**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**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, 2002**                                                                                                                             |
|                                                                                                                                                                         |
| **or**                                                                                                                                                                       |
|                                                                                                                                                                         |
| **o**** TRANSITION REPORT PURSUANT  TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                    |
|                                                                                                                                                                         |
| **For the Transition Period from             to             ** |
|                                                                                                                                                                         |
| **Commission  File No. 333-59054-01**                                                                                                                                        |

 

**Chevron Phillips Chemical CompanyLLC**

(Exact name of Registrant as specified in its charter)

 

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

 

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

 

**Yes  **ý      **No  ****o**

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  ý

 

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

 

**Yes  **o      **No  ****ý**

The aggregate marketvalue of the voting and non-voting common equity stock held by non-affiliatesof the registrant at June 30, 2002:

**None**

 

**DOCUMENTS INCORPORATED BY REFERENCE:**

** **

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

**None**

 

 

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TABLE OF CONTENTS

 
| **PART I**            |   |
|-----------------------|--------|
|                  |   |   |   |
| Items 1. and  2. |   | Business and Properties | 2 |
| Item 3.               |   | Legal Proceedings | 16 |
| Item 4.               |   | Submission of Matters to a Vote of Security  Holders | 17 |
|                  |   |   |   |
| **PART II**           |   |
|                  |   |   |   |
| Item 5.               |   | Market for Registrant’s Common  Equity and Related Stockholder Matters | 17 |
| Item 6.               |   | Selected Financial Data | 18 |
| Item 7.               |   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 19 |
| Item 7A.              |   | Quantitative and Qualitative Disclosures About  Market Risk | 34 |
| Item 8.               |   | Financial Statements and Supplementary Data | 35 |
| Item 9.               |   | Change in and Disagreements with Accountants on  Accounting and Financial Disclosure | 92 |
|                  |   |   |   |
| **PART III**          |   |
|                  |   |   |   |
| Item 10.              |   | Directors and Executive Officers of the  Registrant | 92 |
| Item 11.              |   | Executive Compensation | 94 |
| Item 12.              |   | Security Ownership of Certain Beneficial Owners  and Management | 98 |
| Item 13.              |   | Certain Relationships and Related Transactions | 99 |
| Item 14.              |   | Controls and Procedures | 99 |
|                  |   |   |   |
| **PART IV**           |   |
|                  |   |   |   |
| Item 15.              |   | Exhibits, Financial Statement Schedules and  Reports on Form 8-K | 100 |

 

**CAUTIONARYSTATEMENTS REGARDING FORWARD-LOOKING INFORMATION**

 

This annual report contains “forward-looking statements” within themeaning of the federal securities laws. Such statements can generally be identified with words and phrases suchas “believes,” “expects,” “anticipates,” “should,” “estimates,” “foresees” orother words and phrases of similar meaning. Where Chevron Phillips Chemical Company LLC (CPChem) expresses anexpectation or belief as to future results, there can be no assurance that theexpectation or belief will result, be achieved or be accomplished.  Where any such forward-looking statementincludes a statement of the assumptions or bases underlying suchforward-looking statement, CPChem believes such assumptions or bases to bereasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and thedifferences between assumed facts or bases and actual results can be material,depending on the circumstances.  Themore significant factors that, if erroneous, could cause actual results todiffer materially from those expressed include, among others: the timing andduration of periods of expansion and contraction within the chemicals business,plans for the construction, modernization, start-up or de-bottlenecking ofdomestic and foreign chemical plants, prices of feedstocks and products, forcemajeure events, accidents, labor relations, political risks, changes in foreignand domestic laws, rules and regulations and the interpretation and enforcementthereof, regulatory decisions relating to taxes, the environment and humanresources, the U.S. global economy, results of financing efforts and overallfinancial market conditions.  Allforward-looking statements in this annual report are qualified in theirentirety by the cautionary statements contained in this section.  CPChem does not undertake to update, reviseor correct any of the forward-looking information.

 

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**PART I**

 

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

 

Chevron Phillips ChemicalCompany LLC (CPChem), a limited liability company formed under Delaware law,manufactures and markets a wide range of petrochemicals and plastics on aworldwide basis through its subsidiaries, with manufacturing facilities inexistence or under construction in the United States, Puerto Rico, Singapore,China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium.

 

On July 1, 2000, ChevronCorporation, now ChevronTexaco Corporation (ChevronTexaco), and PhillipsPetroleum Company, now ConocoPhillips, combined their worldwide chemicals andplastics businesses, excludingChevronTexaco’s Oronite additives business, to form Chevron Phillips ChemicalCompany LLC.  ChevronTexaco andConocoPhillips (collectively, the “parents”) each own 50% of CPChem.

 

CPChem is governed by aBoard of Directors currently comprised of six representatives under the termsof a limited liability company agreement. ChevronTexaco and ConocoPhillips each have two voting representatives,and the chief executive officer and the chief financial officer of CPChem arenon-voting representatives.  Certainmajor decisions and actions require the unanimous approval of the votingrepresentatives.

 

CPChemfiles quarterly, annual and other reports with the Securities and ExchangeCommission (the “SEC”).  These reportsare available to the public on the SEC’s Internet site at http://www.sec.gov or on CPChem’s Internet site athttp://www.cpchem.com/financial/financial.asp.

 

CPChem’s business isstructured around three primary operating segments:  Olefins & Polyolefins, Aromatics & Styrenics, andSpecialty Products.  For a list of the principalproducts of these segments, see the table on pages 12 and 13 of thissection.  See also “Part II – Item 8.Financial Statements and Supplementary Data – Note 16” for financial data bysegment and geographic location.

 

***Olefins & Polyolefins***

 

# **This segmentgathers, buys, sells and fractionates natural gas liquids, and manufactures andmarkets olefin products such as ethylene and propylene.  This segment also manufactures and marketsalpha olefins and polyolefin products such as normal alpha olefins, polyethylene,polypropylene and polyethylene pipe. CPChem’s five olefin and polyolefin production facilities are located inTexas.  CPChem also has nine domesticpipe facilities and one in Mexico, and one domestic pipe fittingsfacility.  In addition, CPChem ownsequity interests in a polypropylene facility located at the Houston ChemicalComplex in Texas and in polyethylene facilities in Singapore and China.  Construction of a world-scale ethylene,polyethylene and 1-hexene facility in Qatar, in which CPChem has a 49% equityinterest, is nearing completion and is currently undergoing commissioning.  The facility is designed to produce 1.1billion pounds of ethylene, 1.0 billion pounds of polyethylene and 100 millionpounds of 1-hexene annually.  A high-densitypolyethylene plant located at CPChem’s Cedar Bayou facility in Texas, of whichCPChem has a 50% interest, is also currently undergoing commissioning.**

 

2

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***Olefins & Polyolefins***

 
| **Product**                                   |   | **Approximate****Net Capacity** |    | **Primary Uses**                                                                                                                                                                                                                                                                 |
|-----------------------------------------------|--------|---------------------------------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |   | **(million lbs. per year)**     |    |                                                                                                                                                                                                                                                                             |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Ethylene                                      |   | 7,600                           | (1)     | Basic building block for  plastics and elastomers, and also a raw material for chemicals used to make  paints, detergents and antifreeze.                                                                                                                                        |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Polyethylene                                  |   | 5,080                           | (1,2,3) | Thermoplastic  polymer used in various applications, including:                                                                                                                                                                                                                  |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
|                                          |   |                            |    | •                  high-density  polyethylene (HDPE), which is a resin used for detergent bottles, pails,  plastic pipe and conduit, shopping bags, geomembrane and film applications; |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
|                                          |   |                            |    | •                  linear  low-density polyethylene (LLDPE), which is a resin used for plastic film and  containers; and                                                               |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
|                                          |   |                            |    | •                  low-density  polyethylene (LDPE), which is a resin used for plastic films, paper coating,  surgical gloves and containers.                                          |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Polyethylene  pipe, conduit and pipe fittings |   | 544                             |    | Used in a wide  variety of industries such as electrical, energy, gas distribution,  geothermal, mining, municipal projects and telecommunications.                                                                                                                              |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Propylene                                     |   | 2,880                           |    | Basic building  block for various fibers and plastics, such as polypropylene, and used as a  raw material for chemicals used to make paints, detergents and resins.                                                                                                              |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Polypropylene                                 |   | 486                             | (2)     | Thermoplastic  polymer used in fibers, films, automobiles and housewares.                                                                                                                                                                                                        |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Normal alpha  olefins (NAO)                   |   | 1,250                           | (1)     | A group of  chemicals produced from ethylene and used in plasticizer alcohols,  polyethylene, surfactants and synthetic lubricants and additives.                                                                                                                                |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Polyalpha  olefins                            |   | 104                             |    | Base stock for  synthetic lubricants.                                                                                                                                                                                                                                            |
|                                          |   |                            |    |                                                                                                                                                                                                                                                                             |
| Acetylene black                               |   | 18                              |    | Carbon black resulting  from the exothermic decomposition of acetylene gas, used in batteries,  magnetic tape, caulk, sealant, conductive paint and ink, specialty silicone  rubber and plastics, and explosives.                                                                |

 

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(1)          ExcludesCPChem’s share of the capacity of Qatar Chemical Company Ltd. (Q-Chem), anequity affiliate.  The Q-Chem complex iscurrently undergoing commissioning.

(2)          RepresentsCPChem’s share of an equity affiliate’s capacity.

(3)          Excludesadditional capacity of a plant at the Cedar Bayou facility which is currentlyundergoing commissioning.

 

3

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*Competition*.  Olefins and polyolefins are delivered into the worldwidecommodity markets.  Competitive factorsinclude price, product quality and performance, product deliverability andcustomer service.  CPChem generallyranks within the top 10 ethylene and polyethylene producers worldwide based onpublished rated capacities.  Other majorproducers include Dow Chemical Company (Dow), Equistar Chemicals LP (Equistar),ExxonMobil Chemical Company (ExxonMobil), BP p.l.c. (BP) and Shell ChemicalCompany (Shell).  CPChem’s NAOtechnology allows it to produce a wide range of hydrocarbon products thatcompete in many different markets, including comonomers for polyethylene,surfactants, drilling fluids and polyalpha olefins.  Other significant producers of NAO are BP, Shell and SasolLtd.  Major producers of polyalphaolefins include BP and ExxonMobil.

 

**Ethylene**

 

By volume, ethylene isthe most widely-consumed petrochemical product in the world, according toChemical Markets Associates, Inc. Domestically, ethylene is produced at CPChem’s Sweeny facility in OldOcean, Texas, at its Cedar Bayou facility in Baytown, Texas and at its PortArthur, Texas facility.  Thesefacilities have recently been modernized by upgrading control systems and bymaking other process improvements. The  combined capacity of thesefacilities is approximately 7.6 billion pounds per year.  Internationally, CPChem will produceethylene through its 49%-owned joint venture, Qatar Chemical Company Ltd.(Q-Chem), located in Mesaieed, Qatar. The Q-Chem complex is currently undergoing commissioning.

 

Polyethylene accounts formore than half of global ethylene consumption, making growth in theapplications for and the consumption of polymer derivatives a key driver forthe ethylene market as a whole. Polyethylene end-uses include various nondurable applications such assoap packaging, food packaging and other consumer packaging that are not asaffected as other products during general economic slowdowns.

 

*Supply/Feedstock Sources.*  Ethylenecan be produced from ethane, propane, butane, natural gasoline or certainrefinery liquids such as naphtha.  Thetwo most common feedstocks are ethane, because of its high ethylene yield, andnaphtha, because of its availability and transportability.  CPChem’s ethylene production is primarilyethane-based, but certain facilities also use a feedstock slate of propane,butane and/or naphtha.  CPChem’sethylene plants have varying degrees of flexibility in the feedstocks they usedue to their configuration, which enables the plants to utilize differentfeedstock slates depending on feedstock costs and availability.  The price of ethane tends to correlate withthe price of natural gas, while the prices of the other ethylene feedstockslates tend to correlate with the price of crude oil.

 

CPChem has long-term,market-based purchase contracts with Duke Energy Field Services, LLC (anaffiliate of ConocoPhillips) and Dynegy Inc. (an affiliate of ChevronTexaco)which cover over 75% of CPChem’s anticipated domestic ethylene feedstockneeds.  The agreement with Duke Energyextends through December 31, 2014 and the agreement with Dynegy extends throughAugust 31, 2006.  Contracts with othersuppliers provide the remainder of feedstock needs.  These contracts can be long-term, monthly, or daily contractsmade on a spot basis.

 

*Marketing.***** CPChem uses approximately 75% of its ethylene in the production ofcertain of its derivative products (polyethylene, NAO and styrene).  The remainder of ethylene production is soldon the merchant market, largely in the form of long-term contracts.  CPChem owns an extensive ethylene pipelinesystem that provides access to many ethylene consumers in the Texas Gulf Coastregion.  CPChem owns the only ethyleneimport and export facility on the Gulf Coast and has the right to transporthalf of the product imported or exported through the facility.  CPChem’s ethylene storage capacity isapproximately one billion pounds and is split between its Texas cavern storagefacilities in Clemens and Mont Belvieu.

 

4

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**Polyethylene**

 

Domestically,polyethylene is produced at the Houston Chemical Complex and the Orange andCedar Bayou facilities, all located in Texas. Internationally, CPChem produces polyethylene through its joint venturefacilities in Singapore and Shanghai, China. CPChem’s share of the combined capacity of its domestic andinternational facilities is approximately 5.1 billion pounds per year.  Polyethylene will also be produced atCPChem’s joint venture in Qatar.  TheQ-Chem complex is currently undergoing commissioning.

 

*Supply/Feedstock Sources.*  The primary raw material for polyethyleneproduction is ethylene, which typically represents 60% to 70% of polyethylenemanufacturing costs.  CPChem producesethylene in excess of its polyethylene production requirements.  Hexene and butene, also used in theproduction of polyethylene, are produced at the Cedar Bayou facility.  The complex in Qatar will produce all of theethylene required for its production of polyethylene.

 

*Marketing.** ***AtDecember 31, 2002, approximately 90% of CPChem’s polyethylene net capacity waslocated in the United States, along the Texas Gulf Coast.  CPChem markets almost all its productionfrom this area in the United States, with the remainder exported to Mexico,Central and South America, Europe and Asia. Production from CPChem’s plants in Singapore and China is marketedalmost exclusively in the Far East. CPChem has entered into an agency agreement with Q-Chem to act as anagent for the sale of substantially all of Q-Chem’s production.  CPChem will market polyethylene produced byQ-Chem through CPChem’s established marketing network, primarily targetingdeveloped markets in Western Europe and high-growth markets in Asia.

 

Polyethylene is currentlysold to over 400 customers, the single largest consumer being CPChem’sPerformance Pipe Division.  Thisdivision manufactures polyethylene pipe, conduit and pipe fittings in 10 plantsthroughout the United States and one in Mexico.  Performance Pipe is the largest polyethylene pressure pipemanufacturer in North America.

 

In addition, asignificant amount of HDPE is sold into the blow-molded container market.  CPChem’s customers are suppliers of bottlesto large consumer product manufacturers, dairies and bottled watersuppliers.  CPChem also supplies HDPEfor rigid product applications such as pails, paint cans, margarine tubs andstadium cups.  Durable applicationsinclude pipe, sheeting for landfill liners and automotive fuel tanks.

 

LDPE and LLDPE productsare sold mainly to flexible packaging suppliers, who produce coated cardboardjuice cartons, food packaging, plastic wrap, plastic bags and other products.  Some customers also produce pallet stretchwrap and container liners.

 

**Propylene**

 

Propylene is a basicbuilding block for various chemicals, plastics and fibers.  CPChem produces propylene at its CedarBayou, Port Arthur and Sweeny facilities. The combined capacity of these facilities is approximately 2.9 billionpounds per year.

 

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*Supply/Feedstock Sources. *Approximatelyone-half of CPChem’s propylene is produced as a co-product of ethylene production,the amount of which varies with the type of feedstock used.  The remainder of CPChem’s propyleneproduction comes from the processing of refinery-grade propylene, which isconverted into polymer-grade product. CPChem purchases approximately 25% of its refinery-grade propylene fromCPChem’s parents and the remainder from a variety of suppliers under long-termand short-term contracts.

 

*Marketing. *Polymer-grade propylene is sold to majorchemical manufacturers, with the majority to polypropylene producers.  Approximately 25% of CPChem’s propylene issold to Phillips Sumika Polypropylene Company (Phillips Sumika), a CPChem jointventure located at the Houston Chemical Complex.  Propylene is also sold to external customers under long-termcontracts and to international contract and spot customers through athird-party export facility located in Deer Park, Texas.  CPChem has an extensive propylene pipelinedelivery system, which allows it to deliver product to a majority of the Texaspolymer-grade propylene consumers.

 

**NormalAlpha Olefins, Polyalpha Olefins**

 

CPChem is currentlycapable of producing approximately 1.3 billion pounds of NAO per year, all inthe U.S., which currently represents approximately 15% of global capacity.  All of CPChem’s domestic NAO is currentlyproduced at the Cedar Bayou facility. The joint venture complex in Qatar, currently undergoing commissioning,will have a gross annual capacity of an additional 100 million pounds of1-hexene, an NAO used as a comonomer in the production of polyethylene.

 

*Supply/Feedstock Sources. *NAO is generally produced by processing ethylene.  CPChem produces all of the ethylene requiredin its production of NAO.  CPChem’sethylene is produced at the Sweeny, Cedar Bayou and Port Arthurfacilities.  Polyalpha olefins areproduced from fractions of NAO produced at CPChem’s Cedar Bayou facility.

 

*Marketing. *CPChemprimarily sells NAO and polyalpha olefins to other chemical companies who usethem to produce a broad range of intermediate products.  CPChem also uses a portion of its ownproduction of NAO in the manufacturing of polyethylene and polyalphaolefins.  North America and Europe arethe largest markets for NAO and polyalpha olefins, but the Asian Pacific,Middle Eastern and South American markets are growing.  Most domestic sales of NAO and polyalphaolefins are transported via bulk railcars and tank trucks.  International sales are transportedprimarily via parcel tankers.

 

# ***Aromatics & Styrenics***

 

This segment manufacturesand markets aromatics products such as benzene, styrene, paraxylene,cyclohexane and cumene.  This segmentalso manufactures and markets polystyrene and styrene-butadiene copolymers soldunder the trademark K-Resin®. Major production facilities are 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 facility in South Korea.

 

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# ***Aromatics & Styrenics***

 
| **Product**                                       |   | **Approximate****Net Capacity** |   | **Primary Uses**                                                                                                                                                                                                                             |
|---------------------------------------------------|--------|---------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                              |   | **(million lbs. per year)**     |   |                                                                                                                                                                                                                                         |
|                                              |   |                            |   |                                                                                                                                                                                                                                         |
| Benzene                                           |   | 2,660                           | (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 in packing materials, cups, toys, furniture and housewares.                                                                                                                                                      |
|                                              |   |                            |   |                                                                                                                                                                                                                                         |
| Paraxylene                                        |   | 1,000                           | (2)    | Used almost exclusively to make terephthalic acid or  dimethyl terephthalate intermediates in the production of polyester and  packaging resins such as polyethylene terephthalate (PET).                                                    |
|                                              |   |                            |   |                                                                                                                                                                                                                                         |
| Cyclohexane                                       |   | 575                             | (3)    | Predominantly  used in intermediates for the manufacture of nylon.                                                                                                                                                                           |
|                                              |   |                            |   |                                                                                                                                                                                                                                         |
| K-Resin®  styrene-butadiene copolymers (SBC) |   | 339                             | (1)    | A high quality, clear polymer material used in a  variety of products including medical components, toys, candy wrap, food  packaging, cups and garment hangers.                                                                             |
|                                              |   |                            |   |                                                                                                                                                                                                                                         |
| Cumene                                            |   | 1,100                           |   | An intermediate  used to produce phenol and acetone.                                                                                                                                                                                         |

 

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(1)          IncludesCPChem’s share of an equity affiliate’s capacity.

(2)          Excludescapacity of plant in Puerto Rico that is currently idled.

(3)          Excludescapacity of an equity affiliate’s plant that became operational in the firstquarter of 2003.

 

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

 

**Benzene**

 

Domestically, benzene isproduced at CPChem’s Pascagoula, Mississippi and Port Arthur facilities.  Internationally, CPChem produces benzenethrough its joint venture facility in Al Jubail, Saudi Arabia. CPChem’s shareof the combined capacity of its domestic and international facilities isapproximately 2.7 billion pounds per year.

 

Historically, benzene hasbeen produced mostly as a by-product of the motor fuel and ethylene productionprocesses.  However, depending oneconomics, about 5% to 15% of the world’s requirements are produced “on purpose”in plants using a process known as the hydro-dealkylation (HDA) process.  The HDA process is one of the highest costprocesses currently used in this area of the industry.  To an extent, producers using the HDAprocess control the price of benzene since they are able to produce untilprices drop to levels that will not allow them to recover costs.  At that point, they tend to shut down theircapacity until prices recover to levels that make their operations economical.  However, CPChem has developed and uses itsproprietary Aromax® technology for most of its benzene production,which results in lower production costs than the HDA process.

 

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*Supply/FeedstockSources. *The two mainfeedstocks for benzene production are pyrolysis gasoline and reformate, both ofwhich are intermediate products of petroleum refining and petrochemicalplants.  These two feedstocks accountfor over 75% of benzene production worldwide. CPChem purchases its benzene feedstocks from refineries owned by itsparents, located in proximity to CPChem’s benzene plants, and from variousother sources.  In Saudi Arabia,CPChem’s 50%-owned affiliate has a 30-year feedstock agreement with a producerthat owns a refining complex located within six miles of the plant.

 

*Marketing. *CPChem is a net consumer of benzene in the Gulf Coast region, which isthe largest production area of North America. This allows CPChem to operate its benzene plants at full capacity,preserving a low-cost position, even during times of slack demand forderivatives.  At CPChem’s joint ventureplant in Saudi Arabia, approximately one-half of the benzene produced isconsumed by the joint venture’s cyclohexane plant located within the samefacility.  The balance of benzene issold on a term contract basis to a local Saudi Arabian styrene producer.  CPChem has a marketing agreement withPertamina, the Indonesian state oil company, under which CPChem markets benzeneproduced by Pertamina in Cilacap, Indonesia. This product is sold predominantly through one-year contracts withconsumers in Asia.

 

**Styrene**

 

Styrene is produced atCPChem’s St. James, Louisiana facility, which has a capacity of approximately2.1 billion pounds per year.  Amodernization project at the St. James plant that was completed in 2002increased annual plant capacity by approximately 25%.

 

*Supply/Feedstock Sources.** ***Styrene is made from benzene and ethylene.  Almost all of the benzene used at CPChem’sstyrene plant is produced internally at CPChem’s Pascagoula facility, with theremainder acquired through contract purchases. Ethylene is supplied to the St. James plant by a proprietary pipelineconnected to the Louisiana grid system. CPChem maintains flexibility in ethylene supply through contract purchases,exchanges from CPChem’s Texas facilities and spot purchases.

 

*Marketing. *CPChemcurrently consumes approximately 600 million pounds of styrene annually at itspolystyrene plant in Marietta, Ohio and a smaller amount in its production ofK-Resin®.  The balance ofproduction is sold in the merchant market. CPChem generally markets styrene in all regions of the world and sellsalmost all of its styrene production through term contracts.  Distribution of product is primarily handledby railcars, barges and ocean vessels.

 

**Polystyrene**

 

Polystyrene is producedat CPChem’s facilities in Marietta, Ohio and Zhangjiagang, China.  Both plants have the ability to make highimpact polystyrene and general purpose polystyrene.

 

*Supply/Feedstock Sources.** ***Polystyrene is manufactured primarily fromstyrene.  The styrene consumed atMarietta is supplied by CPChem’s St. James styrene facility.  The China plant is supplied by a combinationof styrene from the St. James plant and from third parties.

 

*Marketing. *CPChemsells a variety of grades of polystyrene to the packaging, food service, mediaenclosure and various other markets. Most business in the U.S. is conducted on a term-contract basis, whilebusiness in China follows the local practice of being primarily sold on thespot market.  Polystyrene in the U.S. isshipped in railcars and bulk trucks.  InChina, polystyrene is packaged in 25-kilogram bags, then shipped from the plantprimarily in trucks.

 

8

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**Paraxylene**

 

CPChemhas a production capacity of approximately 1.0 billion pounds of paraxylene peryear at its Pascagoula plant. Production at the Guayama, Puerto Rico plant, which has a capacity ofapproximately 700 million pounds per year, was idled in 2001 for economicreasons.  The plant is beingreconfigured and it is currently anticipated that paraxylene operations at theplant will resume in the third quarter of 2003, depending on market conditions.

 

*Supply/Feedstock Sources.***** Mixed xylenes are the feedstock for theproduction of paraxylene.  Mixed xylenesare the end product of either reforming operations that are part of the motorfuels production process in refineries, or the end product of the conversion oftoluene, another intermediate refining product, into benzene and xylenes.  Mixed xylenes are available on the merchantmarket as both gasoline blending stocks and paraxylene plant feedstocks thatCPChem uses during periods of high market demand.  CPChem purchases mixed xylenes from ChevronTexaco and other suppliers.  During periods of high paraxylene demand,mixed xylenes are also purchased on the spot market.

 

*Marketing. *In North America, a few very large consumers buy most of theparaxylene available in the market. They purchase mainly on a term contract basis with pricing tied to amonthly-negotiated, industry-wide contract price.  With purchasing concentrated among a few large consumers, theselarge consumers are able to exert pressure on the monthly-negotiated contractprice, which means that low margins result during times of oversupply.  There is also an active spot market forparaxylene, which allows large consumers a degree of flexibility with respectto pricing options and the periodic need to cut back production for inventorycontrol.  CPChem currently sells all ofits production under long-term contracts. CPChem sells its paraxylene production to major producers of polyesterin North America and Europe.  Paraxyleneis also sold to polyester producers in Asia via a marketing agreement withPertamina.  Paraxylene is shipped viarailcars, barges and ocean vessels.

 

**Cyclohexane**

 

CPChem marketsapproximately 15% of global cyclohexane production.  This includes volumes produced at the Port Arthur and SaudiArabian plants, as well as volumes for which CPChem has marketing rights.  In the first quarter of 2003, the SaudiArabian plant increased its capacity to 620 million pounds per year.  CPChem owns a 50% interest in the SaudiArabian facility and has the exclusive right to market all the cyclohexane exportedfrom that facility.  In addition, CPChemhas the exclusive right to market the cyclohexane produced by ConocoPhillips atits Sweeny and Borger, Texas refineries.

 

CPChem announced plans inOctober 2002 to build a new cyclohexane production facility at its Port Arthurplant.  It is anticipated that construction will begin in early 2003, withcompletion and start-up anticipated by the end of the first quarter of2004.  The project will increase thecyclohexane capacity of the facility by approximately 587 million pounds peryear.

 

*Supply/Feedstock Sources. *The raw materials for cyclohexane are benzene andhydrogen.  CPChem consumes more benzenethan it produces.  Remaining benzenerequirements are obtained through term contracts and spot purchases.  Hydrogen is currently obtained from CPChem’sPort Arthur facility.

 

*Marketing. *Most of CPChem’s cyclohexane is soldin North America and Europe through sales contracts that are typicallylong-term arrangements.  CPChem also hasaccess to the Asian market via its joint venture plant in Saudi Arabia.  Like many other commodity aromaticschemicals, cyclohexane is distributed via trucks, railcars, barges and oceanvessels.

 

9

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**K-Resin®Styrene-Butadiene Copolymer**

 

CPChem produces an SBCsold under the trademark K-Resin®. Production comes from the Houston Chemical Complex and CPChem’s K RCopolymer Co., Ltd. joint venture plant located in Yochon, South Korea.  Production of K-Resin SBC at the HoustonChemical Complex was idled in March 2000 as the result of an accident and fireat the plant.  The plant began aphased-in start-up in the fourth quarter of 2001, and the force majeure statusof the plant was lifted in May 2002.

 

*Supply/Feedstock Sources. *Themain feedstocks for K-Resin SBC are styrene and butadiene.  For domestic production, CPChem produces itsown styrene feedstock at its St. James facility, and secures butadiene on along-term contract basis with a single producer.  Other sources of butadiene are available if necessary.  In South Korea, feedstocks are securedthrough long-term contracts with a companyin which CPChem’s joint venture partner, Daelim Industrial Co., Ltd., has a 50%interest.

 

*Marketing. *Becausehigh-styrene content SBC such as K-Resin SBC are generally specialty polymers,pricing does not, in all markets, tend to follow the same cyclical patternsexperienced by commodity resins such as polyethylene and polypropylene.  CPChem conducts its marketing primarily byworking with customers to create new K-Resin SBC applications, to improveexisting applications and to improve customers’ processing capabilities.  CPChem has a sales and technical supportorganization, comprised of direct representatives, agents and distributors,that is active in North America and internationally.  Some product is sold under multi-year agreements.  The majority of K-Resin SBC, however, issold through individual purchase orders with customers and is delivered viatruck, railcar and ocean vessels.

 

***Specialty Products***

 

This segment manufacturesand markets a variety of specialty chemical products, including organosulfurchemicals and high-performance polyphenylene sulfide polymers and compoundssold under the trademark RytonTM. Major production facilities are located in Texas, Belgium and Singapore.

 
| **Product**                                                                      |   | **Approximate****Net Capacity** |   | **Primary Uses**                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------|--------|---------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                             |   | **(million lbs. per year)**     |   |                                                                                                                                                                                                                         |
|                                                                             |   |                            |   |                                                                                                                                                                                                                         |
| RytonTM  polyphenylene sulfide (PPS) polymer and compounds                       |   | 29                              | (1)    | A high-performance engineering polymer used in  electronic, automotive and appliance applications.                                                                                                                           |
|                                                                             |   |                            |   |                                                                                                                                                                                                                         |
| High-purity hydrocarbons and solvents                                            |   | 125                             |   | 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                                                           |   | 226                             |   | Chemical intermediates, primarily mercaptans, used  in agricultural and pharmaceutical intermediates and polymerization  modifiers.                                                                                          |
|                                                                             |   |                            |   |                                                                                                                                                                                                                         |
| Performance and reference fuels                                                  |   | 80                              |   | Specialty fuels for calibration standards and  high-performance service, such as automobile and boat racing.                                                                                                                 |
|                                                                             |   |                            |   |                                                                                                                                                                                                                         |
| Drilling specialty chemicals, including Soltex® and  Potassium Soltex® |   | 21                              |   | Additives used in water-based drilling fluids for  controlling unstable shale formations and increasing hole lubricity during  oil and gas well drilling.                                                                    |

 

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(1)          Excludescapacity of the Houston compounding facility which is currently undergoingcommissioning.

 

*Competition. *Specialty chemical products are characterized by smaller, niche marketswith fewer producers.

 

10

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**SpecialtyChemicals**

 

Specialty chemicalsconsist of a variety of organosulfur chemicals, fine chemicals and otherspecialties.  The volumes of any givenproduct are not large when compared to the basic commodity products likeethylene and polyethylene produced by CPChem’s other business segments.  However, in the aggregate, specialtychemicals can account for a significant portion of the earnings of theSpecialty Products segment.  Productionfacilities are located in Borger and Conroe, Texas, and Tessenderlo, Belgium.

 

*Supply/Feedstock Sources*.  Specialty chemicals production depends onthe availability of a number of specialized streams of products and co-productsthat are the result of the petroleum refining and petrochemical productionprocesses.  Feedstocks include hydrogensulfide, a variety of olefins and other hydrocarbon streams.  In many cases, CPChem acquires thesefeedstocks through long-term arrangements with its parents from facilities thatare integrated with production facilities that CPChem owns.

 

*Marketing. *Specialty chemicals are generally soldinto smaller, niche markets.  The numberof suppliers and consumers of any given product can be limited.  As a result, many of CPChem’s products aresold under long-term contracts.  Becausethe customer and applications base is diverse, the business is generally lesscyclical than the commodity chemicals business.

 

CPChem has a globalmarketing network, consisting of CPChem representatives and third-partydistributors and agents.  More than halfof CPChem’s representatives are located outside the United States in all majorregions of the world.  This networkprovides sales, distribution and technical services to customers.  Distribution channels used to deliverproduct to customers include ocean vessels, railcars and airfreight.

 

**RytonTMPolyphenylene Sulfide**

 

CPChem produceshigh-performance PPS polymers and compounds sold under the trademark RytonTM.  Compounds are combinations of Rytonpolymerand various additives, designed to have specific properties.  CPChem has an annual production capacity ofapproximately 22 million pounds of Ryton polymer at its Borger, Texas facility.  Substantially all Ryton polymer produced atthe Borger facility is currently used by CPChem’s Singapore and Kallo-Beveren,Belgium facilities to produce Ryton compounds. These facilities have an annual capacity of approximately 29 millionpounds of Ryton compounds in the aggregate. The compounds are subsequently sold to third parties.  Ryton compounds will also be produced atCPChem’s Houston compounding facility in La Porte, Texas.  The facility is currently undergoingcommissioning.

 

*Supply/Feedstock Sources. *The feedstocks for Ryton polymer are substances suchas caustic, sodium hydrosulfide, paradichlorobenzene and other chemicals andsolvents that are generally available in substantial quantities on the openmarket.  CPChem has a number of supplierswho provide these materials under either long-term or renewable contracts.  The materials used in the compoundingprocess are generally purchased at locations close to CPChem compoundingfacilities.

 

*Marketing*.  CPChem has a global sales network that includes directrepresentatives, distributors and agents to market PPS products.  CPChem’s compounding facilities are locatednear its customers, enhancing global sales and distribution efforts.  The customer base includes componentsuppliers and appliance manufacturers. Products are generally sold under one-year, renewable agreements.  Distribution channels used to deliverproduct to customers include truck, railcar and ocean vessels.

