, 2002

 
| **Millions**                                                                                              | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Cash  Flows From Operating Activities                                                                     |       |    |       |   |       |                |       |             |       |      |       |
| Net  income (loss)                                                                                        |       | $       | (30        | )      | $          | (70                 | )          | $                | 35         |      | $          | 35 |   | $ | (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     |       | 55                  |       | (80              | )          | (6        | )          |
| Changes  in operating working capital                                                                     |       | (22     | )          | 251    |       | (147                | )          | —           |       | 82        |       |
| Other  operating cash flow activity                                                                       |       | 263     |       | (256   | )          | (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 Q-Chem                                                                                       |       | —  |       | — |       | (210                | )          | —           |       | (210      | )          |
| Proceeds  from the sale of assets                                                                         |       | —  |       | 2      |       | —              |       | —           |       | 2         |       |
| Increase  in other investments                                                                            |       | (228    | )          | — |       | —              |       | 228              |       | —    |       |
| 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 |   |

 

66

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Chevron Phillips Chemical Company LLC

Selected Quarterly Financial Data

 (Unaudited)

 

| **Millions**    | ** ** | **Net  Sales** | ** ** | **Income (Loss)  Before Interest  and Taxes** | ** ** | **Net Income  (Loss)** | ** ** |
|-----------------|------------|----------------|------------|-----------------------------------------------|------------|------------------------|------------|
| 2004            |       |           |       |                                          |       |                   |       |
| First  quarter  |       | $              | 1,993      |                                          | $          | 127                    |       | $ | 108 |   |
| Second  quarter |       | 2,091          |       | 117                                           |       | 97                     |       |
| Third  quarter  |       | 2,534          |       | 227                                           |       | 205                    |       |
| Fourth  quarter |       | 2,620          |       | 236                                           |       | 216                    |       |
| Total           |       | $              | 9,238      |                                          | $          | 707                    |       | $ | 626 |   |
|            |       |           |       |                                          |       |                   |       |
| 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 |   |

 

Income (loss)before interest and taxes in 2004 included gains on the sale of assets of $4million in the third quarter and $5 million in the fourth quarter.

 

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

 

See Part I – Item7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Notes to Consolidated Financial Statements” for furtherdiscussions.

 

67

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|                                                              |   |           |   |                                              |
|--------------------------------------------------------------|--------|----------------|--------|---------------------------------------------------|
| ***DR.  ABDULLAH A. BAESHEN-COUNTRY CO-ORDINATING PARTNER*** |   | P.O. Box 3795  |   | Phone:   8825414                        |
| *** ***                                                 |   | 4th Floor      |   | Fax:        8827224 |
| *** ***                                                 |   | Fluor Building |   | www.ey.com/me                                     |
| *** ***                                                 |   | Alkhobar 31952 |   |                                              |
| *** ***                                                 |   | Saudi Arabia   |   | Registration No. 45                               |

 

**AUDITORS’ REPOR****T TO THEPARTNERS OF**

**SAUDI CHEVRON PHILLIPSCOMPANY LIMITED**

 

We haveaudited the accompanying balance sheet of Saudi ChevronPhillips Company Limited, expressed in United States Dollars, as of 31December 2004, 31 December 2003 and 31 December 2002 and the related statementsof income, cash flows and changes in partners’ equity for the year then ended.These financial statements are the responsibility of the company’s management.Our responsibility is to express an opinion on these financial statements basedon our audit.

 

We conductedour audit in accordance with generally accepted auditing standards in theKingdom of Saudi Arabia, which are substantially the same as those followed inthe United States of America. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement. An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Saudi ChevronPhillips Company Limited as of 31 December 2004, 31 December 2003, 31 December2002 and the results of its operations and its cash flows for the year then endedin conformity with accounting standards generally accepted in the Kingdom ofSaudi Arabia.

 

Accountingprinciples generally accepted in the Kingdom of Saudi Arabia vary in certainsignificant respects from accounting principles generally accepted in UnitedStates of America.  The significantdifferences between the accounting principles generally accepted in the Kingdomof Saudi Arabia and those generally accepted in the United States of America sofar as concerns the financial statements referred to are summarised in note 18to the accompanying financial statements.

 

 

for Ernst& Young

 

 

Abdulaziz SaudAlshubaibi

CertifiedPublic Accountant

RegistrationNo. 339

 

5February 2005

 

Alkhobar

 

 

| Dr. Abdullah  A. Baeshen (66), Husam H. Sadagah (73)       |
|------------------------------------------------------------|
| Abdulaziz A.  Alsowailim (277), Abdulaziz Alshubaibi (339) |
|                                                       |
| Offices in  the Kingdom : Alkhobar, Jeddah, Riyadh         |

 

68

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Saudi Chevron Phillips Company Limited

BALANCE SHEET

As At31 December 2004

 
| ** **                           | ** ** | **Note**   | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** ** |
|--------------------------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| **ASSETS EMPLOYED**                  |       |       |       |                    |       |                    |       |                    |       |
| ** **                           |       |       |       |                    |       |                    |       |                    |       |
| **PROPERTY, PLANT AND EQUIPMENT**    |       | 3          | ** ** | **456,374**             |       | 469,625                 |       | 498,021                 |       |
|                                 |       |       |       |                    |       |                    |       |                    |       |
| **DEFERRED CHARGES**                 |       | 4          | ** ** | **15,499**              |       | 18,804                  |       | 22,110                  |       |
|                                 |       |       |       |                    |       |                    |       |                    |       |
| **CURRENT ASSETS**                   |       |       |       |                    |       |                    |       |                    |       |
| Inventories                          |       | 5          | ** ** | **63,764**              |       | 60,185                  |       | 50,953                  |       |
| Accounts  receivable and prepayments |       | 6          | ** ** | **103,839**             |       | 57,955                  |       | 34,400                  |       |
| Bank  balances and cash              |       | 7          | ** ** | **220,492**             |       | 78,833                  |       | 30,716                  |       |
|                                 |       |       | ** ** | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **388,095**             |       | 196,973                 |       | 116,069                 |       |
|                                 |       |       |       |                    |       |                    |       |                    |       |
| **CURRENT LIABILITIES**              |       |       |       |                    |       |                    |       |                    |       |
| Accounts  payable and accruals       |       | 9          | ** ** | **83,377**              |       | 46,013                  |       | 43,329                  |       |
| Current  portion of term loans       |       | 13         | ** ** | **53,894**              |       | 40,693                  |       | 40,000                  |       |
|                                 |       |       | ** ** | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **137,271**             |       | 86,706                  |       | 83,329                  |       |
| ** **                           | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| **NET CURRENT ASSETS**               | ** ** | ** ** |       | **250,824**             |       | 110,267                 |       | 32,740                  |       |
| ** **                           | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **722,697**             |       | 598,696                 |       | 552,871                 |       |
|                                 |       |       |       |                    |       |                    |       |                    |       |
| **FUNDS EMPLOYED**                   |       |       |       |                    |       |                    |       |                    |       |
|                                 |       |       |       |                    |       |                    |       |                    |       |
| **PARTNERS’ EQUITY**            |       |       |       |                    |       |                    |       |                    |       |
| Capital                              |       | 11         | ** ** | **174,667**             |       | 162,667                 |       | 162,667                 |       |
| Statutory  reserve                   |       | 12         | ** ** | **47,838**              |       | 17,731                  |       | 6,519                   |       |
| Retained  earnings                   | ** ** | ** ** |       | **365,635**             |       | 124,700                 |       | 43,691                  |       |
|                                 | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **588,140**             |       | 305,098                 |       | 212,877                 |       |
| ** **                           |       |       |       | ** **              |       |                    |       |                    |       |
| **NON CURRENT LIABILITIES**          |       |       |       |                    |       |                    |       |                    |       |
| Term  loans                          |       | 13         | ** ** | **106,156**             |       | 201,905                 |       | 248,969                 |       |
| Subordinated  partners’ loans   |       | 14         | ** ** | **25,733**              |       | 89,834                  |       | 89,834                  |       |
| Employees’  terminal benefits   | ** ** | ** ** |       | **2,668**               |       | 1,859                   |       | 1,191                   |       |
|                                 | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **134,557**             |       | 293,598                 |       | 339,994                 |       |
| ** **                           |       |       |       | ** **              |       |                    |       |                    |       |
| ** **                           |       |       |       | **722,697**             |       | 598,696                 |       | 552,871                 |       |

 

Theattached notes 1 to 18 form part of these financial statements.

 

69

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Saudi Chevron Phillips Company Limited

STATEMENT OF INCOME

YearEnded 31 December 2004

 
| ** **                        | ** ** | **Note**   | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** ** |
|-----------------------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                        | ** ** | ** ** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
|                              |       |       |       |                    |       |                    |       |                    |       |
| Sales                             | ** ** | ** ** |       | **664,559**             |       | 392,131                 |       | 309,976                 |       |
| Cost  of sales                    | ** ** | ** ** |       | **(351,128**            | )          | (269,333                | )          | (252,641                | )          |
|                              |       |       |       |                    |       |                    |       |                    |       |
| **GROSS PROFIT**                  | ** ** | ** ** |       | **313,431**             |       | 122,798                 |       | 57,335                  |       |
|                              |       |       |       |                    |       |                    |       |                    |       |
| **EXPENSES**                      |       |       |       |                    |       |                    |       |                    |       |
| Selling  and distribution         |       | 15         | ** ** | **(4,456**              | )          | (1,880                  | )          | (2,089                  | )          |
| Amortisation  of deferred charges |       | 4          | ** ** | **(3,305**              | )          | (3,306                  | )          | (3,254                  | )          |
|                              |       |       |       |                    |       |                    |       |                    |       |
| **INCOME FROM MAIN OPERATIONS**   | ** ** | ** ** |       | **305,670**             |       | 117,612                 |       | 51,992                  |       |
|                              |       |       |       |                    |       |                    |       |                    |       |
| Income  from bank deposits        | ** ** | ** ** |       | **1,535**               |       | 335                     |       | 425                     |       |
| Loss  on sale of equipment        | ** ** | ** ** |       | **—**              |       | (435                    | )          | —                  |       |
| Financial  charges                |       | 16         | ** ** | **(6,136**              | )          | (5,397                  | )          | (8,342                  | )          |
|                              |       |       |       |                    |       |                    |       |                    |       |
| **NET INCOME FOR THE YEAR**       | ** ** | ** ** |       | 301,069                 |       | 112,115                 |       | 44,075                  |       |

 

The attached notes 1 to 18 form part of thesefinancial statements.

 

70

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Saudi Chevron Phillips Company Limited

STATEMENT OF CASH FLOWS

Year Ended 31 December 2004

 
| ** **                                           | ** **   | **2004**                | ** **   | **2003**                | ** **   | **2002**                | *** *** |
|------------------------------------------------------|--------------|-------------------------|--------------|-------------------------|--------------|-------------------------|--------------|
| ** **                                           | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** |
| **OPERATING ACTIVITIES**                             |         |                    |         |                    |         |                    |         |
| Net  income for the year                             | ** **   | **301,069**             |         | 112,115                 |         | 44,075                  |         |
| Adjustments  for:                                    |         |                    |         |                    |         |                    |         |
| Depreciation                                         |         | 29,809                  |         | 29,797                  |         | 29,182                  |         |
| Amortisation                                         | ** **   | **3,305**               |         | 3,306                   |         | 3,254                   |         |
| Employees’  terminal benefits (net)             | ** **   | **809**                 |         | 668                     |         | 467                     |         |
| Income  from bank deposits                           | ** **   | **(1,535**              | **)**        | (335                    | )            | (425                    | )            |
| Financial  charges                                   | ** **   | **6,136**               |         | 5,397                   |         | 8,342                   |         |
| Loss  on sale of equipment                           | ** **   | —                  |         | 435                     |         | —                  |         |
| ** **                                           |         |                    |         |                    |         |                    |         |
| ** **                                           |         | **339,593**             |         | 151,383                 |         | 84,895                  |         |
| Changes  in operating assets and liabilities:        |         |                    |         |                    |         |                    |         |
| Inventories                                          | ** **   | **(3,579**              | **)**        | (9,232                  | )            | (10,203                 | )            |
| Receivables                                          | ** **   | **(45,884**             | **)**        | (23,555                 | )            | (7,587                  | )            |
| Payables                                             | ** **   | **37,364**              |         | 3,016                   |         | 10,885                  |         |
|                                                 |         |                    |         |                    |         |                    |         |
| Cash  from operations                                | ** **   | **327,494**             |         | 121,612                 |         | 77,990                  |         |
|                                                 |         |                    |         |                    |         |                    |         |
| Financial  charges paid                              |         | **(6,136**              | **)**        | (5,729                  | )            | (8,623                  | )            |
|                                                 |         |                    |         |                    |         |                    |         |
| Net  cash from operating activities                  | ** **   | **321,358**             |         | 115,883                 |         | 69,367                  |         |
|                                                 |         |                    |         |                    |         |                    |         |
| **INVESTING ACTIVITIES**                             |         |                    |         |                    |         |                    |         |
| Purchase  of property, plant and equipment           | ** **   | **(16,558**             | **)**        | (1,871                  | )            | (6,411                  | )            |
| Proceeds  from sale of equipment                     | ** **   | **—**              |         | 35                      |         | —                  |         |
| Income  from bank deposits                           | ** **   | **1,535**               |         | 335                     |         | 462                     |         |
|                                                 |         |                    |         |                    |         |                    |         |
| Net  cash used in investing activities               | ** **   | **(15,023**             | **)**        | (1,501                  | )            | (5,949                  | )            |
|                                                 |         |                    |         |                    |         |                    |         |
| **FINANCING ACTIVITIES**                             |         |                    |         |                    |         |                    |         |
| Issue  of share capital                              | ** **   | **12,000**              |         | —                  |         | —                  |         |
| Repayment  of term loans                             | ** **   | **(82,548**             | **)**        | (46,371                 | )            | (73,500                 | )            |
| Repayment  of subordinated partners loans            | ** **   | **(64,101**             | **)**        | —                  |         | —                  |         |
| Proceeds  from term loans                            | ** **   | **—**              |         | —                  |         | 421                     |         |
| Dividends  paid                                      | ** **   | **(30,027**             | **)**        | (19,894                 | )            | —                  |         |
|                                                 |         |                    |         |                    |         |                    |         |
| Net  cash used in financing activities               | ** **   | **(164,676**            | **)**        | (66,265                 | )            | (73,079                 | )            |
|                                                 |         |                    |         |                    |         |                    |         |
| **INCREASE (DECREASE) IN BANK BALANCES AND CASH**    |         | **141,659**             |         | 48,117                  |         | (9,661                  | )            |
| ** **                                           |         | ** **              |         |                    |         |                    |         |
| Bank  balances and cash at the beginning of the year | ** **   | **78,833**              |         | 30,716                  |         | 40,377                  |         |
|                                                 |         |                    |         |                    |         |                    |         |
| **BANK BALANCES AND CASH AT THE END OF THE YEAR**    | ** **   | **220,492**             |         | 78,833                  |         | 30,716                  |         |

 

The attached notes 1 to 18 form part of thesefinancial statements.

 

71

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Saudi Chevron Phillips Company Limited

STATEMENT OF CHANGES INPARTNERS’ EQUITY

Year Ended 31 December 2004

 
| ** **                      | ** ** | **Capital**             | ** ** | **Statutory  reserve**  | ** ** | **Retained  earnings**  | ** ** | **Total**               | ** ** |
|---------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| 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 10)  |       | —                  |       | —                  |       | (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 10)  |       | —                  |       | —                  |       | (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                 |       |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Net  income for the year        |       | —                  |       | —                  |       | 301,069                 |       | 301,069                 |       |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Provision  for zakat (note 10)  |       | —                  |       | —                  |       | (3,773                  | )          | (3,773                  | )          |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Zakat  reimbursable by partners |       | —                  |       | —                  |       | 3,773                   |       | 3,773                   |       |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Transfer  to statutory reserve  |       | —                  |       | 30,107                  |       | (30,107                 | )          | —                  |       |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Dividends  paid                 |       | —                  |       | —                  |       | (30,027                 | )          | (30,027                 | )          |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| Issue  of capital               |       | 12,000                  |       | —                  |       | —                  |       | 12,000                  |       |
|                            |       |                    |       |                    |       |                    |       |                    |       |
| **Balance at 31 December 2004** | ** ** | **174,667**             | ** ** | **47,838**              | ** ** | **365,635**             | ** ** | **588,140**             | ** ** |

 

The attached notes 1 to 18 form part of thesefinancial statements.

 

72

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Saudi Chevron Phillips Company Limited

NOTES TO THEFINANCIALSTATEMENTS

31December 2004

 

**1          ACTIVITIES**

 

The company is a limited liability company registeredin Jubail - Saudi Arabia under Commercial Registration number 2055003839dated 22 Safar 1417H, corresponding to 8 July 1996 with a branch in Jubailunder Commercial Registration number 2055003839/001. The company wasestablished to develop, construct and operate a petrochemical plant in Jubail,Saudi Arabia, to produce aromatics, solvents and Cyclohexane. It is owned 50%by Saudi and 50% by non-Saudi partners.

