Item 3. Legal Proceedings
Governmental Agency Proceedings
The following are descriptions of reportable legal proceedings involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment. While it is not possible to predict with certainty the outcome of an unresolved proceeding, if the proceedings described below were decided adversely to CPChem, CPChem expects that there would be no material adverse effect on consolidated results of operations, financial position or liquidity. Nevertheless, such proceedings are reported pursuant to the SEC’s regulations.
CPChem is a party to certain agreements with ChevronTexaco and ConocoPhillips relating to the operation of facilities at which CPChem and either ChevronTexaco or ConocoPhillips have common operations. In December 2002, the U.S. Department of Justice (the “DOJ”) notified ConocoPhillips of various alleged violations of the National Pollutant Discharge Elimination System permit at its Sweeny,
Texas facility. The DOJ asserts that these alleged violations occurred at various times during the period beginning January 1997 through July 2002. On September 30, 2004 and October 4, 2004, the DOJ filed papers evidencing the parties’ agreement to resolve the matter through the payment of a civil penalty and performance of a Supplemental Environmental Project (SEP) for a combined value of $700,000. ConocoPhillips has advised CPChem that it is seeking a portion of the assessment from CPChem pursuant to an agreement relating to the operation of common facilities at the Sweeny complex.
The U.S. Environmental Protection Agency (the “EPA”) and the DOJ previously informed CPChem that they were considering a civil enforcement action against CPChem related to inspections performed in mid-2000 of CPChem’s facility in Pasadena, Texas. This civil enforcement action stemmed from alleged violations of Section 112(r) of the Clean Air Act and related regulations, largely in connection with fires that occurred at the Pasadena facility’s K-Resin® styrene-butadiene copolymer (SBC) unit in 1999 and 2000. On September 27, 2004, CPChem reached an agreement with the EPA and the DOJ to resolve the matter for a $1.8 million civil penalty and performance of SEPs with a value of $1.2 million. The Contribution Agreement under which CPChem was formed provides that ConocoPhillips shall indemnify CPChem for liabilities associated with the 2000 K-Resin® SBC unit fire. Accordingly, ConocoPhillips reimbursed CPChem for its agreed portion of the settlement.
In July and August 2004, the Texas Commission for Environmental Quality (the “TCEQ”) conducted an annual air compliance inspection at CPChem’s facility in Port Arthur, Texas. By letter dated December 30, 2004, the TCEQ issued a Notice of Enforcement letter to CPChem with a proposed Agreed Order and recommended penalty amount of $420,036, which CPChem is disputing. The enforcement matter and corresponding penalty are for alleged violations of state and federal reporting and record keeping requirements, fugitive emissions monitoring requirements, permit-by-rule requirements and three emission events.
In late 2001, CPChem received a Notice of Violation (NOV) from the Texas Natural Resource Conservation Commission, now the TCEQ, following an inspection of the solid waste management program at CPChem’s Cedar Bayou facility in Baytown, Texas. The NOV pertained to the historical management of an on-site impoundment. CPChem agreed to conduct an investigation of the unit and, in late June 2004, completed the investigation. The investigation characterized the contents of the impoundment and identified a small groundwater plume, adjacent to and unrelated to the operation of the impoundment. In November 2004, CPChem and TCEQ representatives agreed to move forward on addressing the groundwater plume. TCEQ and CPChem are presently in discussions regarding the final disposition of the impoundment and the management of the materials contained within the impoundment.
Other Proceedings
CPChem is a party to a number of other legal proceedings that arose in the ordinary course of business for which, in many instances, no provision has been made in the financial statements. While the final outcome of these proceedings cannot be predicted with certainty, CPChem believes that none of these proceedings, when resolved, will have a material adverse effect on consolidated results of operations, financial position or liquidity.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
There is no established public trading market for the ownership interests of CPChem. See “Item 12. Security Ownership of Certain Beneficial Owners and Management” for a listing of the holders of ownership interests in CPChem.
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with “Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
An accounting policy is deemed to be “critical” if it is important to a company’s results of operations and financial condition, and requires significant judgment and estimates on the part of management in its application. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions.
CPChem believes that the estimates and assumptions used in connection with the amounts reported in its financial statements and related disclosures are reasonable and made in good faith. CPChem further believes the following represent its most critical accounting policies. For a summary of all of CPChem’s significant accounting policies, see Part II - Item 8. Financial Statements and Supplementary Data - Note 2.
Impairment of Assets - Long-lived assets used in operations are assessed for possible impairment when events or changes in circumstances indicate a potential significant deterioration in future cash flows projected to be generated by an asset group. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets - generally at a product line level. If, upon review, the sum of the projected undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Since there are usually no quoted market prices available to determine the fair values of CPChem’s long-lived assets, fair values of impaired assets are usually determined based on the present value of projected future cash flows using discount rates commensurate with the risks involved in the asset group. This area often requires management to make complex and subjective judgments, involving significant variables such as asset lives, future product demand, and future product, feedstock and energy prices in order to estimate projected future cash flows. Should the outlook for projected cash flows change unfavorably, material charges for impairments could occur.
Inventories - For U.S. operations, cost of product inventories is primarily determined using the dollar-value, last-in, first-out (LIFO) method. These inventories are valued at the lower of cost or market, aggregated at a segment level. Lower-of-cost-or-market write-downs for LIFO-valued inventories are generally considered temporary. However, deterioration of market prices for prolonged periods of time could result in write-downs determined to be permanent in nature.