 

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**Properties and ManufacturingFacilities**

 

CPChem currently leases the office space for itsheadquarters in The Woodlands, Texas and also owns or leases administrative,technical and sales office space in various other locations.  CPChem has 32 manufacturing facilities in eightcountries.  The following table providesinformation regarding principal manufacturing facilities, business segmentsserved, principal products and approximate gross annual capacity. 

 
| **Facility /  Location**                      |   | **Segments Served**        |   | **Product**                                     |   | **Approximate****Gross Capacity** |      |
|-----------------------------------------------|--------|----------------------------|--------|-------------------------------------------------|--------|-----------------------------------|-----------|
|                                          |   |                       |   |                                            |   | **(million lbs. per year)**       |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Houston Chemical Complex                      |   | Aromatics &  Styrenics |   | K-Resin® SBC                               |   | 270                               |      |
| Pasadena, Texas                               |   | Olefins &  Polyolefins |   | High-density  polyethylene                      |   | 2,100                             |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Sweeny Facility                               |   | Olefins &  Polyolefins |   | Ethylene                                        |   | 4,100                             |      |
| Old Ocean, Texas                              |   | Olefins & Polyolefins  |   | Propylene                                       |   | 1,100                             |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Borger Facility                               |   | Specialty  Products        |   | Organosulfur  chemicals                         |   | 160                               |      |
| Borger, Texas                                 |   | Specialty  Products        |   | RytonTM  PPS polymer                            |   | 22                                |      |
|                                          |   | Specialty  Products        |   | Performance and reference fuels                 |   | 80                                |      |
|                                          |   | Specialty  Products        |   | High-purity hydrocarbons and solvents           |   | 125                               |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Cedar Bayou  Facility                         |   | Olefins &  Polyolefins |   | Ethylene                                        |   | 1,750                             |      |
| Baytown, Texas                                |   | Olefins &  Polyolefins |   | Propylene                                       |   | 1,000                             |      |
|                                          |   | Olefins &  Polyolefins |   | Acetylene Black                                 |   | 18                                |      |
|                                          |   | Olefins &  Polyolefins |   | NAO                                             |   | 1,250                             |      |
|                                          |   | Olefins &  Polyolefins |   | Polyalpha  olefins                              |   | 104                               |      |
|                                          |   | Olefins &  Polyolefins |   | Linear-low, low- and high- density polyethylene |   | 1,530                             |  (1) |
|                                          |   |                       |   |                                            |   |                              |      |
| Orange Chemical  Facility                     |   | Olefins &  Polyolefins |   | High-density  polyethylene                      |   | 900                               |      |
| Orange, Texas                                 |   |                       |   |                                            |   |                              |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Port Arthur  Facility                         |   | Olefins &  Polyolefins |   | Ethylene                                        |   | 1,750                             |      |
| Port Arthur, Texas                            |   | Olefins &  Polyolefins |   | Propylene                                       |   | 780                               |      |
|                                          |   | Aromatics &  Styrenics |   | Benzene                                         |   | 530                               |      |
|                                          |   | Aromatics &  Styrenics |   | Cyclohexane                                     |   | 330                               |      |
|                                          |   | Aromatics &  Styrenics |   | Cumene                                          |   | 1,100                             |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Drilling Specialties  Conroe, Texas           |   | Specialty  Products        |   | Drilling  specialty chemicals                   |   | 21                                |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Houston Compounding Facility  La Porte, Texas |   | Specialty  Products        |   | RytonTM  compounds                              |   | —                            |  (2) |
|                                          |   |                       |   |                                            |   |                              |      |
| St. James Facility   St. James, Louisiana     |   | Aromatics &  Styrenics |   | Styrene                                         |   | 2,100                             |      |
|                                          |   |                       |   |                                            |   |                              |      |
| Pascagoula  Facility                          |   | Aromatics &  Styrenics |   | Paraxylene                                      |   | 1,000                             |      |
| Pascagoula, Mississippi                       |   | Aromatics &  Styrenics |   | Benzene                                         |   | 1,540                             |      |

 

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| **Facility /  Location**                                                        |   | **Segments Served**        |   | **Product**                                  |   | **Approximate****Gross Capacity** |      |
|---------------------------------------------------------------------------------|--------|----------------------------|--------|----------------------------------------------|--------|-----------------------------------|-----------|
|                                                                            |   |                       |   |                                         |   | **(million lbs. per year)**       |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Marietta  Facility  Marietta, Ohio                                              |   | Aromatics &  Styrenics |   | Polystyrene                                  |   | 770                               |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Puerto Rico Facility  Guayama, Puerto Rico                                      |   | Aromatics &  Styrenics |   | Paraxylene                                   |   | —                            |  (3) |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Performance Pipe  Division  10 locations in the United States and one in Mexico |   | Olefins &  Polyolefins |   | Polyethylene pipe, conduit and pipe fittings |   | 544                               |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Plastics Compounds &

Development Center  Singapore                         |   | Specialty Products         |   | RytonTM  compounds                           |   | 9                                 |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Zhangjiagang, China FacilityZhangjiagang, China                                 |   | Aromatics &  Styrenics |   | Polystyrene                                  |   | 220                               |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Tessenderlo Chemicals Facility   Tessenderlo, Belgium                           |   | Specialty  Products        |   | Organosulfur  chemicals                      |   | 66                                |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Kallo Compounding FacilityKallo-Beveren, Belgium                                |   | Specialty  Products        |   | RytonTM  compounds                           |   | 20                                |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| **Joint  Venture Facilities:**                                                  |   |                       |   |                                         |   |                              |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Qatar Chemical  Company                                                         |   | Olefins &  Polyolefins |   | Ethylene                                     |   | —                            |  (2) |
| Ltd. (Q-Chem)                                                                   |   | Olefins &  Polyolefins |   | High-density  polyethylene                   |   | —                            |  (2) |
| Mesaieed, Qatar                                                                 |   | Olefins &  Polyolefins |   | NAO                                          |   | —                            |  (2) |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Chevron Phillips Singapore 

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

Petrochemicals Co.  Shanghai, China                  |   | Olefins &  Polyolefins |   | High-density  polyethylene                   |   | 300                               |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Phillips Sumika Polypropylene 

Company   Pasadena, Texas                       |   | Olefins &  Polyolefins |   | Polypropylene                                |   | 810                               |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| Saudi Chevron                                                                   |   | Aromatics &  Styrenics |   | Benzene                                      |   | 1,180                             |      |
| Phillips Company                                                                |   | Aromatics &  Styrenics |   | Cyclohexane                                  |   | 490                               | (4)       |
| Al Jubail, Saudi Arabia                                                         |   |                       |   |                                         |   |                              |      |
|                                                                            |   |                       |   |                                         |   |                              |      |
| K R Copolymer Co., Ltd.  Yochon, South Korea                                    |   | Aromatics &  Styrenics |   | K-Resin® SBC                            |   | 115                               |      |

 

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(1)          Excludesadditional capacity of a plant at the facility which is currently undergoingcommissioning.

(2)          Currentlyundergoing commissioning.

(3)          Plantcurrently idled.

(4)          Excludesadditional capacity that became operational in the first quarter of 2003.

 

13

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**Projects**

 

*Q-ChemII. *In June 2001,CPChem and Qatar Petroleum announced plans for the development of a secondworld-scale petrochemical project in Qatar (Q-Chem II) to produce polyethyleneand NAO on a site adjacent to the facility currently under construction inQatar.  In June 2002, CPChem and Qatar Petroleum announcedthat the project would include theconstruction of a larger ethane cracker than was previously planned.  Inconnection with this change in the project scope, CPChem and Qatar Petroleum entered into a joint ventureagreement in June 2002 with Atofina and Qatar PetrochemicalCompany to jointly develop theethane cracker.  Finalapproval of the Q-Chem II project is anticipated in mid-2004, with start-upexpected in 2007.  Preliminary financingplans for the project include limited recourse loans from commercial banks andexport credit agencies.

 

*JubailChevron Phillips Project.* CPChem announced plans in 2002 for a 50%-owned joint venture project atAl Jubail, Saudi Arabia (the “Jubail Chevron Phillips project”).  The project, expected to cost approximately$1 billion, includes the construction of styrene and propylene facilities on asite adjacent to the existing aromatics complex owned by Saudi Chevron PhillipsCompany, a 50%-owned CPChem joint venture. The project also includes the expansion of Saudi Chevron PhillipsCompany’s benzene facility.  Thisadditional benzene capacity will be used to provide feedstock for the newJubail Chevron Phillips styrene facility. Final approval of the project is anticipated in the fourth quarter of2003, with operational start-up expected in 2006.  It is expected that the project will be financed primarilythrough limited recourse loans from Saudi Arabian government agencies and SaudiArabian commercial banks.

 

**Employees**

 

CPChem and its wholly-owned subsidiaries employed 5,517 people atDecember 31, 2002.  Approximately 90% ofthe workforce was employed in North America, 5% in Asia, 4% in Europe and 1% inthe Middle East.  Some employees aresubject to collective bargaining arrangements. Overall, CPChem believes that employee relations are good.

 

**Intellectual Property**

 

CPChem’s business is, to a considerable extent,technology driven.  CPChem aggressivelydevelops and protects the intellectual property necessary to conduct itsoperations via a combination of patent, trademark, copyright and trade secretlaws, as well as confidentiality procedures and contractual provisions toprotect its intellectual property rights. Where CPChem does not possess a necessary technology, it obtains orlicenses it from third parties.

 

As of January 31, 2003, CPChem owned or licensed fromits parents the rights to 866 issued patents and 198 applications in the UnitedStates, and 2,067 issued patents and 1,274 applications in foreignjurisdictions relating to CPChem’s operations and products.  CPChem’s parents granted CPChem anirrevocable, exclusive license, with the right to grant sublicenses, to use thepatents that they own in connection with CPChem’s operations and products.  CPChem has the option to have these patentsassigned to it.  ChevronTexaco andConocoPhillips retain certain irrevocable, nonexclusive rights to use thepatents, which they have assigned or licensed to CPChem, for their own businessoperations or to license such patents to third parties for use in fields of operations not primarily relatedto the business of CPChem.  Furthermore,ChevronTexaco and ConocoPhillips have granted CPChem nonexclusive rightsto use certain other intellectual property that they own, which is, to somedegree, useful in CPChem’s business.

 

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CPChem often grants licenses to its technology tothird parties.  Two significantprocesses that it licenses include CPChem’s loop slurry polyethylene and Aromax®aromatics production processes. Licenses granted for these processes typically provide for royaltypayments from third parties based on the actual or anticipated volume ofproduct that they may produce, payable either as a lump sum or as a “runningroyalty.”  The licenses for theseprocesses generally provide that any technologies developed by the licenseerelated to such process shall be licensed to CPChem with the right tosublicense such developments to third parties. This technique, common in technology licensing, enhances CPChem’sability to provide customers and licensees with the most current technologyavailable.

 

CPChem relies on confidentiality agreements andcontractual provisions to protect its technology in cases where the technologyis not patented or patentable.  CPChem’slicenses to third parties contain restrictions on disclosure.  Employees execute nondisclosure agreementswhen their employment begins and agree to assign to CPChem the rights tointellectual property developed during their employment.  Third parties are not allowed to inspect orphotograph facilities except under close supervision.  Contractors involved in the detailed design or construction ofCPChem’s or its licensees’ facilities are also required to executenondisclosure agreements.  Appropriateactions are taken to prevent third parties from disclosing proprietary data, orotherwise using intellectual property, without proper authorization.

 

CPChem is the owner of the Marlex®, RytonTM,and K-Resin® trademarks, which are each used in the plastics andspecialty chemicals businesses, and the Aromax® trademark, which isused in the aromatics business.  Also,CPChem licenses its trade name on a nonexclusive basis from its parents.  Appropriate actions are taken to maintain,renew, protect and enforce CPChem’s trademarks in order to prevent infringement, dilution or misappropriation by thirdparties in the United States and abroad.

 

**Research and Development**

 

CPChem has scientists, process engineers and technicalservice experts at six****technicalcenters.  The Bartlesville, Oklahomasite provides basic research, pilot plants and product development forpolyethylene, specialty chemicals, Ryton and K-Resin, and a plastics technicalcenter for all polymer products.  TheKingwood, Texas technology center focuses on process engineering in support ofall manufacturing as well as all phases of research and process development foraromatics, NAO, polyalpha olefins, oxygen scavenging polymers and specialtycatalysts.  The technology center atOrange, Texas provides gas phase pilot plant support, a plastics technicalcenter and technical services for polyethylene.  Polystyrene research and technical services are located atMarietta, Ohio.  International technicalsupport and product development are provided by the Belgium and Singaporetechnical centers.

 

Research and development expenditures totaled $47million for the year ended December 31, 2002, $60 million for the year endedDecember 31, 2001 and $23 million for the six-month period ended December 31,2000.

 

**Environmental Regulation**

 

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

 

15

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CPChem incurs, and expects to continue to incur,significant costs for capital improvements and general compliance underapplicable environmental laws, including costs to acquire, maintain and repairpollution control equipment.  By 2007,industrial facilities in the Texas Gulf Coast region, including facilitiesCPChem owns, will require modification and the installation of additionalcontrol equipment to comply with regulations relating to nitrogen oxide (NOx)emissions, which apply generally to industries in this region.  This equipment, which will need to beinstalled well in advance of the 2007 deadline, is expected to require capitalexpenditures of approximately $100 million. CPChem also anticipates that new regulations will be issued concerningreleases of highly-reactive volatile organic compounds (HRVOC’s), but cannot atthis time assess capital expenditure or operating cost impacts.

 

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.  Accrued costs forenvironmental liabilities, undiscounted, totaled $7 million at both December31, 2002 and December 31, 2001.  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, 2002 or 2001.  Based on available information, CPChembelieves that the costs that may be incurred to investigate and remediate knowncontamination will not have a material adverse effect on consolidated resultsof operations, financial position or liquidity.

 

**International Operations**

 

International operationsare exposed to political, economic and regulatory risks not faced by businessesthat operate solely in the United States.  A portion of CPChem’s operations are outside the continentalUnited States, with manufacturing facilities in existence or under constructionin Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico andBelgium.  Assets located outside of theU.S. as of December 31, 2002 totaled $893 million and net sales from non-U.S.operations were $711 million in 2002. These international operations are subject to risks similar to thoseaffecting CPChem’s U.S. operations in addition to a number of other risks,including difficulties in enforcing contractual and intellectual propertyrights, and impositions or increases of withholding and other taxes onremittances and other payments by subsidiaries and affiliates.  Other risks include, but are not limited to,exposure to different legal standards, fluctuations in currency exchange rates,impositions or increases of investment and other restrictions by foreigngovernments, the requirements of a wide variety of foreign laws, political andeconomic instability, and difficulties in staffing and managing operations,particularly in remote locations.  Inaddition, the escalation of political tensions in the Middle East and NorthKorea, including the possible onset of military actions by the United Statesand others, could have a material adverse effect on CPChem’s business.

 

**Item 3****.  Legal Proceedings**

 

**K-Resin®Facility Incidents**

 

As previously reported, aflash fire occurred in a reactor vessel on June 23, 1999 at the K-Resinfacility located at CPChem’s Houston Chemical Complex.  The final two lawsuits relating to thatincident have been settled.  While theincident occurred prior to the formation of CPChem, provisions in the contributionagreement under which CPChem was formed (the “Contribution Agreement”) providefor CPChem’s indemnification of ConocoPhillips for all liabilities associatedwith this incident.  The aggregateamounts of these two settlements did not have a material adverse effect onCPChem’s consolidated results of operations, financial position or liquidity.

 

16

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An additional K-Resin related lawsuit was filedagainst CPChem in 2002.  However, the plaintiff’s claim in that case relatesto an incident that occurred at the K-Resin facility on March 27, 2000.  Unlike the liabilities for the June 23, 1999incident, CPChem did not assume any responsibility for liability in connectionwith the March 27, 2000 incident, and the Contribution Agreement specifically providesfor ConocoPhillips’ indemnification of CPChem for all liabilities associatedwith the March 27, 2000 incident.  ConocoPhillipshas therefore undertaken defense of that case.

 

**GovernmentalAgency Proceedings**

 

The following aredescriptions of legal proceedings involving governmental authorities underfederal, state and local laws regulating the discharge of materials into theenvironment.  While it is not possibleto predict the outcome of an unresolved proceeding, if the proceedingsdescribed below were decided adversely to CPChem, there would be no materialadverse effect on CPChem’s consolidated results of operations, financialposition or liquidity.  Nevertheless,such proceedings are reported pursuant to the U.S. Securities and ExchangeCommission’s regulations.

 

The Environmental ProtectionAgency and the Texas Commission on Environmental Quality jointly proposed acivil penalty in connection with inspections conducted in 1999 and 2000 atCPChem’s Borger facility.  CPChem hasreached an agreement in principle with these agencies and is currentlynegotiating the final terms of the settlement.

 

CPChem’s Puerto Ricofacility received a complaint and penalty assessment from the EnvironmentalProtection Agency (EPA) in September 2002 alleging violations of the facility’sNational Pollutant Discharge Elimination System permit as a result of a June2002 inspection.  CPChem has reached anagreement in principle with the EPA and is currently negotiating the finalterms of the settlement.

 

**Other**

 

In addition, CPChem is aparty to a number of other legal proceedings pending in various courts oragencies for which, in some instances, no provision has been made.  While the final outcome of these proceedingscannot be predicted with certainty, CPChem believes that none of the otherproceedings, when resolved, will have a material adverse effect on consolidatedresults of operations, financial position or liquidity.

 

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

 

None.

 

# **PART II**

 

**Item 5****.  Market For Registrant’s Common Equity andRelated Stockholder Matters**

 

There is no established public trading market for the ownershipinterests of CPChem.  See “Item 12.Security Ownership of Certain Beneficial Owners and Management” for a listingof the holders of ownership interests of CPChem.

 

17

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**Item 6****.  Selected Financial Data**

 

The following selected financial data was derivedfrom the audited financial statements included in this Annual Report on Form10-K and should be read in conjunction with “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations” and “Item 8.Financial Statements and Supplementary Data.”

 

***Chevron Phillips Chemical Company LLC***

 
|              |   | **Years ended December 31,** |   | **July 1, 2000**

**(inception) through** |   |
|-------------------|--------|------------------------------|--------|-------------------------------------------|--------|
| **Millions**      |   | **2002**                     |   | **2001**                                  |   | **December 31, 2000** |   |
| Net sales         |   | $                            | 5,389  |                                      | $      | 5,871 |   | $ | 3,402 |   |
| Net income (loss) |   | (30                          | )      | (480                                      | )      | (241 | ) |
|                   |        |                              |        |                                           |        |  |  |  |  |  |

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

 

Thefollowing financial information of Phillips Petroleum Company’s ChemicalsBusiness and Chevron Chemical Company C Chem Business (the businessescontributed to form Chevron Phillips Chemical Company LLC) is presented forinformational purposes only.  Theresults of these contributed businesses presented, when combined, are notintended to and do not represent pro forma results of Chevron Phillips ChemicalCompany LLC, nor do the results necessarily reflect results that would havebeen achieved had the contributed businesses been combined for the periodspresented.

 

***Phillips Petroleum Company’sChemicals Business***

 
|                                    |   | **Six months ended****June 30, 2000** |        | **Years ended December 31,** |     |
|-----------------------------------------|--------|---------------------------------------|-------------|------------------------------|----------|
| **Millions**                            |   |                                  | **1999**    |                         | **1998** |   |
| Net sales                               |   | $                                     | 2,238       |                         | $        | 3,117 |   | $ | 2,800 |   |
| Net income                              |   | 84                                    |        | 147                          |     | 147 |   |
|                                    |   |                                  |        |                         |     |   |   |
|                                    |   | **December 31,**                      |        |
|                                    |   | **1999**                              |        | **1998**                     |     |
| Total assets                            |   | $                                     |  3,214 |                         | $        |  3,021 |   |
| Long-term debt, less current maturities |   | —                                |        | —                       |     |
|                                         |        |                                       |             |                              |          |  |  |  |  |  |

 

***Chevron Chemical Company C ChemBusiness***

 
|                                    |   | **Six months ended****June 30, 2000** |     | **Years ended December 31,** |     |
|-----------------------------------------|--------|---------------------------------------|----------|------------------------------|----------|
| **Millions**                            |   | ** **                            | **1999** | ** **                   | **1998** | ** ** |
| Net sales                               |   | $                                     | 1,834    |                         | $        | 2,695 |   | $ | 2,289 |   |
| Net income                              |   | 96                                    |     | 177                          |     | 22 |   |
|                                    |   |                                  |     |                         |     |   |   |
|                                    |   | **December 31,**                      |     |
|                                    |   | **1999**                              |     | **1998**                     |     |
| Total assets                            |   | $                                     | 3,072    |                         | $        | 2,684 |   |
| Long-term debt,less current  maturities |   | —                                |     | —                       |     |
|                                         |        |                                       |          |                              |          |  |  |  |  |  |  |  |  |  |  |

 

18

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

 

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

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontains “forward-looking statements” within the meaning of the federalsecurities laws.  Such statements cangenerally be identified with words and phrases such as “believes,” “expects,”“anticipates,” “should,” “estimates,” “foresees” or other words and phrases ofsimilar meaning.  Where CPChem expressesan expectation or belief as to future results, there can be no assurance thatthe expectation or belief will result, be achieved or be accomplished.  Where any such forward-looking statementincludes a statement of the assumptions or bases underlying suchforward-looking statement, CPChem believes such assumptions or bases to bereasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and thedifferences between assumed facts or bases and actual results can be material,depending on the circumstances.  Themore significant factors that, if erroneous, could cause actual results todiffer materially from those expressed include, among others: the timing andduration of periods of expansion and contraction within the chemicals business,plans for the construction, modernization, start-up or de-bottlenecking ofdomestic and foreign chemical plants, prices of feedstocks and products, forcemajeure events, accidents, labor relations, political risks, changes in foreignand domestic laws, rules and regulations and the interpretation and enforcementthereof, regulatory decisions relating to taxes, the environment and humanresources, the U.S. economy, results of financing efforts and overall financialmarket conditions.  All forward-lookingstatements in this annual report are qualified in their entirety by thecautionary statements contained in this section.  CPChem does not undertake to update, revise or correct any of theforward-looking information.

 

**Overview**

 

CPChem was formed July 1,2000.  As such, the following discussionfocuses on CPChem’s results of operations for the years ended December 31, 2002and 2001, and for the period July 1, 2000 (inception) through December 31,2000.  To comply with the Securities andExchange Commission rules and regulations, similar discussions are presentedfor Phillips Petroleum Company’s Chemicals Business and Chevron ChemicalCompany C Chem Business (the businesses contributed to form CPChem) for theperiod January 1, 2000 through June 30, 2000. The results of those contributed businesses presented, when combined,are not intended to and do not representpro forma results of CPChem, nor do the results necessarily reflect resultsthat would have been achieved had the contributed businesses beencombined for the period presented.

 

# ***Critical Accounting Policies***

 

TheSecurities and Exchange Commission issued guidance in December 2001 suggestingcompanies provide additional disclosure and commentary on those accountingpolicies considered most critical.  Anaccounting policy is deemed to be “critical” if it is important to a company’sresults of operations and financial condition, and requires significantjudgment and estimates on the part of management in its application.  The preparation of financial statements andrelated disclosures in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions thataffect amounts reported in financial statements and related disclosures.  Actual results could differ from theseestimates and assumptions.

 

CPChem believes that the estimates and assumptions usedin connection with the amounts reported in its financial statements and relateddisclosures are reasonable and made in good faith.  CPChem further believes the following represents its mostcritical accounting policies.  For asummary of all of CPChem’s significant accounting policies, see Part II - Item8. Financial Statements and Supplementary Data – Note 2.

 

19

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*Impairment of Assets –*****Long-lived assets used inoperations are assessed for possible impairment when events or changes incircumstances indicate a potential significant deterioration in future cashflows projected to be generated by an asset group.  Individual assets are grouped for impairment purposes at thelowest level for which there are identifiable cash flows that are largelyindependent of the cash flows of other groups of assets – generally at aproduct line level.  If, upon review,the sum of the projected undiscounted pre-tax cash flows is less than thecarrying value of the asset group, the carrying value is written down toestimated fair value.  The fair valuesof impaired assets are determined based on quoted market prices in activemarkets, if available, or on the present value of projected future cash flowsusing discount rates commensurate with the risks involved in the assetgroup.  Considerable amounts of judgmentby management are required, involving significant variables such as futureproduct demand and future product, feedstock and energy prices, in order toestimate projected future cash flows. Should the outlook for future projected cash flows change, materialcharges for impairments could occur.

 

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

 

*ProjectedBenefit Obligations –* Determination of CPChem’s projectedbenefit obligations for its pension plans affects the amounts of relatedexpense recorded in the current period and also impacts the level and timing ofrequired company contributions into the plans. An actuarial determination of projected benefit obligations and companycontribution requirements involves estimates regarding future unknown events,such as rates of return on pension plan assets, estimated employee retirementdates, salary levels at retirement and mortality rates.  Ultimately, CPChem will be required to fundall benefits promised under its pension plans, however, the judgmental assumptionsused in the actuarial calculations significantly affect periodic financialstatements and funding patterns over time.

 

*Contingencies –*****As facts concerningcontingencies become known, CPChem reassesses its position both with respect toaccrued liabilities and other potential exposures.  Estimates that are particularly sensitive to future changeinclude legal matters and contingent liabilities for environmentalremediation.  Estimated futureenvironmental remediation costs are subject to change due to such factors asthe unknown magnitude of cleanup costs, prospective changes in laws andregulations, the unknown timing and extent of remedial actions that may berequired and the determination of CPChem’s liability in proportion to otherresponsible parties.  Estimated futurecosts related to legal matters are subject to change as events occur and asadditional information becomes available during the administrative andlitigation process.

 

CPChem is a party to anumber of legal proceedings pending in various courts or agencies for which, insome instances, no provision has been made. While the final outcome of these proceedings cannot be predicted withcertainty, CPChem believes that none of these proceedings, when resolved, willhave a material adverse effect on consolidated results of operations, financialposition or liquidity.

 

20

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***CPChem Results of Operations***

 
| **Consolidated**                         |   | **Years ended****December  31,** |       | **July 1, 2000  (inception) through** |       |
|------------------------------------------|--------|----------------------------------|------------|---------------------------------------|------------|
| **Millions**                             |   | **2002**                         | ** ** | **2001**                              | ** ** | **December 31, 2000** | ** ** |
| Income (loss) before interest  and taxes |   | $                                | 35         |                                  | $          | (336 | ) | $ | (158 | ) |
|                                          |        |                                  |            |                                       |            |  |  |  |  |  |

 

Effective January 1, 2002, CPChem restructured thecomposition of its operating segments. Prior year information has been restated to conform to the current segmentreporting presentation.  Statements in the following discussions for theperiod July 1, 2000 (inception) through December 31, 2000 regardingincreases or decreases in production, margins or similar matters are inrelation to levels of such items as they existed at the inception of CPChem onJuly 1, 2000.

 

***Income (loss) before interest and taxes by segment***

 
| **Millions**                                       |   | **Olefins &  Polyolefins** |   | **Aromatics &  Styrenics** |   | **Specialty  Products** |   | **Corporate  & Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|--------------------------------|--------|--------------------------------|--------|-------------------------|--------|----------------------------|--------|------------------|--------|
| Year ended December 31, 2002                       |   | $                              | 33     |                           | $      | (13                     | )      | $                          | 40     |             | $      | (25 | ) | $ | 35 |   |
| Year  ended December 31, 2001                      |   | (166                           | )      | (172                           | )      | 31                      |   | (29                        | )      | (336             | )      |
| July 1, 2000 (inception) through December 31, 2000 |   | 42                             |   | (173                           | )      | 12                      |   | (39                        | )      | (158             | )      |
|                                                    |        |                                |        |                                |        |                         |        |                            |        |                  |        |  |  |  |  |  |

 

Consolidated income(loss) before interest and taxes for the year ended December 31, 2002 improved$371 million compared with the year ended December 31, 2001.  The improvement was primarily the result ofhigher overall margins due to lower operating expenses, feedstock costs andenergy prices, partially offset by decreased sales prices.

 

Earnings before interestand taxes in 2002 includedcertain charges related to asset retirements, the write-off of certaintechnology projects, an asset impairment, a pension plan curtailment andbenefits related to business interruption and property casualty insurance claimsettlements.  These and othersimilar types of net charges totaled $30 million in the aggregate.

 

Includedin 2001 results were $153 million of charges affecting income before interestand taxes related to the permanent idling of certain assets, asset impairmentsand retirements, costs associated with the collapse of a styrene column,CPChem’s share of an asset impairment recorded by an equity affiliate, andbenefits recorded in connection with the settlement of business interruptioninsurance claims.

 

Earningsbefore interest and taxes for the six-month period ended December 31, 2000included net charges totaling $171 million associated with asset impairments,primarily related to CPChem’s Puerto Rico facility, workforce reductions, theretirement of a normal alpha olefins (NAO) unit, and contingency andenvironmental accruals.

 

21

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***Olefins & Polyolefins***

 
|                                     |   | **Years ended  December 31,** |   | **July 1, 2000  (inception) through** |   |
|------------------------------------------|--------|-------------------------------|--------|---------------------------------------|--------|
| **Millions**                             |   | **2002**                      |   | **2001**                              |   | **December 31, 2000** |   |
| Income (loss) before interest  and taxes |   | $                             | 33     |                                  | $      | (166 | ) | $ | 42 |   |
|                                          |        |                               |        |                                       |        |  |  |  |  |  |

 

*2002compared with 2001*

 

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

 

Polyethylene marginsincreased in 2002 due to lower ethylene prices and lower energy costs,partially offset by lower sales prices. NGL margins benefited from lower product and energy costs, partiallyoffset by lower sales prices.  Ethyleneearnings were down in 2002 primarily due to lower margins and volumes.  The margin impact was the result ofsubstantially lower sales prices in 2002, partially offset by lower feedstockand energy prices.

 

Results in 2002 also included a $7 million charge for thewrite-off of two technology projects, a $4 million charge for the remainder ofthe accelerated depreciation associated with the retirement in February 2002 oftwo polyethylene particle loop reactors at the Orange, Texas facility and abenefit related to the reversal of certain customer claim accruals.  Results in 2002 also included a $5 millionimpairment charge related to CPChem’s Colton, California polyethylene pipefacility.  The facility was written downto its estimated net realizable value and is classified as an asset held forsale at December 31, 2002.  These andother similar types of net charges totaled $12 million in the aggregate in2002.

 

Included in 2001 resultswere $68 million of charges to depreciation expense (included as a component ofCost of Goods Sold) related to the permanent idling of the front end of anethylene unit at the Sweeny facility, $14 million of charges related toaccelerated depreciation associated with the planned permanent shutdown inFebruary 2002 of two particle loop reactors at the Orange facility, $6 millionof charges for the retirement of the polyethylene developmental reactor unit atthe Houston Chemical Complex and charges for certain customer claim accruals.  Also included was a $46 million charge toEquity in Net Loss of Affiliates representing CPChem’s share of an impairmentcharge recorded by Phillips Sumika Polypropylene Company (Phillips Sumika), anequity affiliate, adjusted for the difference between CPChem’s carrying valueof its investment in Phillips Sumika and CPChem’s equity in its netassets.  These and other similar typesof net charges totaled $162 million in the aggregate in 2001.

 

*SixMonths Ended December 31, 2000*

 

Ethylene and polyethylene margins deteriorated, assales prices fell on decreased demand and increased operating capacity in theindustry.  Product costs increased dueto higher feedstock, fuel and utility costs. Ethylene production was adversely impacted during August and September2000 by an unexpected production interruption at CPChem’s Port Arthur facilitythat resulted from a loss of steam provided by a third-party supplier.  Ethylene production was also impacted inDecember 2000 as a result of a decision to shut down two units at the Sweeny facilityfor inventory control purposes. Polyethylene production was reduced in December 2000 to controlinventory levels and minimize the purchase of high-cost feedstocks.

 

22

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Production of NAO increased during the six-monthperiod, due primarily to the August 2000 start-up of a new750-million-pound-per-year NAO plant at the Cedar Bayou facility.  As a result of the new plant start-up, anolder 250-million-pound-per-year plant was retired in November 2000.  Included in the 2000 period results was a$14 million charge associated with the retirement of the older NAO plant.

 

***Aromatics & Styrenics***

 
|                                     |   | **Years ended  December 31,** |       | **July 1, 2000  (inception) through** |       |
|------------------------------------------|--------|-------------------------------|------------|---------------------------------------|------------|
| **Millions**                             |   | **2002**                      | ** ** | **2001**                              | ** ** | **December 31, 2000** | ** ** |
| Income (loss) before interest  and taxes |   | $                             | (13        | )                                     | $          | (172 | ) | $ | (173 | ) |
|                                          |        |                               |            |                                       |            |  |  |  |  |  |

 

*2002compared with 2001*

 

Results for Aromatics& Styrenics improved $159 million in 2002 compared with 2001, as higherearnings from benzene and styrene were partially offset by lower earnings fromparaxylene operations.  Earnings frombenzene improved primarily as a result of significantly higher sales prices andvolumes, and lower operating costs in 2002. Earnings from benzene also benefited from significantly improved resultsfrom Saudi Chevron Phillips Company, an equity affiliate.  Styrene earnings improved due to higherproduction and sales volumes, and improved gross margins, as production at theSt. James facility was restored in October 2001 following the column collapsein February 2001.  Completion of amodernization project at the St. James plant in 2002 also contributed to higherstyrene production.  A high level ofindustry-wide plant outages experienced in the styrene market also benefitedsales volume and price levels. Paraxylene results declined due to lower feedstock margins, primarilyattributable to lower selling prices. Cumene results declined as a result of higher product costs, partiallyoffset by higher selling prices.  Theforce majeure status of CPChem’s K-Resin® styrene-butadienecopolymer (SBC) plant at the Houston Chemical Complex was lifted on May 1, 2002following a successful phased-in start-up.

 

Results in 2002 includedthe reversal of a $25 million lower-of-cost-or-market inventory reserveestablished in the fourth quarter of 2001. A similar reserve was not established at December 31, 2002 due toimproved market conditions and prices. Results also benefited in 2002 from lower depreciation and operatingexpenses due to the impairment and subsequent retirement of benzene andcyclohexane assets at the Puerto Rico facility in December 2001.  The shutdown of the motor fuels reformer atthe Puerto Rico facility in March 2001 also contributed to improved results in2002.

 

Results in 2002 also included a $12 million charge relatedto the retirement of obsolete equipment at CPChem’s Pascagoula, Mississippifacility and a $6 million pension plan curtailment charge related to enhancedbenefits granted to terminated employees at CPChem’s Puerto Rico facility.  Also included were $9 million of benefitsrelated to business interruption and property casualty insurance claimsettlements recorded in the fourth quarter and a $5 million charge for theretirement of equipment rendered obsolete as a result of the modernizationproject at the St. James, Louisiana styrene plant.  In addition, results included $4 million ofaccelerated depreciation related to the planned closure of the UDEX unit atCPChem’s Port Arthur facility. Approximately $8 million of accelerated depreciation related to the unitwill be recorded in 2003.  Theseand other similar types of net charges totaled $18 million in the aggregate in2002.