 

**2          SIGNIFICANTACCOUNTING POLICIES**

 

The financial statements have beenprepared in accordance with accounting standards generally accepted in theKingdom of Saudi Arabia.  The significantaccounting policies adopted are as follows:

 

***Accountingconvention***

The financial statements are preparedunder the historical cost convention.

 

***Fixedassets/depreciation***

All property, plant and equipment are recorded atcost. The cost of property, plant and equipment is depreciated on a straightline basis over the estimated useful lives of the assets.

 

Expenditure for repair and maintenance are charged toincome. Improvements that increase the value or materially extend the life ofthe related assets are capitalised.

*** ***

***Deferred charges/amortisation***

Deferred charges comprise total pre-productioncosts net of pre-production income, and Saudi Industrial Development Fund(SIDF) loan appraisal fees and are amortised in equal annual instalments fromthe date of commencement of commercial production over the estimated period ofbenefit.

 

***Inventories***

Inventories are stated at the lower of cost and marketvalue.  Cost is determined 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 incometax***

Zakat and income tax are provided for in accordancewith Saudi Arabian fiscal regulations. The provision is charged   to retainedearnings. Reimbursements by the partners of such zakat and income tax arecredited to retained earnings.

 

***Employees’ terminal benefits***

Provision is made for amounts payableto comply with the Saudi Arabian labour law applicable to employees’ accumulatedperiods of service at the balance sheet date.

 

***Sales***

Sales represent the invoiced value ofgoods supplied by the company during the year net of marketing costs.

*** ***

***Foreign currencies***

Transactions in foreign currenciesare recorded in US Dollars at the rate ruling at the date of thetransaction.  Monetary assets andliabilities denominated in foreign currencies are retranslated at the rate ofexchange ruling at the balance sheet date. All differences are taken to the statement of income.

 

***Expenses***

Sellingand distribution expenses comprise expenses that specifically relate to thedelivery of products. All other period expenses, other than amortisation ofdeferred charges and financial charges, are classified as cost of sales.

 

73

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

**31 December 2004**

** **

**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  2004**         | ** ** | **Total  2003**         | ** ** | **Total  2002**         | ** ** |
|-------------------------------|------------|-------------------------|------------|--------------------------|------------|--------------------------------------|------------|-------------------------|------------|-------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **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                  |       | 560,889                  |       | 4,636                                |       | 979                     |       | 2,072                               | ** ** | **587,424**             |       | 586,297                 |       | 579,886                 |       |
| Additions                     |       | —                  |       | —                   |       | —                               |       | —                  |       | 16,558                              | ** ** | **16,558**              |       | 1,871                   |       | 6,411                   |       |
| Disposals                     |       | —                  |       | —                   |       | —                               |       | —                  |       | —                              |       | —                  |       | (744                    | )          | —                  |       |
| Transfers                     |       | 75                      |       | 471                      |       | 201                                  |       | 623                     |       | (1,370                              | )          | —                  |       | —                  |       | —                  |       |
|                          |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| At  the end of the year       |       | 18,923                  |       | 561,360                  |       | 4,837                                |       | 1,602                   |       | 17,260                              | ** ** | **603,982**             |       | 587,424                 |       | 586,297                 |       |
|                          |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| Depreciation:                 |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| At  the beginning of the year |       | 3,718                   |       | 110,050                  |       | 3,182                                |       | 849                     |       | —                              | ** ** | **117,799**             |       | 88,276                  |       | 59,094                  |       |
| Charge  for the year          |       | 951                     |       | 28,181                   |       | 564                                  |       | 113                     |       | —                              | ** ** | **29,809**              |       | 29,797                  |       | 29,182                  |       |
| Disposals                     |       | —                  |       | —                   |       | —                               |       | —                  |       | —                              |       | —                  |       | (274                    | )          | —                  |       |
|                          |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| At  the end of the year       |       | 4,669                   |       | 138,231                  |       | 3,746                                |       | 962                     |       | —                              | ** ** | **147,608**             |       | 117,799                 |       | 88,276                  |       |
|                          |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| Net  book amounts:            |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| **At 31 December 2004**       | ** ** | **14,254**              | ** ** | **423,129**              | ** ** | **1,091**                            | ** ** | **640**                 | ** ** | **17,260**                          | ** ** | **456,374**             |       |                    |       |                    |       |
|                          |       |                    |       |                     |       |                                 |       |                    |       |                                |       |                    |       |                    |       |                    |       |
| 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                 |       |

 

The buildings and plant and equipment are situated onland leased from the Royal Commission for Jubail and Yanbu.  The lease is initially for a period of 30years commencing from 20 Rajab 1417H (corresponding to 1 December 1996) and isrenewable for further periods thereafter.

 

All plant and equipment are mortgaged to the SaudiIndustrial Development Fund as security for certain term loans (note 13 (b)).Finance charges of US $ 18.9 million (2003 and 2002: US $ 18.9 million)incurred during construction phase in respect of the loan facilities disclosedin note 13 (b) have been capitalised as part of plant and equipment.

 

Construction work in progress represents costsincurred on certain civil and mechanical projects currently under construction(also see note 17).

 

74

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December 2004

 

**4         ****DEFERRED CHARGES**

 
| ** **                                  | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| * *                                    | * *   | * *                | * *   | * *                | * *   | * *                | * *   |
| Costs  at the beginning and end of the year | ** ** | **31,545**              |       | 31,545                  |       | 31,545                  |       |
|                                        |       |                    |       |                    |       |                    |       |
| Amortisation:                               |       |                    |       |                    |       |                    |       |
| At  the beginning of the year               | ** ** | **12,741**              |       | 9,435                   |       | 6,181                   |       |
| Provided  during the year                   | ** ** | **3,305**               |       | 3,306                   |       | 3,254                   |       |
|                                        |       |                    |       |                    |       |                    |       |
| At  the end of the year                     | ** ** | **16,046**              |       | 12,741                  |       | 9,435                   |       |
|                                        |       |                    |       |                    |       |                    |       |
| Net  book amounts                           | ** ** | **15,499**              |       | 18,804                  |       | 22,110                  |       |

 

Deferred charges consist of pre-production costsof US $ 22.2 million (2003 and 2002: US $ 22.2 million) and appraisal fees onthe SIDF and commercial loans of US $ 9.3 million (2003 and 2002: US $ 9.3million).

 

In 2003, in order to comply with the SOCPA’s standardon “Intangible Assets”, with effect from 1 January 2003, the company reducedthe pre-production costs amortisation period of ten years. The balance isnow being amortised over 7 years.

 

Appraisal fees on the SIDF and commercial loans areamortised over the period of the related loans (9 years).

 

**5          INVENTORIES**

 
|              | ** **   | **2004**                | ** **   | **2003**                | ** **   | **2002**                | *** *** |
|-------------------|--------------|-------------------------|--------------|-------------------------|--------------|-------------------------|--------------|
|              | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** |
|              | *** *** | ** **              | *** *** | ** **              | *** *** | ** **              | *** *** |
| Goods  in transit |         | —                  |         | —                  |         | 7,675                   |         |
| Raw  materials    | ** **   | **2,389**               |         | 1,953                   |         | 441                     |         |
| Finished  goods   | ** **   | **14,484**              |         | 17,602                  |         | 4,972                   |         |
| Spares            | ** **   | **3,684**               |         | 3,566                   |         | 3,071                   |         |
| Catalyst          | ** **   | **43,207**              |         | 37,064                  |         | 34,794                  |         |
|              |         |                    |         |                    |         |                    |         |
| ** **        |         | **63,764**              |         | 60,185                  |         | 50,953                  |         |

 

**6          ACCOUNTS RECEIVABLE ANDPREPAYMENTS**

** **
| *** ***                                | *** *** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | *** *** |
|---------------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| *** ***                                | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | *** *** |
| *** ***                                | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Trade  accounts receivable                  | ** **   | **59,827**              | ** ** | **37,638**              |       | 24,400                  |         |
| Amounts  due from partners (notes 8 and 10) | ** **   | **3,773**               | ** ** | **2,026**               |       | 920                     |         |
| Amount  due from an affiliate (note 8)      | ** **   | **29,726**              | ** ** | **12,391**              |       | 4,105                   |         |
| Other  receivables                          | ** **   | **8,125**               | ** ** | **3,614**               |       | 3,215                   |         |
| Prepaid  expenses                           | ** **   | **2,388**               | ** ** | **2,286**               |       | 1,760                   |         |
|                                        |         |                    |       |                    |       |                    |         |
| ** **                                  | ** **   | **103,839**             | ** ** | **57,955**              |       | 34,400                  |         |

 

Four customersaccount for the entire trade accounts receivable balance as at 31 December 2004(2003: four customers and 2002: three customers).

 

**7          BANK BALANCES AND CASH**

 

Bank balancesamounting to US $ 220.5 million are assigned as security against loanfacilities from a consortium of banks (note 13 (a)).

 

75

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December2004

 

**8          RELATED PARTYTRANSACTIONS AND BALANCES**

 

Purchases amounting to approximately US $ 11.4 millionwere made from the foreign partner’s parent company and its affiliates during2004 (2003: approximately US $ 3.2 million and 2002: approximately US $ 11.4million).

 

Approximately 48% (2003: approximately 38% and 2002:approximately 31%) of the company’s sales are made through a marketingaffiliate of the foreign partner under a marketing agreement. Upon delivery ofthe product to the marketing affiliate, sales are recorded at provisionalprices approved by the Board. The provisional prices are subsequently adjustedto actual selling prices, as received by the marketer from its customers, afterdeducting shipping, distribution and selling costs, and a marketing fee (inaccordance with the above marketing contract) to cover all other marketingexpenses. Adjustments are recorded on a quarterly basis as they are reported bythe marketer and become known to the company.

 

The prices and terms of the transactions are approvedby the management.Amounts due from partners and an affiliate and amountspayable to affiliates are shown under notes 6 and 9, respectively.

 

In addition, subordinated loans from the partners aredisclosed in note 14 to these financial statements.

 

**9          ACCOUNTS PAYABLE AND ACCRUALS**

** **
| *** ***                        | *** *** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | *** *** |
|-------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| *** ***                        | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | *** *** |
| *** ***                        | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Trade  accounts payable             | ** **   | **28,584**              |       | 19,434                  |       | 17,122                  |         |
| Amounts  due to affiliates (note 8) | ** **   | **19,563**              |       | 4,672                   |       | 10,537                  |         |
| Zakat payable (note 10)             | ** **   | **3,773**               |       | 1,410                   |       | 870                     |         |
| Accrued  expenses                   | ** **   | **31,457**              |       | 20,497                  |       | 14,800                  |         |
|                                |         |                    |       |                    |       |                    |         |
| ** **                          |         | **83,377**              |       | 46,013                  |       | 43,329                  |         |

 

**10        ZAKAT ANDINCOME TAX**

** **

**a)         Zakat**

** **

**Charge for the year**

 

The zakat charge relating to the Saudi partnerconsists of:

 
| ** **                    | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Provision  for the year       | ** ** | **3,773**               |       | 1,410                   |       | 870                     |       |
| Adjustment  for previous year |       | **—**              |       | (313                    | )          | —                  |       |
|                          |       |                    |       |                    |       |                    |       |
| Charge  for the year          | ** ** | **3,773**               |       | 1,097                   |       | 870                     |       |

 

76

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December 2004

 

**10       ZAKAT AND INCOME TAX (continued)**

 

The Saudi partner’s provision is based on his share asfollows:

 
| *** ***                              | *** *** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | *** *** |
|-------------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| *** ***                              | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | *** *** |
| * *                                  | * *     | * *                | * *   | * *                | * *   | * *                | * *     |
| Equity                                    | ** **   | **150,402**             | ** ** | **96,492**              |       | 84,401                  |         |
| Opening  provisions and other adjustments | ** **   | **80,984**              | ** ** | **166,811**             |       | 189,764                 |         |
| Book  value of long term assets           | ** **   | **(259,382**            | **)**      | **(264,529**            | **)**      | (261,600                | )            |
|                                      |         |                    |       |                    |       |                    |         |
| ** **                                | ** **   | **(28,026**             | **)**      | **(1,226**              | **)**      | 12,565                  |         |
|                                      |         |                    |       |                    |       |                    |         |
| Zakatable  profit for the year            | ** **   | **150,939**             | ** ** | **56,392**              |       | 22,271                  |         |
|                                      |         |                    |       |                    |       |                    |         |
| Zakat  base                               | ** **   | **150,939**             | ** ** | **56,392**              |       | 34,836                  |         |

 

The differences between the financialand the zakatable profit are mainly due to adjustments for certain costs/claimsbased on the relevant fiscal regulations.

 

The adjustment for previous year relates tothe difference between provision made in the books on a provisional basis andthe amount calculated and included in the final zakat declaration for thepreceding year.

 

**Movement in provision**

 

The movement in the zakat provision was as follows:
| ** **                | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** ** |
|---------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| At  the beginning of year | ** ** | **1,410**               | ** ** | **870**                 |       | 437                     |       |
| Provided  during the year | ** ** | **3,773**               | ** ** | **1,097**               |       | 870                     |       |
| Payments  during the year | ** ** | **(1,410**              | **)**      | **(557**                | **)**      | (437                    | )          |
|                      |       |                    |       |                    |       |                    |       |
| At  the end of year       | ** ** | **3,773**               | ** ** | **1,410**               |       | 870                     |       |

 

**b)             Incometax**

 

Under the provisions of the ForeignCapital Investment Code, the non-Saudi partner is exempt from income taxon its share of income for ten years from the date of commencement ofcommercial production (1 March 2000). The non-Saudi partner’s cumulativeshare of net income since the commencement of the tax holiday is US $ 233million (2003: US $ 82 million and 2002: US $ 25.6 million).

 

**Status ofassessments**

For the period ended 31 December 1997and the year ended 31 December 1998, the Department of Zakat and Income Tax(DZIT) raised assessments with additional zakat, tax and delay fine liabilitiesof US $ 0.4 million, US $ 2.2 million and US $ 0.6 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 December2004.The zakat and income tax assessments for the yearsended 31 December 1999 to 2003 have not yet been received by the company.

 

**11        CAPITAL**

 

Capital is divided into 6,550,000shares (2003 and 2002: 6,100,000 shares) of US $ 26.67 (100 Saudi Riyals)each.  During the year, the partnersresolved to increase the capital of the company by US $ 12 million.  All the legal formalities were completed inthis respect.

 

77

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December 2004

 

**12        STATUTORYRESERVE**

 

As required by Saudi ArabianRegulations for Companies, 10% of the net income for the yearhas been transferred to a statutory reserve. The company may resolve todiscontinue such transfers when the reserve totals 50% of the capital. Thereserve is not available for distribution.

 

**13        TERM LOANS**

 
| ** **              | ** ** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | *** *** |
|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| ** **              | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | *** *** |
| ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Consortium              | ** ** | **91,000**              | ** ** | **146,189**             |       | 170,000                 |         |
| SIDF                    | ** ** | **69,050**              | ** ** | **96,409**              |       | 118,969                 |         |
|                    |       |                    |       |                    |       |                    |         |
| ** **              | ** ** | **160,050**             | ** ** | **242,598**             |       | 288,969                 |         |
|                    |       |                    |       |                    |       |                    |         |
| Less:  Current portion: |       |                    |       |                    |       |                    |         |
| Consortium              | ** ** | **30,000**              | ** ** | **20,000**              |       | 20,000                  |         |
| SIDF                    | ** ** | **23,894**              | ** ** | **20,693**              |       | 20,000                  |         |
|                    |       |                    |       |                    |       |                    |         |
| ** **              | ** ** | **53,894**              | ** ** | **40,693**              |       | 40,000                  |         |
|                    |       |                    |       |                    |       |                    |         |
| ** **              | ** ** | **106,156**             | ** ** | **201,905**             |       | 248,969                 |         |

 

----

a)                                      During the year, the companyhas restructured the previous term loan facilities from a consortium of banks(the consortium). The new term loans facilities consist of US $ 101 million forrefinancing the old term loan, US $ 40 million as a new term loan facility andUS $ 38 million as a revolving credit facility. The US $ 101 million isrepayable in 7 half yearly instalments increasing from US $ 10 million to US $20 million. The repayment of this loan commenced on 25 October 2004 with thefinal instalment due on 25 October 2007. The $ 40 million is repayable in 18half yearly instalments commencing six months after the expansion projectcompletion which is expected in 2006. The loans are secured by assignment ofresidual proceeds of the plant and equipment of the company, assignment ofreceipts from all material and significant contracts, charge and assignmentover offshore project accounts and pledge and assignment over onshore projectaccounts. The facilities are subject to commission at LIBOR plus 1% (2003 and2002: same terms and conditions).

 

                Amounts due within 12 monthsfrom the balance sheet date are shown as current liabilities.

