**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

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

 

###### ****

 

###### **Form 10-K**

 
| **ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**                                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                |
|                                                                                                                                                                                                                                   |
| **For the Fiscal Year  Ended December 31, 2005**                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                             |
| **or**                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                   |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**                                                                                                                                                                |
| **THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                |
|                                                                                                                                                                                                                                   |
| **For the Transition Period from                  to                ** |

 

# **Commission File No. 333-59054-01**

 

###### **Chevron Phillips ChemicalCompany LLC**

(Exactname of Registrant as specified in its charter)

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

##### ** **

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

**TheWoodlands, TX 77380-1498**

(Address of principal executiveoffices, including zip code)

 

**(832) 813-4100**

(Registrant’stelephone number, including area code)

 

Securities registered pursuantto Section 12(b) of the Act:

**None**

** **

Securities registered pursuantto Section 12(g) of the Act:

# **None**

# ** **

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

 

**Yes****o      No****ý**

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.

 

**Yes****ý      No****o**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has been subjectto such filing requirements for the past 90 days.

 

**Yes****o      No****ý**

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 
| **Large accelerated filer****o** | ** ** | **Accelerated filer****o** | ** ** | **Non-accelerated filer****ý** |
|----------------------------------|------------|----------------------------|------------|-------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).

 

**Yes****o      No****ý**

 

The aggregate market value of the voting and non-voting common equitystock held by non-affiliates of the registrant at June 30, 2005:

 

# **None**

 

**DOCUMENTSINCORPORATED BY REFERENCE:**

 

List hereunder the following documents ifincorporated by reference and the Part of the Form 10-K into whichthe document is incorporated:

 

# **None**

 

----

 

TABLE OF CONTENTS

 
|      | **PART I**                                                                                                    | ** ** |
|-----------|--------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.   | Business                                                                                                           | 2          |
| Item  1A. | Risk  Factors                                                                                                      | 16         |
| Item 1B.  | Unresolved Staff Comments                                                                                          | 19         |
| Item  2.  | Properties                                                                                                         | 19         |
| Item  3.  | Legal  Proceedings                                                                                                 | 19         |
| Item 4.   | Submission of Matters to a Vote of Security Holders                                                                | 20         |
|      |                                                                                                               |       |
|      | **PART II**                                                                                                   | ** ** |
| Item 5.   | Market for Registrant’s Common Equity, Related Stockholder Matters  and Issuer Purchases of Equity Securities | 20         |
| Item 6.   | Selected Financial Data                                                                                            | 21         |
| Item 7.   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        | 22         |
| Item 7A.  | Quantitative and Qualitative Disclosures  About Market Risk                                                        | 31         |
| Item 8.   | Financial Statements and Supplementary Data                                                                        | 32         |
| Item 9.   | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure                              | 105        |
| Item 9A.  | Controls and Procedures                                                                                            | 105        |
| Item 9B.  | Other Information                                                                                                  | 105        |
|      |                                                                                                               |       |
|      | **PART III**                                                                                                  | ** ** |
| Item 10.  | Directors and Executive Officers of the  Registrant                                                                | 105        |
| Item 11.  | Executive Compensation                                                                                             | 108        |
| Item 12.  | Security Ownership of Certain Beneficial  Owners and Management                                                    | 113        |
| Item 13.  | Certain Relationships and Related  Transactions                                                                    | 113        |
| Item 14.  | Principal Accounting Fees and Services                                                                             | 114        |
|      |                                                                                                               |       |
|      | **PART IV**                                                                                                   | ** ** |
| Item 15.  | Exhibits, Financial Statement Schedules                                                                            | 115        |

 

### **CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKINGINFORMATION**

### ** **

This annual report contains certain “forward-looking statements.” Suchstatements can generally be identified with words and phrases such as “believes,”“expects,” “anticipates,” “should,” “estimates” or other words and phrases ofsimilar meaning. Where Chevron Phillips Chemical Company LLC (CPChem) expressesan expectation or belief as to future events or results, there can be noassurance that the expectation or belief will result, be achieved or beaccomplished. Where any such forward-looking statement includes a statement ofthe assumptions or bases underlying such forward-looking statement, CPChembelieves such assumptions or bases to be reasonable and to be made in goodfaith. Assumed facts or bases almost always vary from actual results, and thedifferences between assumed facts or bases and actual results can be material,depending on the circumstances. 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; severe weather; accidents; labor relations; political risks; terroristacts; war; changes in foreign and domestic laws, rules and regulations andthe interpretation and enforcement thereof; the effects of accounting rule changesunder generally accepted accounting principles promulgated by variousrule-setting bodies; regulatory decisions relating to taxes, the environmentand human resources; results of operations and the 

 

----

 

financial condition of equityaffiliates; the global economy; results of financing efforts; and overallfinancial market conditions. All forward-looking statements and risk factors inthis annual report are qualified in their entirety by the cautionary statementscontained herein. Unpredictable or unknown factors not discussed herein couldalso have material adverse effects on such forward-looking statements. CPChemdoes not undertake to update, revise or correct any of the forward-lookinginformation.

 

# **PART I**

# ** **

**Item 1.   Business**

 

Chevron Phillips Chemical Company LLC, a limited liability companyformed under Delaware law, manufactures and markets a wide range ofpetrochemicals on a worldwide basis through its subsidiaries and equityaffiliates, with manufacturing facilities located in the United States, PuertoRico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. ChevronCorporation (“Chevron,” formerly ChevronTexaco Corporation) and ConocoPhillips(collectively, the “members” or the “owners”) each own 50% of CPChem.

 

CPChem is governed by its Board of Directors (the “Board”), comprisedof six representatives, under the terms of a limited liability companyagreement. Chevron and ConocoPhillips each have two voting representatives, andthe chief executive officer and the chief financial officer of CPChem arenon-voting representatives. Certain major decisions and actions require theapproval of the Board. All decisions and actions of the Board require theapproval of at least one representative of both Chevron and ConocoPhillips.

 

CPChem is a “voluntary filer” of quarterly,annual and other periodic reports with the Securities and Exchange Commission(the “SEC”). These reports are available to the public at no charge throughCPChem’s website at *www.cpchem.com.*,or alternatively, through the SEC’s website at *www.sec.gov.*Information contained on CPChem’s website is not considered part ofthis Annual Report on Form 10-K.

 

CPChem’s business is structured around three primary operatingsegments: Olefins & Polyolefins, Aromatics & Styrenics, andSpecialty Products. For a list of the principal products of these segments, seethe tables included in each segment’s discussion. See also “Part II - Item 8. Financial Statements andSupplementary Data - Note 16.Segment and Geographic Information” for financial data by segment andgeographic location. Capacity information presented in this report is as of December 31,2005 unless otherwise indicated.

 

***Olefins &Polyolefins***

 

This segment produces andmarkets ethylene, propylene, and other olefin products which are primarilyconsumed internally for the production of polyethylene, normal alpha olefins(NAO), polypropylene and polyethylene pipe. CPChem has five olefin and/orpolyolefin production facilities located in Texas, eight domestic pipeproduction facilities and one domestic pipe fittings production facility. CPChemalso has one pipe production facility in Mexico. In addition, CPChem ownsinterests in a polypropylene facility located at the Pasadena Plastics Complexin Texas, a high-density polyethylene plant located at CPChem’s Cedar Bayoufacility in Baytown, Texas, an ethylene, polyethylene and 1-hexene facility inQatar, and polyethylene facilities in Singapore and China.

 

An ethylene plant at theSweeny facility in Old Ocean, Texas, idle since 2001, was restarted in thesecond quarter of 2005, and the Waxahachie, Texas pipe production facility waspermanently closed in the third quarter of 2005.

 

2

----

 

***Olefins & Polyolefins****(continued)*

 
| **Product**                                   | ** ** | **Approximate   Net Capacity** | ** ** | **Primary Uses**                                                                                                                                                                           |
|-----------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                    | ** ** | **(million  pounds per year)** | ** ** | ** **                                                                                                                                                                                 |
| Ethylene                                      |       | 8,139                          |  (1)  | Basic  building block for plastics and elastomers, and also a raw material for  chemicals used to make paints, detergents and antifreeze.                                                  |
|                                          |       |                           |       |                                                                                                                                                                                       |
| Polyethylene                                  |       | 6,110                          |  (1)  | 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 |       | 558                            |       | Rigid and flexible plastic pipe 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                            |  (1)  | Thermoplastic polymer used in fibers,  films, automobiles and housewares.                                                                                                                  |
|                                          |       |                           |       |                                                                                                                                                                                       |
| Normal alpha olefins                          |       | 1,549                          |  (1)  | A group of chemicals used in plasticizer  alcohols, polyethylene, surfactants and synthetic lubricants and additives.                                                                      |
|                                          |       |                           |       |                                                                                                                                                                                       |
| Polyalphaolefins                              |       | 104                            |       | Base stock for synthetic lubricants.                                                                                                                                                       |

 

----

(1) Includes CPChem’s share of equity affiliates’ capacities

 

*Competition*.Olefins and polyolefins are delivered into the worldwide commodity chemicalmarkets. Competitive factors include price, product quality and performance,product deliverability and customer service. CPChem generally ranks within thetop ten ethylene and polyethylene producers worldwide based on publishedproduction capacities. Other major producers include Dow Chemical Company(Dow), Equistar Chemicals LP (Equistar), ExxonMobil Chemical Company(ExxonMobil), Ineos Group Holdings plc (Ineos) and Shell Chemical Company(Shell). CPChem’s NAO technology allows it to produce a wide range ofhydrocarbon products that compete in many different markets. Other significantproducers of NAO are Ineos, Shell and Sasol Ltd. Major producers ofpolyalphaolefins (PAO) include Ineos and ExxonMobil.

 

*Distribution.*Dependingon the particular product and location of the production facility, Olefins &Polyolefins’ products are shipped by trucks, railcars, barges, parcel tankers,ships and CPChem and third-party pipelines.

 

3

----

 

**Ethylene**

 

By volume, ethylene is the most widely consumed petrochemical productin the world, according to Chemical Market Associates, Inc., a companythat specializes in petrochemical industry data and consulting services. Domestically,ethylene is produced at CPChem’s Sweeny facility in Old Ocean, Texas, at itsCedar Bayou facility in Baytown, Texas and at its Port Arthur, Texas facility. Internationally,CPChem produces ethylene through its 49%-owned joint venture, Qatar ChemicalCompany Ltd. (Q-Chem), located in Mesaieed, Qatar. CPChem’s share of thecombined ethylene capacity of its domestic and international facilities isapproximately 8.1 billion pounds per year.

 

*Supply/Feedstock Sources.*Ethylenecan be produced from ethane, propane, butane, natural gasoline or certainrefinery liquids such as naphtha and gas oil. The two most common ethylenefeedstocks are ethane, because of its high ethylene yield, and naphtha, becauseof its availability and transportability. Much of CPChem’s ethylene productionis based on ethane/propane feedstock, however certain domestic facilities havevarying degrees of flexibility to process butane and naphtha. The price ofethane tends to correlate with the price of natural gas, while the prices ofthe other feedstocks tend to correlate more with the price of crude oil.

 

CPChem has market-based purchase contracts with Duke Energy FieldServices, LLC (an affiliate of ConocoPhillips) and Targa Resources, Inc.,which together cover over 75% of CPChem’s expected domestic ethylene feedstockneeds. The agreement with Duke Energy Field Services, LLC expires in 2014 andthe agreement with Targa Resources, Inc. expires in 2008. Contracts withother suppliers provide the remainder of feedstock needs. These contracts canbe long-term or monthly, or daily contracts made on a spot basis.

 

*Marketing.*Polyethylene accounts for more than one-half of all globalethylene consumption. CPChem uses approximately 80% of its U.S. ethylene in itsproduction of polyethylene, NAO and styrene. The remainder of domestic ethyleneproduction is sold on the merchant market, largely under long-term contracts. CPChem’sethylene storage capacity is approximately one billion pounds at its Texascavern storage facilities in Clemens and Mont Belvieu. Internationally, all ofthe ethylene produced by Q-Chem is consumed internally in its production ofpolyethylene and 1-hexene.

 

**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 polyethylenecapacity of its domestic and international facilities is approximately 6.1billion pounds per year.

 

*Supply/FeedstockSources.*The primary raw material for polyethylene productionis ethylene, which typically represents the majority of polyethylenemanufacturing costs. CPChem producesethylene in excess of its polyethylene production requirements. Buteneand 1-hexene, also used in the production of polyethylene, are produced at theCedar Bayou facility. The complex in Qatar produces all of the ethylene and 1-hexene required for the production of polyethyleneat that location.

 

*Marketing.*At December 31, 2005, approximately 80% of CPChem’s netpolyethylene capacity was located in the United States, along the Texas GulfCoast. 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. Production from CPChem’s plants in Singapore andChina is marketed primarily in the Far East. CPChem acts as an agent for thesale of substantially all of Q-Chem’s polyethylene production. The polyethyleneis sold in Western Europe, Australia, Africa and Asia through CPChem’sestablished marketing network.

 

4

----

 

CPChem’s largest polyethylene customer is its Performance Pipe division.This division manufactures polyethylene pipe, fittings and conduit in nineplants located throughout the United States and one plant in Mexico.

 

In addition, CPChem sells a significant amount of HDPE to customers whoare suppliers of bottles to large consumer product manufacturers, dairies andbottled water suppliers. CPChem also supplies HDPE for rigid productapplications such as pails, paint cans, margarine tubs and stadium cups. Durableapplications include pipe, sheeting for landfill liners and automotive fueltanks.

 

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

 

**Propylene**

 

CPChem produces propylene at its Cedar Bayou,Port Arthur and Sweeny facilities. The combined propylene capacity of thesefacilities is approximately 2.9 billion pounds per year.

 

*Supply/Feedstock Sources.*Approximatelyone-half of CPChem’s propylene is produced as a co-product of ethyleneproduction, the amount of which varies with the type of feedstock used. Theremainder of CPChem’s propylene production comes from the processing ofrefinery-grade propylene, which is converted into polymer-grade product. CPChempurchases approximately 30% of its refinery-grade propylene from CPChem’sowners and the remainder from a variety of suppliers, both under short-term andlong-term contracts.

 

*Marketing.*Polymer-grade propylene is sold tomajor chemical manufacturers, the majority of which are polypropylene producers.Approximately 25% of CPChem’s propylene is sold to Phillips SumikaPolypropylene Company, a CPChem joint venture with production facilitieslocated at the Pasadena Plastics Complex. Propylene is also sold to externalU.S. 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.

 

**Alpha Olefins**

 

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

 

*Supply/FeedstockSources.*CPChem converts ethylene into NAO using aproprietary CPChem process. CPChem produces substantially all of the ethylenerequired in its domestic production of NAO. Ethylene is produced at the Sweeny,Cedar Bayou and Port Arthur facilities. CPChem’s joint venture in Qatarproduces all of the ethylene required for its production of 1-hexene. PAO isproduced from fractions of NAO produced at the Cedar Bayou facility.

 

*Marketing.*CPChem sells NAO and PAO primarily to other chemicalcompanies who use them to produce a broad range of intermediate products. CPChemalso uses a portion of its own production of NAO in the manufacturing ofpolyethylene and PAO. North America and Europe are the largest geographicmarkets for NAO and PAO.

 

5

----

 

# ***Aromatics & Styrenics***

# ** **

This segment manufactures and markets aromatics products such asbenzene, styrene, paraxylene and cyclohexane. This segment also manufacturesand markets polystyrene as well as styrene-butadiene copolymers (SBC) soldunder the trademark K-Resin®. Production facilities are located inMississippi, Louisiana, Texas, Ohio, Puerto Rico and China. CPChem also ownsequity interests in an aromatics facility in Saudi Arabia and in a K-Resin®SBC facility in South Korea. In October 2005, CPChem sold its Port Arthur,Texas cumene production unit, which was idled in 2003.

 
| **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                            |  (1,2) | 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.                                                                     |

 

----

(1) Includes CPChem’s share of an equity affiliate’s capacity

(2) Excludes70 million pounds of idled capacity at the Pasadena Plastics Complex

 

*Competition.*Aromatics & Styrenics’ products aresold into global commodity chemical markets. Competitive factors includeprice, product quality and performance, product deliverability and customerservice. CPChem generally ranks within the top ten******producers and competes with other largeproducers including Dow, Equistar, ExxonMobil, Ineos and Shell.

 

*Distribution.*Dependingon the particular product and location of the production facility, Aromatics & Styrenics’ productsare shipped by trucks, railcars, barges, ships and pipelines.

 

**Benzene**

 

Domestically, benzene is produced at CPChem’s Pascagoula, Mississippifacility. Internationally, CPChem produces benzene through its joint venturefacility 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 its proprietary Aromax®technology for its benzene production.

 

6

----

 

*Supply/Feedstock Sources.*Thetwo main feedstocks for benzene production are pyrolysis gasoline andreformate, both of which are intermediate products of petroleum refining andpetrochemical plants. These two feedstocks account for over 75% of benzeneproduction worldwide. Domestically, CPChem purchases benzene feedstocks fromits owners’ refineries, located in proximity to CPChem’s benzene plant, andfrom various other sources. In Saudi Arabia, CPChem’s 50%-owned affiliate has along-term feedstock agreement with a producer that owns a refining complexlocated near the Al Jubail facility.

 

*Marketing.*CPChemis a net consumer of benzene in the U.S. Gulf Coast region. This allows CPChemto routinely operate its benzene plant at full capacity, preserving a low-costposition, even during times of reduced demand for derivatives. At CPChem’sjoint venture plant in Saudi Arabia, approximately 60% of the benzene producedis consumed by the joint venture’s cyclohexane plant located at the samefacility. The balance of benzene is sold under short-term and long-termcontracts.

 

**Styrene**

 

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

 

*Supply/FeedstockSources.*Styrene is made from benzene and ethylene. Most ofthe benzene used at CPChem’s styrene plant is produced internally at CPChem’sPascagoula facility, with the remainder acquired through contract purchases. Allof the ethylene required at the St. James plant is supplied internally.

 

*Marketing.*CPChem currently uses about one-third of its annual styreneproduction in the production of polystyrene at its Marietta, Ohio plant and asmaller amount in its production of K-Resin® SBC. The balance ofproduction is sold in the merchant market. CPChem generally markets styrene inall regions of the world and sells almost all of its styrene production through short-term and long-term contracts.

 

**Polystyrene**

 

Polystyrene is produced at CPChem’s facilities in Marietta, Ohio andZhangjiagang, China. The combined polystyrene capacity of these facilities isapproximately 1.0 billion pounds per year. Both plants have the ability toproduce high-impact and general purpose polystyrene.

 

*Supply/FeedstockSources.*Polystyrene is manufactured primarily from styrene. Thestyrene consumed at Marietta is normally supplied by CPChem’s St. James styrenefacility. The China plant is supplied by styrene from the St. James plant andfrom third parties.

 

*Marketing.*CPChem sells a variety of polystyrene grades. Most of CPChem’spolystyrene business in the U.S. is conducted on a short-term and long-termcontract basis, while business in China follows the local practice of beingconducted primarily in the spot market.

 

**Paraxylene**

 

CPChem has a production capacity of approximately 1.0 billion pounds ofparaxylene per year at its Pascagoula plant. The Guayama, Puerto Rico plant,which has a capacity of approximately 715 million pounds of paraxylene peryear, became operational in 2003 after being idled in 2001 for economic reasons.The plant is currently being utilized in a campaign mode due to marketconditions.

 

7

----

 

*Supply/FeedstockSources.*Mixed xylenes are the feedstock for the productionof paraxylene. Mixed xylenes are the end product of either reforming operationsthat are part of the motor fuels production process in refineries, or the endproduct of the conversion of toluene, another intermediate refining product,into benzene and xylenes. Mixed xylenes are available on the merchant market inthe forms of both gasoline blending stocks and paraxylene feedstocks. CPChempurchases mixed xylenes from its owners and other suppliers on a contract basis.During periods of high paraxylene demand, mixed xylenes are also purchased onthe spot market.

 

*Marketing.*In North America, afew very large consumers buy most of the paraxylene available in the market. CPChemcurrently sells its paraxylene production to major producers of polyester inNorth America and Europe under long-term contracts, and also periodically sellsinto the Asian market.

 

**Cyclohexane**

 

CPChemis the largest marketer of cyclohexane in the world. Marketed volumes includethose produced at the Port Arthur and Saudi Arabian plants, of which CPChem’sshare of the combined capacity is approximately 1.2 billion pounds per year, aswell as certain volumes produced by ConocoPhillips for which CPChem hasmarketing rights. CPChem owns a 50% interest in the Saudi Arabian facility andhas an obligation to market all of the cyclohexane exported outside of theMiddle East from that facility. CPChem also has the exclusive right to marketthe cyclohexane produced by ConocoPhillips at its Sweeny refinery.

 

*Supply/Feedstock Sources.*The raw materials for cyclohexane are benzeneand hydrogen. CPChem consumes more benzene than it produces. Remaining benzenerequirements are met through short-term and long-term contracts and spotpurchases. Hydrogen is currently obtained from CPChem’s Port Arthur facilityand outside sources.

 

*Marketing.*Most of CPChem’scyclohexane is sold in North America and Europe through sales contracts thatare typically long-term arrangements. CPChem also has access to the Asianmarket through its joint venture plant in Saudi Arabia.

 

**K-Resin® Styrene-ButadieneCopolymer**

 

CPChem produces an SBC sold under the trademark K-Resin®. Productioncomes from the Pasadena Plastics Complex and CPChem’s K R Copolymer Co., Ltd.joint venture plant located in Yochon, South Korea. CPChem’s share of thecombined K-Resin® SBC capacity of the facilities is approximately269 million pounds per year.

 

*Supply/Feedstock Sources.*The main feedstocks for K-Resin® SBC are styreneand butadiene. CPChem produces styrene at its St. James facility for domesticproduction, and secures butadiene on a long-term contract basis from a singleproducer. Other sources of butadiene are available if necessary. In SouthKorea, feedstocks are secured through long-term contracts with a company inwhich CPChem’s joint venture partner, Daelim Industrial Co., Ltd., has a 50%interest.

 

*Marketing.*CPChem conducts its K-Resin® SBC marketingprimarily by working with customers to create new K-Resin® SBCapplications, to improve existing applications and to improve customers’processing capabilities. CPChem has a sales and technical support organization,comprised of direct representatives, and third-party agents and distributors,that is active in North America and internationally. Some product is sold undermulti-year agreements. The majority of K-Resin® SBC, however, issold based on individual sales orders.

 

8

----

 

***Specialty Products***

 

This segment manufactures and markets a variety of specialty chemicalproducts, including organosulfur chemicals, solvents, catalysts, drillingchemicals, mining chemicals and high-performance polyphenylene sulfide polymersand compounds sold under the trademark Ryton®. Production and/orcompounding facilities are located in Texas, Belgium and 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 |       | 29                             |       | Additives  used in water-based drilling fluids for controlling unstable shale formations  and increasing hole lubricity during oil and gas well drilling.                                                                    |

 

*Competition.*This segment’s products compete in smaller, niche marketswith fewer producers as compared with other CPChem products.

 

*Distribution.*Dependingon the particular product and location of the production facility, product isshipped by trucks, railcars and ships.

 

**Specialty Chemicals**

 

Specialty chemicals consist of a variety of organosulfur chemicals,fine chemicals and other specialties. Volumes of any given product are notlarge when compared to the basic commodity chemical products like ethylene andpolyethylene. However, in the aggregate, specialty chemicals can account for asignificant portion of the earnings of the Specialty Products segment. Productionfacilities are located in Borger and Conroe, Texas, and Tessenderlo, Belgium.

 

*Supply/FeedstockSources*. Specialty chemicals production depends on theavailability of a number of specialized streams of products and co-productsthat are the result of petroleum refining and petrochemical productionprocesses. Feedstocks include hydrogen sulfide and a variety of olefins andother hydrocarbon streams. In many cases, CPChem acquires these feedstocksthrough long-term arrangements with its owners from facilities that areintegrated with CPChem’s production facilities.

 

9

----

 

*Marketing.*Specialtychemicals are generally sold into smaller, niche markets, as compared to otherproducts produced or marketed by CPChem. The number of suppliers and consumersof any given product can be limited. As a result, many of CPChem’s products aresold under long-term contracts. Because both the customer and application basesare diverse, the specialty chemicals business is generally less cyclical thanthe commodity chemicals business.

 

Specialty chemicals are sold throughCPChem’s global marketing network. This network provides sales, distributionand technical services to customers.

 

**Ryton**®**Polyphenylene Sulfide**

 

CPChem produces high-performance polyphenylene sulfide (PPS) polymersand compounds sold under the trademark Ryton®. Compounds arecombinations of Ryton® polymer and various additives, designed tohave specific properties. CPChem currently has an annual production capacity ofapproximately 22 million pounds of Ryton® polymer at its Borger,Texas facility. Substantially all Ryton® polymer produced at theBorger facility is currently used to produce Ryton® compounds atCPChem’s compounding facility in La Porte, Texas, its plastics compounds anddevelopment center in Singapore and its Kallo compounding facility inKallo-Beveren, Belgium. Ryton® compounds are sold to third parties. Thecombined capacity of the facilities is approximately 44 million pounds of Ryton®compounds per year.

 

CPChem’s Board has granted preliminary approval to construct a new 22million pound-per-year Ryton® PPS plant next to CPChem’s existingPPS plant in Borger, Texas. It is expected that final Board approval will besought in 2006, with operational start-up anticipated in early 2008.

 

*Supply/FeedstockSources.*The feedstocks for Ryton® polymer aresubstances such as caustic, sodium hydrosulfide, paradichlorobenzene and otherchemicals and solvents that are generally available in substantial quantitieson the open market. CPChem has a number of suppliers who provide thesematerials under either long-term or renewable contracts. The additives used inthe compounding process are generally purchased at locations close to CPChem’scompounding facilities.

 

*Marketing*.Ryton® PPS polymers and compounds are sold through CPChem’s globalmarketing network. CPChem’s compoundingfacilities are regionally located, enhancing global sales and distributionefforts. The customer base includes automotive, appliance and consumer electronics manufacturers. Productsare generally sold based on individualsales orders.

 

10

----

 

**Properties and ManufacturingFacilities**

 

CPChemcurrently leases the office space for its headquarters located in TheWoodlands, Texas and also owns or leases administrative, technical and salesoffice space in various other locations. CPChem, including its equityaffiliates, has 31 manufacturing facilities located in eight countries. Thefollowing table provides information regarding principal manufacturingfacilities, business segments served, principal products and approximate grossannual production capacities at December 31, 2005.

 
| **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                           |       |
| 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                             |       | 1,500                           |       |
|                      |       | Olefins & Polyolefins |       | Polyalphaolefins                                 |       | 104                             |       |
|                      |       | Olefins & Polyolefins |       | Linear-low, low- and high-  density polyethylene |       | 1,900                           |       |
|                      |       |                           |       |                                             |       |                            |       |
| Orange Chemical Facility  |       | Olefins & Polyolefins |       | High-density polyethylene                        |       | 930                             |       |
| Orange,  Texas            |       |                           |       |                                             |       |                            |       |
|                      |       |                           |       |                                             |       |                            |       |
| Port Arthur Facility      |       | Olefins & Polyolefins |       | Ethylene                                         |       | 1,750                           |       |
| Port Arthur,  Texas       |       | Olefins & Polyolefins |       | Propylene                                        |       | 780                             |       |
|                      |       | Aromatics & Styrenics |       | Cyclohexane                                      |       | 920                             |       |
|                      |       |                           |       |                                             |       |                            |       |
| Drilling Specialties      |       | Specialty Products             |       | Drilling specialty chemicals                     |       | 29                              |       |
| Conroe,  Texas            |       |                           |       |                                             |       |                            |       |
|                      |       |                           |       |                                             |       |                            |       |
| Houston Compounding       |       | Specialty Products             |       | Ryton® PPS compounds                        |       | 15                              |       |
| Facility                  |       |                           |       |                                             |       |                            |       |
| La Porte,  Texas          |       |                           |       |                                             |       |                            |       |
|                      |       |                           |       |                                             |       |                            |       |
| St. James Facility        |       | Aromatics & Styrenics |       | Styrene                                          |       | 2,100                           |       |
| St. James,  Louisiana     |       |                           |       |                                             |       |                            |       |
|                      |       |                           |       |                                             |       |                            |       |
| Pascagoula Facility       |       | Aromatics & Styrenics |       | Paraxylene                                       |       | 1,000                           |       |
| Pascagoula,  Mississippi  |       | Aromatics & Styrenics |       | Benzene                                          |       | 1,540                           |       |
|                      |       |                           |       |                                             |       |                            |       |
| Marietta Facility         |       | Aromatics & Styrenics |       | Polystyrene                                      |       | 770                             |       |
| Marietta,  Ohio           |       |                           |       |                                             |       |                            |       |

 

11

----

 
| **Facility / Location**          | ** ** | **Segment Served**             | ** ** | **Product**                | ** ** | **Approximate  Gross Capacity** | ** ** |
|----------------------------------|------------|--------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | ** **                     | ** ** | ** **                 | ** ** | **(million  pounds per year)**  | ** ** |
| Puerto Rico  Facility            |       | Aromatics & Styrenics |       | Paraxylene                 |       | 715                             |       |
| Guayama,  Puerto Rico            |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Performance Pipe Division   |       | Olefins & Polyolefins |       | Polyethylene pipe, conduit |       | 558                             |       |
| Nine  locations in the United    |       |                           |       | and pipe fittings          |       |                            |       |
| States and  one in Mexico        |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Plastics Compounds &    |       | Specialty Products             |       | Ryton® PPS compounds  |       | 9                               |       |
| Development Center               |       |                           |       |                       |       |                            |       |
| Singapore                        |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Zhangjiagang, China Facility     |       | Aromatics & Styrenics |       | Polystyrene                |       | 220                             |       |
| Zhangjiagang,  China             |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Tessenderlo Chemicals Facility   |       | Specialty Products             |       | Organosulfur chemicals     |       | 70                              |       |
| Tessenderlo,  Belgium            |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Kallo Compounding Facility       |       | Specialty Products             |       | Ryton® PPS compounds  |       | 20                              |       |
| Kallo-Beveren,  Belgium          |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| **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  |       | Olefins & Polyolefins |       | High-density polyethylene  |       | 860                             |       |
| Chemicals (Private) Limited      |       |                           |       |                       |       |                            |       |
| Singapore                        |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Shanghai Golden Phillips    |       | Olefins & Polyolefins |       | High-density polyethylene  |       | 300                             |       |
| Petrochemical Co., Ltd.          |       |                           |       |                       |       |                            |       |
| Jinshanwei,  China               |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Phillips Sumika                  |       | Olefins & Polyolefins |       | Polypropylene              |       | 810                             |       |
| Polypropylene Company            |       |                           |       |                       |       |                            |       |
| Pasadena,  Texas                 |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| Saudi Chevron                    |       | Aromatics & Styrenics |       | Benzene                    |       | 1,180                           |       |
| Phillips Company                 |       | Aromatics & Styrenics |       | Cyclohexane                |       | 620                             |       |
| Al Jubail,  Saudi Arabia         |       |                           |       |                       |       |                            |       |
|                             |       |                           |       |                       |       |                            |       |
| K R Copolymer Co., Ltd.          |       | Aromatics & Styrenics |       | K-Resin® SBC          |       | 115                             |       |
| Yochon,  South Korea             |       |                           |       |                       |       |                            |       |

 

----

(1) Excludes 70 million pounds of idled capacity

 

12

----

 

**Projects**

 

*JCP Project.*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-yearfacility, being built on a site adjacent to the existing aromatics complexowned by Saudi Chevron Phillips Company (SCP), will include feed fractionation,an olefins cracker, and ethylbenzene and styrene monomer processing units. Constructionof the JCP facility will be in conjunction with an expansion of SCP’s benzeneplant, together called “the JCP project.” Financial closing of the estimated$1.2 billion JCP Project occurred in July 2004. Construction began in thefourth quarter of 2004 and operational start-up is anticipated in late 2007. Itis estimated that project completion, as defined in the JCP project’s financingagreements, will be achieved in the first half of 2008.

 

*Q-ChemII Project.*CPChemand Qatar Petroleum announced plans in 2001 for the development of apetrochemical project in Mesaieed, Qatar, designed to produce polyethylene (770million pounds per year) and normal alpha olefins (760 million pounds per year).These plants will be owned by Qatar Chemical Company II Ltd. (Q-Chem II), anequity affiliate that is owned 49% by CPChem and 51% by Qatar Petroleum. Bothplants will be located on a site adjacent to the existing complex owned byQatar Chemical Company Ltd. (Q-Chem). In connection with this project, CPChemand Qatar Petroleum (the “co-venturers”) entered into a separate agreement in2002 with Total Petrochemicals and Qatar Petrochemical Company Ltd.,establishing a joint venture to develop a 2.9 billion-pound-per-year ethylenecracker in Ras Laffan Industrial City, Qatar. The cracker will provide ethylenefeedstock via pipeline to the planned polyethylene and normal alpha olefinsplants.

 

The ethylene cracker andpipeline will be owned by Ras Laffan Olefins Company, a joint venture of Q-ChemII and Qatofin Company Limited (Qatofin). Q-Chem II will own 53.85% of thecapacity rights to the ethylene cracker and pipeline, and the balance will beheld by Qatofin. Collectively, Q-Chem II’s interest in the ethylene cracker andpipeline, and the polyethylene and normal alpha olefins plants are referred toas “the Q-Chem II project.” Financial closing of the Q-Chem II project occurredin November 2005. Construction began in late 2005, with start-upanticipated in late 2008. The project will be financed through limited recourseloans from commercial banks and an export credit agency (collectively, “seniordebt”), and equity contributions and subordinated loans from the co-venturers.

 

*NCP Project.*CPChem received authorizationfrom its Board in the fourth quarter of 2005 for the continued development of athird major project in Saudi Arabia. Preliminary studies are focused on theconstruction of a world-scale ethane/propane cracker and a metathesis unit toproduce ethylene and propylene, as well as downstream units to producepolyethylene, polypropylene, 1-hexene and polystyrene. The request for finalBoard approval of the project is expected in 2007.

 

**Employees**

 

Chevron Phillips Chemical Company LLC and its wholly owned subsidiariesemployed approximately 5,150 people at December 31, 2005. About 89% of theworkforce was employed in North America, 6% in Asia, 4% in Europe and 1% in theMiddle East. Almost one-fifth of all employees are covered under collectivebargaining agreements, and of those covered, none are subject to collectivebargaining agreements that will expire by December 31, 2006. Overall,CPChem believes that its relations with its employees are good.

 

13

----

 

**IntellectualProperty**

 

CPChem’sbusiness 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. WhereCPChem does not possess a necessary technology, it obtains or licenses it fromthird parties. CPChem owned or licensed from its owners the rights toapproximately 2,850 patents and/or patent applications in the United States andabroad at December 31, 2005.

 

CPChemperiodically grants licenses to its technology to third parties. Two of themore significant processes that it licenses are CPChem’s loop slurrypolyethylene and Aromax® aromatics production processes. Licensesgranted for these processes typically provide for royalty payments from thirdparties based on the actual or anticipated volume of product that they mayproduce, payable either in advance of production or as a “running royalty.” Thelicenses for these processes generally provide that any technologies developedby the licensee related to such process shall be licensed to CPChem with theright to sublicense such developments to third parties. This technique, commonin technology licensing, enhances CPChem’s ability to provide customers andlicensees with the most current technology available.

 

CPChem relieson confidentiality agreements and contractual provisions to protect itstechnology that is provided to third parties. 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 toinspect or photograph facilities without permission, and even then only underclose supervision. Appropriate actions are taken to prevent third parties fromdisclosing proprietary data, or otherwise using intellectual property, withoutproper authorization.

 

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

 

**Researchand Development**

 

CPChem hasscientists, process engineers and technical service experts at six****technical centers. The Bartlesville,Oklahoma site provides basic research, pilot plants and product development forpolyethylene, specialty chemicals, Ryton® PPS polymers and compoundsand K-Resin® SBC, and a plastics technical center for all polymerproducts. The Kingwood, Texas technology center focuses on process engineeringin support of all manufacturing as well as all phases of research and processdevelopment for aromatics, NAO, PAO and specialty catalysts. The technologycenter at Orange, Texas provides a plastics technical center and technicalservices for polyethylene. Polystyrene research and technical services arelocated at Marietta, Ohio. International technical support and productdevelopment are provided by the Belgium and Singapore technical centers.

 

Research anddevelopment expense totaled $41 million in 2005, $42 million in 2004 and $55million in 2003. Included in 2003 expense was a $9 million charge related tothe permanent closure of a research and technology pilot plant in Orange,Texas.

 

**EnvironmentalRegulation**

 

CPChem mustcomply with, and is subject to liability under, environmental laws andregulations in the jurisdictions in which it conducts business. Under somelaws, CPChem may be subject to joint and several liability regardingenvironmental contamination on or from properties that it previously owned or

 

14

----

 

operated orcurrently owns or operates. CPChem may also be subject to liability forcontaminated properties where it has disposed of or arranged for disposal ofhazardous substances, or where feedstocks or products that contained hazardoussubstances have been accidentally spilled or released. For further discussion,see “Item 1A. Risk Factors - Extensive environmental, health and safety lawsand regulations impact our operations and assets; compliance with, and/orliability under, these laws and regulations could adversely affect our resultsof operations.”