 

Included in 2001 resultswas a $110 million benefit, recorded as Other Income, in connection with thesettlement of a business interruption insurance claim associated with a March2000 incident at the Houston Chemical Complex K-Resin facility.  Production of K-Resin SBC was idled in March2000 as the result of an accident and fire at the plant.  The plant began a

 

23

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successful phased-instart-up in the fourth quarter of 2001 and the force majeure status of theplant was lifted in May 2002.  Resultsin 2001 also included costs associated with a column collapse at the St. Jamesfacility in February 2001 and a $42 million asset impairment charge related tothe Puerto Rico facility.  Theimpairment charge was necessitated by the outlook for future margin conditionsat that time.  The present value ofprojected future cash flows was used to determine fair value.  In addition, a $17 million charge todepreciation expense, included as a component of Cost of Goods Sold, wasrecorded in December 2001 to permanently retire the benzene and cyclohexaneplant assets in Puerto Rico based on the decision to discontinue suchproduction in Puerto Rico.  As a result,the workforce was reduced to a level necessary to support only the paraxyleneoperations at the Puerto Rico facility once operations resume.  Paraxylene operations at the Puerto Rico facilitywere idle during 2002 and are in the process of being reconfigured.  It is currently anticipated that theparaxylene operations will resume in the third quarter of 2003.  These and other similar types of chargesresulted in a net benefit of $15 million in the aggregate in 2001.

 

*SixMonths Ended December 31, 2000*

 

Pricesfor Aromatics & Styrenics products were depressed due to overcapacity inthe industry.  Additionally, feedstockand utility costs rose due to energy prices reaching historically high levels,resulting in lower margins.  Demand forthese derivatives decreased during the six-month period, which resulted in abuildup of inventory by customers.  Anew 220-million-pound-per-year polystyrene plant, located in China, cameonstream in August 2000, adding additional production volumes for the six-monthperiod.  During the six-month period,the K-Resin facility remained shut down as facility repairs continued followingthe March 2000 incident.

 

Earnings before interest andtaxes for the six-month period ended December 31, 2000 included  $135 million of impairment charges relatedto CPChem’s Puerto Rico facility.  Theimpairment charge was necessitated by the outlook for future margin conditionsat that time and a shift in the strategic direction for the facility.  The present value of projected future cashflows was used to determine fair value.

 

***Specialty Products***

 
|                             |   | **Years ended  December 31,** |   | **July 1, 2000  (inception) through** |   |
|----------------------------------|--------|-------------------------------|--------|---------------------------------------|--------|
| **Millions**                     |   | **2002**                      |   | **2001**                              |   | **December 31, 2000** |   |
| Income before interest and taxes |   | $                             | 40     |                                  | $      | 31 |   | $ | 12 |   |
|                                  |        |                               |        |                                       |        |  |  |  |  |  |

 

*2002compared with 2001*

 

Incomebefore interest and taxes for Specialty Products was $40 million in 2002compared with $31 million in the prior year. Higher earnings in 2002 from RytonTM polyphenylene sulfide polymers and compounds were due to increasedsales volumes and improved margins. Lower earnings from other specialty chemicals were attributable todecreased sales prices and volumes, partially offset by lower feedstock costs.  Resultsin 2001 included a $3 million benefit related to the settlement of a businessinterruption insurance claim associated with the March 2000 incident at theHouston Chemical Complex facility.

 

*SixMonths Ended December 31, 2000*

 

Production and sales volumes for Specialty Productsincreased during the six-month period, while sales prices remained steady.  Margins deteriorated towards the end of theperiod due to higher feedstock and energy costs.

 

24

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***Corporate and Other***

 
|                                     |   | **Years ended  December 31,** |       | **July 1, 2000  (inception) through** |       |
|------------------------------------------|--------|-------------------------------|------------|---------------------------------------|------------|
| **Millions**                             |   | **2002**                      | ** ** | **2001**                              | ** ** | **December 31, 2000** | ** ** |
| Income (loss) before interest  and taxes |   | $                             | (25        | )                                     | $          | (29 | ) | $ | (39 | ) |
|                                          |        |                               |            |                                       |            |  |  |  |  |  |

 

Income before interestand taxes included $9 million of net charges in 2001 and $12 million of netcharges in 2000 primarily associatedwith workforce reductions.

 

*Interestexpense.*  Interestexpense totaled $66 million in 2002 and $104 million in 2001.  The decrease primarily resulted from loweraverage debt balances and lower average interest rates, primarily on thecommercial paper and trade receivables securitization programs.  Interest rates under the commercial paperprogram averaged 2.20% during 2002, 5.01% during 2001 and 6.91% during thesix-month period ended December 31, 2000. Interest expense totaled $65million in the six-month period ended December 31, 2000.

 

*IncomeTaxes.*  Income taxexpense totaled $6 million in 2002, $49 million in 2001 and $28 million in thesix-month period ended December 31, 2000. CPChem is treated as a flow-through entity for federal income taxpurposes, whereby each member is taxable on its respective share of income andlosses.  However, CPChem is directlyliable for federal and state income taxes and franchise taxes on certain separatelegal entities and for any foreign taxes incurred.

 

In 2001, CPChem increasedits valuation allowance related to its Puerto Rican subsidiary’s deferred taxassets by $44 million.  The increase inthe valuation allowance, charged to income tax expense, was necessitated, inpart, by the ConocoPhillips merger with Tosco Corporation in September 2001,which triggered regulatory limitations on the future utilization of the PuertoRican subsidiary’s pre-merger net operating losses.  The valuation allowance was also increased as a result of a changein the outlook for future margin conditions at that time.

 

In the six months ended December 31, 2000, a valuationallowance of $45 million was recorded against the Puerto Rican subsidiary’sdeferred tax assets because it was viewed as unlikely at the time that thePuerto Rico facility would generate sufficient future taxable income to fullyutilize such tax benefit.

 

***Chevron Chemical Company C Chem Business Results ofOperations***

 

*Six months ended June 30, 2000*

 

Net income was $96 million for the first six monthsof 2000.  Product margins were strong asprices for olefins, polyethylene, styrene, polystyrene and benzene continuedtheir upward trend, reflecting higher worldwide demand and tighter industryinventories for olefins.  Margins forstyrene widened as prices rose on improved economic conditions in Asia andrestricted industry capacity due to planned and unplanned turnarounds.  NAO margins were depressed by both higherfeedstock costs and plant operational problems.  Operating expense was unfavorably impacted by higher fuelcosts.  Sales volumes of polystyrene andbenzene were higher than in 1999. Polyethylene sales rose on stronger demand, resulting in lower externalolefin sales as olefins are used as a feedstock for polyethyleneproduction.  Net income included anafter-tax LIFO inventory valuation gain of $6 million resulting from thereduction of certain inventory quantities which were valued at lower LIFOcosts.

 

Production in the first half of 2000 was slightly below 1999levels.  Styrene and NAO production werelower due to a planned turnaround at the St. James, Louisiana styrene facilityand Cedar Bayou NAO plant operational problems.  Benzene production remained high on a record run for an Aromax®I catalyst charge at Pascagoula.

 

25

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

 

*Six months ended June 30, 2000*

 

Netincome for the six-month period ended June 30, 2000 was $84 million.  Sales and other operating revenues were $2.2billion.  Average ethylene, propylene,polyethylene and paraxylene prices for the six-month period were all higherthan year-end 1999 prices.  Equity inearnings of affiliated companies was $33 million.  Equity earnings from Sweeny Olefins Limited Partnership, which is100% owned by CPChem since July 1, 2000, benefited from improved ethylene andpropylene margins.  Other revenues were$17 million for the six-month period, primarily representing net gains on assetsales and insurance-related activity.

 

Purchasedproducts were $1.6 billion in the first six months of 2000.  The business experienced higher averagefeedstock costs for natural gas liquids and ethylene during the period comparedwith year-end 1999 levels.  Controllablecosts, which are comprised of operating expenses and selling, general andadministrative expenses, were $457 million during the period.  The business experienced increased fuel andutility costs, as well as costs commensurate with higher production levels ofcertain products.  Depreciation andamortization costs were $57 million, while taxes other than income taxes were$20 million.  If annualized, both ofthese items would be slightly higher than corresponding amounts in the prioryear.

 

During the six-month period ended June 30, 2000, thebusiness experienced higher ethylene margins and production volumes, as well asincreased propylene, other chemicals, and plastic pipe margins andvolumes.  The second quarter of 2000 wasnegatively impacted by the expiration of the business’ composition of matterpatents on crystalline polypropylene in March, which led to lower licensingincome.  Earnings from the K-Resinbusiness were also lower during the period. In late March 2000, the K-Resin facility was damaged by an explosion andfire, and the facility was idled.

 

**CPChem Outlook**

 

WhileNorth American commodity chemicals showed signs of demand growth in 2002,primarily in the first half of the year, annual consumption did not recover tolevels experienced in 2000. Geopolitical issues associated with Iraq, North Korea and Venezuela havecreated a resurgence in energy price increases and volatility, and heighteneduncertainty among consumers, which threatens both U.S. and key tradingpartners’ economic recoveries going into 2003.

 

Nearterm, the chemicals industry will continue to be challenged to effectivelyutilize capacity and manage costs, while at the same time addressing the needfor margin improvement, as energy-driven feedstock prices rise.  Absent protracted conflicts in energy-producingregions, it is anticipated that chemical demand will continue to recover in2003 in relation to economic growth.  Atthe same time, announced and anticipated industry capacity reductions, coupledwith the lack of near-term new investment, should help alleviate some of theexcess capacity in the industry and promote future margin improvements asoperating rates trend up.

 

CPChemis addressing prevailing market conditions by continuing to ensure safe andreliable operations, while at the same time focusing on cost stewardship,improving efficiencies and prudently managing its assets.  New world-scale investments infeedstock-advantaged regions with access to growing markets are expected toenhance future earnings.

 

A700-million-pound-per-year, high-density polyethylene plant located at CPChem’sCedar Bayou facility in Baytown, Texas, owned equally by CPChem and BP SolvayPolyethylene North America (BP Solvay), is currently undergoingcommissioning.  CPChem and BP Solvaywill each market their own share of production from the plant.

 

Construction of theQ-Chem complex, a project in which CPChem owns a 49% interest, is nearingcompletion and is currently undergoing commissioning.

 

26

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**CPChem Liquidity and Capital Resources**

 

*ContractualObligations*

** **
| **As of December 31, 2002, in  millions**                 |   | **Total** |       | **<1 year** |       | **1-3 years** |       | **3-5 years** |       | **>5 years** |       |
|-----------------------------------------------------------|--------|-----------|------------|----------------|------------|---------------|------------|---------------|------------|-----------------|------------|
|                                                      |   |      | ** ** |           | ** ** |          | ** ** |          | ** ** |            | ** ** |
| Secured  borrowings (accounts receivable  securitization) |   | $         | 290        |           | $          | 290           |       | $             | —     |            | $          | — |   | $ | — |   |
| Commercial  paper                                         |   | 185       | *          | —         |       | —        |       | —        |       | 185             | *          |
| Long-term  debt                                           |   | 1,000     |       | —         |       | —        |       | 500           |       | 500             |       |
| Other debt, including current portion                     |   | 14        |       | 4              |       | 2             |       | 2             |       | 6               |       |
| Operating  lease obligations                              |   | 244       |       | 28             |       | 54            |       | 67            |       | 95              |       |
| Members’  preferred interests                        |   | 250       |       | —         |       | 250           |       | —        |       | —          |       |
| Advances  to Q-Chem (estimated)                           |   | 170       |       | 170            |       | —        |       | —        |       | —          |       |
| Total                                                     |   | $         | 2,153      |           | $          | 492           |       | $             | 306        |            | $          | 569 |   | $ | 786 |   |

 

----

* Assumesmaintaining the current ability to re-issue upon maturity.

 

CPChem has nounconsolidated limited-purpose or special-purpose entities, and therefore, hasno other legal obligations that might be associated with entities of thisnature, such as the purchase of such entities’ capital stock or assets, theissuance of securities pursuant to a call option held by such entities or thefinancial support for such entities’ non-performance in a commercialarrangement.

 

CPChem’s cash balance atDecember 31, 2002 was $39 million, of which $30 million was held by foreignsubsidiaries, compared with a $111 million cash balance at December 31, 2001,of which $37 million was held by foreign subsidiaries.  CPChem’s objective is to minimize cashbalances through effective management of its commercial paper program for dailyoperating requirements.

 

*OperatingActivities*

 

Cash provided byoperating activities in 2002 totaled $335 million, compared with $332 millionduring 2001.  Excluding working capitalchanges, cash provided by operating activities increased to $253 million in2002 compared with $92 million in 2001. Operating activities in 2001 included $169 million of net proceedsreceived from the settlement of a business interruption insurance claimassociated with the March 2000 incident at the Houston Chemical Complex K-Resinplant.  Operating activities generated$92 million during the six-month period ended December 31, 2000.  Excluding changes in working capital,operating activities generated $69 million in the 2000 period.

 

*Investing Activities*

 

*Capital and investment expenditures*

 
| **Millions**                                       |   | **Olefins &  Polyolefins** |    | **Aromatics &  Styrenics** |   | **Specialty  Products** |   | **Corporate &  Other** |   | **Consolidated** |   |
|----------------------------------------------------|--------|--------------------------------|---------|--------------------------------|--------|-------------------------|--------|----------------------------|--------|------------------|--------|
| Year  ended December 31, 2002                      |   | $                              | **179** |                           | $      | 103                     |   | $                          | 20     |             | $      | 12 |   | $ | 314 |   |
| Year  ended December 31, 2001                      |   | 134                            |    | 121                            |   | 17                      |   | 19                         |   | 291              |   |
| July 1, 2000 (inception) through December 31, 2000 |   | not available                  |    | not available                  |   | not available           |   | not available              |   | 112              |   |
|                                                    |        |                                |         |                                |        |                         |        |                            |        |                  |        |  |  |  |  |  |

 

27

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Capital and investmentexpenditures in 2002 included a $45 million equity investment in PhillipsSumika.  In addition to the capital andinvestment expenditures, CPChem advanced Qatar Chemical Company Ltd. (Q-Chem),a CPChem equity investment, $210 million in 2002 under a subordinated loanagreement used towards the cost of construction and start-up of the Qatarcomplex.  No advances were made toQ-Chem during 2001 or the six-month period ended December 31, 2000.  Advances bear interest at market-based ratesand, upon completion of the complex, are to be repaid from cash available afterthe payment of debt obligations on Q-Chem’s $750 million senior bank debt,subject to certain financial tests.  Theloan is subordinate to Q-Chem’s senior bank debt.

 

CPChem currently expectsto invest a total of approximately $235 million in capital and investmentexpenditures in 2003, excluding advances to Q-Chem.  Approximately $130 million is expected to be spent in Olefins& Polyolefins, $70 million in Aromatics & Styrenics, and $20 million inSpecialty Products, with the remainder to be spent at the corporate level.  In addition, advances to Q-Chem during 2003are estimated to be approximately $170 million.

 

Qatar Chemical CompanyLtd. (Q-Chem), a 49%-owned joint venture company, was formed in 1997 to developa world-scale petrochemical complex in Qatar in the Middle East at an estimatedcost of $1.2 billion.  The facility isdesigned to produce 1.1 billion pounds of ethylene, 1.0 billion pounds ofpolyethylene and 100 million pounds of 1-hexene annually.  Construction of the Q-Chem complex began inOctober 1999.  The complex is currentlyundergoing commissioning.  At December31, 2002, $750 million had been drawn by Q-Chem under a 1999 bank financingagreement for the construction of the complex. CPChem is required to fund any remaining construction costs, initialworking capital requirements, and certain debt service and operating reservefund requirements through advances under a subordinated loan agreement withQ-Chem.  CPChem will have no furtherobligation to make advances under the subordinated loan agreement uponcompletion of the facilities, as defined in the bank financing agreements.

 

If the project is notcompleted by August 2003 under the terms of the bank financing, the banks havethe right to demand payment from each co-venturer on a pro rata, several basisto the extent necessary to cover the debt service requirements until August 2004.  If the project is not completed by August2004, the banks have the right to demand repayment of all outstanding principaland interest from each co-venturer on a pro rata, several basis.  These dates may be extended for up to oneyear due to events of force majeure. After the project is completed, the bank financing is non-recourse withrespect to the co-venturers, with the exception of the contingent obligationsdescribed below.  CPChem anticipatesthat the project will be completed prior to August 2003.

 

In addition, after theproject is completed, CPChem has agreed to provide up to $75 million of loansto Q-Chem if there is insufficient cash to pay the minimum debt service amounton the bank financing.  CPChem believesit is unlikely that funding under this support agreement will be required.

 

CPChem also agreed that,during the first 33 months of commercial operation, it will provide loans toQ-Chem if there is insufficient cash to pay the target debt serviceamount.  These loans are limited to anamount equal to lost operating margins resulting from sales volumes being lessthan 100% of design capacity.  CPChembelieves that any funding required under this support agreement is unlikely tohave a material adverse effect on CPChem’s consolidated results of operations,financial position or liquidity.

 

28

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CPChem has entered intoan agency agreement with Q-Chem to act as an agent for the sale ofsubstantially all of Q-Chem’s production. CPChem has also entered into an offtake and credit risk agreement withQ-Chem, under which CPChem is required to purchase, at market prices, specifiedamounts of production if CPChem fails to sell that product under the terms ofthe agency agreement.  CPChem expectsthat it will be able to sell all the production under the terms of the agencyagreement.

 

Should the Q-Chem1-hexene unit fail to operate as designed, CPChem has guaranteed to compensateQ-Chem for any economic loss of diverting surplus ethylene not used to produce1-hexene to the HDPE units.  CPChembelieves the risk of the 1-hexene unit failing to operate as designed isremote.

 

CPChem and Qatar Petroleum signed a jointventure agreement in June 2001 for the development of a second world-scalepetrochemical project in Qatar (Q-Chem II). In June 2002, CPChem and Qatar Petroleum amended the original Q-Chem IIjoint venture agreement to provide for the construction of a larger ethanecracker than was previously planned.  Inconnection with this change in the project scope, CPChem and Qatar Petroleumentered into a joint venture agreement in June 2002 with Atofina and QatarPetrochemical Company to jointly develop the ethane cracker.  Final approval of the project is anticipatedin mid-2004, with start-up expected in 2007. Preliminary financing plans for the project include limited recourseloans from commercial banks and export credit agencies.

 

CPChemannounced plans in 2002 for a 50%-owned joint venture project at Al Jubail,Saudi Arabia (the “Jubail Chevron Phillips project”).  The project, expected to cost approximately $1 billion,includes the construction of styrene and propylene facilities on a siteadjacent to the existing aromatics complex owned by Saudi Chevron PhillipsCompany, a 50%-owned CPChem joint venture. The project also includes the expansion of the Saudi Chevron Phillipsbenzene facility.  This new benzenecapacity will be used to provide feedstock for the new styrene facility.  Final approval of the project is anticipatedin the fourth quarter of 2003, with operational start-up expected in 2006.  It is expected that the Jubail ChevronPhillips project will be financed primarily through limited recourse loans fromSaudi Arabian government agencies and Saudi Arabian commercial banks.

 

*FinancingActivities*

 

Cash provided by (usedin) financing activities totaled $115 million during 2002, $(113) millionduring 2001 and $101 million in the six months ended December 31, 2000.  During 2002, commercial paper outstandingdecreased $808 million, primarily with proceeds from the issuance of $500million of 5 3/8% notes and from the sale of $250 million of Members’ PreferredInterests to ChevronTexaco and ConocoPhillips. Commercial paper outstanding decreased $783 million in 2001 and a notepayable to ChevronTexaco was repaid, mostly with proceeds from the issuance of$500 million of 7% notes and from monies received in connection with theimplementation of a trade receivables securitization program.

 

Chevron Phillips ChemicalCompany LLC and its wholly-owned subsidiary, Chevron Phillips Chemical CompanyLP, jointly and severally issued $500 million of senior unsecured 5 3/8% notes(the “5 3/8% notes”) on June 21, 2002 in a private placement.  The 5 3/8% notes are due in June 2007and interest is payable semiannually, with the first interest payment made inDecember 2002.  The notes containcertain covenants, such as limitations on liens, sale/leaseback transactions,sales of assets and business combinations, that CPChem does not consider to berestrictive to normal operations.

 

29

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In accordance withobligations under the registration rights agreement entered into in connectionwith the notes, the LLC and the LP filed a joint registration statement on FormS-4 with the SEC to register exchange notes that have terms substantiallyidentical to the private placement notes, except that the exchange notes arefreely tradeable.  All of the holders ofthese private placement notes tendered their notes for the registered exchangenotes.

 

On August 29, 2002,CPChem entered into a $400 million 364-day credit facility and a $400 millionthree-year credit facility with a syndicate of banks.  Both facilities are used to provide backup committed credit forthe commercial paper program.  Theagreements replaced a $700 million 364-day credit agreement that expired inJuly 2002 and a $900 million three-year credit agreement that CPChem terminatedeffective upon the closing of the new credit facilities.  The current 364-day agreement provides thatCPChem may, at its option, extend the date of repayment by one year of anyborrowings outstanding on August 28, 2003 under the agreement.  There were no borrowings outstanding underany of the credit agreements at December 31, 2002 or 2001, nor were there anyborrowings under any of the credit facilities during 2002 or the six-monthperiod ended December 31, 2000.  CPChemborrowed funds for one day on September 12, 2001 under the $900 million creditagreement.  CPChem intends to request anextension of the expiration date of the current 364-day credit agreement orreplace the existing agreements with new agreements that have substantiallysimilar terms.

 

CPChem had $290 million of short-term borrowings outstanding atDecember 31, 2002 under its trade receivables securitization program, securedby $393 million of trade receivables. The agreement allows CPChem to borrow up to $300 million for whichCPChem grants a security interest in certain of its trade receivables ascollateral for any amounts outstanding. The trade receivables securitization agreement, which replaced a prioragreement that expired in May 2002, currently expires on May 21, 2003.  CPChem is currently negotiating the terms ofan extension of the expiration date of the current agreement to May 2004.

 

CPChemsold $250 million of Members’ Preferred Interests on July 1, 2002, purchased50% each by ChevronTexaco and ConocoPhillips. Preferred distributions are cumulative at 9% per annum and are payablequarterly from cash earnings, as defined in CPChem’s Second Amended andRestated Limited Liability Company Agreement. The securities have no stated maturity date and are redeemablequarterly, in increments of $25 million, when CPChem’s ratio of debt to totalcapitalization falls below a stated level. The Members’ Preferred Interests are also redeemable at the sole optionof CPChem.  There were no redemptions in2002.

 

ChevronPhillips Chemical Company LLC and its wholly-owned subsidiary, Chevron PhillipsChemical Company LP, jointly and severally issued $500 million of seniorunsecured 7% notes in March 2001 in a private placement.  The notes are due in March 2011 and interestis payable semiannually.  Substantiallyall of the holders of the private placement notes tendered their notes forregistered exchange notes that have terms substantially identical to theprivate placement notes, except that the exchange notes are freelytradeable.  The notes contain covenantsidentical to the 53/8% notes sold in June 2002.

 

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

 

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**CPChem Other**

 

*Risk and Other Factors That May AffectFuture Performance*

 

*Cyclicality and Overcapacity in thePetrochemicals and Plastics Business. *Thepetrochemicals and plastics industry is both cyclical and volatile.  Historically, the industry has experiencedalternating periods of tight supply, resulting in increased prices and profitmargins.  This is typically followed byperiods of substantial capacity expansion, resulting in oversupply anddeclining prices and profit margins.  Asa result of changes in demand for products, changes in energy prices andchanges in economic conditions around the world, CPChem’s profit margins mayfluctuate, not only from year to year, but also from quarter to quarter.

 

Currently, industry-wide capacity expansions have alsocontributed to a decline in the profit margin of some of CPChem’sproducts.  There can be no guaranteethat future growth in product demand will be sufficient to utilize thisadditional capacity.  Fluctuations incapacity and supply can cause volatility in profit margins.

 

*Feedstock costs and other externalfactors. *Due to theoverall commodity nature of the products CPChem sells, market position cannotnecessarily be protected by product differentiation or by passing on costincreases to customers.  Accordingly,price increases in raw materials and other costs may not correlate with changesin the prices received for products. Feedstock prices can fluctuate widely for a variety of reasons,including changes in availability because of major capacity additions orsignificant facility operating problems. Other external factors that can cause volatility in feedstock prices, aswell as demand for products, product prices and volumes, and margindeterioration, include general economic conditions, the level of businessactivity in industries that use CPChem’s products, competitors’ actions, energyprices, domestic and international events and circumstances, product andprocess technology changes, currency fluctuations and governmental regulationin the United States and abroad.

 

Although CPChem producesfeedstocks to meet a portion of its demand and has long-term feedstock supplycontracts with affiliates of its parents and others, CPChem is still subject tovolatile feedstock prices.  Extremeprice volatility, such as that currently being experienced and as wasexperienced at the beginning of the fourth quarter of 2000, can result in theneed to temporarily idle or curtail production units.

 

*Environmental, Health and Safety.*  The chemicals and plastics business ishighly regulated, subject to increasingly stringent laws and regulationsaddressing environmental, health and safety matters.  Such matters include, but are not limited to, air pollutantemissions, discharge of treated wastewater, stormwater runoff, solid wastemanagement, workplace safety, and contamination. Violations of these laws andregulations often result in monetary penalties and corrective action, butdepending on the severity of the violation, could result in substantial fines,criminal sanctions, permit revocation and/or facility shutdowns.

 

Under some laws, including the Comprehensive Environmental Response,Compensation and Liability Act of 1980 (“Superfund”), the Resource Conservationand Recovery Act of 1976 and the laws of many states, CPChem may be subject tojoint and several liability regarding environmental contamination on or fromproperties that it previously owned or operated or currently owns oroperates.  CPChem may also be subject toliability for contaminated properties where it has disposed of or arranged fordisposal of hazardous substances, or where feedstocks or products thatcontained hazardous substances have been spilled or released.  Depending on the circumstances, such liabilitiesmay involve, for example, investigation or clean-up costs, claims for damagesto natural resources or punitive damage claims.  In addition, CPChem may be the subject of third-party tort claimsseeking compensatory and punitive damages for alleged impacts on human healthor the environment.  These liabilitiesand claims could result in substantial costs to CPChem.

 

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CPChem incurs, and expects to continue toincur, significant costs for capital improvements and general compliance underapplicable environmental laws, including costs to acquire, maintain and repairpollution control equipment.  By 2007,industrial facilities in the Texas Gulf Coast region, including facilitiesCPChem owns, will require modification and the installation of additionalcontrol equipment to comply with regulations relating to nitrogen oxide (NOx)emissions, which apply generally to industries in this area.  This equipment, which will need to beinstalled well in advance of the 2007 deadline, is expected to require capitalexpenditures of approximately $100 million. CPChem also anticipates that new regulations will be issued concerningreleases of highly-reactive volatile organic compounds (HRVOC’s), but cannot atthis time assess capital expenditure or operating cost impacts.

 

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

 

There are risks associated with the production ofchemicals and plastics, such as operational hazards and unforeseeninterruptions caused by events beyond CPChem’s control.  These include accidents, breakdowns orfailures of equipment or processes, acts of terrorism and other catastrophicevents.  These events can result ininjury or loss of life and extensive property or environmental damage.  In addition, the handling of chemicals hasthe potential for serious impacts on human health and the environment.  Liabilities incurred and interruptions inoperations caused by these events have the potential to materially affectconsolidated results of operations, financial position and liquidity.  While CPChem maintains general and businessinterruption insurance, insurance proceeds may not be adequate to fully coversubstantial liabilities incurred, lost revenues or increased expenses.

 

*International Operations.*  International operations are exposed topolitical, economic and regulatory risks not faced by businesses that operatesolely in the United States.  A portionof CPChem’s operations are outside the continental United States, withmanufacturing facilities in existence or under construction in Puerto Rico,Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium.  Assets located outside of the U.S. as ofDecember 31, 2002 totaled $893 million and net sales from non-U.S. operationswere $711 million in 2002.  Theseinternational operations are subject to risks similar to those affectingCPChem’s U.S. operations in addition to a number of other risks, includingdifficulties in enforcing contractual and intellectual property rights, andimpositions or increases of withholding and other taxes on remittances andother payments by subsidiaries and affiliates. Other risks include, but are not limited to, exposure to different legalstandards, impositions or increases of investment and other demands by foreigngovernments, the requirements of a wide variety of foreign laws, political andeconomic instability, and difficulties in staffing and managing operations,particularly in remote locations.  Inaddition, the escalation of political tensions in the Middle East and NorthKorea, including the possible onset of military actions by the United Statesand others, could have a material adverse effect on CPChem’s business.

 

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*Foreign Currency Risk. *Internationally, CPChem operates facilities in eight countries andsells product in many other countries, resulting in transactions denominated invarious currencies.  As such, CPChem isexposed to foreign currency risk to the extent there are devaluations andfluctuations in the exchange rates of the local currencies of those countriesagainst the U.S. dollar and other foreign currencies which may adversely affectrevenues and margins.  The potentialforeign currency transaction gain or loss from a hypothetical 10% change in theexchange rates of those localcurrencies against the U.S. dollar at December 31, 2002 was approximately $10million in the aggregate.

 

*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 in connectionwith the accounts receivable securitization program is also variable-ratebased.  A hypothetical 100 basis pointchange (a one percentage point change) in the weighted average interest ratesof the outstanding balances at December 31, 2002 of these debt instruments would impact interest expense byapproximately $5 million annually in the aggregate.

 

*Contingencies*

 

In the case of all knowncontingencies, CPChem records an undiscounted liability when the loss isprobable and the amount is reasonably estimable.  These liabilities are not reduced for potential insurancerecoveries.  If applicable, undiscountedreceivables are recorded for probable insurance or other third-partyrecoveries.  Based on currentlyavailable information, CPChem believes it is remote that future costs relatedto known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect onconsolidated results of operations, financial position or liquidity.

 

As facts concerningcontingencies become known, CPChem reassesses its position both with respect toaccrued liabilities and other potential exposures.  Estimates that are particularly sensitive to future changeinclude legal matters and contingent liabilities for environmental remediation.  Estimated future environmental remediationcosts are subject to change due to such factors as the unknown magnitude ofcleanup costs, prospective changes in laws and regulations, the unknown timingand extent of remedial actions that may be required and the determination ofCPChem’s liability in proportion to other responsible parties.  Estimated future costs related to legalmatters are subject to change as events occur and as additional informationbecomes available during the administrative and litigation process.

 

CPChem is a party to anumber of legal proceedings pending in various courts or agencies for which, insome instances, no provision has been made. While the final outcome of these proceedings cannot be predicted withcertainty, CPChem believes that none of these proceedings, when resolved, willhave a material adverse effect on consolidated results of operations, financialposition or liquidity.

 

*New Accounting Pronouncements*

 

CPChem adopted Statementof Financial Accounting Standards (SFAS) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets,” effective January 1, 2002.  Implementation of this standard did not havea material effect on consolidated results of operations, financial position orliquidity.

 

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In June 2001, theFinancial Accounting Standards Board (FASB) issued SFAS No. 143, “Accountingfor Asset Retirement Obligations,” which addresses the accounting and reportingrequirements for legal obligations associated with the retirement of long-livedassets.  This standard requires that aliability for an asset retirement obligation, measured at fair value, berecognized in the period in which it is incurred if a reasonable estimate offair value is determinable.  Thatinitial fair value is capitalized as part of the carrying amount of thelong-lived asset and subsequently depreciated. The liability is adjusted each reporting period for accretion, with acharge to the statement of operations. CPChem implemented SFAS No. 143 effective January 1, 2003.  CPChem believes that the implementation ofthis new standard will not have a material impact on consolidated results ofoperations or financial position.

 

In July 2002, FASB issuedSFAS No. 146, “Accounting for Costs Associated With Exit or DisposalActivities,” which requires that a liability for costs associated with an exitor disposal activity be recognized when the liability occurs, and that theliability be measured initially at fair value. The liability is adjusted each reporting period for accretion, with acharge to the statement of operations. This statement replaces Emerging Issues Task Force (EITF) IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  CPChem will apply SFASNo. 146 to exit or disposal activities initiated on or after January 1, 2003.

 

*Approval of Services of Independent Auditors*

 

In accordance withSection 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee of CPChem’sBoard of Directors approved the performance of certain audit and non-auditservices by CPChem’s independent auditors, Ernst & Young LLP.  These engagements are primarily fortax-related compliance and advisory services, annual audits of benefit plans,and statutory audits of CPChem’s subsidiaries.

 

**ITEM 7A****.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

See“Item 7.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations – CPChem Other.”

 

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**ITEM 8****.  FinancialStatements and Supplementary Data**

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Chevron PhillipsChemical Company LLC**

 
| Report  of Management                                                                                                                                               |   | 36 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----|
| Report of Independent  Auditors                                                                                                                                     |   | 37 |
| Consolidated Statement  of Operations for the years ended December 31, 2002 and 2001,  and the period July 1, 2000 (inception) through December 31, 2000            |   | 38 |
| Consolidated Balance Sheet  at December 31, 2002 and December 31, 2001                                                                                              |   | 39 |
| Consolidated  Statement of Members’ Capital for the years ended December 31, 2002 and 2001,  and the period July 1, 2000 (inception) through December 31, 2000 |   | 40 |
| Consolidated  Statement of Cash Flows for the years ended December 31, 2002 and 2001,  and the period July 1, 2000 (inception) through December 31, 2000            |   | 41 |
| Notes  to Consolidated Financial Statements                                                                                                                         |   | 42 |
| Selected Quarterly  Financial Data (Unaudited)                                                                                                                      |   | 69 |

 

The following financialinformation of Phillips Petroleum Company’s Chemicals Business and ChevronChemical Company C Chem Business (the businesses contributed to form ChevronPhillips Chemical Company LLC) is presented for informational purposesonly.  The results of these contributedbusinesses presented, when combined, are not intended to and do not representpro forma results of Chevron Phillips Chemical Company LLC, nor do the resultsnecessarily reflect results that would have been achieved had the contributedbusinesses been combined for the periods presented.