 

b)                                     During the year, the companyalso restructured its term loans facilities of US $ 151 million (2003 and 2002:US $ 151 million) with SIDF.  The totalamount of term loans facilities with the SIDF is now US $ 215 million of whichUS $ 150 million (2003 and 2002: US $ 150 million) has been drawn as at thebalance sheet date.  According to therevised terms of the agreement, the loans are secured by a mortgage on thecompany’s plant and equipment and assignment of insurance proceeds andtechnology rights. The loans carry appraisal fees which are being amortisedover the term of the loans (note 4) and are repayable in twenty half yearlyinstalments (2003: fifteen half yearly instalments) of varying amounts from US$ 4.3 million to US $ 9.3 million (2003: US $7.5 million to US $ 14.4million).  Repayment of the remainingbalance, after restructuring, commenced on 15 Sha’aban 1425H (corresponding to30 September 2004), with the final instalment due on 15 Sha’aban 1429H(corresponding to 23 February 2008).

 

                Amountsdue within 12 months from the balance sheet date are shown as currentliabilities.

 

**14**                        SUBORDINATED PARTNERS’ LOANS

** **

Subordinated partners’ loans are commission free andare repayable subject to the minimum level required to be maintained by theterms of the SIDF loan agreement disclosed in note 13.

 

78

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December 2004

 

## **15       SELLING AND DISTRIBUTION EXPENSES**

 
| ** **          | ** **   | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** **   |
|---------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| ** **          | ** **   | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** **   |
| *** ***        | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Inspection  charges | ** **   | **4,456**               |       | 1,880                   |       | 2,089                   |         |

 

## **16       FINANCIAL CHARGES**

 
| ** **                  | ** **   | **2004**                | ** ** | **2003**                | ** ** | **2002**                | ** **   |
|-----------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| ** **                  | ** **   | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** **   |
| *** ***                | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Term  loans borrowing costs | ** **   | **2,847**               |       | 4,009                   |       | 6,973                   |         |
| Bank  charges               | ** **   | **3,289**               |       | 1,388                   |       | 1,369                   |         |
|                        |         |                    |       |                    |       |                    |         |
| ** **                  |         | **6,136**               |       | 5,397                   |       | 8,342                   |         |

** **

**17**                      CAPITAL COMMITMENTS

** **

**The directors haveauthorised future capital expenditure amounting to US $ 122 million inconnection with the construction of certain civil and mechanical projects.**

** **

**18**                      SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLESFOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES

** **

The financial statements of thecompany have been prepared in accordance with accounting standards generallyaccepted in the Kingdom of Saudi Arabia. For the purpose of these financialstatements, following are the differences between the accounting standardsgenerally accepted in the Kingdom of Saudi Arabia and United States GenerallyAccepted Accounting Principles (US GAAP).

 

***a)            Reconciliation of net income with US GAAP***

** **
| *** ***                                                      | *** *** | **2004**                | ** **   | **2003**                | ** **   | **2002**                | *** *** |
|-------------------------------------------------------------------|--------------|-------------------------|--------------|-------------------------|--------------|-------------------------|--------------|
| *** ***                                                      | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** | **US $ ‘000** | *** *** |
| *** ***                                                      | *** *** | *** ***            | *** *** | *** ***            | *** *** | *** ***            | *** *** |
| Net  income per financial statements (Saudi accounting standards) | ** **   | **301,069**             |         | 112,115                 |         | 44,075                  |         |
| US  GAAP adjustment:                                              |         |                    |         |                    |         |                    |         |
| Pre  production costs balance included in deferred charges        | ** **   | **(11,377**             | )            | (13,652                 | )            | (15,927                 | )            |
|                                                              |         |                    |         |                    |         |                    |         |
| Net  income under US GAAP (see note below)                        | ** **   | **289,692**             |         | 98,463                  |         | 28,148                  |         |

** **

**For each year presented in thetable above, it has been assumed that the pre production costs balance is notadjusted in the preceding year.  Had thebalance of pre production costs been written off prior to 2002, US GAAP netincome for 2004, 2003 and 2002 would have been US $ 304 million, US $ 115million,  US $ 47 million, respectively.**

** **

***b)****                        **Reconciliation of partners’equity with US GAAP*

** **
| *** ***                                                                 | *** *** | **2004**                | ** ** | **2003**                | ** ** | **2002**                | *** *** |
|------------------------------------------------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
| *** ***                                                                 | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | *** *** |
| *** ***                                                                 | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | *** *** |
| Partners’  equity per financial statements (Saudi Accounting Standards) | ** **   | **588,140**             |       | 305,098                 |       | 212,877                 |         |
| US  GAAP adjustment:                                                         |         |                    |       |                    |       |                    |         |
| Difference  in net income                                                    | ** **   | **(11,377**             | )          | (13,652                 | )          | (15,927                 | )            |
|                                                                         |         |                    |       |                    |       |                    |         |
| Partners’  equity under US GAAP                                         | ** **   | **576,763**             |       | 291,446                 |       | 196,950                 |         |

** **

**79**

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** **

Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

**31 December 2004**

** **

**18**                      SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLESFOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES - continued

 

***c) Estimated futureaggregate amortisation expense***

 

The estimated aggregate amortisation expense duringthe next five years would be US $ 3.306 million per annum (same as in 2004) asno more deferred charges are expected to be incurred during the next fiveyears.

 

***d) Related partytransactions***

 

Theamounts of the company’s sales made through a marketing affiliate of theforeign partner as described in note 8 were 2004: US $ 320.1 million, 2003: US $ 150.5 million and 2002: US $ 96.1million.

 

***e) Source of rawmaterials***

 

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

 

***f) Term loansmaturities***

 

Following arethe combined aggregate amounts of next five years’ maturities of the term loansstated under note 13 to the financial statements: 

 
| ** ** | ** ** | **US $ ‘000** | ** ** |
|------------|------------|-------------------------|------------|
| * *   | * *   | * *                | * *   |
| 2005       |       | 53,894                  |       |
| 2006       |       | 63,606                  |       |
| 2007       |       | 41,053                  |       |
| 2008       |       | 1,497                   |       |

** **

***g) Dividends paid***

 

Cash dividendsduring the year were US $ 30 million (2002: US $ 19.9 million and 2001: Nil)and constitute 17.19% of the capital (2003: 12.23%) and US $ 4.92 per share(2003: US $ 3.26 per share).

 

***h) 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 10 to the financial statements.

 

***i) Fair value***

 

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

 

***j) Comprehensive income***

 

Comprehensive income under US GAAP issubstantially the same as the net income under US GAAP.

 

***k)******Employees’terminal benefits***

 

Provision for employees’ terminalbenefits is made for amounts payable to comply with the Saudi Arabian labourlaw applicable to employees’ accumulated periods of service at the balancesheet date and therefore, does not require actuarial calculation.

 

80

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Saudi Chevron Phillips Company Limited

NOTESTO THE FINANCIAL STATEMENTS - continued

31 December2004

 

**18**                      SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLESFOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTINGPRINCIPLES - continued

 

***l) Statement of cash flows***

 

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

 

***m) Provision for tax***

 

Provision forzakat is charged to the statement of partners’ equity in accordance with SaudiAccounting Standards as it is considered to be a charge of the Saudipartner.  Had the provision for zakat beencharged to the statement of income, the net income for 2004, 2003 and 2002would have been reduced by US $ 3.8 million, US $ 1.1 million and US $ 0.9million, respectively.

 

81

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**Report of the Auditors**

 

To

The Shareholders

Qatar Chemical Company Limited, Q.S.C

Doha,

Qatar

 

We have audited the accompanying financialstatements of Qatar Chemical Company Limited, Q.S.C (the “Company”) on pages 2to 21 as of and for the year ended 31 December 2004. The financial statementsof the Company as of 31 December 2003 were audited by another auditor whosereport thereon dated 24 March 2004, expressed an unqualified opinion on thosestatements with an emphasis of matter relating to going concern assumption ofthe financial statements resulting from accumulated losses as at 31 December2003.

 

**Respective responsibilities ofthe Company’s management and auditors**

These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

**Basis of opinion**

We conducted our audit in accordance with theInternational Standards on Auditing. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  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 the management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

**Opinion**

In our opinion, the financial statements presentfairly, in all material respects, the financial position of the Company as of31 December 2004, the results of its operations, changes in its shareholders’equity and its cash flows for the year then ended in accordance with InternationalFinancial Reporting Standards.

 

**Other matters**

In addition, in our opinion, the Company hasmaintained proper accounting records and the financial statements are inagreement therewith and a physical count of the inventories was carried out inaccordance with the established principles. We have obtained all theinformation and explanations we required for the purpose of our audit and arenot aware of any significant violations of the provisions of the Company’sArticles of Association and Qatar Commercial Companies’ Law No. 5 of 2002 tothe extent applicable having occurred during the year which might have had amaterial adverse effect on the business of the Company or its financialposition.

 

 
| *13 February 2005* | *Abdul Hakim Al-Adhamy*                  |
|--------------------|------------------------------------------|
| *Doha*             | *KPMG*                                   |
| *State of Qatar*   | *Qatar Auditors’ Registry No.  105* |

 

82

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| **ERNST  & YOUNG** | •  |  P.O. Box 164    | •  | Phone:         | 4414599 |
|------------------------|--------------|-----------------------|--------------|----------------|---------|
|                   |         | 3rd Floor             |         | Fax:           | 4414649 |
|                   |         | Al-Abdulghani  Tower  |         | doha@qa.ey.com |
|                   |         | Airport Road          |         | www.ey.com/me  |
|                   |         | Doha, State of  Qatar |         |           |

 

 

**AUDITORS’ REPORT****TO THE SHAREHOLDERS OF**

**QATARCHEMICAL COMPANY LTD. (Q-CHEM), Q.S.C.**

 

We have audited theaccompanying balance sheet of Qatar Chemical Company Ltd. (Q-Chem), a QatariShareholding Company (Q.S.C.), as of 31 December 2003 and 31 December 2002,and the related statements of income, cash flows and changes in equity for theyears then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.  These financial statements are presentedtogether with the financial statements for the year ended 31 December 2004which are audited by another auditor whose report dated 13 February 2005,expressed an unqualified opinion on these financial statements.

 

We conducted our audit inaccordance with International Standards on Auditing.  Those Standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, thefinancial statements present fairly, in all material respects, the financialposition of the Company as of 31 December 2003 and 31 December 2002and the results of its operations and its cash flows for the years then endedin accordance with International Financial Reporting Standards.

 

Furthermore, in ouropinion, proper books of account have been kept by the Company and thefinancial statements comply with the Qatar Commercial Companies’ Law No. 5 of2002 and the Company’s Articles of Association. We have obtained all the information and explanations we required forthe purpose of our audit, and are not aware of any violations of the abovementioned law or the Articles of Association having occurred during the yearwhich might have had a material effect on the business of the Company or itsfinancial position.

 

In our reports dated 24 March 2004and 31 March 2003 we expressed an unqualified opinion on the individualfinancial statements for the years ended 31 December 2003 and 31 December 2002respectively with an emphasis of matter relating to going concern assumption ofthe financial statements resulting from accumulated losses as at 31 December 2003and 31 December 2002.

 

 
| /s/ T. F. Sexton                     |   |
|--------------------------------------|--------|
| T. F. Sexton                         |
| of Ernst &  Young                |
| Auditor’s  Registration No. 114 |
|                                 |
| Date: 13 February 2005          |
| Doha                                 |

 

A Member of Ernst & Young Global

 

83

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| **Qatar Chemical Company Limited, Q.S.C** | **2** |
|-------------------------------------------|-------|

 

**BalanceSheet**

**as****at 31 December2004**

** **
| ** **                                             | ** ** | **Notes**  | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **ASSETS**                                             |       |       |       |             |       |             |       |             |       |
| ** **                                             |       |       |       |             |       |             |       |             |       |
| **Non-current assets**                                 |       |       |       |             |       |             |       |             |       |
| Property, plant and equipment                          |       | 4          |       | 880,156          |       | 939,639          |       | 6,940            |       |
| Accumulated plant costs                                |       | 5          |       | —           |       | —           |       | 929,052          |       |
| Long- term receivables                                 |       | 6          |       | 220              |       | 616              |       | 918              |       |
|                                                   |       |       |       | 880,376          |       | 940,255          |       | 936,910          |       |
| **Current assets**                                     |       |       |       |             |       |             |       |             |       |
| Inventories                                            |       | 7          |       | 32,416           |       | 23,953           |       | 10,163           |       |
| Other receivables and prepayments                      |       | 8          |       | 5,536            |       | 5,354            |       | 6,014            |       |
| Due from related parties                               |       | 9(a)       |       | 65,824           |       | 27,985           |       | 95               |       |
| Trade accounts receivable                              |       | 10         |       | 57,201           |       | 16,691           |       | —           |       |
| Cash and cash equivalents                              |       | 11         |       | 104,047          |       | 37,507           |       | 6,040            |       |
|                                                   |       |       |       | 265,024          |       | 111,490          |       | 22,312           |       |
| **TOTAL ASSETS**                                       | ** ** | ** ** |       | **1,145,400**    |       | 1,051,745        |       | 959,222          |       |
|                                                   |       |       |       |             |       |             |       |             |       |
| **SHAREHOLDERS’ EQUITY AND  LIABILITIES**         |       |       |       |             |       |             |       |             |       |
| ** **                                             |       |       |       |             |       |             |       |             |       |
| **Shareholders’ Equity**                          |       |       |       |             |       |             |       |             |       |
| Share capital                                          |       | 12         |       | 112,800          |       | 56,300           |       | 20,000           |       |
| Legal reserve                                          |       |       |       | 11,676           |       | —           |       | —           |       |
| Retained earnings / (Accumulated losses)               |       |       |       | 22,329           |       | (82,756          | )          | (42,958          | )          |
|                                                   |       |       |       | 146,805          |       | (26,456          | )          | (22,958          | )          |
|                                                   |       |       |       |             |       |             |       |             |       |
| **Non-current liabilities**                            |       |       |       |             |       |             |       |             |       |
| Non-current portion of syndicated loan                 |       | 13         |       | 574,430          |       | 644,700          |       | 706,350          |       |
| Subordinated loan                                      |       | 14         |       | 310,184          |       | 303,181          |       | 212,895          |       |
| Provision for employees’ end of service  benefits |       | 15         |       | 1,833            |       | 1,236            |       | 650              |       |
| Deferred liability                                     |       | 16         |       | 1,870            |       | 25,000           |       | —           |       |
| Deferred tax liability                                 |       | 17(a)      |       | 370              |       | —           |       | —           |       |
|                                                   |       |       |       | 888,687          |       | 974,117          |       | 919,895          |       |
| **Current liabilities**                                |       |       |       |             |       |             |       |             |       |
| Current portion of syndicated loan                     |       | 13         |       | 65,925           |       | 61,650           |       | 43,650           |       |
| Provision for taxation                                 |       | 17(b)      |       | 11,859           |       | —           |       | —           |       |
| Due to related parties                                 |       | 9(b)       |       | 15,761           |       | 11,679           |       | 6,532            |       |
| Accounts payable and accrued expenses                  |       | 18         |       | 16,363           |       | 30,755           |       | 12,103           |       |
|                                                   |       |       |       | 109,908          |       | 104,084          |       | 62,285           |       |
| **TOTAL SHAREHOLDERS’  EQUITY AND LIABILITIES**   | ** ** | ** ** |       | **1,145,400**    |       | 1,051,745        |       | 959,222          |       |

 

The attached notes on pages 6 to 21 form an integralpart of these financial statements.

 

84

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| **Qatar Chemical Company Limited, Q.S.C** | **3** |
|-------------------------------------------|-------|

 

**Statementof Income**

**for** the yearended 31 December 2004

 
| ** **                                                          | ** ** | **Note**   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| ** **                                                          |       |       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                               |       |       |       | 323,872          |       | 72,996           |       | —           |       |
| Cost of goods sold                                                  |       |       |       | (153,984         | )          | (86,467          | )          | —           |       |
| **Gross profit**                                                    |       |       | ** ** | **169,888**      |       | (13,471          | )          | —           |       |
|                                                                |       |       |       |             |       |             |       |             |       |
| Other income                                                        |       |       |       | 412              |       | 72               |       | 120              |       |
| Selling and administration expenses                                 |       |       |       | (21,406          | )          | (12,978          | )          | (22,329          | )          |
| **Profit / (loss) from  operations**                                |       |       | ** ** | **148,894**      |       | (26,377          | )          | (22,209          | )          |
| Foreign exchange gain                                               |       |       |       | 3,388            |       | 977              |       | —           |       |
| Interest expense                                                    |       |       |       | (23,292          | )          | (14,398          | )          | —           |       |
| **Net profit / (loss) for  the year before provision for taxation** |       |       | ** ** | **128,990**      |       | (39,798          | )          | (22,209          | )          |
| Income taxes                                                        |       |       |       |             |       |             |       |             |       |
| Current                                                             |       | 17(b)      |       | (11,859          | )          | —           |       | —           |       |
| Deferred                                                            |       | 17(a)      |       | (370             | )          | —           |       | —           |       |
|                                                                |       |       |       |             |       |             |       |             |       |
| **Net profit / (loss) for  the year**                               | ** ** | ** ** | ** ** | **116,761**      |       | (39,798          | )          | (22,209          | )          |

 

The attached notes on pages 6 to 21 form an integralpart of these financial statements.