 

CPChem incurs, and expects to continue to incur, significant costs forcapital improvements and general compliance under applicable environmentallaws, including costs to acquire, maintain and repair equipment dealing withpollution control. By 2007, industrial facilities in the eight counties in andaround Houston, Texas, including certain facilities that CPChem owns, mustcomply with new nitrogen oxide (NOx) emission standards. These new standardsare being phased in between 2003 and 2007. Modifications to existing equipmentand the installation of additional control equipment are required to meet thesenew NOx standards. CPChem expects that total capital expenditures ofapproximately $100 million will be required during this period to comply withthese standards. To date, CPChem has invested approximately $78 million of suchexpenditures ($3 million in 2005).

 

In addition,new regulations were issued in 2004 concerning emissions of highly reactivevolatile organic compounds (HRVOCs). CPChem expects that total capitalexpenditures of approximately $25 million will be required to comply with themonitoring aspects of these regulations. To date, CPChem has investedapproximately $17 million of such expenditures ($15 million in 2005). 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 thatthere is or may be soil or groundwater contamination at some facilities andthat remediation of soil and groundwater contaminated with hazardous substanceswill be required. Undiscounted accrued environmental liabilities totaled $5million at December 31, 2005 and $6 million at December 31, 2004. Therewere no accrued environmental costs associated with discontinued or soldoperations, sites where CPChem had been named a potentially responsible party,or environmental litigation at December 31, 2005 or 2004. Based onavailable information, CPChem believes that the costs that may be incurred toinvestigate and remediate known contamination will not have a material adverseeffect on consolidated results of operations, financial position or liquidity.

 

**InternationalOperations**

 

International operations are exposed to different political, economicand regulatory risks that are not faced by businesses that operate solely inthe United States. Some of CPChem’s operations, including certain of its equityaffiliates, are outside the continental United States, with manufacturingfacilities in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar,Mexico and Belgium. Domestic assets totaled $5.455 billion as of December 31,2005 and net sales from domestic operations were $9.135 billion in 2005. Assetslocated outside of the U.S. as of December 31, 2005 totaled $1.505 billionand net sales from non-U.S. operations were $1.572 billion in 2005. Asset andnet sales calculations were determined based on location of the operation. CPChem’sinternational operations are subject to risks similar to those affecting itsU.S. operations in addition to a number of other risks, including difficultiesin enforcing contractual and intellectual property rights, and impositions orincreases of withholding and other taxes on remittances and other payments bysubsidiaries 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.

 

15

----

 

 

**Item 1A.   RiskFactors**

 

Unless otherwise indicated, “we,” “our,” and “us” as used in this section referto Chevron Phillips Chemical Company LLC and its consolidated subsidiaries. Discussedbelow are the more significant risk factors relating to our business.

 

*Our industry is cyclical and volatile. Profitability may be adverselyaffected by some external factors beyond our control.*

 

Thepetrochemicals industry is both cyclical and volatile. Cyclicality occurs whenperiods of tight supply, resulting in increased prices and profit margins, arefollowed by periods of capacity expansion, resulting in oversupply anddeclining prices and profit margins. Volatility occurs as a result of changesin supply and demand for products, changes in energy prices and changes invarious other economic conditions around the world. Consequently, our salesvolumes and profit margins may fluctuate, not only from year to year, but alsofrom quarter to quarter.

 

Feedstockcosts and some other external factors beyond our control can cause widefluctuations in margins. Due to the commodity nature of most of the products wesell, 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 our products. Feedstock prices can fluctuate widelyfor a variety of reasons, including changes in worldwide energy prices, changesin availability or significant facility operating problems. Other externalfactors that can cause volatility in feedstock prices, as well as changes indemand for products, product prices and volumes, and margin deterioration,include:

 

•                  general economicconditions;

•                  levels ofbusiness activity and the creditworthiness of industries and companies that useour products;

•                  competitors’actions;

•                  domestic andinternational events and circumstances;

•                  severe weather;

•                  product andprocess technology changes;

•                  currencyfluctuations; and

•                  governmentalregulation in the United States and abroad.

 

Although wegather, transport and fractionate feedstocks to meet a portion of our demandand have certain long-term feedstock supply contracts with affiliates of ourowners and others, we are still subject to volatile feedstock prices. Extremeprice volatility, such as that experienced during various times over the pastfive years, can result in the need to temporarily idle or curtail productionunits. In addition, sustained or projected periods of high feedstock costs,coupled with the inability to raise prices to sufficiently maintain margins,could result in a significant deterioration of projected cash flows which maynecessitate the need to recognize asset impairment charges, some of which couldbe material.

 

*Extensive environmental, health and safety laws and regulations impactour operations and assets; compliance with, and/or liability under, these lawsand regulations could adversely affect our results of operations.*

 

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.

 

16

----

 

Under somelaws, including the Comprehensive Environmental Response, Compensation andLiability Act of 1980 (“Superfund”), the Resource Conservation and Recovery Actof 1976 and the laws of many states, we may be subject to joint and severalliability regarding environmental contamination on or from properties that wepreviously owned or operated or currently own or operate. We may also besubject to liability for contaminated properties where we have disposed of orarranged for disposal of hazardous substances, or where feedstocks or productsthat contained hazardous substances may have been spilled or released. Dependingon the circumstances, such liabilities may involve, for example, investigationor clean-up costs, claims for damages to natural resources or punitive damageclaims. In addition, we may be the subject of third-party tort claims seekingcompensatory and punitive damages for alleged impacts on human health or theenvironment. These liabilities and claims could result in substantial costs.

 

We incur, andexpect 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. In addition, we are aware that thereis or may be soil or groundwater contamination at some facilities and thatremediation of soil and groundwater contaminated with hazardous substances willbe required. See “Item 1. Business -Environmental Regulation” for further discussion.

 

New laws and regulations, changes to existinglaws and regulations, the discovery of previously unknown contamination or theimposition of new disposal or cleanup requirements could in the future requireus to incur costs, or affect our production or revenues, in ways that couldhave a negative effect on our financial condition or results of operations. Therefore,there can be no assurance that material capital expenditures, costs, oroperating expenses beyond those currently anticipated will not be requiredunder applicable environmental, health, and safety laws and regulations, orthat developments with respect to such laws and regulations, will not adverselyaffect production or revenues.

 

*The nature of our operations subjects us to hazards which could exposeus to the risk of significant liabilities, lost revenues or increased expenses.*

 

While weincorporate extensive safety controls and processes within our business, thereare risks inherent with the production of petrochemicals and the relatedstorage and transportation of raw materials and products, such as operationalhazards and unforeseen interruptions caused by events beyond our control. Theseinclude, but are not limited to, accidents, explosions, fires, breakdowns orfailures of equipment or processes, acts of terrorism and severe weather. Theseevents can result in injury or loss of life and extensive property orenvironmental damage. In addition, the handling of chemicals has the potentialfor serious impacts on human health and the environment from such events aschemical spills and unintentional discharges or releases of toxic or hazardoussubstances or gases. Liabilities incurred and interruptions in operationscaused by such events have the potential to materially impact our consolidatedresults of operations, financial position and liquidity. While we maintaingeneral liability, property and business interruption insurance coverage,insurance proceeds may not be adequate to fully cover significant liabilitiesincurred, lost revenues or increased expenses.

 

*Our relationships with Chevron and ConocoPhillips are important to ourbusiness and a change or termination of such relationship may affect ourstrategic direction or our financial and operating practices and our financialresults may thereby be adversely affected.*

 

Chevron and ConocoPhillips,through their ownership interests in us and their membership on our Board, playan active role in setting our strategic and financial policies and in providingmanagement oversight. Should either or both of them dispose of their interestsin us, and thereby cease or diminish their participation, we cannot guaranteethat our strategic plans, our financial policies or other aspects of ourbusiness will remain the same. Our financial performance may be adverselyaffected if either or both of

17

----

 

Chevron andConocoPhillips dispose of their interest in us. Moreover, in view of theunanimous consent provisions of our governance structure, any transfer of aninterest in us, or any change in our control, may affect our governance.

 

*We purchase substantial portions of our feedstocks from Chevron,ConocoPhillips, an affiliate of ConocoPhillips and one other supplier. Overtime, these suppliers may cease or decrease production of the feedstocks wepurchase.*

 

Substantialquantities of feedstocks for certain of our domestic plants are acquired underagreements with Chevron, ConocoPhillips, an affiliate of ConocoPhillips and oneother supplier. Portions of these feedstocks come from certain plants connectedto pipelines we own or to which we have access. Over time, these suppliers mayrationalize their feedstock production by closing plants or consolidatingproduction in new or existing plants to which we do not have access. While wehave no indication at present that we will lose access to such supplies, wecannot guarantee that our feedstock supplies will not be affected as marketsevolve. While we believe we could replace any lost supplies with new supplyarrangements, we cannot guarantee that the terms of those arrangements would beas favorable as the terms of current contracts.

 

*Our international operations expose us to political, economic andregulatory risks not normally faced by businesses that operate only in theUnited States.*

 

Internationaloperations are exposed to different political, economic and regulatory risksthat are not faced by businesses that operate solely in the United States. Someof our operations, including certain of our equity affiliates, are outside thecontinental United States, with manufacturing facilities in Puerto Rico,Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Ourinternational operations are subject to risks similar to those affecting ourU.S. operations in addition to a number of other risks, including:

 

•                  difficulties inenforcing contractual and intellectual property rights;

•                  impositions orincreases of withholding and other taxes on remittances and other payments bysubsidiaries and affiliates;

•                  exposure todifferent legal standards;

•                  fluctuations incurrency exchange rates;

•                  impositions orincreases of investment and other restrictions by foreign governments;

•                  the requirementsof a wide variety of foreign laws;

•                  political andeconomic instability;

•                  terrorist acts;

•                  war; and

•                  difficulties instaffing and managing operations, particularly in remote locations.

 

*We depend on proprietary technologies to maintain our competitiveposition.*

 

Proprietarytechnology rights are important to our success and competitive position. Theuse of similar technology by others or the misappropriation and wrongful use ofour technology by third parties could reduce or eliminate competitiveadvantages we have developed, cause us to lose sales or otherwise harm ourbusiness.

 

Although weown, or license from our owners, numerous U.S. and foreign patents and havenumerous pending patents that relate to our technology, we cannot assure thatany patents, issued or pending, will provide us with any competitive advantageor will not be challenged by third parties.

 

18

----

 

We haveentered into confidentiality and assignment of invention agreements with ouremployees and nondisclosure agreements with customers, suppliers and potentialstrategic partners, among others; however, we cannot assure that we have doneso on a uniform basis or in all instances. If any party to these agreementswere to violate their agreement with us and disclose our proprietary technologyto a third party, we may be unable to prevent the third party from using thisinformation. Our trade secrets may otherwise become known or independentlydeveloped by others, and trade secret laws provide no remedy againstindependent development or discovery.

 

We haveregistered and applied for some service marks and trademarks, and will continueto evaluate the registration of additional service marks and trademarks, as wedeem appropriate. A failure to obtain trademark registrations in the UnitedStates and in other countries could limit our ability to use our trademarks andimpede our marketing efforts in those jurisdictions.

 

*We depend on multiple third partiesto assist us in executing our capital program around the world on a timely,cost-effective basis.*

 

We enter intothird-party contracts for certain engineering, procurement, construction andmaintenance services for various facilities around the world. Some of thesecontracts are on a cost-plus basis, a reimbursable basis or require thecompletion of work in a specified time frame for a lump sum price, subject toadjustments for changes in scope and other defined variables. Recently,construction costs have risen sharply in certain markets due to increasedmaterial and labor costs, lack of contractor and subcontractor availability,equipment shortages, logistics issues and other factors. As a result,anticipated construction costs for certain projects in the planning stage mayincrease to the level where the projects may be delayed or even terminated. Inthose instances, costs incurred and previously capitalized for ongoing projectsthat might be terminated or indefinitely postponed may need to be expensed,which could have a material impact on our financial results in the periodrecorded. In addition, contractors may request additional compensation onexisting projects or even default in rare instances, potentially exposing us toproject delays and additional project completion and financing costs including the repayment of loans as requiredunder project completion guarantees. We often include project milestonepayment schedules, delay damage provisions and performance guarantees in ourlargest contracts to mitigate potential losses should any of these occur.

 

**Item 1B.   UnresolvedStaff Comments**

 

Not applicable.

 

**Item 2.   Properties**

 

See “Item 1. Business.”

 

**Item 3.   LegalProceedings**

 

**Governmental Agency Proceedings**

 

The following are descriptionsof reportable legal proceedings involving governmental authorities underfederal, state and local laws regulating the discharge of materials into theenvironment.  While it is not possible to predict with certainty theoutcome of an unresolved proceeding, if the proceedings described below weredecided adversely to CPChem, CPChem expects that there would be no materialadverse effect on consolidated results of operations, financial position orliquidity.  Nevertheless, such proceedings are reported pursuant to theSEC’s regulations.

 

19

----

 

As previouslyreported, in July and August 2004, the Texas Commission forEnvironmental Quality (the “TCEQ”) conducted an annual air complianceinspection at CPChem’s facility in Port Arthur, Texas. By letter dated December 30,2004, the TCEQ issued a Notice of Enforcement letter to CPChem with a proposedAgreed Order and recommended penalty amount. In June 2005, CPChem and theTCEQ agreed to settle this matter by entering into an Agreed Order providingfor the payment of a penalty and performance of a Supplemental EnvironmentalProject for a combined value of $278,250. CPChem also agreed to submit a permitapplication to authorize emissions from the cyclohexane unit that wereoriginally authorized under a permit by rule.

 

As previously reported, in late 2001, CPChem received a Notice ofViolation from the TCEQ following an inspection of the solid waste managementprogram at CPChem’s Cedar Bayou facility in Baytown, Texas. The Notice ofViolation pertained to the historical management of an on-site impoundment. CPChemagreed to conduct an investigation of the unit and, in late June 2004,completed the investigation. The investigation characterized the contents ofthe impoundment and identified a small groundwater contamination plume,adjacent to and unrelated to the operation of the impoundment. In November 2004,CPChem and TCEQ representatives agreed to move forward on addressing thegroundwater plume. TCEQ and CPChem are presently in discussions regarding thefinal disposition of the impoundment and the management of the materialscontained within the impoundment.

 

**OtherProceedings**

 

CPChem is aparty to certain asbestos lawsuits for which the financial responsibilitybetween CPChem and ConocoPhillips is disputed.  CPChem, ConocoPhillips andChevron are attempting to resolve whether ConocoPhillips or CPChem hasfinancial responsibility for these lawsuits.  In the meantime,ConocoPhillips is managing and defending these lawsuits.  In the event thefinancial responsibility for these lawsuits is ultimately determined to restwith CPChem, CPChem may be required to record a charge to operations that couldbe material to the period reported. However, CPChem believes that any suchcharge, if required, would not have a material adverse effect on financialposition or liquidity.

 

CPChem is aparty to a number of other legal proceedings that arose in the ordinary courseof business for which, in many instances, no provision has been made in thefinancial statements. While the final outcome of these proceedings cannot bepredicted with certainty, CPChem believes that none of these individualproceedings, when resolved, will have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

**Item 4.   Submissionof Matters to a Vote of Security Holders**

 

None.

 

**Item 5.   MarketFor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities**

 

There is no established public trading marketfor the ownership interests of CPChem. See “Part III - Item 12.Security Ownership of Certain Beneficial Owners and Management” for a listing of the holders of ownershipinterests in CPChem.

 

20

----

 

# **PART II**

**Item 6.   SelectedFinancial Data**

 

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

 
| ** **        | ** ** | **Years ended December 31,** | ** ** |
|-------------------|------------|-----------------------------------|------------|
| **Millions**      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Net sales         |       | $                                 | 10,707     |   | $ | 9,165 |   | $ | 6,838 |   | $ | 5,328 |   | $ | 5,804 |   |
| Net income (loss) |       | 853                               |       | 626 |   | 7 |   | (30 | ) | (480 | ) |
|                   |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|
| **Millions**                              | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Total assets                              |       | $                     | 6,960      |   | $ | 6,872 |   | $ | 6,242 |   | $ | 6,109 |   | $ | 5,860 |   |
| Long-term  debt,  less current maturities |       | 1,186                 |       | 1,390 |   | 1,189 |   | 1,190 |   | 1,507 |   |
| Members’ preferred interests         |       | —                |       | 75 |   | 250 |   | 250 |   | — |   |
|                                           |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

----

 

**Item 7.   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*CriticalAccounting Policies*

 

An accounting policy is deemed to be “critical” ifit is important to a company’s results of operations and financial condition, andrequires significant 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 assumptionsused in connection with the amounts reported in its financial statements andrelated disclosures are reasonable and were made in good faith.  CPChem further believes the followingrepresent its most critical accounting policies.  For a summary of all of CPChem’s significantaccounting policies, see “Part II - Item 8. Financial Statements andSupplementary Data - Note 2. Summary of Significant Accounting Policies.”

 

*Impairment of Assets –*****Long-lived assets used in operations are assessed forpossible impairment when events or changes in circumstances indicate apotential significant deterioration in future cash flows projected to begenerated by an asset group.  Individualassets are grouped for impairment purposes at the lowest level for which thereare identifiable cash flows that are largely independent of the cash flows ofother groups of assets – generally at a product line level.  If the estimated fair value of an asset orgroup of assets is less than the respective carrying value, the carrying valueis written down to estimated fair value. Since there are usually no quoted market prices available to determinethe fair values of CPChem’s long-lived assets, if upon review, the sum of theprojected undiscounted pre-tax cash flows is less than the carrying value ofthe asset group, the carrying value is written down to estimated fairvalue.  Fair values of impaired assetsare usually determined based on the present value of projected future cashflows using discount rates commensurate with the risks involved in the assetgroup.  This area often requiresmanagement to make complex and subjective judgments covering extended periodsof time, involving significant variables such as asset lives, future productdemand, and future product, feedstock and energy prices in order to estimate projectedfuture cash flows.  Should the outlookfor projected cash flows change unfavorably, material charges for impairmentscould 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 the segment level. Lower-of-cost-or-market write-downs for LIFO-valued inventories aregenerally considered temporary.  However,deterioration of market prices for prolonged periods of time could result inwrite-downs determined to be permanent in nature.

 

*Contingencies –*****As facts concerning contingent liabilities become known,CPChem reassesses its position with respect to accrued liabilities and other potentialexposures.  Estimates that areparticularly sensitive to future change include legal matters and contingentliabilities for environmental remediation. Estimated future environmental remediation costs are subject to changedue to such factors as the unknown magnitude of cleanup costs, prospectivechanges in laws and regulations, the unknown timing and extent of remedialactions that may be required and the determination of CPChem’s liability inproportion to those of other responsible parties.  Estimated future costs related to legalmatters are subject to change as events occur and as additional informationbecomes available.

 

22

----

 

**Results of Operations**

 

***Overview***

 

CPChem’sbusiness, and the chemicals industry in general, is cyclical in nature and isimpacted by, among other things, product demand and the prices of rawmaterials, feedstocks and energy.  CPChemis particularly impacted by the prices of natural gas and natural gas liquids(NGLs).  During periods of significantnatural gas and NGL price volatility and corresponding spikes in natural gasand NGL prices such as those experienced during various times over the pastfive years, CPChem is less able to fully recover such increased costs throughproduct sales price increases than it could had there been steady, sustainedprices, even at elevated levels.  CPChemis also affected by overall domestic and global economic conditions, whichdrive consumer spending for durable goods. In addition, capacity expansions or contractions contribute to thecyclical and volatile nature of the commodity chemicals industry.

 

CPChem’s results continued to improve in 2005 as margins were higher,due in part to healthier U.S. economic conditions.  Results improved despite the negative impactof hurricane activity in the Gulf Coast during the second half of theyear.  In the third quarter of 2005,Hurricanes Katrina (August 29) and Rita (September 24) made landfalland disrupted to varying degrees industry operations located along the Texas,Louisiana and Mississippi Gulf Coast. CPChem’s Pascagoula, Mississippi facility and St. James, Louisianaoperations were shut down for Hurricane Katrina.  The St. James facility sustained minimaldamage and promptly resumed operations. However, portions of the Pascagoula facility sustained more substantialdamage.  CPChem’s Cedar Bayou, Conroe, LaPorte, Pasadena and Sweeny facilities, all located in Texas, as well as its St.James facility, were temporarily shut down due to Hurricane Rita, but did notexperience any significant property damage. The Orange and Port Arthur, Texas facilities, however, experienced moresignificant damage and extended power outages. CPChem resumed operations at all of its affected facilities by the firstweek in October, except at Orange and Port Arthur.  Those two facilities resumed operations in November atvarious operating rates, and achieved normal operating rates in December.  As a result of these force majeure events,certain product lines encountered varying degrees of production shortfalls,resulting in product allocations to customers and decreased overall production.

 

***Condensed Consolidated Statement of Operations***

 
| ** **                           | ** ** | **Years ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| **Millions**                         | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales                            |       | $                                 | 10,707     |   | $ | 9,165 |   | $ | 6,838 |   |
| Equity in  income of affiliates, net |       | 185                               |       | 218 |   | 41 |   |
| Other income                         |       | 146                               |       | 111 |   | 75 |   |
| Total revenues                       |       | 11,038                            |       | 9,494 |   | 6,954 |   |
| Cost of  goods sold                  |       | 9,601                             |       | 8,324 |   | 6,390 |   |
| Other costs  and expenses            |       | 503                               |       | 463 |   | 488 |   |
| Income  before interest and taxes    |       | 934                               |       | 707 |   | 76 |   |
| Net interest  expense                |       | (61                               | )          | (66 | ) | (64 | ) |
| Income taxes                         |       | (20                               | )          | (15 | ) | (5 | ) |
| Net income                           |       | $                                 | 853        |   | $ | 626 |   | $ | 7 |   |

 

*2005 compared with 2004*

 

Net income in 2005 was $853 million, compared with$626 million in 2004.  Consolidated netsales revenues increased in 2005 as a result of higher overall sales prices,which was partially offset by lower sales volumes largely due to the hurricane-relatedplant shutdowns. Lower equity 

 

23

----

 

earnings from affiliates in 2005, primarily fromSaudi Chevron Phillips Company (SCP), were offset by an increase in otherincome resulting primarily from approximately $30 million in proceeds receivedin the fourth quarter related to a technology agreement.  Cost of Goods Sold rose due to higher feedstockprices, and in addition, to increased insurance costs primarily resulting from2005 hurricane activity.  Other Costs andExpenses were higher in 2005, attributable to increased Selling, General andAdministrative (SG&A) expenses related to distribution costs and foreigncurrency transaction losses.

 

*2004 compared with 2003*

 

Netincome in 2004 was $626 million, representing a $619 million improvement overthe $7 million of net income recorded in 2003. Consolidated net sales revenue rose significantly in 2004 on higheroverall sales prices and volumes.  Equityearnings from affiliates improved, primarily on improved results from SCP andQatar Chemical Company Ltd. (Q-Chem). Cost of Goods Sold rose in the 2004 period, attributable to increasedfeedstock costs and higher sales volumes.

*** ***

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

* *
| **Millions**                       | ** ** | **Olefins &  Polyolefins** | ** ** | **Aromatics &  Styrenics** | ** ** | **Specialty  Products** | ** ** | **Corporate  & Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------|------------|
| Year ended  December 31, 2005 |       | $                                   | 831        |                                | $          | 99                      |       | $                          | 43         |             | $          | (39 | ) | $ | 934 |   |
| Year ended  December 31, 2004 |       | 428                                 |       | 251                                 |       | 58                      |       | (30                        | )          | 707              |       |
| Year ended  December 31, 2003 |       | 41                                  |       | 27                                  |       | 34                      |       | (26                        | )          | 76               |       |
|                                    |            |                                     |            |                                     |            |                         |            |                            |            |                  |            |  |  |  |  |  |

 

Includedin 2005 results was an $11 million net benefit (a $13 million benefit recordedto Other Income and a $2 million charge to SG&A expense) from a legalsettlement related to a styrene column collapse at the St. James facility in2001 and a $9 million benefit recorded to Cost of Goods Sold to recognizeunit/line fill inventory at various manufacturing facilities.

 

Includedin 2003 results were charges related to CPChem’s share of certain Chevron andConocoPhillips legal settlements and accruals relating to CPChem’s facilities,asset retirements, a pilot plant closure, employee termination benefit costsrelated to workforce reductions and a benefit recorded as a result of a salesand use tax audit.  These and othersimilar types of net charges totaled $36 million in the aggregate in 2003.  See subsequent segment-level discussions foradditional information.

 

***Olefins & Polyolefins***

 
| ** **                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| **Millions**                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income  before interest and taxes |       | $                                 | 831        |   | $ | 428 |   | $ | 41 |   |
|                                   |            |                                   |            |  |  |  |  |  |  |  |

 

*2005 compared with 2004*

 

Olefins &Polyolefins’ income before interest and taxes totaled $831 million in 2005compared with $428 million in 2004. Significantly higher earnings from olefins and polyethylene on highermargins were the main drivers of the improved results.  Revenues increased from higher averagerealized sales prices, partially offset by lower sales volumes resulting fromthe hurricane-related shutdowns.  Netequity earnings from affiliates were higher on improved results from PhillipsSumika Polypropylene Company, and other income increased from approximately $30million in proceeds received in the fourth quarter related to a technologyagreement.  Feedstock and utility costsincreased largely due to higher energy prices. The improvement in Olefins & Polyolefins’

 

24

----

 

earnings was alsoattributable to lower turnaround costs, partially offset by costs associatedwith the 2005 restart of an ethylene plant at the Sweeny facility.  Overall earningswere also negatively impacted by hurricane-related activity.  Earnings in 2004 included a gain of $4 million relatedto reductions in certain LIFO-valued inventories.

 

*2004 compared with 2003*

 

Income before interest and taxes forOlefins & Polyolefins totaled $428 million in 2004, compared with $41million in 2003, driven primarily by higher earnings from the olefins andpolyethylene product lines.  Higherrevenues from increased sales prices and volumes were partially offset byhigher feedstock costs.  Equity earningsfrom affiliates increased significantly, largely from improved results of Q-Chem.  Earnings in 2004 and 2003 included gains of $4 million and $10million, respectively, related to reductions in certainLIFO-valued inventories.

 

Results in 2003 also included $13 millionof charges to SG&A expense for the Chevron and ConocoPhillips legalsettlements and accruals relating to CPChem’s facilities, a $9 million chargeto Research and Development depreciation related to the permanent closure ofthe research and technology pilot plant facility in Orange, Texas, and a $5million net benefit resulting from the sales and use tax audit.

 

***Aromatics & Styrenics***

*** ***
| ** **                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| **Millions**                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income  before interest and taxes |       | $                                 | 99         |   | $ | 251 |   | $ | 27 |   |
|                                   |            |                                   |            |  |  |  |  |  |  |  |

 

*2005 compared with 2004*

 

Income before interest and taxes for Aromatics &Styrenics totaled $99 million in 2005 compared with $251 million in 2004.  The decrease in earnings in 2005 was drivenprimarily by lower earnings from the benzene product line.  Overall revenues were down slightly in 2005as lower sales volumes across most product lines, including benzene, weremostly offset by higher sales prices. CPChem’s Pascagoula benzene facility was down through most of the thirdquarter of 2005 due to turnaround and operational issues, and also from theimpact of Hurricane Katrina’s landfall in late August.  Equity earnings from affiliates decreased onlower earnings from SCP.  Feedstock costsincreased primarily due to higher prices, while higher utility costs alsocontributed to the lower overall results. Overall earnings were also negatively impacted by hurricane-relatedactivity.  Earnings in 2005 included a$14 million gain related to reductions in certain LIFO-valued inventories.  Earnings in 2005 also included an $11 millionnet benefit from a legal settlement related to the St. James styrene columncollapse in 2001 and a $7 million benefit to recognize unit/line fillinventory.

 

*2004 compared with 2003*

 

Aromatics & Styrenics’ income before interest and taxestotaled $251 million in 2004 compared with $27 million in 2003.  Results in 2004 improved primarily fromhigher benzene earnings, including significantly higher equity earnings fromSCP.  Sales revenues increased across allproduct lines as a result of higher sales prices, partially offset by lowersales volumes in benzene and paraxylene, and higher feedstock costs in mostproduct lines.  Improved results in 2004were also partially attributable to the actions taken in 2003 to close the UDEXbenzene extraction unit and idle thecumene plant, both of which are located at the Port Arthur, Texasfacility.  Earnings in 2003 included $10million of accelerated depreciation related to the closure of the UDEX benzeneextraction unit, partially offset by a $3 million gain related to reductions incertain LIFO-valued inventories.

 

25

----

 

***Specialty Products***

 
| ** **                        | ** ** | **Years ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------|------------|
| **Millions**                      | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income  before interest and taxes |       | $                                 | 43         |   | $ | 58 |   | $ | 34 |   |
|                                   |            |                                   |            |  |  |  |  |  |  |  |

 

*2005 compared with 2004*

 

Specialty Products’ income before interest and taxes totaled $43million in 2005 compared with $58 million in 2004 due to lower earnings fromboth Specialty Chemicals and Ryton® polyphenylene sulfide (Ryton® PPS).  Lower sales volumes and higher feedstockcosts of Ryton® PPS were partially offset by higher sales prices.  Earnings from Specialty Chemicals declined onlower margins, partially driven by the impact of a feedstock supplyinterruption that occurred earlier in the year at the Borger facility.   Higher sales prices and volumes were offsetby higher feedstock costs.  Earnings fromRyton® PPS and Specialty Chemicals were also affected by a fire at the Borger,Texas facility in the third quarter of 2005. Earnings in 2005 included a $4 million charge from the adjustment of theeconomic life of certain leasehold improvements at a third-party tollingfacility.

 

*2004 compared with 2003*

 

Income before interest and taxes for SpecialtyProducts was $58 million in 2004 compared with $34 million in 2003, as earningsfrom both Specialty Chemicals and Ryton® PPS increased.  Earnings from Ryton® PPS rose primarily on highersales volumes, partially offset by higher feedstock costs.  Earnings from Specialty Chemicals increasedas a result of higher sales volumes and prices, partially offset by increasedfeedstock costs primarily due to the higher sales volumes.  Results for Specialty Products in 2003included a $2 million net benefit from the sales and use tax audit.

* *

***Corporate and Other***

* *
| ** **                               | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------|------------|-----------------------------------|------------|
| **Millions**                             | ** ** | **2005**                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income (loss)  before interest and taxes |       | $                                 | (39        | ) | $ | (30 | ) | $ | (26 | ) |
|                                          |            |                                   |            |  |  |  |  |  |  |  |

 

Corporateand Other reported losses before interest and taxes of $39 million in 2005, $30million in 2004 and $26 million in 2003. The increased loss in 2005 was largely due to higher project expendituresand employee incentive plan expenses held at the corporate level in 2005.  Results in 2003 included $11 million of employeetermination benefit costs related to workforce reductions.

 

***Interest expense.***  Interest expense totaled $78 million in 2005,$75 million in 2004 and $72 million in 2003. The increase in 2005 compared with 2004 was attributable to higherinterest rates on variable-rate based debt, partially offset by lower averagedebt balances and higher capitalized interest in 2005.  The increase in 2004 compared with 2003 wasprimarily attributable to higher interest rates on variable-rate based debt.

 

***Interestincome.*** Interest income totaled $17 million in 2005, $9 million in 2004 and $8million in 2003.  The improvement in 2005was attributable to higher interest income on outstanding advances to Q-Chemdue to higher average interest rates.

 

***Income Taxes.***  Income tax expense totaled $20 million in2005, $15 million in 2004 and $5 million in 2003.  The increase in 2005 was primarily due tohigher foreign withholding taxes.  Theincrease in 2004 compared with 2003 was due to taxes on higher overall foreignincome.

 

26

----

 

CPChem is treated as a flow-through entity for federal income tax andfor most state income tax purposes, whereby each member is taxable on itsrespective share of income and losses. However, CPChem is directly liable for federal and state income taxesand franchise taxes on certain separate legal entities and for any foreign taxesincurred.

 

**Outlook**

 

In 2005, CPChem posted its fourth consecutiveyear of improved earnings, based on the strong performance of its Olefins &Polyolefins segment and CPChem’s Middle East joint ventures.  However, earnings for the year werenegatively impacted by lower sales volumes, mostly the result of plant downtimecaused by two hurricanes in the Gulf of Mexico, and elevated energy prices.CPChem continues to maintain its focus on safety, environmental stewardship,operational reliability, cost management, project execution and increasingsales volumes in order to sustain profitable and responsible growth.

 

Chemicalindustry sales volumes and earnings are expected to improve in 2006 asindustrial production remains strong. Prices and margins for certain products could decline from recentlevels, however, due to various factors including uncertain energy andfeedstock prices, foreign currency exchange rates, imbalances in internationaltrade and geopolitical pressures.

 

Atthis time, the amount and timing of reimbursement for business interruption andproperty damage insurance claims from 2005 hurricane activity isuncertain.  However, such reimbursementsmay have a material positive impact to the period or periods when recorded.

 

# **Liquidityand Capital Resources**

 

Cash balances were $40 million at December 31, 2005 and $63million at December 31, 2004, of which $21 million and $48 million,respectively, was held by foreign subsidiaries. CPChem’s objective is to minimize cash balances in its worldwide operationswhile utilizing the commercial paper program to meet its daily operatingrequirements.

 

*Operating Activities*

 

Cash provided by operating activities totaled $1.031 billion in 2005,$459 million in 2004 and $280 million in 2003. The increases primarily reflect a trend of improved earnings in each ofthe years.  Cash from operations for 2004was negatively impacted by a $235 million increase in operating workingcapital.

 

*Investing Activities*

 

Capital and investment expenditures

 
| **Millions**                       | ** ** | **Olefins &  Polyolefins** | ** ** | **Aromatics &  Styrenics** | ** ** | **Specialty  Products** | ** ** | **Corporate  & Other** | ** ** | **Consolidated** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|----------------------------|------------|------------------|------------|
| Year ended  December 31, 2005 |       | $                                   | 121        |                                | $          | 27                      |       | $                          | 20         |             | $          | 9 |   | $ | 177 |   |
| Year ended  December 31, 2004 |       | 138                                 |       | 34                                  |       | 12                      |       | 7                          |       | 191              |       |
| Year ended  December 31, 2003 |       | 127                                 |       | 53                                  |       | 17                      |       | 6                          |       | 203              |       |
|                                    |            |                                     |            |                                     |            |                         |            |                            |            |                  |            |  |  |  |  |  |

 

Inaddition to the capital and investment expenditures shown above, CPChemsubscribed to additional shares of and advanced Q-Chem (Olefins &Polyolefins), a total of $28 million in 2004 and $103 million in 2003, and madeinvestments in and advances towards the JCP Project (Aromatics &Styrenics) totaling $35 million in 2005, $10 million in 2004 and $20 million in

 

27

----

 

2003.  In 2005, Q-Chem repaid $25 million of suchadvances. In addition, SCP (Aromatics & Styrenics) made advance repaymentsto CPChem totaling $9 million in 2005 and $32 million in 2004.

 

CPChem currently expects to invest a total of approximately $270million in capital and investment expenditures in 2006.  It is expected that $131 million will beinvested in Olefins & Polyolefins, $83 million in Aromatics &Styrenics, and $40 million in Specialty Products, with the remainder to bespent at the corporate level.  Includedin estimated 2006 capital and investment expenditures are $39 million ininvestments in and advances towards the JCP Project.

 

*JCP Project.*  Jubail Chevron Phillips Company (JCP), a50%-owned joint venture company with Saudi Industrial Investment Group (SIIG),was formed in 2003 to develop an integrated styrene facility in Al Jubail,Saudi Arabia.  The 1.6billion-pound-per-year facility, being 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.”  Financial closing of theestimated $1.2 billion JCP Project occurred in July 2004. Constructionbegan in the fourth quarter of 2004 and operational start-up is anticipated inlate 2007.  It is estimated that projectcompletion, as defined in the JCP project’s financing agreements, will beachieved in the first half of 2008.  TheJCP project is being financed through equity contributions and subordinatedloans from the co-venturers, in proportion to their equal ownership interests,and limited recourse loans from commercial banks and two Saudi Arabiangovernmental agencies.

 

*Q-Chem II Project. *CPChem and Qatar Petroleum announcedplans in 2001 for the development of a petrochemical project in Mesaieed,Qatar, designed to produce polyethylene and normal alpha olefins.  In connection with this project, CPChem andQatar Petroleum entered into a separate agreement in 2002 with TotalPetrochemicals and Qatar Petrochemical Company Ltd., establishing a jointventure to develop an ethylene cracker in Ras Laffan Industrial City,Qatar.  The project will be financedthrough limited recourse loans from commercial banks and an export creditagency (collectively, “senior debt”), and equity contributions and subordinatedloans from the co-venturers.  It isexpected that 2006 funding requirements for the Q-Chem II project will besatisfied from drawdowns on the senior debt facilities.

 

*Financing Activities*

 

Cash provided by (used in) financing activitiestotaled $(891) million in 2005, $(260) million in 2004 and $49 million in2003.  Commercial paper balancesoutstanding decreased $203 million during 2005 compared to a $201 millionincrease in 2004, while borrowing outstanding under the accounts receivablesecuritization program decreased $100 million in both 2005 and 2004.  CPChem voluntarily redeemed $175 million ofmembers’ preferred interests in 2004 and the remaining $75 million in 2005, andpaid distributions on those interests of $55 million in 2004 and $2 million in2005.  Financing activities in 2005 also included $263 million ofdistributions to members to fund their estimated tax liabilities attributableto CPChem, compared with $118 million of such distributions in 2004.  Discretionary distributions paid to members totaled$250 million in 2005.  At December 31,2005, accrued discretionary distributions to members totaled $180 million andaccrued distributions to fund the members’ estimated tax liabilities totaled $122 million.  These accrued distributions to members werepaid in the first quarter of 2006.