 

**PhillipsPetroleum Company’s Chemicals Business**

** **
| **Report  of Independent Auditors**                                                                                             | **70** |
|---------------------------------------------------------------------------------------------------------------------------------|--------|
| **Combined Statement of Income  for the six months ended June 30, 2000**                                                        | **71** |
| **Combined Statement of  Cash Flows for the six months ended June  30, 2000**                                                   | **72** |
| **Combined  Statement of Parent Company Investment and Accumulated Comprehensive Incomefor the six months ended June 30, 2000** | **73** |
| **Notes to Combined  Financial Statements**                                                                                     | **74** |

 

**ChevronChemical Company C Chem Business**

 
| **Report of Independent  Accountants**                                                                    | **83** |
|-----------------------------------------------------------------------------------------------------------|--------|
| **Combined Statement of  Income for the six months ended June 30,  2000**                                 | **84** |
| **Combined Statement of  Changes in Owner’s Net Investment for the  six months ended June 30, 2000** | **85** |
| **Combined Statement of  Cash Flows for the six months ended June  30, 2000**                             | **86** |
| **Notes to Combined Financial  Statements**                                                               | **87** |

 

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Report of Management

 

Management is responsiblefor the preparation and integrity of the accompanying consolidated financialstatements of Chevron Phillips Chemical Company LLC (CPChem).  The financial statements have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America and include, where necessary, amounts that are based onmanagement’s best estimate and judgment.

 

Management is alsoresponsible for maintaining an internal control structure designed to providereasonable assurance that CPChem’s assets are safeguarded from unauthorized useand that transactions are recorded properly to permit the preparation ofaccurate financial information.  Suchinternal control structure is based upon established policies and proceduresand is monitored by an internal audit department that conducts a program ofinternal audits and independently assesses the effectiveness of internalcontrols.  Management believes that thesystem of internal controls in place at December 31, 2002 provides reasonableassurance that the books and records accurately reflect the transactions ofCPChem and there has been compliance with established policies and procedures.

 

The Audit Committee ofthe Board of Directors meets regularly with members of management, the internalauditors and the independent auditors to discuss the adequacy of CPChem’sinternal controls, results of internal audits, the independent auditors’findings and opinion, financial information and related matters.  Both the independent auditors and theinternal auditors have free and direct access to the Audit Committee, with andwithout management present.

 

 
| */s/  James L. Gallogly*                |                                                | */s/  C. Kent Potter*           |   | */s/  Greg G. Maxwell* |   |
|-----------------------------------------|-----------------------------------------------------|---------------------------------|--------|------------------------|--------|
| James  L. Gallogly                      | C.  Kent Potter                                     | Greg  G. Maxwell                |
| President  and Chief  Executive Officer | Senior  Vice President  and Chief Financial Officer | Vice  President  and Controller |
|                                    |                                                |                            |
|                                    |                                                |                            |
| January 31, 2003                        |                                                |                            |

 

36

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### **Report ofIndependent Auditors**

 

To the Board of Directorsof Chevron Phillips Chemical Company LLC:

 

We have audited theaccompanying consolidated balance sheets of Chevron Phillips Chemical CompanyLLC and subsidiaries (the Company) as of December 31, 2002 and 2001, and therelated consolidated statements of operations, members’ capital, and cash flowsfor each of the two years in the period ended December 31, 2002 and for theperiod July 1, 2000 (inception) through December 31, 2000.  Our audits also included the financialstatement schedule listed in the Index at Item 15(a).  These financial statements and schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these financial statements and schedulebased on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Chevron Phillips ChemicalCompany LLC and subsidiaries at December 31, 2002 and 2001, and theconsolidated results of their operations and their cash flows for each of thetwo years in the period ended December 31, 2002 and for the period July 1, 2000(inception) through December 31, 2000, in conformity with accounting principlesgenerally accepted in the United States. Also, in our opinion, the related financial statement schedule, whenconsidered in relation to the basic financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

 
| Ernst & Young LLP |   |
|-----------------------|--------|
|                  |
| Houston, Texas        |
| January 31, 2003      |

 

37

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**ChevronPhillips Chemical Company LLC**

##### **Consolidated Statement of Operations**

 
|                                                |   | **Years ended December 31,** |   | **July 1, 2000  (inception) through** |   |
|-----------------------------------------------------|--------|------------------------------|--------|---------------------------------------|--------|
| **Millions**                                        |   | **2002**                     |   | **2001**                              |   | **December 31, 2000** |   |
| Revenue                                             |   |                         |   |                                  |   |   |   |
| Net sales                                           |   | $                            | 5,389  |                                  | $      | 5,871 |   | $ | 3,402 |   |
| Equity in income (loss) of  affiliates, net         |   | 22                           |   | (65                                   | )      | (3 | ) |
| Other income                                        |   | 62                           |   | 204                                   |   | 64 |   |
| Total revenue                                       |   | 5,473                        |   | 6,010                                 |   | 3,463 |   |
|                                                |   |                         |   |                                  |   |   |   |
| Costs and Expenses                                  |   |                         |   |                                  |   |   |   |
| Cost of goods sold                                  |   | 4,986                        |   | 5,733                                 |   | 3,171 |   |
| Selling, general and administrative                 |   | 399                          |   | 509                                   |   | 290 |   |
| Asset impairments                                   |   | 6                            |   | 44                                    |   | 137 |   |
| Research and development                            |   | 47                           |   | 60                                    |   | 23 |   |
| Total costs and expenses                            |   | 5,438                        |   | 6,346                                 |   | 3,621 |   |
|                                                |   |                         |   |                                  |   |   |   |
| Income (Loss) Before Interest  and Taxes            |   | 35                           |   | (336                                  | )      | (158 | ) |
|                                                |   |                         |   |                                  |   |   |   |
| Interest income                                     |   | 7                            |   | 9                                     |   | 10 |   |
| Interest expense                                    |   | (66                          | )      | (104                                  | )      | (65 | ) |
|                                                |   |                         |   |                                  |   |   |   |
| Income (Loss) Before Taxes                          |   | (24                          | )      | (431                                  | )      | (213 | ) |
|                                                |   |                         |   |                                  |   |   |   |
| Income taxes                                        |   | (6                           | )      | (49                                   | )      | (28 | ) |
|                                                |   |                         |   |                                  |   |   |   |
| Net Income (Loss)                                   |   | (30                          | )      | (480                                  | )      | (241 | ) |
|                                                |   |                         |   |                                  |   |   |   |
| Distributions on members’ preferred interests  |   | (11                          | )      | —                                |   | — |   |
|                                                |   |                         |   |                                  |   |   |   |
| Income (Loss) Attributed to Members’ Interests |   | $                            | (41    | )                                     | $      | (480 | ) | $ | (241 | ) |

 

See Notes to Consolidated Financial Statements.

 

38

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**ChevronPhillips Chemical Company LLC**

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

 
|                                          |   | **December 31,** |       |
|-----------------------------------------------|--------|------------------|------------|
| **Millions**                                  |   | **2002**         | ** ** | **2001** | ** ** |
| ASSETS                                        |   |
| Current assets                                |   |             |       |   |   |
| Cash and cash equivalents                     |   | $                | 39         |   | $ | 111 |   |
| Accounts receivable, net – trade         |   | 746              |       | 674 |   |
| Accounts receivable, net – affiliates    |   | 51               |       | 108 |   |
| Inventories                                   |   | 702              |       | 638 |   |
| Other current assets                          |   | 23               |       | 20 |   |
| Total current assets                          |   | 1,561            |       | 1,551 |   |
|                                          |   |             |       |   |   |
| Property, plant and equipment                 |   | 7,607            |       | 7,515 |   |
| Less: accumulated depreciation                |   | 3,657            |       | 3,532 |   |
| Net property, plant and equipment             |   | 3,950            |       | 3,983 |   |
|                                          |   |             |       |   |   |
| Investments in and advances to affiliates     |   | 515              |       | 238 |   |
| Other assets and deferred charges             |   | 83               |       | 88 |   |
|                                          |   |             |       |   |   |
| Total Assets                                  |   | $                | 6,109      |   | $ | 5,860 |   |
|                                          |   |             |       |   |   |
| LIABILITIES AND MEMBERS’ EQUITY          |   |
| Current liabilities                           |   |             |       |   |   |
| Accounts payable – trade                 |   | $                | 488        |   | $ | 335 |   |
| Accounts and note payable – affiliates   |   | 108              |       | 114 |   |
| Accrued income and other taxes                |   | 53               |       | 57 |   |
| Accrued salaries, wages and benefits          |   | 84               |       | 89 |   |
| Secured borrowings and other debt             |   | 294              |       | 200 |   |
| Other current liabilities                     |   | 24               |       | 25 |   |
| Total current liabilities                     |   | 1,051            |       | 820 |   |
|                                          |   |             |       |   |   |
| Long-term debt                                |   | 1,190            |       | 1,507 |   |
| Other liabilities and deferred credits        |   | 117              |       | 99 |   |
|                                          |   |             |       |   |   |
| Total liabilities                             |   | 2,358            |       | 2,426 |   |
|                                          |   |             |       |   |   |
| Members’ preferred interests             |   | 250              |       | — |   |
|                                          |   |             |       |   |   |
| Members’ capital                         |   | 3,494            |       | 3,450 |   |
| Accumulated other comprehensive income (loss) |   | 7                |       | (16 | ) |
|                                          |   |             |       |   |   |
| Total Liabilities and  Members’ Equity   |   | $                | 6,109      |   | $ | 5,860 |   |

 

See Notes to Consolidated Financial Statements.

 

39

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**ChevronPhillips Chemical Company LLC**

##### **Consolidated Statement of Members’ Capital**

 
| **Millions**                                                    |   | **Members’  Capital** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **Total** |   |
|-----------------------------------------------------------------|--------|----------------------------|--------|------------------------------------------------------|--------|-----------|--------|
| Contributions  from Members on July 1, 2000, net of Adjustments |   | $                          | 5,747  |                                                 | $      | —    |   | $ | 5,747 |   |
|                                                            |   |                       |   |                                                 |   |      |   |   |   |   |
| Net  income (loss)                                              |   | (241                       | )      | —                                               |   | (241      | )      |
| Foreign  currency translation adjustments                       |   | —                     |   | (6                                                   | )      | (6        | )      |
| Total  comprehensive income (loss)                              |   |                       |   |                                                 |   | (247      | )      |
| Member  contributions                                           |   | 35                         |   | —                                               |   | 35        |   |
| Distributions  to members                                       |   | (1,692                     | )      | —                                               |   | (1,692    | )      |
|                                                            |   |                       |   |                                                 |   |      |   |
| Balance  on December 31, 2000                                   |   | 3,849                      |   | (6                                                   | )      | 3,843     |   |
|                                                            |   |                       |   |                                                 |   |      |   |
| Net  income (loss)                                              |   | (480                       | )      | —                                               |   | (480      | )      |
| Foreign  currency translation adjustments                       |   | —                     |   | (10                                                  | )      | (10       | )      |
| Total  comprehensive income (loss)                              |   |                       |   |                                                 |   | (490      | )      |
| Member  contributions                                           |   | 101                        |   | —                                               |   | 101       |   |
| Distributions  to members                                       |   | (20                        | )      | —                                               |   | (20       | )      |
|                                                            |   |                       |   |                                                 |   |      |   |
| Balance  on December 31, 2001                                   |   | 3,450                      |   | (16                                                  | )      | 3,434     |   |
|                                                            |   |                       |   |                                                 |   |      |   |
| Net  income (loss)                                              |   | (30                        | )      | —                                               |   | (30       | )      |
| Foreign  currency translation adjustments                       |   | —                     |   | 23                                                   |   | 23        |   |
| Total  comprehensive income (loss)                              |   |                       |   |                                                 |   | (7        | )      |
| Member  contributions                                           |   | 86                         |   | —                                               |   | 86        |   |
| Distributions  on members’ preferred interests             |   | (11                        | )      | —                                               |   | (11       | )      |
| Other  distributions to members                                 |   | (1                         | )      | —                                               |   | (1        | )      |
|                                                            |   |                       |   |                                                 |   |      |   |
| Balance  on December 31, 2002                                   |   | $                          | 3,494  |                                                 | $      | 7         |   | $ | 3,501 |   |

 

See Notes to Consolidated Financial Statements.

 

40

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**ChevronPhillips Chemical Company LLC**

##### **Consolidated Statement of Cash Flows**

 
|                                                                                           |   | **Years ended December 31,** |      | **July 1, 2000  (inception) through** |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|---------------------------------------|--------|
| **Millions**                                                                                   |   | **2002**                     |      | **2001**                              |   | **December 31, 2000** |   |
| Cash  Flows From Operating Activities                                                          |   |                         |      |                                  |   |   |   |
| Net income (loss)                                                                              |   | $                            |  (30 | )                                     | $      |  (480 | ) | $ |  (241 | ) |
| Adjustments to reconcile net  income (loss) tonet cash flows  provided by operating activities |   |                         |      |                                  |   |   |   |
| Depreciation, amortization and retirements                                                     |   | 291                          |      | 381                                   |   | 151 |   |
| Asset impairments                                                                              |   | 6                            |      | 44                                    |   | 137 |   |
| Deferred income taxes                                                                          |   | —                       |      | 44                                    |   | 27 |   |
| Undistributed equity in losses (income) of affiliates,  net                                    |   | (6                           | )         | 67                                    |   | 3 |   |
| Changes in operating working capital                                                           |   |                         |      |                                  |   |   |   |
| Decrease (increase) in accounts receivable                                                     |   | 3                            |      | 242                                   |   | (62 | ) |
| Decrease (increase) in inventories                                                             |   | (54                          | )         | 234                                   |   | (153 | ) |
| Decrease (increase) in other current assets                                                    |   | 1                            |      | (3                                    | )      | 3 |   |
| Increase (decrease) in accounts payable                                                        |   | 142                          |      | (333                                  | )      | 256 |   |
| Increase (decrease) in accrued income and other taxes                                          |   | (4                           | )         | 13                                    |   | (8 | ) |
| Increase (decrease) in other current liabilities                                               |   | (6                           | )         | 87                                    |   | (13 | ) |
| Total changes in operating working capital                                                     |   | 82                           |      | 240                                   |   | 23 |   |
| Other operating cash flow activity                                                             |   | (8                           | )         | 36                                    |   | (8 | ) |
| Net cash flows provided by operating activities                                                |   | 335                          |      | 332                                   |   | 92 |   |
|                                                                                           |   |                         |      |                                  |   |   |   |
| Cash  Flows From Investing Activities                                                          |   |                         |      |                                  |   |   |   |
| Capital and investment expenditures                                                            |   | (314                         | )         | (291                                  | )      | (112 | ) |
| Advances to Qatar Chemical Company Ltd. (Q-Chem)                                               |   | (210                         | )         | —                                |   | — |   |
| Decrease in other investments                                                                  |   | 2                            |      | 27                                    |   | — |   |
| Net cash flows used in investing activities                                                    |   | (522                         | )         | (264                                  | )      | (112 | ) |
|                                                                                           |   |                         |      |                                  |   |   |   |
| Cash Flows From Financing Activities                                                           |   |                         |      |                                  |   |   |   |
| Increase (decrease) in commercial paper, net                                                   |   | (808                         | )         | (783                                  | )      | 1,784 |   |
| Increase in secured borrowings, net                                                            |   | 91                           |      | 199                                   |   | — |   |
| Increase (decrease) in note payable to member, net                                             |   | —                       |      | (50                                   | )      | 50 |   |
| Proceeds from the issuance of other debt, net                                                  |   | 500                          |      | 509                                   |   | — |   |
| Advance from member                                                                            |   | —                       |      | —                                |   | 70 |   |
| Proceeds from the issuance of members’ preferred  interests                               |   | 250                          |      | —                                |   | — |   |
| Contributions from (distributions to) members, net                                             |   | 75                           |      | 25                                    |   | (1,686 | ) |
| Post-closing adjustments from (to) members, net                                                |   | 7                            |      | (13                                   | )      | (117 | ) |
| Net cash flows provided by (used in) financing  activities                                     |   | 115                          |      | (113                                  | )      | 101 |   |
|                                                                                           |   |                         |      |                                  |   |   |   |
| Net Increase (Decrease) in  Cash and Cash Equivalents                                          |   | (72                          | )         | (45                                   | )      | 81 |   |
| Cash and Cash Equivalents at Beginning of Period                                               |   | 111                          |      | 156                                   |   | 75 |   |
| Cash and Cash Equivalents at  End of Period                                                    |   | $                            |  39  |                                  | $      |  111 |   | $ |  156 |   |
|                                                                                           |   |                         |      |                                  |   |   |   |
| Supplemental Disclosures of  Cash Flow Information                                             |   |                         |      |                                  |   |   |   |
| Cash paid for interest                                                                         |   | $                            |  73  |                                  | $      |  88 |   | $ |  16 |   |
| Cash paid for income taxes                                                                     |   | $                            |  7   |                                  | $      |  4 |   | $ |  4 |   |

 

See Notes to Consolidated Financial Statements.

 

41

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**ChevronPhillips Chemical Company LLC**

##### **Notes to Consolidated** Financial Statements

 

 

| **Index** |   |
|-----------|--------|
| 1.        |   | Formation and Nature of  Operations | 42 |
| 2.        |   | Summary of Significant Accounting Policies | 43 |
| 3.        |   | Transactions with Affiliates | 45 |
| 4.        |   | Business Interruption Insurance Settlement | 46 |
| 5.        |   | Inventories | 47 |
| 6.        |   | Investments in and Advances to Affiliates | 47 |
| 7.        |   | Property, Plant and Equipment | 50 |
| 8.        |   | Environmental Liabilities | 51 |
| 9.        |   | Debt | 51 |
| 10.       |   | Members’ Preferred Interests | 53 |
| 11.       |   | Contingencies | 53 |
| 12.       |   | Credit Risk | 53 |
| 13.       |   | Operating Leases | 54 |
| 14.       |   | Benefit Plans | 54 |
| 15.       |   | Taxes | 56 |
| 16.       |   | Segment and Geographic Information | 58 |
| 17.       |   | Fair Values of Financial Instruments | 60 |
| 18.       |   | Consolidating Financial Statements | 61 |

 

Note 1.          Formation and Nature ofOperations

 

On July 1, 2000, ChevronCorporation, now ChevronTexaco Corporation (ChevronTexaco), and PhillipsPetroleum Company, now ConocoPhillips, combined their worldwide chemicals andplastics businesses, excluding ChevronTexaco’s Oronite additives business, intoa new company, Chevron Phillips Chemical Company LLC.  The company, through its subsidiaries, manufactures and markets awide range of petrochemicals and plastics on a worldwide basis, with manufacturingfacilities in existence or under construction in the United States, PuertoRico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico andBelgium.  Chevron Phillips ChemicalCompany LLC is a limited liability company formed under Delaware law, owned 50%each by ChevronTexaco and ConocoPhillips (collectively, the “members”).  For accounting purposes, the combination wasaccounted for on the historical basis of the assets and liabilitiescontributed.

 

The company is governedby a Board of Directors currently comprised of six representatives under theterms of a limited liability company agreement.  ChevronTexaco and ConocoPhillips each have two votingrepresentatives, and the chief executive officer and the chief financialofficer of CPChem are non-voting representatives.  Certain major decisions and actions require the unanimousapproval of the voting representatives.

 

42

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Note 2.          Summary of Significant Accounting Policies

 

*Basis of Financial Statements –*The accompanying consolidated financial statements include the accounts ofChevron Phillips Chemical Company LLC and its wholly-owned subsidiaries(collectively, “CPChem”).  Allsignificant intercompany investments, accounts and transactions have beeneliminated in consolidation. Investments in affiliates in which CPChem owns 20% to 50% of the votingcontrol are accounted for using the equity method.  Other securities and investments, if any, are carried at thelower of cost or market.  Certainamounts for prior periods have been reclassified in order to conform to thecurrent reporting presentation.

 

*Estimates, Risks and Uncertainties –*The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect amounts reported in the financialstatements and accompanying notes. Actual results could differ from these estimates and assumptions.

 

Accounts receivable isshown net of a $7 million allowance for estimated non-recoverable amounts atDecember 31, 2002 and net of a $6 million allowance at December 31, 2001.

 

CPChem has manufacturingfacilities in existence or under construction in the United States, PuertoRico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico andBelgium.  There are varying degrees ofrisk and uncertainty in each of these countries.  CPChem insures its business and assets against insurable risk ina manner it deems appropriate.  Becauseof the diversity of its operations, CPChem believes any loss incurred from anoninsurable event in any one business or country would not have a materialadverse effect on operations as a whole.

 

*Revenue Recognition –*CPChem follows the guidance provided by the Securities and Exchange Commission(SEC) Staff Accounting Bulletin No. 101, “Revenue Recognition in FinancialStatements.”  Sales of petrochemicals,plastics, natural gas liquids and other items, including by-products, are recordedwhen title passes to the customer. Revenues from royalties for licensed technology are generally recordedbased on volumes produced by the licensee. Sales are presented net of discounts and allowances.  Freight costs billed to customers arerecorded as a component of revenue.

 

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

 

*Inventories –*Product inventories are valued at the lower of cost or market, aggregated atthe segment level for dollar-value, last-in, first-out (LIFO) pools.  For U.S. operations, cost is primarilydetermined using the LIFO method. Lower-of-cost-or-market write-downs for LIFO-valued inventories are generallyconsidered temporary.  For operationsoutside the United States, product inventories are valued using a combinationof 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 (PP&E) is stated at cost.  PP&E is comprised of assets, defined as property units, withan economic life beyond one year. Initial contributions of PP&E from ChevronTexaco and ConocoPhillipswere recorded at their book values. Asset categories are used to compute depreciation and amortization usingthe straight-line method over the associated future useful lives.

 

43

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*Impairment of Assets –*****Long-livedassets used in operations are assessed for possible impairment when events orchanges in circumstances indicate a potential significant deterioration infuture cash flows projected to be generated by an asset group.  Individual assets are grouped for impairmentpurposes at the lowest level for which there are identifiable cash flows thatare largely independent of the cash flows of other groups of assets – generallyat a product line level.  If, uponreview, the sum of the projected undiscounted pre-tax cash flows is less thanthe carrying value of the asset group, the carrying value is written down toestimated fair value.  The fair valuesof impaired assets are determined based on quoted market prices in activemarkets, if available, or on the present value of projected future cash flowsusing discount rates commensurate with the risks involved in the asset group.

 

The expected future cashflows used for impairment reviews and related fair value calculations are basedon projected production and sales volumes, prices and costs, considering allavailable evidence at the date of review.

 

*Maintenance and Repairs –*****Maintenanceand repair costs, including turnaround costs of major producing units, that arenot considered to be significant improvements are expensed as incurred.

 

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

 

*Property Dispositions –*****Assetsthat are no longer in service and for which there is no contemplated future useby the company are retired.  When assetsare retired or sold, the asset cost and related accumulated depreciation areeliminated, with any gain or loss reflected in income.

 

*Environmental Costs –*Environmental expenditures are expensed or capitalized as appropriate,depending on future economic benefit. Expenditures that relate to an existing condition caused by pastoperations and that do not have future economic benefit are expensed.  Liabilities for expenditures are recorded onan undiscounted basis when environmental assessments or claims are probable andthe costs can be reasonably estimated. Expenditures that create future benefits or that contribute to futurerevenue generation are capitalized.

 

*Capitalization of Interest*–**Interestcosts incurred to finance projects of at least $75 million and that are longerthan one year in duration, and interest costs associated with investments inequity affiliates that have their planned principal operations underconstruction, are capitalized until commercial production begins.  Capitalized interest is amortized over thelife of the associated asset. Unamortized capitalized interest totaled $44 million at December 31,2002 and $39 million at December 31, 2001. Interest costs capitalized during 2002 totaled $7 million, including $5million associated with CPChem’s investment in Qatar Chemical Company Ltd.(Q-Chem).  No interest costs were capitalized during 2001 or the period July 1, 2000through December 31, 2000.

 

*Income Taxes –*****CPChemis treated as a flow-through entity for federal income tax purposes wherebyeach member is taxable on its respective share of income and losses.  However, CPChem is directly liable forfederal and state income taxes and franchise taxes on certain separate legalentities and for any foreign taxes incurred. CPChem follows the liability method of accounting for these incometaxes.

 

*Comprehensive Income (Loss) –*****CPChem’sonly item of other comprehensive income (loss) resulted from the translationinto U.S. dollars of the financial statements of foreign subsidiaries andcorporate joint ventures whose functional currencies are not the U.S. dollar.

 

44

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*Accounting Pronouncements*– CPChem adopted Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” effectiveJanuary 1, 2002.  Implementation of thisstandard did not have a material effect on consolidated results of operations,financial position or liquidity.

 

In June 2001, theFinancial Accounting Standards Board (FASB) issued SFAS No. 143, “Accountingfor Asset Retirement Obligations,” which addresses the accounting and reportingrequirements for legal obligations associated with the retirement of long-livedassets.  This standard requires that aliability for an asset retirement obligation, measured at fair value, berecognized in the period in which it is incurred if a reasonable estimate offair value is determinable.  Thatinitial fair value is capitalized as part of the carrying amount of the long-livedasset and subsequently depreciated.  Theliability is adjusted each reporting period for accretion, with a charge to thestatement of operations.  CPChem adoptedSFAS No. 143 effective January 1, 2003. CPChem believes that the implementation of this new standard will nothave a material impact on consolidated results of operations or financialposition.

 

In July 2002, FASB issuedSFAS No. 146, “Accounting for Costs Associated With Exit or DisposalActivities,” which requires that a liability for costs associated with an exitor disposal activity be recognized when the liability occurs, and that theliability be measured initially at fair value. The liability is adjusted each reporting period for accretion, with acharge to the statement of operations. This statement replaces Emerging Issues Task Force (EITF) IssueNo. 94-3, “Liability Recognition for Certain Employee Termination Benefitsand Other Costs to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  CPChem will apply SFASNo. 146 to exit or disposal activities initiated on or after January 1, 2003.

 

Note 3.          Transactions withAffiliates

 

Significant transactionswith affiliated parties were as follows:

 
|                                      |   | **Years ended December 31,** |   | **July 1, 2000  (inception) through** |   |
|-------------------------------------------|--------|------------------------------|--------|---------------------------------------|--------|
| **Millions**                              |   | **2002**                     |   | **2001**                              |   | **December 31, 2000** |   |
| Net sales (a)                             |   | $                            | 659    |                                  | $      | 799 |   | $ | 412 |   |
| Other income                              |   | 32                           |   | 22                                    |   | 14 |   |
| Cost of goods sold (b,c)                  |   | 1,148                        |   | 1,310                                 |   | 923 |   |
| Selling, general and administrative (c,d) |   | 28                           |   | 64                                    |   | 143 |   |
|                                           |        |                              |        |                                       |        |  |  |  |  |  |

 

----

(a)          CPChem sells ethyleneresidue gas to ConocoPhillips’ crude oil refining operations, specialtychemicals, alpha olefin products and Aromatics & Styrenics by-products toChevronTexaco, and feedstocks and various services to non-consolidated equitycompanies, all at prices that approximate market.

 

(b)         ConocoPhillips sellsCPChem natural gas liquids feedstocks for olefins products, and provides commonfacility services such as steam generation, waste and water treatment, andwarehouse facilities.  CPChem purchasesfeedstocks from ChevronTexaco for CPChem’s Aromax® and paraxyleneunits at Pascagoula, Mississippi.  Inaddition, ChevronTexaco provides common facility and manufacturing services atCPChem’s Pascagoula facility.

 

(c)          ConocoPhillips andChevronTexaco provide various services to CPChem under services agreements.

 

(d)         Includes billings in 2002to Qatar Chemical Company Ltd. (Q-Chem), an equity affiliate, credited toexpense.

 

45

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Phillips PetroleumCompany and Conoco, Inc. consummated their merger on August 30, 2002, formingConocoPhillips.  For the purposes ofthis report, Conoco, Inc. and its majority-owned subsidiaries were consideredto be affiliates as of that date.

 

Services provided underservices agreements with ChevronTexaco and ConocoPhillips included activitiessuch as engineering consultation, research and development, laboratoryservices, environmental management services, security services and pipelineoperating services.

 

Due to an incident atConocoPhillips’ K-Resin® styrene-butadiene copolymer plant in March2000 (before CPChem was formed), the K-Resin facility that was contributed toCPChem was idled.  Under thecontribution agreement, upon formation of CPChem, ConocoPhillips agreed toindemnify CPChem for all physical loss or damage to the facility.  In addition, ConocoPhillips advanced CPChem$70 million in 2000.  Pursuant to theagreement, a certain portion of the advance would be re-characterized as amember contribution each month until the plant met a pre-established productionthreshold.  Accordingly, $35 million ofthe advance was recorded as Member Contributions during the six months endedDecember 31, 2000 and the remaining $35 million was recorded as MemberContributions during 2001.  During 2002,ConocoPhillips contributed $38 million as a result of K-Resin productionthreshold shortfalls.  In addition,ConocoPhillips agreed in 2002 to make a member contribution of $22 million tocompensate for K-Resin’s failure to meet pre-established earnings targets.  This contribution was recorded as areceivable from an affiliate at December 31, 2002, and was subsequentlyreceived by CPChem in 2003.

 

# **CPChem borrowed $50 million fromChevronTexaco in December 2000 and an additional $50 million in February 2001under a $100 million credit agreement. Both borrowings were repaid in March 2001 with a portion of the proceedsfrom the issuance of private placement notes, and the credit agreement withChevronTexaco was terminated.**

 

Note 4.          Business Interruption Insurance Settlement

 

An agreement was reachedin 2001 among ConocoPhillips and various insurers to settle the businessinterruption insurance claim associated with the March 2000 incident atCPChem’s (formerly ConocoPhillips’) Houston Chemical Complex K-Resinstyrene-butadiene copolymer plant. After adjusting for previously accrued claims, in 2001, CPChemrecognized $113 million in Other Income ($110million in Aromatics & Styrenics and $3 million in Specialty Products) inconnection with the settlement.  Inaddition, ConocoPhillips agreed in 2002 to reimburse CPChem an additional $5million related to the incident.  Thiswas recorded as Other Income in the fourth quarter of 2002 and is included in receivables from affiliates at December 31,2002.  The reimbursement was subsequentlyreceived by CPChem in 2003.

 

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Note5.          Inventories

 

Inventories were asfollows:

 
|                          |   | **December 31,** |       |
|-------------------------------|--------|------------------|------------|
| **Millions**                  |   | **2002**         | ** ** | **2001** | ** ** |
| LIFO inventories              |   |             |       |   |   |
| Olefins & Polyolefins     |   | $                | 332        |   | $ | 300 |   |
| Aromatics & Styrenics     |   | 150              |       | 112 |   |
| Specialty Products            |   | 48               |       | 58 |   |
| Total LIFO inventories        |   | 530              |       | 470 |   |
| Non-LIFO inventories          |   |             |       |   |   |
| Olefins & Polyolefins     |   | 52               |       | 66 |   |
| Aromatics & Styrenics     |   | 37               |       | 31 |   |
| Specialty Products            |   | 35               |       | 27 |   |
| Total non-LIFO inventories    |   | 124              |       | 124 |   |
| Materials, supplies and other |   | 48               |       | 44 |   |
| Total inventories             |   | $                | 702        |   | $ | 638 |   |

 

A lower-of-cost-or-marketinventory reserve was established in 2001 to adjust Aromatics & Styrenics’domestic dollar-value LIFO pool inventories to current net realizable value,resulting in a 2001 charge of approximately $25 million.  Market conditions and prices improved in2002, therefore, a similar reserve was not established at December 31, 2002.

 

The excess of replacementcost over book value of product inventories valued under the LIFO method was $147 million at December 31, 2002 and$29 million at December 31, 2001 (including the dollar-value LIFOreserve).

 

Note 6.          Investments in andAdvances to Affiliates

 

CPChem’s investments inits affiliates, who are also engaged in the manufacturing and marketing ofpetrochemicals and plastics, are accounted for using the equity method.  The carrying amounts of these investmentswere as follows:

 
|                                                    |   |          |       | **December 31,** |       |
|---------------------------------------------------------|--------|---------------|------------|------------------|------------|
| **Millions**                                            |   | **Ownership** | ** ** | **2002**         | ** ** | **2001** | ** ** |
| Qatar Chemical Company Ltd. (Q-Chem)                    |   | 49%           |       | $                | 206        |   | $ | — |   |
| Saudi Chevron Phillips Company                          |   | 50%           |       | 148              |       | 122 |   |
| Chevron Phillips Singapore Chemicals (Private)  Limited |   | 50%           |       | 49               |       | 43 |   |
| Phillips Sumika Polypropylene Company                   |   | 60%*          |       | 49               |       | 10 |   |
| K R Copolymer Co., Ltd.                                 |   | 60%           |       | 45               |       | 47 |   |
| Shanghai Golden Phillips Petrochemical Co.              |   | 40%           |       | 18               |       | 16 |   |
| Total investments                                       |   |          |       |             | $          | 515 |   | $ | 238 |   |
|                                                         |        |               |            |                  |            |  |  |  |  |  |  |

 

----

*  Profit/loss sharingpercentage.

 

Phillips SumikaPolypropylene Company (Phillips Sumika) and K R Copolymer Co., Ltd. are notconsolidated because CPChem does not have majority voting control of theseentities.  Dividends received fromequity investments totaled $16 million in 2002 and $2 million in 2001.  No dividends were received in the periodJuly 1, 2000 through December 31, 2000. Additional equity contributions to Phillips Sumika were made by itspartners in 2002, with CPChem’s share being $45 million.  Phillips Sumika used a portion of theproceeds to satisfy an outstanding feedstock payable to CPChem.

 

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***Qatar Chemical Company Ltd. (Q-Chem)***

 

Qatar Chemical CompanyLtd. (Q-Chem), a joint venture company, was formed in 1997 to develop aworld-scale petrochemical complex in Qatar in the Middle East at an estimatedcost of $1.2 billion.  The facility isdesigned to produce 1.1 billion pounds of ethylene, 1.0 billion pounds ofpolyethylene and 100 million pounds of 1-hexene annually.  Construction of the Q-Chem complex began inOctober 1999.  The complex is currently undergoing commissioning.  At December 31, 2002, $750 millionhad been drawn by Q-Chem under a 1999 bank financing agreement for theconstruction of the complex.  CPChem isrequired to fund any remaining construction costs, initial working capitalrequirements, and certain debt service and operating reserve fund requirementsthrough advances under a subordinated loan agreement with Q-Chem.