 

85

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| **Qatar Chemical Company Limited, Q.S.C** | **4** |
|-------------------------------------------|-------|

 

**Statementof Changes in Shareholders’ Equity**

**for****the year ended 31 December 2004**

 
| ** **                       | ** ** | **Share   Capital** | ** ** | **Legal   reserve** | ** ** | **Retained   earnings/  (Accumulated  losses)** | ** ** | **Total**        | ** ** |
|----------------------------------|------------|---------------------|------------|---------------------|------------|-------------------------------------------------|------------|------------------|------------|
| ** **                       | ** ** | **US$’000**    | ** ** | **US$’000**    | ** ** | **US$’000**                                | ** ** | **US$’000** | ** ** |
|                             |       |                |       |                |       |                                            |       |             |       |
| Balance at 31 December 2001      |       | 20,000              |       | —              |       | (20,749                                         | )          | (749             | )          |
| Net loss for the year            |       | —              |       | —              |       | (22,209                                         | )          | (22,209          | )          |
| Balance at 31 December 2002      |       | 20,000              |       | —              |       | (42,958                                         | )          | (22,958          | )          |
|                             |       |                |       |                |       |                                            |       |             |       |
| Share capital issued during 2003 |       | 36,300              |       | —              |       | —                                          |       | 36,300           |       |
| Net loss for the year            |       | —              |       | —              |       | (39,798                                         | )          | (39,798          | )          |
| Balance at 31 December 2003      |       | 56,300              |       | —              |       | (82,756                                         | )          | (26,456          | )          |
|                             |       |                |       |                |       |                                            |       |             |       |
| Share capital issued during 2004 |       | 56,500              |       | —              |       | —                                          |       | 56,500           |       |
| Net profit for the year          |       | —              |       | —              |       | 116,761                                         |       | 116,761          |       |
| Transfer to legal reserve        |       | —              |       | 11,676              |       | (11,676                                         | )          | —           |       |
| Balance at 31 December 2004      |       | 112,800             |       | 11,676              |       | 22,329                                          | ** ** | **146,805**      | ** ** |

 

##### **Legal reserve**

In accordance withthe regulations of Qatar Commercial Companies Law No. 5 of 2002, 10% of the netprofit for the year is required to be transferred to the Legal Reserve untilthe balance in the Reserve equals 50% of the paid up capital. This Reserve isnot normally available for distribution except in circumstances specified inthe Qatar Commercial Companies Law No. 5 of 2002.

 

The attached notes on pages 6 to 21 form an integral part of thesefinancial statements.

 

86

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| **Qatar Chemical Company Limited, Q.S.C** | **5** |
|-------------------------------------------|-------|

 

**Statementof cash flows**

**for** the yearended 31 December 2004

 
| ** **                                                       | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **Operating activities**                                         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net profit / (loss) for the year                                 |       | 116,761          |       | (39,798          | )          | (22,209          | )          |
| Adjustments for :                                                |       |             |       |             |       |             |       |
| Depreciation                                                     |       | 41,261           |       | 26,634           |       | 829              |       |
| Interest income                                                  |       | (803             | )          | (146             | )          | (96              | )          |
| Interest expense                                                 |       | 23,292           |       | 14,398           |       | —           |       |
| Unrealised foreign exchange loss/ (gain)                         |       | 7                |       | (45              | )          | —           |       |
| Loss on disposal of property, plant and  equipment               |       | —           |       | 80               |       | —           |       |
| Provision for employees’ end of service  benefits           |       | 834              |       | 684              |       | 490              |       |
| Operating profit / (loss) before changes in  working capital     |       | 181,352          |       | 1,807            |       | (20,986          | )          |
|                                                             |       |             |       |             |       |             |       |
| Working capital changes                                          |       |             |       |             |       |             |       |
| Increase in inventories                                          |       | (8,463           | )          | (13,790          | )          | (10,163          | )          |
| (Increase) / decrease in other receivables  and prepayments      |       | (182             | )          | 660              |       | (248             | )          |
| Increase in due from related parties                             |       | (37,839          | )          | (27,890          | )          | —           |       |
| Increase in trade accounts receivables                           |       | (40,510          | )          | (16,691          | )          | —           |       |
| Increase in provision for taxation                               |       | 12,229           |       | —           |       | —           |       |
| Increase in due to related parties                               |       | 4,082            |       | 5,147            |       | —           |       |
| (Decrease)/ Increase in accounts payable and  accrued expenses   |       | (14,866          | )          | 18,099           |       | (44,493          | )          |
|                                                             |       |             |       |             |       |             |       |
| Cash from / (used in) operating activities                       |       | 95,803           |       | (32,658          | )          | (75,890          | )          |
| Decrease / (Increase) in long term  receivables                  |       | 396              |       | 302              |       | (464             | )          |
| Employees’ end of service benefits paid                     |       | (237             | )          | (98              | )          | (5               | )          |
| (Decrease) / Increase in deferred credit                         |       | (23,130          | )          | 25,000           |       | —           |       |
|                                                             |       |             |       |             |       |             |       |
| **Net cash from / (used in)  operating activities**              | ** ** | **72,832**       |       | (7,454           | )          | (76,359          | )          |
|                                                             |       |             |       |             |       |             |       |
| **Investing activities**                                         |       |             |       |             |       |             |       |
| Payments for purchase of property, plant and  equipment          |       | (7,093           | )          | (2,491           | )          | (6,458           | )          |
| Additions to accumulated plant cost                              |       | —           |       | (21,895          | )          | (106,609         | )          |
| Deferred credit adjustment and write off of  plant and equipment |       | 25,315           |       | —           |       | —           |       |
| Proceeds from disposal of property, plant and  equipment         |       | —           |       | 693              |       | —           |       |
| Interest received                                                |       | 803              |       | 146              |       | 96               |       |
| Interest paid                                                    |       | (15,815          | )          | (15,127          | )          | (19,592          | )          |
|                                                             |       |             |       |             |       |             |       |
| **Net cash from / (used in)  investing activities**              | ** ** | **3,210**        |       | (38,674          | )          | (132,563         | )          |
|                                                             |       |             |       |             |       |             |       |
| **Financing activities**                                         |       |             |       |             |       |             |       |
| Drawdown of subordinated loan                                    |       | —           |       | 84,900           |       | 212,895          |       |
| Repayment of syndicated loan                                     |       | (65,995          | )          | (43,650          | )          | —           |       |
| Proceeds from issue of Share capital                             |       | 56,500           |       | 36,300           |       | —           |       |
|                                                             |       |             |       |             |       |             |       |
| **Net cash (used in)/ from  financing activities**               | ** ** | **(9,495**       | **)**      | **77,550**       | ** ** | **212,895**      | ** ** |
|                                                             |       |             |       |             |       |             |       |
| **Net Increase in cash and  cash equivalents**                   |       | 66,547           |       | 31,422           |       | 3,973            |       |
|                                                             |       |             |       |             |       |             |       |
| Cash and cash equivalents at 1 January                           |       | 37,462           |       | 6,040            |       | 2,067            |       |
|                                                             |       |             |       |             |       |             |       |
| **Cash and cash equivalents  at 31 December (note 11)**          | ** ** | **104,009**      |       | 37,462           |       | 6,040            |       |

 

The attached notes on pages 6 to 21 form an integralpart of these financial statements.

 

87

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| **Qatar Chemical Company Limited, Q.S.C** | **6** |
|-------------------------------------------|-------|

 

**Notes to the financial statements**

**for** the yearended 31 December 2004

 

**1              LEGAL STATUS AND PRINCIPALACTIVITIES**

 

Qatar Chemical Company Limited (“the Company”) wasformed by the enactment of Emiri decree no. 20 issued on 6 October 1998 and isregistered in Qatar as a Qatari Shareholding Company (Q.S.C). The activities ofthe Company are governed by a joint venture agreement dated 16 November 1997 betweenQatar General Petroleum Corporation (now doing business under the name of QatarPetroleum), Chevron Phillips Chemical International Qatar Holdings LLC(“CPCIQH”, as successor to Phillips Investment Company) and Chevron PhillipsChemical Company LLC (“CPChem”, as successor to Phillips Petroleum Company), asamended and is valid for a period of 25 years. The Company is owned by QatarPetroleum (51%) and Chevron Phillips Chemical International Qatar Holdings LLC(49%).

 

The principal objectives of the Company are to own,operate and maintain a complex for the production, storage and sale ofpolyethylene, hexene-1 and other petrochemical products. The Company commencedproduction on 8 April 2003.

 

**2              BASIS OF PREPARATION**

 

These financial statements have been prepared inaccordance with the International Financial Reporting Standards. The financialstatements have been prepared under the historical cost convention.

 

**3              SIGNIFICANT ACCOUNTING POLICIES**

 

The following significant accounting policies areconsistent with those used in the previous year.

 

**3.1          Functional currency**

The currency of the State of Qatar, in which theCompany is domiciled, is Qatari Riyals. However these financial statements havebeen presented in United States Dollars in accordance with the amended JointVenture Agreement between the shareholders.

 

**3.2          Revenue recognition**

Sales of petrochemicals including by-products, arerecorded when title passes to the customer. Revenue is reported net of freightand insurance. No revenue is recognised if there are significant uncertaintiesregarding recovery of the consideration due or associated costs or possiblereturn of goods.

 

Interest income and expenses are recognised on accrualbasis using the effective interest rate.

 

**3.3          Income tax**

Income tax is the expected tax payable on taxableincome for the year in accordance with Qatar Income Tax Regulations applyingthe tax rates specified in Law No.8 of 1999 related to the incorporation of theCompany.

 

Deferred income tax is provided for using the liabilitymethod on all temporary differences at the balance sheet date. Deferred incometax assets and liabilities are measured at the tax rates that are expected toapply to the period when the asset is realised or the liability is settled,based on the laws that have been enacted at the balance sheet date.

 

**3.4          Operating leases**

Operating lease payments are recognised as an expensein the income statement on a straight-line basis over the lease term.

 

88

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| **Qatar Chemical Company Limited, Q.S.C** | **7** |
|-------------------------------------------|-------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

**3.5          Property, plant and equipment**

Property, plant and equipment have been recorded atcost less accumulated depreciation and impairment losses, if any (referaccounting policy 3.11).

 

Expenditure incurred to replace a component of an itemof property, plant and equipment that is accounted for separately iscapitalised and net book value of replaced component is written-off. Othersubsequent expenditure is capitalised only when it increases the futureeconomic benefits embodied in the item of property, plant and equipment. Allother expenditure is recognised in the statement of income as an expense asincurred. Capital work in progress is transferred to property, plant andequipment on completion of work.

 

Shutdown costs incurred by the Company are normallyexpensed except when a design change to an item of plant and equipment iscarried out as part of the shutdown which is capitalised.

 

**3.6          Depreciation**

Depreciation is provided on all property, plant andequipment on a straight-line basis over the assets’ estimated useful lives atthe following annual rates:

 
| Plant facilities                    |   | 25 years   |   |
|-------------------------------------|--------|------------|--------|
| Buildings                           |   | 25 years   |   |
| Land improvements                   |   | 25 years   |   |
| Furniture, fixtures and equipment   |   | 5 years    |   |
| Computer hardware and software      |   | 3-10 years |   |
| Mobile plant equipment and Vehicles |   | 4-10 years |   |
| Capital spares                      |   | 25 years   |   |
|                                |   |       |   |

 

**3.7          Inventories**

Inventories are stated at the lower of cost and netrealisable value (NRV). Costs are those expenses incurred in bringing eachproduct to its present location and condition, as follows:

 
| Raw materials, consumables, spare parts and packaging supplies | - | moving weighted average cost                                                                                                                                          |
|----------------------------------------------------------------|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Work in progress and finished goods                            | - | moving weighted average cost which comprised of direct  materials, direct labour, other direct costs, plus attributable overheads  based on normal level of capacity. |

 

NRV is the estimated selling price in the ordinarycourse of business less the estimated costs of disposition.

 

**3.8          Accounts’ receivable and otherreceivables**

Receivables are stated at the original invoice amountless a provision for any estimated uncollectible amounts. An estimate fordoubtful debts is made when collection of the full amount is no longer probable.Bad debts are written off as incurred.

 

**3.9          Cash and cash equivalents**

Cash and cash equivalents comprise of cash on hand,balances with banks under current and call accounts and short term depositswith maturity of 90 days or less.

 

**3.10        Accounts payable and accruals**

Liabilities are recognised for amounts to be paid inthe future for goods or services received, whether billed by the supplier ornot.

 

**3.11        Impairment**

The carrying amounts of the Company assets, other thaninventories (refer accounting policy 3.7) are reviewed at each balance sheetdate to determine whether there is any indication of impairment. If any suchindication exists, the asset’s recoverable amount is estimated. An impairmentloss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the statement of income.

 

89

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| **Qatar Chemical Company Limited, Q.S.C** | **8** |
|-------------------------------------------|-------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

**3.12        Provisions**

Provisions are recognised when the Company has a legalor constructive obligation arising from a past event, and the costs to settlethe obligation are both probable and can be reliably measured.

 

**3.13        Loans**

Loans are carried on the balance sheet at itsprincipal amount plus accrued interest. Instalments due within one year areshown as a current liability. Interest due under the syndicated loan isincluded in “accounts payable and accruals”.

 

**3.14        Borrowing costs**

Borrowing costs that are attributable to theconstruction of the Company’s plant have been capitalised as part of property,plant and equipment. The capitalisation of borrowing costs ceased once theasset was put to use in April 2003. Thereafter the intereston borrowed funds are being charged to the income statement.

 

**3.15        End of service benefits**

The Company provides for end of service benefits toits employees based upon the employees’ length of service and the completion ofa minimum service period.

 

Under Law No. 24 of 2002 on Retirement and Pension,the Company makes contribution to a government pension scheme for Qatariemployees calculated as a percentage of the Qatari employees’ salaries. TheCompany’s obligations are limited to these contributions, which are expensed onaccrual basis.

 

**3.16        Foreign currencies**

The books of account are maintained in United StatesDollars. Transactions in foreign currencies are translated to US Dollars at therates of exchange prevailing at the date of the transaction. Monetary assetsand liabilities denominated in foreign currencies other than US Dollars aretranslated at rates ruling at the balance sheet date. Foreign exchangedifferences arising on translation are recognised in the income statement.

 

90

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **9** |
|-------------------------------------------|-------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

**4              PROPERTY, PLANT AND EQUIPMENT**

 
| ** **                              | ** ** | **Plant  facilities** | ** ** | **Buildings**    | ** ** | **Land  improvements** | ** ** | **Furniture,   fixtures and  equipment** | ** ** | **Computer  hardware &  software** | ** ** | **Mobile  Plant   Equipment  and  Vehicles** | ** ** | **Capital spares** | ** ** | **Capital work in  progress** | ** ** | **Total**        | ** ** |
|-----------------------------------------|------------|-----------------------|------------|------------------|------------|------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|--------------------|------------|-------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **US$’000**      | ** ** | **US$’000** | ** ** | **US$’000**       | ** ** | **US$’000**                         | ** ** | **US$’000**                       | ** ** | **US$’000**                             | ** ** | **US$’000**   | ** ** | **US$’000**              | ** ** | **US$’000** | ** ** |
| **Cost:**                               |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| At 1 January 2003                       |       | —                |       | —           |       | 251                    |       | 2,502                                    |       | 894                                    |       | 4,485                                        |       | —             |       | —                        |       | 8,132            |       |
| Transfers from accumulated plant costs  |       | 862,226               |       | 47,470           |       | 21,300                 |       | 725                                      |       | 15,424                                 |       | —                                       |       | 5,029              |       | 5,441                         |       | 957,615          |       |
| Additions                               |       | 439                   |       | 82               |       | 58                     |       | 1,210                                    |       | 248                                    |       | 454                                          |       | —             |       | —                        |       | 2,491            |       |
| Reclassification                        |       | 61                    |       | —           |       | (251                   | )          | 251                                      |       | —                                 |       | —                                       |       | (61                | )          | —                        |       | —           |       |
| Disposals & write offs              |       | —                |       | —           |       | —                 |       | (827                                     | )          | (95                                    | )          | —                                       |       | —             |       | —                        |       | (922             | )          |
| At 1 January 2004                       |       | 862,726               |       | 47,552           |       | 21,358                 |       | 3,861                                    |       | 16,471                                 |       | 4,939                                        |       | 4,968              |       | 5,441                         |       | 967,316          |       |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| Additions                               |       | 104                   |       | 90               |       | 6                      |       | 606                                      |       | 6                                      |       | 31                                           |       | —             |       | 6,250                         |       | 7,093            |       |
| Transfer from CWIP                      |       | 8,247                 |       | —           |       | —                 |       | —                                   |       | —                                 |       | —                                       |       | —             |       | (8,247                        | )          | —           |       |
| Deferred credit adjustment              |       | (23,080               | )          | (1,246           | )          | (541                   | )          | —                                   |       | —                                 |       | —                                       |       | (133               | )          | —                        |       | (25,000          | )          |
| Reclassification                        |       | 347                   |       | —           |       | —                 |       | —                                   |       | —                                 |       | —                                       |       | (347               | )          | —                        |       | —           |       |
| Disposals & write offs              |       | (315                  | )          | —           |       | —                 |       | —                                   |       | —                                 |       | —                                       |       | —             |       | —                        |       | (315             | )          |
| At 31 December 2004                     |       | 848,029               |       | 46,396           |       | 20,823                 |       | 4,467                                    |       | 16,477                                 |       | 4,970                                        |       | 4,488              |       | 3,444                         |       | 949,094          |       |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| **Accumulated depreciation:**           |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| At 1 January 2003                       |       | —                |       | —           |       | 216                    |       | 344                                      |       | 429                                    |       | 203                                          |       | —             |       | —                        |       | 1,192            |       |
| Charge                                  |       | 23,000                |       | 1,268            |       | 569                    |       | 649                                      |       | 333                                    |       | 682                                          |       | 133                |       | —                        |       | 26,634           |       |
| Reclassification                        |       | —                |       | —           |       | (216                   | )          | 216                                      |       | —                                 |       | —                                       |       | —             |       | —                        |       | —           |       |
| Disposals & write offs              |       | —                |       | —           |       | —                 |       | (149                                     | )          | —                                 |       | —                                       |       | —             |       | —                        |       | (149             | )          |
| At 1 January 2004                       |       | 23,000                |       | 1,268            |       | 569                    |       | 1,060                                    |       | 762                                    |       | 885                                          |       | 133                |       | —                        |       | 27,677           |       |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| Charge                                  |       | 33,908                |       | 1,867            |       | 838                    |       | 759                                      |       | 2,988                                  |       | 706                                          |       | 195                |       | —                        |       | 41,261           |       |
| Reclassification                        |       | 24                    |       | —           |       | —                 |       | —                                   |       | —                                 |       | —                                       |       | (24                | )          | —                        |       | —           |       |
| Disposals & write offs              |       | —                |       | —           |       | —                 |       | —                                   |       | —                                 |       | —                                       |       | —             |       | —                        |       | —           |       |
| At 31 December 2004                     |       | 56,932                |       | 3,135            |       | 1,407                  |       | 1,819                                    |       | 3,750                                  |       | 1,591                                        |       | 304                |       | —                        |       | 68,938           |       |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| **Net book value at 31  December 2004** |       | 791,097               |       | 43,261           |       | 19,416                 |       | 2,648                                    |       | 12,727                                 |       | 3,379                                        |       | 4,184              |       | 3,444                         | ** ** | **880,156**      | ** ** |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| at 31 December 2003                     |       | 839,726               |       | 46,284           |       | 20,789                 |       | 2,801                                    |       | 15,709                                 |       | 4,054                                        |       | 4,835              |       | 5,441                         |       | 939,639          |       |
|                                    |       |                  |       |             |       |                   |       |                                     |       |                                   |       |                                         |       |               |       |                          |       |             |       |
| at 31 December 2002                     |       | —                |       | —           |       | 35                     |       | 2,158                                    |       | 465                                    |       | 4,282                                        |       | —             |       | —                        |       | 6,940            |       |