 

28

----

 

In 2004, CPChem entered into an $800 million five-year credit facilitywith various banks that provides committed credit support for the commercialpaper program and concurrently terminated its existing credit facilities.  There were no borrowings under any of thecurrent or prior credit facilities during 2005, 2004 or 2003.

 

Notes issued under CPChem’s commercial paper program are in the tier-2commercial paper market with maturities of 90 days or less.  These commercial paper borrowings totaled$182 million at December 31, 2005 and were classified as Long-Term Debtsince CPChem’s intent is to refinance or replace the obligations on a long-termbasis and CPChem has a committed backup credit facility in effect.

 

CPChem had $100 million of short-term borrowings outstanding at December 31,2005 under a trade receivables securitization program.  The agreement allows for borrowings of up to$300 million for which CPChem grants a security interest in certain of itstrade receivables as collateral for any amounts outstanding.  The trade receivables securitizationagreement expires in May 2006.  CPChem intends to request an extension of thecurrent agreement to May 2007.

 

CPChem believes cash requirements over the nexttwelve months will be funded through a combination of cash on hand, cash flowsfrom operations and commercial paper.  CPChem is not aware of any conditionsthat exist as of the date of this report that would cause any of its debtobligations to be in or at risk of default. In addition, a change in CPChem’s credit ratings would not result in theacceleration of any existing debt obligation maturities.

 

*Contractual Obligations*

 

Contractual obligations, including debt obligations, at December 31,2005 were as follows:

 
| ** **                                                              | ** ** | ** ** | ** ** | **Payments Due** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| **Millions**                                                            | ** ** | **Total**  | ** ** | **2006**         | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** |
| Secured  borrowings                                                     |       | $          | 100        |             | $          | 100 |   | $ | — |   | $ | — |   | $ | — |   |
| Commercial  paper                                                       |       | 182        |       | —           |       | — |   | 182 |   | — |   |
| Long-term  debt                                                         |       | 1,000      |       | —           |       | 500 |   | — |   | 500 |   |
| Other debt,  including current portions                                 |       | 12         |       | 5                |       | 2 |   | 3 |   | 2 |   |
| Other long-term liabilities included in the  consolidated balance sheet |       | 72         |       | —           |       | 47 |   | 8 |   | 17 |   |
| Operating  lease obligations                                            |       | 195        |       | 31               |       | 40 |   | 60 |   | 64 |   |
| Purchase  obligations                                                   |       | 3,796      |       | 1,522            |       | 2,112 |   | 97 |   | 65 |   |
| Total                                                                   |       | $          | 5,357      |             | $          | 1,658 |   | $ | 2,701 |   | $ | 350 |   | $ | 648 |   |

 

See also “Part II- Item 8. Financial Statements and Supplementary Data - Note 8. Debt” for further discussionrelated to debt obligations and “Part II - Item 8. Financial Statements and Supplementary Data - Note 13. Operating Leases” for adiscussion related to operating lease obligations.

 

*Secured Borrowings.*  This represents borrowings related to theaccounts receivable securitization program.

 

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

 

29

----

 

*Other Long-term Liabilities Includedin the Consolidated Balance Sheet. *Theamounts consist primarily of obligations related to various employee benefitplans, excluding pension plans.

 

*Purchase Obligations.*  This represents obligations to purchase goodsor services which contain: fixed or minimum quantities to be purchased; fixed,minimum or variable price provisions; and the approximate timing of thetransaction.  Estimated future market ratesbased on CPChem’s long-term forecast were used to calculate obligation amountsthat contain variable price provisions. Obligations with no fixed or minimum purchase requirements for productsor services were not included.  Inaddition, for obligations that include rights to terminate, the amountscalculated assumed invocation of those rights.

 

The above contractual obligations do not include CPChem’s anticipatedfunding under its pension plans.  Basedon internal and actuarial assumptions used in conjunction with thedetermination of future projected benefit obligations, it is estimated thatannual funding of approximately $45 million into CPChem’s existing pensionplans would be sufficient for the plans to achieve fully funded status over aten year planning horizon.  This level offunding would be in excess of future expected minimum regulatory fundingrequirements.  Actual annual fundinglevels may differ from this estimate due to, among other things, economicconditions, actual pension asset returns and changes in business conditions.

 

In addition, the above contractual obligations do not include anyanticipated funding by CPChem towards the JCP or Q-Chem II Projects.  See “Part II - Item 8. FinancialStatements and Supplementary Data - Note 5. Investments in and Advances toAffiliates” for further discussion.

 

*Off-Balance Sheet Arrangements*

 

Anoff-balance sheet arrangement is generally any transaction, agreement or othercontractual arrangement involving an unconsolidated entity of a company underwhich such company has (1) made certain guarantees, (2) a retained ora contingent interest in assets transferred to an unconsolidated entity thatprovides financing, liquidity, market risk or credit risk support to thecompany, (3) an obligation, including a contingent obligation, underderivative instruments classified as equity or (4) any obligation,including a contingent obligation, arising out of a material variable interestin an unconsolidated entity that provides financing, liquidity, market risk orcredit risk support to the company, or that engages in leasing, hedging orresearch and development arrangements 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. FinancialStatements and Supplementary Data - Note 5. Investments in and Advances to Affiliates” for a discussion ofcertain guarantees related to CPChem’s equity affiliates and “Part II- Item 8. Financial Statements and Supplementary Data - Note 10. Guarantees, Commitments and Indemnifications” for a discussion of the residual guarantee.

 

**Other**

 

*New Accounting Pronouncements.*  See “Part II – Item 8. FinancialStatements and Supplementary Data - Note2. Accounting Pronouncements.”

 

*Contingencies.*  See“Part II - Item 8.Financial Statements and Supplementary Data - Note 11.  ContingentLiabilities.”

 

30

----

 

**Item 7A.   Quantitativeand Qualitative Disclosures About Market Risk**

 

*Foreign Currency Risk*. Internationally, CPChem, including its equity affiliates,operates facilities in eight countries and sells product in many othercountries, resulting in transactions denominated in various currencies.  As such, CPChem is exposed to foreigncurrency risk to the extent there are devaluations and fluctuations in theexchange rates of those countries against the U.S. dollar and other foreigncurrencies which may adversely affect revenues and margins.  Thepotential foreign currency transaction gain/loss from a hypothetical 10%decrease (or increase) in the value of the U.S. dollar relative to those localcurrencies was approximately $5 million in the aggregate at December 31,2005.

 

*Interest Rate Risk.*  BecauseCPChem’s commercial paper obligations have maturities of 90 days or less andare generally reissued upon maturity, the debt is considered variable-ratebased.  The secured debt issued inconnection with the accounts receivable securitization program is alsovariable-rate based.  A hypothetical onepercentage point change in the weighted average interest rates of theoutstanding balances at December 31, 2005 of these debt instruments wouldimpact interest expense by approximately $3 million annually in the aggregate.

 

31

----

 

**Item8.**   FinancialStatements and Supplementary Data

 

**INDEXTO FINANCIAL STATEMENTS**

 
| ** **                                                                                                                                                                                              | **Page**   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Chevron Phillips Chemical Company LLC**                                                                                                                                                               | ** ** |
| ** **                                                                                                                                                                                              | ** ** |
| **Report of Independent Registered Public Accounting  Firm**                                                                                                                                            | **33**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Consolidated Statement of Operations for the years  ended December 31, 2005, 2004 and 2003**                                                                                                          | **34**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Consolidated Balance Sheet at December 31, 2005 and  2004**                                                                                                                                           | **35**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Consolidated Statement of Members’ Equity for the  years ended December 31, 2005, 2004 and 2003**                                                                                                | **36**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Consolidated Statement of Cash Flows for the years  ended December 31, 2005, 2004 and 2003**                                                                                                          | **37**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Notes to Consolidated Financial Statements**                                                                                                                                                          | **38**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Selected Quarterly Financial Data (Unaudited)**                                                                                                                                                       | **68**     |
| ** **                                                                                                                                                                                              | ** ** |
| ***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**                                                                                                                                                                               | **69**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Balance  Sheet at December 31, 2005, 2004 and 2003**                                                                                                                                                  | **70**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Income  Statement for the years ended December 31, 2005, 2004 and 2003**                                                                                                                              | **71**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Statement of Cash Flows for  the years ended December 31, 2005, 2004 and 2003**                                                                                                                       | **72**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Statement of  Changes in Partners’ Equity for the years ended December 31, 2005, 2004 and  2003**                                                                                                | **73**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Notes to the  Financial Statements**                                                                                                                                                                  | **74**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Qatar Chemical Company Ltd. (Q-Chem)**                                                                                                                                                                |       |
| ** **                                                                                                                                                                                              | ** ** |
| **Report of the Auditors**                                                                                                                                                                              | **83**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Auditors’ Report **                                                                                                                                                                         | **84**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Balance  Sheet at December 31, 2005, 2004 and 2003**                                                                                                                                                  | **85**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Statement  of Income for the years ended December 31, 2005, 2004 and 2003**                                                                                                                           | **86**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Statement of  Changes in Shareholders’ Equity for the years ended December 31, 2005, 2004  and 2003**                                                                                            | **87**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Statement of Cash Flows for  the years ended December 31, 2005, 2004 and 2003**                                                                                                                       | **88**     |
| ** **                                                                                                                                                                                              | ** ** |
| **Notes to the  Financial Statements**                                                                                                                                                                  | **89**     |

 

32

----

 

### **Reportof Independent Registered Public Accounting Firm**

 

To the Board of Directorsof Chevron Phillips Chemical Company LLC:

 

We have auditedthe accompanying consolidated balance sheets of Chevron Phillips ChemicalCompany LLC (the Company) as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, members’ equity, and cash flows for eachof the three years in the period ended December 31, 2005. 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’s management.Our responsibility is to express an opinion on these financial statements andschedule based on our audits. The financial statements of Qatar ChemicalCompany Ltd. (Q-Chem), a joint venture company in which the Company has a 49%interest, as of December 31, 2005 and 2004 and for each of the two years thenended, have been audited by other auditors whose report has been furnished tous, and our opinion on the consolidated financial statements, insofar as itrelates to the amounts included for Q-Chem, is based solely on the report ofthe other auditors. In the consolidated financial statements, the Company’sinvestment in Q-Chem is stated at $398 million and $387 million, respectively,at December 31, 2005 and 2004, and the Company’s equity in the net income ofQ-Chem is stated at $58 million and $57 million, for the years 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. We were not engaged to perform anaudit of the Company’s internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits and the report of other auditors provide a reasonable basis for ouropinion.

 

In our opinion,based on our audits and the report of other auditors, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Chevron Phillips Chemical Company LLC at December 31,2005 and 2004, and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles. Also, in ouropinion, the related financial statement schedule, when considered in relationto the basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

 

Ernst & Young LLP

 

Houston, Texas

February 20, 2006

 

33

----

 

**Chevron Phillips Chemical Company LLC**

##### **ConsolidatedStatement of Operations**

 
| ** **                                           | ** ** | **Years ended December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------|------------|
| **Millions**                                         | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenue                                              |       |                         |       |   |   |   |   |
| Net sales                                            |       | $                            | 10,707     |   | $ | 9,165 |   | $ | 6,838 |   |
| Equity in income  of affiliates, net                 |       | 185                          |       | 218 |   | 41 |   |
| Other income                                         |       | 146                          |       | 111 |   | 75 |   |
| Total revenue                                        |       | 11,038                       |       | 9,494 |   | 6,954 |   |
|                                                 |       |                         |       |   |   |   |   |
| Costs and  Expenses                                  |       |                         |       |   |   |   |   |
| Cost of goods  sold                                  |       | 9,601                        |       | 8,324 |   | 6,390 |   |
| Selling, general  and administrative                 |       | 462                          |       | 421 |   | 433 |   |
| Research and  development                            |       | 41                           |       | 42 |   | 55 |   |
| Total costs and  expenses                            |       | 10,104                       |       | 8,787 |   | 6,878 |   |
|                                                 |       |                         |       |   |   |   |   |
| Income Before  Interest and Taxes                    |       | 934                          |       | 707 |   | 76 |   |
|                                                 |       |                         |       |   |   |   |   |
| Interest income                                      |       | 17                           |       | 9 |   | 8 |   |
| Interest expense                                     |       | (78                          | )          | (75 | ) | (72 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Income Before  Taxes                                 |       | 873                          |       | 641 |   | 12 |   |
|                                                 |       |                         |       |   |   |   |   |
| Income taxes                                         |       | (20                          | )          | (15 | ) | (5 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Net Income                                           |       | 853                          |       | 626 |   | 7 |   |
|                                                 |       |                         |       |   |   |   |   |
| Distributions on  members’ preferred interests  |       | (2                           | )          | (21 | ) | (23 | ) |
|                                                 |       |                         |       |   |   |   |   |
| Income (Loss)  Attributed to Members’ Interests |       | $                            | 851        |   | $ | 605 |   | $ | (16 | ) |

 

See Notes to Consolidated Financial Statements.

 

34

----

 

**Chevron Phillips Chemical Company LLC**

##### **ConsolidatedBalance Sheet**

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| **Millions**                                    | ** ** | **2005**         | ** ** | **2004** | ** ** |
| ASSETS                                          |       |
| Current assets                                  |       |             |       |   |   |
| Cash and cash  equivalents                      |       | $                | 40         |   | $ | 63 |   |
| Accounts  receivable, net – trade          |       | 1,227            |       | 1,140 |   |
| Accounts receivable,  net – affiliates     |       | 166              |       | 126 |   |
| Inventories                                     |       | 776              |       | 784 |   |
| Other current  assets                           |       | 66               |       | 43 |   |
| Total current  assets                           |       | 2,275            |       | 2,156 |   |
|                                            |       |             |       |   |   |
| Property, plant  and equipment                  |       | 7,897            |       | 7,903 |   |
| Less:  accumulated depreciation                 |       | 4,317            |       | 4,135 |   |
| Net property,  plant and equipment              |       | 3,580            |       | 3,768 |   |
|                                            |       |             |       |   |   |
| Investments in  and advances to affiliates      |       | 1,057            |       | 893 |   |
| Other assets and  deferred charges              |       | 48               |       | 55 |   |
|                                            |       |             |       |   |   |
| Total Assets                                    |       | $                | 6,960      |   | $ | 6,872 |   |
|                                            |       |             |       |   |   |
| LIABILITIES AND  MEMBERS’ EQUITY           |
|                                            |       |             |       |   |   |
| Current  liabilities                            |       |             |       |   |   |
| Accounts payable  – trade                  |       | $                | 767        |   | $ | 665 |   |
| Accounts payable  – affiliates             |       | 250              |       | 219 |   |
| Accrued income  and other taxes                 |       | 64               |       | 60 |   |
| Accrued  salaries, wages and benefits           |       | 118              |       | 102 |   |
| Secured  borrowings and other debt              |       | 105              |       | 201 |   |
| Accrued  distributions to members               |       | 302              |       | 39 |   |
| Other current  liabilities and deferred credits |       | 51               |       | 55 |   |
| Total current  liabilities                      |       | 1,657            |       | 1,341 |   |
|                                            |       |             |       |   |   |
| Long-term debt                                  |       | 1,186            |       | 1,390 |   |
| Other  liabilities and deferred credits         |       | 87               |       | 91 |   |
|                                            |       |             |       |   |   |
| Total liabilities                               |       | 2,930            |       | 2,822 |   |
|                                            |       |             |       |   |   |
| Members’  preferred interests              |       | —           |       | 75 |   |
|                                            |       |             |       |   |   |
| Members’ capital                           |       | 4,000            |       | 3,925 |   |
| Accumulated  other comprehensive income         |       | 30               |       | 50 |   |
| Total members’  equity                     |       | 4,030            |       | 3,975 |   |
|                                            |       |             |       |   |   |
| Total  Liabilities and Members’ Equity     |       | $                | 6,960      |   | $ | 6,872 |   |

 

See Notes to Consolidated Financial Statements.

 

35

----

 

**Chevron Phillips Chemical Company LLC**

##### **ConsolidatedStatement of Members’ Equity**

 
| **Millions**                                        | ** ** | **Members’  Capital** | ** ** | **Accumulated Other  Comprehensive  Income (Loss)** | ** ** | **Total  Members’  Equity** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------|------------|----------------------------------|------------|
|                                                |       |                       |       |                                                |       |                             |       |
| 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                            |       |
|                                                |       |                       |       |                                                |       |                             |       |
| Net income                                          |       | 853                        |       | —                                              |       | 853                              |       |
| Foreign currency  translation adjustments           |       | —                     |       | (20                                                 | )          | (20                              | )          |
| Total  comprehensive income                         |       |                       |       |                                                |       | 833                              |       |
| Distributions on  members’ preferred interests |       | (2                         | )          | —                                              |       | (2                               | )          |
| Other  distributions to members                     |       | (776                       | )          | —                                              |       | (776                             | )          |
|                                                |       |                       |       |                                                |       |                             |       |
| Balance on December 31, 2005                        |       | $                          | 4,000      |                                                | $          | 30                               |       | $ | 4,030 |   |

 

**SeeNotes to Consolidated Financial Statements**.

** **

**36**

----

** **

**Chevron Phillips Chemical Company LLC**

##### **ConsolidatedStatement of Cash Flows**

 
| ** **                                                                                      | ** ** | **Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **Millions**                                                                                    | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash Flows From  Operating Activities                                                           |       |                         |       |   |   |   |   |
| Net income                                                                                      |       | $                            | 853        |   | $ | 626 |   | $ | 7 |   |
| Adjustments to  reconcile net income to net cash flows provided by operating activities         |       |                         |       |   |   |   |   |
| Depreciation,  amortization and retirements                                                     |       | 283                          |       | 281 |   | 298 |   |
| Undistributed  equity in income of affiliates, net                                              |       | (115                         | )          | (197 | ) | (28 | ) |
| Changes in  operating working capital                                                           |       | (6                           | )          | (235 | ) | (14 | ) |
| Other operating  cash flow activity                                                             |       | 16                           |       | (16 | ) | 17 |   |
| Net cash flows  provided by operating activities                                                |       | 1,031                        |       | 459 |   | 280 |   |
|                                                                                            |       |                         |       |   |   |   |   |
| Cash Flows From  Investing Activities                                                           |       |                         |       |   |   |   |   |
| Capital and  investment expenditures                                                            |       | (177                         | )          | (191 | ) | (203 | ) |
| Investments in  and advances towards JCP Project                                                |       | (35                          | )          | (10 | ) | (20 | ) |
| Advance  repayments from (investments in and advances to) Qatar Chemical Company Ltd.  (Q-Chem) |       | 25                           |       | (28 | ) | (103 | ) |
| Advance  repayments from Saudi Chevron Phillips Company                                         |       | 9                            |       | 32 |   | — |   |
| Proceeds from  the sale of assets                                                               |       | 15                           |       | 18 |   | 1 |   |
| Net cash flows  used in investing activities                                                    |       | (163                         | )          | (179 | ) | (325 | ) |
|                                                                                            |       |                         |       |   |   |   |   |
| Cash Flows From  Financing Activities                                                           |       |                         |       |   |   |   |   |
| Increase  (decrease) in commercial paper, net                                                   |       | (203                         | )          | 201 |   | (1 | ) |
| Increase  (decrease) in secured borrowings, net                                                 |       | (100                         | )          | (100 | ) | 10 |   |
| Increase  (decrease) in other debt, net                                                         |       | 2                            |       | (13 | ) | 8 |   |
| Redemptions of members’  preferred interests                                               |       | (75                          | )          | (175 | ) | — |   |
| Distributions on  members’ preferred interests                                             |       | (2                           | )          | (55 | ) | — |   |
| Other  distributions to members                                                                 |       | (513                         | )          | (118 | ) | — |   |
| Contributions  from members                                                                     |       | —                       |       | — |   | 32 |   |
| Net cash flows  provided by (used in) financing activities                                      |       | (891                         | )          | (260 | ) | 49 |   |
|                                                                                            |       |                         |       |   |   |   |   |
| Net Increase  (Decrease) in Cash and Cash Equivalents                                           |       | (23                          | )          | 20 |   | 4 |   |
| Cash and Cash  Equivalents at Beginning of Period                                               |       | 63                           |       | 43 |   | 39 |   |
| Cash and Cash  Equivalents at End of Period                                                     |       | $                            | 40         |   | $ | 63 |   | $ | 43 |   |
|                                                                                            |       |                         |       |   |   |   |   |
| *Supplemental  Disclosures of Cash Flow Information*                                            |       |                         |       |   |   |   |   |
| Changes in  operating working capital                                                           |       |                         |       |   |   |   |   |
| Increase in  accounts receivable                                                                |       | $                            | (132       | ) | $ | (408 | ) | $ | (100 | ) |
| Decrease  (increase) in inventories                                                             |       | (4                           | )          | (77 | ) | 13 |   |
| Increase in  other current assets                                                               |       | (25                          | )          | (13 | ) | (5 | ) |
| Increase in  accounts payable                                                                   |       | 138                          |       | 216 |   | 70 |   |
| Increase in  accrued income and other taxes                                                     |       | 5                            |       | 6 |   | 1 |   |
| Increase in  other current liabilities                                                          |       | 12                           |       | 41 |   | 7 |   |
| Total                                                                                           |       | $                            | (6         | ) | $ | (235 | ) | $ | (14 | ) |
| Cash paid for  interest                                                                         |       | $                            | 76         |   | $ | 70 |   | $ | 70 |   |
| Cash paid for  income taxes                                                                     |       | $                            | 22         |   | $ | 18 |   | $ | 5 |   |

 

See Notes toConsolidated Financial Statements.

 

37

----

 

**Chevron Phillips Chemical Company LLC**

##### **Notes toConsolidated Financial Statements**

 

| **Index** | ** ** | ** **                                    | **Page** |
|-----------|------------|-----------------------------------------------|----------|
| 1.        |       | Nature of Operations                          | 38       |
| 2.        |       | Summary of Significant  Accounting Policies   | 38       |
| 3.        |       | Transactions with Affiliates                  | 41       |
| 4.        |       | Inventories                                   | 42       |
| 5.        |       | Investments in and Advances  to Affiliates    | 43       |
| 6.        |       | Property, Plant and Equipment                 | 47       |
| 7.        |       | Environmental Liabilities                     | 48       |
| 8.        |       | Debt                                          | 48       |
| 9.        |       | Members’ Preferred Interests             | 49       |
| 10.       |       | Guarantees, Commitments and  Indemnifications | 49       |
| 11.       |       | Contingent Liabilities                        | 50       |
| 12.       |       | Credit Risk                                   | 51       |
| 13.       |       | Operating Leases                              | 51       |
| 14.       |       | Benefit Plans                                 | 51       |
| 15.       |       | Taxes                                         | 55       |
| 16.       |       | Segment and Geographic  Information           | 57       |
| 17.       |       | Fair Values of Financial  Instruments         | 59       |
| 18.       |       | Consolidating Financial  Statements           | 60       |

 

Note 1.          Natureof 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 Chevron Corporation (“Chevron,” formerly ChevronTexacoCorporation) and ConocoPhillips (collectively, the “members”).

 

The company is governedby its Board of Directors (the “Board”), comprised of six representatives,under the terms of a limited liability company agreement. Chevron andConocoPhillips each have two voting representatives, and the chief executiveofficer and the chief financial officer of the company are non-votingrepresentatives. Certain major decisions and actions require the approval ofthe Board. All decisions and actions of the Board require the approval of atleast one representative of both Chevron and ConocoPhillips.

 

Note 2.          Summaryof Significant Accounting Policies

 

*Basis ofFinancial Statements –* The accompanying consolidatedfinancial statements include the accounts of Chevron Phillips Chemical CompanyLLC and its 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.

 

38

----

 

*Estimates,Risks and Uncertainties –* The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect certainamounts reported in the financial statements and accompanying notes. Actualresults could differ from these estimates and assumptions.

 

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. However,any such loss could have a material impact on financial results in the periodrecorded.

 

*RevenueRecognition –*Sales of petrochemicals, natural gas liquidsand other items, including by-products, are recorded when title passes to thecustomer. Revenues from royalties for licensed technology are recorded as theassociated services are rendered when royalties are paid in advance, and asvolumes are produced by the licensee when royalties are paid based on alicensee’s production. Sales are presented net of discounts and allowances. Freightcosts billed to customers are recorded as a component of revenue.

 

*Cash and Cash Equivalents –* Cashequivalents are highly liquid, short-term investments readily convertible toknown amounts of cash that have original maturities of three months or lessfrom date of purchase.

 

*Accounts receivable**–* Accounts receivable is shown net of a $14 millionallowance for estimated non-recoverable amounts at December 31, 2005 and net ofa $7 million allowance at December 31, 2004.

 

*Inventories–* For U.S. operations, cost of product inventories isprimarily determined using the dollar-value, last-in, first-out (LIFO) method. Theseinventories are valued at the lower of cost or market, aggregated at thesegment level. Lower-of-cost-or-market write-downs for LIFO-valued inventoriesare generally considered temporary. For operations outside the United States,product inventories are valued using a combination of the first-in, first-out(FIFO) and weighted average methods. Materials and supplies inventories arecarried at average cost.

 

*Property,Plant and Equipment –*****Property,plant and equipment is stated at cost. Property, plant and equipment is comprisedof assets, 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.

 

*Impairmentof 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 assetsare grouped 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. If, upon review, the sumof the projected undiscounted pre-tax cash flows is less than the carryingvalue of the asset group, the carrying value is written down to estimated fairvalue. The fair values of impaired assets are usually determined based on thepresent value of projected future cash flows using discount rates commensuratewith the risks involved in the asset group, as quoted market prices in activemarkets are generally not available.

 

The expectedfuture cash flows used for impairment reviews and related fair valuecalculations are based on projected production volumes, sales volumes, pricesand costs, considering available information at the date of review.

 

39

----

 

*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.

 

*PropertyDispositions –*****Assets thatare no longer in service and for which there is no contemplated future use byCPChem are 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 a discounted 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**–*Interestcosts incurred to finance projects of at least $75 million and that are longerthan one year in duration, and interest costs associated with investments inequity affiliates that have their planned principal operations underconstruction, are capitalized until commercial production begins. Capitalizedinterest is generally amortized over the life of the associated asset. Unamortizedcapitalized interest totaled $42 million at both December 31, 2005 and December31, 2004. Interest costs capitalized totaled $3 million in 2005, $1 million in2004 and $3 million in 2003.

 

*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 for anyforeign taxes incurred. CPChem follows the liability method of accounting forthese income taxes.

 

*Accounting Pronouncements* – The Financial Accounting Standards Board (the “FASB”)issued Interpretation No. 46 (revised December 2003), “Consolidation ofVariable Interest Entities” (FIN No. 46(R)), which provides guidance as to whena company is required to include in its financial statements the assets,liabilities and activities of a variable interest entity (a “VIE”). A VIE isgenerally a corporation, partnership, trust, or any other legal structure usedfor business purposes that either does not have equity investors with votingrights or that has equity investors that do not provide sufficient financialresources for the entity to support its activities. FIN No. 46(R) requires aVIE to be consolidated by a company if that company is subject to a majority ofthe risk of loss from the activities of the VIE or is entitled to receive amajority of the residual returns of the VIE. FIN No. 46(R) also requiresdisclosures about VIEs that are not required to be consolidated by a company,but in which the company has a significant variable interest. The consolidationrequirements of FIN No. 46(R) became effective January 1, 2005 for CPChem. FIN No. 46(R) did not require the consolidation of any existing VIE into CPChem’sconsolidated financial statements.

 

InNovember 2004, the FASB issued Statement of Financial Accounting Standards(SFAS) No. 151, “Inventory Costs, an Amendment of ARB No. 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 requires that allocation of fixed productionoverheads to the costs of conversion be based on the normal capacity of theproduction facilities. For CPChem, the provisions of SFAS No. 151 are effectiveJanuary 1, 2006. CPChem believes that implementation of this standard will nothave a material impact on consolidated results of operations, financialposition or liquidity.

 

40

----

 

In December 2004, theFASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets, an Amendment ofAPB Opinion No. 29.”  The guidance inAccounting Principles Board (APB) Opinion No. 29, “Accounting for Non-MonetaryTransactions,” is based on the principle that exchanges of non-monetary assetsshould be measured based on the fair value of the assets exchanged, withcertain exceptions. This statement amends APB Opinion No. 29 to eliminate the exceptionfor non-monetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of non-monetary assets that do not havecommercial substance. A non-monetary exchange does not have commercialsubstance if the future cash flows of the entity are not expected to changesignificantly as a result of the exchange. For CPChem, the provisions of SFASNo. 153 were effective July 1, 2005. Implementation of this standard did nothave a material impact on consolidated results of operations, financialposition or liquidity.

 

In 2003, CPChem adoptedSFAS No. 143, “Accounting for Asset Retirement Obligations,” which addressesthe accounting and reporting requirements for legal obligations associated withretirement of long-lived assets. On December 31, 2005, CPChem adopted FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations, an Interpretation of FASB Statement No. 143” (FIN No. 47), whichmainly clarifies the timing of the recording of certain asset retirementobligations. CPChem has entered into certain right of way agreements withlandowners, some of which require removal of pipelines if they are idled for aspecified period of time. In addition, certain CPChem facilities containamounts of asbestos that may require abatement in the future. CPChem performsperiodic reviews of its long-lived assets for, among other things, changes infacts and circumstances that might require the recognition of a retirementobligation. Implementation of SFAS No. 143 and FIN No. 47 did not have amaterial impact on consolidated results of operations, financial position orliquidity.

 

InSeptember 2005, the Emerging Issues Task Force (EITF) of the FASB reached aconsensus on Issue No. 04-13, “Accounting for Purchases and Sales of Inventorywith the Same Counterparty.”  Insituations in which one inventory transaction is entered into in contemplationof another inventory transaction in the same line of business with the samecounterparty, the two inventory transactions are deemed to be a singlenon-monetary exchange transaction. It was determined that such transactionsshould generally be recognized at the carrying amount of the inventorytransferred. For CPChem, the provisions of EITF Issue No. 04-13 are effectiveApril 1, 2006. CPChem believes that implementation of EITF Issue No. 04-13 willnot have a material impact on consolidated results of operations, financialposition or liquidity.

 

Note 3.          Transactionswith Affiliates

 

Significanttransactions with affiliated parties, including equity affiliates, were asfollows:

 
| ** **                                  | ** ** | **Years ended December 31,** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| **Millions**                                | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net sales (a)                               |       | $                            | 1,291      |   | $ | 1,085 |   | $ | 789 |   |
| Other income                                |       | 63                           |       | 54 |   | 33 |   |
| Cost of goods sold (b),(c),(d)              |       | 2,560                        |       | 2,440 |   | 1,573 |   |
| Selling, general and administrative (c),(d) |       | 5                            |       | 8 |   | 11 |   |
|                                             |            |                              |            |  |  |  |  |  |  |  |

 

(a)          CPChemsells ethylene residue gas to ConocoPhillips’ crude oil refining operations; specialtychemicals, alpha olefin products and aromatics and styrenics by-products toChevron; and feedstocks and various services to non-consolidated equitycompanies, all at prices that approximate market.

 

41

----

 

(b)         CPChempurchases various feedstocks and finished product from Chevron andConocoPhillips, and also purchases finished product from certainnon-consolidated equity companies. In addition, Chevron and ConocoPhillipsprovide CPChem certain common facility and manufacturing services at some ofCPChem’s facilities.

 

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

 

(d)         Cost ofgoods sold amounts include billings to certain non-consolidated equity companiesfor non-core services provided at cost, totaling $94 million in 2005, $73million in 2004 and $68 million in 2003, that were credited to expense. Selling,general and administrative amounts include similar credits totaling $40 millionin 2005, $32 million in 2004 and $33 million in 2003.

 

In2005, CPChem made discretionary distributions to its members totaling $250million. See Note 9 for a discussion of members’ preferred interests and Note15 for a discussion of tax distributions to members.

 

The K-Resin®styrene-butadiene copolymer (SBC) plant at the Pasadena Plastics Complex inPasadena, Texas, while still owned by ConocoPhillips, was idled in March 2000due to a fire. The contribution agreement that was entered into upon theformation of CPChem contained certain provisions related to pre-establishedK-Resin® SBC plant earnings and production targets. In accordancewith those provisions, ConocoPhillips made member contributions of $22 millionin 2003.

 

# **Note 4.**          Inventories

 

Inventories wereas follows:

 

| ** **                    | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Millions**                  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| LIFO inventories              |       |             |       |   |   |
| Olefins &  Polyolefins    |       | $                | 294        |   | $ | 267 |   |
| Aromatics &  Styrenics    |       | 133              |       | 169 |   |
| Specialty  Products           |       | 55               |       | 48 |   |
| Total LIFO  inventories       |       | 482              |       | 484 |   |
| Non-LIFO  inventories         |       |             |       |   |   |
| Olefins & Polyolefins     |       | 119              |       | 111 |   |
| Aromatics &  Styrenics    |       | 83               |       | 91 |   |
| Specialty  Products           |       | 36               |       | 47 |   |
| Total non-LIFO  inventories   |       | 238              |       | 249 |   |
| Materials, supplies and other |       | 56               |       | 51 |   |
| Total inventories             |       | $                | 776        |   | $ | 784 |   |

 

The excess ofreplacement cost over book value of product inventories valued under the LIFOmethod was $552 million at December 31, 2005 and $396 million at December 31,2004.

 

CPChem recordedgains of $14 million in 2005 (Aromatics & Styrenics), $4 million in 2004(Olefins & Polyolefins) and $13 million in 2003 ($10 million in Olefins& Polyolefins and $3 million in Aromatics & Styrenics) related toreductions in certain LIFO-valued inventories.

 

42

----

 

# **Note 5.**          Investmentsin and Advances to Affiliates

# ** **

CPChem’sinvestments in its affiliates are accounted for using the equity method. Theseaffiliates are also engaged in the manufacturing and marketing ofpetrochemicals. The carrying amounts of these investments were as follows:

 
| ** **                                              | ** ** | ** **    | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|------------------|------------|
| **Millions**                                            | ** ** | **Ownership** | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Qatar Chemical  Company Ltd. (Q-Chem)                   |       | 49            | %          | $                | 398        |   | $ | 387 |   |
| Saudi Chevron  Phillips Company                         |       | 50            | %          | 353              |       | 303 |   |
| Jubail Chevron  Phillips Company                        |       | 50            | %          | 72               |       | 27 |   |
| Phillips Sumika  Polypropylene Company                  |       | 60            | %*         | 62               |       | 52 |   |
| Chevron Phillips  Singapore Chemicals (Private) Limited |       | 50            | %          | 58               |       | 58 |   |
| K R Copolymer  Co., Ltd.                                |       | 60            | %          | 41               |       | 42 |   |
| Shanghai Golden  Phillips Petrochemical Company Limited |       | 40            | %          | 23               |       | 24 |   |
| Qatar Chemical  Company II Ltd. (Q-Chem II)             |       | 49            | %          | 50               |       | — |   |
| Total  investments                                      |       |          |       | $                | 1,057      |   | $ | 893 |   |

 

* Profit/losssharing percentage.

 

Dividends receivedfrom equity affiliates totaled $70 million in 2005, $21 million in 2004 and $13million in 2003. CPChem’s members’ capital included $184 million of undistributed net earnings from equity affiliatesat December 31, 2005 and $69million at December 31, 2004.

 

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 ChemicalCompany Ltd. (Q-Chem) is a joint venture company that owns a petrochemicalcomplex in Qatar. Prior to achieving project completion, CPChem made certainadvances to Q-Chem under a subordinated loan agreement. In addition, CPChemagreed to provide up to $75 million of loans to Q-Chem if there is insufficientcash to pay the minimum debt service payments on Q-Chem’s senior bank financing.CPChem also agreed to loan funds to Q-Chem through December 2006 if there isinsufficient cash to make Q-Chem’s targeted debt service payments. This loanwould be limited to the amount of lost operating margins resulting from salesvolumes being less than design capacity, or the actual cash deficiency,whichever is less. CPChem believes it is unlikely that funding under thesesupport agreements will be required.

 

CPChem is party toan agency agreement with Q-Chem to act as an agent for the sale ofsubstantially all of Q-Chem’s production. CPChem is also party to an offtakeand credit risk agreement with Q-Chem, under which CPChem is required topurchase, at market prices, specified amounts of production if CPChem fails tosell that product under the terms of the agency agreement. CPChem has noexposure to price risk for volumes it may be obligated to purchase under theterms of the offtake agreement. CPChem also guarantees the customer payments toQ-Chem for all sales arranged by CPChem under the agency agreement. The offtakeand credit 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. CPChem expects that it will be able to sellall the production under the terms of the agency agreement, and further expectsthat reimbursements to Q-Chem for customer payment defaults, if any, would beminimal.

 

43

----

 

CPChem’s rights under the subordinated loan agreement and the otherloan agreements described above are subordinate to Q-Chem’s senior bank debt. Securityinterests in the notes related to such loans have been granted to the banks tosupport the terms of subordination. Advances to Q-Chem under the subordinatedloan agreement totaled $273 million at December 31, 2005 and $310 million atDecember 31, 2004. As it applies to CPChem, Q-Chem is not considered to be aVIE under the provisions of FIN No. 46(R).