 

CPChem advanced Q-Chem$210 million in 2002 under the subordinated loan agreement.  No advances were made to Q-Chem during 2001or the six-month period ended December 31, 2000.  Advances bear interest at market-based rates and, upon completionof the complex, are to be repaid from cash available after the payment of debtobligations on Q-Chem’s $750 million senior bank debt, subject to certainfinancial tests.  The loan issubordinate to Q-Chem’s senior bank debt. CPChem expects to advance approximately $170 million to Q-Chem in 2003under the subordinated loan agreement. CPChem will have no further obligation to make advances under thesubordinated loan agreement upon completion of the facilities, as defined inthe bank financing agreements.

 

Ifthe project is not completed by August 2003 under the terms of the bankfinancing, the banks have the right to demand payment from each co-venturer ona pro rata, several basis to the extent necessary to cover the debt servicerequirements until August 2004.  If theproject is not completed by August 2004, the banks have the right to demandrepayment of all outstanding principal and interest from each co-venturer on apro rata, several basis.  These datesmay be extended for up to one year due to events of force majeure.  After the project is completed, the bankfinancing is non-recourse with respect to the co-venturers, with the exceptionof the contingent obligations described below. CPChem anticipates that the project will be completed prior to August2003.

 

In addition, after the project is completed, CPChemhas agreed to provide up to $75 million of loans to Q-Chem if there isinsufficient cash to pay the minimum debt service amount on the bankfinancing.  CPChem believes it isunlikely that funding under this support agreement will be required.

 

CPChem also agreed that,during the first 33 months of commercial operation, it will provide loans toQ-Chem if there is insufficient cash to pay the target debt serviceamount.  These loans are limited to anamount equal to lost operating margins resulting from sales volumes being lessthan 100% of design capacity.  CPChembelieves that any funding required under this support agreement is unlikely tohave a material adverse effect on CPChem’s consolidated results of operations,financial position or liquidity.

 

CPChem has entered intoan agency agreement with Q-Chem to act as an agent for the sale ofsubstantially all of Q-Chem’s production. CPChem has also entered into an offtake and credit risk agreement withQ-Chem, under which CPChem is required to purchase, at market prices, specifiedamounts of production if CPChem fails to sell that product under the terms ofthe agency agreement.  CPChem expectsthat it will be able to sell all the production under the terms of the agencyagreement.

 

Should the Q-Chem1-hexene unit fail to operate as designed, CPChem has guaranteed to compensateQ-Chem for any economic loss of diverting surplus ethylene not used to produce1-hexene to the HDPE units.  CPChembelieves the risk of the 1-hexene unit failing to operate as designed isremote. 

 

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Aggregate summarizedfinancial information follows:

 

*QatarChemical Company Ltd. (Q-Chem)*

 
|                              |   | **Years  ended December 31,** |   | **July 1, 2000  (inception) through** |   |
|-----------------------------------|--------|-------------------------------|--------|---------------------------------------|--------|
| **Millions**                      |   | **2002**                      |   | **2001**                              |   | **December 31, 2000** |   |
| Revenues                          |   | $                             | — |                                  | $      | — |   | $ | — |   |
| Income (loss) before income taxes |   | (22                           | )      | (10                                   | )      | (3 | ) |
| Net income (loss)                 |   | (22                           | )      | (10                                   | )      | (3 | ) |
|                                   |        |                               |        |                                       |        |  |  |  |  |  |

 
|                   |   | **December 31,** |       |
|------------------------|--------|------------------|------------|
|                   |   | **2002**         | ** ** | **2001** | ** ** | **2000** | ** ** |
| Current assets         |   | $                | 20         |   | $ | 3 |   | $ | 13 |   |
| Noncurrent assets      |   | 940              |       | 810 |   | 427 |   |
| Current liabilities    |   | 19               |       | 63 |   | 91 |   |
| Noncurrent liabilities |   | 964              |       | 751 |   | 340 |   |
|                        |        |                  |            |  |  |  |  |  |  |  |

 

***Saudi Chevron Phillips Company***

 

Saudi Chevron PhillipsCompany (Saudi Chevron Phillips) is a 50%-owned joint venture located in AlJubail, Saudi Arabia.  The plantproduces benzene and cyclohexane, and began production in December 1999.  Saudi Chevron Phillips Company was financedwith loans from Saudi Arabian commercial banks and a government agency.  The loans are payable in installments andmature in 2009.  The co-venturers have aseveral obligation of up to $25 million each to fund debt service requirementsin the event Saudi Chevron Phillips has insufficient cash to pay debtservice.  In addition, CPChem isobligated to purchase, at market price, 100% of production from the plant lessany quantities sold by Saudi Chevron Phillips in the Middle East region.  CPChem pays market price less a marketing feefor its purchases.

 

Aggregate summarizedfinancial information follows:

 

*Saudi Chevron Phillips Company*

 
|                              |   | **Years ended December 31,** |       | **July 1, 2000  (inception) through** |       |
|-----------------------------------|--------|------------------------------|------------|---------------------------------------|------------|
| **Millions**                      |   | **2002**                     | ** ** | **2001**                              | ** ** | **December 31, 2000** | ** ** |
| Revenues                          |   | $                            |  313  |                                  | $          |  220 |   | $ |  176 |   |
| Income (loss) before income taxes |   | 44                           |       | (19                                   | )          | 25 |   |
| Net income (loss)                 |   | 44                           |       | (19                                   | )          | 25 |   |
|                                   |        |                              |            |                                       |            |  |  |  |  |  |

 
|                   |   | **December 31,** |      |
|------------------------|--------|------------------|-----------|
|                   |   | **2002**         |      | **2001** |   | **2000** |   |
| Current assets         |   | $                |  121 |   | $ |  110 |   | $ |  153 |   |
| Noncurrent assets      |   | 519              |      | 546 |   | 600 |   |
| Current liabilities    |   | 88               |      | 112 |   | 104 |   |
| Noncurrent liabilities |   | 340              |      | 380 |   | 466 |   |
|                        |        |                  |           |  |  |  |  |  |  |  |

 

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***Other investments***

 

Aggregate summarizedfinancial information follows:

 

*Other investments*

 
|                              |   | **Years ended December 31,** |       | **July 1, 2000  (inception) through** |       |
|-----------------------------------|--------|------------------------------|------------|---------------------------------------|------------|
| **Millions**                      |   | **2002**                     | ** ** | **2001**                              | ** ** | **December 31, 2000** | ** ** |
| Revenues                          |   | $                            | 598        |                                  | $          | 599 |   | $ | 356 |   |
| Income (loss) before income taxes |   | 26                           |       | (156                                  | )          | (16 | ) |
| Net income (loss)                 |   | 22                           |       | (160                                  | )          | (17 | ) |
|                              |   |                         |       |                                  |       |   |   |
|                              |   | **December 31,**             |       |
|                              |   | **2002**                     |       | **2001**                              |       | **2000** | ** ** |
| Current assets                    |   | $                            |  185  |                                  | $          |  174 |   | $ |  203 |   |
| Noncurrent assets                 |   | 336                          |       | 343                                   |       | 516 |   |
| Current liabilities               |   | 101                          |       | 173                                   |       | 136 |   |
| Noncurrent liabilities            |   | 105                          |       | 123                                   |       | 178 |   |
|                                   |        |                              |            |                                       |            |  |  |  |  |  |  |  |  |

** **

The data above includes a$137 million impairment charge recorded by Phillips Sumika in the fourthquarter of 2001.  CPChem recorded $46million of charges in 2001 as Equity in Net Loss of Affiliates representing itsshare of the impairment charge, adjusted for the difference between CPChem’scarrying value of its investment in Phillips Sumika and CPChem’s equity in itsnet assets.

 

Note 7.          Property, Plant andEquipment

 

Property, plant andequipment was as follows:

 
|                                         |   | **December 31,** |   |
|----------------------------------------------|--------|------------------|--------|
| **Millions**                                 |   | **2002**         |   | **2001** |   |
| Olefins & Polyolefins                    |   | $                | 4,820  |   | $ | 4,835 |   |
| Aromatics & Styrenics                    |   | 2,065            |   | 1,989 |   |
| Specialty Products                           |   | 529              |   | 495 |   |
| Other                                        |   | 193              |   | 196 |   |
| Gross property, plant and equipment, at cost |   | 7,607            |   | 7,515 |   |
| Accumulated depreciation                     |   | 3,657            |   | 3,532 |   |
| Net property, plant and equipment            |   | $                | 3,950  |   | $ | 3,983 |   |

 

Approximately $6.2billion of gross property, plant and equipment at December 31, 2002 consistedof chemical plant assets depreciated on estimated useful lives of approximately25 years.  Other non-plant items, suchas furniture, fixtures, buildings and automobiles, have estimated useful livesranging from 5 to 45 years, with a weighted average of 27 years.

 

Assetimpairment charges totaling $6 million were recorded in the third quarter of2002, consisting primarily of a $5 million charge related to CPChem’s Colton,California polyethylene pipe facility, part of the Olefins & Polyolefinssegment.  The facility, written down toits estimated net realizable value, is classified as an asset held for sale andis included in Other Current Assets.

 

CPChem recordedbefore-tax asset impairment charges totaling $44 million in 2001.  Of these charges, $42 million was related tothe Puerto Rico facility, part of the Aromatics & Styrenics segment, as aresult of the outlook for future margin conditions at that time.  The present value of projected future cashflows was used to determine fair value. The remaining $2 million of impairment charges was related to apolyethylene pipe manufacturing facility that is part of the Olefins &Polyolefins segment.

 

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In addition to theimpairment charges previously described, CPChem recorded $104 million ofcharges during 2001 as depreciation expense, included as a component of Cost ofGoods Sold, for permanent shutdowns in 2001 of an ethylene unit at Sweeny,cyclohexane and benzene units in Puerto Rico, and a polyethylene developmentalreactor at the Houston Chemical Complex, as well as accelerated depreciationassociated with the planned permanent shutdown in February 2002 of twopolyethylene particle loop reactors at the Orange facility.  The gross value of assets retired was $338million, with $247 million of associated accumulated depreciation.

 

Before-tax assetimpairment charges totaling $137 million were recorded in the period July 1,2000 through December 31, 2000. Approximately $135 million of the charges related to the write-down ofthe Puerto Rico facility, resulting from the outlook for future marginconditions at that time and a shift in strategic direction for thefacility.  The present value ofprojected future cash flows was used to determine fair value.

 

Note 8.          EnvironmentalLiabilities

 

CPChem is subject to federal, state and localenvironmental laws and regulations that may result in obligations to mitigateor remove the effects on the environment of the placement, storage, disposal orrelease of certain chemical, mineral and petroleum substances at itssites.  Accrued costs for environmentalliabilities, undiscounted, totaled $7 million at both December 31, 2002 andDecember 31, 2001.  Approximately $1million of environmental expenses was paid in 2001.  There were no accrued environmental costs associated withdiscontinued or sold operations.

 

Note 9.          Debt

 

Long-term debt, net ofapplicable debt discounts, as shown on the consolidated balance sheet was asfollows:

 
|                        |   | **December 31,** |   |
|-----------------------------|--------|------------------|--------|
| **Millions**                |   | **2002**         |   | **2001** |   |
| 7% notes due 2011           |   | $                | 500    |   | $ | 500 |   |
| 5 3/8% notes due  2007 |   | 500              |   | — |   |
| Commercial paper            |   | 185              |   | 1,002 |   |
| Other                       |   | 10               |   | 11 |   |
| Subtotal                    |   | 1,195            |   | 1,513 |   |
| Unamortized debt discount   |   | (5               | )      | (6 | ) |
| Total long-term debt        |   | $                | 1,190  |   | $ | 1,507 |   |

 

In addition to the debtinformation presented, CPChem had $290 million of borrowings outstanding atDecember 31, 2002 and $199 million of borrowings outstanding at December 31,2001 under a trade receivables securitization agreement.  These borrowings are classified asshort-term and were secured by $393 million and $269 million of tradereceivables, respectively.  Theagreement allows CPChem to borrow up to $300 million for which CPChem grants asecurity interest in certain of its trade receivables as collateral for anyamounts outstanding.  As the receivablesare collected by CPChem, borrowings under the agreement are reduced or securityinterests in new trade receivables are granted.  The trade receivables securitization agreement, which replaced aprior agreement that expired in May 2002, currently expires on May 21,2003.  CPChem is currently negotiatingthe terms of an extension of the expiration date of the current agreement toMay 2004.  The interest rate of borrowingsoutstanding under the agreement was 1.40% at December 31, 2002 and 2.06% atDecember 31, 2001, and averaged 1.78% in 2002 and 3.28% in 2001.  The trade receivables securitization programbegan in May 2001.  Proceeds from theinitial borrowing were used to reduce outstanding commercial paper obligations.

 

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On June 21, 2002, ChevronPhillips Chemical Company LLC and its wholly-owned subsidiary, Chevron PhillipsChemical Company LP, jointly and severally issued $500 million of seniorunsecured 5 3/8% notes (the 5 3/8% notes) in a privateplacement.  The 5 3/8% notes aredue in June 2007 and interest is payable semiannually, with the first interestpayment made in December 2002.  In March2001, Chevron Phillips Chemical Company LLC and Chevron Phillips ChemicalCompany LP jointly and severally issued $500 million of senior unsecured 7%notes (the 7% notes) in a private placement. These notes are due in March 2011 and interest is also payablesemiannually.  Both the 5 3/8%notes and the 7% notes contain certain covenants, such as limitations on liens,sale/leaseback transactions, sales of assets and business combinations, thatCPChem does not consider to be restrictive to normal operations.  Proceeds from both debt issuances were usedto retire a portion of outstanding commercial paper obligations and for generalcorporate purposes.  In addition, aportion of the proceeds from the 7% notes was used to repay the notes payableto ChevronTexaco described later.

 

In accordance withobligations under the registration rights agreement entered into in connectionwith the issuances of the 5 3/8%notes and the 7% notes, the LLC and the LP filed joint registration statementson Form S-4 with the SEC to register exchange notes that have termssubstantially identical to the 5 3/8%notes and the 7% notes, except that the exchange notes are freelytradeable.  All of the 5 3/8% notes were tendered forregistered exchange notes and substantially all of the 7% notes were tendered.

 

Notes issued under CPChem’s commercial paper programare in the tier-2 commercial paper market with maturities of 90 days orless.  These commercial paper borrowingsare classified as Long-Term Debt on the consolidated balance sheet sinceCPChem’s intent is to refinance or replace the obligations on a long-term basisand CPChem has the option to extend the date of repayment by one year of anyborrowings outstanding on August 28, 2003 under the 364-day credit agreementdescribed below, which serves as backup committed credit.  The weighted average interest rate ofcommercial paper borrowings outstanding was 1.45% at December 31, 2002 and3.05% at December 31, 2001.  Interestrates under the commercial paper program averaged 2.20% during 2002, 5.01%during 2001 and 6.91% during the six-month period ended December 31, 2000.

 

On August 29, 2002,CPChem entered into a $400 million 364-day credit facility and a $400 millionthree-year credit facility with a syndicate of banks.  Both facilities are used to provide backup committed credit forthe commercial paper program.  Theagreements replaced a $700 million 364-day credit agreement that expired inJuly 2002 and a $900 million three-year credit agreement that CPChem terminatedeffective upon the closing of the new credit facilities. The current 364-dayagreement provides that CPChem may, at its option, extend the date of repaymentby one year of any borrowings outstanding on August 28, 2003 under theagreement.  The agreements containcovenants and events of default typical of bank revolving credit facilities,such as restrictions on liens.  Theagreements also contain a provision requiring the maintenance of ownership ofCPChem by ChevronTexaco and ConocoPhillips of at least 50% in theaggregate.  Provisions under theseagreements are not considered restrictive to normal operations.  The rates of interest of both existingagreements vary, depending on market rates and CPChem’s long-term debtrating.  There were no borrowingsoutstanding under any of the credit agreements at December 31, 2002 or 2001,nor were there any borrowings under any of the credit facilities during 2002 orthe six-month period ended December 31, 2000. CPChem borrowed funds for one day on September 12, 2001 under the $900million credit agreement.  CPChemintends to request an extension of the expiration date of the current 364-daycredit agreement or replace the existing agreements with new agreements thathave substantially similar terms.

 

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

 

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

 

Note 10.    Members’ Preferred Interests

 

OnJuly 1, 2002, CPChem sold $250 million of Members’ Preferred Interests,purchased 50% each by ChevronTexaco and ConocoPhillips.  Preferred distributions are cumulative at 9%per annum and are payable quarterly from cash earnings, as defined in CPChem’sSecond Amended and Restated Limited Liability Company Agreement.  The securities have no stated maturity dateand are redeemable quarterly, in increments of $25 million, when CPChem’s ratioof debt to total capitalization falls below a stated level.  The Members’ Preferred Interests are alsoredeemable at the sole option of CPChem. Proceeds were used to retire a portion of outstanding commercial paperobligations.  There were no redemptionsin 2002.  Accrued dividends payabletotaled $11 million at December 31, 2002 and are included in Other Liabilitiesand Deferred Credits.

 

Note 11.    Contingencies

 

In the case of all knowncontingencies, CPChem records an undiscounted liability when the loss isprobable and the amount is reasonably estimable.  These liabilities are not reduced for potential insurancerecoveries.  If applicable, undiscountedreceivables are recorded for probable insurance or other third-partyrecoveries.  Based on currentlyavailable information, CPChem believes it is remote that future costs relatedto known contingent liabilities will exceed current accruals by an amount thatwould have a material adverse effect on consolidated results of operations,financial position or liquidity.

 

As facts concerningcontingencies become known, CPChem reassesses its position both with respect toaccrued liabilities and other potential exposures.  Estimates that are particularly sensitive to future change includelegal matters and contingent liabilities for environmental remediation.  Estimated future environmental remediationcosts are subject to change due to such factors as the unknown magnitude ofcleanup costs, prospective changes in laws and regulations, the unknown timingand extent of remedial actions that may be required and the determination ofCPChem’s liability in proportion to other responsible parties.  Estimated future costs related to legalmatters are subject to change as events occur and as additional informationbecomes available during the administrative and litigation process.

 

CPChem is a party to anumber of legal proceedings pending in various courts or agencies for which, insome instances, no provision has been made. While the final outcome of these proceedings cannot be predicted withcertainty, CPChem believes that none of these proceedings, when resolved, willhave a material adverse effect on consolidated results of operations, financialposition or liquidity.

 

Note 12.    Credit Risk

 

Financial instrumentsthat potentially subject CPChem to concentrations of credit risk consistprimarily of cash equivalents and trade receivables.  Cash equivalents are comprised of bank accounts and short-terminvestments with several financial institutions that have high credit ratings.  CPChem’s policy for short-term investmentsdiversifies and limits exposure to credit risk.  Trade receivables are dispersed among a broad customer base, bothdomestic and foreign, which results in limited concentrations of creditrisk.  CPChem maintains credit policiesand procedures that minimize credit risk and exposures.  Letters of credit or negotiated salescontracts are utilized when customer financial strength is consideredinsufficient.

 

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Note 13.    Operating Leases

 

CPChem leases tank andhopper rail cars, computers, office buildings and other facilities andequipment.  Total operating lease rentalcharges were $48 million in 2002, $62 million in 2001 and $28 million duringthe six-month period ended December 31, 2000. Aggregate future minimum lease payments under non-cancelable leases atDecember 31, 2002 totaled $28 million, $28 million, $26 million, $19 millionand $48 million in the years 2003 through 2007, respectively, and $95 millionthereafter.

 

During 2002, CPChementered into a synthetic lease (a lease that qualifies as an operating leasefor financial accounting purposes and as a capital lease for tax accountingpurposes) covering its new headquarters building.  Under the terms of the lease agreement, CPChem has a fixed pricepurchase option.  The purchase option price was considered tobe the fair market value of the building at the inception of the lease.  If CPChem does not exercise thepurchase option upon the expiration of the lease in 2007, 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 a stated amount. However, CPChem is entitled to receive any proceeds from the sale of thebuilding that are in excess of CPChem’s purchase option price.

 

Included in aggregateminimum lease payments in 2007 is CPChem’s maximum exposure of $27 millionunder the contingent obligation associated with the synthetic leaseagreement.  While it is not possible topredict with certainty the amount, if any, that CPChem would be required to payor be entitled to receive should the building be sold to a third party upon theexpiration of the lease, CPChem feels that the amount paid or received wouldnot be material to results of operations, financial position or liquidity.

 

Note14.    Benefit Plans

 

Almost all employees ofCPChem are former employees of Chevron Corporation (Chevron) or PhillipsPetroleum Company (Phillips).  Theseindividuals provided services to CPChem from July 1, 2000 (the formation dateof CPChem) through December 31, 2000 pursuant to transition servicesagreements.  These individuals werecovered by Chevron’s or Phillips’ employee benefit plans through December 31,2000 and became employees of CPChem on January 1, 2001.  CPChem established its own benefit planseffective January 1, 2001.  CertainCPChem benefit plans provide that employees who were former employees ofChevron or Phillips receive enhanced benefits, including credit for servicewhile employees of Chevron or Phillips.

 

*Pension and Other Postretirement Health Care*

 

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

 

CPChemalso offers health care benefits to eligible employees, mostly U.S.-based, upontheir retirement.  A retiree flexiblespending account is established by CPChem for eligible retirees and isestablished by CPChem at the time of retirement based on years of service timesa fixed dollar amount and marital status. Retirees may use funds in their account to purchase medical and/ordental coverage from CPChem or from private health care plans, or to payeligible out-of-pocket

 

54

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health care expenses. Retirees’ flexible spending accounts earn interest upon inception atmarket-based rates.  Any changes infuture health care cost rates for retirees would not impact future CPChemearnings as health care benefits for retirees are solely based on years ofservice and marital status.

 

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

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

 

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

 
|                                            |   | **December  31, 2002** |   | **December  31, 2001** |   |
|-------------------------------------------------|--------|------------------------|--------|------------------------|--------|
| **Millions**                                    |   | **Pension  Benefits**  |   | **Other  Benefits**    |   | **Pension  Benefits** |   | **Other  Benefits** |   |
| Change  in Benefit Obligation                   |   |                   |   |                   |   |   |   |   |   |
| Benefit  obligation at beginning of year        |   | $                      | 219    |                   | $      | 51 |   | $ | 186 |   | $ | 48 |   |
| Service  cost                                   |   | 18                     |   | 2                      |   | 16 |   | 2 |   |
| Interest  cost                                  |   | 16                     |   | 4                      |   | 14 |   | 3 |   |
| Actuarial  loss                                 |   | 25                     |   | 6                      |   | 5 |   | 1 |   |
| Curtailment  loss                               |   | (1                     | )      | —                 |   | — |   | — |   |
| Plan  amendment                                 |   | 5                      |   | —                 |   | — |   | — |   |
| Foreign  currency exchange loss                 |   | 1                      |   | —                 |   | — |   | — |   |
| Benefits  paid                                  |   | (12                    | )      | (1                     | )      | (2 | ) | (3 | ) |
| Benefit  obligation at end of year              |   | 271                    |   | 62                     |   | 219 |   | 51 |   |
| Change  in Plan Assets                          |   |                   |   |                   |   |   |   |   |   |
| Fair  value of plan assets at beginning of year |   | 64                     |   | —                 |   | 38 |   | — |   |
| Actual  return on plan assets                   |   | (5                     | )      | —                 |   | 2 |   | — |   |
| Employer  contributions                         |   | 52                     |   | 1                      |   | 26 |   | 3 |   |
| Foreign  currency exchange gain                 |   | 2                      |   | —                 |   | — |   | — |   |
| Benefits  paid                                  |   | (12                    | )      | (1                     | )      | (2 | ) | (3 | ) |
| Fair  value of plan assets at end of year       |   | 101                    |   | —                 |   | 64 |   | — |   |
| Funded  Status of Plan                          |   |                   |   |                   |   |   |   |   |   |
| Excess  obligation                              |   | (170                   | )      | (62                    | )      | (155 | ) | (51 | ) |
| Unrecognized  net actuarial loss                |   | 35                     |   | 8                      |   | 4 |   | 2 |   |
| Unrecognized  transition obligation             |   | 1                      |   | —                 |   | 1 |   | — |   |
| Unrecognized  prior service cost                |   | 129                    |   | 37                     |   | 141 |   | 41 |   |
| Total  recognized                               |   | $                      | (5     | )                      | $      | (17 | ) | $ | (9 | ) | $ | (8 | ) |
|                                            |   |                   |   |                   |   |   |   |   |   |
| Components  of total recognized                 |   |                   |   |                   |   |   |   |   |   |
| Prepaid  pension benefits                       |   | $                      | — |                   | $      | — |   | $ | 5 |   | $ | — |   |
| Intangible  asset                               |   | 35                     |   | —                 |   | 25 |   | — |   |
| Accrued  pension liability                      |   | (40                    | )      | (17                    | )      | (39 | ) | (8 | ) |
| Total  recognized                               |   | $                      | (5     | )                      | $      | (17 | ) | $ | (9 | ) | $ | (8 | ) |

 

55

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Included in the pensionplans tables is an unfunded supplemental retirement plan covering keyexecutives.  The benefit obligationassociated with this plan was $5 million at December 31, 2002 and $10 millionat December 31, 2001.  Also included areseparate pension plans for employees of the Puerto Rico and Belgium facilities,and employees of certain bargaining units within the Performance Pipe divisionof CPChem.

 

The projected benefitobligation, accumulated benefit obligation and fair value of plan assets forpension plans with accumulated benefit obligations in excess of plan assets was$253 million, $124 million and $87 million, respectively, at December 31, 2002,and $220 million, $96 million and $28 million, respectively, at December 31,2001.

 

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

 
|                                    |   | **December  31, 2002** |   | **December  31, 2001** |   |
|-----------------------------------------|--------|------------------------|--------|------------------------|--------|
|                                    |   | **Pension  Benefits**  |   | **Other  Benefits**    |   | **Pension  Benefits** |   | **Other  Benefits** |   |
| Discount  rate                          |   | 6.5                    | %      | 6.5                    | %      | 7.3 | % | 7.3 | % |
| Expected  return on plan assets         |   | 8.0                    |   | —                 |   | 10.0 |   | — |   |
| Rate of increase in compensation levels |   | 4.0                    |   | —                 |   | 4.0 |   | — |   |

 

*ContributionPlans*

 

Defined contributionplans are available for most employees, whereby CPChem matches a percentage ofthe employee’s contribution.  CPChem’scontributions to the plans are expensed and funded on a current basis, and totaled$13 million in 2002 and $13 million in 2001.

 

*Stock-BasedCompensation*

 

CPChem currently does notutilize any stock-based employee compensation plans, as defined in SFAS No.123, “Accounting for Stock-Based Compensation.”

 

*TerminationBenefits*

 

Approximately $8 millionwas recorded in 2001 for employee termination benefits in connection withannounced workforce reductions of 242 positions at various locations.  Approximately $7 million was recorded asSelling, General and Administrative expense and $1 million was recorded as Cost of Goods Sold.  Termination benefits payable totaled $6million at December 31, 2001 and were paid in 2002.

 

Note 15.    Taxes

 

CPChem is treated as aflow-through entity for federal income tax purposes, whereby each member istaxable on its respective share of income and losses.  However, CPChem is directly liable for federal and state incometaxes and franchise taxes on certain separate legal entities and for anyforeign taxes incurred.  CPChem has aU.S. subsidiary operating in Puerto Rico that is subject to U.S. federal incometax, but has been granted an exemption from certain Puerto Rico taxes,including income taxes.  All Puerto Ricotax exemptions related to this subsidiary expire in 2017.  Limited tax incentives, in the form ofreduced income tax rates, also exist in South Korea, China, Saudi Arabia andQatar.  CPChem is subject to stateincome tax in certain jurisdictions.

 

56

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Thecomponents of income tax expense follows:

 
|                     |   | **Years ended December 31,** |   | **July 1, 2000  (inception) through** |   |
|--------------------------|--------|------------------------------|--------|---------------------------------------|--------|
| **Millions**             |   | **2002**                     |   | **2001**                              |   | **December 31, 2000** |   |
| Federal                  |   |                         |   |                                  |   |   |   |
| Current                  |   | $                            | (1     | )                                     | $      | — |   | $ | — |   |
| Deferred                 |   |                         | — |                                  |   | 44 |   |   | 27 |   |
| State – current     |   |                         | 1      |                                  |   | — |   |   | — |   |
| Foreign – current   |   |                         | 6      |                                  |   | 5 |   |   | 1 |   |
| Total income tax expense |   | $                            | 6      |                                  | $      | 49 |   | $ | 28 |   |

 

Deferred income taxassets and liabilities follow:

 
|                                         |   | **December 31,** |   |
|----------------------------------------------|--------|------------------|--------|
| **Millions**                                 |   | **2002**         |   | **2001** |   |
| Deferred income tax assets                   |   |             |   |   |   |
| Federal                                      |   | $                | 181    |   | $ | 175 |   |
| Foreign                                      |   | —           |   | 1 |   |
| Gross deferred income tax assets             |   | 181              |   | 176 |   |
| Valuation allowance                          |   | (181             | )      | (175 | ) |
| Deferred income tax assets                   |   | —           |   | 1 |   |
| Deferred tax liabilities – foreign      |   | (2               | )      | (2 | ) |
| Net deferred income tax assets (liabilities) |   | $                | (2     | ) | $ | (1 | ) |

 

At December 31, 2002 and2001, the deferred tax assets of CPChem’s Puerto Rico subsidiary were fullyoffset by valuation allowances.  Avaluation allowance of $92 million was initially established in December2000.  The valuation allowance reduceddeferred tax assets of the Puerto Rican subsidiary’s net operating losscarryforwards and tax depreciation differences to amounts that would morelikely than not be realized at that time. During 2001, the valuation allowance was increased by $83 million sothat the total valuation allowance relating to the Puerto Rican subsidiary’s deferredtax assets totaled $175 million at December 31, 2001.  Approximately $44 million of the increase related to the deferredtax assets balance at December 31, 2000 of the Puerto Rican subsidiary.  The increase in the valuation allowance in2001, charged to income tax expense, was necessitated, in part, by theConocoPhillips merger with Tosco Corporation in September 2001, which triggeredregulatory limitations on the future utilization of the Puerto Ricansubsidiary’s pre-merger net operating losses. The valuation allowance was also increased in 2001 as a result of achange in the outlook for future margin conditions at that time.  In 2002, the valuation allowance wasincreased to $181 million primarily to offset recognition of tax benefitsassociated with continued losses. Uncertainties that may affect the realization of these assets includetax law changes and the future profitability of operations.

 

Net deferred income taxassets and liabilities related to the following:

 
|                                         |   | **December 31,** |   |
|----------------------------------------------|--------|------------------|--------|
| **Millions**                                 |   | **2002**         |   | **2001** |   |
| Deferred income tax assets                   |   |             |   |   |   |
| Loss carryforward (expires 2011 - 2021)      |   | $                | 144    |   | $ | 126 |   |
| Depreciation and amortization                |   | 31               |   | 45 |   |
| Foreign and other                            |   | 6                |   | 5 |   |
| Gross deferred income tax assets             |   | 181              |   | 176 |   |
| Valuation allowance                          |   | (181             | )      | (175 | ) |
| Deferred income tax assets                   |   | —           |   | 1 |   |
| Deferred tax liabilities – foreign      |   | (2               | )      | (2 | ) |
| Net deferred income tax assets (liabilities) |   | $                | (2     | ) | $ | (1 | ) |

 

57

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Note 16.    Segment and GeographicInformation

 

CPChem’s reportingstructure is based on the grouping of similar products, resulting in threeoperating segments.  Effective January1, 2002, CPChem restructured the composition of its operating segments.  Prior year information has been restated toconform to the current segment reporting presentation.

 

*Olefins & Polyolefins*– This segment gathers, buys, sells and fractionates natural gas liquids, andmanufactures and markets olefin products such as ethylene and propylene.  This segment also manufactures and marketsalpha olefins and polyolefin products such as normal alpha olefins,polyethylene, polypropylene and polyethylene pipe.  CPChem’s five olefin and polyolefin production facilities arelocated in Texas.  CPChem also has ninedomestic pipe facilities and one in Mexico, and one domestic pipe fittingsfacility.  In addition, CPChem ownsequity interests in a polypropylene facility located at the Houston ChemicalComplex in Texas and in polyethylene facilities in Singapore and China.  Construction of a world-scale ethylene,polyethylene and 1-hexene facility in Qatar, in which CPChem has a 49% equityinterest, is nearing completion and is currently undergoing commissioning.  A high-density polyethylene plant located atCPChem’s Cedar Bayou facility in Texas, of which CPChem has a 50% interest, isalso currently undergoing commissioning.

 

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

 

*Specialty Products*– This segment manufactures and markets a variety of specialty chemicalproducts, including organosulfur chemicals and high-performance polyphenylenesulfide polymers and compounds sold under the trademark RytonTM.  Major production facilities are located inTexas, Belgium and Singapore.

 

“Other” or “Corporate”includes items not directly attributable to CPChem’s operating segments.  Interest expense and income are generallyretained within Corporate, as are charges related to domestic workforcereductions.