 

91

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **10** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*4              PROPERTY, PLANT ANDEQUIPMENT (Continued)*

 
| ** **                                              | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                    |       |             |       |             |       |             |       |
| The depreciation charge has been allocated as  follows: | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accumulated plant cost                                  |       | —           |       | 200              |       | 262              |       |
| Cost of production                                      |       | 39,977           |       | 25,914           |       | —           |       |
| Selling and administration expenses                     |       | 1,284            |       | 520              |       | 567              |       |
| ** **                                              |       | ** **       |       |             |       |             |       |
| ** **                                              |       | **41,261**       |       | 26,634           |       | 829              |       |

** **

**5****                                        ****ACCUMULATED PLANT COSTS**

 
| ** **                                   | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                         |       |             |       |             |       |             |       |
| Balance as at 1 January                      |       | —           |       | 929,052          |       | 802,851          |       |
| Additions during the year                    |       | —           |       | 28,563           |       | 126,201          |       |
|                                         |       | —           |       | 957,615          |       | 929,052          |       |
| Transferred to property, plant and equipment |       | —           |       | (957,615         | )          | —           |       |
|                                         |       |             |       |             |       |             |       |
| Balance as at 31 December                    |       | —           |       | —           |       | 929,052          |       |

 

Included in accumulated plant costs of 2003 wascapitalised interest of US$68.9 million (2002: US$63.7 million). Interestcapitalised during the year was nil (2003: US$5.2 million; 2002: US$24million). Accumulated plant costs were transferred to property, plant andequipment upon the assets being put to use on 8 April 2003.

 

The unamortized capital interest cumulative balance asof 31 December 2004 was US$64.3 million (2003: US$67.1 million).

** **

**6****                                        ****LONG TERMRECEIVABLES**

 

Long term receivables represent furniture allowance recoverable fromemployees and prepayments.

** **

**7****                                        ****INVENTORIES**

** **
| ** **                  | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                        |       |             |       |             |       |             |       |
| Finished goods              |       | 12,977           |       | 7,489            |       | —           |       |
| Work in progress            |       | 169              |       | 145              |       | —           |       |
| Raw materials               |       | 3,992            |       | 3,340            |       | 1,397            |       |
| Packaging supplies          |       | 387              |       | 339              |       | 13               |       |
| Spare parts and consumables |       | 14,891           |       | 12,640           |       | 8,753            |       |
|                        |       | ** **       |       |             |       |             |       |
|                        |       | **32,416**       |       | 23,953           |       | 10,163           |       |

 

Material consumption of US$ 54.2 million (2003: US$23.6 million) is included under cost of goods sold.

** **

**8****                                        ****OTHER RECEIVABLESAND PREPAYMENTS**

 
| ** **                 | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                       |       |             |       |             |       |             |       |
| Prepayments                |       | 2,580            |       | 1,267            |       | 2,516            |       |
| Receivables from employees |       | 1,440            |       | 1,485            |       | —           |       |
| Other receivables          |       | 1,516            |       | 2,602            |       | 3,498            |       |
| ** **                 |       | ** **       |       |             |       |             |       |
| ** **                 |       | **5,536**        |       | 5,354            |       | 6,014            |       |

 

92

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **11** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

** **

**9****                                        ****TRANSACTIONS WITHRELATED PARTIES**

 

A significant portion of the Company’s costs have beencharged by the shareholders. The prices and terms of payment for thesetransactions are in accordance with specific agreements entered into, by theshareholders, pursuant to the Joint Venture Agreement. In accordance with theseagreements, the shareholders provide support services, feedstock fuel gas,catalysts and other goods and services to the Company. Also, the Company sellsits products to the related affiliates.

 

QChem entered into an Agency Agreement with CPChem toact as an agent for the sale of substantially all of QChem’s production. QChemhas also entered into an Offtake and Credit Risk Agreement with CPChem, underwhich CPChem is required to purchase at market prices, specified amounts ofproduction if CPChem fails to sell that product under the terms of the AgencyAgreement. As of balance sheet date no transaction has been executed under theOfftake and Credit Risk Agreement. The Offtake and Credit Risk Agreementexpires upon the earlier of the repayment in full by QChem of its outstandingbank financing, currently scheduled to mature in 2012, or any refinancingthereof.

 

QChem entered into an Agency Agreement with QAPCO toact as an agent for the sale of QChem’s products, primarily in the Middle Eastregion to a maximum of 10% of QChem’s production.

 

QChem and Qatar Petroleum entered into a FeedstockSupply Agreement for the duration of the amended Joint Venture Agreement, whereQP agreed to provide ethane gas to meet QChem production requirement.

 

Transactions with significant related parties duringthe year are summarised as follows:

** **
| **Nature of transaction**                                                                                                  | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                       |       |             |       |             |       |             |       |
| Chevron Phillips Chemical Company LLC  (CPChem) (Shareholder) and affiliates:                                              |       |             |       |             |       |             |       |
| • Purchases & services                                                                                            |       | 11,647           |       | 17,453           |       | 21,408           |       |
| • Sales & marketing commission                                                                                    |       | 55,700           |       | 33,215           |       | —           |       |
|                                                                                                                       |       |             |       |             |       |             |       |
| Qatar Petroleum (QP)(Shareholder):                                                                                         |       |             |       |             |       |             |       |
| • Purchases & services                                                                                            |       | 42,647           |       | 24,971           |       | 3,520            |       |
|                                                                                                                       |       |             |       |             |       |             |       |
| Qatar Petrochemical Company Ltd (Q.S.C)  (QAPCO) (a joint venture with Industries Qatar, a subsidiary of Qatar  Petroleum) |       |             |       |             |       |             |       |
| • Sales & marketing commission                                                                                    |       | 18,519           |       | 3,560            |       | —           |       |

 

**(a)****                                 ****Due from relatedparties**

 
| ** **            | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                  |       |             |       |             |       |             |       |
| CPChem and affiliates |       | 58,609           |       | 24,698           |       | —           |       |
| QAPCO                 |       | 7,215            |       | 3,287            |       | —           |       |
| QP                    |       | —           |       | —           |       | 95               |       |
| ** **            |       | ** **       |       |             |       |             |       |
| ** **            |       | **65,824**       |       | 27,985           |       | 95               |       |

** **

** (b)****                              ****Due to relatedparties**

 
| ** **            | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                  |       |             |       |             |       |             |       |
| CPChem and affiliates |       | 4,650            |       | 4,893            |       | 1,350            |       |
| QP                    |       | 11,111           |       | 6,786            |       | 5,182            |       |
| ** **            |       | ** **       |       |             |       |             |       |
| ** **            |       | **15,761**       |       | 11,679           |       | 6,532            |       |

 

Refer to note 14 for disclosure of subordinate loanpayable to an affiliate.

 

93

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **12** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

** **

**10****                                 ****TRADE ACCOUNTSRECEIVABLE**

 
| ** **                 | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                       |       |             |       |             |       |             |       |
| Trade accounts receivable  |       | 57,084           |       | 16,691           |       | —           |       |
| Advances paid to suppliers |       | 117              |       | —           |       | —           |       |
| ** **                 |       | ** **       |       |             |       |             |       |
| ** **                 |       | **57,201**       |       | 16,691           |       | —           |       |

 

The Company is engaged in the sale of polyethylene,hexene-1 and other petrochemical products to a large number of customers. Itsfive largest customers account for 52% of outstanding accounts receivable at 31December 2004 (2003: 32%).

 

**11****                                 ****CASH AND CASHEQUIVALENTS**

 
| ** **                                                            | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                  |       |             |       |             |       |             |       |
| Petty cash                                                            |       | 5                |       | 5                |       | 3                |       |
| Bank Balances                                                         |       |             |       |             |       |             |       |
| Current account                                                       |       | (794             | )          | (196             | )          | (279             | )          |
| Call account                                                          |       | 104,836          |       | 37,698           |       | 6,316            |       |
| ** **                                                            |       | **104,047**      |       | 37,507           |       | 6,040            |       |
| ** **                                                            |       | ** **       |       |             |       |             |       |
| Unrealised foreign exchange fluctuation on  cash and cash equivalents |       | (38              | )          | (45              | )          | —           |       |
|                                                                  | ** ** | ** **       |       |             |       |             |       |
| Cash and cash equivalents as per statement of  cash flows             | ** ** | **104,009**      |       | 37,462           |       | 6,040            |       |

 

The call deposits of US$104.8million (2003: US$37.7 million) is maintained in the United States inaccordance with the terms of the senior debt agreements.

 

**12****                                 ****SHARE CAPITAL**

 
| ** **                      | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                            |       |             |       |             |       |             |       |
| Authorised:                     |       |             |       |             |       |             |       |
| 900,000 shares of US$1,000 each |       | 900,000          |       | 900,000          |       | 900,000          |       |
|                            |       |             |       |             |       |             |       |
| Issued and fully paid:          |       |             |       |             |       |             |       |
| 112,800 shares of US$1,000 each | ** ** | **112,800**      |       | 56,300           |       | 20,000           |       |

 

During 2004, the Board of Directors had approved theissue of 56,500 shares with a par value of US$ 1,000 per share. The issue wassubscribed by the shareholders according to their proportion of shareholding.

 

**13           SYNDICATED LOAN**

 
| ** **                                  | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                        |       |             |       |             |       |             |       |
| Senior debt                                 |       | 640,355          |       | 706,350          |       | 750,000          |       |
|                                        |       |             |       |             |       |             |       |
| Classified in the balance sheet as follows: |       |             |       |             |       |             |       |
| Current liability                           |       | 65,925           |       | 61,650           |       | 43,650           |       |
| Non-current liability                       |       | 574,430          |       | 644,700          |       | 706,350          |       |
| ** **                                  |       | ** **       |       |             |       |             |       |
| ** **                                  |       | **640,355**      |       | 706,350          |       | 750,000          |       |

 

The Company signed a facility credit agreement with a syndicate of bankson 27 August 1999 for a project finance loan of US$ 750,000,000. The Companyhad drawn down the entire loan by the end of year 2001 to fund the project. Theloan carries interest at LIBOR plus pre-determined mark-ups.

 

According to the terms of the agreement, the loan isrepayable in quarterly instalments that commenced on 15 June 2003. During theyear, the total amount repaid was US$ 66 million (2003: US$ 43.6 million).Fixed repayment amounts are due in the amount of US$ 65.9 million in 2005, US$70.5 million in 2006, US$ 75.2 million in 2007, US$ 80.6 million in 2008 andUS$ 86.2 million in 2009.

 

94

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **13** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*13           SYNDICATED LOAN(Continued)*

 

Each of the shareholders had provided LaSalle BankNational Association (security trustee), for the benefit of the consortium oflenders, a completion guarantee which provided the banks the right to demandrepayment of all outstanding principal and interest from each QChem co-venturerif the project was not completed by 31 August 2004, which was subsequentlyextended to 31 October 2004. The project completion was successfully achievedon 16 September 2004. Hence the subject agreement was terminated.

 

**14****                                 ****SUBORDINATED LOANS**

 
| ** **       | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|             |       |             |       |             |       |             |       |
| Tranche A        |       | 294,500          |       | 294,500          |       | 209,600          |       |
| Tranche B        |       | 13,479           |       | 7,399            |       | 2,195            |       |
| Accrued interest |       | 2,205            |       | 1,282            |       | 1,100            |       |
| ** **       |       | ** **       |       |             |       |             |       |
| ** **       |       | **310,184**      |       | 303,181          |       | 212,895          |       |

 

The Company signed a subordinated loan agreement with Chevron PhillipsChemical International Qatar Holdings LLC (CPCIQH) on 16 September 1999 asamended in accordance with the QChem Joint Venture Agreement. Accordingly,CPCIQH has agreed to make the subordinated loan available until projectcompletion.

 

Excluding the accrued interest, the Company has drawn down US$ 308million (2003: US$ 302 million) of the subordinated loan as of 31 December 2004to fund the project as the syndicated loan was fully drawn down as of 31December 2001. The subordinated loan carries interest as follows:

•                 The outstanding principal amount of eachsubordinated loan shall bear interest until repayment in full at a rate equalto the rate payable under the syndicated loan.

•                 Any amounts outstanding, after the syndicatedloan terminates, shall bear interest at a rate equal to LIBOR plus the marginover LIBOR payable under the syndicated loan on the termination date.

 

According to the terms of this agreement, there is noschedule of repayment and the principal balance of all outstanding subordinatedloans and interest thereon shall be repayable each quarter from available cashflows after the payment of all priority dividends.

 

With respect to any interest due and payable at theend of each quarter not paid from available cash flows, an amount equal to suchinterest shall be deemed to have been advanced to the Company as a Tranche BSubordinated loan in accordance with the agreement.

 

CPChem has agreed to provide up to US$ 75 million ofloans to QChem if there is insufficient cash to pay the minimum debt servicepayments on the bank financing. CPChem has also agreed to provide loans toQChem through December 2006 if there is insufficient cash to make QChem’starget debt service payments. These loans are limited to an amount not greaterthan operating margin loss resulting from sales volumes being less than designcapacity. CPChem’s rights under the Subordinated Loan Agreement and the othercontingent loan agreements related to QChem previously described aresubordinated to QChem’s senior bank debt.

 

**15****                                 ****PROVISION FOREMPLOYEES’ END OF SERVICE BENEFITS**

 
| ** **                 | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                       |       |             |       |             |       |             |       |
| At 1 January               |       | 1,236            |       | 650              |       | 165              |       |
| Provided during the year   |       | 834              |       | 684              |       | 490              |       |
| Less: paid during the year |       | (237             | )          | (98              | )          | (5               | )          |
|                       | ** ** | ** **       |       |             |       |             |       |
| At 31 December             | ** ** | **1,833**        |       | 1,236            |       | 650              |       |

 

The Company has created a provision for its estimatedobligation for pension contribution for Qatari staff in accordance with therequirements of Qatari Retirement and Pension Law No. 24 of 2002. The provisionof US$ 0.5 million as of 31 December 2004 (2003: US$ 0.3 million) is includedin accounts payable and accrued expenses.

 

95

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **14** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

** **

**16****                                 ****DEFERRED LIABILITY**

 

Deferred liability as at 31 December 2004 represents apremium amount payable to an insurance company. Since QChem doesn’t expect thisamount to be paid within next one year, the same has been classified asnon-current.