 

*QatarChemical Company II Ltd. (Q-Chem II)*

 

CPChemand Qatar Petroleum announced plans in 2001 for the development of apetrochemical project in Mesaieed, Qatar, designed to produce polyethylene (770million pounds per year) and normal alpha olefins (760 million pounds per year).These plants will be owned by Qatar Chemical Company II Ltd. (Q-Chem II), anequity affiliate that is owned 49% by CPChem and 51% by Qatar Petroleum. Bothplants will be located on a site adjacent to the existing complex owned byQatar Chemical Company Ltd. (Q-Chem). In connection with this project, CPChemand Qatar Petroleum (the “co-venturers”) entered into a separate agreement in2002 with Total Petrochemicals and Qatar Petrochemical Company Ltd.,establishing a joint venture to develop a 2.9 billion-pound-per-year ethylene cracker in Ras Laffan Industrial City, Qatar. The cracker will provide ethylene feedstockvia pipeline to the planned polyethylene and normal alpha olefins plants.

 

Theethylene cracker and pipeline will be owned by Ras Laffan Olefins Company, ajoint venture of Q-Chem II and Qatofin Company Limited (Qatofin). Q-Chem IIwill own 53.85% of the capacity rights to the ethylene cracker and pipeline,and the balance will be held by Qatofin. Collectively, Q-Chem II’s interest inthe ethylene cracker and pipeline, and the polyethylene and normal alphaolefins plants are referred to as “the Q-Chem II project.”  Construction began in late 2005, withstart-up anticipated in late 2008. The project will be financed through limitedrecourse loans from commercial banks and an export credit agency (collectively,“senior debt”), and equity contributions and subordinated loans from theco-venturers. As it applies to CPChem, Q-Chem II is not considered to be a VIE under theprovisions of FIN No. 46(R).

 

Financial closingof the Q-Chem II project occurred on November 16, 2005. Effective with thefinancial closing, the following commitments and guarantees were granted:

 

Under the terms ofthe financing agreements, funding available from the senior debt is limited to70% of project costs, as defined, or $1.478 billion, whichever is lower. Principaland accrued interest outstanding under the commercial bank loans and the loanfrom the export credit agency totaled $48 million at December 31, 2005. Theco-venturers are obligated to each fund their pro rata ownership share ofQ-Chem II’s share of project costs that are not funded by senior debt andoperating cash flow through equity contributions and non-interest-bearingsubordinated loans, subject to stated maximum amounts for each co-venturer. Afterthese amounts are reached, additional project costs, if any, related to Q-ChemII’s share of total project costs will be funded by an interest-bearingsubordinated loan from CPChem. These funding obligations terminate uponachieving project completion, as defined in the financing agreements.

 

Under the terms of acompletion guarantee in the financing agreements, if project completion has notoccurred by June 30, 2010, the senior debt lenders will have the right todemand from each co-venturer, on a pro rata basis, funds to cover the quarterlysenior debt service requirements that are due after June 30, 2010, untilproject completion is achieved. If the project is not completed by June 30,2011, they will further have the right to demand from each co-venturer, on apro rata basis, repayment of all outstanding principal and interest on thesenior debt. CPChem believes it is unlikely that performance under theseguarantees will be required.

 

44

----

 

Each co-venturerhas also agreed to provide loans to Q-Chem II, on a pro rata basis and for aperiod of three years after project completion, if there is insufficient cashavailable to pay the targeted quarterly principal amounts due on the seniordebt. These loans (a) are limited to the amount of lost operating marginsdirectly resulting from any shortfalls in feedstock supplies, or the actualcash deficiency, whichever is less, and (b) are capped at $50 million for theco-venturers, combined. CPChem believes that any funding required under thissupport agreement is unlikely to have a material adverse effect on CPChem’sconsolidated results of operations, financial position or liquidity.

 

CPChem is party to anagency agreement with Q-Chem II to act as an agent for the sale ofsubstantially all of Q-Chem II’s polyethylene and all of its normal alphaolefins production. CPChem is also party to an offtake and credit riskagreement with Q-Chem II under which CPChem is required to purchase, at marketprices, specified amounts of production if CPChem fails to sell that productunder the terms of the agency agreement. CPChem has no exposure to price riskfor any volumes it may be obligated to purchase under the terms of the offtakeagreement. CPChem also guarantees the customer payments to Q-Chem II for allsales arranged by CPChem under the agency agreement. The offtake and creditrisk agreement expires the earlier of (a) 12 years after commencement of thecommercial operation date, as defined, or (b) the cessation of Q-Chem II as ajoint venture. CPChem expects that it will be able to sell all the productionunder the terms of the agency agreement, and further expects thatreimbursements to Q-Chem II for customer payment defaults, if any, would beminimal.

 

The total carryingamount of liabilities recorded, discounted and weighted for probability, forthe aforementioned guarantees related to Q-Chem II totaled $3 million atDecember 31, 2005. The liabilities are recorded as Other Liabilities andDeferred Credits, with an offsetting increase to Investments in and Advances toAffiliates.

 

*SaudiChevron Phillips Company*

 

Saudi Chevron PhillipsCompany (SCP) is a joint venture company that owns an aromatics complex in AlJubail, Saudi Arabia. The subsidiary of Chevron Phillips Chemical Company LLCwhich directly owns the 50% interest in SCP, along with the other co-venturer,have each guaranteed their respective 50% share of certain loans to SCP from aSaudi Arabian governmental agency. These loans totaled $12 million (gross) atDecember 31, 2005 and $69 million at December 31, 2004. CPChem believes it isunlikely that funding under this guarantee will be required. Chevron PhillipsChemical Company LLC is not a party to this guarantee. As it applies to CPChem, SCP is not considered to be a VIE under theprovisions of FIN No. 46(R).

 

Underthe terms of a sales and marketing agreement that runs through 2026, CPChem isobligated to purchase, at market prices, 100% of production from the plant lessany quantities sold by SCP in the Middle East. CPChem has no exposure to pricerisk for volumes it may be obligated to purchase and believes that it willcontinue to be able to sell all the purchased production required under theterms of the sales and marketing agreement.

 

45

----

 

*JubailChevron Phillips Company*

 

Jubail Chevron PhillipsCompany (JCP), a joint venture company, was formed in 2003 to develop anintegrated styrene facility in Al Jubail, 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 late 2007. Itis estimated that project completion, as defined in the JCP project’s financingagreements, will be achieved in the first half of 2008. As it applies to CPChem, JCP is notconsidered to be a VIE under the provisions of FIN No. 46(R).

 

The$1.2 billion JCP project is being financed through equity contributions andsubordinated loans from the co-venturers, in proportion to their equalownership interests, and limited recourse loans from commercial banks and twoSaudi Arabian governmental agencies (collectively, called “senior debt”). Principaland accrued interest outstanding under the commercial bank loans and the loanfrom the first governmental agency totaled $266 million at December 31, 2005and $92 million at December 31, 2004. No amounts were outstanding under theloan agreements with the second governmental agency.

 

Underthe terms of the commercial bank facilities, funding available from the seniordebt is limited to 75% of the estimated project cost, as defined. The JCPco-venturers are obligated to each fund their respective 50% share of theremaining estimated project cost through equity contributions and subordinatedloans. In addition, the co-venturers are obligated to each fund theirrespective 50% share, through equity contributions or subordinated loans, ofany project costs incurred in excess of the estimated project cost and of anyproject costs not funded by senior debt. These funding obligations terminateupon achieving project completion.

 

Under the terms ofcompletion guarantees, if project completion has not occurred by March 31,2009, the commercial bank lenders and the first Saudi Arabian governmentalagency will have the right to demand from each JCP co-venturer, on a pro ratabasis, funds to cover the debt service requirements associated with the JCPproject that are due after March 31, 2009 until project completion is achieved.Furthermore, if the project is not completed by March 31, 2010, they will havethe right to demand from each co-venturer, on a pro rata basis, repayment ofall outstanding principal and interest.

 

The subsidiary ofCPChem which directly owns the 50% interest in JCP, along with the otherco-venturer, have each guaranteed their respective 50% share of certain loanspayable by JCP to the second Saudi Arabian governmental agency for the durationof the loans.

 

Inaddition to the above guarantees, each co-venturer guaranteed their respective50% share of payment to a contractor for certain construction costs of theproject, limited to a maximum of $103 million each. The guarantee remains ineffect until payment for those construction costs is made.

 

The total carryingamount of liabilities recorded, discounted and weighted for probability, forthe aforementioned guarantees related to the JCP project totaled $11 million atDecember 31, 2005 and $4 million at December 31, 2004. The liabilities arerecorded as Other Liabilities and Deferred Credits, with an offsetting increaseto Investments in and Advances to Affiliates. CPChem believes it is unlikelythat performance under any of the guarantees will be required. However, shouldsuch performance be required, CPChem believes it would not have a materialadverse effect on consolidated results of operations, financial position orliquidity.

 

46

----

 

*EquityInvestments’ Financial Information*

 

##### **In accordance with the Securitiesand Exchange Commission’s rules pertaining to equity investments that aredeemed to be “significant” in any of the periods presented, summarizedfinancial information for CPChem’s equity investments, shown at 100%, follows:**

 
| ** **                         | ** ** | **Qatar Chemical  Company Ltd. (Q-Chem)** | ** ** | **Saudi Chevron  Phillips Company** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                         | ** ** | **Years ended December 31,**              | ** ** | **Years ended December 31,**        | ** ** |
| **Millions**                       | ** ** | **2005**                                  | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                           |       | $                                         | 437        |                                | $          | 324 |   | $ | 73 |   | $ | 618 |   | $ | 665 |   | $ | 392 |   |
| Income (loss)  before income taxes |       | 182                                       |       | 129                                 |       | (40 | ) | 218 |   | 304 |   | 115 |   |
| Net income  (loss)                 |       | 128                                       |       | 117                                 |       | (40 | ) | 218 |   | 304 |   | 115 |   |
|                                    |            |                                           |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------|------------|------------------|------------|------------------|------------|
| ** **             | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current assets         |       | $                | 323        |             | $          | 265 |   | $ | 111 |   | $ | 373 |   | $ | 388 |   | $ | 197 |   |
| Noncurrent  assets     |       | 848              |       | 880              |       | 940 |   | 489 |   | 460 |   | 475 |   |
| Current  liabilities   |       | 143              |       | 110              |       | 104 |   | 125 |   | 137 |   | 87 |   |
| Noncurrent liabilities |       | 772              |       | 889              |       | 974 |   | 43 |   | 135 |   | 294 |   |
|                        |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                  | ** ** | **All Others  in the Aggregate** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Years ended December 31,**     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Millions**                | ** ** | **2005**                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                    |       | $                                | 1,130      |       | $          | 951        |       | $          | 682        |   |   |   |   |   |   |   |
| Income before  income taxes |       | 44                               |       | 33         |       | 13         |       |       |       |   |   |   |   |
| Net income                  |       | 39                               |       | 28         |       | 10         |       |       |       |   |   |   |   |
|                        |       |                             |       |       |       |       |       |       |       |   |   |   |   |
| ** **                  | ** ** | **December 31,**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **2005**                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current assets              |       | $                                | 330        |       | $          | 295        |       | $          | 196        |   |   |   |   |   |   |   |
| Noncurrent  assets          |       | 871                              |       | 412        |       | 357        |       |       |       |   |   |   |   |
| Current  liabilities        |       | 225                              |       | 134        |       | 105        |       |       |       |   |   |   |   |
| Noncurrent  liabilities     |       | 519                              |       | 191        |       | 90         |       |       |       |   |   |   |   |

 

Note 6.          Property,Plant and Equipment

 

Property, plantand equipment was as follows:

 
| ** **                                    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------|------------|------------------|------------|
| **Millions**                                  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Olefins &  Polyolefins                    |       | $                | 5,113      |   | $ | 5,086 |   |
| Aromatics &  Styrenics                    |       | 2,019            |       | 2,060 |   |
| Specialty  Products                           |       | 587              |       | 589 |   |
| Other                                         |       | 178              |       | 168 |   |
| Gross property,  plant and equipment, at cost |       | 7,897            |       | 7,903 |   |
| Accumulated  depreciation                     |       | 4,317            |       | 4,135 |   |
| Net property,  plant and equipment            |       | $                | 3,580      |   | $ | 3,768 |   |

 

47

----

 

Approximately $6.4billion of gross property, plant and equipment at December 31, 2005 consistedof chemical plant assets depreciated on estimated useful lives of approximately25 years. Other non-plant items, such as furniture, fixtures, buildings andautomobiles, have estimated useful lives ranging from 5 to 45 years, with aweighted average of 27 years.  Assetsunder construction totaled $115 million at December 31, 2005 and $136 millionat December 31, 2004.

 

In October 2005,CPChem sold its Port Arthur, Texas cumene production unit, which was idled in2003. CPChem will continue to provide certain operational and maintenanceservices related to the cumene unit.

 

Note 7.          EnvironmentalLiabilities

 

CPChem is subjectto federal, state and local environmental laws and regulations that may resultin obligations to mitigate or remove the effects on the environment of theplacement, storage, disposalor release of certain chemical, mineral and petroleum substances at its sites. Discountedaccrued environmental liabilities totaled $5 million at December 31, 2005 and$6 million at December 31, 2004. There were no material differences betweenaccrued discounted environmental liabilities and the associated undiscountedamounts. In addition, there were no accrued environmental costs associated withdiscontinued or sold operations.

 

Note 8.          Debt

 

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

 
| ** **                  | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|------------------|------------|
| **Millions**                | ** ** | **2005**         | ** ** | **2004** | ** ** |
| 5 3/8%  notes due 2007 |       | $                | 500        |   | $ | 500 |   |
| 7% notes due  2011          |       | 500              |       | 500 |   |
| Commercial paper            |       | 182              |       | 385 |   |
| Other                       |       | 7                |       | 9 |   |
| Subtotal                    |       | 1,189            |       | 1,394 |   |
| Unamortized debt  discount  |       | (3               | )          | (4 | ) |
| Total long-term  debt       |       | $                | 1,186      |   | $ | 1,390 |   |

 

In addition to theinformation presented, CPChem had secured borrowings outstanding totaling $100million at December 31, 2005 and $200 million at December 31, 2004 under atrade receivables securitization agreement. These borrowings are classified asshort-term and were secured by $821 million and $665 million of tradereceivables, respectively. The agreement allows CPChem to borrow up to $300million for which CPChem grants a security interest in certain of its tradereceivables as collateral for any amounts outstanding. Borrowings under theagreement are reduced or security interests in new trade receivables aregranted as the receivables are collected by CPChem. The trade receivablessecuritization agreement expires in May 2006. CPChem intends to request an extension of the current agreement to May2007. The interest rate of borrowings outstanding under the agreementwas 4.33% at December 31, 2005 and 2.20% at December 31, 2004, and averaged3.24% in 2005, 1.37% in 2004 and 1.21% in 2003.

 

In 2002 and 2001,respectively, Chevron Phillips Chemical Company LLC and its wholly ownedsubsidiary, Chevron Phillips Chemical Company LP, jointly and severally issued$500 million of senior unsecured 5 3/8% notes that mature in 2007, and$500 million of senior unsecured 7% notes that mature in 2011. Both series ofnotes contain certain covenants, such as limitations on liens, sale/leasebacktransactions, sales of assets and business combinations, which CPChem does notconsider to be restrictive to normal operations. Interest is payablesemiannually on both series of notes.

 

48

----

 

Notes issued underCPChem’s commercial paper program are in the tier-2 commercial paper marketwith maturities of 90 days or less. These commercial paper borrowings areclassified as Long-Term Debt since CPChem’s intent is to refinance or replacethe obligations on a long-term basis and CPChem has a committed backup creditfacility in effect. The weighted average interest rate of commercial paperborrowings outstanding was 4.38% at December 31, 2005 and 2.35% at December 31,2004, and averaged 3.28% in 2005, 1.54% in 2004 and 1.23% in 2003.

 

In 2004, CPChementered into an $800 million five-year credit facility with various banks thatprovides committed credit support for the commercial paper program andconcurrently terminated its existing credit facilities. The current agreementcontains covenants and events of default typical of bank revolving creditfacilities, such as restrictions on liens. The agreement also contains aprovision requiring the maintenance of ownership of CPChem by Chevron andConocoPhillips of at least 50% in the aggregate. Provisions under thisagreement are not considered to be restrictive to normal operations. There wereno borrowings under any of the current or prior credit facilities during 2005,2004 or 2003.

 

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, a change in CPChem’s credit ratings would not result in theacceleration of any existing debt obligation maturities.

 

Note 9.          Members’Preferred Interests

 

On July 1, 2002,CPChem sold $250 million of members’ preferred interests, purchased 50% each byChevron and ConocoPhillips. Preferred distributions were cumulative at 9% perannum and were payable quarterly from cash earnings, as defined in CPChem’sSecond Amended and Restated Limited Liability Company Agreement. In 2004,CPChem voluntarily redeemed $175 million of members’ preferred interests andpaid $55 million of distributions on members’ preferred interests. In 2005,CPChem voluntarily redeemed the remaining $75 million of members’ preferredinterests and paid $2 million of distributions. There were no redemptions or preferreddistributions paid in 2003.

 

Note 10.    Guarantees,Commitments and Indemnifications

 

*Guarantees*

 

CPChem’sheadquarters building is leased under a synthetic lease agreement, entered intoin 2002 and subsequently extended in March 2005, which contains a fixed pricepurchase option and a residual guarantee. The purchase option price wasconsidered to be the fair market value of the building at the time of theextension of the lease. If CPChem does not extend the lease or exercise thepurchase option upon the current expiration of the lease in 2010, CPChem has anobligation to pay the lessor the shortfall, if any, in the proceeds realizedfrom the sale of the building to a third party relative to the purchase optionprice, not to exceed $27 million. CPChem is entitled to receive any proceedsfrom the sale of the building that are in excess of the purchase option price. Whileit is not possible to predict with certainty the amount, if any, that CPChemwould be required to pay or be entitled to receive should the building be soldto a third party upon the expiration of the lease, CPChem believes that theamount paid or received would not be material to consolidated results ofoperations, financial position or liquidity.

 

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

 

*Commitments*

 

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

 

49

----

 

*Indemnifications*

 

As part of CPChem’songoing business operations and consistent with generally accepted andrecognized industry practice, CPChem enters into numerous agreements with otherparties which apportion future risks between the parties to the transaction orrelationship governed by the agreements. One method of apportioning risk is theinclusion of provisions requiring one party to indemnify the other partyagainst losses that might be incurred in the future. Many of CPChem’sagreements, including technology license agreements, contain indemnities thatrequire CPChem to perform certain acts, such as defending certain licensees againstpatent infringement claims of others, as a result of the occurrence of atriggering event or condition.

 

The nature of theseindemnity obligations are diverse and numerous and each has different terms,business purposes, and triggering events 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’s indemnity obligations are not limitedin duration or potential monetary exposure, CPChem cannot reasonably calculatethe maximum potential amount of future payments that could possibly be paidunder the indemnity obligations stemming from all of CPChem’s existingagreements. In the case of known contingent liabilities, however, CPChemrecords an undiscounted liability when a loss is probable and the amount can bereasonably estimated.

 

CPChem is not aware ofthe occurrence of any triggering event or condition that would have a materialadverse impact on consolidated results of operations, financial position orliquidity as a result of an indemnity obligation arising from such triggeringevent or condition.

 

Note 11.    ContingentLiabilities

 

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 loss recoveries from insurance or otherparties. As facts concerning contingent liabilities become known, CPChemreassesses its position with respect to accrued liabilities and other potentialexposures. Estimates that are particularly sensitive to future change includelegal matters and contingent liabilities for environmental 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. Estimated future costs related to legal matters aresubject to change as events occur and as additional information becomesavailable.

 

Other than thosematters discussed below and based on currently available information, CPChembelieves it is remote that future costs related to known contingent liabilitieswill exceed current accruals by an amount that would have a material adverseeffect on consolidated results of operations, financial position or liquidity.

 

*LegalMatters*

 

CPChem is a partyto certain asbestos lawsuits for which the financial responsibility betweenCPChem and ConocoPhillips is disputed.  CPChem, ConocoPhillips and Chevronare attempting to resolve whether ConocoPhillips or CPChem has financialresponsibility for these lawsuits.  In the meantime, ConocoPhillips ismanaging and defending these lawsuits.  In the event the financial responsibilityfor these lawsuits is ultimately determined to rest with CPChem, CPChem may berequired to record a charge to operations that could be material to the periodreported. However, CPChem believes that any such charge, if required, would nothave a material adverse effect on financial position or liquidity.

 

50

----

 

CPChem is a partyto a number of other legal proceedings that arose in the ordinary course ofbusiness for which, in many instances, no provision has been made in thefinancial statements. While the final outcome of these proceedings cannot bepredicted with certainty, CPChem believes that none of these individualproceedings, when resolved, will have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

*ElectricityDeregulation*

 

Legislation forelectricity deregulation enacted in 1999 allowed utilities to file anapplication with the Public Utility Commission of Texas (the “PUCT”) for thedetermination and reimbursement of certain costs associated with utility assetdevaluation that may have occurred due to that legislation. CenterPoint EnergyHouston Electric LLC (CenterPoint), which previously provided electricity toCPChem’s Cedar Bayou manufacturing facility and Kingwood research center, bothlocated in Texas, filed its application for such determination with the PUCT onMarch 31, 2004. Following the initial determination and appeals, CenterPointwas permitted to recover certain costs in the form of securitized transitioncharges and unsecuritized competitive transition charges. The implementation ofthese charges is expected to increase the monthly cost of electricity byapproximately 3% to 4%. The actual increase could change depending on theoutcome of the ongoing legal proceedings challenging these charges.

 

Note 12.    CreditRisk

# ** **

Financialinstruments that potentially subject CPChem to concentrations of credit riskconsist primarily of cash equivalents and trade receivables. Cash equivalentsare currently comprised of bank accounts and short-term investments withseveral financial institutions that have high credit ratings. CPChem’s policyfor short-term investments both diversifies and limits its exposure to creditrisk. Trade receivables are dispersed among a broad customer base, both U.S.and foreign, which generally results in limited concentrations of credit risk. However,increased economic pressures on CPChem’s customers and the continuing overallconsolidation and reorganization of customers in the industry has resulted inmore customers with significant financial leverage and has increased overallcredit risk and exposure. CPChem maintains and follows credit policies andprocedures designed to control such credit risk and exposure.

 

Note 13.    OperatingLeases

# ** **

CPChem leases tankand hopper railcars, office buildings and certain other facilities andequipment. Total operating lease rental expense was $47 million in 2005, and$44 million in both 2004 and 2003. Aggregate future minimum lease paymentsunder non-cancelable leases at December 31, 2005 totaled $31 million, $22million, $18 million, $17 million and $43 million in the years 2006 through2010, respectively, and $64 million thereafter. Included in aggregate futureminimum lease payments in 2010 is CPChem’s maximum exposure of $27 millionunder the contingent obligation associated with the lease agreement for CPChem’sheadquarters building.

 

Note 14.    BenefitPlans

# ** **

Themajority of CPChem employees are former employees of Chevron Corporation orPhillips Petroleum Company (Phillips), now ConocoPhillips. Certain CPChembenefit plans provide that employees who were employed by CPChem on January 1,2001 and who were employed by Chevron Corporation or Phillips, or any of theiraffiliates, immediately prior to that date receive enhanced benefits, includingcredit for service while employed by Chevron Corporation or Phillips.

 

51

----

 

*Pensionand Other Postretirement Health Care*

 

CPChem’s retirement plan is a defined benefit planthat covers most U.S.-based employees. Eligible employees automaticallyparticipate in the plan and begin accruing benefits from January 1, 2001 ortheir first day of employment if employed after that date. Eligible employeesbecome fully vested in their retirement benefits after five years of servicewith CPChem, including prior service with Chevron Corporation or Phillips ortheir affiliates, if applicable. Retirement benefits are based on two types ofcredits: a career average pay benefit and a variable annuity account benefit. Bothbenefits are based on an employee’s compensation over the years and the numberof years that an employee is qualified to receive benefit credits.

 

CPChemalso offers health care benefits to eligible employees, mostly U.S.-based, upontheir retirement. A retiree flexible spending account is established by CPChemfor eligible retirees at the time of retirement based on years of service andmarital status times a fixed dollar amount. 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 earn interest upon inception at market-based rates. Anychanges in future health care cost rates for retirees would not impact futureCPChem earnings as health care benefits for retirees are solely based on yearsof service and marital status.

 

AJanuary 1 measurement date is used in the determination of pension and otherpostretirement net periodic benefit costs. A December 31 measurement date isused in the determination of pension and other postretirement benefitobligations and plan assets.

 

Includedin the pension plan tables presented is an unfunded supplemental retirementplan covering key executives. The primary purpose of the plan is to providecompensating benefits to those employees affected by federally mandated limitson eligible compensation levels contained in CPChem’s normal retirement plan oras a result of certain incentive bonus amounts or deferrals not beingrecognized as compensation under the retirement plan. The benefit obligationassociated with this plan was $20 million at both December 31, 2005 andDecember 31, 2004. Also included are separate pension plans for employees atCPChem’s Puerto Rico and Belgium facilities, and employees of certainbargaining units within the Performance Pipe division of CPChem.

 

Net periodic benefitcosts for pension and other postretirement benefits included the following:

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| **Millions**                                    | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost  benefits earned during the year   |       | $                    | 23         |               | $          | 22 |   | $ | 21 |   | $ | 2 |   | $ | 2 |   | $ | 3 |   |
| Interest cost on  projected benefit obligations |       | 20                   |       | 18                 |       | 17 |   | 5 |   | 3 |   | 5 |   |
| Expected return  on plan assets                 |       | (17                  | )          | (12                | )          | (9 | ) | (2 | ) | (1 | ) | — |   |
| Amortization of  prior service costs            |       | 11                   |       | 12                 |       | 12 |   | 3 |   | 3 |   | 3 |   |
| Net actuarial  loss                             |       | 1                    |       | 1                  |       | 1 |   | 1 |   | — |   | 1 |   |
| Net periodic  benefit cost                      |       | $                    | 38         |               | $          | 41 |   | $ | 42 |   | $ | 9 |   | $ | 7 |   | $ | 12 |   |

 

52

----

 

Thepension and other postretirement benefit plans’ funded status and relatedamounts follow:

 
| ** **                                      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **December 31,**     | ** ** | **December 31,**   | ** ** |
| **Millions**                                    | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Change in Benefit  Obligation                   |       |                 |       |               |       |   |   |   |   |
| Benefit  obligation at beginning of year        |       | $                    | 358        |               | $          | 321 |   | $ | 92 |   | $ | 75 |   |
| Service cost                                    |       | 23                   |       | 22                 |       | 2 |   | 2 |   |
| Interest cost                                   |       | 20                   |       | 18                 |       | 5 |   | 3 |   |
| Actuarial loss  (gain)                          |       | (11                  | )          | 1                  |       | 4 |   | 15 |   |
| Foreign currency  exchange loss (gain)          |       | (3                   | )          | 2                  |       | — |   | — |   |
| Plan amendment                                  |       | 2                    |       | —             |       | (5 | ) | (1 | ) |
| Benefits paid                                   |       | (12                  | )          | (6                 | )          | (2 | ) | (2 | ) |
| Benefit  obligation at end of year              |       | 377                  |       | 358                |       | 96 |   | 92 |   |
|                                            |       |                 |       |               |       |   |   |   |   |
| Change in Plan  Assets                          |       |                 |       |               |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | 219                  |       | 151                |       | 26 |   | 12 |   |
| Actual return on  plan assets                   |       | 22                   |       | 17                 |       | 2 |   | 2 |   |
| Employer  contributions                         |       | 57                   |       | 56                 |       | 7 |   | 14 |   |
| Foreign currency  exchange gain (loss)          |       | (3                   | )          | 1                  |       | — |   | — |   |
| Benefits paid                                   |       | (12                  | )          | (6                 | )          | (2 | ) | (2 | ) |
| Fair value of  plan assets at end of year       |       | 283                  |       | 219                |       | 33 |   | 26 |   |
|                                            |       |                 |       |               |       |   |   |   |   |
| Funded Status of  Plan                          |       |                 |       |               |       |   |   |   |   |
| Excess  obligation                              |       | (94                  | )          | (139               | )          | (63 | ) | (66 | ) |
| Unrecognized net  actuarial loss                |       | 24                   |       | 37                 |       | 29 |   | 26 |   |
| Unrecognized  transition obligation             |       | —               |       | 1                  |       | — |   | — |   |
| Unrecognized  prior service cost                |       | 94                   |       | 105                |       | 22 |   | 31 |   |
| Total recognized                                |       | $                    | 24         |               | $          | 4 |   | $ | (12 | ) | $ | (9 | ) |
|                                            |       |                 |       |               |       |   |   |   |   |
| Components of  Total Recognized                 |       |                 |       |               |       |   |   |   |   |
| Prepaid asset                                   |       | $                    | 35         |               | $          | 12 |   | $ | — |   | $ | — |   |
| Intangible asset                                |       | 5                    |       | 5                  |       | — |   | — |   |
| Accrued  liability                              |       | (19                  | )          | (16                | )          | (12 | ) | (9 | ) |
| Accumulated  comprehensive loss                 |       | 3                    |       | 3                  |       | — |   | — |   |
| Total recognized                                |       | $                    | 24         |               | $          | 4 |   | $ | (12 | ) | $ | (9 | ) |

 

CPChem expects to fundapproximately $40 million to its pension plans and $7 million to its otherpostretirement benefits plans in 2006.

 

The weighted averageamortization period for the unrecognized prior service costs at December 31,2005 was approximately eight years for the retirement plans and approximatelynine years for other postretirement benefits plans. Unrecognized net actuariallosses at December 31, 2005 related to CPChem’s retirement and otherpostretirement benefits plans are being amortized on a straight-line basis overapproximately 12 years, which represents the average remaining service periodof employees expected to receive benefits under the plans.

 

53

----

 

The accumulated benefitobligation for all pension plans was $260 million at December 31, 2005 and $222million at December 31, 2004. Certain information for pension plans withaccumulated benefit obligations in excess of plan assets at December 31, 2005follows:

 

| ** **                     | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------|------------|
| **Millions**                   | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Projected benefit obligation   |       | $                | 43         |   | $ | 42 |   |
| Accumulated benefit obligation |       | 36               |       | 33 |   |
| Fair value of plan assets      |       | 17               |       | 18 |   |
|                                |            |                  |            |  |  |  |  |

 

CPChem’s investmentstrategy with respect to pension plan assets is to maintain a diversifiedportfolio of domestic and international equities, fixed income securities andcash equivalents.  Target asset allocations are chosen based on ananalysis of the historical returns and volatilities of various assetclasses.  The plan investments are periodically rebalanced to maintainthe target asset allocation.  Rates of return for the investmentfunds comprising each asset class are monitored quarterly against benchmarksand peer fund results.

 

Asset allocations forCPChem’s pension plans, along with target allocations for 2006, follow:

 

| ** **   | ** ** | **Target  Allocation** | ** ** | **Plan Assets  at December 31,** | ** ** |
|--------------|------------|------------------------|------------|----------------------------------|------------|
| **Category** | ** ** | **2006**               | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| Equity       |       | 67                     | %          | 52                               | %          | 43 | % |
| Debt         |       | 32                     |       | 36                               |       | 34 |   |
| Real estate  |       | —                 |       | 9                                |       | 8 |   |
| Other        |       | 1                      |       | 3                                |       | 15 |   |
| Total        |       | 100                    | %          | 100                              | %          | 100 | % |

 

Weighted averagerate assumptions used in determining estimated benefit obligations were asfollows:

 

| ** **                               | ** ** | **December 31,**      | ** ** | **December 31,**    | ** ** |
|------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                               | ** ** | **2005**              | ** ** | **2004**            | ** ** |
| ** **                               | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Discount rate                            |       | 5.5                   | %          | 5.5                 | %          | 5.8 | % | 5.8 | % |
| Expected return on plan assets           |       | 7.5                   |       | —              |       | 8.0 |   | — |   |
| Rate of increase  in compensation levels |       | 3.7                   |       | —              |       | 4.0 |   | — |   |

 

Weighted averagerate assumptions used in determining periodic benefit costs for pension andother postretirement benefits follow:

 
| ** **                              | ** ** | **2005**              | ** ** | **2004**            | ** ** | **2003**              | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
| Discount rate                           |       | 5.8                   | %          | 5.8                 | %          | 6.0                   | %          | 6.0 | % | 6.5 | % | 6.5 | % |
| Expected return on plan assets          |       | 8.0                   |       | —              |       | 8.0                   |       | — |   | 8.0 |   | — |   |
| Rate of increase in compensation levels |       | 4.0                   |       | —              |       | 4.0                   |       | — |   | 4.0 |   | — |   |

 

54

----

 

The expectedreturn on plan assets were developed through, among other things, analysis ofhistorical market returns for the plans’ investment classes and current marketconditions.

 

The determinationof CPChem’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 natureof these calculations, CPChem utilizes outside actuarial firms to assist in thecalculation of these obligations. An actuarial determination of projectedbenefit obligations and company contribution requirements involves significantestimates regarding future unknown events, which include estimated future ratesof return on pension plan assets, discount rates applied to pension planobligations, estimated employee retirement dates and salary levels atretirement, 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 estimated future returns on pension plan assets or a 1%decrease in the discount rates applied to pension plan obligations would nothave a material adverse effect on consolidated results of operations, financialposition or liquidity.

 

It is anticipatedthat benefit payments, which reflect expected future service, will be paid asfollows:

 

| **Millions** | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|--------------|------------|-----------------------|------------|---------------------|------------|
| 2006         |       | $                     | 14         |                | $          | 3 |   |
| 2007         |       | 18                    |       | 3                   |       |
| 2008         |       | 21                    |       | 4                   |       |
| 2009         |       | 25                    |       | 4                   |       |
| 2010         |       | 31                    |       | 5                   |       |
| 2011-2015    |       | 252                   |       | 35                  |       |
|              |            |                       |            |                     |            |  |  |

 

*ContributionPlans*

 

Definedcontribution plans are available for most employees, whereby CPChem matches apercentage of the employee’s contribution. CPChem’s contributions to the plansare expensed and funded on a current basis, and totaled $27 million in 2005,$17 million in 2004 and $13 million in 2003.

 

*Share-BasedCompensation*

 

CPChem does notcurrently utilize any share-based employee compensation plans.

 

Note 15.    Taxes

 

CPChem is treatedas a flow-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 liable for federal and state income taxes andfranchise taxes on certain separate legal entities and for any foreign taxesincurred.

 

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 tax exemptions related to this subsidiary expirein 2017. Limited tax incentives, in the form of reduced income tax rates, alsoexist in South Korea, China, Singapore, Saudi Arabia and Qatar. CPChem issubject to state income tax in certain jurisdictions.

 

55

----

 

CPChem is requiredto make 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. Tax distributionspaid to members totaled $263 million in 2005 and $118 million in 2004. Accruedtax distributions totaled $122 million at December 31, 2005 and $39 million atDecember 31, 2004.

 

The components ofincome (loss) before taxes follow:

 
| ** **                | ** ** | **Years ended December 31,** | ** ** |
|---------------------------|------------|------------------------------|------------|
| **Millions**              | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic                  |       | $                            | 600        |   | $ | 301 |   | $ | (98 | ) |
| Foreign                   |       | 273                          |       | 340 |   | 110 |   |
| Total income before taxes |       | $                            | 873        |   | $ | 641 |   | $ | 12 |   |

 

The components ofincome tax expense follow:

 
| ** **               | ** ** | **Years ended December 31,** | ** ** |
|--------------------------|------------|------------------------------|------------|
| **Millions**             | ** ** | **2005**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
| State – current     |       | $                            | 1          |   | $ | — |   | $ | — |   |
| Foreign – current   |       | 19                           |       | 15 |   | 5 |   |
| Total income tax expense |       | $                            | 20         |   | $ | 15 |   | $ | 5 |   |

 

Deferred incometax assets and liabilities follow:

 
| ** **                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| **Millions**                                   | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Deferred income tax assets – federal      |       | $                | 193        |   | $ | 191 |   |
| Valuation allowance                            |       | (193             | )          | (191 | ) |
| Total                                          |       | —           |       | — |   |
| Deferred income tax liabilities – foreign |       | (1               | )          | (1 | ) |
| Net deferred income tax liability              |       | $                | (1         | ) | $ | (1 | ) |

 

At December 31,2005 and 2004, the deferred tax assets of CPChem’s Puerto Rico subsidiary werefully offset by valuation allowances. A valuation allowance was established toreduce the deferred tax assets of the subsidiary’s net operating losscarryforwards and tax depreciation differences to amounts that would morelikely than not be realized. Uncertainties that may affect the realization ofthese assets include tax law changes and the future profitability ofoperations.

 

Net deferredincome tax assets and liabilities related to the following:

 
| ** **                               | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|------------------|------------|
| **Millions**                             | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Deferred income  tax assets              |       |             |       |   |   |
| Loss  carryforward (expires 2011- 2025)  |       | $                | 176        |   | $ | 171 |   |
| Depreciation and  amortization           |       | 13               |       | 15 |   |
| Other                                    |       | 4                |       | 5 |   |
| Gross deferred  income tax assets        |       | 193              |       | 191 |   |
| Valuation  allowance                     |       | (193             | )          | (191 | ) |
| Deferred income  tax assets              |       | —           |       | — |   |
| Deferred tax  liabilities – foreign |       | (1               | )          | (1 | ) |
| Net deferred  income tax liability       |       | $                | (1         | ) | $ | (1 | ) |

 

56

----

 

Note 16.    Segmentand Geographic Information

 

CPChem’sreporting structure is based on the grouping of similar products, resulting inthree primary operating segments – Olefins & Polyolefins (O&P),Aromatics & Styrenics (A&S), and Specialty Products.