 

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

 
| **Millions**                           |   | **Olefins &  Polyolefins  (O&P)** |   | **Aromatics &  Styrenics  (A&S)** |   | **Specialty  Products**                  |   | **Corporate  & Other  (Other)**      |   | **Consolidated** |   |
|----------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------|--------|
| **Investments/advances to affiliates** |   |                                      |   |                                      |   |                                     |   |                                     |   |             |   |
| December 31, 2002                      |   | $                                         | 322    |                                      | $      | 193                                      |   | $                                        | — |             | $      | — |   | $ | 515 |   |
| December 31, 2001                      |   | 68                                        |   | 170                                       |   | —                                   |   | —                                   |   | 238              |   |
|                                   |   |                                      |   |                                      |   |                                     |   |                                     |   |             |   |
| Total assets                           |   |                                      |   |                                      |   |                                     |   |                                     |   |             |   |
| December 31, 2002                      |   | 3,620                                     |   | 1,815                                     |   | 468                                      |   | 206                                      |   | 6,109            |   |
| December 31, 2001                      |   | 3,465                                     |   | 1,679                                     |   | 467                                      |   | 249                                      |   | 5,860            |   |
|                                   |   |                                      |   |                                      |   |                                     |   |                                     |   |             |   |
| Capital & investment expenditures  |   |                                      |   |                                      |   |                                     |   |                                     |   |             |   |
| Year  ended December 31, 2002          |   | 179                                       |   | 103                                       |   | 20                                       |   | 12                                       |   | 314              |   |
| Year  ended December 31, 2001          |   | 134                                       |   | 121                                       |   | 17                                       |   | 19                                       |   | 291              |   |
| July  1, 2000 (inception) through      |   |        not  |   |        not  |   |        not |   |        not |   | 112              |   |
| December  31, 2000                     |   | available                                 |   | available                                 |   | available                                |   | available                                |   |             |   |
|                                        |        |                                           |        |                                           |        |                                          |        |                                          |        |                  |        |  |  |  |  |  |

 

58

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| **Millions**                                         |   | **Olefins &  Polyolefins  (O&P)** |   | **Aromatics &  Styrenics  (A&S)** |   | **Specialty  Products** |   | **Corporate,  Other &.  Eliminations  (Other)** |   | **Consolidated** |   |
|------------------------------------------------------|--------|-------------------------------------------|--------|-------------------------------------------|--------|-------------------------|--------|-----------------------------------------------------|--------|------------------|--------|
| *Year ended December 31, 2002*                       |   |                                      |   |                                      |   |                    |   |                                                |   |             |   |
| Net  sales – external                           |   | $                                         | 3,211  |                                      | $      | 1,825                   |   | $                                                   | 353    |             | $      | — |   | $ | 5,389 |   |
| Net sales – inter-segment                       |   | 263                                       |   | 124                                       |   | 1                       |   | (388                                                | )      | —           |   |
| Equity in income (loss) of  affiliates               |   | (10                                       | )      | 32                                        |   | —                  |   | —                                              |   | 22               |   |
| Other income                                         |   | 39                                        |   | 22                                        |   | 1                       |   | —                                              |   | 62               | (a)    |
| Total revenue                                        |   | 3,503                                     |   | 2,003                                     |   | 355                     |   | (388                                                | )      | 5,473            |   |
| Operating and selling costs                          |   | 3,284                                     |   | 1,926                                     |   | 296                     |   | (365                                                | )      | 5,141            | (b)    |
| Depreciation and amortization                        |   | 180                                       |   | 90                                        |   | 19                      |   | 2                                                   |   | 291              | (c)    |
| Asset impairments                                    |   | 6                                         |   | —                                    |   | —                  |   | —                                              |   | 6                | (d)    |
| Income  (loss) before interest & taxes           |   | 33                                        |   | (13                                       | )      | 40                      |   | (25                                                 | )      | 35               |   |
| Interest  income (expense), net                      |   | 5                                         |   | 1                                         |   | —                  |   | (65                                                 | )      | (59              | )      |
| Income tax benefit (expense)                         |   | 2                                         |   | (1                                        | )      | (7                      | )      | —                                              |   | (6               | )      |
| Net  income (loss)                                   |   | 40                                        |   | (13                                       | )      | 33                      |   | (90                                                 | )      | (30              | )      |
| Distributions on members’ preferred interests   |   | —                                    |   | —                                    |   | —                  |   | (11                                                 | )      | (11              | )      |
| Income  (loss) attributed to members’ interests |   | $                                         | 40     |                                      | $      | (13                     | )      | $                                                   | 33     |             | $      | (101 | ) | $ | (41 | ) |
|                                                 |   |                                      |   |                                      |   |                    |   |                                                |   |             |   |
| *Year ended December 31, 2001*                       |   |                                      |   |                                      |   |                    |   |                                                |   |             |   |
| Net  sales – external                           |   | $                                         | 3,793  |                                      | $      | 1,708                   |   | $                                                   | 370    |             | $      | — |   | $ | 5,871 |   |
| Net sales – inter-segment                       |   | 204                                       |   | 137                                       |   | 1                       |   | (342                                                | )      | —           |   |
| Equity in income (loss) of  affiliates               |   | (76                                       | )      | 11                                        |   | —                  |   | —                                              |   | (65              | )(e)   |
| Other income                                         |   | 40                                        |   | 160                                       |   | 4                       |   | —                                              |   | 204              | (f)    |
| Total revenue                                        |   | 3,961                                     |   | 2,016                                     |   | 375                     |   | (342                                                | )      | 6,010            |   |
| Operating and selling costs                          |   | 3,863                                     |   | 2,047                                     |   | 326                     |   | (315                                                | )      | 5,921            | (g)    |
| Depreciation and amortization                        |   | 262                                       |   | 99                                        |   | 18                      |   | 2                                                   |   | 381              | (h)    |
| Asset impairments                                    |   | 2                                         |   | 42                                        |   | —                  |   | —                                              |   | 44               | (i)    |
| Income  (loss) before interest & taxes           |   | (166                                      | )      | (172                                      | )      | 31                      |   | (29                                                 | )      | (336             | )      |
| Interest  income (expense), net                      |   | —                                    |   | 3                                         |   | —                  |   | (98                                                 | )      | (95              | )      |
| Income tax benefit (expense)                         |   | 1                                         |   | (44                                       | )      | (6                      | )      | —                                              |   | (49              | )(j)   |
| Net  income (loss)                                   |   | $                                         | (165   | )                                         | $      | (213                    | )      | $                                                   | 25     |             | $      | (127 | ) | $ | (480 | ) |
|                                                 |   |                                      |   |                                      |   |                    |   |                                                |   |             |   |
| *July 1, 2000 (inception) through December 31, 2000* |   |                                      |   |                                      |   |                    |   |                                                |   |             |   |
| Net  sales – external                           |   | $                                         | 2,076  |                                      | $      | 1,148                   |   | $                                                   | 178    |             | $      | — |   | $ | 3,402 |   |
| Net sales – inter-segment                       |   | 103                                       |   | 64                                        |   | —                  |   | (167                                                | )      | —           |   |
| Equity in income (loss) of  affiliates               |   | (13                                       | )      | 10                                        |   | —                  |   | —                                              |   | (3               | )      |
| Other income                                         |   | 25                                        |   | 32                                        |   | 7                       |   | —                                              |   | 64               | (k)    |
| Total revenue                                        |   | 2,191                                     |   | 1,254                                     |   | 185                     |   | (167                                                | )      | 3,463            |   |
| Operating and selling costs                          |   | 2,040                                     |   | 1,259                                     |   | 164                     |   | (130                                                | )      | 3,333            | (l)    |
| Depreciation and amortization                        |   | 109                                       |   | 33                                        |   | 9                       |   | —                                              |   | 151              | (m)    |
| Asset impairments                                    |   | —                                    |   | 135                                       |   | —                  |   | 2                                                   |   | 137              | (n)    |
| Income  (loss) before interest & taxes           |   | 42                                        |   | (173                                      | )      | 12                      |   | (39                                                 | )      | (158             | )      |
| Interest  income (expense), net                      |   | 1                                         |   | —                                    |   | —                  |   | (56                                                 | )      | (55              | )      |
| Income tax expense                                   |   | (1                                        | )      | (25                                       | )      | (2                      | )      | —                                              |   | (28              | )(o)   |
| Net  income (loss)                                   |   | $                                         | 42     |                                      | $      | (198                    | )      | $                                                   | 10     |             | $      | (95 | ) | $ | (241 | ) |

 

59

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Thefollowing charges or benefits were related to items such as asset impairments,assets retirements, business interruption and property casualty insurance claimsettlements, pension plan curtailments and other items of that nature.

 

(a)          Includes$9 million of benefits in A&S related to business interruption and propertycasualty insurance claim settlements.

(b)         Includes $6 million of net charges, primarily related to apension curtailment charge in A&S. Also includes a benefit for the reversal of certain customer claimaccruals, offset by the write-off of two technology projects in O&P.

(c)          Includes$28 million of net charges related to asset retirements - $21 million inA&S and $7 million in O&P.

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

(e)          Includes$43 million of net charges, mostly CPChem’s share (O&P) of an impairmentcharge recorded by an equity affiliate.

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

(g)         Includes$72 million of various net charges - $30 million in O&P, $34 million inA&S and $8 million in Other.

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

(i)             The $44million impairment charge relates mostly to Puerto Rico assets.

(j)             Includesa $44 million charge for an increase in the valuation allowance for deferredtax assets in A&S.

(k)          Includes$9 million in various benefits in O&P.

(l)             Includes$29 million in various charges, primarily in O&P ($16 million) and Other($9 million).

(m)       Includes $14million in charges in O&P for the retirement of a normal alpha olefinsunit.

(n)         The $137million impairment charge relates mostly to Puerto Rico assets.

(o)         Includes a$45 million charge for an increase in the valuation allowance fordeferred tax assets in A&S.

 

Foreign currencytransaction gains (losses) were $7 million in 2002, $(2) million in 2001 and$(1) million in the six-month period ended December 31, 2000.

 

Geographic informationwas as follows.  Net sales weredetermined based on location of the operation generating the sale.

 
| **Millions**                                       |   | **United  States** |   | **Foreign  Countries** |   | **Total** |   |
|----------------------------------------------------|--------|--------------------|--------|------------------------|--------|-----------|--------|
| Net  sales – external                         |   |               |   |                   |   |      |   |
| Year ended December 31, 2002                       |   | $                  | 4,678  |                   | $      | 711       |   | $ | 5,389 |   |
| Year ended December 31, 2001                       |   | 5,307              |   | 564                    |   | 5,871     |   |
| July 1, 2000 (inception) through December 31, 2000 |   | 3,146              |   | 256                    |   | 3,402     |   |
|                                               |   |               |   |                   |   |      |   |
| Investments in and advances to affiliates          |   |               |   |                   |   |      |   |
| December 31, 2002                                  |   | 49                 |   | 466                    |   | 515       |   |
| December 31, 2001                                  |   | 10                 |   | 228                    |   | 238       |   |
|                                               |   |               |   |                   |   |      |   |
| Property, plant and equipment, net                 |   |               |   |                   |   |      |   |
| December 31, 2002                                  |   | 3,812              |   | 138                    |   | 3,950     |   |
| December 31, 2001                                  |   | 3,852              |   | 131                    |   | 3,983     |   |
|                                                    |        |                    |        |                        |        |           |        |  |  |  |

 

Note 17.    FairValues of Financial Instruments

 

The carrying amounts ofcash and cash equivalents, trade and affiliated receivables, and trade andaffiliated payables approximate their estimated fair values.  The carrying amount of secured borrowingsoutstanding also approximates fair value due to the short-term nature of theborrowings.  The carrying amount ofcommercial paper outstanding also approximates fair value due to the variableinterest rate feature.  The carryingamount of other long-term debt outstanding was $1.005 billion at December 31,2002 and $505 million at December 31, 2001, with fair values of $1.092 billionand $486 million, respectively, based on quoted market prices.

 

60

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Note 18.    ConsolidatingFinancial Statements

 

Consolidating financialstatements follow.  This information ispresented in accordance with SEC rules and regulations as they relate to thedebt jointly and severally issued by Chevron Phillips Chemical Company LLC andChevron Phillips Chemical Company LP. See Note 9 for further discussion.

 

The LLC is thenon-operating parent holding company. The LP is the primary U.S. operating company.  “Other Entities” is principally comprised of foreign operationsand the holding companies that have direct ownership of the LP.  These consolidating financial statementswere prepared using the equity method of accounting for investments.

 

Chevron Phillips ChemicalCompany LLC

Consolidating Statementof Operations

Forthe Year ended December 31, 2002

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

 

61

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Note 18.    ConsolidatingFinancial Statements (continued)

 

Chevron Phillips ChemicalCompany LLC

Consolidating Statementof Operations

Forthe Year ended December 31, 2001

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

 

62

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Note 18.    Consolidating FinancialStatements (continued)

 

Chevron PhillipsChemical Company LLC

Consolidating Statement of Operations

July 1, 2000 (Inception) through December 31, 2000

 
| **Millions**                               |   | **LLC** |   | **LP** |   | **Other****Entities** |   | **Eliminations** |   | **Total** |   |
|--------------------------------------------|--------|---------|--------|--------|--------|-----------------------|--------|------------------|--------|-----------|--------|
| Revenue                                    |   |    |   |   |   |                  |   |             |   |      |   |
| Net sales                                  |   | $       | — |   | $      | 3,424                 |   | $                | 908    |      | $      | (930 | ) | $ | 3,402 |   |
| Equity in income (loss) of  affiliates     |   | (175    | )      | (10    | )      | (34                   | )      | 216              |   | (3        | )      |
| Other income                               |   | —  |   | 55     |   | 35                    |   | (26              | )      | 64        |   |
| Total revenue                              |   | (175    | )      | 3,469  |   | 909                   |   | (740             | )      | 3,463     |   |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Costs and Expenses                         |   |    |   |   |   |                  |   |             |   |      |   |
| Cost of goods sold                         |   | —  |   | 3,227  |   | 874                   |   | (930             | )      | 3,171     |   |
| Selling, general and administrative        |   | 1       |   | 264    |   | 51                    |   | (26              | )      | 290       |   |
| Asset impairments                          |   | —  |   | 2      |   | 135                   |   | —           |   | 137       |   |
| Research and development                   |   | —  |   | 23     |   | —                |   | —           |   | 23        |   |
| Total costs and expenses                   |   | 1       |   | 3,516  |   | 1,060                 |   | (956             | )      | 3,621     |   |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Income (Loss) Before Interest  & Taxes |   | (176    | )      | (47    | )      | (151                  | )      | 216              |   | (158      | )      |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Interest income                            |   | —  |   | 6      |   | 4                     |   | —           |   | 10        |   |
| Interest expense                           |   | (65     | )      | — |   | —                |   | —           |   | (65       | )      |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Income (Loss) Before Taxes                 |   | (241    | )      | (41    | )      | (147                  | )      | 216              |   | (213      | )      |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Income taxes                               |   | —  |   | — |   | (28                   | )      | —           |   | (28       | )      |
|                                       |   |    |   |   |   |                  |   |             |   |      |   |
| Net Income (Loss)                          |   | $       | (241   | )      | $      | (41                   | )      | $                | (175   | )         | $      | 216 |   | $ | (241 | ) |

 

63

----

 

Note 18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Balance Sheet

December 31, 2002

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

 

64

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Note 18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Balance Sheet

December 31, 2001

 
| **Millions**                                  |   | **LLC** |   | **LP** |   | **Other****Entities** |   | **Eliminations** |   | **Total** |   |
|-----------------------------------------------|--------|---------|--------|--------|--------|-----------------------|--------|------------------|--------|-----------|--------|
| Current assets                                |   |    |   |   |   |                  |   |             |   |      |   |
| Cash and cash equivalents                     |   | $       | — |   | $      | 71                    |   | $                | 40     |      | $      | — |   | $ | 111 |   |
| Accounts receivable, net                      |   | 196     |   | 444    |   | 543                   |   | (401             | )      | 782       |   |
| Inventories                                   |   | —  |   | 541    |   | 97                    |   | —           |   | 638       |   |
| Other current assets                          |   | —  |   | 17     |   | 3                     |   | —           |   | 20        |   |
| Total current assets                          |   | 196     |   | 1,073  |   | 683                   |   | (401             | )      | 1,551     |   |
|                                          |   |    |   |   |   |                  |   |             |   |      |   |
| Property, plant and equipment, net            |   | —  |   | 3,696  |   | 287                   |   | —           |   | 3,983     |   |
| Investments in and advances to  affiliates    |   | 5,430   |   | 65     |   | 4,916                 |   | (10,173          | )      | 238       |   |
| Other assets and deferred charges             |   | 26      |   | 746    |   | 17                    |   | (701             | )      | 88        |   |
| Total Assets                                  |   | $       | 5,652  |   | $      | 5,580                 |   | $                | 5,903  |      | $      | (11,275 | ) | $ | 5,860 |   |
|                                          |   |    |   |   |   |                  |   |             |   |      |   |
| Current liabilities                           |   |    |   |   |   |                  |   |             |   |      |   |
| Accounts payable                              |   | $       | 16     |   | $      | 652                   |   | $                | 182    |      | $      | (401 | ) | $ | 449 |   |
| Secured borrowings and other debt             |   | —  |   | 1      |   | 199                   |   | —           |   | 200       |   |
| Other current liabilities                     |   | 10      |   | 141    |   | 20                    |   | —           |   | 171       |   |
| Total current liabilities                     |   | 26      |   | 794    |   | 401                   |   | (401             | )      | 820       |   |
|                                          |   |    |   |   |   |                  |   |             |   |      |   |
| Long-term debt                                |   | 1,496   |   | 11     |   | —                |   | —           |   | 1,507     |   |
| Other liabilities and deferred credits        |   | 680     |   | 87     |   | 33                    |   | (701             | )      | 99        |   |
| Total liabilities                             |   | 2,202   |   | 892    |   | 434                   |   | (1,102           | )      | 2,426     |   |
|                                          |   |    |   |   |   |                  |   |             |   |      |   |
| Members’ capital                         |   | 3,450   |   | 4,688  |   | 5,485                 |   | (10,173          | )      | 3,450     |   |
| Accumulated other comprehensive income (loss) |   | —  |   | — |   | (16                   | )      | —           |   | (16       | )      |
|                                          |   |    |   |   |   |                  |   |             |   |      |   |
| Total Liabilities and  Members’ Equity   |   | $       | 5,652  |   | $      | 5,580                 |   | $                | 5,903  |      | $      | (11,275 | ) | $ | 5,860 |   |

 

65

----

 

Note 18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Cash Flows

For the Year ended December 31, 2002

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

 

66

----

 

Note 18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Cash Flows

For the Year ended December 31, 2001

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

 

67

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Note 18.    Consolidating FinancialStatements (continued)

 

Chevron Phillips Chemical Company LLC

Consolidating Statement of Cash Flows

July 1, 2000 (Inception) through December 31, 2000

 
| **Millions**                                                                                             |   | **LLC** |   | **LP** |   | **Other****Entities** |   | **Eliminations** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------------|--------|---------|--------|--------|--------|-----------------------|--------|------------------|--------|-----------|--------|
| Cash Flows From Operating  Activities                                                                    |   |    |   |   |   |                  |   |             |   |      |   |
| Net income (loss)                                                                                        |   | $       | (241   | )      | $      | (41                   | )      | $                | (175   | )         | $      | 216 |   | $ | (241 | ) |
| Adjustments  to reconcile net income (loss) to net cashflows provided by (used in)  operating activities |   |    |   |   |   |                  |   |             |   |      |   |
| Depreciation, amortization and retirements                                                               |   | —  |   | 125    |   | 26                    |   | —           |   | 151       |   |
| Asset impairments                                                                                        |   | —  |   | 2      |   | 135                   |   | —           |   | 137       |   |
| Deferred income taxes                                                                                    |   | —  |   | — |   | 27                    |   | —           |   | 27        |   |
| Undistributed equity in losses of affiliates, net                                                        |   | 178     |   | 10     |   | 34                    |   | (219             | )      | 3         |   |
| Changes in operating working capital                                                                     |   | (177    | )      | 248    |   | (48                   | )      | —           |   | 23        |   |
| Other operating cash flow activity                                                                       |   | 221     |   | (240   | )      | 11                    |   | —           |   | (8        | )      |
| Net cash flows provided by (used in) operating  activities                                               |   | (19     | )      | 104    |   | 10                    |   | (3               | )      | 92        |   |
|                                                                                                     |   |    |   |   |   |                  |   |             |   |      |   |
| Cash Flows From Investing  Activities                                                                    |   |    |   |   |   |                  |   |             |   |      |   |
| Capital expenditures                                                                                     |   | —  |   | (98    | )      | (14                   | )      | —           |   | (112      | )      |
| Increase in investments                                                                                  |   | (82     | )      | — |   | (66                   | )      | 148              |   | —    |   |
| Net cash flows used in investing activities                                                              |   | (82     | )      | (98    | )      | (80                   | )      | 148              |   | (112      | )      |
|                                                                                                     |   |    |   |   |   |                  |   |             |   |      |   |
| Cash Flows From Financing  Activities                                                                    |   |    |   |   |   |                  |   |             |   |      |   |
| Increase in commercial paper, net                                                                        |   | 1,784   |   | — |   | —                |   | —           |   | 1,784     |   |
| Increase in note payable to member                                                                       |   | 50      |   | — |   | —                |   | —           |   | 50        |   |
| Advance from member                                                                                      |   | 70      |   | — |   | —                |   | —           |   | 70        |   |
| Contributions from  (distributions to) parents/members                                                   |   | (1,686  | )      | 66     |   | 82                    |   | (148             | )      | (1,686    | )      |
| Post-closing adjustments to members                                                                      |   | (117    | )      | — |   | —                |   | —           |   | (117      | )      |
| Other financing cash flow activity                                                                       |   | —  |   | — |   | (3                    | )      | 3                |   | —    |   |
| Net cash flows provided by financing activities                                                          |   | 101     |   | 66     |   | 79                    |   | (145             | )      | 101       |   |
|                                                                                                     |   |    |   |   |   |                  |   |             |   |      |   |
| Net Increase in Cash and Cash Equivalents                                                                |   | —  |   | 72     |   | 9                     |   | —           |   | 81        |   |
| Cash and Cash Equivalents at Beginning of Period                                                         |   | —  |   | 3      |   | 72                    |   | —           |   | 75        |   |
| Cash and Cash Equivalents  at End of Period                                                              |   | $       | — |   | $      | 75                    |   | $                | 81     |      | $      | — |   | $ | 156 |   |

 

 

68

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Chevron Phillips Chemical Company LLC

Selected Quarterly Financial Data

(Unaudited)

 

| **Millions**   |   | **Net****Sales** |   | **Income (Loss)  Before Interest****and Taxes** |   | **Net Income****(Loss)** |   |
|----------------|--------|------------------|--------|-------------------------------------------------|--------|--------------------------|--------|
| **2002**       |   |             |   |                                            |   |                     |   |
| First quarter  |   | $                | 1,147  |                                            | $      | (5                       | )      | $ | (22 | ) |
| Second quarter |   | 1,387            |   | 26                                              |   | 11                       |   |
| Third quarter  |   | 1,429            |   | 19                                              |   | 1                        |   |
| Fourth quarter |   | 1,426            |   | (5                                              | )      | (20                      | )      |
| Total          |   | $                | 5,389  |                                            | $      | 35                       |   | $ | (30 | ) |
|           |   |             |   |                                            |   |                     |   |
| **2001**       |   |             |   |                                            |   |                     |   |
| First quarter  |   | $                | 1,825  |                                            | $      | (87                      | )      | $ | (118 | ) |
| Second quarter |   | 1,521            |   | 58                                              |   | 30                       |   |
| Third quarter  |   | 1,367            |   | (101                                            | )      | (167                     | )      |
| Fourth quarter |   | 1,158            |   | (206                                            | )      | (225                     | )      |
| Total          |   | $                | 5,871  |                                            | $      | (336                     | )      | $ | (480 | ) |

 

Income (loss) beforeinterest and taxes in 2002 included net charges (credits) of $10 million, $26million and $(6) million in the first, third and fourth quarters, respectively,related to items such asasset impairments, assets retirements, business interruption and propertycasualty insurance claim settlements, pension plan curtailments and other itemsof that nature.

 

Income (loss) beforeinterest and taxes in 2001 included net charges (credits) of $17 million, $(81)million, $50 million and $167 million in the first through fourth quarters,respectively, similar in nature to those mentioned above.  In addition, net income (loss) in 2001included a $44 million charge in the third quarter related to income taxes.

 

See Part I – Item 7.“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and “Notes to Consolidated Financial Statements” for furtherdiscussions.

 

69

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Report of Independent Auditors

 

The Board of Directors

Phillips Petroleum Company

 

We have audited the accompanying combined statementsof income, parent company investment and accumulated comprehensive income, andcash flows of Phillips Petroleum Company’s Chemicals Business for the sixmonths ended June 30, 2000.  Thesefinancial statements are the responsibility of the company’s Management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our audit in accordance with auditingstandards generally accepted in the United States.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by Management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the combined results ofoperations and cash flows of Phillips Petroleum Company’s Chemicals Businessfor the six months ended June 30, 2000, in conformity with accountingprinciples generally accepted in the United States.

 

 
|              | /s/ ERNST & YOUNG LLP |   |
|-------------------|---------------------------|--------|
|              |                      |
|              | ERNST & YOUNG LLP     |
|              |                      |
| Tulsa, Oklahoma   |
| February 22, 2001 |

 

70

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**PhillipsPetroleum Company’s Chemicals Business**

CombinedStatement of Income

 
| **Millions of  Dollars**                      |   | **Six Months Ended****June 30,  2000** |   |
|-----------------------------------------------|--------|----------------------------------------|--------|
| **Revenues**                                  |   |                                   |   |
| Sales and other  operating revenues           |   | $                                      | 2,238  |   |
| Equity in earnings of  affiliated companies   |   | 33                                     |   |
| Other revenues                                |   | 17                                     |   |
| Total Revenues                                |   | 2,288                                  |   |
|                                          |   |                                   |   |
| **Costs  and Expenses**                       |   |                                   |   |
| Purchased products                            |   | 1,620                                  |   |
| Operating expenses                            |   | 313                                    |   |
| Selling, general and  administrative expenses |   | 144                                    |   |
| Depreciation and  amortization                |   | 57                                     |   |
| Taxes other than income  taxes                |   | 20                                     |   |
| Foreign currency  transaction losses          |   | 1                                      |   |
| Total Costs and  Expenses                     |   | 2,155                                  |   |
|                                          |   |                                   |   |
| Income before income  taxes                   |   | 133                                    |   |
|                                          |   |                                   |   |
| Provision for income  taxes                   |   | 49                                     |   |
|                                          |   |                                   |   |
| **Net Income**                                |   | $                                      | 84     |   |

 

*SeeNotes to Combined Financial Statements.*

 

71

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**PhillipsPetroleum Company’s Chemicals Business**

CombinedStatement of Cash Flows

 
| **Millions of  Dollar*****s***                                                    |   | **Six Months Ended****June 30, 2000** |   |
|-----------------------------------------------------------------------------------|--------|---------------------------------------|--------|
| **Cash Flows From Operating  Activities**                                         |   |                                  |   |
| Net income                                                                        |   | $                                     | 84     |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |   |                                  |   |
| Non-working capital adjustments                                                   |   |                                  |   |
| Depreciation and amortization                                                     |   | 57                                    |   |
| Deferred taxes                                                                    |   | 7                                     |   |
| Other                                                                             |   | (33                                   | )      |
| Working capital adjustments                                                       |   |                                  |   |
| Increase in accounts receivable                                                   |   | (36                                   | )      |
| Increase in inventories                                                           |   | (28                                   | )      |
| Decrease in prepaid expenses and other current  assets                            |   | 7                                     |   |
| Increase in accounts payable                                                      |   | 81                                    |   |
| Decrease in taxes and other accruals                                              |   | (7                                    | )      |
| Net Cash Provided by Operating Activities                                         |   | 132                                   |   |
|                                                                              |   |                                  |   |
| **Cash Flows From Investing  Activities**                                         |   |                                  |   |
| Capital expenditures                                                              |   | (41                                   | )      |
| Advances to affiliated companies                                                  |   | (64                                   | )      |
| Investment purchases                                                              |   | (24                                   | )      |
| Proceeds from asset dispositions                                                  |   | 1                                     |   |
| Proceeds from property insurance                                                  |   | 14                                    |   |
| Net Cash Used for Investing Activities                                            |   | (114                                  | )      |
|                                                                              |   |                                  |   |
| **Cash Flows From Financing  Activities**                                         |   |                                  |   |
| Net cash change in parent company advances                                        |   | (18                                   | )      |
| Net Cash Used for Financing Activities                                            |   | (18                                   | )      |
|                                                                              |   |                                  |   |
| **Net Change in Cash and Cash  Equivalents**                                      |   | —                                |   |
| Cash and cash equivalents at beginning of period                                  |   | —                                |   |
|                                                                              |   |                                  |   |
| Cash and Cash Equivalents at End of Period                                        |   | $                                     | — |   |

 

*SeeNotes to Combined Financial Statements.*

 

72

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**PhillipsPetroleum Company’s Chemicals Business**

CombinedStatement of Parent Company Investment and

Accumulated Comprehensive Income

 
| **Millions of  Dollars**                                                             |   |   |   |   |   |
|--------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| Parent company investment and accumulated  comprehensive income at December 31, 1999 |   |   |   | $      | 2,427  |   |
|                                                                                 |   |   |   |   |   |
| Net income                                                                           |   | 84     |   |   |   |
| Foreign currency translation adjustments                                             |   | (5     | )      |   |   |
| Comprehensive income                                                                 |   |   |   | 79     |   |
| Net change in parent company advances                                                |   |   |   | (40    | )      |
|                                                                                 |   |   |   |   |   |
| Parent company investment and accumulated  comprehensive income at June 30, 2000     |   |   |   | $      | 2,466  |   |

 

*SeeNotes to Combined Financial Statements.*

 

73

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**PhillipsPetroleum Company’s Chemicals Business**

Notesto Combined Financial Statements

 

**Note 1 – Accounting Policies**

 

*Basisof Financial Statements -*These financial statementsrepresent Phillips Petroleum Company’s (Phillips or the parent company)worldwide chemicals business and include certain natural gas liquids andpipeline operations (hereinafter collectively referred to as Chemicals).  The financial statements are presented as ifChemicals had existed as an entity separate from Phillips during the periodspresented.  Chemicals is not and was nota separate legal entity during the periods presented.  References to Chemicals are to “Phillips Petroleum Company, withrespect to its chemicals business.” Phillips charges Chemicals a portion of its corporate support costs,including engineering, legal, treasury, planning, environmental, tax, auditing,information technology, research and development and other corporate services,based on usage, actual costs or other allocation methods considered reasonableby Phillips’ Management.

 

Chemicals manufactures and markets petrochemicals andplastics on a worldwide basis, with manufacturing facilities in the UnitedStates, Puerto Rico, Singapore, China, Mexico, South Korea and Belgium.  Key products manufactured include ethylene,propylene, polyethylene, polypropylene, K-Resin® styrene-butadienecopolymer, paraxylene, RytonTM polyphenylene sulfide, andpolyethylene pipe.  Chemicals alsofractionates and markets natural gas liquids.

 

On February 7, 2000, Phillips announced that it hadsigned a letter of intent to form a 50/50 joint venture with ChevronCorporation combining the two companies’ worldwide chemicals businesses,excluding Chevron’s Oronite additives business.  The proposed joint venture was approved by the companies’ Boardsof Directors and the U.S. Federal Trade Commission, and definitive agreementswere signed on May 23, 2000.  Thetransaction closed July 1, 2000, forming Chevron Phillips Chemical Company LLC(CPChem).

 

*ConsolidationPrinciples and Investments -*Majority-owned, controlledsubsidiaries are consolidated. Investments in affiliates in which Chemicals owns 20 percent to 50percent of voting control are accounted for using the equity method.  Other securities and investments aregenerally carried at cost.

 

*RevenueRecognition -*Revenues associated with sales ofpetrochemicals, plastics, natural gas liquids, and all other items are recordedwhen title passes to the customer. Revenues associated with royalty fees from licensed technology arerecorded periodically based upon volumes produced by the licensee.

 

*Use ofEstimates -*The preparation of financial statements inconformity with generally accepted accounting principles requires Management tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses, and the disclosures of contingent assetsand liabilities.  The estimates weremade as if Phillips continued to own and operate Chemicals subsequent to June30, 2000.  Actual results could differfrom the estimates and assumptions used.

 

*Parent Company Investment -*Theparent company investment represents the net balances resulting from varioustransactions between Chemicals and Phillips. There are no terms of settlement or interest charges associated withmost of the account balance.  Thebalance includes

 

74

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**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

Chemicals’ participationin Phillips’ central cash management program. Chemicals’ cash receipts are remitted to Phillips and its cashdisbursements are funded by Phillips. Other transactions include product purchases from and sales to Phillips,Chemicals’ share of the current portion of Phillips’ consolidated income taxliability, and other administrative and support expenses incurred by Phillipsand allocated or charged to Chemicals.

 

*Inventories -*Inventoriesare valued at cost, which is lower than market in the aggregate, on thefirst-in, first-out (FIFO) basis, the weighted-average basis, and last-in,first-out (LIFO) basis.  Materials andsupplies are valued at, or below, average cost.

 

*DerivativeInstruments -*In accordance with Phillips’ risk-managementpolicies, any derivative instruments held by Chemicals must relate to anunderlying, offsetting position, probable anticipated transaction or firmcommitment.  Additionally, the hedginginstrument used must be expected to be highly effective in achieving marketvalue changes that offset the opposing market value changes of the underlyingtransaction.  If an existing derivativeposition is terminated prior to expected maturity or re-pricing, any deferredor resultant gain or loss will continue to be deferredunless the underlying position has ceased to exist.  During the six months ended June 30, 2000, Chemicals didnot use any material derivative instruments.

 

*Depreciationand Amortization -*Depreciation and amortization of majoroperating units are determined using the group composite straight-line methodover an estimated life of 25 years for most of these assets.  Major operating units are grouped for thispurpose based on their relative similarity and the degree of physical andeconomic interdependence between individual pieces of equipment.  Other properties, plants and equipment aredepreciated using the straight-line method over the estimated useful lives ofthe individual assets.

 

*Impairmentof Assets -*Long-lived assets used in operations are assessedfor impairment whenever changes in facts and circumstances indicate a possiblesignificant deterioration in the future cash flows expected to be generated byan asset group.  If, upon review, thesum of the undiscounted pretax cash flows are less than the carrying value ofthe asset group, the carrying value is written down to estimated fairvalue.  Individual assets are groupedfor impairment purposes at the lowest level for which there are identifiable cash flows that are largelyindependent of the cash flows of other groups of assets — generally atan entire complex level for Chemicals’ assets. The fair value of impaired assets is determined based on quoted marketprices in active markets, if available, or upon the present values of expectedfuture cash flows using discount rates commensurate with the risks involved inthe asset group.  Long-lived assetscommitted by Management for disposal are accounted for at the lower ofamortized cost or fair value, less cost to sell.

 

The expected future cashflows used for impairment reviews and related fair value calculations are basedon production volumes, prices and costs, considering all available evidence atthe date of the review.

 

*Maintenanceand Repairs -*Maintenance and repair costs incurred, whichare not significant improvements, are expensed.  The estimated turnaround costs of major producing units areaccrued in other liabilities over the estimated interval between turnarounds.

 

75

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**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

*PropertyDispositions -*When complete units of depreciable propertyare retired or sold, the asset cost and related accumulated depreciation areeliminated with any gain or loss reflected in income.  When less-than-complete units of depreciable property are disposedof or retired, the difference between asset cost and salvage value is chargedor credited to accumulated depreciation with no recognition of gain orloss.  Retirements or sales ofequipment, whether complete units of depreciable property or less-than-completeunits of depreciable property, have not been significant to the financialstatements.