 

The engineering, procurement and construction (EPC)contract for the construction of an integrated petrochemical complex at theMesaieed Industrial area, contains provisions allowing the Company to collectliquidated delay damages if the complex is not completed by stipulated dates.During 2003, the Company asserted its claim that it was entitled to collect thefull delay damages. In order to enforce this claim, the Company drew from theletters of credit that were provided by the contractor as security andimmediately suspended payment of the remaining invoices. The contractordisputed the Company’s claim. In November 2003, the contractor and the Companyagreed to the general terms of settlement that were incorporated into a bindingagreement executed in February 2004. In accordance with this agreement thecompensation receivable by the Company amounting to US$ 25 million wasclassified as a deferred credit as at 31 December 2003. During 2004, thecontractor had settled this amount and the Company had set off the deferredcredit of US$ 25 million against the cost of the plant facilities.

 

**17****                                 ****TAXATION**

 

**(a)****                                 ****DEFERRED TAXATION**

Deferred income tax is provided for temporarydifferences existing between the financial statement and the tax basis of theCompany’s assets and liabilities and relate primarily to depreciation onproperty, plant and equipment.

 
| ** **                      | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                            |       |             |       |             |       |             |       |
| At 1 January                    |       | —           |       | —           |       | —           |       |
| Provided during the year        |       | 370              |       | —           |       | —           |       |
| Less: recovered during the year |       | —           |       | —           |       | —           |       |
|                            |       |             |       |             |       |             |       |
| At 31 December                  | ** ** | **370**          |       | —           |       | —           |       |

 

The deferred liability comprises of the following typeof temporary differences:

 
| ** **                                                                       | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                             |       |             |       |             |       |             |       |
| Net taxable temporary differences                                                |       | (1,059           | )          | —           |       | —           |       |
| Deferred tax expense relating to the  origination of temporary differences @ 35% |       | (370             | )          | —           |       | —           |       |

 

**(b)****                                 ****CASH TAX PROVISION**

 
| ** ** | ** ** | ** **                                                    | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|------------|------------|---------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | ** **                                                    | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |                                                          |       |             |       |             |       |             |       |
|       |       | Profit/(loss) as per financial statements before tax          |       | 128,990          |       | (39,798          | )          | (22,209          | )          |
|       |       |                                                          |       |             |       |             |       |             |       |
| Add:       |       | Depreciation as per books                                     |       | 41,261           |       | 26,634           |       | 829              |       |
|       |       | Interest capitalised                                          |       | —           |       | —           |       | 16,662           |       |
|       |       | Others                                                        |       | 1,870            |       | 92               |       | (180             | )          |
| Less:      |       | Depreciation as per form 3 (at income tax depreciation rates) |       | (102,150         | )          | (1,817           | )          | (781             | )          |
|       |       |                                                          |       |             |       |             |       |             |       |
|       |       | Profit / (loss) as per tax declaration                        |       | 69,971           |       | (14,889          | )          | (5,679           | )          |
|       |       |                                                          |       |             |       |             |       |             |       |
|       |       | Carried forward loss                                          |       | (24,794          | )          | (9,905           | )          | (4,226           | )          |
|       |       |                                                          |       |             |       |             |       |             |       |
|       | ** ** | Net taxable profit / (loss)                                   | ** ** | **45,177**       |       | (24,794          | )          | (9,905           | )          |
|       |       |                                                          |       |             |       |             |       |             |       |
|       | ** ** | Cash tax payable @ 26.25%                                     | ** ** | **11,859**       |       | —           |       | —           |       |

 

96

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **15** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

** **

**(c)****                                 ****EFFECTIVE INCOMETAX RATE RECONCILIATION**

 
| ** **                                                      | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                            |       |             |       |             |       |             |       |     |       |     |       |     |       |
| Income / (loss) from continuing operations  before income taxes | ** ** | **128,990**      |       | (39,798          | )          | (22,209          | )          | **9.5**  |       | —   |       | —   |       |
|                                                            |       |             |       |             |       |             |       |     |       |     |       |     |       |
| Statutory income tax                                            |       | 33,860           |       | —           |       | —           |       | 26.3     |       | —   |       | —   |       |
| Deferred tax asset                                              |       | (21,723          | )          | —           |       | —           |       | (16.9    | )          | —   |       | —   |       |
| Deferred tax rate difference                                    |       | 92               |       | —           |       | —           |       | 0.1      |       | —   |       | —   |       |
|                                                            |       |             |       |             |       |             |       |     |       |     |       |     |       |
| ** **                                                      |       | **12,229**       |       | —           |       | —           | ** ** | **9.5**  |       | —   |       | —   |       |

 

**18****                                 ****ACCOUNTS PAYABLEAND ACCRUED EXPENSES**

 
| ** **                             | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                   |       |             |       |             |       |             |       |
| Trade payables                         |       | 9,938            |       | 5,326            |       | 10,215           |       |
| Advances received from customers       |       | 450              |       | 232              |       | —           |       |
| Accrued expenses and other payables    |       | 3,702            |       | 23,937           |       | 742              |       |
| Bonus payable to employees             |       | 742              |       | 357              |       | —           |       |
| Pension liability for Qatari employees |       | 464              |       | 310              |       | —           |       |
| Interest payable                       |       | 1,067            |       | 593              |       | 1,146            |       |
|                                   |       |             |       |             |       |             |       |
| ** **                             |       | **16,363**       |       | 30,755           |       | 12,103           |       |

 

The amount recognised for 2004 as an expense for thepension liability for Qatari employees is US$ 0.05 million (2003: US$ 0.1million).

 

**19****                                 ****NET PROFIT / (LOSS)FOR THE YEAR**

 
| ** **                                                            | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                  |       |             |       |             |       |             |       |
| The net profit / (loss) for the year is  stated after the charges of: | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Staff cost                                                            |       | 33,623           |       | 28,331           |       | 10,557           |       |
| Rental – operating lease                                         |       | 535              |       | 523              |       | 107              |       |

 

**20****                                 ****EXPENDITURECOMMITMENTS**

 

The Company has the following outstanding contractual commitments:

 
| ** **                                | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                      |       |             |       |             |       |             |       |
| **Capital expenditure  commitments:**     |       |             |       |             |       |             |       |
|                                      |       |             |       |             |       |             |       |
| Engineering, procurement and construction |       | —           |       | 1,442            |       | 8,151            |       |
| Other contractual commitments             |       | 1,407            |       | —           |       | 738              |       |
|                                      |       |             |       |             |       |             |       |
|                                      |       | 1,407            |       | 1,442            |       | 8,889            |       |

 

97

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **16** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*20**                                 **EXPENDITURECOMMITMENTS (Continued)*

 
| **Operating lease  commitments:**                                           |   |   |   |   |   |   |   |
|-----------------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
|                                                                        |   |   |   |   |   |   |   |
| Future minimum lease payments:                                              |   |   |   |   |   |   |   |
| Within one year                                                             |   | 488    |   | 488    |   | 488    |   |
| After one year but not more than five years                                 |   |   |   |   |   |   |   |
| 2004                                                                        |   | — |   | — |   | 487    |   |
| 2005                                                                        |   | — |   | 487    |   | 488    |   |
| 2006                                                                        |   | 487    |   | 488    |   | 488    |   |
| 2007                                                                        |   | 488    |   | 488    |   | 488    |   |
| 2008                                                                        |   | 488    |   | 488    |   | — |   |
| 2009                                                                        |   | 488    |   | — |   | — |   |
|                                                                        |   |   |   |   |   |   |   |
| Total                                                                       |   | 1,951  |   | 1,951  |   | 1,951  |   |
|                                                                        |   |   |   |   |   |   |   |
| More than five years                                                        |   | 7,317  |   | 7,805  |   | 8,293  |   |
| Total operating lease expenditure contracted  for at the balance sheet date |   | 9,756  |   | 10,244 |   | 10,732 |   |

 

Landon which the plant is constructed, located at Mesaieed Industrial area, hasbeen leased from Qatar Petroleum under a land lease agreement signed on 25August 1999.

 

**21****                                 ****FINANCIALINSTRUMENTS**

 

A financial instrument is any contract that gives riseto both a financial asset of one enterprise and a financial liability or equityinstrument of another enterprise.

 

Accounting policies for financial assets andliabilities are set out in note 3.

 

Financial instruments comprise of cash and bankbalances, accounts receivables, other receivables, duefrom / to related parties, term loans, accounts payable and accrued expenses.

 

**a)      Fair values**

Fair value is the amount for which an asset could beexchanged or a liability settled between knowledgeable willing parties on anarm’s length basis. Differences can therefore arise between the book valuesunder the historical cost method and fair value estimates.

 

Underlying the definition of fair value is apresumption that an enterprise is a going concern without any intention or needto liquidate, curtail materially the scale of its operations or undertake atransaction on adverse terms.

 

The fair values of financial asset and liabilities arenot materially different from their carrying values at the balance sheet date.

 

**b)      Credit risk**

Credit risk is the risk that one party to a financialinstrument will fail to discharge an obligation and cause the other party toincur a financial loss. The Company exposure to credit risk is as indicated bythe carrying amount of its financial assets which consist primarily of currentbalances with banks and accounts receivable, net of provision for doubtfulaccounts, if any.

 

The Company manages its exposure to balances withbanks through selection of reputed local and international banks for placingits funds. The Company seeks to limit its credit risk with respect to customersby setting credit limits for individual customers and monitoring outstandingreceivables. Further more, Chevron Phillips Chemical Company LLC guaranteescertain credit sales of it’s agents.

 

**c)      Liquidity risk**

The Company is not exposed to significant liquidityrisk. The Company’s terms of sales require amount to be paid within 30-150 daysof the date of sale. Trade payables are normally settled within 30-45 days ofthe date of purchase.

 

98

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **17** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*21**                                 **FINANCIALINSTRUMENTS (Continued)*

 

**d)      Currency risk**

The Company is exposed to significant currency risk on a portion of itstrade accounts receivable. Trade accounts receivable include US$ 46.2 million(2003: US$ 13.19 million) receivable in foreign currencies, mainly Euro.

 

The balances in Qatari Riyal are not considered to represent significantcurrency risk since the US Dollar is pegged to Qatari Riyal.

 

Trade accounts payable include US$ 4.2 million (2003: US$ 3.2 million)due in foreign currencies, mainly Qatari Riyal.

 

99

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **18** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*21**                                 **FINANCIALINSTRUMENTS (Continued)*

 

**e)      Interest rate risk**

 

A significant portion of the Company’s financialassets and liabilities as of 31 December 2004 are exposed to interest ratefluctuations.

 

The Company’s exposure to interest rate risk and theeffective interest rates on its financial assets and liabilities are summarisedbelow:

 
| ** **                                            | ** ** | **Up to  3 months** | ** ** | **3-12  months** | ** ** | **1-5  years** | ** ** | **More than  5 years** | ** ** | **Non-interest  sensitive** | ** ** | **Total** | ** ** | **Effective interest  Rate %** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|------------------|------------|----------------|------------|------------------------|------------|-----------------------------|------------|-----------|------------|--------------------------------|------------|
| **As at 31 December 2004**                            |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial assets:                                     |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Long-term receivables                                 |       | —              |       | —           |       | —         |       | —                 |       | 220                         |       | 220       |       | —                         |       |
| Other receivables and prepayments                     |       | —              |       | —           |       | —         |       | —                 |       | 5,536                       |       | 5,536     |       | —                         |       |
| Due from related parties                              |       | —              |       | —           |       | —         |       | —                 |       | 65,824                      |       | 65,824    |       | —                         |       |
| Accounts receivable                                   |       | —              |       | —           |       | —         |       | —                 |       | 57,201                      |       | 57,201    |       | —                         |       |
| Cash and cash equivalents                             |       | 104,047             |       | —           |       | —         |       | —                 |       | —                      |       | 104,047   |       | 1.04                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | 104,047             |       | —           |       | —         |       | —                 |       | 128,781                     |       | 232,828   |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial liabilities:                                |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Syndicated loan                                       |       | 16,050              |       | 49,875           |       | 404,850        |       | 169,580                |       | —                      |       | 640,355   |       | 2.35                           |       |
| Subordinated loan                                     |       | —              |       | —           |       | —         |       | 310,184                |       | —                      |       | 310,184   |       | 2.2                            |       |
| Provision for employees’ end of service  benefit |       | —              |       | —           |       | —         |       | —                 |       | 1,833                       |       | 1,833     |       | —                         |       |
| Deferred liability                                    |       | —              |       | —           |       | —         |       | —                 |       | 1,870                       |       | 1,870     |       | —                         |       |
| Deferred tax liability                                |       | —              |       | —           |       | —         |       | —                 |       | 370                         |       | 370       |       | —                         |       |
| Provision for taxation                                |       | —              |       | —           |       | —         |       | —                 |       | 11,859                      |       | 11,859    |       | —                         |       |
| Due to related parties                                |       | —              |       | —           |       | —         |       | —                 |       | 15,761                      |       | 15,761    |       | —                         |       |
| Accounts payable and accrued expenses                 |       | —              |       | —           |       | —         |       | —                 |       | 16,363                      |       | 16,363    |       | —                         |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | 16,050              |       | 49,875           |       | 404,850        |       | 479,764                |       | 48,056                      |       | 998,595   |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Net financial assets / (liabilities)                  |       | 87,997              |       | (49,875          | )          | (404,850       | )          | (479,764               | )          | 80,725                      |       | (765,767  | )          |                           |       |

 

100

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **19** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*21**                                 **FINANCIALINSTRUMENTS (Continued)*

 

**e)      Interest rate risk**

 
| ** **                                            | ** ** | **Up to  3 months** | ** ** | **3-12  months** | ** ** | **1-5  years** | ** ** | **More than  5 years** | ** ** | **Non-interest  sensitive** | ** ** | **Total** | ** ** | **Effective interest  Rate %** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|------------------|------------|----------------|------------|------------------------|------------|-----------------------------|------------|-----------|------------|--------------------------------|------------|
| **As at 31 December 2003**                            |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial assets:                                     |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Long-term receivables                                 |       | —              |       | —           |       | —         |       | —                 |       | 616                         |       | 616       |       | —                         |       |
| Other receivables and prepayments                     |       | —              |       | —           |       | —         |       | —                 |       | 5,354                       |       | 5,354     |       | —                         |       |
| Due from related parties                              |       | —              |       | —           |       | —         |       | —                 |       | 27,985                      |       | 27,985    |       | —                         |       |
| Accounts receivable                                   |       | —              |       | —           |       | —         |       | —                 |       | 16,691                      |       | 16,691    |       | —                         |       |
| Cash and cash equivalents                             |       | 37,507              |       | —           |       | —         |       | —                 |       | —                      |       | 37,507    |       | 0.69                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | 37,507              |       | —           |       | —         |       | —                 |       | 50,646                      |       | 88,153    |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial liabilities:                                |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Syndicated loan                                       |       | 15,000              |       | 50,995           |       | 378,525        |       | 261,830                |       | —                      |       | 706,350   |       | 1.94                           |       |
| Subordinated loan                                     |       | —              |       | —           |       | —         |       | 303,181                |       | —                      |       | 303,181   |       | 1.9                            |       |
| Provision for employees’ end of service  benefit |       | —              |       | —           |       | —         |       | —                 |       | 1,236                       |       | 1,236     |       | —                         |       |
| Deferred liability                                    |       | —              |       | —           |       | —         |       | —                 |       | 25,000                      |       | 25,000    |       | —                         |       |
| Due to related parties                                |       | —              |       | —           |       | —         |       | —                 |       | 11,679                      |       | 11,679    |       | —                         |       |
| Accounts payable and accrued expenses                 |       | —              |       | —           |       | —         |       | —                 |       | 30,755                      |       | 30,755    |       | —                         |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | 15,000              |       | 50,995           |       | 378,525        |       | 565,011                |       | 68,670                      |       | 1,078,201 |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Net financial assets / (liabilities)                  |       | 22,507              |       | (50,995          | )          | (378,525       | )          | (565,011               | )          | (18,024                     | )          | (990,048  | )          |                           |       |

 

101

----

 
| **Qatar Chemical Company Limited, Q.S.C** | **20** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

 

*21**                                 **FINANCIALINSTRUMENTS (Continued)*

 

**e)      Interest rate risk**

 
| ** **                                            | ** ** | **Up to  3 months** | ** ** | **3-12  months** | ** ** | **1-5  years** | ** ** | **More than  5 years** | ** ** | **Non-interest  sensitive** | ** ** | **Total** | ** ** | **Effective interest  Rate %** | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|------------------|------------|----------------|------------|------------------------|------------|-----------------------------|------------|-----------|------------|--------------------------------|------------|
| **As at 31 December 2002**                            |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial assets:                                     |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Long-term receivables                                 |       | —              |       | —           |       | —         |       | —                 |       | 918                         |       | 918       |       | —                         |       |
| Other receivables and prepayments                     |       | —              |       | —           |       | —         |       | —                 |       | 6,014                       |       | 6,014     |       | —                         |       |
| Due from related parties                              |       | —              |       | —           |       | —         |       | —                 |       | 95                          |       | 95        |       | —                         |       |
| Cash and cash equivalents                             |       | 6,040               |       | —           |       | —         |       | —                 |       | —                      |       | 6,040     |       | 1.58                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | 6,040               |       | —           |       | —         |       | —                 |       | 7,027                       |       | 13,067    |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Financial liabilities:                                |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Syndicated loan                                       |       | —              |       | 43,650           |       | 358,270        |       | 348,080                |       | —                      |       | 750,000   |       | 2.5                            |       |
| Subordinated loan                                     |       | —              |       | —           |       | —         |       | 212,895                |       | —                      |       | 212,895   |       | 2.5                            |       |
| Provision for employees’ end of service  benefit |       | —              |       | —           |       | —         |       | —                 |       | 650                         |       | 650       |       | —                         |       |
| Due to related parties                                |       | —              |       | —           |       | —         |       | —                 |       | 6,532                       |       | 6,532     |       | —                         |       |
| Accounts payable and accrued expenses                 |       | —              |       | —           |       | —         |       | —                 |       | 12,103                      |       | 12,103    |       | —                         |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
|                                                  |       | —              |       | 43,650           |       | 358,270        |       | 560,975                |       | 19,285                      |       | 982,180   |       |                           |       |
|                                                  |       |                |       |             |       |           |       |                   |       |                        |       |      |       |                           |       |
| Net financial assets / (liabilities)                  |       | 6,040               |       | (43,650          | )          | (358,270       | )          | (560,975               | )          | (12,258                     | )          | (969,113  | )          |                           |       |

 

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| **Qatar Chemical Company Limited, Q.S.C** | **21** |
|-------------------------------------------|--------|

 

**Notes to thefinancial statements**

**for** the yearended 31 December 2004

** **

**22           COMPARATIVE FIGURES**

 

The corresponding figures presented for 2003 and 2002 have beenreclassified and restated where necessary to preserve consistency with 2004figures. However, such reclassification did not have an effect on the totalassets or total liabilities or the net profit of the previous year.