 

*Olefins& Polyolefins* – This segment produces and marketsethylene, propylene, and other olefin products which are primarily consumedinternally for the production of polyethylene, normal alpha olefins,polypropylene and polyethylene pipe. CPChem has five olefin and/or polyolefinproduction facilities located in Texas, eight domestic pipe productionfacilities and one domestic pipe fittings production facility. CPChem also hasone pipe production facility in Mexico. In addition, CPChem owns interests in apolypropylene facility located at the Pasadena Plastics Complex in Texas, ahigh-density polyethylene plant located at CPChem’s Cedar Bayou facility inTexas, an ethylene, polyethylene and 1-hexene facility in Qatar, andpolyethylene facilities in Singapore and China.

 

*Aromatics& Styrenics* – This segment manufactures and marketsaromatics products such as benzene, styrene, paraxylene and cyclohexane. Thissegment also manufactures and markets polystyrene as well as styrene-butadienecopolymers sold under the trademark K-Resin®. Production facilitiesare located in Mississippi, Louisiana, Texas, Ohio, Puerto Rico and China. CPChemalso owns an equity interest in an aromatics facility in Saudi Arabia and in aK-Resin® SBC facility in South Korea.

 

*SpecialtyProducts* – This segment manufactures and markets a variety ofspecialty chemical products, including organosulfur chemicals and high-performancepolyphenylene sulfide polymers and compounds sold under the trademark Ryton®.Production facilities are located in Texas, Belgium and Singapore.

 

“Corporate andOther” (Other) includes items not directly attributable to CPChem’s operatingsegments. Interest expense, certain charges for employee incentive plans andcharges related to domestic workforce reductions are generally retained withinOther.

 

Financialinformation follows. Inter-segment transactions are billed at prevailing marketrates.

 
| **Millions**                                         | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|
| *Year  ended December 31, 2005*                      | ** ** | ** **  | ** ** | ** **  | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **       | ** ** |
| Net sales –  external                           |       | $           | 7,027      |        | $          | 3,146                   |       | $                           | 534        |             | $          | — |   | $ | 10,707 |   |
| Net sales –  inter-segment                      |       | 330         |       | 2           |       | 3                       |       | (335                        | )          | —           |       |
| Equity in income  of affiliates                      |       | 78          |       | 107         |       | —                  |       | —                      |       | 185              |       |
| Other income                                         |       | 104         |       | 41          |       | 1                       |       | —                      |       | 146              | (a)        |
| Total revenue                                        |       | 7,539       |       | 3,296       |       | 538                     |       | (335                        | )          | 11,038           |       |
| Operating and  selling costs                         |       | 6,533       |       | 3,118       |       | 467                     |       | (297                        | )          | 9,821            | (b)        |
| Depreciation and  amortization                       |       | 175         |       | 79          |       | 28                      |       | 1                           |       | 283              | (c)        |
| Income (loss)  before interest & taxes           |       | 831         |       | 99          |       | 43                      |       | (39                         | )          | 934              |       |
| Interest income  (expense), net                      |       | 14          |       | 1           |       | —                  |       | (76                         | )          | (61              | )          |
| Income taxes                                         |       | (4          | )          | (7          | )          | (7                      | )          | (2                          | )          | (20              | )          |
| Net income  (loss)                                   |       | 841         |       | 93          |       | 36                      |       | (117                        | )          | 853              |       |
| Distributions on  members’ preferred interests  |       | —      |       | —      |       | —                  |       | (2                          | )          | (2               | )          |
| Income (loss)  attributed to members’ interests |       | $           | 841        |        | $          | 93                      |       | $                           | 36         |             | $          | (119 | ) | $ | 851 |   |
|                                                      |            |             |            |             |            |                         |            |                             |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

57

----

 
| **Millions**                                         | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other and  Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|-----------------------------|------------|------------------|------------|
| *Year  ended December 31, 2004*                      |       |        |       |        |       |                    |       |                        |       |             |       |
| Net sales –  external                           |       | $           | 5,501      |        | $          | 3,187                   |       | $                           | 477        |             | $          | — |   | $ | 9,165 |   |
| Net sales –  inter-segment                      |       | 295         |       | 1           |       | 2                       |       | (298                        | )          | —           |       |
| Equity in income  of affiliates                      |       | 73          |       | 145         |       | —                  |       | —                      |       | 218              |       |
| Other income                                         |       | 76          |       | 33          |       | 2                       |       | —                      |       | 111              |       |
| Total revenue                                        |       | 5,945       |       | 3,366       |       | 481                     |       | (298                        | )          | 9,494            |       |
| Operating and  selling costs                         |       | 5,343       |       | 3,032       |       | 400                     |       | (269                        | )          | 8,506            |       |
| 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 taxes                                         |       | (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                           |       | $           | 4,010      |        | $          | 2,437                   |       | $                           | 391        |             | $          | — |   | $ | 6,838 |   |
| Net sales –  inter-segment                      |       | 272         |       | 144         |       | 1                       |       | (417                        | )          | —           |       |
| Equity in income  (loss) of affiliates               |       | (14         | )          | 55          |       | —                  |       | —                      |       | 41               |       |
| Other income                                         |       | 53          |       | 17          |       | 5                       |       | —                      |       | 75               | (d)        |
| Total revenue                                        |       | 4,321       |       | 2,653       |       | 397                     |       | (417                        | )          | 6,954            |       |
| Operating and  selling costs                         |       | 4,098       |       | 2,533       |       | 342                     |       | (393                        | )          | 6,580            | (e)        |
| Depreciation and  amortization                       |       | 182         |       | 93          |       | 21                      |       | 2                           |       | 298              | (f)        |
| Income (loss)  before interest & taxes           |       | 41          |       | 27          |       | 34                      |       | (26                         | )          | 76               |       |
| Interest income  (expense), net                      |       | 6           |       | 1           |       | —                  |       | (71                         | )          | (64              | )          |
| Income taxes                                         |       | —      |       | —      |       | (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 | ) |
|                                                      |            |             |            |             |            |                         |            |                             |            |                  |            |  |  |  |  |  |  |

 

The following charges or benefits were related to items such as assetretirements and plant closures, legal and other settlements, employee severancecosts and other items of that nature.

 

(a)                         Includesa $13 million benefit in A&S from a legal settlement.

(b)                       Includes$7 million of net benefits, primarily related to the recognition of inventory:$5 million in A&S and $2 million in O&P.

(c)                        Includesa $4 million charge in Specialty Products related to the adjustment of theeconomic life of certain leasehold improvements.

(d)                       Includesa $10 million benefit related to a sales and use tax audit: $7 million inO&P and $3 million in Specialty Products.

(e)                        Includes$27 million of charges, mostly related to legal settlements and accruals, andemployee severance costs: $16 million in O&P, $10 million in Other and $1million in Specialty Products.

(f)                           Includes$19 million in asset retirements and plant closures: $10 million in A&S and$9 million in O&P.

 

58

----

 
| **Millions**                              | ** ** | **O&P** | ** ** | **A&S** | ** ** | **Specialty  Products** | ** ** | **Other**  | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------|------------|-------------------------|------------|------------|------------|------------------|------------|
| Investments in and advances to affiliates | ** ** | ** **  | ** ** | ** **  | ** ** | ** **              | ** ** | ** ** | ** ** | ** **       | ** ** |
| December 31, 2005                         |       | $           | 591        |        | $          | 466                     |       | $          | —     |             | $          | — |   | $ | 1,057 |   |
| December 31, 2004                         |       | 520         |       | 373         |       | —                  |       | —     |       | 893              |       |
|                                      |       |        |       |        |       |                    |       |       |       |             |       |
| Total assets                              |       |        |       |        |       |                    |       |       |       |             |       |
| December 31, 2005                         |       | 4,333       |       | 1,997       |       | 504                     |       | 126        |       | 6,960            |       |
| December 31, 2004                         |       | 4,108       |       | 2,125       |       | 508                     |       | 131        |       | 6,872            |       |
|                                      |       |        |       |        |       |                    |       |       |       |             |       |
| Capital and investment expenditures*      |       |        |       |        |       |                    |       |       |       |             |       |
| Year ended December 31, 2005              |       | 121         |       | 27          |       | 20                      |       | 9          |       | 177              |       |
| Year ended December 31, 2004              |       | 138         |       | 34          |       | 12                      |       | 7          |       | 191              |       |
| Year ended December 31, 2003              |       | 127         |       | 53          |       | 17                      |       | 6          |       | 203              |       |
|                                           |            |             |            |             |            |                         |            |            |            |                  |            |  |  |  |  |  |

 

----

*Excludes investments in and advances to Q-Chem (O&P) of $28 million in 2004and $103 million in 2003, and investments in and advances towards the JCPproject (A&S) of $35 million in 2005, $10 million in 2004 and $20 millionin 2003.

 

Geographicinformation was as follows. Net sales were determined based on location of theoperation generating the sale. 

 
| **Millions**                              | ** ** | **United  States** | ** ** | **Foreign  Countries** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|--------------------|------------|------------------------|------------|-----------|------------|
| Net sales - external                      |       |               |       |                   |       |      |       |
| Year ended December 31, 2005              |       | $                  | 9,135      |                   | $          | 1,572     |       | $ | 10,707 |   |
| Year ended December 31, 2004              |       | 7,681              |       | 1,484                  |       | 9,165     |       |
| Year ended December 31, 2003              |       | 5,752              |       | 1,086                  |       | 6,838     |       |
|                                      |       |               |       |                   |       |      |       |
| Investments in and advances to affiliates |       |               |       |                   |       |      |       |
| December 31, 2005                         |       | 62                 |       | 995                    |       | 1,057     |       |
| December 31, 2004                         |       | 52                 |       | 841                    |       | 893       |       |
|                                      |       |               |       |                   |       |      |       |
| Property, plant and equipment, net        |       |               |       |                   |       |      |       |
| December 31, 2005                         |       | 3,446              |       | 134                    |       | 3,580     |       |
| December 31, 2004                         |       | 3,586              |       | 182                    |       | 3,768     |       |
|                                           |            |                    |            |                        |            |           |            |  |  |  |

 

Foreign currencytransaction losses were $5 million in 2005 and foreign currency transactiongains were $5 million in each of 2004 and 2003.

 

Note 17.    FairValues of Financial Instruments

 

The carrying amounts ofcash and cash equivalents, trade and affiliated receivables, and trade andaffiliated payables approximate fair values. The carrying amount of securedborrowings outstanding also approximates fair value due to the short-termnature of the borrowings. The carrying amount of commercial paper outstandingalso approximates fair value due to the variable interest rate feature. Thecarrying amount of other long-term debt outstanding was $1.004 billion atDecember 31, 2005 and $1.005 billion at December 31, 2004, with fair values of$1.050 billion and $1.094 billion, respectively, based on quoted market prices.

 

59

----

 

Note 18.    ConsolidatingFinancial Statements

 

Consolidatingfinancial statements follow. This information is presented in accordance withthe Securities and Exchange Commission’s rules and regulations as they relateto the debt jointly and severally issued by Chevron Phillips Chemical CompanyLLC and Chevron Phillips Chemical Company LP.

 

The LLC is thenon-operating parent holding company. The LP is the primary U.S. operatingcompany. “Other Entities” is principally comprised of foreign operations andthe holding companies that have direct ownership of the LP. These consolidatingfinancial statements were prepared using the equity method of accounting forinvestments.

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year endedDecember 31, 2005

 
| **Millions**                                        | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Revenue                                             |       |    |       |   |       |                |       |             |       |      |       |
| Net sales                                           |       | $       | —     |   | $          | 9,606               |       | $                | 1,746      |      | $          | (645 | ) | $ | 10,707 |   |
| Equity in income  of affiliates                     |       | 925     |       | — |       | 807                 |       | (1,547           | )          | 185       |       |
| Other income                                        |       | —  |       | 105    |       | 126                 |       | (85              | )          | 146       |       |
| Total revenue                                       |       | 925     |       | 9,711  |       | 2,679               |       | (2,277           | )          | 11,038    |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Costs and  Expenses                                 |       |    |       |   |       |                |       |             |       |      |       |
| Cost of goods  sold                                 |       | —  |       | 8,580  |       | 1,634               |       | (613             | )          | 9,601     |       |
| Selling, general  and administrative                |       | 1       |       | 472    |       | 106                 |       | (117             | )          | 462       |       |
| Research and  development                           |       | —  |       | 41     |       | —              |       | —           |       | 41        |       |
| Total costs and  expenses                           |       | 1       |       | 9,093  |       | 1,740               |       | (730             | )          | 10,104    |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income Before  Interest & Taxes                 |       | 924     |       | 618    |       | 939                 |       | (1,547           | )          | 934       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Interest income                                     |       | —  |       | 19     |       | 17                  |       | (19              | )          | 17        |       |
| Interest expense                                    |       | (71     | )          | (1     | )          | (25                 | )          | 19               |       | (78       | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income Before  Taxes                                |       | 853     |       | 636    |       | 931                 |       | (1,547           | )          | 873       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income taxes                                        |       | —  |       | (3     | )          | (17                 | )          | —           |       | (20       | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Net Income                                          |       | 853     |       | 633    |       | 914                 |       | (1,547           | )          | 853       |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Distributions on  members’ preferred interests |       | (2      | )          | — |       | —              |       | —           |       | (2        | )          |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Income  Attributed to Members’ Interests       |       | $       | 851        |   | $          | 633                 |       | $                | 914        |      | $          | (1,547 | ) | $ | 851 |   |

 

60

----

 

Note18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Operations

For the Year endedDecember 31, 2004

 
| **Millions**                                        | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Revenue                                             |       |    |       |   |       |                |       |             |       |      |       |
| Net sales                                           |       | $       | —     |   | $          | 8,071               |       | $                | 1,688      |      | $          | (594 | ) | $ | 9,165 |   |
| Equity in income  of affiliates                     |       | 716     |       | 4      |       | 591                 |       | (1,093           | )          | 218       |       |
| Other income                                        |       | —  |       | 85     |       | 92                  |       | (66              | )          | 111       |       |
| Total revenue                                       |       | 716     |       | 8,160  |       | 2,371               |       | (1,753           | )          | 9,494     |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| Costs and  Expenses                                 |       |    |       |   |       |                |       |             |       |      |       |
| Cost of goods  sold                                 |       | —  |       | 7,341  |       | 1,538               |       | (555             | )          | 8,324     |       |
| Selling, general  and administrative                |       | —  |       | 429    |       | 97                  |       | (105             | )          | 421       |       |
| Research and  development                           |       | —  |       | 42     |       | —              |       | —           |       | 42        |       |
| Total costs and  expenses                           |       | —  |       | 7,812  |       | 1,635               |       | (660             | )          | 8,787     |       |
|                                                |       |    |       |   |       |                |       |             |       |      |       |
| 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 |   |

 

61

----

 

Note18.    Consolidating FinancialStatements (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                                            |       | $       | —     |   | $          | 6,034               |       | $                | 1,247      |      | $          | (443 | ) | $ | 6,838 |   |
| Equity in income  of affiliates                      |       | 86      |       | 7      |       | 17                  |       | (69              | )          | 41        |       |
| Other income                                         |       | —  |       | 80     |       | 80                  |       | (85              | )          | 75        |       |
| Total revenue                                        |       | 86      |       | 6,121  |       | 1,344               |       | (597             | )          | 6,954     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| Costs and  Expenses                                  |       |    |       |   |       |                |       |             |       |      |       |
| Cost of goods  sold                                  |       | —  |       | 5,641  |       | 1,157               |       | (408             | )          | 6,390     |       |
| Selling, general  and administrative                 |       | —  |       | 457    |       | 96                  |       | (120             | )          | 433       |       |
| Research and  development                            |       | —  |       | 55     |       | —              |       | —           |       | 55        |       |
| Total costs and  expenses                            |       | —  |       | 6,153  |       | 1,253               |       | (528             | )          | 6,878     |       |
|                                                 |       |    |       |   |       |                |       |             |       |      |       |
| 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 | ) |

 

62

----

 

Note18.    Consolidating FinancialStatements (continued)

 

**ChevronPhillips Chemical Company LLC**

Consolidating Balance Sheet

December 31, 2005

 
| **Millions**                                    | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Current assets                                  |       |    |       |   |       |                |       |             |       |      |       |
| Cash and cash  equivalents                      |       | $       | —     |   | $          | 19                  |       | $                | 21         |      | $          | — |   | $ | 40 |   |
| Accounts  receivable, net                       |       | 58      |       | 1,104  |       | 1,000               |       | (769             | )          | 1,393     |       |
| Inventories                                     |       | —  |       | 613    |       | 163                 |       | —           |       | 776       |       |
| Other current  assets                           |       | 1       |       | 57     |       | 8                   |       | —           |       | 66        |       |
| Total current  assets                           |       | 59      |       | 1,793  |       | 1,192               |       | (769             | )          | 2,275     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Property, plant  and equipment, net             |       | —  |       | 3,322  |       | 258                 |       | —           |       | 3,580     |       |
| Investments in  and advances to affiliates      |       | 5,485   |       | 69     |       | 5,028               |       | (9,525           | )          | 1,057     |       |
| Other assets and  deferred charges              |       | 19      |       | 37     |       | 20                  |       | (28              | )          | 48        |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Total Assets                                    |       | $       | 5,563      |   | $          | 5,221               |       | $                | 6,498      |      | $          | (10,322 | ) | $ | 6,960 |   |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Current  liabilities                            |       |    |       |   |       |                |       |             |       |      |       |
| Accounts payable                                |       | $       | 63         |   | $          | 913                 |       | $                | 810        |      | $          | (769 | ) | $ | 1,017 |   |
| Secured  borrowings and other debt              |       | —  |       | 1      |       | 104                 |       | —           |       | 105       |       |
| Other current  liabilities and deferred credits |       | 314     |       | 198    |       | 23                  |       | —           |       | 535       |       |
| Total current  liabilities                      |       | 377     |       | 1,112  |       | 937                 |       | (769             | )          | 1,657     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Long-term debt                                  |       | 1,179   |       | 7      |       | —              |       | —           |       | 1,186     |       |
| Other  liabilities and deferred credits         |       | 7       |       | 70     |       | 38                  |       | (28              | )          | 87        |       |
| Total  liabilities                              |       | 1,563   |       | 1,189  |       | 975                 |       | (797             | )          | 2,930     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Members’ capital                           |       | 4,000   |       | 4,033  |       | 5,492               |       | (9,525           | )          | 4,000     |       |
| Accumulated  other comprehensive income (loss)  |       | —  |       | (1     | )          | 31                  |       | —           |       | 30        |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Total  Liabilities and Members’ Equity     |       | $       | 5,563      |   | $          | 5,221               |       | $                | 6,498      |      | $          | (10,322 | ) | $ | 6,960 |   |

 

63

----

 

Note18.    Consolidating FinancialStatements (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      |       | 986    |       | 1,013               |       | (749             | )          | 1,266     |       |
| Inventories                                     |       | —  |       | 601    |       | 183                 |       | —           |       | 784       |       |
| Other current  assets                           |       | 2       |       | 34     |       | 7                   |       | —           |       | 43        |       |
| Total current  assets                           |       | 18      |       | 1,636  |       | 1,251               |       | (749             | )          | 2,156     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Property, plant  and equipment, net             |       | —  |       | 3,453  |       | 315                 |       | —           |       | 3,768     |       |
| Investments in  and advances to affiliates      |       | 5,537   |       | 32     |       | 5,009               |       | (9,685           | )          | 893       |       |
| Other assets and  deferred charges              |       | 20      |       | 32     |       | 31                  |       | (28              | )          | 55        |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Total Assets                                    |       | $       | 5,575      |   | $          | 5,153               |       | $                | 6,606      |      | $          | (10,462 | ) | $ | 6,872 |   |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Current  liabilities                            |       |    |       |   |       |                |       |             |       |      |       |
| Accounts payable                                |       | $       | 141        |   | $          | 710                 |       | $                | 782        |      | $          | (749 | ) | $ | 884 |   |
| Secured  borrowings and other debt              |       | —  |       | 1      |       | 200                 |       | —           |       | 201       |       |
| Other current  liabilities and deferred credits |       | 50      |       | 181    |       | 25                  |       | —           |       | 256       |       |
| Total current liabilities                       |       | 191     |       | 892    |       | 1,007               |       | (749             | )          | 1,341     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Long-term debt                                  |       | 1,381   |       | 9      |       | —              |       | —           |       | 1,390     |       |
| Other  liabilities and deferred credits         |       | 3       |       | 85     |       | 31                  |       | (28              | )          | 91        |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Total  liabilities                              |       | 1,575   |       | 986    |       | 1,038               |       | (777             | )          | 2,822     |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Members’  preferred interests              |       | 75      |       | — |       | —              |       | —           |       | 75        |       |
| Members’ capital                           |       | 3,925   |       | 4,168  |       | 5,517               |       | (9,685           | )          | 3,925     |       |
| Accumulated  other comprehensive income (loss)  |       | —  |       | (1     | )          | 51                  |       | —           |       | 50        |       |
|                                            |       |    |       |   |       |                |       |             |       |      |       |
| Total  Liabilities and Members’ Equity     |       | $       | 5,575      |   | $          | 5,153               |       | $                | 6,606      |      | $          | (10,462 | ) | $ | 6,872 |   |

 

64

----

 

Note18.    Consolidating FinancialStatements (continued)

 

**ChevronPhillips Chemical Company LLC**

Consolidating Statement of Cash Flows

For the Year endedDecember 31, 2005

 
| **Millions**                                                                            | ** ** | **LLC** | ** ** | **LP** | ** ** | **Other  Entities** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------|------------|--------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Cash Flows From  Operating Activities                                                   |       |    |       |   |       |                |       |             |       |      |       |
| Net income                                                                              |       | $       | 853        |   | $          | 633                 |       | $                | 914        |      | $          | (1,547 | ) | $ | 853 |   |
| Adjustments to  reconcile net income to net cash flows provided by operating activities |       |    |       |   |       |                |       |             |       |      |       |
| Depreciation,  amortization and retirements                                             |       | —  |       | 262    |       | 21                  |       | —           |       | 283       |       |
| Undistributed  equity in income of affiliates, net                                      |       | (112    | )          | — |       | (8                  | )          | 5                |       | (115      | )          |
| Changes in  operating working capital                                                   |       | (115    | )          | 133    |       | (24                 | )          | —           |       | (6        | )          |
| Other operating  cash flow activity                                                     |       | 2       |       | (18    | )          | 32                  |       | —           |       | 16        |       |
| Net cash flows  provided by operating activities                                        |       | 628     |       | 1,010  |       | 935                 |       | (1,542           | )          | 1,031     |       |
|                                                                                    |       |    |       |   |       |                |       |             |       |      |       |
| Cash Flows From  Investing Activities                                                   |       |    |       |   |       |                |       |             |       |      |       |
| Capital and  investment expenditures                                                    |       | —  |       | (158   | )          | (19                 | )          | —           |       | (177      | )          |
| Investments in  and advances towards JCP project                                        |       | —  |       | — |       | (35                 | )          | —           |       | (35       | )          |
| Advance  repayments from Q-Chem                                                         |       | —  |       | — |       | 25                  |       | —           |       | 25        |       |
| Advance  repayments from SCP                                                            |       | —  |       | — |       | 9                   |       | —           |       | 9         |       |
| Proceeds from  the sale of assets                                                       |       | —  |       | 13     |       | 2                   |       | —           |       | 15        |       |
| Decrease  (increase) in other investments                                               |       | 165     |       | (38    | )          | 93                  |       | (220             | )          | —    |       |
| Net cash flows  provided by (used in) investing activities                              |       | 165     |       | (183   | )          | 75                  |       | (220             | )          | (163      | )          |
|                                                                                    |       |    |       |   |       |                |       |             |       |      |       |
| Cash Flows From  Financing Activities                                                   |       |    |       |   |       |                |       |             |       |      |       |
| Decrease in commercial  paper, net                                                      |       | (203    | )          | — |       | —              |       | —           |       | (203      | )          |
| Decrease in  secured borrowings, net                                                    |       | —  |       | — |       | (100                | )          | —           |       | (100      | )          |
| Increase  (decrease) in other debt, net                                                 |       | —  |       | (1     | )          | 3                   |       | —           |       | 2         |       |
| Redemptions of  members’ preferred interests                                       |       | (75     | )          | — |       | —              |       | —           |       | (75       | )          |
| Distributions on  members’ preferred interests                                     |       | (2      | )          | — |       | —              |       | —           |       | (2        | )          |
| Other  distributions to parents/members, net                                            |       | (513    | )          | (822   | )          | (940                | )          | 1,762            |       | (513      | )          |
| Net cash flows  used in financing activities                                            |       | (793    | )          | (823   | )          | (1,037              | )          | 1,762            |       | (891      | )          |
|                                                                                    |       |    |       |   |       |                |       |             |       |      |       |
| Net Increase (Decrease)  in Cash and Cash Equivalents                                   |       | —  |       | 4      |       | (27                 | )          | —           |       | (23       | )          |
| Cash and Cash  Equivalents at Beginning of Year                                         |       | —  |       | 15     |       | 48                  |       | —           |       | 63        |       |
|                                                                                    |       |    |       |   |       |                |       |             |       |      |       |
| Cash and Cash  Equivalents at End of Year                                               |       | $       | —     |   | $          | 19                  |       | $                | 21         |      | $          | — |   | $ | 40 |   |

 

65

----

 

Note18.    Consolidating FinancialStatements (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   | )          | (28                 | )          | —           |       | (191      | )          |
| Investments in  and advances to Q-Chem                                                             |       | —  |       | — |       | (28                 | )          | —           |       | (28       | )          |
| Investments in  and advances towards JCP Project                                                   |       | —  |       | — |       | (10                 | )          | —           |       | (10       | )          |
| 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 |   |

 

66

----

 

Note18.    Consolidating FinancialStatements (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                                                           |       | 10      |       | 64     |       | (88                 | )          | —           |       | (14       | )          |
| Other operating  cash flow activity                                                             |       | 165     |       | (147   | )          | (1                  | )          | —           |       | 17        |       |
| Net cash flows  provided by operating activities                                                |       | 103     |       | 172    |       | 12                  |       | (7               | )          | 280       |       |
|                                                                                            |       |    |       |   |       |                |       |             |       |      |       |
| Cash Flows From  Investing Activities                                                           |       |    |       |   |       |                |       |             |       |      |       |
| Capital and  investment expenditures                                                            |       | —  |       | (169   | )          | (34                 | )          | —           |       | (203      | )          |
| Investments in  and advances to Q-Chem                                                          |       | —  |       | — |       | (103                | )          | —           |       | (103      | )          |
| Investments in  and advances towards JCP Project                                                |       | —  |       | — |       | (20                 | )          | —           |       | (20       | )          |
| Proceeds from  the sale of assets                                                               |       | —  |       | 1      |       | —              |       | —           |       | 1         |       |
| Increase in  other investments                                                                  |       | (134    | )          | — |       | —              |       | 134              |       | —    |       |
| Net cash flows  used in investing activities                                                    |       | (134    | )          | (168   | )          | (157                | )          | 134              |       | (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      |       | — |       | 127                 |       | (127             | )          | 32        |       |
| Net cash flows  provided by (used in) financing activities                                      |       | 31      |       | (1     | )          | 146                 |       | (127             | )          | 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 |   |

 

67

----

 

Chevron PhillipsChemical Company LLC

Selected Quarterly Financial Data

For the Yearsended December 31, 2005 and 2004

 (Unaudited)

 

| ** **     | ** ** | **Net Sales**              | ** ** | **Income**     | ** ** | ** **     | ** ** |
|----------------|------------|----------------------------|------------|----------------|------------|----------------|------------|
| **Millions**   | ** ** | **As Previously Reported** | ** ** | **Adjustment** | ** ** | **As Revised** | ** ** | **Before Interest  and Taxes** | ** ** | **Net Income  (Loss)** | ** ** |
| 2005           |       |                       |       |           |       |           |       |   |   |   |   |
| First quarter  |       | $                          | 2,658      |           | $          | (18            | )          | $ | 2,640 |   | $ | 409 |   | $ | 389 |   |
| Second quarter |       | 2,503                      |       | (19            | )          | 2,484          |       | 195 |   | 173 |   |
| Third quarter  |       | 2,624                      |       | (20            | )          | 2,604          |       | 17 |   | (1 | ) |
| Fourth quarter |       |                       |       |           |       | 2,979          |       | 313 |   | 292 |   |
| Total          |       |                       |       |           |       | $              | 10,707     |   | $ | 934 |   | $ | 853 |   |
|           |       |                       |       |           |       |           |       |   |   |   |   |
| 2004           |       |                       |       |           |       |           |       |   |   |   |   |
| First quarter  |       | $                          | 1,993      |           | $          | (17            | )          | $ | 1,976 |   | $ | 127 |   | $ | 108 |   |
| Second quarter |       | 2,091                      |       | (18            | )          | 2,073          |       | 117 |   | 97 |   |
| Third quarter  |       | 2,534                      |       | (18            | )          | 2,516          |       | 227 |   | 205 |   |
| Fourth quarter |       | 2,620                      |       | (20            | )          | 2,600          |       | 236 |   | 216 |   |
| Total          |       | $                          | 9,238      |           | $          | (73            | )          | $ | 9,165 |   | $ | 707 |   | $ | 626 |   |
|                |            |                            |            |                |            |                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Net Sales in 2005and 2004 were revised to reflect CPChem billings to a non-consolidated equitycompany for non-core services, provided at cost, as reductions of expense.

 

Income beforeinterest and taxes in 2005 included a second quarter net benefit totaling $20million related to a legal settlement and an adjustment to inventory.

 

See “Part I — Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Part II — Item 8. Financial Statements andSupplementary Data - Notes to Consolidated Financial Statements” for further discussions.

 

68

----

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

** **

**AUDITORS’ REPORT TO THE PARTNERS OF**

**SAUDI CHEVRON PHILLIPS COMPANY LIMITED**

 

 

We have audited the accompanying balance sheet of Saudi Chevron Phillips Company Limited,expressed in United States Dollars, as of 31 December 2005, 31 December 2004and 31 December 2003 and the related statements of income, cash flows andchanges in partners’ equity for the years then ended. These financialstatements are the responsibility of the company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

We conducted our audit in accordance with generally accepted auditingstandards in the Kingdom of Saudi Arabia, which are substantially the same asthose followed in the United States of America. Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that ouraudit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Saudi Chevron Phillips Company Limitedas of 31 December 2005, 31 December 2004, 31 December 2003 andthe results of its operations and its cash flows for the years then ended inconformity with accounting standards generally accepted in the Kingdom of SaudiArabia.

 

Accounting principles generally accepted in the Kingdom of Saudi Arabiavary in certain significant respects from accounting principles generallyaccepted in United States of America. The significant differences between theaccounting principles generally accepted in the Kingdom of Saudi Arabia andthose generally accepted in the United States of America so far as concerns thefinancial statements referred to are summarised in note 18 to the accompanyingfinancial statements.

 

for Ernst & Young

 

[stamp affixed]

 

Abdulaziz Saud Alshubaibi

Certified Public Accountant

Registration No. 339

 

8 February 2006

 

Alkhobar

 

Dr. Abdullah A. Baeshen(66)  Abdulaziz A. Alsowailim (277)Abdulaziz Alshubaibi (339)Offices in the Kingdom : Alkhobar, Jeddah, Riyadh

 

69

----

 

Saudi Chevron Phillips CompanyLimited

BALANCE SHEET

As of 31 December 2005

 
| ** **                                            | ** ** | **Note**   | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|-------------------------------------------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| **ASSETS EMPLOYED**                                   | ** ** | ** ** | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| **PROPERTY, PLANT AND EQUIPMENT**                     |       | 3          | ** ** | **485,920**             |       | 456,374                 |       | 469,625                 |       |
|                                                  |       |       |       |                    |       |                    |       |                    |       |
| **DEFERRED CHARGES**                                  |       | 4          | ** ** | **12,193**              |       | 15,499                  |       | 18,804                  |       |
|                                                  |       |       |       |                    |       |                    |       |                    |       |
| **CURRENT ASSETS**                                    |       |       |       |                    |       |                    |       |                    |       |
| Inventories                                           |       | 5          | ** ** | **78,422**              |       | 63,764                  |       | 60,185                  |       |
| Accounts receivable and prepayments                   |       | 6          | ** ** | **71,889**              |       | 103,839                 |       | 57,955                  |       |
| Bank balances and cash                                |       | 7          | ** ** | **222,237**             |       | 220,492                 |       | 78,833                  |       |
|                                                  |       |       | ** ** | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **372,548**             |       | 388,095                 |       | 196,973                 |       |
| ** **                                            |       | ** ** |       | ** **              |       |                    |       |                    |       |
| **CURRENT LIABILITIES**                               |       |       |       |                    |       |                    |       |                    |       |
| Accounts payable and accruals                         |       | 9          | ** ** | **85,297**              |       | 83,377                  |       | 46,013                  |       |
| Current portion of term loans                         |       | 13         | ** ** | **31,490**              |       | 53,894                  |       | 40,693                  |       |
| Current portion of subordinated partners’  loans |       | 14         | ** ** | **8,000**               |       | —                  |       | —                  |       |
|                                                  |       |       | ** ** | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **124,787**             |       | 137,271                 |       | 86,706                  |       |
| ** **                                            |       | ** ** |       | ** **              |       |                    |       |                    |       |
| **NET CURRENT ASSETS**                                | ** ** | ** ** |       | **247,761**             |       | 250,824                 |       | 110,267                 |       |
| ** **                                            | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **745,874**             |       | 722,697                 |       | 598,696                 |       |
|                                                  |       |       |       |                    |       |                    |       |                    |       |
| **FUNDS EMPLOYED**                                    |       |       |       |                    |       |                    |       |                    |       |
|                                                  |       |       |       |                    |       |                    |       |                    |       |
| **PARTNERS’ EQUITY**                             |       |       |       |                    |       |                    |       |                    |       |
| Capital                                               |       | 11         | ** ** | **174,667**             |       | 174,667                 |       | 162,667                 |       |
| Statutory reserve                                     |       | 12         | ** ** | **69,407**              |       | 47,838                  |       | 17,731                  |       |
| Retained earnings                                     | ** ** | ** ** |       | **459,140**             |       | 365,635                 |       | 124,700                 |       |
|                                                  | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **703,214**             |       | 588,140                 |       | 305,098                 |       |
| ** **                                            |       |       |       |                    |       |                    |       |                    |       |
| **NON CURRENT LIABILITIES**                           |       |       |       |                    |       |                    |       |                    |       |
| Term loans                                            |       | 13         | ** ** | **40,000**              |       | 106,156                 |       | 201,905                 |       |
| Subordinated partners’ loans                     |       | 14         | ** ** | **—**              |       | 25,733                  |       | 89,834                  |       |
| Employees’ terminal benefits                     | ** ** | ** ** |       | **2,660**               |       | 2,668                   |       | 1,859                   |       |
|                                                  | ** ** | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **42,660**              |       | 134,557                 |       | 293,598                 |       |
| ** **                                            |       | ** ** |       | ** **              |       |                    |       |                    |       |
| ** **                                            |       | ** ** |       | **745,874**             |       | 722,697                 |       | 598,696                 |       |

 

The attached notes 1 to 18 form part of these financial statements.

 

70

----

 

Saudi Chevron Phillips CompanyLimited

INCOMESTATEMENT

Year Ended 31 December 2005

 
| ** **                       | ** ** | **Note**   | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                       | ** ** | ** ** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                       | ** ** | ** ** | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Sales                            | ** ** | ** ** | ** ** | **617,849**             | ** ** | 664,559                 |       | 392,131                 |       |
| Cost of sales                    | ** ** |       | ** ** | **(398,447**            | **)**      | (351,128                | )          | (269,333                | )          |
|                             | ** ** |       | ** ** | ** **              | ** ** |                    |       |                    |       |
| **GROSS PROFIT**                 | ** ** | ** ** | ** ** | **219,402**             | ** ** | 313,431                 |       | 122,798                 |       |
|                             |       |       |       |                    | ** ** |                    |       |                    |       |
| **EXPENSES**                     |       |       |       |                    | ** ** |                    |       |                    |       |
| Selling and distribution         |       | 15         | ** ** | **(3,392**              | **)**      | (4,456                  | )          | (1,880                  | )          |
| Amortization of deferred charges |       | 4          | ** ** | **(3,306**              | **)**      | (3,305                  | )          | (3,306                  | )          |
|                             |       |       | ** ** | ** **              | ** ** |                    |       |                    |       |
| **INCOME FROM MAIN OPERATIONS**  | ** ** | ** ** | ** ** | **212,704**             | ** ** | 305,670                 |       | 117,612                 |       |
|                             |       |       |       |                    | ** ** |                    |       |                    |       |
| Income from bank deposits        | ** ** |       | ** ** | **5,937**               | ** ** | 1,535                   |       | 335                     |       |
| Loss on sale of equipment        | ** ** |       | ** ** | **—**              | ** ** | —                  |       | (435                    | )          |
| Financial charges                |       | 16         |       | **(2,948**              | **)**      | (6,136                  | )          | (5,397                  | )          |
|                             |       |       |       | ** **              | ** ** |                    |       |                    |       |
| **NET INCOME FOR THE YEAR**      | ** ** | ** ** | ** ** | **215,693**             | ** ** | 301,069                 |       | 112,115                 |       |

 

The attached notes 1 to 18 form part of these financial statements.