 

*EnvironmentalCosts -*Environmental costs are expensed or capitalized asappropriate, depending upon their future economic benefit.  Costs that relate to an existing conditioncaused by past operations, and that do not have future economic benefit, areexpensed.  Liabilities are recorded onan undiscounted basis when environmental assessments or cleanups are probableand the costs can be reasonably estimated.

 

*IncomeTaxes -*Chemicals’ results of operations are included in theconsolidated U.S. federal and state income tax returns of Phillips.  Deferred taxes are provided on all temporarydifferences between the financial reporting basis and the tax basis of Chemicals’assets and liabilities, except for temporary differences related to investmentsin certain foreign subsidiaries and corporate joint ventures that areessentially permanent in duration. Income tax expense represents Chemicals on a separate-return basis usingthe same principles and elections used in Phillips’ consolidated return.  Any resulting current tax liability orrefund is settled with Phillips on a current basis.

 

*ComprehensiveIncome -*Chemicals’ only item of other comprehensive incomeresults from the process of translating the financial statements of certainforeign subsidiaries and corporate joint ventures into U.S. dollars.  Chemicals’ investment in these subsidiariesand joint ventures is essentially permanent in duration so deferred taxes havenot been provided on the related temporary differences.

 

**Note 2 - Related Party Transactions**

 

Significant transactions with affiliated parties were:

 
| **Millions of  Dollars**                         |   | **Six Months Ended****June 30, 2000** |   |
|--------------------------------------------------|--------|---------------------------------------|--------|
| Sales and other operating  revenues (a)          |   | $                                     | 549    |   |
| Purchased products (b)                           |   | 810                                   |   |
| Operating expenses (c,d,e)                       |   | 10                                    |   |
| Selling, general and administrative expenses (e) |   | 44                                    |   |
|                                                  |        |                                       |        |  |

 

----

(a)          Chemicals sells ethyleneresidue natural gas to Phillips’ crude oil refining operations, as well asfeedstocks to non-consolidated equity companies, at prices that approximatemarket.

 

(b)         Chemicals purchasesnatural gas liquids feedstocks for its ethylene and propylene products fromPhillips and its affiliates, and purchases finished products fromnon-consolidated equity companies, at prices that approximate market.

 

76

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**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

(c)          Phillips’ refiningoperations charge Chemicals for its use of facilities common to bothoperations, such as steam generation, waste and water treaters, pumps, gauges,etc.

 

(d)         Chemicals purchasesnatural gas from Phillips and its affiliates for use as fuel at itsmanufacturing facilities at prices that approximate market.  In addition, Phillips provides for andarranges liability, property and business interruption insurance coverage forChemicals through its captive insurance subsidiary.

 

(e)          Phillips chargesChemicals a portion of its corporate support costs, including engineering,legal, treasury, planning, environmental, tax, auditing, informationtechnology, research and development, and other corporate services, based onusage, actual costs, or other allocation methods considered reasonable byPhillips’ Management.

 

**Note 3 - Equity Investments**

 

Chemicals owns investments in entities in thepetrochemical and plastics industries. In the ordinary course of business, Chemicals has transactions with mostof these equity investee companies. Summarized financial information for all entities accounted for using theequity method, except Sweeny Olefins Limited Partnership (see below), follows:

 

| **Millions of  Dollars** |   | **Six Months Ended****June 30, 2000** |   |
|--------------------------|--------|---------------------------------------|--------|
| Revenues                 |   | $                                     | 321    |   |
| Loss before income taxes |   | (28                                   | )      |
| Net loss                 |   | (28                                   | )      |
|                          |        |                                       |        |  |

 

*Sweeny Olefins Limited Partnership(SOLP) -* Chemicals is a general partner and has a 50 percentinterest in SOLP, which owns and operates a 2-billion-pound-per-year ethylenefacility located adjacent to Phillips’ Sweeny, Texas, refinery.  During construction of the facility,Chemicals made advances to the partnership under a subordinated loan agreementto fund certain costs related to completing the project.  During 1995, SOLP entered into a secondsubordinated loan agreement with Chemicals, with essentially the same terms asthe first, for $120 million to fund three new furnaces for the ethyleneplant.  In November 1999, the secondsubordinated loan was increased by $20 million to fund expenditures to improveplant operating efficiency.

 

On June 30, 2000, SOLP made a distribution to its partners that broughtthe total distribution to the other unrelated general partner to atarget-specified after-tax internal rate of return on its investment.  The partnership agreement states that oncethis general partner achieved the specified internal rate of return, its 49.49percent general partnership interest is withdrawn in the subsequent month withno additional cash distribution required. Also, the remaining .51 percent limited partner investment interestconverts to 1 percent following the withdrawal of the unrelated generalpartner. Accordingly, the other general partner withdrew from SOLP effectiveJuly 1, 2000, and its general partnership interest reverted to CPChem, givingCPChem a majority interest in SOLP. Also in July, CPChem purchased, subject to the receipt of necessaryapprovals or clearances and the execution of required documentation, thecombined remaining 1 percent limited partnership interests.

 

77

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**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

Summarized financial information for SOLP follows:

 

| **Millions of  Dollars**   |   | **Six Months Ended****June 30,  2000** |   |
|----------------------------|--------|----------------------------------------|--------|
| Revenues                   |   | $                                      | 380    |   |
| Income before income taxes |   | 67                                     |   |
| Net income                 |   | 67                                     |   |
|                            |        |                                        |        |  |

 

*QatarChemical Company Ltd. (Q-Chem) -* In 1997, Chemicals enteredinto an agreement with Qatar General Petroleum Corporation to form a jointventure to develop a major petrochemical complex in Qatar, at an estimated costof $1.16 billion.  During 1999, Q-Chem,the joint-venture company established by the co-venturers, signed a $750million bank financing agreement for the constructionof the complex.  At June 30, 2000, $153million (excluding accrued interest) had been drawn under this financingagreement.  After the bankfinancing has been fully drawn, Chemicals will be required to fund anyremaining construction costs under a subordinated loan agreement withQ-Chem.  In connection with the bankfinancing, the co-venturers agreed that, if the complex is not successfullycompleted by August 31, 2003 (which may be extended for up to one year due toforce majeure), each will make, or cause to be made, capital contributions on apro rata, several basis to the extent necessary to cover bank financing servicerequirements including, if demanded, repayment of principal.  After construction is successfullycompleted, the bank financing is non-recourse with respect to the twoco-venturers and the lenders can look only to Q-Chem’s cash flows for payment,except Chemicals has agreed to provide up to $75 million of credit support tothe venture under a contingent equity loan agreement.  Construction has begun, with start-up scheduled for the last halfof 2002.  Chemicals owns 49 percent ofQ-Chem.

 

**Note 4 -Contingencies**

 

In the case of all known contingencies, Chemicalsaccrues an undiscounted liability when the loss is probable and the amount isreasonably estimable.  These liabilitiesare not reduced for potential insurance recoveries.  If applicable, undiscounted receivables are accrued for probableinsurance or other third-party recoveries. Based on currently available information, Chemicals believes that it isremote that future costs related to known contingent liability exposures willexceed current accruals by an amount that would have a material adverse impacton Chemicals’ financial statements.

 

As facts concerning contingenciesbecome known, Chemicals reassesses its position both with respect to accruedliabilities and other potential exposures. Estimates that are particularly sensitive to future change includecontingent liabilities recorded for environmental remediation and legalmatters.  Estimated future environmentalremediation costs are subject to change due to such factors as the unknownmagnitude of clean-up costs, the unknown time and extent of such remedialactions that may be required, and the determination of Chemicals’ liability inproportion to other responsible parties. Estimated future costs related to legal matters are subject to change asevents evolve, and as additional information becomes available during theadministrative and litigation process.

 

78

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**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

*Environmental-*Chemicals is subject to federal, state and localenvironmental laws and regulations. These may result in obligations to remove or mitigate the effects on theenvironment of the placement, storage, disposal or release of certain chemical,mineral and petroleum substances at various sites.

 

*OtherLegal Proceedings -*Chemicals is a party to a number of otherlegal proceedings pending in various courts or agencies for which, in someinstances, no provision has been made.

 

**Note 5 -Financial Instruments and Credit Risk**

 

Chemicals’ financial instruments that are exposed toconcentrations of credit risk consist primarily of cash equivalents and tradereceivables.  Phillips’ cash equivalentsare placed in high quality time deposits with major international banks andfinancial institutions, limiting Chemicals’ exposure to concentrations ofcredit risk.  Chemicals’ tradereceivables reflect a broad customer base. Chemicals routinely assesses the financial strength of its customers.

 

**Note 6 -Operating Leases**

 

Chemicals leases tank and hopper railcars, computers,office buildings and other facilities and equipment.  At June 30, 2000, future minimum payments due undernon-cancelable operating leases were:

 

|                                    |   | **Millions of Dollars** |   |
|-----------------------------------------|--------|-------------------------|--------|
| July 1, 2000 through  December 31, 2000 |   | $                       | 12     |   |
| 2001                                    |   | 24                      |   |
| 2002                                    |   | 22                      |   |
| 2003                                    |   | 21                      |   |
| 2004                                    |   | 24                      |   |
| 2005                                    |   | 19                      |   |
| Remaining years                         |   | 163                     |   |
|                                    |   | $                       | 285    |   |
|                                         |        |                         |        |  |  |

 

Operating lease rental expensewas $18 million for the six months ended June 30, 2000.

 

**Note 7 -Employee Benefit Plans**

 

Chemicals employees areincluded in the various employee benefit plans of Phillips.  These plans include the Retirement IncomePlan, employee and retiree medical, dental and life insurance plans, the Thriftand Long-Term Stock Savings Plans of Phillips, and other such benefits.  For the purpose of these separate financialstatements, Chemicals is considered to be participating in multi-employerbenefit plans.  Chemicals’ share ofallocated parent company employee benefitplan expenses was $14 million for the six months ended June 30, 2000.

 

79

----

 

**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

**Note 8 -Taxes**

 

Taxes charged to income were:

 

| **Millions of Dollars**        |   | **Six Months Ended****June 30,  2000** | ** ** |
|--------------------------------|--------|----------------------------------------|------------|
| Taxes other than income  taxes |   |                                   |       |
| Property                       |   | $                                      | 10         |   |
| Payroll                        |   | 9                                      |       |
| Other                          |   | 1                                      |       |
|                           |   | 20                                     |       |
| Income taxes                   |   |                                   |       |
| Federal                        |   |                                   |       |
| Current                        |   | 28                                     |       |
| Deferred                       |   | 10                                     |       |
| Foreign                        |   |                                   |       |
| Current                        |   | 7                                      |       |
| State and local                |   |                                   |       |
| Current                        |   | 2                                      |       |
| Deferred                       |   | 2                                      |       |
|                           |   | 49                                     |       |
| Total taxes charged to income  |   | $                                      | 69         |   |

 

Deferred income taxes reflect the net tax effect oftemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for tax purposes.

 

Deferred taxes have not beenprovided on temporary differences related to investments in certain foreignsubsidiaries and corporate joint ventures that are essentially permanent induration.  These temporary differenceswere $28 million at June 30, 2000. Determination of the amount of unrecognized deferred taxes on thesetemporary differences is not practicable due to foreign tax credits andexclusions.  Any loss carryforwards thathave not been utilized will begin expiring in 2011.

 

The amounts of U.S. income before income taxes, with areconciliation of tax at the federal statutory rate with the provision forincome taxes were:

 
|                                               |   | **Six Months Ended****June 30, 2000** |       |
|----------------------------------------------------|--------|---------------------------------------|------------|
| **Millions of Dollars, except percentages**        |   | **Amount**                            | ** ** | **Percent of**Pretax Income | ** ** |
| Income before income taxes                         |   |                                  |       |   |   |
| United States                                      |   | $                                     | 98         |   | 74 | % |
| Foreign                                            |   | 35                                    |       | 26 |   |
|                                               |   | $                                     | 133        |   | 100 | % |
|                                               |   |                                  |       |   |   |
| Federal statutory income tax                       |   | $                                     | 46         |   | 35 | % |
| State income tax                                   |   | 3                                     |       | 2 |   |
| Foreign taxes in excess of  federal statutory rate |   | 1                                     |       | 1 |   |
| Other                                              |   | (1                                    | )          | (1 | ) |
|                                               |   | $                                     | 49         |   | 37 | % |

 

80

----

 

**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

Excise taxes accrued on the sale of chemical productswere less than $1 million in the first six months of 2000.  These taxes are excluded from reportedrevenues and expenses.

 

**Note 9 -Cash Flow Information**

 

Cash payments for incometaxes totaled $37 million for the six months ended June 30, 2000.

 

**Note 10- Other Financial Information**

 

Expensed research and development expenditures totaled$16 million for the six months ended June 30, 2000.

 

**Note 11- Segment Disclosures and Related Information**

 

Chemicals has organized its reporting structure basedon the grouping of similar products, resulting in three operating segments:

 

(1)             *Olefins and Polyolefins*.  This segment manufactures andmarkets olefins and polyolefins products, including ethylene, propylene,polyethylene, polypropylene, and polyethylene pipe. This segment alsofractionates and markets natural gas liquids and has pipeline operations.  Major production facilities are located atthe Sweeny Complex and the Houston Chemical Complex, both in Texas.  Chemicals also owns equity interests in anethylene/propylene facility at the Sweeny Complex, a polypropylene facility atthe Houston Chemical Complex, and polyethylene facilities in Singapore andChina.  Polyethylene pipe is manufactured at six regionally located U.S.plants and at a plant in Mexico. Natural gas liquids are fractionated at the Sweeny Complex.

 

(2)             *Aromatics*.  This segment manufactures and marketsaromatics, including paraxylene and cyclohexane.  The major production facility is located in Puerto Rico.

 

(3)             *Specialty Chemicals and Plastics*.  This segment manufactures and marketsspecialty chemicals and plastics, including K-Resin styrene-butadienecopolymer, Ryton polyphenylene sulfide, and methyl mercaptans.  Major production facilities are located atthe Borger Complex and the Houston Chemical Complex, both located inTexas.  Other manufacturing facilitiesare located in Belgium and Singapore. Chemicals also owns an equity interest in a K-Resin production facilityin South Korea.

 

Other includes all items not directly attributable tothe operating segments.  All interestrevenue and expense is retained by the parent company.  Chemicals evaluates performance andallocates resources based on netincome.  The segment accounting policiesare the same as those in Note 1 - Accounting Policies.  Intersegment sales were not material.

 

81

----

 

**PhillipsPetroleum Company’s Chemicals Business**

Notes to Combined FinancialStatements

 

*Analysisof Results by Operating Segment*

* *
| **Millions  of Dollar***s*                 |   | **Olefins &**Polyolefins |       | **Aromatics** |       | **Specialty  Chemicals  & Plastics** |       | **Other** |       | **Consolidated** |       |
|--------------------------------------------|--------|------------------------------|------------|---------------|------------|------------------------------------------|------------|-----------|------------|------------------|------------|
| ***Six Months Ended June 30, 2000***       |   |                         | ** ** |          | ** ** |                                     | ** ** |      | ** ** |             | ** ** |
| Sales & Other Operating  Revenues      |   |                         |       |          |       |                                     |       |      |       |             |       |
| External customers*                        |   | $                            | 1,600      |          | $          | 346                                      |       | $         | 292        |             | $          | — |   | $ | 2,238 |   |
|                                       |   |                         |       |          |       |                                     |       |      |       |             |       |
| Operating  Results                         |   | $                            | 132        |          | $          | (19                                      | )          | $         | 48         |             | $          | — |   | $ | 161 |   |
| Depreciation  & amortization           |   | (37                          | )          | (5            | )          | (15                                      | )          | —    |       | (57              | )          |
| Equity in earnings of affiliates           |   | 31                           |       | —        |       | 2                                        |       | —    |       | 33               |       |
| Other  items                               |   | —                       |       | —        |       | —                                   |       | (4        | )          | (4               | )          |
| Income  taxes                              |   | (47                          | )          | 9             |       | (13                                      | )          | 2         |       | (49              | )          |
| Net  income (loss)                         |   | $                            | 79         |          | $          | (15                                      | )          | $         | 22         |             | $          | (2 | ) | $ | 84 |   |
|                                       |   |                         |       |          |       |                                     |       |      |       |             |       |
| Assets                                     |   |                         |       |          |       |                                     |       |      |       |             |       |
| Identifiable  assets                       |   | $                            | 1,685      |          | $          | 440                                      |       | $         | 733        |             | $          | — |   | $ | 2,858 |   |
| Investments  in and advances to affiliates |   | 485                          |       | —        |       | 59                                       |       | —    |       | 544              |       |
| Total  assets                              |   | $                            | 2,170      |          | $          | 440                                      |       | $         | 792        |             | $          | — |   | $ | 3,402 |   |
|                                       |   |                         |       |          |       |                                     |       |      |       |             |       |
| Capital  Expenditures                      |   | $                            | 15         |          | $          | 5                                        |       | $         | 21         |             | $          | — |   | $ | 41 |   |

 

----

* Includes sales to parent company’s non-chemicalsbusinesses.

 

*Geographic Information*

 
|                            |   | **United States** |   | **Foreign Countries** |   | **Worldwide Consolidated** |   |
|---------------------------------|--------|-------------------|--------|-----------------------|--------|----------------------------|--------|
| Outside Operating  Revenues*    |   |              |   |                  |   |                       |   |
| Six months ended June 30,  2000 |   | $                 | 2,009  |                  | $      | 229                        |   | $ | 2,238 |   |
|                            |   |              |   |                  |   |                       |   |
| Long-Lived Assets**             |   |              |   |                  |   |                       |   |
| June 30, 2000                   |   | 2,242             |   | 185                   |   | 2,427                      |   |
|                                 |        |                   |        |                       |        |                            |        |  |  |  |

 

----

* Revenues are attributable to countries based on thelocation of the operations generating the revenue.

** Includes property, plant and equipment andinvestments in equity affiliates.

 

**Note 12- Subsequent Event**

 

Subsequent to the contribution of Chemicals to CPChemon July 1, 2000 (see Note 1 - Basis of Financial Statements), the outlook forfuture paraxylene market conditions deteriorated. Paraxylene, along withgasoline and certain other petroleum and chemical products, was produced atChemicals’ Puerto Rico Core facility in Guayama, Puerto Rico.  In response to market conditions and as partof a strategic review of CPChem’s businesses, CPChem’s management decided tochange the strategic direction of the facility, including a decision to shutdown gasoline production, and revised the facility’s estimated remainingeconomic life.  As a result of thesesubsequent changes and developments, a property impairment related to thePuerto Rico Core facility was recorded in the fourth quarter of 2000 byCPChem.  In addition, a valuationallowance was recorded against a related deferred tax asset.  Combined, these two items resulted in anon-cash $180 million after-tax charge for CPChem.

 

82

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Report of Independent Accountants

 

To the Board of Directors of

Chevron Corporation:

 

In our opinion, the accompanying combined statements of income, ofchanges in owner’s net investment and of cash flows present fairly, in allmaterial respects, the results of the operations and the cash flows of ChevronChemical Company C Chem Business for the six month period ended June 30, 2000in conformity with accounting principles generally accepted in the UnitedStates of America.  These financialstatements are the responsibility of the Business’ management; ourresponsibility is to express an opinion on these financial statements based onour audit.  We conducted our audit ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audit provides a reasonable basis for our opinion.

 

 
| /s/  PRICEWATERHOUSECOOPERS LLP |   |
|---------------------------------|--------|
|                            |
| San Francisco,  California      |
| February 1, 2001                |

 

83

----

 

**ChevronChemical Company C Chem Business**

Combined Statement of Income

(in millions of dollars)

 
|                                             |   | **Six Months Ended****June 30, 2000** |   |
|--------------------------------------------------|--------|---------------------------------------|--------|
| **Revenue**                                      |   |                                  |   |
| Sales and other  operating revenues (see Note 6) |   | $                                     | 1,834  |   |
| Other income                                     |   | 2                                     |   |
| Total revenue and other  income                  |   | 1,836                                 |   |
|                                             |   |                                  |   |
| **Costs  and other deductions**                  |   |                                  |   |
| Purchased products (see  Note 6)                 |   | 1,130                                 |   |
| Operating expenses                               |   | 387                                   |   |
| Selling, general and  administrative expenses    |   | 97                                    |   |
| Depreciation and  amortization                   |   | 54                                    |   |
| Taxes other than income                          |   | 18                                    |   |
| Total costs and other  deductions                |   | 1,686                                 |   |
|                                             |   |                                  |   |
| Income before income  tax expense                |   | 150                                   |   |
|                                             |   |                                  |   |
| Income tax expense                               |   | 54                                    |   |
|                                             |   |                                  |   |
| Net income                                       |   | $                                     | 96     |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

84

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**ChevronChemical Company C Chem Business**

Combined Statementof Changes in Owner’s Net Investment

(in millions of dollars)

 

 

| Balance  at December 31, 1999 |   | $      | 2,334  |   |
|-------------------------------|--------|--------|--------|--------|
|                          |   |   |   |
| Net  income                   |   | 96     |   |
| Net  transfers to owner       |   | (66    | )      |
|                          |   |   |   |
| Balance  at June 30, 2000     |   | $      | 2,364  |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

85

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**ChevronChemical Company C Chem Business**

Combined Statementof Cash Flows

(in millions of dollars)

 
|                                      |   | **Six Months Ended****June 30, 2000** |   |
|-------------------------------------------|--------|---------------------------------------|--------|
| **Cash flows from operating  activities** |   |                                  |   |
| Net income                                |   | $                                     | 96     |   |
| Add (deduct) adjustments to net income    |   |                                  |   |
| Depreciation and amortization             |   | 54                                    |   |
| Deferred income taxes                     |   | 35                                    |   |
| Changes in working capital:               |   |                                  |   |
| Accounts receivable                       |   | (75                                   | )      |
| Inventories                               |   | (7                                    | )      |
| Prepaid expenses and other current assets |   | 1                                     |   |
| Accounts payable                          |   | 85                                    |   |
| Accrued liabilities                       |   | (11                                   | )      |
| Deferred income and other taxes payable   |   | (12                                   | )      |
| Net cash provided by operating activities |   | 166                                   |   |
|                                      |   |                                  |   |
| **Cash flows from investing  activities** |   |                                  |   |
| Capital expenditures                      |   | (81                                   | )      |
| Net cash used in investing activities     |   | (81                                   | )      |
|                                      |   |                                  |   |
| **Cash flows from financing  activities** |   |                                  |   |
| Net transfers to owner                    |   | (66                                   | )      |
| Net cash used in financing activities     |   | (66                                   | )      |
|                                      |   |                                  |   |
| Net change in cash                        |   | 19                                    |   |
| Cash, beginning of period                 |   | 13                                    |   |
|                                      |   |                                  |   |
| Cash, end of period                       |   | $                                     | 32     |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

86

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**ChevronChemical Company C Chem Business**

Notes toCombined Financial Statements

(in millions of dollars)

 

**1.**              **Overviewand Basis of Presentation**

 

On May 23, 2000, ChevronCorporation (Chevron) and Phillips Petroleum Company (Phillips) signed aContribution Agreement to form a joint venture, Chevron Phillips ChemicalCompany LLC (the Venture), to combine certain chemical operations of Chevronand Phillips effective July 1, 2000.

 

These financial statementsinclude the operating results and cash flows of the businesses of Chevron (theBusiness) that were contributed to the joint venture.  The results of operations include revenues and costs directlyattributable to the Business, including costs for certain functions andservices performed by centralized Chevron organizations and charged to theBusiness.  Also included are allocationsof certain Chevron corporate expenses in such areas as legal, accounting,employee benefits, real estate, insurance, information technology, treasury andother corporate and infrastructure costs. The expense allocations have been determined on bases that the Businessconsiders to be a reasonable reflection of the utilization of services providedor the benefit received by the Business. Principle allocation methods include proportionate allocation on thebasis of assets, usage, revenues and employees.  However, the financial information included herein may notreflect the operating results and cash flows of the Business in the future orwhat would have resulted if the Business had operated as a separate,stand-alone entity during the periods presented.

 

**2.**              **Summaryof Significant Accounting Policies**

 

*Basis of combination*

 

The financial statements includethe accounts of the Business. Investments in and advances to affiliates in which the Business has asubstantial ownership interest of approximately 20 to 50 percent are accountedfor by the equity method.

 

*Use of estimates*

 

The preparation of financialstatements in accordance with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and disclosure of contingentassets and liabilities.  Actual resultscould differ from these estimates.

 

*Revenue recognition*

 

Revenuesassociated with sales of chemicals products are recorded when title passes tothe customer.

 

*Inventories*

 

Product inventories are stated at the lower of cost,using a Last-In, First-Out (LIFO) method, or net realizable value.  Materials and supplies generally are statedat average cost.  Other merchandise isstated at cost, using a First-In, First-Out (FIFO) method.

 

*Property, plant and equipment*

 

Depreciation of property, plant and equipment isdetermined over the assets’ useful lives, generally using the declining balancemethod.  Generally, the estimated usefullife of plant and equipment is 20 years, and of buildings is 45 years.

 

87

----

 

**ChevronChemical Company C Chem Business**

Notes to Combined Financial Statements

(in millions of dollars)

 

Gainsor losses for normal retirements or sales of property, plant and equipment areincluded in income and are immaterial.

 

Expenditures for maintenance, repairs,turnaround costs and minor renewals to maintain facilities in operatingcondition are expensed as incurred. Major replacements and renewals are capitalized.

 

The carrying values of long-lived assets andintangibles are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable.  Recoverability of thecarrying value of an asset is assessed by reference to an estimate of theasset’s undiscounted future net cash flows. Measurement of any impairment would include a comparison of discountedestimated future net cash flows to the net carrying value of the relatedassets.

 

*Patents and licenses*

 

Patents and licenses areamortized on a straight line basis over periods ranging from 2 to 20 years.

 

*Environmental liabilities*

 

Environmental expenditures that relate to currentongoing operations or to conditions caused by past operations areexpensed.  Expenditures that createfuture benefits or contribute to future revenue generation are capitalized.

 

Liabilities related to future remediation costs arerecorded when environmental assessments and/or cleanups are probable and thecosts can be reasonably estimated. Other than for assessments, the timing and magnitude of these accrualsare generally based on the Business’ commitment to a formal plan of action,such as an approved remediation plan or the sale or disposal of an asset.

 

The Business records the gross amount of its liabilitybased on its best estimate of future costs using currently available technologyand applying current regulations as well as the Business’ own internalenvironmental policies.  Future amountsare not discounted.  Recoveries or reimbursementsare recorded as an asset when receipt is reasonably ensured.

 

*Income taxes*

 

Historically, the Business’ results have been includedin the consolidated federal and state income tax returns of Chevron.  The income tax provisions in these financialstatements have been determined as ifthe Business were a stand-alone taxable entity filing its own tax returns.Accordingly, the calculation of the tax provisions and related balancesnecessarily require certain assumptions, allocations and estimates whichmanagement believes are reasonable to reflect the tax amounts of the Businessas a stand-alone entity.

 

*Concentration of credit risk andsignificant customers*

 

The Business does not believe it is vulnerable to therisk of a near-term severe impact as a result of any concentration of itsactivities.

 

88

----

 

**ChevronChemical Company C Chem Business**

Notes to Combined Financial Statements

(in millions of dollars)

 

**3.**              **Inventories**

 

Substantially all chemical product inventories areaccounted for on the LIFO method.  TheBusiness reduced certain inventory quantities which were valued at differentLIFO costs prevailing in prior periods. The effect of this reduction was to increase net income by approximately$6 for the six month period ended June 30, 2000.

 

**4.**              **IncomeTaxes**

 

Income tax expense consists of the following:

 

|                  |   | **Six Months Ended****June 30, 2000** |   |
|-----------------------|--------|---------------------------------------|--------|
| U.S. Federal          |   |                                  |   |
| Current               |   | $                                     | 15     |   |
| Deferred              |   | 35                                    |   |
| State and local       |   | 4                                     |   |
| Total taxes on income |   | $                                     | 54     |   |

 

The Business’ effectiveincome tax rate varied from the U.S. statutory federal income tax rate becauseof the following:

 

|                                                                     |   | **Six Months Ended****June 30,  2000** |   |
|--------------------------------------------------------------------------|--------|----------------------------------------|--------|
| Statutory U.S. federal  income tax rate                                  |   | 35.0                                   | %      |
| Effect of Foreign Sales  Corporation                                     |   | (2.0                                   | )      |
| Losses of equity investee                                                |   | 0.6                                    |   |
| State and local taxes on  income, net of U.S. federal income tax benefit |   | 2.4                                    |   |
| Other                                                                    |   | 0.2                                    |   |
| Effective tax rate                                                       |   | 36.2                                   | %      |

 

Before-tax income forU.S. operations was $147 for the six months ended June 30, 2000.  For international operations, beforetax-income was $3 for the six months ended June 30, 2000.

 

**5.**              **EmployeeBenefit Plans**

 

Chevronhas defined benefit pension plans that covered substantially all employees ofthe Business.  Benefits under theseplans are based primarily upon years of service and final earnings.  Chevron also provides for certain healthcare and life insurance plans for active and qualifying retired employees.  For purposes of these financial statements,the Business is considered to be participating in the multi-employer benefitplans of Chevron.  Charges from Chevronassociated with these benefits were $9 for the six months ended June 30, 2000.

 

89

----

 

**ChevronChemical Company C Chem Business**

Notes to Combined Financial Statements

(in millions of dollars)

 

Eligibleemployees of the Business also participated in various defined benefit plans ofChevron, including the Profit Sharing/Savings Plan, the Employee StockOwnership Plan, the Management Incentive Plan, Chevron Success Sharing and theStock Option Plan.  Charges from Chevronassociated with these plans were $19 for the six months ended June 30, 2000.

 

After formation, theVenture established its own employee benefit plans.

 

**6.**              **RelatedParty Transactions**

 

Asummary of transactions with Chevron and affiliated companies is shown below:

 
|                                          |   | **Six Months Ended****June 30, 2000** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|
| Purchases from equity  investees of Chevron   |   | $                                     | 181    |   |
| Purchases from affiliated companies           |   | 77                                    |   |
| Sales to affiliated companies                 |   | 80                                    |   |
| Corporate, general and administrative charges |   | 37                                    |   |
| Benefit plan costs                            |   | 28                                    |   |
| Current income taxes                          |   | 15                                    |   |
|                                               |        |                                       |        |  |

 

Intercompany receivable,payable and other balances are non-interest bearing.  Purchases and sales from/to Chevron were recorded at prices thatmanagement believes approximate prices an unrelated third party would pay.

 

**7.**              **Segmentand Geographic Data and Other Data**

 

The Business’ primarycountry of operation is the United States. The Business operates in one segment, the manufacture and marketing ofcommodity petrochemicals and plastics.

 

Information aboutgeographic areas follows:

 

|          |   | **Six Months Ended****June 30, 2000** |   |
|---------------|--------|---------------------------------------|--------|
| Revenues      |   |                                  |   |
| United States |   | $                                     | 1,815  |   |
| International |   | 19                                    |   |
|          |   | $                                     | 1,834  |   |

 

|              |   | **June 30, 2000** |   |
|-------------------|--------|-------------------|--------|
| Long-lived assets |   |              |   |
| United States     |   | $                 | 2,049  |   |
| Other*            |   | 197               |   |
|              |   | $                 | 2,246  |   |

 

----

* Includes equityinvestment in a 50 percent joint venture, Saudi Chevron Petrochemical Company(SCPC), which began operations in late 1999.

 

90

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**ChevronChemical Company C Chem Business**

Notes to Combined Financial Statements

(in millions of dollars)

 

Revenue for the six monthperiod through June 30, 2000 of Saudi Chevron Petrochemical Company was$93.  The Business’ 50% of the netlosses is included in operating expenses.

 

Research and developmentcosts expensed by the Business were $16 for the six months ended June 30, 2000.

 

**8.**              **Commitmentsand Contingencies**

 

In the ordinary course ofbusiness, the Business is subject to various laws and regulations.  In the opinion of management, compliancewith existing laws and regulations will not materially affect the financial positionor results of operations of the Business. There are certain pending legal actions which have arisen in theordinary course of business with respect to the assets and operations of theBusiness.  Management believes that theultimate disposition of these actions, either individually or in the aggregate,will not have a material, adverse effect on the financial position, cash flowsor results of operations of the Business.

 

TheBusiness is also subject to various environmental laws and regulations andincurred costs for preventive and corrective actions at facilities and wastedisposal sites, and those environmental costs of operations and remediationactivities are accrued on a basis consistent with the accounting policy setforth in Note 2.  The Business may beobligated to take remedial action as a result of the enactment of laws or theissuance of new regulations or to correct the effects on the environment ofdisposal practices or release of chemical substances.  Expensed environmental costs and related accruals at June 30,2000 were not significant.

 

At June 30, 2000, ChevronUSA, a subsidiary of Chevron, had a guarantee related to a bank term loanfacility of SCPC in the amount of approximately $137.  In September 2000 SCPC was advised by Gulf International Bank(GIB) that SCPC was in default on the facility due to certain covenantviolations.  The Business believes thatit is remote that GIB would invoke the guarantee of the indebtedness by ChevronUSA.

 

Future minimum leasepayments under noncancelable operating leases at June 30, 2000 are as follows:

 

| **Year ending****June 30,** |   |   |   |
|-----------------------------|--------|--------|--------|
| 2001                        |   | $      | 11     |   |
| 2002                        |   | 10     |   |
| 2003                        |   | 6      |   |
| 2004                        |   | 3      |   |
| 2005                        |   | 2      |   |
| Thereafter                  |   | 13     |   |
|                        |   | $      | 45     |   |

 

Rental expense underoperating leases was $10 through June 30, 2000.

 

91

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**Item 9****.  Changein and Disagreements with Accountants on Accounting and Financial Disclosure**

 

None.