 

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**Item 9****.****  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A****.****  Controls and 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 CPChem’s most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, CPChem’s internal control over financial reporting.

 

**Item 9B****.****  Other Information**

 

None.

 

**PART III**

 

**Item 10****.**** Directors and Executive Officers of the Registrant**

 

*Directorsand Officers.* Directors, executive officers and certain other officers of ChevronPhillips Chemical Company LLC are set forth in the following table:

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                                        |
|------------------------|------------|---------|------------|-------------------------------------------------------------------------------------|
| James L. Gallogly      |       | 52      |       | President and Chief  Executive Officer; Non-voting Director                         |
| Greg G. Maxwell        |       | 48      |       | Senior Vice President,  Chief Financial Officer and Controller; Non-voting Director |
| Greg C. Garland        |       | 47      |       | Senior Vice President,  Planning & Specialty Products                           |
| Craig B. Glidden       |       | 47      |       | Senior Vice President,  Legal and Public Affairs, General Counsel and Secretary     |
| J. Mike Parker         |       | 58      |       | Senior Vice President,  Aromatics & Styrenics                                   |
| Rick L. Roberts        |       | 50      |       | Senior Vice President,  Manufacturing                                               |
| Tim G. Taylor          |       | 51      |       | Senior Vice President,  Olefins & Polyolefins                                   |
| Joe M. McKee           |       | 54      |       | Vice President and  Treasurer                                                       |
| Patricia E. Yarrington |       | 48      |       | Class C Director                                                                    |
| Gary G. Yesavage       |       | 52      |       | Class C Director                                                                    |
| John E. Lowe           |       | 46      |       | Class P Director                                                                    |
| Jim W. Nokes           |       | 58      |       | Class P Director                                                                    |

 

***James L. Gallogly:***  Mr. Galloglyhas been President and Chief Executive Officer, and has served as a non-votingdirector, since the inception of CPChem in July 2000.  He previously served as Senior Vice Presidentof Chemicals for Phillips Petroleum Company (Phillips), now ConocoPhillips, aposition he accepted in 1999.

 

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***Greg G. Maxwell:***  Mr. Maxwellhas been Senior Vice President, Chief Financial Officer and Controller, and hasserved as a non-voting director, since August 2003.  From July 2000 to August 2003, Mr. Maxwellwas Vice President and Controller.  From1998 to July 2000, he served as General Auditor for Phillips.

 

***Greg C. Garland:***  Mr. Garlandhas been Senior Vice President, Planning & Specialty Products of CPChemsince October 2001.  From July 2000 toOctober 2001, Mr. Garland was Senior Vice President, Planning and StrategicTransactions.  From 1997 to July 2000, heserved as General Manager, Qatar/Middle East for Phillips.

 

***Craig B. Glidden:***  Mr. Gliddenhas been Senior Vice President, Legal and Public Affairs, General Counsel andSecretary of CPChem since April 2004. From July 2000 to April 2004, Mr. Glidden was Vice President, GeneralCounsel and Secretary.  In 1996, Mr.Glidden founded the law firm of Glidden Partners LLP and was managing partnerof the firm until joining CPChem in 2000.

 

***J. Mike Parker:***  Mr. Parker hasbeen Senior Vice President, Aromatics & Styrenics of CPChem since October2001.  From July 2000 to October 2001,Mr. Parker was Senior Vice President of Aromatics.  He served Chevron Chemical Company LLC(Chevron Chemical) as General Manager, Olefins and Plastics, from 1999 to July2000.

 

***Rick L. Roberts:***  Mr. Robertshas been Senior Vice President, Manufacturing of CPChem since October2001.  From July 2000 to October 2001,Mr. Roberts was Vice President of Manufacturing for Olefins &Polyolefins.  He served Chevron Chemicalas Plant Manager at Cedar Bayou from 1999 to July 2000.

 

***Tim G. Taylor:***  Mr. Taylor hasbeen Senior Vice President, Olefins & Polyolefins of CPChem since July2000.  He served Phillips as Polyolefins Managerfrom 1999 to July 2000.

 

***Joe M. McKee:***  Mr. McKee hasbeen Vice President and Treasurer of CPChem since July 2000.  Prior to assuming his current position, heserved as Finance Manager for the Americas Division of Phillips Exploration andProduction, a position to which he was appointed in 1993.

 

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

 

***Gary G. Yesavage:***  Mr. Yesavagewas elected a director of CPChem on June 1, 2003.  He currently serves as General Manager of theChevron Products Company El Segundo refinery, a position to which he wasappointed in 1999.

 

***John E. Lowe:*** Mr. Lowe hasserved as a director of CPChem since its inception in July 2000.  He currently serves as Executive VicePresident, Planning, Strategy and Corporate Affairs for ConocoPhillips, aposition to which he was appointed in 2002. Mr. Lowe previously served as Senior Vice President, Corporate Strategyand Development for Phillips, a position to which he was appointed in 2001, andas Senior Vice President of Planning and Strategic Transactions in 2000.  In 1999, he served as Vice President,Planning and Strategic Transactions and Manager of Strategic Growth Projectsfor Phillips.  Mr. Lowe also serves as aDirector of Duke Energy Field Services, LLC.

 

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***Jim W. Nokes:*** Mr. Nokes waselected a director of CPChem on October 24, 2002.  He currently serves as Executive VicePresident, Refining, Marketing, Supply and Transportation for ConocoPhillips, aposition to which he was appointed in 2002. Mr. Nokes previously served Conoco Inc. (Conoco) as Executive VicePresident, Worldwide Refining, Marketing, Supply and Transportation, a positionto which he was named in 1999.

 

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

 

*Code ofEthics. *CPChem has adopted a code of ethics that applies toits principal executive officer and principal financial officer.  A copy of this code is available to anyperson 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.

 

**Item 11****.****  Executive Compensation**

 

**Summary Compensation Table**

 

The table below provides information regardingcompensation earned by CPChem’s Chief Executive Officer and the next four mosthighly compensated executive officers for the year ended December 31, 2004 (collectively,the “named executive officers”). Information for the named executive officers is also presented for theyears ended December 31, 2003 and 2002.

 
| ** **                         | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Long-term  Compensation** | ** ** | ** **       | ** ** |
|------------------------------------|------------|------------|------------|--------------------------|------------|-----------------------------|------------|------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                  | ** ** | **Awards**       | ** ** | **Payouts** | ** ** | **All  Other** | ** ** |
| **Name and Principal Position**    | ** ** | **Year**   | ** ** | **Salary**               | ** ** | **Bonus**                   | ** ** | **Options  (a)** | ** ** | **LTIP (b)** | ** ** | **Compensation  (c)** | ** ** |
| James  L. Gallogly                 |       | 2004       |       | $                        | 504,200    |                        | $          | 505,479          |       | — |   | $ | 671,100 |   | $ | 31,240 |   |
| President  and                     |       | 2003       |       | 483,750                  |       | 309,200                     |       | —           |       | 967,700 |   | 24,503 |   |
| Chief  Executive Officer           |       | 2002       |       | 460,648                  |       | 333,700                     |       | 55,000           |       | 850,000 |   | 23,367 |   |
|                               |       |       |       |                     |       |                        |       |             |       |   |   |   |   |
| Greg  C. Garland                   |       | 2004       |       | 295,175                  |       | 243,838                     |       | —           |       | 222,200 |   | 18,148 |   |
| Senior Vice  President,            |       | 2003       |       | 279,107                  |       | 157,618                     |       | —           |       | 288,100 |   | 14,071 |   |
| Planning &  Specialty Products |       | 2002       |       | 262,752                  |       | 113,488                     |       | 18,200           |       | 330,000 |   | 13,125 |   |
|                               |       |       |       |                     |       |                        |       |             |       |   |   |   |   |
| Craig  B. Glidden                  |       | 2004       |       | 308,710                  |       | 214,848                     |       | —           |       | 243,500 |   | 19,209 |   |
| Senior Vice  President,            |       | 2003       |       | 298,637                  |       | 116,042                     |       | —           |       | 352,300 |   | 15,162 |   |
| Legal and Public  Affairs,         |       | 2002       |       | 285,851                  |       | 160,974                     |       | 19,900           |       | 210,000 |   | 14,535 |   |
| General Counsel  and Secretary     |       |       |       |                     |       |                        |       |             |       |   |   |   |   |
|                               |       |       |       |                     |       |                        |       |             |       |   |   |   |   |
| Rick  L. Roberts                   |       | 2004       |       | 258,650                  |       | 205,603                     |       | —           |       | 199,500 |   | 14,890 |   |
| Senior  Vice President,            |       | 2003       |       | 246,586                  |       | 121,965                     |       | —           |       | 262,100 |   | 12,495 |   |
| Manufacturing                      |       | 2002       |       | 234,909                  |       | 90,826                      |       | 16,300           |       | 240,000 |   | 11,697 |   |
|                               |       |       |       |                     |       |                        |       |             |       |   |   |   |   |
| Tim  G. Taylor                     |       | 2004       |       | 303,762                  |       | 229,424                     |       | —           |       | 286,200 |   | 18,814 |   |
| Senior  Vice President,            |       | 2003       |       | 291,284                  |       | 126,994                     |       | —           |       | 414,700 |   | 14,797 |   |
| Olefins  & Polyolefins         |       | 2002       |       | 279,177                  |       | 118,372                     |       | 23,400           |       | 320,000 |   | 14,244 |   |
|                                    |            |            |            |                          |            |                             |            |                  |            |  |  |  |  |  |  |  |  |

 

(a)          Underprovisions contained in CPChem’s amended and restated Long-Term Incentive Plan,in 2003, all Phantom Share Option holders exchanged options that they wereawarded for performance cycles beginning in 2002 and 2001 for retroactiveRelative Performance (RP) awards effective for the same 2002 and 2001

 

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performance cycles. The target amounts of the retroactive RP awards were equal to the targetamounts of the respective Phantom Share Options awarded for the 2002 and 2001performance cycles, and for the above named executive officers were as follows:Mr. Gallogly - $479,800 (2002) and $557,700 (2001); Mr. Garland - $158,700(2002) and $166,100 (2001); Mr. Glidden - $173,900 (2002) and $203,100 (2001);Mr. Roberts - $142,500 (2002) and $151,100 (2001); and Mr. Taylor - $204,400(2002) and $239,100 (2001).  See“Long-Term Incentive Plans” for a discussion of the RP awards and StrategicPerformance (SP) awards.

 

(b)         Informationfor 2004 represents SP awards earned in 2004 for the completed 2002-2004performance cycle that will be paid in 2005. As of the date of this report, amounts earned and payable for the2002-2004 performance cycle under the RP awards had not been determined and arenot included in the table.  Informationfor 2003 represents RP and SP awards earned in 2003 for the completed 2001-2003performance cycle that were paid in 2004 (information for 2003 as presented inthe 2003 Annual Report on Form 10-K included only SP awards, as the RP awardamounts had not been determined as of the date of the report).  Information presented for 2002 representsawards that were paid in 2002 under CPChem’s Special Synergy Incentive Plan(SSIP).  The SSIP expired on June 30,2002.

 

(c)          During2004, Messrs. Gallogly, Garland, Glidden, Roberts and Taylor received companycontributions to their savings plan accounts of $30,413, $17,675, $18,698,$14,469 and $18,317, respectively, and life insurance premiums of $827, $473,$511, $421 and $497, respectively, were paid on their behalf.  During 2003, those officers received companycontributions to their savings plan accounts of $23,725, $13,628, $14,676,$12,096 and $14,322, respectively, and life insurance premiums of $778, $443,$486, $399 and $475, respectively, were paid on their behalf.  During 2002, those officers received companycontributions to their savings plan accounts of $22,589, $12,707, $14,049,$11,321 and $13,769, respectively, and life insurance premiums of $778, $418,$486, $376 and $475, respectively, were paid on their behalf.

 

**Option Grants and OptionsExercised During 2004**

 

There were no options topurchase securities of CPChem granted or exercised during 2004 nor were anysuch options outstanding as of December 31, 2004.

 

**Long-Term Incentive 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, participants wereeligible for two types of awards: Phantom Share Options and Target Awards. The LTIP, as amended and restated, currently provides for two differenttypes of awards:  Relative Performance(RP) awards and Strategic Performance (SP) awards.  Effective for performance cycles beginning onor after January 1, 2003, grants of Phantom Share Options and Target Awards areno 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 2002 and 2001 for retroactive RP awards effective for the same2002 and 2001 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 theireligible 2002 and 2001 Target Awards for retroactive SP awards effective forthe same 2002 and 2001 performance cycles. The target amounts of the retroactive SP awards were equal to the targetamounts of the respective Target Awards granted for the 2002 and 2001performance cycles.  The CompensationCommittee of the Board of Directors of CPChem (the “Compensation Committee”)has the sole discretion 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 peer companies asselected 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,payable only in cash, are determined at the end of each performance cycle,which is typically three years.  TheCompensation Committee has the sole discretion to determine the amountspayable, if any, under each type of award.

 

**LTIP Awards in 2004**

 
| ** **         | ** ** | **Award** | ** ** | **Target** | ** ** | **Performance  Period Until** | ** ** | **Estimated  Future Payouts  Under Non-Stock-Price-Based Plans** | ** ** |
|--------------------|------------|-----------|------------|------------|------------|-------------------------------|------------|------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Type**  | ** ** | **Award**  | ** ** | **Payout**                    | ** ** | **Threshold**                                                    | ** ** | **Target** | ** ** | **Maximum** | ** ** |
| James  L. Gallogly |       | RP        |       | $          | 529,400    |                          | 12/31/2006 |                                                             | $          | — |   | $ | 529,400 |   | $ | 1,058,800 |   |
|               |       | SP        |       | 529,400    |       | 12/31/2006                    |       | —                                                           |       | 529,400 |   | 1,058,800 |   |
|               |       |      |       |       |       |                          |       |                                                             |       |   |   |   |   |
| Greg  C. Garland   |       | RP        |       | 179,100    |       | 12/31/2006                    |       | —                                                           |       | 179,100 |   | 358,200 |   |
|               |       | SP        |       | 179,100    |       | 12/31/2006                    |       | —                                                           |       | 179,100 |   | 358,200 |   |
|               |       |      |       |       |       |                          |       |                                                             |       |   |   |   |   |
| Craig  B. Glidden  |       | RP        |       | 189,900    |       | 12/31/2006                    |       | —                                                           |       | 189,900 |   | 379,800 |   |
|               |       | SP        |       | 189,900    |       | 12/31/2006                    |       | —                                                           |       | 189,900 |   | 379,800 |   |
|               |       |      |       |       |       |                          |       |                                                             |       |   |   |   |   |
| Rick  L. Roberts   |       | RP        |       | 157,100    |       | 12/31/2006                    |       | —                                                           |       | 157,100 |   | 314,200 |   |
|               |       | SP        |       | 157,100    |       | 12/31/2006                    |       | —                                                           |       | 157,100 |   | 314,200 |   |
|               |       |      |       |       |       |                          |       |                                                             |       |   |   |   |   |
| Tim  G. Taylor     |       | RP        |       | 222,500    |       | 12/31/2006                    |       | —                                                           |       | 222,500 |   | 445,000 |   |
|               |       | SP        |       | 222,500    |       | 12/31/2006                    |       | —                                                           |       | 222,500 |   | 445,000 |   |
|                    |            |           |            |            |            |                               |            |                                                                  |            |  |  |  |  |  |  |  |  |

 

**Relative Performance Awards forthe 2002-2004 Performance Cycle Under the LTIP**

 

On August 24,2003, the Compensation Committee approved the grant of RP awards to certainexecutives, including Messrs. Gallogly, Garland, Glidden, Roberts andTaylor.  According to the terms of the grant,each of those executives is entitled to earn between 0% and 200% of suchexecutive’s respective target RP award depending on performance measuresachieved during the three year performance cycle beginning January 1, 2002 andending December 31, 2004, as determined by the Compensation Committee at theend of the performance cycle.  Target RPawards are set as a percentage of such executive’s base salary at the time ofthe grant, with the percentage differing based upon the executive’s gradelevel.  The payment of any RP awardamount, once determined, will be made in 2005.