 

71

----

 

Saudi Chevron Phillips CompanyLimited

STATEMENT OF CASH FLOWS

YearEnded 31 December 2005

 
| ** **                                           | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| **OPERATING ACTIVITIES**                             | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Net income for the year                              |       | **215,693**             | ** ** | 301,069                 |       | 112,115                 |       |
| Adjustments for:                                     |       |                    | ** ** |                    |       |                    |       |
| Depreciation                                         |       | **30,320**              | ** ** | 29,809                  |       | 29,797                  |       |
| Amortization                                         | ** ** | **3,306**               | ** ** | 3,305                   |       | 3,306                   |       |
| Employees’  terminal benefits (net)             | ** ** | **(8**                  | **)**      | 809                     |       | 668                     |       |
| Income from  bank deposits                           | ** ** | **(5,937**              | **)**      | (1,535                  | )          | (335                    | )          |
| Financial  charges                                   | ** ** | **2,948**               | ** ** | 6,136                   |       | 5,397                   |       |
| Loss on sale  of equipment                           | ** ** | **—**              | ** ** | —                  |       | 435                     |       |
| ** **                                           |       | **246,322**             | ** ** | 339,593                 |       | 151,383                 |       |
| Changes in operating assets and  liabilities:        |       |                    | ** ** |                    |       |                    |       |
| Inventories                                          | ** ** | **(14,658**             | **)**      | (3,579                  | )          | (9,232                  | )          |
| Receivables                                          | ** ** | **31,950**              | ** ** | (45,884                 | )          | (23,555                 | )          |
| Payables                                             | ** ** | **1,920**               | ** ** | 37,364                  |       | 3,016                   |       |
|                                                 | ** ** | ** **              | ** ** |                    |       |                    |       |
| Cash from operations                                 | ** ** | **265,534**             | ** ** | 327,494                 |       | 121,612                 |       |
|                                                 | ** ** | ** **              | ** ** |                    |       |                    |       |
| Financial charges paid                               |       | **(2,948**              | **)**      | (6,136                  | )          | (5,729                  | )          |
|                                                 |       | ** **              | ** ** |                    |       |                    |       |
| Net cash from operating activities                   | ** ** | **262,586**             | ** ** | 321,358                 |       | 115,883                 |       |
|                                                 |       |                    | ** ** |                    |       |                    |       |
| **INVESTING ACTIVITIES**                             |       |                    | ** ** |                    |       |                    |       |
| Purchase of property, plant and equipment            | ** ** | **(59,866**             | **)**      | (16,558                 | )          | (1,871                  | )          |
| Proceeds from sale of equipment                      | ** ** | **—**              | ** ** | —                  |       | 35                      |       |
| Income from bank deposits                            | ** ** | **5,937**               | ** ** | 1,535                   |       | 335                     |       |
|                                                 | ** ** | ** **              | ** ** |                    |       |                    |       |
| Net cash used in investing activities                | ** ** | **(53,929**             | **)**      | (15,023                 | )          | (1,501                  | )          |
|                                                 |       |                    | ** ** |                    |       |                    |       |
| **FINANCING ACTIVITIES**                             |       |                    | ** ** |                    |       |                    |       |
| Issue of share capital                               |       | —                  | ** ** | 12,000                  |       | —                  |       |
| Proceeds from term loans                             | ** ** | **40,000**              | ** ** | —                  |       | —                  |       |
| Repayment of term loans                              | ** ** | **(128,560**            | **)**      | (82,548                 | )          | (46,371                 | )          |
| Repayment of subordinated partners’ loans       | ** ** | **(17,733**             | **)**      | (64,101                 | )          | —                  |       |
| Dividends paid                                       | ** ** | **(100,619**            | **)**      | (30,027                 | )          | (19,894                 | )          |
|                                                 | ** ** | ** **              | ** ** |                    |       |                    |       |
| Net cash used in financing activities                | ** ** | **(206,912**            | **)**      | (164,676                | )          | (66,265                 | )          |
|                                                 |       |                    | ** ** |                    |       |                    |       |
| **INCREASE IN BANK BALANCES AND CASH**               | ** ** | **1,745**               | ** ** | 141,659                 |       | 48,117                  |       |
| ** **                                           | ** ** | ** **              | ** ** |                    |       |                    |       |
| Bank balances and cash at the beginning of  the year | ** ** | **220,492**             | ** ** | 78,833                  |       | 30,716                  |       |
|                                                 | ** ** | ** **              | ** ** |                    |       |                    |       |
| **BANK BALANCES AND CASH AT THE END OF THE  YEAR**   | ** ** | **222,237**             | ** ** | 220,492                 |       | 78,833                  |       |

 

The attached notes 1 to 18 form part of these financial statements.

 

72

----

 

Saudi Chevron Phillips CompanyLimited

STATEMENT OF CHANGES IN PARTNERS’ EQUITY

Year Ended 31 December 2005

 
| ** **                           | ** ** | **Capital**             | ** ** | **Statutory  reserve**  | ** ** | **Retained  earnings**  | ** ** | **Total**               | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                           | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| 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 a partner      |       | —                  |       | —                  |       | 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 a partner      |       | —                  |       | —                  |       | 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                 |       |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| Net income for the year              |       | —                  |       | —                  |       | 215,693                 |       | 215,693                 |       |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| Provision for zakat (note 10)        |       | —                  |       | —                  |       | (3,058                  | )          | (3,058                  | )          |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| Zakat reimbursable by a partner      |       | —                  |       | —                  |       | 3,058                   |       | 3,058                   |       |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| Transfer to statutory reserve        |       | —                  |       | 21,569                  |       | (21,569                 | )          | —                  |       |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| Dividends paid                       |       | —                  |       | —                  |       | (100,619                | )          | (100,619                | )          |
|                                 |       |                    |       |                    |       |                    |       |                    |       |
| **Balance at 31 December 2005** | ** ** | **174,667**             | ** ** | **69,407**              | ** ** | **459,140**             | ** ** | **703,214**             | ** ** |

 

The attached notes 1 to 18 form part of these financial statements.

 

73

----

 

Saudi Chevron Phillips Company Limited

NOTES TO THE FINANCIAL STATEMENTS

31 December 2005

 

**1**                                         ACTIVITIES

** **

The company is a limited liability company registered in Jubail - SaudiArabia under Commercial Registration number 2055003839 dated 22 Safar 1417H,corresponding to 8 July 1996 with a branch in Jubail under CommercialRegistration number 2055003839/001. The company was established to develop,construct and operate a petrochemical plant in Jubail, Saudi Arabia, to producearomatics, solvents and Cyclohexane. It is owned 50% by Saudi and 50% by non-Saudipartners.

 

These financial statements have been presented in United States Dollars(USD).

 

**2**                                         SIGNIFICANT ACCOUNTING POLICIES

** **

Thefinancial statements have been prepared in accordance with accounting standardsgenerally accepted in the Kingdom of Saudi Arabia. The significant accountingpolicies adopted are as follows:

 

***Accounting convention***

Thefinancial statements are prepared under the historical cost convention.

 

***Fixedassets/depreciation***

All property, plant and equipment are recorded at cost. The cost ofproperty, plant and equipment is depreciated on a straight line basis over theestimated useful lives of the assets.

 

Expenditure for repair and maintenance are charged to income.Improvements that increase the value or materially extend the life of therelated assets are capitalized.

 

***Deferredcharges/amortization***

Deferred charges comprise total pre-production costs net of pre-productionincome, and Saudi Industrial Development Fund (SIDF) loan appraisal fees andare amortized in equal annual installments from the date of commencement ofcommercial production over the estimated period of benefit.

 

***Inventories***

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

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

 

***Zakat and income tax***

Zakat and income tax are provided for in accordance with Saudi Arabianfiscal regulations. The provision is charged to retained earnings.Reimbursements by the partners of such zakat and income tax are credited toretained earnings.

 

***Employees’terminal benefits***

Provisionis made for amounts payable to comply with the Saudi Arabian labor lawapplicable to employees’ accumulated periods of service at the balance sheetdate.

 

***Sales***

Salesrepresent the invoiced value of goods supplied by the company during the yearnet of shipping, distribution and selling and marketing costs.

 

***Foreigncurrencies***

Transactionsin foreign currencies are recorded in US Dollars at the rate ruling at the dateof the transaction. Monetary assets and liabilities denominated in foreigncurrencies are retranslated at the rate of exchange ruling at the balance sheetdate. All differences are taken to the income statement.

 

***Expenses***

Selling and distribution expenses comprise expenses that specificallyrelate to the delivery of products. All other period expenses, other thanamortization of deferred charges and financial charges, are classified as costof sales.

 

74

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**3**                               PROPERTY, PLANT AND EQUIPMENT

 

The estimated useful lives of the assets for thecalculation of depreciation are as follows:

 
| 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  2005**         | ** ** | **Total  2004**         | ** ** | **Total  2003**         | ** ** |
|-------------------------------|------------|-------------------------|------------|-------------------------|------------|------------------------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000**            | ** ** | **US $ ‘000** | ** ** | **US $ ‘000**           | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                    | ** ** | ** **              | ** ** | ** **              | ** ** | ** **                         | ** ** | ** **              | ** ** | ** **                        | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Cost:                         |       |                    |       |                    |       |                               |       |                    |       |                              |       |                    |       |                    |       |                    |       |
| At the beginning of the  year |       | 18,923                  |       | 561,360                 |       | 4,837                              |       | 1,602                   |       | 17,260                            | ** ** | **603,982**             |       | 587,424                 |       | 586,297                 |       |
| Additions                     |       | —                  |       | —                  |       | —                             |       | —                  |       | 59,866                            | ** ** | **59,866**              |       | 16,558                  |       | 1,871                   |       |
| Disposals                     |       | —                  |       | —                  |       | —                             |       | —                  |       | —                            |       | —                  |       | —                  |       | (744                    | )          |
| Transfers                     |       | —                  |       | 1,663                   |       | 51                                 |       | 235                     |       | (1,949                            | )          | —                  |       | —                  |       | —                  |       |
| At the end of the year        |       | 18,923                  |       | 563,023                 |       | 4,888                              |       | 1,837                   |       | 75,177                            | ** ** | **663,848**             |       | 603,982                 |       | 587,424                 |       |
| Depreciation:                 |       |                    |       |                    |       |                               |       |                    |       |                              |       |                    |       |                    |       |                    |       |
| At the beginning of the  year |       | 4,669                   |       | 138,231                 |       | 3,746                              |       | 962                     |       | —                            | ** ** | **147,608**             |       | 117,799                 |       | 88,276                  |       |
| Charge for the year           |       | 946                     |       | 28,577                  |       | 554                                |       | 243                     |       | —                            | ** ** | **30,320**              |       | 29,809                  |       | 29,797                  |       |
| Disposals                     |       | —                  |       | —                  |       | —                             |       | —                  |       | —                            |       | —                  |       | —                  |       | (274                    | )          |
| At the end of the year        |       | 5,615                   |       | 166,808                 |       | 4,300                              |       | 1,205                   |       | —                            | ** ** | **177,928**             |       | 147,608                 |       | 117,799                 |       |
| Net book amounts:             |       |                    |       |                    |       |                               |       |                    |       |                              |       |                    |       |                    |       |                    |       |
| **At 31 December 2005**  | ** ** | **13,308**              | ** ** | **396,215**             | ** ** | **588**                            | ** ** | **632**                 | ** ** | **75,177**                        | ** ** | **485,920**             |       |                    |       |                    |       |
| 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                 |       |

 

The buildings and plant and equipment are situated on land leased fromthe Royal Commission for Jubail and Yanbu. The lease is initially for a periodof 30 years commencing from 20 Rajab 1417H (corresponding to 1 December 1996)and is renewable for further periods thereafter.

 

All plant and equipment are mortgaged to the Saudi IndustrialDevelopment Fund as security for certain term loans (note 13 (b)). Theseinclude finance charges of US $18.9 million (2004 and 2003: US $18.9 million)capitalized during construction phase in respect of the loan facilitiesdisclosed in note 13 (b).

 

Construction work in progress mainly represents costs incurred oncertain civil and mechanical projects currently under construction (also seenote 17) and includes capitalized borrowing costs of US $1.1 million.

 

75

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**4****                             DEFERRED CHARGES**

 
| ** **                                 | ** **   | **2005**                | ** **   | **2004**                | ** **   | **2003**                | ** **   |
|--------------------------------------------|--------------|-------------------------|--------------|-------------------------|--------------|-------------------------|--------------|
| ** **                                 | ** **   | **US $ ‘000** | ** **   | **US $ ‘000** | ** **   | **US $ ‘000** | ** **   |
| *** ***                               | *** *** | *** ***            | *** *** | *** ***            | *** *** | *** ***            | *** *** |
| Costs at the beginning and end of the year |         | **31,545**              | ** **   | 31,545                  |         | 31,545                  |         |
|                                       |         | ** **              | ** **   |                    |         |                    |         |
| Amortization:                              |         | ** **              | ** **   |                    |         |                    |         |
| At the  beginning of the year              |         | **16,046**              | ** **   | 12,741                  |         | 9,435                   |         |
| Provided  during the year                  |         | **3,306**               | ** **   | 3,305                   |         | 3,306                   |         |
| At the end  of the year                    |         | **19,352**              | ** **   | 16,046                  |         | 12,741                  |         |
|                                       |         | ** **              | ** **   |                    |         |                    |         |
| Net book amounts                           |         | **12,193**              | ** **   | 15,499                  |         | 18,804                  |         |

 

Deferred charges consist of pre-production costs of US $22.2 million(2004 and 2003: US $22.2 million) and appraisal fees on the SIDF and commercialloans of US $9.3 million (2004 and 2003: US $9.3 million).

 

In 2003, in order to comply with the SOCPA’s standard on “IntangibleAssets”, with effect from 1 January 2003, the company reduced the pre-productioncosts amortization period of ten years. The balance outstanding at 1 January 2003is now being amortized over 7 years.

 

Appraisal fees on the SIDF and commercial loans are amortized over theperiod of the related loans.

 

**5****                             INVENTORIES**

 
| ** **     | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|----------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **     | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **     | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Raw materials  |       | **2,954**               | ** ** | 2,389                   |       | 1,953                   | ** ** |
| Finished goods |       | **32,834**              | ** ** | 14,484                  |       | 17,602                  | ** ** |
| Spares         |       | **3,387**               | ** ** | 3,684                   |       | 3,566                   | ** ** |
| Catalyst       |       | **39,247**              | ** ** | 43,207                  |       | 37,064                  | ** ** |
|           |       | **78,422**              | ** ** | 63,764                  |       | 60,185                  | ** ** |

 

**6****                             ACCOUNTSRECEIVABLE AND PREPAYMENTS**

 
| ** **                            | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|---------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                            | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                            | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Trade accounts receivable             |       | **36,676**              |       | 59,827                  |       | 37,638                  | ** ** |
| Amounts due from partners (note 8)    |       | **3,172**               |       | 3,773                   |       | 2,026                   | ** ** |
| Amount due from an affiliate (note 8) |       | **23,940**              |       | 29,726                  |       | 12,391                  | ** ** |
| Other receivables                     |       | **5,710**               |       | 8,125                   |       | 3,614                   | ** ** |
| Prepaid expenses                      |       | **2,391**               |       | 2,388                   |       | 2,286                   | ** ** |
|                                  |       | **71,889**              |       | 103,839                 |       | 57,955                  | ** ** |

 

Three customers account for the entire trade accounts receivablebalance as of 31 December 2005 (2004 and 2003: four customers).

 

**7****                             BANKBALANCES AND CASH**

 

Bank balances amounting to US $222.2 million (2004: US $220.5 million)are assigned as security against loan facilities from a consortium of banks(note 13 (a)).

 

76

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

** **

**8**                               RELATED PARTY TRANSACTIONS AND BALANCES

 

Purchases amounting to approximately US $8.7****millionwere made from the foreign partner’s parent company and its affiliates during2005 (2004: approximately US $11.4 million and 2003: approximately US $3.2million).

 

Approximately 45% (2004: approximately 48% and 2003: approximately 38%)of the company’s sales are made through a marketing affiliate of the foreignpartner under a marketing agreement. Upon delivery of the product to themarketing affiliate, sales are recorded at provisional prices calculated on thebasis of a methodology approved by the board of directors. The provisionalprices are subsequently adjusted to actual selling prices, as received by themarketer from its customers, after deducting shipping, distribution and sellingcosts, and a marketing fee (in accordance with the above marketing contract) tocover all other marketing expenses. Adjustments are recorded on a quarterlybasis as they are reported by the marketer and become known to the company.

 

The prices and terms of the transactions are approved by themanagement. Amountsdue from partners and an affiliate and amounts payable to affiliates are shownunder notes 6 and 9, respectively. Subordinated loans from the partners aredisclosed in note 14 to these financial statements.

 

**9****                             ACCOUNTSPAYABLE AND ACCRUALS**

 
| ** **                         | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                         | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Trade accounts payable             |       | **32,006**              |       | 28,584                  |       | 19,434                  | ** ** |
| Amounts due to affiliates (note 8) |       | **4,437**               |       | 19,563                  |       | 4,672                   | ** ** |
| Zakat payable (note 10)            |       | **3,058**               |       | 3,773                   |       | 1,410                   | ** ** |
| Accrued expenses                   |       | **45,796**              |       | 31,457                  |       | 20,497                  | ** ** |
|                               |       | **85,297**              |       | 83,377                  |       | 46,013                  | ** ** |

 

**10**                        ZAKAT AND INCOME TAX

** **

**a)**                            Zakat

** **

**Chargefor the year**

 

The zakat charge relating to the Saudi partner consists of:

 
| ** **                   | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                   | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Provision for the year       |       | **3,058**               |       | 3,773                   |       | 1,410                   | ** ** |
| Adjustment for previous year |       | —                  |       | —                  |       | (313                    | )          |
|                         |       |                    |       |                    |       |                    |       |
| Charge for the year          |       | **3,058**               |       | 3,773                   |       | 1,097                   | ** ** |

 

77

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**10****                      ZAKAT ANDINCOME TAX (continued)**

 

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

 
| ** **                               | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                               | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Equity                                   |       | **247,761**             |       | 150,402                 |       | 96,492                  | ** ** |
| Opening provisions and other adjustments |       | **37,079**              |       | 80,984                  |       | 166,811                 | ** ** |
| Book value of long term assets           |       | **(232,020**            | **)**      | (259,412                | )          | (264,529                | )          |
|                                     |       | **52,820**              |       | (28,026                 | )          | (1,226                  | )          |
| Zakatable profit for the year            |       | **69,488**              |       | 150,939                 |       | 56,392                  | ** ** |
| Zakat base                               |       | **122,308**             |       | 150,939                 |       | 56,392                  | ** ** |

 

Thedifferences between the financial and the zakatable profit are mainly due toadjustments for certain costs/claims based on the relevant fiscal regulations.

 

**Movement in provision**

 

The movement in the zakat provision was as follows:

 
| ** **               | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|--------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **               | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| At the beginning of year |       | **3,773**               |       | 1,410                   |       | 870                     | ** ** |
| Provided during the year |       | **3,058**               |       | 3,773                   |       | 1,097                   | ** ** |
| Payments during the year |       | **(3,773**              | **)**      | (1,410                  | )          | (557                    | )          |
|                     |       | ** **              | ** ** |                    |       |                    |       |
| At the end of year       |       | **3,058**               |       | 3,773                   |       | 1,410                   | ** ** |

 

**b)****                                      Incometax**

 

Underthe provisions of the Foreign Capital Investment Code, the non-Saudi partner isexempt from income tax on its share of income for ten years from the date ofcommencement of commercial production (1 March 2000). The non-Saudipartner’s cumulative share of net income since the commencement of the taxholiday is US $302****million (2004:US $233 million and 2003: US $82 million).

 

**Status of assessments**

 

TheDepartment of Zakat and Income Tax (DZIT) raised assessments for the year 1997to 2002 with additional zakat, tax and delay fine liabilities of US $1.5million, US $2.3 million and US $0.6 million, respectively. The company hasfiled an appeal against the DZIT’s assessments with the Preliminary AppealsCommittee. Management is confident that the committee’s decision will be infavor of the company. Accordingly no provision for the additional liabilities,as assessed by DZIT, has been made in the books as of 31 December 2005.Thezakat and income tax assessments for the years ended 31 December 2003 and2004 have not yet been received by the company.

 

**11**                        CAPITAL

 

Capitalis divided into 6,550,000 shares (2004: 6,550,000 and 2003: 6,100,000 shares)of US $26.67 (100 Saudi Riyals) each.

 

78

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**12**                        STATUTORY RESERVE

 

Asrequired by Saudi Arabian Regulations for Companies, 10% of the net income forthe year has been transferred to the statutory reserve.The company may resolve to discontinue such transfers when the reserve totals50% of the capital. The reserve is not available for distribution.

 

**13**                        TERM LOANS

 
| ** **             | ** ** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Consortium             |       | **59,667**              |       | 91,000                  |       | 146,189                 | ** ** |
| SIDF                   |       | **11,823**              |       | 69,050                  |       | 96,409                  | ** ** |
|                   |       | **71,490**              |       | 160,050                 |       | 242,598                 | ** ** |
|                   |       | ** **              |       |                    |       |                    | ** ** |
| Less: Current portion: |       | ** **              |       |                    |       |                    | ** ** |
| Consortium             |       | **19,667**              |       | 30,000                  |       | 20,000                  | ** ** |
| SIDF                   |       | **11,823**              |       | 23,894                  |       | 20,693                  | ** ** |
|                   |       | ** **              |       |                    |       |                    | ** ** |
|                   |       | **31,490**              |       | 53,894                  |       | 40,693                  | ** ** |
|                   |       | ** **              |       |                    |       |                    | ** ** |
|                   |       | **40,000**              |       | 106,156                 |       | 201,905                 | ** ** |

 

a)             Theterm loan facilities from consortium of banks (the consortium) consist of:

 

*i)            *US$101 million term loan facility restructured in 2004. The facility wasrepayable in 7 half yearly installments increasing from US $10 million to US $20million. The company accelerated its repayment of the loan and repaid anadditional US $41.3 million during the year 2005. The board of directors, afterconsidering the company’s cash flow requirements, intends to repay theremaining portion of the loan in 2006 and accordingly, the remaining balancehas been classified as current liabilities.

 

*ii)           *US$40 million term loan facility. The facility is repayable in 18 half yearlyinstallments commencing six months after the expansion project completion date.

 

*iii)         *US$38 million as a revolving credit facility. As of 31 December 2005, noamount has been drawn from this loan facility (2004: No amount drawn).

 

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% (2004 and2003: same terms and conditions).

 

b)                                     Thetotal amount of term loans facilities with the SIDF is US $215 million of whichUS $150 million (2004 and 2003: US $150 million) has been drawn as of thebalance sheet date. After restructuring in 2004, the repayment of the remainingbalance commenced on 15 Sha’aban 1425H (corresponding to 30 September 2004).The company accelerated its repayment of the loans and repaid additional US $41.3million during the year 2005. The board of directors, after considering thecompany’s cash flow requirements, intends to repay the remaining portion of theloans in 2006 and accordingly, the remaining balance has been classified ascurrent liabilities. The loans are secured by a mortgage on the company’s plantand equipment and assignment of insurance proceeds and technology rights. Theloans carry appraisal fees which are being amortized over the term of the loans(note 4).

 

79

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**13**                        TERM LOANS - continued

 

Following are thecombined aggregate amounts of next five years’ maturities of the term loans:

 
| ** ** | ** ** | **US $ ‘000** | ** ** |
|------------|------------|-------------------------|------------|
|       |       |                    |       |
| 2006       |       | 31,490                  |       |
| 2007       |       | 1,120                   |       |
| 2008       |       | 2,240                   |       |
| 2009       |       | 2,760                   |       |
| 2010       |       | 3,280                   |       |

 

**14**                        SUBORDINATED PARTNERS’ LOANS

** **

Subordinated partners’ loans are commission free and are repayablesubject to the minimum level required to be maintained by the terms of the SIDFloan agreement disclosed in note 13. The board of directors intends to repaythe balance as of 31 December 2005 during the year 2006, after therepayment of SIDF term loans (see note 13 (b)).

 

**15****                                  SELLINGAND DISTRIBUTION EXPENSES**

 
| ** **         | *** *** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | *** *** |
|--------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
|               |         | **US $ ‘000** |       | **US $ ‘000** |       | **US $ ‘000** | ** **   |
|               |         | ** **              |       | ** **              |       | ** **              | ** **   |
| Inspection charges |         | **3,392**               |       | 4,456                   |       | 1,880                   | ** **   |

 

**16****                                  FINANCIALCHARGES**

 
| ** **                 | *** *** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | *** *** |
|----------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|--------------|
|                       |         | **US $ ‘000** |       | **US $ ‘000** |       | **US $ ‘000** | ** **   |
|                       |         | ** **              |       | ** **              |       | ** **              | ** **   |
| Term loans borrowing costs |         | **1,987**               |       | 2,847                   |       | 4,009                   | ** **   |
| Bank charges               |         | **961**                 |       | 3,289                   |       | 1,388                   | ** **   |
|                       |         | **2,948**               |       | 6,136                   |       | 5,397                   | ** **   |

 

**17**                      CAPITAL COMMITMENTS

** **

**The directors have authorizedfuture capital expenditure amounting to US $162**million as of 31 December 2005 (2004: US $122 million)in connection with certain projects.

** **

**80**

----

** **

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**18**                      SUMMARY OF SIGNIFICANT DIFFERENCES (BOTHAMOUNTS AND DISCLOSURES) BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANYAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

** **

Thefinancial statements of the company have been prepared in accordance withaccounting standards generally accepted in the Kingdom of Saudi Arabia. For thepurpose of these financial statements, following are the differences betweenthe accounting standards generally accepted in the Kingdom of Saudi Arabia andUnited States Generally Accepted Accounting Principles (US GAAP).

 

***a)******                                    ******Reconciliation of netincome with US GAAP***

** **
| ** **                                                        | *** *** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|-------------------------------------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                        | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                                                        | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Net income  per financial statements (Saudi accounting standards) |         | **215,693**             |       | 301,069                 |       | 112,115                 | ** ** |
| US GAAP adjustment:                                               |         |                    |       |                    |       |                    | ** ** |
| Add back pre production costs amortization                        |         | **2,275**               |       | 2,275                   |       | 2,275                   | ** ** |
| Net income under US GAAP (see note below)                         |         | **217,968**             |       | 303,344                 |       | 114,390                 | ** ** |

** **

For each year presented in the table above,it has been assumed that pre production costs were expensed when originallyincurred.

*** ***

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

** **
| ** **                                                                   | *** *** | **2005**                | ** ** | **2004**                | ** ** | **2003**                | ** ** |
|------------------------------------------------------------------------------|--------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                                   | *** *** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** | **US $ ‘000** | ** ** |
| ** **                                                                   | *** *** | ** **              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Partners’  equity per financial statements (Saudi Accounting Standards) |         | **703,214**             |       | 588,140                 |       | 305,098                 | ** ** |
| US GAAP adjustment:                                                          |         |                    |       |                    |       |                    | ** ** |
| Difference in net income                                                     |         | **(9,102**              | **)**      | (11,377                 | )          | (13,652                 | )          |
| Partners’ equity under US GAAP                                          |         | **694,112**             |       | 576,763                 |       | 291,446                 | ** ** |

** **

***c) Estimated futureaggregate amortization expense***

 

The estimated aggregate amortization expense during the next four yearswould be in the region of US $3 million to US $5 million per annum as no more deferred charges are expected to be incurredduring the next four years.

 

***d) Related partytransactions***

 

The amounts of the company’ssales made through a marketing affiliate of the foreign partner as described innote 8 were 2005: US $277.6****million, 2004:US $320.1 million and 2003: US $150.5 million.

 

***e) Source of rawmaterials***

 

The company purchases its raw materials primarily from one supplier inthe Kingdom of Saudi Arabia.

 

***f) Dividends paid***

 

Cash dividends during the year were US $100.6 million (2004: US $30million and 2003: US $19.9 million) and constitute 57.6% of the capital (2004:17.19% and 2003: 12.23%).

 

81

----

 

Saudi Chevron Phillips CompanyLimited

NOTES TO THE FINANCIAL STATEMENTS - continued

31 December 2005

 

**18**                      SUMMARY OF SIGNIFICANT DIFFERENCES (BOTHAMOUNTS AND DISCLOSURES) BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANYAND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - continued

 

***g) Deferredtaxation***

 

There is no deferred tax liability or asset as of the balance sheetdate because the non—Saudi partner is enjoying a tax holiday as mentioned undernote 10 to the financial statements.

 

***h) Fair value***

 

The fair values of the company’s financial assets and liabilitiesapproximate their book values.

 

***i) Comprehensiveincome***

 

Comprehensiveincome under US GAAP is substantially the same as the net income under US GAAP.

 

***j)******Employees’ terminal benefits***

 

Provisionfor employees’ terminal benefits is made for amounts payable to comply with theSaudi Arabian labor law applicable to employees’ accumulated periods of serviceat the balance sheet date and therefore, does not require actuarial calculation.

 

***k) Statement ofcash flows***

 

Statement of cash flows as presented in the financial statementscomplies, in all material respects, with the International Financial ReportingStandard on “Cash Flow Statements”.

 

***l) Provision fortax***

 

Provision for zakat is charged to the statement of partners’ equity inaccordance with Saudi Accounting Standards as it is considered to be a chargeon the Saudi partner. Had the provisionfor zakat been charged to the income statement, and subsequently beenreimbursed by the partner, there would have been no impact on the net incomefor the years 2005, 2004 and 2003.

 

***m) Averageborrowing costs***

** **

**Theweighted average rate of borrowing cost during the construction period was4.47% (2004: nil).**

 

82

----

 

**Report of the Auditors**

 

To

TheShareholders

Qatar ChemicalCompany Limited, Q.S.C

Doha,

Qatar

 

We haveaudited the accompanying financial statements of Qatar Chemical CompanyLimited, Q.S.C (the “Company”) on pages 2 to 21 as of and for the yearended 31 December 2005. The financial statements of the Company as of 31 December 2003were audited by another auditor whose report thereon dated 24 March 2004,expressed an unqualified opinion on those statements with an emphasis of matterrelating to going concern assumption of the financial statements resulting fromaccumulated losses as at 31 December 2003.

 

**Respectiveresponsibilities of the Company’s directors and auditors**

Thesefinancial statements are the responsibility of the Company’s directors. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

**Basisof opinion**

We conductedour audit in accordance with the International Standards on Auditing. Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by themanagement, as well as evaluating the overall financial statement presentation.We believe that our audit provides a reasonable basis for our opinion.

 

**Opinion**

In ouropinion, the financial statements present fairly, in all material respects, thefinancial position of the Company as of 31 December 2005, the results ofits operations, changes in its shareholders’ equity and its cash flows for theyear then ended in accordance with International Financial Reporting Standards.

 

**Othermatters**

In addition,in our opinion, the Company has maintained proper accounting records and thefinancial statements are in agreement therewith and a physical count of theinventories was carried out in accordance with the established principles. Wehave obtained all the information and explanations we required for the purposeof our audit and are not aware of any violations of the provisions of theCompany’s Articles of Association and Qatar Commercial Companies’ Law No. 5of 2002 to the extent applicable having occurred during the year which mighthave had a material adverse effect on the business of the Company or itsfinancial position.

 

 
| 20  February 2006 |     | *Abdul Hakim Al-Adhamy*                      |
|-------------------|----------|----------------------------------------------|
| *Doha*            | * * | *KPMG*                                       |
| *State of Qatar*  | * * | *Qatar Auditors’ Registry No. 105* |

 

 

83

----

 

**AUDITORS’REPORT TO THE SHAREHOLDERS OF**

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

 

We have audited the accompanying balance sheetof Qatar Chemical Company Ltd. (Q-Chem), a Qatari Shareholding Company(Q.S.C.), as of 31 December 2003, and the related statements of income, cashflows and changes in equity for the year then ended. These financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audit. Thesefinancial statements are presented together with the financial statements forthe years ended 31 December 2004 and 31 December 2005 which are audited byanother auditor whose report dated 20 February 2006, expressed an unqualifiedopinion on these financial statements.

 

We conducted our audit in accordance withInternational 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 management, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the financial statementspresent fairly, in all material respects, the financial position of the Companyas of 31 December 2003 and the results of its operations and its cash flows forthe year then ended in accordance with International Financial ReportingStandards.

 

Furthermore, in our opinion, proper books ofaccount have been kept by the Company and the financial statements comply withthe Qatar Commercial Companies’ Law No. 5 of 2002 and the Company’s Articles ofAssociation.  We have obtained all theinformation and explanations we required for the purpose of our audit, and arenot aware of any violations of the above mentioned law or the Articles ofAssociation having occurred during the year which might have had a materialeffect on the business of the Company or its financial position.

 

In our report dated 24 March 2004, we expressedan unqualified opinion on the individual financial statements for the yearended 31 December 2003 with an emphasis of matter relating to the going concernassumption of the financial statements resulting from accumulated losses as at31 December 2003.

 

 

T. F. Sexton

of Ernst & Young

Auditor’s Registration No. 114

 

Date : 20 February 2006

Doha

 

 

84

----

 
| **Qatar Chemical Company Limited,  Q.S.C** |   | **2**  |
|--------------------------------------------|--------|--------|
| ** **                                 |   |   |
| **Balance Sheet**                          |   |   |
| **as at 31 December 2005**            |   |   |

 
| ** **                                             | ** ** | **Notes**  | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **ASSETS**                                             | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |             |       |
| ** **                                             | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** |             |       |
| **Non-current assets**                                 |       |       |       |             |       |             | ** ** |             |       |
| Property, plant and equipment                          |       | 4          |       | 848,467          |       | 880,156          |       | 939,639          |       |
| Long- term receivables                                 |       | 5          |       | 68               |       | 220              |       | 616              |       |
|                                                   |       |       |       | 848,535          |       | 880,376          |       | 940,255          |       |
| **Current assets**                                     |       |       |       |             |       |             | ** ** |             |       |
| Inventories                                            |       | 6          |       | 33,122           |       | 32,416           | ** ** | 23,953           |       |
| Other receivables and prepayments                      |       | 7          |       | 6,101            |       | 5,536            | ** ** | 5,354            |       |
| Due from related parties                               |       | 8(a)       |       | 59,085           |       | 65,824           | ** ** | 27,985           |       |
| Trade accounts receivable                              |       | 9          |       | 58,960           |       | 57,201           | ** ** | 16,691           |       |
| Cash and bank                                          |       | 10         |       | 165,308          |       | 104,047          | ** ** | 37,507           |       |
|                                                   | ** ** | ** ** |       | 322,576          |       | 265,024          | ** ** | 111,490          |       |
| **TOTAL ASSETS**                                       |       |       |       | **1,171,111**    |       | 1,145,400        | ** ** | 1,051,745        |       |
|                                                   |       |       | ** ** | ** **       | ** ** | ** **       | ** ** |             |       |
| **SHAREHOLDERS’ EQUITY AND LIABILITIES**          |       |       |       |             |       |             | ** ** |             |       |
| ** **                                             |       |       |       |             |       |             | ** ** |             |       |
| **Shareholders’ Equity**                          |       |       |       |             |       |             | ** ** |             |       |
| Share capital                                          |       | 11         |       | 112,800          |       | 112,800          | ** ** | 56,300           |       |
| Legal reserve                                          |       |       |       | 24,495           |       | 11,676           |       | —           |       |
| Retained earnings / (Accumulated losses)               |       |       |       | 118,513          |       | 22,329           |       | (82,756          | )          |
|                                                   |       |       |       | 255,808          |       | 146,805          |       | (26,456          | )          |
|                                                   |       |       |       |             |       |             |       |             |       |
| **Non- current liabilities**                           |       |       |       |             |       |             |       |             |       |
| Non-current portion of syndicated loan                 |       | 12         |       | 465,524          |       | 574,430          |       | 644,700          |       |
| Subordinated loan                                      |       | 13         |       | 273,042          |       | 310,184          |       | 303,181          |       |
| Provision for employees’ end of service  benefits |       | 14         |       | 2,728            |       | 1,833            |       | 1,236            |       |
| Deferred liability                                     |       | 15         |       | 1,642            |       | 1,870            |       | 25,000           |       |
| Deferred tax liability                                 |       | 16(a)      |       | 22,528           |       | 370              |       | —           |       |
| Due to a related party                                 |       | 8(b)       |       | 6,481            |       | —           |       | —           |       |
|                                                   |       |       |       | 771,945          |       | 888,687          |       | 974,117          |       |
| **Current liabilities**                                |       |       |       |             |       |             |       |             |       |
| Current portion of syndicated loan                     |       | 12         |       | 70,500           |       | 65,925           |       | 61,650           |       |
| Provision for taxation                                 |       | 16(b)      |       | 31,696           |       | 11,859           |       | —           |       |
| Due to related parties                                 |       | 8(b)       |       | 22,800           |       | 15,761           |       | 11,679           |       |
| Accounts payable and accrued expenses                  |       | 17         |       | 18,362           |       | 16,363           |       | 30,755           |       |
|                                                   |       |       |       | 143,358          |       | 109,908          |       | 104,084          |       |
| **TOTAL SHAREHOLDERS’ EQUITY AND LIABILITIES**    | ** ** | ** ** | ** ** | **1,171,111**    | ** ** | 1,145,400        | ** ** | 1,051,745        |       |

 

The attachednotes on pages 6 to 21 form an integral part of these financialstatements.