 

**PART III**

 

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

 

The executive officersand directors of Chevron Phillips Chemical Company LLC are set forth in thefollowing table:

 
| **Name**               |   | **Age** |   | **Position**                                                           |
|------------------------|--------|---------|--------|------------------------------------------------------------------------|
| James L. Gallogly      |   | 50      |   | President and Chief  Executive Officer; Nonvoting Director             |
| C. Kent Potter         |   | 56      |   | Senior  Vice President and Chief Financial Officer; Nonvoting Director |
| Greg C. Garland        |   | 45      |   | Senior Vice President,  Planning & Specialty Products              |
| J. Mike Parker         |   | 56      |   | Senior Vice President,  Aromatics & Styrenics                      |
| Rick L. Roberts        |   | 48      |   | Senior Vice President,  Manufacturing                                  |
| Tim G. Taylor          |   | 49      |   | Senior Vice President,  Olefins & Polyolefins                      |
| Joe M. McKee           |   | 52      |   | Vice President and  Treasurer                                          |
| Greg G. Maxwell        |   | 46      |   | Vice President and  Controller                                         |
| Craig B. Glidden       |   | 45      |   | Vice President, General  Counsel and Secretary                         |
| Darald W. Callahan     |   | 60      |   | Class C Director                                                       |
| Patricia E. Yarrington |   | 46      |   | Class C Director                                                       |
| John E. Lowe           |   | 44      |   | Class P Director                                                       |
| Jim W. Nokes           |   | 56      |   | Class P Director                                                       |

 

***James L. Gallogly:***  Mr. Gallogly has been President and ChiefExecutive Officer since the inception of CPChem in July 2000.  He previously served as Senior Vice Presidentof Chemicals for Phillips Petroleum Company (Phillips), a position he acceptedin 1999.  From 1998 to 1999, he was VicePresident for Olefins and Polyolefins for Phillips.  Mr. Gallogly is a Director of the American Chemistry Council andthe American Plastics Council.

 

***C. Kent Potter:***  Mr. Potter has been Senior Vice Presidentand Chief Financial Officer of CPChem since July 2000.  Mr. Potter previously served as VicePresident, Finance, of Chevron Overseas Petroleum Inc., a position he acceptedin 1996.

 

***Greg C. Garland:***  Mr. Garland has been Senior Vice President,Planning & Specialty Products of CPChem since October 2001.  From July 2000 to October 2001, Mr. Garlandwas the Senior Vice President, Planning & Strategic Transactions.  He previously served as General Manager,Qatar/Middle East for Phillips, a position to which he was named in 1997.

 

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

 

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***Rick L. Roberts:***  Mr. Roberts has been Senior Vice President,Manufacturing of CPChem since October 2001. From July 2000 to October 2001, Mr. Roberts was Vice President ofManufacturing for Olefins & Polyolefins. Prior to the formation of CPChem, he served Chevron Chemical as PlantManager at Cedar Bayou.  From 1994 to1999, he was Manager of the Chevron U.S.A. Inc. refinery in Hawaii.

 

***Tim G. Taylor:***  Mr. Taylor has been Senior Vice President,Olefins & Polyolefins of CPChem since July 2000.  He previously served Phillips as Polyolefins Manager.  Beforebeing named to that position in 1999, Mr. Taylor was worldwide Manager forPolyethylene.  From 1995 to 1999, Mr.Taylor held several management positions in Chemicals and Plastics, includingWorldwide Manager of Polyethylene and Manager of Plastics Operations.

 

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

 

***Greg G. Maxwell:***  Mr. Maxwell has been Vice President andController for CPChem since July 2000. Prior to assuming his current position, he served as General Auditor forPhillips, a position to which he was appointed in 1998.

 

***Craig B. Glidden:***  Mr. Glidden has been Vice President, GeneralCounsel and Secretary for CPChem since July 2000.  In 1996, Mr. Glidden founded Glidden Partners LLP, a businesslitigation firm, and was managing partner of the firm until joining CPChem in2000.

 

***Darald W. Callahan:***  Mr. Callahan currently serves as ExecutiveVice President, Power, Chemicals and Technology at ChevronTexaco Corporation(ChevronTexaco), a position to which he was appointed upon the formation ofChevronTexaco in October 2001.  Prior tothe merger of Chevron Corporation (Chevron) and Texaco Inc., he served Chevronas an Executive Vice President responsible for human resources; technology,chemical additives and coal companies; CPChem; the Dynegy power and natural gasbusiness; and Chevron’s joint venture with Sasol.  From 1999 to 2000, he served as President of Chevron Chemical,which subsequently became a part of CPChem, and prior to 1999, he served asSenior Vice President of Chevron Chemical. He also serves as a Director of Dynegy Inc.

 

***Patricia E. Yarrington:***  Ms. Yarrington currently serves as VicePresident, Public and Government Affairs at ChevronTexaco, a position to whichshe was named in 2002.  Ms. Yarringtonpreviously served ChevronTexaco as Vice President, Strategic Planning, aposition to which she was appointed upon the formation of ChevronTexaco in2001.  She served in a similar position,Vice President of Strategic Planning and Development, with Chevron prior to themerger of Chevron and Texaco Inc., which she assumed in August 2000.  In 1998, she was appointed President ofChevron Canada Ltd.

 

***John E. Lowe:*** Mr. Lowe currently serves as Executive VicePresident, Planning and Strategic Transactions for ConocoPhillips, a positionto which he was appointed in 2002.  Mr.Lowe previously served as Senior Vice President, Corporate Strategy andDevelopment for Phillips, a position to which he was appointed in 2001, and asSenior Vice President of Planning and Strategic Transactions in 2000.  In 1999, he served as Vice President,Planning and Strategic Transactions and Manager of Strategic Growth Projectsfor Phillips.  From 1997 to 1999, he wasSupply Chain Manager in Refining, Marketing and Transportation forPhillips.  Mr. Lowe serves as a Directorof Duke Energy Field Services, LLC.

 

***Jim W. Nokes:*** Mr. Nokes currently serves as Executive VicePresident, Refining, Marketing, Supply and Transportation for ConocoPhillips, aposition to which he was appointed in 2002. Mr. Nokes previously served Conoco Inc. (Conoco) as Executive VicePresident, Worldwide Refining, Marketing, Supply and Transportation, a positionto which he was named in 1999.  Prior to1999, he served as President of North American refining and marketing forConoco.

 

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**Item 11****.  ExecutiveCompensation**

 

#### **Summary Compensation Table**

 

Thetable below provides information regarding the compensation earned by CPChem’sChief Executive Officer and the next four most highly compensated executiveofficers (collectively, the “named executive officers”) during the years ended December 31, 2002 and 2001, and thesix months ended December 31, 2000.

 

For the six months endedDecember 31, 2000, either ConocoPhillips or ChevronTexaco paid the compensationshown below of the named executive officers and CPChem reimbursed the parentsfor such amounts.

 
|                              |   |         |   |                    |    |       |   | **Long-term Compensation** |   |          |   |
|-----------------------------------|--------|--------------|--------|-------------------------|---------|------------|--------|----------------------------|--------|---------------|--------|
|                              |   |         |   | **Annual Compensation** |    | **Awards** |   | **Payouts**                |   | **All Other** |   |
| **Name and Principal Position**   |   | **Year (a)** |   | **Salary**              |    | **Bonus**  |   | **Options**                |   | **LTIP**      |   | **Compensation (b)** |   |
| James L.  Gallogly                |   | 2002         |   | $                       | 460,648 |       | $      | 333,700                    |   | 55,000        |   | $ | 850,000 |   | $ | 23,367 |   |
| President and                     |   | 2001         |   | 438,471                 |    | 212,182    |   | 59,108                     |   | 850,000       |   | 14,425 |   |
| Chief Executive  Officer          |   | 2000         |   | 207,498                 |    | 135,814    |   | —                     |   | —        |   | 268 |   |
|                              |   |         |   |                    |    |       |   |                       |   |          |   |   |   |
| C. Kent Potter                    |   | 2002         |   | 264,450                 |    | 147,641    |   | 18,500                     |   | 330,000       |   | 13,647 |   |
| Senior Vice  President and        |   | 2001         |   | 253,500                 |    | 106,683    |   | 19,874                     |   | 320,000       |   | 7,344 |   |
| Chief Financial  Officer          |   | 2000         |   | 120,000                 |    | 56,571     |   | —                     |   | —        |   | 777 |   |
|                              |   |         |   |                    |    |       |   |                       |   |          |   |   |   |
| Greg C. Garland                   |   | 2002         |   | 262,752                 |    | 113,488    |   | 18,200                     |   | 330,000       |   | 13,125 |   |
| Senior Vice  President,           |   | 2001         |   | 237,016                 |    | 114,296    |   | 14,574                     |   | 311,686       |   | 7,496 |   |
| Planning & Specialty Products |   | 2000         |   | 110,000                 |    | 44,542     |   | —                     |   | —        |   | 104 |   |
|                              |   |         |   |                    |    |       |   |                       |   |          |   |   |   |
| Tim G. Taylor                     |   | 2002         |   | 279,177                 |    | 118,372    |   | 23,400                     |   | 320,000       |   | 14,244 |   |
| Senior Vice  President,           |   | 2001         |   | 268,125                 |    | 94,421     |   | 25,339                     |   | 361,280       |   | 8,579 |   |
| Olefins &  Polyolefins        |   | 2000         |   | 127,500                 |    | 60,097     |   | —                     |   | —        |   | 142 |   |
|                              |   |         |   |                    |    |       |   |                       |   |          |   |   |   |
| Craig B. Glidden                  |   | 2002         |   | 285,851                 |    | 160,974    |   | 19,900                     |   | 210,000       |   | 14,535 |   |
| Vice President,                   |   | 2001         |   | 273,650                 |    | 162,747    |   | 21,530                     |   | 200,000       |   | 8,658 |   |
| General Counsel  & Secretary  |   | 2000         |   | 130,000                 |    | 55,714     |   | —                     |   | —        |   | 850 |   |
|                                   |        |              |        |                         |         |            |        |                            |        |               |        |  |  |  |  |  |  |

 

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(a)          The amounts shown for2000 are for the six months ended December 31, 2000.

 

(b)         During 2002, Messrs.Gallogly, Potter, Garland, Taylor and Glidden received company contributions totheir savings plan accounts of $22,589, $13,198, $12,707, $13,769 and $14,049,respectively, and life insurance premiums of $778, $449, $418, $475 and $486,respectively, were paid on their behalf. During 2001, those officers received company contributions to their savingsplan accounts of $13,774, $6,926, $7,113, $8,137 and $8,210, respectively, andlife insurance premiums of $651, $418, $383, $442 and $448, respectively, werepaid on their behalf.  During the lastsix months of 2000, life insurance premiums of $268, $777, $104, $142 and $850,respectively, were paid on their behalf.

 

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#### **Option Grants and Options Exercised During 2002**

 

There were no options topurchase securities of CPChem granted during 2002 nor were any outstanding asof December 31, 2002.  However, underCPChem’s Long-Term Incentive Plan (LTIP), phantom share options were granted tothe named executive officers.  Thefollowing table sets forth information concerning such grants.

 
|               |   | **Number of  Options** |   | **Percent of  Total Options  Granted to  Employees** |   | **Exercise  Price per** |   | **Expiration** |       | **Potential Realizable  Value at Assumed  Annual Rates of****Price Appreciationfor Option Term (b)** |   |
|--------------------|--------|------------------------|--------|------------------------------------------------------|--------|-------------------------|--------|----------------|------------|------------------------------------------------------------------------------------------------------|--------|
| **Name**           |   | **Granted  (a)**       |   | **in 2002**                                          |   | **Share**               |   | **Date**       |       | **@ 5%**                                                                                             |   | **@ 10%** |   |
| James  L. Gallogly |   | 55,000                 |   | 18.3                                                 | %      | $                       | 22.74  |           | 12/31/2011 |                                                                                                 | $      | 786,500 |   | $ | 1,993,200 |   |
|               |   |                   |   |                                                 |   |                    |   |           |       |                                                                                                 |   |   |   |
| C.  Kent Potter    |   | 18,500                 |   | 6.2                                                  |   | 22.74                   |   | 12/31/2011     |       | 264,550                                                                                              |   | 670,440 |   |
|               |   |                   |   |                                                 |   |                    |   |           |       |                                                                                                 |   |   |   |
| Greg  C. Garland   |   | 18,200                 |   | 6.1                                                  |   | 22.74                   |   | 12/31/2011     |       | 260,260                                                                                              |   | 659,568 |   |
|               |   |                   |   |                                                 |   |                    |   |           |       |                                                                                                 |   |   |   |
| Tim  G. Taylor     |   | 23,400                 |   | 7.8                                                  |   | 22.74                   |   | 12/31/2011     |       | 334,620                                                                                              |   | 848,016 |   |
|               |   |                   |   |                                                 |   |                    |   |           |       |                                                                                                 |   |   |   |
| Craig  B. Glidden  |   | 19,900                 |   | 6.6                                                  |   | 22.74                   |   | 12/31/2011     |       | 284,570                                                                                              |   | 721,176 |   |
|                    |        |                        |        |                                                      |        |                         |        |                |            |                                                                                                      |        |  |  |  |  |  |

 

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(a)          The phantom share options vest in one-third (1/3) incrementson each anniversary of the grant date, which was January 1, 2002 for all of theoptions listed above.  Upon exercise,the option holder is entitled to receive in cash the difference between theexercise price and the market value per share on the valuation date immediatelyprior to the exercise date.

 

(b)         Potential realizablevalue is based on the assumption that the market value per share appreciates atthe annual rate shown (compounded annually) from the date of grant until theend of the option term.  The market valueper share at the end of the option term for the options are $37.04 and $58.98,assuming 5% and 10% appreciation rates, respectively.  The amounts of hypothetical appreciation reflect requiredcalculations at rates set by the Securities and Exchange Commission and,therefore, are not intended to represent either historical appreciation oranticipated future appreciation in the market value per share.

 

**AggregatedOption Exercises in 2002 and Option Values at December 31, 2002**

 

The following tableprovides information concerning the exercise of phantom share options and thevalue of unexercised options at year-end. The value of unexercised options is based on the market value determinedon July 1, 2002 (see following discussion on the LTIP).

 
|               |   | **Shares  Acquired on** |   | **Value**    |   | **Number of Options****at December 31, 2002** |   | **Value of Unexercised  In-The-Money Options****at December 31, 2002** |   |
|--------------------|--------|-------------------------|--------|--------------|--------|-----------------------------------------------|--------|------------------------------------------------------------------------|--------|
| **Name**           |   | **Exercise**            |   | **Realized** |   | **Exercisable**                               |   | **Unexercisable**                                                      |   | **Exercisable** |   | **Unexercisable** |   |
| James  L. Gallogly |   | —                  |   | $            | — |                                          | 19,703 |                                                                   | 94,405 |   | $ | — |   | $ | — |   |
|               |   |                    |   |         |   |                                          |   |                                                                   |   |   |   |   |   |
| C.  Kent Potter    |   | —                  |   | —       |   | 6,625                                         |   | 31,749                                                                 |   | — |   | — |   |
|               |   |                    |   |         |   |                                          |   |                                                                   |   |   |   |   |   |
| Greg  C. Garland   |   | —                  |   | —       |   | 4,858                                         |   | 27,916                                                                 |   | — |   | — |   |
|               |   |                    |   |         |   |                                          |   |                                                                   |   |   |   |   |   |
| Tim  G. Taylor     |   | —                  |   | —       |   | 8,446                                         |   | 40,293                                                                 |   | — |   | — |   |
|               |   |                    |   |         |   |                                          |   |                                                                   |   |   |   |   |   |
| Craig  B. Glidden  |   | —                  |   | —       |   | 7,177                                         |   | 34,253                                                                 |   | — |   | — |   |
|                    |        |                         |        |              |        |                                               |        |                                                                        |        |  |  |  |  |  |  |  |

 

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**Long-Term Incentive Plans**

 

In 2001, CPChem’s Boardof Directors adopted the Chevron Phillips Chemical Company LLC Long-TermIncentive Plan for selected key employees. The plan provides for two types of awards: phantom share options andtarget awards.  The CompensationCommittee has the sole discretion to determine which employees receive phantomoptions or target awards.

 

Phantom options have anexercise price equal to the market value per share as of the grant date.  The market value per share is determinedeach January 1 and July 1, and is equal to an amount calculated by multiplyingCPChem’s average annual EBITDA, as defined in the LTIP, by the EBITDA multipleof a group of comparable, publicly-traded chemical companies, and dividing thisamount by 100,000,000.  The options vestin one-third increments on each anniversary of the grant date and remainexercisable until the tenth anniversary of the grant date.  Upon exercise, the option holder is entitledto receive in cash the appreciation in value between the exercise price and themarket value per share as of the exercise date.

 

The CompensationCommittee sets target awards at the time such awards are granted.  The amount payable as a target award is determinedat the end of each performance cycle, typically three years, by comparingCPChem’s average return on assets for the performance cycle with a group ofcomparable companies selected by the Compensation Committee.  This comparison yields a percentile ranking,which is used to determine the amount of the award as a percentage of thetarget award.

 

**LTIPAwards in 2002**

 
|               |   | **Target** |    | **Performance  Period Until** |       | **Estimated Future Payouts  Under Non-Stock-Price-Based-Plans**(a) |   |
|--------------------|--------|------------|---------|-------------------------------|------------|--------------------------------------------------------------------|--------|
| **Name**           |   | **Award**  |    | **Payout**                    |       | **Threshold**                                                      |   | **Target** |   | **Maximum** |   |
| James  L. Gallogly |   | $          | 479,800 |                          | 12/31/2004 |                                                               | $      | 239,900 |   | $ | 479,800 |   | $ | 959,600 |   |
|               |   |       |    |                          |       |                                                               |   |   |   |   |   |
| C.  Kent Potter    |   | 161,300    |    | 12/31/2004                    |       | 80,650                                                             |   | 161,300 |   | 322,600 |   |
|               |   |       |    |                          |       |                                                               |   |   |   |   |   |
| Greg  C. Garland   |   | 158,700    |    | 12/31/2004                    |       | 79,350                                                             |   | 158,700 |   | 317,400 |   |
|               |   |       |    |                          |       |                                                               |   |   |   |   |   |
| Tim  G. Taylor     |   | 204,400    |    | 12/31/2004                    |       | 102,200                                                            |   | 204,400 |   | 408,800 |   |
|               |   |       |    |                          |       |                                                               |   |   |   |   |   |
| Craig  B. Glidden  |   | 173,900    |    | 12/31/2004                    |       | 86,950                                                             |   | 173,900 |   | 347,800 |   |
|                    |        |            |         |                               |            |                                                                    |        |  |  |  |  |  |  |  |  |

 

----

(a)          The LTIP provides for apayout of 50% of the target award if CPChem’s return on assets is at leastequal to the 40th percentile when compared with the peer group (thresholdperformance), with a maximum payout of 200% of the target award.  However, the Compensation Committee has thesole discretion to increase or decrease any amounts payable under the LTIP.

 

**Special Synergy Incentive Plan**

 

TheSpecial Synergy Incentive Plan (SSIP) is intended to provide incentive forselected senior management and other key employees to achieve in excess of $150million in annually recurring synergies and cost savings on or before June 30,2002.  The participants in the SSIP werenominated by CPChem’s President and Chief Executive Officer and confirmed bythe Compensation Committee, which also determines awards granted under theSSIP.  As provided in the SSIP, awardswere paid in March 2002 as CPChem had achieved more than $200 million inrecurring synergies by the end of 2001. Supplemental awards will be paid in March 2003 as CPChem achievedadditional recurring synergies as of June 30, 2002.  The SSIP expired on June 30, 2002.

 

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**Pension Plans**

 

*Retirement Plan*

 

CPChem’s retirement planis a defined benefit plan and applies to most U.S.-based employees.  Eligible employees automatically participatein the plan and began accruing benefits from January 1, 2001 or their first dayof employment if employed after that date. Eligible employees become fully vested in their retirement benefitsafter five years of service with CPChem, including prior service withConocoPhillips or ChevronTexaco or their affiliates.  The CPChem retirement benefit consists of two components: acareer average pay benefit and a variable annuity benefit.  Each year employees receive an annual creditequal to 1% of eligible compensation for that year.  Discretionary upgrades to increase the career average pay benefitmay be made as often as every three years provided CPChem’s performance metricssupport the additional cost.  Thevariable annuity benefit is the second component of the CPChem retirement planand is made up of a monthly credit equal to 1% of each eligible employee’scompensation for that month.  Additionalcredits may be made, at the discretion of CPChem’s Board of Directors, at ratesranging from 0% to 10% of the total amount in each eligible employee’s variableannuity account.  Upon retirement, theaccrued benefit may be paid as a lump sum payment or converted to a monthlybenefit.  If a lump sum payment iselected, that payment may be rolled over to an individual retirement account orindividual retirement annuity of another employer’s plan.

 

Ifan employee leaves CPChem for any reason prior to retirement and is vested, theaccrued benefit may either be paid out at that time in accordance with theoptions described above or remain in the plan until the individual’s early ornormal retirement date, at which time the accrued benefit may be paid out as alump sum or converted to a monthly benefit. Eligible employees that came to CPChem from either parent on January 1,2001 will receive an adjustment to their retirement benefit.  This adjustment will ensure that anemployee’s retirement benefit will not be adversely affected as a result ofthat employee’s ceasing to accumulate service credit under either parent’spension plan.

 

*Supplemental Executive RetirementPlan*

 

The supplementalexecutive retirement plan applies to designated officers and key executives whoreceive a retirement benefit under the retirement plan and who have had theamount of that benefit reduced due to required limitations under the InternalRevenue Code of 1986, as amended, or by reason of deferral of compensationunder CPChem’s executive deferred compensation plan.  The eligible employee’s benefit under this plan is equal to thedifference between (a) the amount the employee would have received under theretirement plan without regard to the limitations imposed by the InternalRevenue Code and the amounts deferred by the employee under CPChem’s executivedeferred compensation plan, and (b) the amount of the employee’s retirementbenefit payable under the retirement plan.

 

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

* *

*Estimated Retirement Benefits*

 

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

 

| **Name**           |   | **Estimated  Retirement Benefits** |    |
|--------------------|--------|------------------------------------|---------|
| James  L. Gallogly |   | $                                  | 226,273 |   |
| C.  Kent Potter    |   |                               | 87,985  |   |
| Greg  C. Garland   |   |                               | 133,447 |   |
| Tim  G. Taylor     |   |                               | 132,671 |   |
| Craig  B. Glidden  |   |                               | 108,889 |   |

 

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**Director Compensation**

 

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

 

#### **Employment Agreements**

 

None of the namedexecutive officers have employment agreements with CPChem.

 

**Compensation Committee Interlocks andInsider Participation**

 

Since December 2000,Messrs. Callahan and Lowe have served as members of the Compensation Committeeof the Board of Directors of CPChem. Neither director has served as an officer or employee of CPChem or anyof its subsidiaries.

 

**Item 12****.  Security Ownership of Certain BeneficialOwners and Management**

 

CPChem is a limitedliability company, wholly owned by ChevronTexaco and ConocoPhillips, eitherdirectly or indirectly through their wholly-owned subsidiaries.  ChevronTexaco’s ownership interest is heldentirely by Chevron U.S.A. Inc., its wholly-owned subsidiary.  ConocoPhillips’ ownership interest is heldby ConocoPhillips Company, WesTTex 66 Pipeline Company, Phillips ChemicalHoldings Company and Phillips Petroleum International Corporation, allwholly-owned subsidiaries of ConocoPhillips. The following information is given with respect to the Owners’ interestsin CPChem as of the date of this annual report.

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

 

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**Item 13****.  Certain Relationships and RelatedTransactions**

 

All of the related transactions described below are onterms substantially no more favorable than those that would have been agreedupon by third parties on an arm’s-length basis.

 

*Services Agreements. *CPChem is a party to aGeneral Services Agreement with ChevronTexaco and a Services Agreement withConocoPhillips, under which ChevronTexaco and ConocoPhillips provide CPChemwith personnel, equipment and technology primarily for research, technologydevelopment, laboratory services, environmental management services, andengineering and project management support. ChevronTexaco and ConocoPhillips charge CPChem for these servicesaccording to the rates agreed upon in these services agreements.  CPChem has also entered into otheragreements with affiliates of ChevronTexaco and ConocoPhillips that cover theprovision of additional services including, but not limited to, securityservices and pipeline operating services.

 

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

 

*Common Facility Operating Agreementsand Supply Agreements. *CPChemis a party to Common Facilities Operating Agreements with ConocoPhillips andChevronTexaco related to the operation of the chemical facilities locatedwithin their refineries in Sweeny, Borger, and Pascagoula.  CPChem is a party to supply agreements withConocoPhillips and ChevronTexaco underwhich CPChem purchases various products produced in these refineries, andConocoPhillips and ChevronTexaco purchase various products CPChemproduces in the chemical facilities. CPChem is also a party to an agreement with ConocoPhillips under whichit purchases low-sulfur kerosene and solvent extraction diluents produced atConocoPhillips’ refinery located in Woods Cross, Utah.

 

*Feedstock Agreements. *CPChem is a party tocontracts with each of ConocoPhillips, Duke Energy Field Services, LLC, anaffiliate of ConocoPhillips, and Dynegy Inc., an affiliate of ChevronTexaco,under which they supply CPChem with natural gas liquid feedstocks.

 

*Sales Agency Agreements. *CPChem is a party to twosales agency agreements with ConocoPhillips under which it markets and sellscertain chemical products produced by ConocoPhillips at its Borger and Sweenyrefineries.

 

*Polyethylene Pipe*.  CPChem’s Performance Pipe division sellspolyethylene pipe to ConocoPhillips. CPChem does not have a long-term sales agreement with ConocoPhillips forthe supply of polyethylene pipe; consequently, all of the sales in 2002 weremade pursuant to individual purchase orders.

 

**Item 14****.  Controls and Procedures**

 

Within90 days prior to the date of 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 Rule 15d-14).  Based upon thatevaluation, the Chief Executive Officer and Chief Financial Officer haveconcluded that CPChem’s disclosure controls and procedures are effective inproviding them with timely material information that is required to bedisclosed in reports CPChem files under Section 15(d) of the SecuritiesExchange Act.

 

There were no significantchanges in CPChem’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluation.

 

99

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**PARTIV**

 

**Item 15****.  Exhibits, Financial Statement Schedulesand Reports on Form 8-K**

 

(a)(1)                    The financialstatements listed in the Index to Consolidated Financial Statements on page 35are filed as part of this annual report. 

 

(a)(2)                    The followingschedule is presented as required.  Allother schedules are omitted because the information is not applicable, notrequired or has been furnished in the Consolidated Financial Statements orNotes thereto.

 

Chevron Phillips Chemical Company LLC

Schedule II – Valuation and Qualifying Accounts

 

| **Millions**                  |   | **Allowance  for Doubtful  Accounts** |   | **Deferred  Income  Tax Valuation  Allowance (a)** |   |
|-------------------------------|--------|---------------------------------------|--------|----------------------------------------------------|--------|
| Balance on July 1, 2000       |   | $                                     | 3      |                                               | $      | — |   |
| Additions (b)                 |   | 1                                     |   | 92                                                 |   |
| Deductions (c)                |   | (1                                    | )      | —                                             |   |
| Balance  on December 31, 2000 |   | 3                                     |   | 92                                                 |   |
| Additions  (b)                |   | 6                                     |   | 83                                                 |   |
| Deductions  (c)               |   | (3                                    | )      | —                                             |   |
| Balance  on December 31, 2001 |   | 6                                     |   | 175                                                |   |
| Additions  (b)                |   | 4                                     |   | 6                                                  |   |
| Deductions  (c)               |   | (3                                    | )      | —                                             |   |
| Balance  on December 31, 2002 |   | $                                     | 7      |                                               | $      | 181 |   |

 

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(a)          Additionswere generally offset by tax benefits of related losses.

(b)         Chargedto expense.

(c)          Receivableswritten off less recoveries, if any.

 

(a)(3)                    The exhibits listed in the Index ofExhibits on pages 104 and 105 are filed as part of this annual report.

 

(b)                                 Therewere no Reports on Form 8-K filed during the quarter ended December 31, 2002.

 

**SIGNATURES**

 

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

 
|                       |   | CHEVRON PHILLIPS CHEMICAL COMPANY LLC |
|----------------------------|--------|---------------------------------------|
|                       |   |                                  |
|                       |   |                                  |
| Date:  March 11, 2003 |   | */s/ C. Kent Potter*                  |   |
|                       |   | C. Kent Potter                        |   |
|                       |   |                                  |   |
|                       |   | Senior Vice President and             |   |
|                       |   | Chief Financial Officer               |   |

 

100

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

 

Pursuant to therequirements of the Securities Act of 1934, this report has been signed belowby the following persons on behalf of the Registrant and in the capacities andon the dates indicated.

 
| **Signature**                |   | **Title**                             |   | **Date**       |
|------------------------------|--------|---------------------------------------|--------|----------------|
|                         |   |                                  |   |           |
| */s/ James L. Gallogly*      |   | President and Chief Executive Officer |   | March 11, 2003 |
| James L. Gallogly            |   |                                  |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ C. Kent Potter*         |   | Senior Vice President and             |   | March 11, 2003 |
| C. Kent Potter               |   | Chief Financial Officer               |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ Greg G. Maxwell*        |   | Vice President and Controller         |   | March 11, 2003 |
| Greg G. Maxwell              |   |                                  |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ Darald W. Callahan*     |   | Director                              |   | March 11, 2003 |
| Darald W. Callahan           |   |                                  |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ John E. Lowe*           |   | Director                              |   | March 11, 2003 |
| John E. Lowe                 |   |                                  |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ Jim W. Nokes*           |   | Director                              |   | March 11, 2003 |
| Jim W. Nokes                 |   |                                  |   |           |
|                         |   |                                  |   |           |
|                         |   |                                  |   |           |
| */s/ Patricia E. Yarrington* |   | Director                              |   | March 11, 2003 |
| Patricia E. Yarrington       |   |                                  |   |           |

 

101

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**CERTIFICATIONS**

 

I, James L. Gallogly,certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Chevron Phillips Chemical Company LLC;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  March 11, 2003 |   | */s/ James  L. Gallogly*               |   |
|----------------------------|--------|----------------------------------------|--------|
|                       |   | James L. Gallogly                      |   |
|                       |   | President and Chief Executive  Officer |   |

 

102

----

 

I, C. Kent Potter,certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Chevron Phillips Chemical Company LLC;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officer and I have indicated in this annual report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
| Date:  March 11, 2003 |   | */s/ C. Kent  Potter*                              |   |
|----------------------------|--------|----------------------------------------------------|--------|
|                       |   | C. Kent Potter                                     |   |
|                       |   | Senior Vice President and  Chief Financial Officer |   |

 

103

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

 

No annual report tosecurity holders covering the Registrant’s last fiscal year has been sent tothe Registrant’s security holders and no proxy statement, form of proxy orother proxy soliciting material has been sent to more than ten of theRegistrant’s security holders with respect to any annual or other meeting ofsecurity holders.  No such report orproxy material is expected to be furnished to security holders subsequent tothe filing of this Annual Report on Form 10-K.

 

**INDEXOF EXHIBITS**

 
| **Exhibit No.** |   | **Document**                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *3.1            |   | Certificate of  Formation of Chevron Phillips Chemical Company LLC, dated May 23, 2000 (Exhibit  No. 3.1 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *3.2            |   | Certificate of  Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26,  2000 (Exhibit No. 3.2 to CPChem’s Registration Statement on Form S-4 dated  April 16, 2001).                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *3.3            |   | Certificate of  Amendment to Certificate of Limited Partnership of Chevron Phillips Chemical  Company LP, dated May 23, 2000 (Exhibit No. 3.3 to CPChem’s Registration  Statement on Form S-4 dated April 16, 2001).                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *3.4            |   | Second Amended  and Restated Limited Liability Company Agreement of Chevron Phillips Chemical  Company LLC, dated July 1, 2002, by and between ChevronTexaco Corporation,  Phillips Petroleum Company, Chevron U.S.A. Inc., Phillips Chemical Holding  Company, WesTTex 66 Pipeline Company and Phillips Petroleum International  Corporation (Exhibit No. 3.4 to CPChem’s Registration Statement on Form S-4  dated August 6, 2002).                |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *3.5            |   | Agreement of  Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26,  2000 (Exhibit No. 3.5 to CPChem’s Registration Statement on Form S-4 dated  April 16, 2001).                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.1            |   | Indenture, dated  as of March 19, 2001 between Chevron Phillips Chemical Company LLC and  Chevron Phillips Chemical Company LP, as Issuers, and The Bank of New York as  Trustee (Exhibit No. 4.1 to CPChem’s Registration Statement on Form S-4 dated  April 16, 2001).                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.2            |   | 364-Day Credit  Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips  Chemical Company LP, as Borrowers, and Barclays Bank Plc, The Royal Bank of  Scotland Plc, The Bank of Tokyo-Mitsubishi Ltd., Sumitomo Mitsui Banking  Corporation and certain lenders from time to time thereto, dated as of August  29, 2002 (Exhibit No. 4.1 to CPChem’s Quarterly Report on Form 10-Q for the  quarter ended September 30, 2002).    |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *4.3            |   | Three-Year  Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron  Phillips Chemical Company LP, as Borrowers, and Barclays Bank Plc, The Royal  Bank of Scotland Plc, The Bank of Tokyo-Mitsubishi Ltd., Sumitomo Mitsui  Banking Corporation and certain lenders from time to time thereto, dated as  of August 29, 2002 (Exhibit No. 4.2 to CPChem’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2002). |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *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).                                                                                                                                                                                                         |

 

104

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| *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.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                       |
| *10.4  |   | Chevron Phillips Chemical Company LP Executive  Deferred Compensation Plan, effective January 1, 2001 (Exhibit No. 10.2 to  CPChem’s Registration Statement on Form S-4 dated April 16, 2001).                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                       |
| *10.5  |   | Chevron Phillips Chemical Company LP Supplemental  Executive Retirement Plan (Exhibit No. 10.3 to CPChem’s Registration  Statement on Form S-4 dated April 16, 2001).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| *10.6  |   | Chevron Phillips Chemical Company LLC Long-Term  Incentive Plan (Exhibit No. 10.5 to CPChem’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                       |
| *10.7  |   | Chevron Phillips Chemical Company LLC Annual  Incentive Plan (Exhibit No. 10.6 to CPChem’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                       |
| *10.8  |   | Chevron Phillips Chemical Company LP Special Synergy  Incentive Plan (Exhibit No. 10.7 to CPChem’s Annual Report on Form 10-K for  the year ended December 31, 2001).                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 21.1   |   | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                       |
| 24.1   |   | Powers of  Attorney (included in signature pages).                                                                                                                                                                                                                                                         |

----

* Incorporated by reference asindicated.

 

105

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