 

The performancemeasures for the RP awards consist of: (1) earnings before interest, taxes anddepreciation (EBITDA) divided by total assets; (2) a comparison of CPChem’sfinancial performance relative to a peer group of companies; and/or (3)economic value added**.**

 

**Executive CompensationArrangements**

 

On February 22,2005, the Compensation Committee approved the following compensationarrangements relating to executive officers of CPChem.

 

*Relative Performance Awards forthe 2005-2007 Performance Cycle Under the LTIP*

 

The CompensationCommittee approved the grant of RP awards to certain executives, includingMessrs. Gallogly, Garland, Glidden, Roberts and Taylor.  According to the terms of the grant, each ofthose executives is entitled to earn between 0% and 200% of such executive’srespective target RP award depending on performance measures achieved duringthe three year performance cycle beginning January 1, 2005 and ending December31, 2007, as determined by the Compensation Committee at the end of the

 

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performancecycle.  Target RP awards are set as apercentage of such executive’s base salary at the time of the grant, with the percentagediffering based upon the executive’s grade level.  The payment of any RP award amount, oncedetermined, will be made in 2008.

 

The performancemeasures for the RP awards consist of: (1) EBITDA divided by total assets; (2)a comparison of CPChem’s financial performance relative to a peer group ofcompanies; and/or (3) economic value added.

 

*Strategic Performance Awards forthe 2005-2007 Performance Cycle Under the LTIP*

 

The CompensationCommittee approved the grant of SP awards to certain executives, includingMessrs. Gallogly, Garland, Glidden, Roberts and Taylor.  According to the terms of the grant, each ofthose executives is entitled to earn between 0% and 200% of such executive’srespective SP award depending on performance measures achieved during the threeyear performance cycle beginning January 1, 2005 and ending December 31, 2007,as determined by the Compensation Committee at the end of the performancecycle.  Target SP awards are set as apercentage of such executive’s base salary at the time of the grant, with thepercentage differing based upon the executive’s grade level.  The payment of any SP award amount, oncedetermined, will be made in 2008.

 

The performancemeasures for the SP awards consist of: (1) gap closure/synergies; (2) majorproject management; (3) portfolio management; (4) effective management ofcapital projects; (5) unit cost reductions versus baseline measurements; (6)reliability versus baseline measurements, and/or (7) achievement of effectivegrowth goals.

 

*2005 Target Awards Pursuant tothe Annual Incentive Plan*

 

The CompensationCommittee approved the grant of target awards to certain executives, includingMessrs. Gallogly, Garland, Glidden, Roberts and Taylor.  Target awards are measured as a percentage ofsuch executive’s base salary at December 31, 2005, with the percentagediffering based upon the executive’s grade level.  Each of those executives is entitled to earnbetween 0% and 200% of such executive’s target award depending on performancemeasures achieved under CPChem’s Employee Incentive Program (EIP) during theyear ending December 31, 2005, as determined by the Compensation Committee atthe end of such year.  The payment of anytarget award amount, once determined, will be made in 2006.

 

The performance measuresfor EIP consist of corporate wide measures and award unit measures.  Corporate wide measures consist of: (1)safety; (2) EBITDA; and (3) operating expenses. Award unit measures, which may vary depending on the executive, consistof (1) safety; (2) earnings; (3) expenses; (4) key projects; and (5) customersatisfaction.

 

**Executive Financial PlanningProgram**

 

CPChem adopted theExecutive Financial Planning Program on February 22, 2005, to be effective for2005.  This program provides for thereimbursement, to qualified executives, of certain personal financial and taxplanning services up to an annual maximum of $10,000, depending on anindividual’s salary grade level.

* *

**Pension Plans**

* *

*Retirement Plan*

 

CPChem’s retirement planis a defined benefit plan and covers most U.S.-based employees.  Eligible employees automatically participatein the plan and begin 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 withChevronTexaco or 

 

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ConocoPhillips or theiraffiliates.  Retirement benefits arebased on two types of credits: a career average pay benefit and a variableannuity benefit.  For the career averagepay benefit, each year employees receive an annual credit equal to 1% ofeligible compensation for that year.  Thevariable annuity benefit is the second component of the retirement plan and ismade up of a monthly credit equal to 1% of each eligible employee’scompensation for that month. Discretionary increases to the career average pay benefit and/or thevariable annuity benefit may be made from time to time provided CPChem’sperformance metrics support the additional cost.  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.

 

If an employee leavesCPChem for any reason prior to retirement and is vested, the accrued benefitmay either be paid out at that time in accordance with the options describedabove or remain in the plan until the individual’s early or normal retirementdate, at which time the accrued benefit may be paid out as a lump sum orconverted to a monthly benefit.  Eligibleemployees that came to CPChem from either ChevronTexaco or ConocoPhillips onJanuary 1, 2001 may receive certain adjustments, or “uplifts,” to theirretirement benefit which are intended to (1) make up for pay increases thatwould have been added to their retirement benefit had they stayed atChevronTexaco or ConocoPhillips, and (2) approximate the extent to which theircontinued employment at ChevronTexaco or ConocoPhillips would have resulted ina more favorable early retirement factor.

 

*Supplemental Executive RetirementPlan*

 

The supplementalexecutive retirement plan applies to designated officers and key executives whoreceive a retirement benefit under the retirement plan and who have had theamount of that benefit reduced due to required limitations under the InternalRevenue Code, or by reason of deferral of compensation under CPChem’s executivedeferred compensation plan, or as a result of management incentive bonusamounts not being recognized as compensation under the retirement plan.  The eligible employee’s benefit under this planis equal to the difference between (1) the amount the employee would havereceived under the retirement plan had the amount been calculated (a) withoutregard to the limitations imposed by the Internal Revenue Code; (b) as ifamounts deferred by the employee under CPChem’s executive deferred compensationplan had been paid, (c) by treating management incentive bonus amounts ascompensation; and (d) with respect to an employee that came from ConocoPhillipson January 1, 2001, by “decoupling” that employee’s compensation payable asbonus and the amount payable as base pay for purposes of determining highestaverage earnings under the retirement plan; and (2) the amount of theemployee’s retirement benefit payable under the retirement plan.

 

The paymentoptions under the supplemental executive retirement plan are generally the sameas those offered under the CPChem retirement plan.

* *

*Estimated Retirement Benefits*

 

The estimatedannual benefits payable upon retirement at normal retirement age (defined inthe retirement plans as age 65) for each of the named executive officers are asfollows:

 
| **Name**           | ** ** | **Estimated  Annual  Retirement Benefits** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| James  L. Gallogly |       | $                                          | 250,421    |   |
| Greg  C. Garland   |       | 152,469                                    |       |
| Craig  B. Glidden  |       | 107,598                                    |       |
| Rick  L. Roberts   |       | 116,405                                    |       |
| Tim  G. Taylor     |       | 131,915                                    |       |
|                    |            |                                            |            |  |

 

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**Director Compensation**

 

Neither the ClassC nor Class P directors of CPChem receive any additional compensation for theirservice as directors.

 

**Employment Agreements**

 

None of the namedexecutive officers have employment, termination of employment, or change incontrol agreements with CPChem.

 

**Compensation Committee Interlocksand Insider Participation**

 

Mr. Lowe, whocurrently serves as Executive Vice President, Planning, Strategy and CorporateAffairs for ConocoPhillips, served as a voting member of the CompensationCommittee during 2004.  Ms. Yarrington,who currently serves as Vice President, Policy, Government and Public Affairsat ChevronTexaco, also served as a voting member of the Compensation Committeeduring 2004.  Mr. Gallogly and Mr.Don F. Kremer, Vice President, Human Resources, served as non-voting membersduring 2004.  Neither Mr. Lowe nor Ms.Yarrington has served as an officer or employee of CPChem or any of itssubsidiaries.

 

**Item 12**.  Security Ownership of Certain Beneficial Owners andManagement

 

CPChem is alimited liability company, owned 50% each by ChevronTexaco and ConocoPhillipseither directly or indirectly through their wholly owned subsidiaries.  The ownership interests in CPChem as of thedate of this report are as follows:

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

** **

**Item 13**.  Certain Relationships and Related Transactions

 

All of the relatedtransactions described below are on terms substantially no more favorable thanthose that would have been agreed upon with third parties on an arm’s-lengthbasis.  See Part II - Item 8. FinancialStatements and Supplementary Data – Notes 3, 9 and 15 for information regardingaggregate amounts paid in transactions with affiliated parties.

 

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*Services Agreements. *CPChem is a party to agreements with ChevronTexaco andConocoPhillips, under which they provide CPChem with personnel, equipment andtechnology primarily for research, technology development, laboratory services,and engineering and project management support. ChevronTexaco and ConocoPhillips charge CPChem for these services accordingto the rates agreed upon in these services agreements.  CPChem has also entered into other agreementswith affiliates of ChevronTexaco and ConocoPhillips that cover the provision ofadditional services including, but not limited to, security, procurement andpipeline operating services.

 

*Intellectual PropertyAgreements. *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 each,assigning or exclusively licensing rights to certain intellectual propertyowned by ChevronTexaco and ConocoPhillips.

 

*Common Facility Operating Agreementsand Supply Agreements. *CPChem is a party to Common Facilities OperatingAgreements with ConocoPhillips and ChevronTexaco related to the operation ofthe chemical facilities located within or near their refineries at Sweeny,Borger and Pascagoula.  CPChem is also aparty to supply agreements with ChevronTexaco and ConocoPhillips under whichCPChem purchases various products produced in these refineries, andChevronTexaco and ConocoPhillips purchase various products that CPChem producesin its chemical facilities.

 

*Feedstock Agreements. *CPChem is a party to agreements with each ofConocoPhillips, Duke Energy Field Services, LLC (an affiliate ofConocoPhillips) and Dynegy Inc. (an affiliate of ChevronTexaco) under whichthey supply CPChem with certain natural gas liquid feedstocks.  CPChem is also a party to agreements withChevronTexaco and ConocoPhillips under which CPChem supplies olefin products tothem.

 

*Sales Agency Agreements. *CPChem is a party to sales agency agreements withConocoPhillips under which it markets and sells certain chemical productsproduced by ConocoPhillips at its Borger 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 and reference fuels,gas odorants, sulfiding agents and extractive solvents to ConocoPhillips,ChevronTexaco and Duke Energy Field Services, LLC.

 

**Item 14**.  Principal Accounting Fees and Services

 

***Fees.***  Aggregate fees for professionalservices rendered by CPChem’s independent auditor, Ernst & Young LLP, wereas follows:

** **
| ** **              | ** ** | **Years  ended December 31,** | ** ** |
|-------------------------|------------|-------------------------------|------------|
| **Dollars**             | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Audit  fees (a)         |       | $                             | 899,415    |   | $ | 598,200 |   |
| Audit-related  fees (b) |       | 133,082                       |       | 131,200 |   |
| Tax  fees (c)           |       | 72,895                        |       | 105,343 |   |
| Other  fees (d)         |       | 243                           |       | — |   |
| Total  fees             |       | $                             | 1,105,635  |   | $ | 834,743 |   |

 

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

 

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(b)         Audit-related fees represent fees billedfor professional 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)         Other fees in 2004 represent charges fora training seminar sponsored by Ernst & Young LLP.

 

CPChem and itsAudit Committee are committed to ensuring the independence of its independentauditor as related to CPChem.  As such,it is CPChem’s policy that all engagements of Ernst & Young LLP by CPChembe pre-approved by the Audit Committee, with the exception that the AuditCommittee has granted CPChem’s Senior Vice President, Chief Financial Officerand Controller the pre-approval authority to engage Ernst & Young LLP forcertain non-audit services in an amount of up to $5,000 per engagement, limitedto a maximum of $50,000 per year in the aggregate.

 

**PARTIV**

 

**Item 15**.  Exhibits and Financial Statement Schedules

** **

**(a)(1)**                   The financial statements listed in the Index to Financial Statements onpage 31 are filed as part of this annual report.  

 

**(a)(2)**                   The following schedule is presented as required.  All other schedules are omitted because theinformation is not applicable, not required or has been furnished in theConsolidated Financial Statements or Notes thereto.

 

**Chevron Phillips Chemical Company LLC**

**Schedule II – Valuation and Qualifying Accounts**

 
| **Millions**                  | ** ** | **Allowance  for Doubtful  Accounts (a,b)** | ** ** | **Deferred  Income  Tax Valuation  Allowance (a,c)** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|
| Balance  on December 31, 2001 |       | $                                           | 6          |                                                 | $          | 175 |   |
| Additions                     |       | 4                                           |       | 6                                                    |       |
| Deductions                    |       | (3                                          | )          | —                                               |       |
| Balance  on December 31, 2002 |       | 7                                           |       | 181                                                  |       |
| Additions                     |       | 4                                           |       | 9                                                    |       |
| Deductions                    |       | (4                                          | )          | —                                               |       |
| Balance  on December 31, 2003 |       | 7                                           |       | 190                                                  |       |
| Additions                     |       | 3                                           |       | 1                                                    |       |
| Deductions                    |       | (3                                          | )          | —                                               |       |
| Balance  on December 31, 2004 |       | $                                           | 7          |                                                 | $          | 191 |   |

 

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(a)  Additions were charged to expense.          

(b)  Deductions represent receivables written offless recoveries, if any.

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

 

**(a)(3)**                    The exhibits listed in the Index of Exhibits on pages 115 and 116 arefiled as part of this annual report.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 

 
|                    |     | CHEVRON PHILLIPS  CHEMICAL COMPANY LLC  |
|-------------------------|----------|-----------------------------------------|
| * *                | * * | * *                                |
| Date: February 25, 2005 | * * | * *                                | */s/  Greg G. Maxwell* | * * |
|                    |     | Greg G. Maxwell                         |
|                    |     | Senior Vice  President,                 |
|                    |     | Chief Financial  Officer and Controller |

 
| **Signature**                 | ** ** | **Title**                               | ** ** | **Date**           |
|-------------------------------|------------|-----------------------------------------|------------|--------------------|
|                          |       |                                    |       |               |
| */s/  James L. Gallogly*      |       | President and Chief  Executive Officer  |       | February 25,  2005 |
| James L. Gallogly             |       |                                    |       |               |
|                          |       |                                    |       |               |
|                          |       |                                    |       |               |
| */s/  Greg G. Maxwell*        |       | Senior Vice President,                  |       | February 25,  2005 |
| Greg G. Maxwell               |       | Chief Financial Officer  and Controller |       |               |
|                          |       |                                    |       |               |
|                          |       |                                    |       |               |
| */s/  John E. Lowe*           |       | Director                                |       | February 25,  2005 |
| John E. Lowe                  |       |                                    |       |               |
|                          |       |                                    |       |               |
|                          |       |                                    |       |               |
| */s/  Jim W. Nokes*           |       | Director                                |       | February 25,  2005 |
| Jim W. Nokes                  |       |                                    |       |               |
|                          |       |                                    |       |               |
|                          |       |                                    |       |               |
| */s/  Patricia E. Yarrington* |       | Director                                |       | February 25,  2005 |
| Patricia E. Yarrington        |       |                                    |       |               |
|                          |       |                                    |       |               |
|                          |       |                                    |       |               |
| */s/  Gary G. Yesavage*       |       | Director                                |       | February 25,  2005 |
| Gary G. Yesavage              |       |                                    |       |               |

 

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**SupplementalInformation to be Furnished with Reports Filed Pursuant to Section 15(d) of theSecurities Exchange Act of 1934 by Registrants which have not RegisteredSecurities Pursuant to Section 12 of the Securities Exchange Act of 1934:**

 

No annual reportto security holders covering the Registrant’s last fiscal year has been sent tothe Registrant’s security holders and no proxy statement, form of proxy orother proxy soliciting material has been sent to more than ten of the Registrant’ssecurity holders with respect to any annual or other meeting of securityholders.  No such report or proxymaterial is expected to be furnished to security holders subsequent to thefiling 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).                                                                                                                                                                                                                                       |

 

115

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**INDEX OFEXHIBITS**(continued)

 
| **Exhibit No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| *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           |       | 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,  Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia, The Bank of  Tokyo-Mitsubishi Ltd., and certain lenders from time to time thereto, dated as  of July 30, 2004 (Exhibit No. 10.1 to CPChem’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2004). |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.9            |       | Chevron Phillips  Chemical Company LP Executive Financial Planning Program.                                                                                                                                                                                                                                                                                                                                                                                        |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1            |       | Subsidiaries of the  Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1            |       | Certification of Chief  Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                                                                                                                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2            |       | Certification of Chief  Financial Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                                                                                                                                                                                                                      |

 

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* Incorporated by reference as indicated.

 

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