 

85

----

 
| **Qatar  Chemical Company Limited, Q.S.C**   | ** ** | **3**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Statement of Income**                      |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

 
| ** **                                                          | ** ** | **Note**   | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| ** **                                                          |       |       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Sales                                                               |       |       |       | 437,329          |       | 323,872          | ** ** | 72,996           | ** ** |
| Cost of goods sold                                                  |       |       |       | (184,902         | )          | (153,984         | )          | (86,467          | )          |
| **Gross profit**                                                    |       |       |       | **252,427**      |       | 169,888          |       | (13,471          | )          |
|                                                                |       |       |       |             |       |             | ** ** |             | ** ** |
| Other income                                                        |       |       |       | 5,450            |       | 412              | ** ** | 72               | ** ** |
| Selling and administration expenses                                 |       |       |       | (26,599          | )          | (21,406          | )          | (12,978          | )          |
| **Profit / (loss) from operations**                                 | ** ** | ** ** | ** ** | **231,278**      | ** ** | 148,894          |       | (26,377          | )          |
| Foreign exchange gain/(loss)                                        |       |       |       | (7,846           | )          | 3,388            |       | 977              |       |
| Interest expense                                                    |       |       |       | (41,429          | )          | (23,292          | )          | (14,398          | )          |
| **Net profit / (loss) for the year before  provision for taxation** |       |       | ** ** | **182,003**      | ** ** | 128,990          |       | (39,798          | )          |
| Income taxes                                                        |       |       | ** ** | ** **       | ** ** |             |       |             |       |
| Current                                                             |       | 16(b       | )          | (31,649          | )          | (11,859          | )          | —           |       |
| Deferred                                                            |       | 16(a       | )          | (22,158          | )          | (370             | )          | —           |       |
|                                                                |       |       |       |             |       |             |       |             |       |
| **Net profit / (loss) for the year**                                | ** ** | ** ** | ** ** | **128,196**      | ** ** | 116,761          |       | (39,798          | )          |

 

The attached notes on pages 6 to 21 form anintegral part of these financial statements.

 

86

----

 
| **Qatar Chemical Company Limited, Q.S.C**              | ** ** | **4**      |
|--------------------------------------------------------|------------|------------|
| ** **                                             |       |       |
| **Statement of Changes in  Shareholders’ Equity** |       |       |
| **for the year ended 31 December 2005**           | ** ** | ** ** |

 
| ** **                        | ** ** | **Share  Capital** | ** ** | **Legal  reserve** | ** ** | **Retained  earnings/  (Accumulated  losses)** | ** ** | **Total**        | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------------|------------|------------------------------------------------|------------|------------------|------------|
| ** **                        | ** ** | **US$’000**   | ** ** | **US$’000**   | ** ** | **US$’000**                               | ** ** | **US$’000** | ** ** |
|                              |       |               |       |               |       |                                           |       |             |       |
| Balance at 1 January 2003    |       | 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          |       |
|                              |       |               |       |               |       |                                           |       |             |       |
| Dividend paid  during the year    |       | —             |       | —             |       | (19,193                                        | )          | (19,193          | )          |
| Net profit for the  year          |       | —             |       | —             |       | 128,196                                        |       | 128,196          |       |
| Transfer to legal  reserve        |       | —             |       | 12,819             |       | (12,819                                        | **)**      | **—**       | ** ** |
| Balance at 31 December 2005  |       | 112,800            |       | 24,495             |       | 118,513                                        | ** ** | **255,808**      | ** ** |

 

##### **Legal reserve**

##### ** **

In accordance withthe regulations of Qatar Commercial Companies Law No. 5 of 2002, 10% ofthe net profit for the year is required to be transferred to the Legal Reserveuntil the balance in the Reserve equals 50% of the paid up capital. ThisReserve is not normally available for distribution except in circumstancesspecified in the Qatar Commercial Companies Law No. 5 of 2002.

 

**Dividend**

 

During theyear, the Company paid a dividend of USD 170.2 per share amounting to USD 19.19million out of the profits earned up to 31 December 2004.

 

The attachednotes on pages 6 to 21 form an integral part of these financialstatements.

 

87

----

 
| **Qatar  Chemical Company Limited, Q.S.C**   | ** ** | **5**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Statement of cash flows**                  |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

 
| ** **                                                       | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **Operating activities**                                         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net profit/(loss) for the year                                   |       | 128,196          |       | 116,761          |       | (39,798          | )          |
| Adjustments for :                                                | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Depreciation                                                     |       | 41,469           |       | 41,261           |       | 26,634           |       |
| Interest income                                                  |       | (4,852           | )          | (803             | )          | (146             | )          |
| Interest expense                                                 |       | 41,429           |       | 23,292           |       | 14,398           |       |
| Unrealised foreign exchange (gain)/loss                          |       | 132              |       | 7                |       | (45              | )          |
| Loss on disposal of property, plant and  equipment               |       | 40               |       | —           |       | 80               |       |
| Provision for employees’ end of service benefits            |       | 1,178            |       | 834              |       | 684              |       |
| Operating profit before changes in  working capital              |       | 207,592          |       | 181,352          |       | 1,807            |       |
|                                                             | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Working capital changes                                          | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Increase in inventories                                          |       | (706             | )          | (8,463           | )          | (13,790          | )          |
| (Increase)/decrease in other receivables  and prepayments        |       | (565             | )          | (182             | )          | 660              |       |
| Decrease/(Increase) in due from related  parties                 |       | 6,739            |       | (37,839          | )          | (27,890          | )          |
| Increase in trade accounts receivables                           |       | (1,759           | )          | (40,510          | )          | (16,691          | )          |
| Increase in provision for taxation                               |       | 41,578           |       | 12,229           |       | —           |       |
| Increase in due to related  parties-Current                      |       | 7,039            |       | 4,082            |       | 5,147            |       |
| Increase in due to related  parties-Non-current                  |       | 6,481            |       | —           | ** ** | ** **       | ** ** |
| Increase/(Decrease) in accounts payable  and accrued expenses    |       | 2,001            |       | (14,866          | )          | 18,099           |       |
| Cash from/(used in) operating activities                         |       | 268,400          |       | 95,803           |       | (32,658          | )          |
|                                                             |       |             |       |             |       |             |       |
| Decrease in long term receivables                                |       | 152              |       | 396              |       | 302              |       |
| Employees’ end of service benefits paid                     |       | (283             | )          | (237             | )          | (98              | )          |
| Decrease in deferred credit                                      |       | (228             | )          | (23,130          | )          | 25,000           |       |
| **Net cash from/(used in) operating  activities**                | ** ** | **268,041**      |       | 72,832           |       | (7,454           | )          |
| ** **                                                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Investing activities**                                         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Payments for purchase of property, plant  and equipment          |       | (9,820           | )          | (7,093           | )          | (2,491           | )          |
| Additions to accumulated plant cost                              |       | —           |       | —           |       | (21,895          | )          |
| Deferred credit adjustment and write off  of plant and equipment |       | 170              |       | 25,315           |       | —           |       |
| Proceeds from disposal of property, plant  and equipment         |       | 26               |       | —           |       | 693              |       |
| Interest received                                                |       | 4,583            |       | 803              |       | 146              |       |
| Interest paid                                                    |       | (41,021          | )          | (15,815          | )          | (15,127          | )          |
| Deposits maturing beyond 90 days                                 |       | (20,500          | )          | —           |       | —           |       |
| **Net cash (used in) / from investing  activities**              | ** ** | **(66,562**      | **)**      | 3,210            |       | (38,674          | )          |
| ** **                                                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Financing activities**                                         | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Movement in subordinated loan                                    |       | (37,142          | )          | —           |       | 84,900           |       |
| Repayment of syndicated loan                                     |       | (104,331         | )          | (65,995          | )          | (43,650          | )          |
| Dividend paid                                                    |       | (19,193          | )          | —           |       | —           |       |
| Proceeds from issue of Share capital                             |       | —           |       | 56,500           |       | 36,300           |       |
| **Net cash (used in)/from financing  activities**                | ** ** | **(160,666**     | **)**      | (9,495           | )          | 77,550           |       |
| ** **                                                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Net Increase in cash and cash equivalents**                    |       | 40,813           |       | 66,547           |       | 31,422           |       |
| ** **                                                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Cash and cash equivalents at 1 January                           |       | 104,009          |       | 37,462           |       | 6,040            |       |
| ** **                                                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash and cash equivalents at 31 December (Note  10)**     | ** ** | **144,822**      |       | 104,009          |       | 37,462           |       |

 

The attachednotes on pages 6 to 21 form an integral part of these financialstatements.

 

88

----

 
| **Qatar  Chemical Company Limited, Q.S.C**   | ** ** | **6**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**1**                             LEGAL STATUS AND PRINCIPALACTIVITIES

** **

**Qatar Chemical Company Limited (“the Company”) was formed by theenactment of Emiri decree no. 20 issued on 6 October 1998 and wasregistered in Qatar as a Qatari Shareholding Company (Q.S.C). The activities ofthe Company are governed by a joint venture agreement dated 16 November 1997between Qatar General Petroleum Corporation (now doing business under the nameof Qatar Petroleum), 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 maintaina complex for the production, storage and sale of polyethylene, hexene-1 andother petrochemical products. The Company commenced production on 8 April 2003.**

** **

**2**                                         BASIS OF PREPARATION

** **

Thesefinancial statements have been prepared in accordance with the InternationalFinancial Reporting Standards. The financial statements have been preparedunder the historical cost convention.

 

**3**                                         SIGNIFICANT ACCOUNTINGPOLICIES

** **

**Thefollowing significant accounting policies are consistent with those used in theprevious year.**

** **

**3.1**                               Functional currency

Thecurrency of the State of Qatar, in which the Company is domiciled, is QatariRiyals. However these financial statements have been presented in United StatesDollars in accordance with the amended Joint Venture Agreement between theshareholders.

 

**3.2**                               Revenue recognition

**Sales of petrochemicals including by-products, are recorded when titlepasses to the customer. Revenue is reported net of freight and insurance. Norevenue is recognised if there are significant uncertainties regarding recoveryof the consideration due or associated costs or possible return of goods.**

** **

**Interest income and expenses are recognised on accrual basis using theeffective interest rate.**

** **

**3.3**                               Income tax

**Income tax is the expected tax payable on taxable income for the year inaccordance with Qatar Income Tax Regulations applying the tax rates specifiedin Law No.8 of 1999 related to the incorporation of the Company.**

** **

**Deferred income tax is provided for using the liability method on alltemporary differences at the balance sheet date. Deferred income tax assets andliabilities are measured at the tax rates that are expected to apply to theperiod when the asset is realised or the liability is settled, based on thelaws that have been enacted at the balance sheet date.**

** **

**3.4**                               Operating leases

**Operating lease payments are recognised as an expense in the incomestatement on payment basis over the lease term.**

** **

**89**

----

** **
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **7**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**3.5**                               Property, plant andequipment

**Property, plant and equipment have been recorded at cost less accumulateddepreciation and impairment losses, if any (refer accounting policy 3.11).**

** **

**Expenditure incurred to replace a component of an item of property, plantand equipment that is accounted for separately is capitalised and the net bookvalue of the replaced component is written-off. Other subsequent expenditure iscapitalised only when it increases the future economic benefits embodied in theitem of property, plant and equipment. All other expenditure is recognised inthe statement of income as an expense as incurred. Capital work in progress istransferred to property, plant and equipment on completion of the work.**

** **

**Shutdown costs incurred by the Company are normally expensed except whena design change to an item of plant and equipment is carried out as part ofthe shutdown which is capitalised.**

** **

**3.6**                               Depreciation

**Depreciation is provided on all property, plant and equipment on astraight-line basis over the assets’ estimated useful lives at the followingannual 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** |

** **

**The depreciation method and the useful lives of the property, plant andequipment are re-assessed annually by the management.**

** **

**3.7**                               Inventories

**Inventories are stated at the lower of cost and net realisable value(NRV). Costs are those expenses incurred in bringing each product to itspresent 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 ordinary course of businessless the estimated costs of disposition.**

** **

**3.8**                               Accounts receivable andother receivables

**Receivables are stated at the amortised cost less a provision for anyestimated uncollectible amounts. An estimate for doubtful debts is made whencollection of the full amount is no longer probable. Bad debts are written offas incurred.**

** **

**3.9**                               Cash and cash equivalents

**Cash and cash equivalents comprise of cash on hand, balances with banksunder current and call accounts and short term deposits with maturity of 90days or less.**

** **

**3.10**                        Accounts payable andaccruals

**Liabilities are recognised for amounts to be paid in the future for goodsor services received, whether billed by the supplier or not.**

** **

**3.11**                        Impairment

**The carrying amounts of the Company assets, other than inventories (referaccounting policy 3.7) are reviewed at each balance sheet date to determinewhether there is any indication of impairment. If any such indication exists,the asset’s recoverable amount is estimated. An impairment loss is recognisedwhenever the carrying amount of an asset or its cash-generating unit exceedsits recoverable amount. Impairment losses are recognised in the statement ofincome.**

** **

**90**

----

** **
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **8**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**3.12 Provisions**

**Provisions are recognised when the Company has a legal or constructiveobligation arising from a past event, and the costs to settle the obligationare both probable and can be reliably measured.**

** **

**3.13 Loans**

**Loans are carried on the balance sheet at its principal amount plusaccrued interest. Instalments due within one year are shown as a currentliability. Interest due under the syndicated loan is included in “accountspayable and accruals”.**

** **

**3.14 Borrowing costs**

**Borrowing costs that are attributable to the construction of the Company’splant and equipment (qualifying assets) are capitalised as part of theasset costs up to the start up date of the assets. Other borrowing costs arerecognised as an expense in the period in which they are incurred.**

** **

**3.15 End of service benefits**

**The Company provides for end of service benefits to its employees basedupon the employees’ length of service and the completion of a minimum serviceperiod. The Company has no expectation of settling all its employees’ end ofservice benefits within the next 12 month period and hence has classified thesame as a non-current liability.**

** **

**Under Law No. 24 of 2002 on Retirement and Pension, the Companymakes contribution to a government pension scheme for Qatari employeescalculated as a percentage of the Qatari employees’ salaries. The Company’sobligations are limited to these contributions, which are expensed on accrualbasis.**

** **

**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.

 

91

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **9**      |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

 

**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 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 01 January 2005         |       | 848,029               |       | 46,396           |       | 20,823                 |       | 4,467                                        |       | 16,477                                      |       | 4,970                                       |       | 4,488              |       | 3,444                                   |       | 949,094          |       |
|                            |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| Additions                       |       | 7,080                 |       | 89               |       | —                 |       | 99                                           |       | 220                                         |       | 24                                          |       | —             |       | 2,308                                   |       | 9,820            |       |
| Transfer from CWIP              |       | 1,592                 |       | 211              |       | —                 |       | 68                                           |       | 869                                         |       | 31                                          |       | —             |       | (2,771                                  | )          | —           |       |
| Disposals & write offs |       | (66                   | )          | —           |       | —                 |       | —                                       |       | (170                                        | )          | —                                      |       | —             |       | —                                  |       | (236             | )          |
| **At 31 December 2005**    | ** ** | **856,635**           | ** ** | **46,696**       | ** ** | **20,823**             | ** ** | **4,634**                                    | ** ** | **17,396**                                  | ** ** | **5,025**                                   | ** ** | **4,488**          | ** ** | **2,981**                               | ** ** | **958,678**      | ** ** |
|                            |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| **Accumulated depreciation:**   |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| 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                | )          | —                                  |       | —           |       |
| At 01 January 2005         |       | 56,932                |       | 3,135            |       | 1,407                  |       | 1,819                                        |       | 3,750                                       |       | 1,591                                       |       | 304                |       | —                                  |       | 68,938           |       |
|                            |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| Charge                          |       | 34,043                |       | 1,861            |       | 833                    |       | 844                                          |       | 2,999                                       |       | 710                                         |       | 179                |       | —                                  |       | 41,469           |       |
| Transfer from CWIP              |       | —                |       | —           |       | —                 |       | —                                       |       | —                                      |       | —                                      |       | —             |       | —                                  |       | —           |       |
| Disposals & write offs |       | (26                   | )          | —           |       | —                 |       | —                                       |       | (170                                        | )          | —                                      |       | —             |       | —                                  |       | (196             | )          |
| **At 31 December 2005**    | ** ** | **90,949**            | ** ** | **4,996**        | ** ** | **2,240**              | ** ** | **2,663**                                    | ** ** | **6,579**                                   | ** ** | **2,301**                                   | ** ** | **483**            | ** ** | **—**                              | ** ** | **110,211**      | ** ** |
|                            |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| **Net book value:**             |       |                  |       |             |       |                   |       |                                         |       |                                        |       |                                        |       |               |       |                                    |       |             |       |
| **at 31 December 2005**    | ** ** | **765,686**           | ** ** | **41,700**       | ** ** | **18,583**             | ** ** | **1,971**                                    | ** ** | **10,817**                                  | ** ** | **2,724**                                   | ** ** | **4,005**          | ** ** | **2,981**                               | ** ** | **848,467**      | ** ** |
| ** **                      | ** ** | ** **            | ** ** | ** **       | ** ** | ** **             | ** ** | ** **                                   | ** ** | ** **                                  | ** ** | ** **                                  | ** ** | ** **         | ** ** | ** **                              | ** ** | ** **       | ** ** |
| 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          |       |

 

92

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **10**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**4****                                         PROPERTY, PLANT AND EQUIPMENT (Continued)**

 
| ** **                                              | ** ** | **200****5**     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|---------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                    |       |             |       |             |       |             |       |
| The depreciation charge has been  allocated as follows: | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Accumulated plant costs                                 |       | —           |       | —           |       | 200              |       |
| Cost of production                                      |       | 40,277           |       | 39,977           |       | 25,914           |       |
| Selling and administration expenses                     |       | 1,192            |       | 1,284            |       | 520              |       |
| ** **                                              |       | **41,469**       |       | 41,261           |       | 26,634           |       |

 

**ACCUMULATED PLANT COSTS**

 
| ** **                                    | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                          |       |             |       |             |       |             |       |
| Balance as at 1 January                       |       | —           |       | —           |       | 929,052          |       |
| Additions during the year                     |       | —           |       | —           |       | 28,563           |       |
|                                          |       | —           |       | —           |       | 957,615          |       |
| Transferred to property, plant and  equipment |       | —           |       | —           |       | (957,615         | )          |
|                                          |       |             |       |             |       |             |       |
| Balance as at 31 December                     |       | —           |       | —           |       | —           |       |

 

Included inthe accumulated plant costs of 2003 was capitalised interest of US$68.9million. Interest capitalised during the year was nil (2004: Nil; 2003: US$5.2million). The accumulated plant costs were transferred to property, plant andequipment upon the assets being put to use on 8 April 2003. 

 

Theunamortized capital interest cumulative balance as of 31 December 2005 wasUS$61.5 million (2004: US$64.3 million; 2003: US$67.1 million).

 

**5****                                         LONG TERM RECEIVABLES**

 

Long term receivables represent furnitureallowances recoverable from employees and prepayments.

 

**6****                                         INVENTORIES**

 
| ** **                  | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                        |       |             |       |             |       |             |       |
| Finished goods              |       | 9,587            |       | 12,977           |       | 7,489            |       |
| Work in progress            |       | 188              |       | 169              |       | 145              |       |
| Raw materials               |       | 4,277            |       | 3,992            |       | 3,340            |       |
| Packaging supplies          |       | 564              |       | 387              |       | 339              |       |
| Spare parts and consumables |       | 18,506           |       | 14,891           |       | 12,640           |       |
|                        |       |             |       |             |       |             |       |
| ** **                  |       | **33,122**       |       | 32,416           |       | 23,953           |       |

 

Material consumption of US$ 66.6 million(2004: US$ 54.2 million; 2003: US$ 23.6 million) is included under cost ofgoods sold.

 

**7****                                         OTHER RECEIVABLES AND PREPAYMENTS**

 
| ** **                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                       |       |             |       |             |       |             |       |
| Prepayments                |       | 3,064            |       | 2,580            |       | 1,267            |       |
| Receivables from employees |       | 1,319            |       | 1,440            |       | 1,485            |       |
| Other receivables          |       | 1,718            |       | 1,516            |       | 2,602            |       |
|                       |       |             |       |             |       |             |       |
| ** **                 | ** ** | **6,101**        | ** ** | **5,536**        | ** ** | **5,354**        | ** ** |

 

93

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **11**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**8**                                         TRANSACTIONSWITH RELATED PARTIES

** **

A significant portion of theCompany’s costs have been charged by the shareholders. In accordance with thespecific agreements entered into by the shareholders, the shareholders providesupport services, feedstock, fuel gas, catalysts and other goods and servicesto the Company. Also, the Company sells some of its products to the relatedaffiliates.

 

QChem entered into an AgencyAgreement with CPChem to act as an agent for the sale of substantially all ofQChem’s production. QChem has also entered into an Offtake and Credit RiskAgreement with CPChem, under which the latter is required to purchase at marketprices, specified amounts of production if CPChem fails to sell that productunder the terms of the Agency Agreement. As of the balance sheet date notransaction has been executed under the Offtake and Credit Risk Agreement. TheOfftake and Credit Risk Agreement expires upon the earlier of the repayment infull by QChem of its outstanding bank financing, currently scheduled to maturein 2012, or any refinancing thereof.

 

QChem entered into an AgencyAgreement with QAPCO to act as an agent for the sale of QChem’s products,primarily in the Middle East region to a maximum of 10% of QChem’s polyethyleneproduction.

 

QChem and Qatar Petroleumentered into a Feedstock Supply Agreement for the duration of the amended JointVenture Agreement, where QP agreed to provide ethane gas to meet QChem’sproduction requirement.

 

Transactions withsignificant related parties during the year are summarised as follows:

 

| **Nature of transaction**                                                                                        | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                                                                       |       |             |       |             |       |             |       |
| Chevron Phillips Chemical Company LLC  (CPChem) (Shareholder) and affiliates:                                              |       |             |       |             |       |             |       |
| • Purchases & services                                                                                       |       | 30,238           |       | 11,647           |       | 17,453           |       |
| • Sales & marketing commission                                                                               |       | 112,974          |       | 55,700           |       | 33,215           |       |
|                                                                                                                       |       |             |       |             |       |             |       |
| Qatar Petroleum (QP)(Shareholder):                                                                                         |       |             |       |             |       |             |       |
| • Purchases, services & marketing commission                                                                 |       | 54,799           |       | 42,647           |       | 24,971           |       |
|                                                                                                                       |       |             |       |             |       |             |       |
| Qatar Petrochemical Company Ltd (Q.S.C)  (QAPCO) (a joint venture with Industries Qatar, a subsidiary of Qatar  Petroleum) |       |             |       |             |       |             |       |
| • Sales & marketing commission                                                                               |       | 26,161           |       | 18,519           |       | 3,560            |       |

 

**(a)****                                  Due from related parties**

 

| ** **            | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                  |       |             |       |             |       |             |       |
| CPChem and affiliates |       | 49,828           |       | 58,609           |       | 24,698           |       |
| QAPCO                 |       | 9,257            |       | 7,215            |       | 3,287            |       |
| ** **            |       | **59,085**       |       | 65,824           |       | 27,985           |       |

 

**(b)****                                  Due to related parties**

 

| ** **            | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **Current:**          |       |             |       |             |       |             |       |
| CPChem and affiliates |       | 4,095            |       | 4,650            |       | 4,893            |       |
| QP                    |       | 18,705           |       | 11,111           |       | 6,786            |       |
| ** **            |       | **22,800**       |       | 15,761           |       | 11,679           |       |
| **Non-current:**      |       |             |       |             |       |             |       |
| QP                    |       | 6,481            |       | —           |       | —           |       |
| ** **            | ** ** | **6,481**        | ** ** | **—**       | ** ** | **—**       | ** ** |

 

Refer to note 14 fordisclosure of the subordinate loan payable to an affiliate.

 

94

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **12**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**8**                                         TRANSACTIONSWITH RELATED PARTIES (continued)

 
| ** ** | ** ** | ** **                                        | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------|------------|---------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | ** **                                        | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| **(c)**    | ** ** | **Compensation paid to key management personnel** | ** ** | **765**          |       | 640              |       | 604              |       |

 

**9**                                         TRADEACCOUNTS RECEIVABLE

 

| ** **                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                       |       |             |       |             |       |             |       |
| Trade accounts receivable  |       | 58,960           |       | 57,084           |       | 16,691           |       |
| Advances paid to suppliers |       | —           |       | 117              |       | —           |       |
| ** **                 |       | **58,960**       |       | 57,201           |       | 16,691           |       |

 

The Company is engaged inthe sale of polyethylene, hexene-1 and other petrochemical products to a largenumber of customers. Its five largest customers account for 49% of outstandingaccounts receivable at 31 December 2005 (2004: 52%; 2003: 32%).

 

**10**                                  CASHAND BANK

 

| ** **                                                | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                      |       |             |       |             |       |             |       |
| Petty cash                                                |       | 5                |       | 5                |       | 5                |       |
| Bank Balances                                             |       |             |       |             |       |             |       |
| Current account                                           |       | 12               |       | (794             | )          | (196             | )          |
| Call account                                              |       | 165,291          |       | 104,836          |       | 37,698           |       |
| ** **                                                |       | **165,308**      |       | 104,047          |       | 37,507           |       |
| Effects of exchange rates on cash and  cash equivalents   |       | 14               |       | (38              | )          | (45              | )          |
| Deposits maturing beyond 90 days                          |       | (20,500          | )          | —           |       | —           |       |
| Cash and cash equivalents as per  statement of cash flows | ** ** | **144,822**      |       | 104,009          |       | 37,462           |       |

 

The call deposits ofUS$165.3 million (2004: US$104.8 million; 2003: US$ 37.7 million) are maintainedin the United States in accordance with the terms of the senior debtagreements.

 

**11**                                  SHARECAPITAL

 

| ** **                      | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **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**      |       | 112,800          |       | 56,300           |       |

 

During 2004, the Board ofDirectors had approved the issue of 56,500 shares with a par value of US$ 1,000per share. The issue was subscribed by the shareholders according to theirproportion of shareholding.

 

95

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **13**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

 

**12**                                  SYNDICATEDLOAN

 
| ** **                                   | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                         |       |             |       |             |       |             |       |
| Syndicated loan                              |       | 536,024          |       | 640,355          |       | 706,350          |       |
| Classified in the balance sheet as  follows: |       |             |       |             |       |             |       |
| Current liability                            |       | 70,500           |       | 65,925           |       | 61,650           |       |
| Non-current liability                        |       | 465,524          |       | 574,430          |       | 644,700          |       |
| ** **                                   |       | **536,024**      |       | 640,355          |       | 706,350          |       |

 

The Companysigned a facility credit agreement with a syndicate of banks on 27 August 1999for a project finance loan of US$ 750 million. The Company had drawn down theentire loan by the end of year 2001. The loan carries interest at LIBOR pluspre-determined mark-ups.

 

According to the terms of the agreement, the loan is repayable inquarterly instalments that commenced on 15 June 2003. During the year, thetotal amount repaid was US$ 104.3 million (2004: US$ 66 million; 2003: US$ 43.6million). Fixed repayment amounts are due in the amount of US$ 70.5 million in2006, US$ 75.2 million in 2007, US$ 80.6 million in 2008, US$ 86.2 million in2009 and US$ 92.2 million in 2010.

 

**13**                                  SUBORDINATEDLOANS

 

| ** **       | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Tranche A        |       | 269,825          |       | 294,500          |       | 294,500          |       |
| Tranche B        |       | —           |       | 13,479           |       | 7,399            |       |
| Accrued interest |       | 3,217            |       | 2,205            |       | 1,282            |       |
| ** **       |       | **273,042**      |       | 310,184          |       | 303,181          |       |

 

The Companysigned a subordinated loan agreement with Chevron Phillips ChemicalInternational Qatar Holdings LLC (CPCIQH) on 16 September 1999 as amendedin accordance with the QChem Joint Venture Agreement. Excluding the accruedinterest, the balance of the loan was US$ 270 million (2004: US$ 308 million;2003: US$ 302 million) as of 31 December 2005. The subordinated loancarries interest as follows:

 

•                 Theoutstanding principal amount of each subordinated loan shall bear interestuntil repayment in full at a rate equal to the rate payable under thesyndicated loan.

 

•                 Anyamounts outstanding, after the syndicated loan terminates, shall bear interestat a rate equal to LIBOR plus the margin over LIBOR payable under thesyndicated loan on the termination date.

 

**According to the terms of this agreement, there is no schedule ofrepayment and the principal balance of all outstanding subordinated loans andinterest thereon shall be repayable each quarter from available cash flowsafter the payment of all priority dividends. With respect to any interest dueand payable at the end of each quarter not paid from available cash flows, anamount equal to such interest shall be deemed to have been advanced to theCompany as a Tranche B Subordinated loan in accordance with the agreement.During the year, repayment of subordinated loans, including accrued interest,was US$ 50.8 million.**

** **

**CPChem has agreed to provide up to US$ 75 million of loans to QChem ifthere is insufficient cash to pay the minimum debt service payments on the bankfinancing. CPChem has also agreed to provide loans to QChem through December 2006if there is insufficient cash to make QChem’s target debt service payments.These loans are limited to an amount not greater than the operating margin lossresulting from sales volumes being less than the design capacity of the plant.CPChem’s rights under the Subordinated Loan Agreement and the other contingentloan agreements related to QChem previously described are subordinated to QChem’ssenior bank debt.**

 

**14**                                  PROVISIONFOR EMPLOYEES’ END OF SERVICE BENEFITS

 

| ** **                 | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                 | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| At 1 January               |       | 1,833            |       | 1,236            |       | 650              |       |
| Provided during the year   |       | 1,178            |       | 834              |       | 684              |       |
| Less: paid during the year |       | (283             | )          | (237             | )          | (98              | )          |
| At 31 December             | ** ** | **2,728**        |       | 1,833            |       | 1,236            |       |

 

96

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **14**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**14****                                  PROVISION FOR EMPLOYEES’ END OF SERVICE BENEFITS (continued)**

 

The Company has created a provision for its estimated obligation forpension contributions for Qatari staff in accordance with the requirements ofQatari Retirement and Pension Law No. 24 of 2002. The provision of US$0.15 million as of 31 December 2005 (2004: US$ 0.5 million; 2003: US$ 0.3million) is included in accounts payable and accrued expenses.

 

**15**                                  DEFERREDLIABILITY

** **

**The deferred liability as at 31 December 2005 represents a premiumamount payable to an insurance company. Since QChem doesn’t expect this amountto be paid within the next one year, the same has been classified asnon-current.**

** **

**16****                                  TAXATION**

** **

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

 

**Deferred income tax is provided for temporary differences existingbetween the financial statement and the tax basis of the Company’s assets andliabilities and relate primarily to depreciation on property, plant andequipment.**

** **
| ** **                      | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                            |       |             |       |             |       |             |       |
| At 1 January                    |       | 370              |       | —           |       | —           |       |
| Provided during the year        |       | 22,158           |       | 370              |       | —           |       |
| Less: recovered during the year |       | —           |       | —           |       | —           |       |
| At 31 December                  | ** ** | **22,528**       |       | 370              |       | —           |       |

 

The deferredliability comprises of the following types of temporary differences:

 
| ** **                                                                       | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                             |       |             |       |             |       |             |       |
| Net taxable temporary differences                                                |       | (63,309          | )          | (1,059           | )          | —           |       |
| Deferred tax expense relating to the origination  of temporary differences @ 35% | ** ** | **(22,158**      | )          | (370             | )          | —           |       |

 

**(b)**                              CURRENTTAX PROVISION

 
| ** ** | ** ** | ** **                                                          | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|------------|------------|---------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** ** | ** ** | ** **                                                          | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|       |       |                                                                |       |             |       |             |       |             |       |
|       |       | Profit / (loss) as per financial  statement before tax              |       | 182,003          |       | 128,990          |       | (39,798          | )          |
|       |       |                                                                |       |             |       |             |       |             |       |
| Add:       |       | Depreciation as per books                                           |       | 41,470           |       | 41,261           |       | 26,634           |       |
|       |       | Others                                                              |       | —           |       | 1,870            |       | 92               |       |
| Less:      |       | Depreciation as per form 3 (at  income tax depreciation rates) |       | (102,906         | )          | (102,150         | )          | (1,817           | )          |
|       |       | Profit / (loss) as per tax declaration                              |       | 120,567          |       | 69,971           |       | (14,889          | )          |
|       |       |                                                                |       |             |       |             |       |             |       |
|       |       | Carried forward loss                                                |       | —           |       | (24,794          | )          | (9,905           | )          |
|       | ** ** | Net taxable profit / (loss)                                         | ** ** | **120,567**      |       | 45,177           |       | (24,794          | )          |
|       |       |                                                                |       |             |       |             |       |             |       |
|       |       | Current tax payable @ 26.25%                                        |       | 31,649           |       | 11,859           |       | —           |       |
| Add:       |       | Net opening balance after payment of  income tax pertaining to 2004 |       | 47               |       | —           |       | —           |       |
| ** ** |       | ** **                                                          |       | **31,696**       |       | 11,859           |       | —           |       |

 

97

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **15**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**16****                                  TAXATION****(continued)**

 

**(c)****                                  EFFECTIVE INCOME TAX RATE RECONCILIATION**

 

** **
| ** **                                                      | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                      | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **%**    | ** ** | **%**    | ** ** | **%**    | ** ** |
|                                                            |       |             |       |             |       |             |       |     |       |     |       |     |       |
| Income / (loss) from continuing  operations before income taxes | ** ** | **182,003**      |       | 128,990          |       | (39,798          | **)**      | **29.6** |       | 9.5      |       | —   |       |
|                                                            |       |             |       |             |       |             |       |     |       |     |       |     |       |
| Statutory income tax                                            |       | 47,776           |       | 33,860           |       | —           |       | 26.3     |       | 26.3     |       | —   |       |
| Deferred tax (asset)                                            |       | —           |       | (21,723          | )          | —           |       | —   |       | (16.9    | )          | —   |       |
| Deferred tax rate difference                                    |       | 6,031            |       | 92               |       | —           |       | 3.3      |       | 0.1      |       | —   |       |
| ** **                                                      |       | **53,807**       |       | 12,229           | ** ** | **—**       | ** ** | **29.6** |       | 9.5      |       | —   |       |

 

**17**                                ACCOUNTSPAYABLE AND ACCRUED EXPENSES

 

| ** **                             | ** ** | **2005**         | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                   |       |             |       |             |       |             |       |
| Trade payables                         |       | 9,137            |       | 9,938            |       | 5,326            |       |
| Advances received from customers       |       | 1,673            |       | 450              |       | 232              |       |
| Accrued expenses and other payables    |       | 4,643            |       | 3,702            |       | 23,937           |       |
| Bonus payable to employees             |       | 1,357            |       | 742              |       | 357              |       |
| Pension liability for Qatari employees |       | 148              |       | 464              |       | 310              |       |
| Interest payable                       |       | 1,404            |       | 1,067            |       | 593              |       |
| ** **                             |       | **18,362**       |       | 16,363           |       | 30,755           |       |

** **

**Theamount recognised for 2005 as an expense for the pension liability for Qatariemployees is US$ 0.56 million (2004: US$ 0.05 million; 2003: US$ 0.1 million).**

** **

**18          **NETPROFIT / (LOSS) FOR THE YEAR

 

| ** **                                                            | ** ** | **200****5**     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                            | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                                                  |       |             |       |             |       |             |       |
| The net profit / (loss) for the year is  stated after the charges of: | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Staff cost                                                            |       | 39,479           |       | 33,623           |       | 28,331           |       |
| Rental – operating lease                                         |       | 549              |       | 535              |       | 523              |       |

 

**19****                                  EXPENDITURE COMMITMENTS**

 

The Company has the following outstanding contractual commitments:

 

| ** **                           | ** ** | **200****5**     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                           | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
|                                 |       |             |       |             |       |             |       |
| **Capital expenditure commitments:** | ** ** | **—**       |       | 1,407            |       | 1,442            |       |

 

98

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **16**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**19****                                  EXPENDITURE COMMITMENTS (continued)**

 
| **Operating lease commitments:**                                  | ** ** | **200****5**     | ** ** | **2004**         | ** ** | **2003**         | ** ** |
|-----------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                  | ** ** | **US$’000** | ** ** | **US$’000** | ** ** | **US$’000** | ** ** |
| Future minimum lease payments:                                              |       |             |       |             |       |             |       |
| Within one year                                                             |       | 544              |       | 488              |       | 488              |       |
| After one year but not more than five  years                                |       |             |       |             |       |             |       |
| 2005                                                                        |       | —           |       | —           |       | 487              |       |
| 2006                                                                        |       | —           |       | 487              |       | 488              |       |
| 2007                                                                        |       | 544              |       | 488              |       | 488              |       |
| 2008                                                                        |       | 544              |       | 488              |       | 488              |       |
| 2009                                                                        |       | 544              |       | 488              |       | —           |       |
| 2010                                                                        |       | 544              |       | —           |       | —           |       |
| Total                                                                       |       | 2,176            |       | 1,951            |       | 1,951            |       |
|                                                                        |       |             |       |             |       |             |       |
| More than five years                                                        |       | 7,616            |       | 7,317            |       | 7,805            |       |
| Total operating lease expenditure  contracted for at the balance sheet date | ** ** | **10,336**       |       | 9,756            |       | 10,244           |       |

 

Land on whichthe plant is constructed, located at Mesaieed Industrial area, has been leasedfrom Qatar Petroleum under a land lease agreement signed on 25 August 1999.

 

**20****                                  FINANCIAL INSTRUMENTS**

 

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

 

Accounting policies for financial assets and liabilities are set out innote 3.

 

Financial instruments comprise of cash and bank balances, accountsreceivables, other receivables, due from / to related parties, term loans,accounts payable and accrued expenses.

 

**a)****                  Fair values**

 

Fair value isthe amount for which an asset could be exchanged or a liability settled betweenknowledgeable willing parties on an arm’s length basis. Differences cantherefore arise between the book values under the historical cost method andfair value estimates.

 

Underlying thedefinition of fair value is a presumption that an enterprise is a going concernwithout any intention or need to liquidate, curtail materially the scale of itsoperations or undertake a transaction on adverse terms.

 

The fairvalues of financial assets and liabilities are not materially different fromtheir carrying values at the balance sheet date.

 

**b)****                  Credit risk**

 

Credit risk isthe risk that one party to a financial instrument will fail to discharge anobligation and cause the other party to incur a financial loss. The Companyexposure to credit risk is as indicated by the carrying amount of its financialassets which consist primarily of current balances with banks and accountsreceivable, net of provision for doubtful accounts, if any.

 

The Companymanages its exposure to balances with banks through the selection of reputedlocal and international banks for placing its funds. The Company seeks to limitits credit risk with respect to customers by setting credit limits forindividual customers and monitoring outstanding receivables. Further more,Chevron Phillips Chemical Company LLC guarantees certain credit sales of it’sagents.

 

**c)****                   Liquidity risk**

 

The Company is not exposed to significant liquidity risk. The Company’sterms of sales require amounts to be paid within 30-150 days of the date ofsale. Trade payables are normally settled within 30-45 days of the date ofpurchase.

 

99

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **17**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**20****                                  FINANCIAL INSTRUMENTS (continued)**

 

**d)    Currency risk**

 

The Company isexposed to significant currency risk on a portion of its trade accountsreceivable. Trade accounts receivable include US$ 36.2 million (2004: US$ 46.2million; 2003: US$ 13.19 million) receivable in foreign currencies, mainlyEuro.

 

The balancesin Qatari Riyal are not considered to represent significant currency risk sincethe US Dollar is pegged to Qatari Riyal.

 

Trade accountspayable include US$ 4.4 million (2004: US$ 4.2 million; 2003: US$ 3.2 million)due in foreign currencies, mainly Qatari Riyal.

 

100

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **18**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**20      FINANCIALINSTRUMENTS (continued)**

 

**e)    Interest rate risk**

 

Asignificant portion of the Company’s financial assets and liabilities as of 31 December 2005is exposed to interest rate fluctuations.

 

TheCompany’s exposure to interest rate risk and the effective interest rates onits financial assets and liabilities are summarised below:

 
| ** **                                            | ** ** | **Up to**    | ** ** | **3-12**   | ** ** | **1-5**   | ** ** | **More than** | ** ** | **Non-interest** | ** ** | ** ** | ** ** | **Effective  interest** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|------------|------------|-----------|------------|--------------------|------------|------------------|------------|------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **3 months** | ** ** | **months** | ** ** | **Years** | ** ** | **5 years**   | ** ** | **sensitive**    | ** ** | **Total**  | ** ** | **Rate %**         | ** ** |
| **As at 31 December 2005**                       |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
|                                                  |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
| Financial assets:                                     |       | —            |       | —     |       | —    |       | —             |       | 68               |       | 68         |       | —                  |       |
| Long-term receivables                                 |       | —            |       | —     |       | —    |       | —             |       | 6,101            |       | 6,101      |       | —                  |       |
| Other receivables and prepayments                     |       | —            |       | —     |       | —    |       | —             |       | 59,085           |       | 59,085     |       | —                  |       |
| Due from related parties                              |       | —            |       | —     |       | —    |       | —             |       | 58,960           |       | 58,960     |       | —                  |       |
| Accounts receivable                                   |       | —            |       | —     |       | —    |       | —             |       | —           |       | —     |       | —                  |       |
| Cash and cash equivalents                             |       | 165,308           |       | —     |       | —    |       | —             |       | —           |       | 165,308    |       | 2.3                     |       |
|                                                  |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
|                                                  |       | 165,308           |       | —     |       | —    |       | —             |       | 124,214          |       | 289,522    |       |                    |       |
|                                                  |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
| Financial liabilities:                                |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
| Syndicated loan                                       |       | 17,175            |       | 53,325     |       | 334,350   |       | 131,174            |       | —           |       | 536,024    |       | 4.59                    |       |
| Subordinated loan                                     |       | —            |       | —     |       | —    |       | 273,042            |       | —           |       | 273,042    |       | 4.44                    |       |
| Provision for employees’ end of service  benefit |       | —            |       | —     |       | —    |       | —             |       | 2,728            |       | 2,728      |       | —                  |       |
| Deferred liability                                    |       | —            |       | —     |       | —    |       | —             |       | 1,642            |       | 1,642      |       | —                  |       |
| Deferred tax liability                                |       | —            |       | —     |       | —    |       | —             |       | 22,528           |       | 22,528     |       | —                  |       |
| Provision for taxation                                |       | —            |       | —     |       | —    |       | —             |       | 31,696           |       | 31,696     |       | —                  |       |
| Due to related parties                                |       | —            |       | —     |       | —    |       | —             |       | 29,281           |       | 29,281     |       | —                  |       |
| Accounts payable and accrued expenses                 |       | —            |       | —     |       | —    |       | —             |       | 18,362           |       | 18,362     |       | —                  |       |
|                                                  |       | 17,175            |       | 53,325     |       | 334,350   |       | 404,216            |       | 106,237          |       | 915,303    |       |                    |       |
|                                                  |       |              |       |       |       |      |       |               |       |             |       |       |       |                    |       |
| Net financial assets / (liabilities)                  |       | 148,133           |       | (53,325    | )          | (334,350  | )          | (404,216           | )          | 17,977           |       | (625,781   | )          |                    |       |

 

101

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **19**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**20****                                  FINANCIAL INSTRUMENTS (continued***)*

 

**e)    Interest rate risk**

 
| ** **                                            | ** ** | **Up to**    | ** ** | **3-12**   | ** ** | **1-5**   | ** ** | **More than** | ** ** | **Non-interest** | ** ** | ** ** | ** ** | **Effective  interest** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|------------|------------|-----------|------------|--------------------|------------|------------------|------------|------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **3 months** | ** ** | **months** | ** ** | **years** | ** ** | **5 years**   | ** ** | **sensitive**    | ** ** | **Total**  | ** ** | **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   | )          |                    |       |

 

102

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **20**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**20      FINANCIALINSTRUMENTS (continued)**

 

**e)    Interest rate risk**

 
| ** **                                            | ** ** | **Up to**    | ** ** | **3-12**   | ** ** | **1-5**   | ** ** | **More than** | ** ** | **Non-interest** | ** ** | ** ** | ** ** | **Effective  interest** | ** ** |
|-------------------------------------------------------|------------|-------------------|------------|------------|------------|-----------|------------|--------------------|------------|------------------|------------|------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **3 months** | ** ** | **months** | ** ** | **years** | ** ** | **5 years**   | ** ** | **sensitive**    | ** ** | **Total**  | ** ** | **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   | )          |                    |       |

 

103

----

 
| **Qatar Chemical Company Limited, Q.S.C**    | ** ** | **21**     |
|----------------------------------------------|------------|------------|
| ** **                                   |       |       |
| **Notes to the financial statements**        |       |       |
| **for the year ended 31 December 2005** | ** ** | ** ** |

** **

**21****                                  COMPARATIVE FIGURES**

 

The corresponding figures presented for 2004 and 2003 have beenreclassified and restated where necessary to preserve consistency with the 2005figures. However, such reclassification did not have an effect on the totalassets or total liabilities or the net profit of the previous years.

 

104

----

 

**Item 9.****  Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

On July 12, 2004, Qatar Chemical Ltd.(Q-Chem), with the approval of its Audit Committee, appointed the accountingfirm of KPMG as its new principal accountants (auditors).  The appointment of KPMG was necessitated by aQatari law which mandates that audit firms be rotated at least once every fiveyears.  Q-Chem, a 49%-owned equityaffiliate of CPChem, is deemed to be a "significant subsidiary" underSEC rules.

 

**Item 9A.****  Controls and Procedures**

 

As ofthe end of the period covered by this report, and with the participation ofmanagement, CPChem’s Chief Executive Officer and Chief Financial Officercarried out an evaluation of the effectiveness of the design and operation ofCPChem’s disclosure controls and procedures (as defined in Securities ExchangeAct Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, theChief Executive 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 Section 15(d) of the Securities Exchange Act.There were no changes in CPChem’s internal control over financial reporting (asdefined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f))that occurred during CPChem’s most recent fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, CPChem’s internalcontrol over financial reporting.

 

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

 

None.

 

**PART III**

 

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

 

*Directors and Officers.*Directors,executive officers and certain other officers of Chevron Phillips ChemicalCompany LLC are set forth in the following table. All of CPChem’s directors areelected in accordance with the terms of its limited liability companyagreement.

 

On February 10,2006, James L. Gallogly submitted his resignation as President and ChiefExecutive Officer of the Company, effective March 31, 2006.  In conjunction with his resignation and inaccordance with the terms of CPChem's limited liability company agreement, Mr. Galloglywill also cease to be non-voting director of CPChem effective March 31, 2006.  Mr. Gallogly will rejoin ConocoPhillipsas Executive Vice President, Refining, Marketing and Transportation, effective April 1,2006.

 

On February 10,2006, CPChem’s Board of Directors elected Raymond I. Wilcox as President andChief Executive Officer of the Company, effective April 1, 2006.

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                                        |
|------------------------|------------|---------|------------|-------------------------------------------------------------------------------------|
| James L. Gallogly      |       | 53      |       | President and Chief  Executive Officer; Non-voting Director                         |
| Greg G. Maxwell        |       | 49      |       | Senior Vice President,  Chief Financial Officer and Controller; Non-voting Director |
| Greg C. Garland        |       | 48      |       | Senior Vice President,  Planning & Specialty Products                      |
| Craig B. Glidden       |       | 48      |       | Senior Vice President,  Legal and Public Affairs, General Counsel and Secretary     |
| J. Mike Parker         |       | 59      |       | Senior Vice President,  Aromatics & Styrenics                              |
| Rick L. Roberts        |       | 51      |       | Senior Vice President,  Manufacturing                                               |
| Tim G. Taylor          |       | 52      |       | Senior Vice President,  Olefins & Polyolefins                              |
| Joe M. McKee           |       | 55      |       | Vice President and  Treasurer                                                       |
| Patricia E. Yarrington |       | 49      |       | Class C Director                                                               |
| Gary G. Yesavage       |       | 53      |       | Class C Director                                                               |
| John E. Lowe           |       | 47      |       | Class P Director                                                               |
| Jim W. Nokes           |       | 59      |       | Class P Director                                                               |

 

105

----

 

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

 

***Greg G. Maxwell:***  Mr. Maxwellhas been Senior Vice President, Chief Financial Officer and Controller, and hasserved as a non-voting director of CPChem, since August 2003. From July 2000to August 2003, Mr. Maxwell was 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 ofCPChem since October 2001. From July 2000 to October 2001, Mr. Garlandwas Senior Vice President, Planning and Strategic Transactions. From 1997 to July 2000,he served 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, General Counsel and Secretary. In 1996, Mr. Gliddenfounded the law firm of Glidden Partners LLP and was managing partner of thefirm until joining CPChem in 2000.

 

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

 

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

 

***Tim G. Taylor:***  Mr. Taylorhas been Senior Vice President, Olefins & Polyolefins of CPChem since July 2000.He served Phillips as Polyolefins Manager from 1999 to July 2000.

 

***Joe M. McKee:***  Mr. McKeehas been Vice President and Treasurer of CPChem since July 2000. Prior toassuming his current position, he served as Finance Manager for the AmericasDivision of Phillips Exploration and Production, a position to which he wasappointed in 1993.

 

***Patricia E. Yarrington:***  Ms. Yarringtonwas elected a director of CPChem in July 2001. She currently serves asVice President, Policy, Government and Public Affairs at Chevron Corporation(Chevron), a position to which she was named in 2002. Ms. Yarringtonpreviously served Chevron as Vice President, Strategic Planning, a position towhich she was appointed upon the merger of Chevron Corporation and Texaco Inc.into ChevronTexaco Corporation (now Chevron) in 2001. Prior to that merger, sheserved Chevron in a similar position, Vice President of Strategic Planning, aposition she assumed in 2000. In 1998, she was appointed President of ChevronCanada Ltd.

 

***Gary G. Yesavage:***  Mr. Yesavagewas elected a director of CPChem in June 2003. He currently serves asGeneral Manager of the Chevron Products Company El Segundo refinery, a positionto which he was appointed in 1999.

 

106

----

 

***John E. Lowe:*** Mr. Lowehas served as a director of CPChem since its inception in July 2000. Hecurrently serves as Executive Vice President, Planning, Strategy and CorporateAffairs for ConocoPhillips, a position to which he was appointed in 2002. Mr. Lowepreviously served as Senior Vice President, Corporate Strategy and Developmentfor Phillips, a position to which he was appointed in 2001, and as Senior VicePresident of Planning and Strategic Transactions in 2000. In 1999, he served asVice President, Planning and Strategic Transactions and Manager of StrategicGrowth Projects for Phillips. Mr. Lowe also serves as a Director of DukeEnergy Field Services, LLC and a Director of DCP Midstream Partners, LP.

 

***Jim W. Nokes:*** Mr. Nokeswas elected a director of CPChem in October 2002. He currently serves asExecutive Vice President, Refining, Marketing, Supply and Transportation forConocoPhillips, a position to which he was appointed in 2002. Mr. Nokespreviously served Conoco Inc. as Executive Vice President, Worldwide Refining,Marketing, Supply and Transportation, a position to which he was named in 1999.

 

*Raymond I. Wilcox:*  On February 10,2006, CPChem’s Board of Directors elected Raymond I. Wilcox as President andChief Executive Officer of CPChem, effective April 1, 2006. Mr. Wilcox,59, currently serves as Vice President of Chevron and President of ChevronNorth America Exploration and Production Company, an affiliate of Chevron,where he is responsible for managing Chevron’s oil and gas exploration andproduction activities and its resource base in North America. Mr. Wilcoxassumed his current positions on January 1, 2002 and prior to that timeserved for two years as Chairman and Managing Director of Chevron Nigeria,Ltd., an affiliate of Chevron.

 

*Audit Committee Financial Expert.*CPChem’s Board of Directors has establishedan audit committee of the Board of Directors (the “Audit Committee”), themembers of which are Ms. Yarrington and Mr. Lowe, and has determinedthat Mr. Lowe qualifies, and has so designated him, as the “AuditCommittee financial expert.”  Mr. Loweis not considered to be “independent” as defined in the applicable SEC rules andregulations.

 

*Code of Ethics.*CPChem has adopted a code of ethics thatapplies to its principal executive officer and principal financial officer. Acopy of this code is available to any person upon request and at no charge.Requests should be directed to the Office of the General Counsel at CPChem’sprincipal executive office at the address and phone number as shown on thecover of this report.

 

107

----

 

**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, 2005(collectively, the “named executive officers”). Information for the namedexecutive officers is also presented for the years ended December 31, 2004and 2003.

 
| ** **                                                                                            | ** ** | ** **       | ** ** | ** **                | ** ** | ** **                | ** ** | **Long-term**             | ** ** | ** **                | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                                                                            | ** ** | ** **       | ** ** | **Annual**                | ** ** | **Payouts**               | ** ** | **All Other**        | ** ** |
| **Name and Principal Position**                                                                       | ** ** | **Year**         | ** ** | **Salary**                | ** ** | **Bonus**                 | ** ** | **LTIP (a )**             | ** ** | **Compensation (b)** | ** ** |
| James L.  Gallogly                                                                                    |       | 2005             |       | $                         | 526,750    |                      | $          | 649,490                   |       | $                         | 984,500    |   | $ | 41,643 |   |
| President  and                                                                                        |       | 2004             |       |                      | 504,200    |                      |       | 505,479                   |       |                      | 1,343,400  |   |   | 31,240 |   |
| Chief  Executive Officer                                                                              |       | 2003             |       |                      | 483,750    |                      |       | 309,200                   |       |                      | 967,700    |   |   | 24,503 |   |
|                                                                                                  |       |             |       |                      |       |                      |       |                      |       |                      |       |
| Greg G.  Maxwell                                                                                      |       | 2005             |       | 287,037                   |       | 210,864                   |       | 247,100                   |       | 21,574                    |       |
| Senior Vice  President,                                                                               |       | 2004             |       | 252,588                   |       | 203,775                   |       | 387,200                   |       | 15,379                    |       |
| Chief Financial Officer and Controller                                                                |       | 2003             |       | 231,196                   |       | 120,256                   |       | 204,200                   |       | 11,531                    |       |
|                                                                                                  |       |             |       |                      |       |                      |       |                      |       |                      |       |
| Greg C.  Garland   Senior Vice President,   Planning & Specialty Products                    |       | 2005  2004  2003 |       | 312,125  295,175  279,107 |       | 230,033  243,838  157,618 |       | 254,700  444,400  288,100 |       | 19,908  18,148  14,071    |       |
|                                                                                                  |       |             |       |                      |       |                      |       |                      |       |                      |       |
| Craig B.  Glidden   Senior Vice President,  Legal and Public Affairs,   General Counsel and Secretary |       | 2005  2004  2003 |       | 319,292  308,710  298,637 |       | 237,362  214,848  116,042 |       | 275,100  487,000  352,300 |       | 25,430  19,209  15,162    |       |
|                                                                                                  |       |             |       |                      |       |                      |       |                      |       |                      |       |
| Tim G.  Taylor   Senior Vice President,   Olefins & Polyolefins                              |       | 2005  2004  2003 |       | 317,958  303,762  291,284 |       | 294,175  229,424  126,994 |       | 321,600  572,400  414,700 |       | 25,141  18,814  14,797    |       |

 

(a)          Informationfor 2005 represents Strategic Performance (SP) awards earned in 2005 for thecompleted 2003-2005 performance cycle that will be paid in 2006. As of the dateof this report, Relative Performance (RP) awards earned and payable for the2003-2005 performance cycle have not been determined and are not included inthe table. Information for 2004 represents RP and SP awards earned in 2004 forthe completed 2002-2004 performance cycle that were paid in 2005 (informationfor 2004 as presented in the 2004 Annual Report on Form 10-K included onlySP awards, as the RP award amounts had not been determined). Information for2003 represents RP and SP awards earned in 2003 for the completed 2001-2003performance cycle that were paid in 2004.

 

(b)         During2005, Messrs. Gallogly, Maxwell, Garland, Glidden and Taylor receivedcompany contributions to their savings plan accounts of $40,957, $21,206,$19,502, $25,014 and $24,727, respectively, and life insurance premiums of$686, $368, $406, $416 and $414, respectively, were paid on their behalf.

 

**Option Grants and Options Exercised During 2005**

 

CPChem does notgrant options to purchase securities of CPChem to its employees or directors. Accordingly,there were no such options granted or exercised during 2005 nor were any suchoptions outstanding as of December 31, 2005.

 

108

----

 

**Long-Term Incentive Plans**

 

In December 2005,the Long-Term Incentive Plan of Chevron Phillips Chemical Company LLC (the “LTIP”)for selected key employees was amended and restated, effective January 1,2005. Prior to the amendment and restatement, participants were eligible fortwo types of awards: Relative Performance (RP) awards and Strategic Performance(SP) awards. After the amendment and restatement, grants of RP awards are nolonger available under the LTIP for performance cycles beginning on or after January 1,2006. The amendment and restatement had no effect on participants’ rights orCPChem’s obligations with respect to grants of RP awards then outstanding.

 

In lieu of RPaward grants that will no longer be available under the LTIP, the RelativePerformance Value Plan of Chevron Phillips Chemical Company LLC (the “RPV Plan”)was adopted effective January 1, 2006. The RPV Plan provides for thegranting of Relative Performance Value (RPV) awards to certain key eligibleemployees of the Company. Any final RPV award amount earned by a participantwill be automatically deferred into the Chevron Phillips Chemical Company LPExecutive Deferred Compensation Plan (the “Deferred Compensation Plan”). TheCompensation Committee of the Board of Directors of CPChem (the “CompensationCommittee”) has the sole discretion to determine which employees receive RPVand SP awards.

 

TheCompensation Committee sets target RPV and SP award amounts for a performancecycle at the time the annual RPV and SP awards are granted. RPV awards aregenerally based on the Company’s relative performance during the performancecycle and the stock prices of Chevron and ConocoPhillips (collectively, the “members”)at the end of the performance cycle, as adjusted by the Compensation Committeeat its discretion. SP awards are based on CPChem’s strategic performance ascompared to defined strategic objectives as selected by the CompensationCommittee. Amounts paid under each type of award are determined at the end ofeach performance cycle, which is typically three years. The CompensationCommittee has the sole discretion to determine the amounts payable, if any,under each type of award.

 

**LTIP Awards in 2005**

 
| ** **         | ** ** | **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        |       | $          | 644,900    |                               | 12/31/2007 |                                                                                                | $          | — |   | $ | 644,900 |   | $ | 1,289,800 |   |
|               |       | SP        |       | 644,900    |       | 12/31/2007                         |       | —                                                                                              |       | 644,900 |   | 1,289,800 |   |
|               |       |      |       |       |       |                               |       |                                                                                                |       |   |   |   |   |
| Greg G.  Maxwell   |       | RP        |       | 178,100    |       | 12/31/2007                         |       | —                                                                                              |       | 178,100 |   | 356,200 |   |
|               |       | SP        |       | 178,100    |       | 12/31/2007                         |       | —                                                                                              |       | 178,100 |   | 356,200 |   |
|               |       |      |       |       |       |                               |       |                                                                                                |       |   |   |   |   |
| Greg C.  Garland   |       | RP        |       | 189,900    |       | 12/31/2007                         |       | —                                                                                              |       | 189,900 |   | 379,800 |   |
|               |       | SP        |       | 189,900    |       | 12/31/2007                         |       | —                                                                                              |       | 189,900 |   | 379,800 |   |
|               |       |      |       |       |       |                               |       |                                                                                                |       |   |   |   |   |
| Craig B.  Glidden  |       | RP        |       | 196,000    |       | 12/31/2007                         |       | —                                                                                              |       | 196,000 |   | 392,000 |   |
|               |       | SP        |       | 196,000    |       | 12/31/2007                         |       | —                                                                                              |       | 196,000 |   | 392,000 |   |
|               |       |      |       |       |       |                               |       |                                                                                                |       |   |   |   |   |
| Tim G.  Taylor     |       | RP        |       | 233,100    |       | 12/31/2007                         |       | —                                                                                              |       | 233,100 |   | 466,200 |   |
|               |       | SP        |       | 233,100    |       | 12/31/2007                         |       | —                                                                                              |       | 233,100 |   | 466,200 |   |
|                    |            |           |            |            |            |                                    |            |                                                                                                     |            |  |  |  |  |  |  |  |  |

 

109

----

 

#### **Relative Performance Awards for the 2003 - 2005 PerformanceCycle Under the LTIP**

 

On August 11,2003, the Compensation Committee approved the grant of RP awards to certainexecutives, including the named executive officers. According to the terms ofthe grant, each of those executives is entitled to earn between 0% and 200% ofsuch executive’s respective target RP award depending on performance measuresachieved during the three year performance cycle beginning January 1, 2003and ending December 31, 2005, as determined by the Compensation Committeeat the end of the performance cycle. Target RP awards are set as a percentageof 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 awardamount, once determined, will be made in 2006.

 

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

 

**2006 Executive Compensation Awards**

 

*Relative Performance Value Awards for the2006 - 2008 Performance Cycle Under the LTIP*

 

On February 24,2006, the Compensation Committee approved the grant of RPV awards to certainexecutives, including the named executive officers. According to the terms ofthe grant, each of those executives is entitled to earn between 0% and 200% ofsuch executive’s respective target RPV award depending on performance measuresachieved during the three year performance cycle beginning January 1, 2006and ending December 31, 2008 and the members’ stock prices, as adjusted bythe Compensation Committee at their discretion at the end of the performancecycle. Target RPV awards are set as a percentage of such executive’s basesalary at the time of the grant, with the percentage differing based upon theexecutive’s grade level. Any RPV award amount, once determined, will beautomatically deferred into the Deferred Compensation Plan in 2009.

 

Theperformance measures for the RPV awards consist of: (1) EBITDA divided bytotal assets; (2) a comparison of CPChem’s financial performance relativeto a peer group of companies; and/or (3) economic value added.

 

*Strategic Performance Awards for the 2006 - 2008Performance Cycle Under the LTIP*

 

On February 24,2006, the Compensation Committee approved the grant of SP awards to certainexecutives, including the named executive officers. According to the terms ofthe grant, each of those executives is entitled to earn between 0% and 200% ofsuch executive’s respective SP award depending on performance measures achievedduring the three year performance cycle beginning January 1, 2006 andending December 31, 2008, as determined by the Compensation Committee atthe end of the performance cycle. Target SP awards are set as a percentage ofsuch executive’s base salary at the time of the grant, with the percentagediffering based upon the executive’s grade level. The payment of any SP awardamount, once determined, will be made in 2009.

 

Theperformance measures for the SP awards consist of: (1) gapclosure/synergies; (2) major project management; (3) portfoliomanagement; (4) effective management of capital projects; (5) unitcost reductions versus baseline measurements; (6) reliability versusbaseline measurements, and/or (7) achievement of effective growth goals.

 

110

----

 

*2006 Target Awards Pursuant to the AnnualIncentive Plan*

 

On February 24,2006, the Compensation Committee approved the grant of target awards to certainexecutives, including the named executive officers. Target awards are measuredas a percentage of such executive’s base salary at December 31, 2006, withthe percentage differing based upon the executive’s grade level. Each of thoseexecutives is entitled to earn between 0% and 200% of such executive’s targetaward depending on performance measures achieved under CPChem’s EmployeeIncentive Program (EIP) during the year ending December 31, 2006, asdetermined by the Compensation Committee. The payment of any target awardamount, once determined, will be made in 2007.

 

Theperformance measures for the EIP consist of corporate-wide measures and awardunit measures. Corporate wide-measures consist of: (1) safety; (2) EBITDA;and (3) operating expenses. Award unit measures, which may varydepending on the executive, consist of (1) safety; (2) earnings; (3) expenses;(4) key projects; and (5) customer satisfaction.

 

**Pension Plans**

 

*Retirement Plan*

 

CPChem’sretirement plan is a defined benefit plan and covers most U.S.-based employees.Eligible employees automatically participate in the plan and began accruingbenefits from January 1, 2001 or their first day of employment if employedafter that date. Eligible employees become fully vested in their retirementbenefits after five years of service with CPChem, including prior service withChevron or ConocoPhillips or their affiliates, if applicable. Retirementbenefits are based on two types of credits: a career average pay benefit and avariable annuity benefit. For the career average pay benefit, each yearemployees receive an annual credit equal to 1.5% of eligible compensation forthat year. The variable annuity benefit is the second component of theretirement plan and is made up of a monthly credit equal to 1% of each eligibleemployee’s compensation for that month. Discretionary increases to the careeraverage pay benefit and/or the variable annuity benefit may be approved bythe Compensation Committee from time to time provided CPChem’s performancemetrics 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 sumpayment is elected, that payment may be rolled over to an individualretirement account or individual retirement annuity of another employer’s plan.

 

If anemployee leaves CPChem for any reason prior to retirement and is vested, theaccrued benefit may either be paid out at that time in accordance with theoptions described above or remain in the plan until the individual’s early ornormal retirement date, at which time the accrued benefit may be paid outas a lump sum or converted to a monthly benefit. Eligible employees that joinedCPChem from either Chevron or ConocoPhillips on January 1, 2001 may receivecertain adjustments, or “uplifts,” to their retirement benefit which areintended to (1) make up for pay increases that would have been added totheir retirement benefit had they stayed at Chevron or ConocoPhillips, and (2) approximatethe extent to which their continued employment at Chevron or ConocoPhillipswould have resulted in a more favorable early retirement factor.

 

111

----

 

*Supplemental Executive Retirement Plan*

 

Thesupplemental executive retirement plan applies to designated officers and keyexecutives who receive a retirement benefit under the retirement plan and whohave had the amount of that benefit reduced due to required limitations underthe Internal Revenue Code, or by reason of deferral of compensation underCPChem’s executive deferred compensation plan, or as a result of managementincentive bonus amounts not being recognized as compensation under theretirement plan. The eligible employee’s benefit under this plan is equal tothe difference between (1) the amount the employee would have receivedunder 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 fromConocoPhillips on January 1, 2001, by “decoupling” that employee’scompensation payable as bonus and the amount payable as base pay for purposesof determining highest average earnings under the retirement plan; and (2) theamount of the employee’s retirement benefit payable under the 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 |       | $                                                   | 268,435    |   |
| Greg G.  Maxwell   |       | 161,603                                             |       |
| Greg C.  Garland   |       | 179,713                                             |       |
| Craig B.  Glidden  |       | 110,485                                             |       |
| Tim G.  Taylor     |       | 144,848                                             |       |
|                    |            |                                                     |            |  |

 

**Director Compensation**

 

No director ofCPChem receives any additional compensation for their service as directors.

 

**Employment Agreement***s*

 

None of thenamed executive officers have employment, termination of employment, or changein control agreements with CPChem.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

Mr. Lowe,who currently serves as Executive Vice President, Planning, Strategy andCorporate Affairs for ConocoPhillips, served as a voting member of theCompensation Committee during 2005. Ms. Yarrington, who currently servesas Vice President, Policy, Government and Public Affairs at Chevron, alsoserved as a voting member of the Compensation Committee during 2005. Mr. Galloglyand Mr. Don F. Kremer, Vice President, Human Resources, served asnon-voting members of the Compensation Committee during 2005. Neither Mr. Lowenor Ms. Yarrington has served as an officer or employee of CPChem or anyof its subsidiaries.

 

112

----

 

**Item 12.**   SecurityOwnership of Certain Beneficial Owners and Management

 

CPChemis a limited liability company, owned 50% each by Chevron and ConocoPhillipseither directly or indirectly through their wholly owned subsidiaries. Theownership interests in CPChem as of the date of this report are as follows:

 
| **Name and Address of Owner**                                              | ** ** | **Title  of Class** | ** ** | **Percentage****of Ownership** | ** ** |
|------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------------------|------------|
| Chevron                                                                                        | ** ** | ** **               | ** ** | ** **                          | ** ** |
|                                                                                           |       |                     |       |                                |       |
| 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.**   CertainRelationships and Related Transactions

** **

CPChembelieves that all of the related transactions described below are on termssubstantially no more favorable than those that would have been agreed uponwith third parties on an arm’s-length basis. See Part II - Item 8.Financial Statements and Supplementary Data – Notes 3, 9 and 15 for informationregarding aggregate amounts paid in transactions with affiliated parties.

 

*ServicesAgreements.*CPChem isa party to agreements with Chevron and ConocoPhillips, under which they provideCPChem with personnel, equipment and technology primarily for research,technology development, laboratory services, and engineering and projectmanagement support. Chevron and ConocoPhillips charge CPChem for these servicesaccording to the rates agreed upon in these services agreements. CPChem hasalso entered into other agreements with affiliates of Chevron andConocoPhillips that cover the provision of additional services including, butnot limited to, procurement and pipeline operating services.

 

*IntellectualProperty Agreements.*Inconnection with the formation of the company, CPChem entered into a TradenameLicense Agreement with Chevron and ConocoPhillips, a General TrademarkAssignment Agreement with ConocoPhillips, and separate Intellectual PropertyAgreements with each, assigning or exclusively licensing rights to certainintellectual property owned by Chevron and ConocoPhillips.

 

*Common Facility Operating Agreements.*CPChem is a party to common facilitiesoperating agreements with ConocoPhillips and Chevron related to the operationof the chemical facilities located within or near their refineries at Sweeny,Borger and Pascagoula.

 

113

----

 

*Supply and Feedstock Agreements*. CPChem is a party to supply agreements withChevron and ConocoPhillips under which CPChem purchases various productsproduced in certain of their refineries. In addition, CPChem is a party toagreements with ConocoPhillips and Duke Energy Field Services LLC (an affiliateof ConocoPhillips) under which they supply CPChem with certain natural gasliquid feedstocks. Chevron and ConocoPhillips also purchase various productsthat CPChem produces in its chemical facilities.

 

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

 

*PolyethylenePipe*. CPChem’sPerformance Pipe division sells polyethylene pipe to Chevron andConocoPhillips.

 

*SpecialtyProducts.*CPChem’sSpecialty Chemicals division sells specialty and reference fuels, gas odorants,sulfiding agents and extractive solvents to Chevron and ConocoPhillips.

 

**Item 14.**   PrincipalAccounting Fees and Services

 

***Fees.***Aggregate fees for professional services rendered by CPChem’sindependent auditor, Ernst & Young LLP, were as follows:

 

| ** **              | ** ** | **Years ended December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| **Dollars**             | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Audit fees  (a)         |       | $                                           | 1,058,115  |   | $ | 872,100 |   |
| Audit-related  fees (b) |       | 141,391                                     |       | 160,397 |   |
| Tax fees (c)            |       | 92,411                                      |       | 72,895 |   |
| All other  fees (d)     |       | —                                      |       | 243 |   |
| Total fees              |       | $                                           | 1,291,917  |   | $ | 1,105,635 |   |

 

(a)          Audit fees represent fees billed for professional services rendered forthe audits of CPChem’s annual consolidated financial statements, statutoryaudits of CPChem’s subsidiaries, reviews of documents filed with the SEC andcomfort letters.

 

(b)         Audit-related fees represent fees billed for professional servicesrendered for audits of employee benefit plans, attest services and certainaccounting consultations.

 

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

 

(d)         All other fees represent charges for training seminars sponsored byErnst & Young LLP.

 

CPChemand its Audit Committee are committed to ensuring the independence of itsindependent auditor as related to CPChem. As such, it is CPChem’s policy thatall engagements of Ernst & Young LLP by CPChem be pre-approved by theAudit Committee, with the exception that the Audit Committee has granted CPChem’sSenior Vice President, Chief Financial Officer and Controller the pre-approvalauthority to engage Ernst & Young LLP for certain non-audit servicesin an amount of up to $5,000 per engagement, limited to a maximum of $50,000per year in the aggregate.

 

114

----

 

**PART IV**

 

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

** **

**(a)(1)**                    The financial statements listed in the Index to FinancialStatements on page 32 are filed as part of this annual report.

** **

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

** **

**Chevron Phillips ChemicalCompany LLCSchedule II – Valuation and Qualifying Accounts**

** **
| **Millions**                       | ** ** | **Allowance  for Doubtful  Accounts (a,b)** | ** ** | **Deferred Income  Tax Valuation  Allowance (a,c)** | ** ** |
|------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| 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                                                                |       |
| Additions                          |       | 8                                                     |       | 2                                                                  |       |
| Deductions                         |       | (1                                                    | )          | —                                                             |       |
| Balance on December 31,  2005 |       | $                                                     | 14         |                                                               | $          | 193 |   |

 

(a)  Additions werecharged to expense.

(b)  Deductions represent receivables writtenoff less 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 117and 118 are filed as part of this annual report.

** **

**115**

----

** **

# **SIGNATURES**

 

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

 
|                    | * * | CHEVRON PHILLIPS CHEMICAL COMPANY LLC   |
|-------------------------|----------|-----------------------------------------|
|                    | * * | * *                                |
|                    | * * | * *                                |
| Date: February 27, 2006 | * * | * *                                | */s/ Greg  G. Maxwell* | * * |
|                    |     | Greg G. Maxwell                         |
|                    |     | Senior Vice President,                  |
|                    |     | Chief Financial Officer  and Controller |

 

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, this report has been signed as of February 27, 2006 bythe following persons on behalf of the registrant and in the capacities indicated.

 

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

 

116

----

 

**Supplemental Information to be Furnished with Reports FiledPursuant to Section 15(d) of the Securities Exchange Act of 1934 byRegistrants which have not Registered Securities Pursuant to Section 12 ofthe Securities Exchange Act of 1934:**

 

No annual report to security holders covering the Registrant’slast fiscal year has been sent to the Registrant’s security holders and noproxy statement, form of proxy or other proxy soliciting material has beensent to more than ten of the Registrant’s security holders with respect to anyannual or other meeting of security holders. No such report or proxy materialis expected to be furnished to security holders subsequent to the filing ofthis 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 Holdings 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 (As Amended and Restated Effective January 1, 2005)                                                                                                                                                                                                                                                                                                                                     |

 

117

----

 

**INDEX OF EXHIBITS**(continued)

 
| **Exhibit No.** | ** ** | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| ***+**10.5           |       | Chevron Phillips Chemical Company LP Supplemental Executive  Retirement Plan (As Amended and Restated Effective January 1, 2005)                                                                                                                                                                                                                                                                                                                                                           |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| ***+**10.6           |       | Long-Term Incentive Plan of Chevron Phillips Chemical Company LLC (as  Amended and Restated Effective January 1, 2005)                                                                                                                                                                                                                                                                                                                                                                |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| ***+**10.7           |       | Annual Incentive Plan of Chevron Phillips Chemical Company LLC (As  Amended and Restated Effective January 1, 2005)                                                                                                                                                                                                                                                                                                                                                                   |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| 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 (Exhibit No. 10.9 to CPChem’s Annual Report on Form 10-K  for the year ended December 31, 2004)                                                                                                                                                                                                                                                                                        |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| ***+**10.10          |       | Relative Performance Value Plan of Chevron Phillips Chemical Company  LLC (As Amended)                                                                                                                                                                                                                                                                                                                                                                                                     |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| ***+**10.11          |       | Offer of Employment Letter, dated as of February 8, 2006,  between Chevron Phillips Chemical Company LP and Raymond I. Wilcox                                                                                                                                                                                                                                                                                                                                                         |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| *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                                                                                                                                                                                                                                                                                                                                                                      |

 

----

* Filed herewith.

**+******Represents a management contract orcompensatory plan or arrangement.

 

118

----