Contingencies - As facts concerning contingent liabilities become known, CPChem reassesses its position with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem’s liability in proportion to those of other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available.
Results of Operations
Overview
CPChem’s business, and the chemicals industry in general, is cyclical in nature and is impacted by, among other things, product demand and the prices of raw materials, feedstocks and energy in general. CPChem is particularly impacted by the prices of natural gas and natural gas liquids (NGLs). During periods of extreme natural gas and NGL price volatility and corresponding spikes in natural gas and NGL prices such as those seen in recent years, CPChem is less able to recover such increased costs through product sales price increases than it could if there had been steady, sustained prices, even at elevated levels. Business is also affected by overall domestic and global economic conditions, which drive consumer spending for durable goods. In addition, capacity expansions or contractions contribute to the cyclical and volatile nature of the commodity chemicals industry.
CPChem’s 2004 results improved on higher volumes and margins, due in part to healthier U.S. economic conditions and an upward trend in industry operating rates. Equity earnings from CPChem’s foreign affiliates also improved. Overall, sales price increases outpaced the rise in feedstock costs and high energy costs. In addition, CPChem’s continued focus on safety and operational reliability, along with aggressive management of costs and assets, contributed to increased profitability in 2004.
Condensed Consolidated Statement of Operations
2004 compared with 2003
Net income in 2004 was $626 million, representing a $619 million improvement over the $7 million of net income recorded in 2003. Consolidated net sales revenue rose significantly in 2004 on higher overall sales prices and volumes. Equity earnings from affiliates improved, primarily on improved results from Saudi Chevron Phillips Company (SCP) and Qatar Chemical Company Ltd. (Q-Chem). Cost of Goods Sold rose in the 2004 period, attributable to increased feedstock costs and higher sales volumes.
2003 compared with 2002
Net income in 2003 was $7 million, compared to a $30 million loss in 2002. Consolidated net sales revenues increased in 2003 compared with 2002 as a result of higher overall sales prices. Other revenues increased in 2003, primarily from higher equity earnings from affiliates, in particular, earnings from SCP. Unseasonably low U.S. natural gas inventory levels, the war in Iraq, geopolitical events in Venezuela and Nigeria, and SARS (severe acute respiratory syndrome)
in Asia, as well as other events experienced early in 2003, negatively influenced feedstock and energy costs, which offset most of the benefit of higher sales prices. Other costs and expenses rose in 2003, which included charges for certain legal settlements and accruals, workforce reductions and the closure of a research and technology pilot plant.
Income (Loss) Before Interest and Taxes by Segment
Included in 2004 results were $9 million of gains on the sale of certain assets. Included in 2003 results were charges related to CPChem’s share of certain ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities, asset retirements, a pilot plant closure, employee termination benefit costs related to workforce reductions and a benefit recorded as a result of a sales and use tax audit. These and other similar types of net charges totaled $36 million in the aggregate in 2003. See subsequent segment-level discussions for additional information.
Included in 2002 results were charges related to asset retirements and impairments, the write-off of certain technology projects and a pension plan curtailment charge (included in Cost of Goods Sold). Also included in 2002 results were benefits related to business interruption and property casualty insurance claim settlements and a benefit recorded for the reduction of a customer claim accrual. These and other similar types of net charges totaled $30 million in the aggregate. See subsequent segment-level discussions for additional information.
Olefins & Polyolefins
2004 compared with 2003
Olefins & Polyolefins income before interest and taxes totaled $428 million in 2004, compared with $41 million in 2003, primarily driven by improved margins and sales volumes.
Results in 2004 included a $4 million gain on the sale of assets. Results in 2003 included $13 million of charges to Selling, General and Administrative (SG&A) expense for the ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities, a $9 million charge to Research and Development depreciation related to the permanent closure of the research and technology pilot plant facility in Orange, Texas and a $5 million net benefit resulting from the sales and use tax audit that covered the period from October 1993 through June 2000.
Olefins & Polyolefins income before interest and taxes improved $387 million in 2004 compared with 2003, driven primarily by higher earnings from the olefins and polyethylene product lines. Higher revenues from increased sales prices and volumes were partially offset by higher feedstock costs. Equity earnings from affiliates also increased significantly in 2004, largely from improved results of Q-Chem. Earnings in 2004 and 2003 included gains of $4 million and $10 million, respectively, related to reductions in certain LIFO-valued inventories.
2003 compared with 2002
Olefins & Polyolefins income before interest and taxes totaled $41 million in 2003 compared with $33 million in 2002. Higher overall sales prices and volumes more than offset higher feedstock and energy costs.
Results in 2002 included a $7 million charge for the write-off of two technology projects, a $4 million charge for the remainder of the accelerated depreciation associated with the retirement in February 2002 of two polyethylene particle loop reactors at the Orange facility and a benefit related to a reduction of a customer claim accrual. Results in 2002 also included a $5 million impairment charge related to the Colton, California polyethylene pipe facility. The remaining assets of the facility were written down to their estimated net realizable value and subsequently sold during 2004. These and other similar types of net charges totaled $12 million in the aggregate in 2002. Results in 2003 included $17 million of similar types of net charges described earlier.
Results improved in 2003 compared with 2002, as higher earnings from the polyethylene, polypropylene, and polyethylene pipe product lines were partially offset by lower earnings from olefins and normal alpha olefins. Average realized sales prices and volumes were up across all the product lines. The positive effects of these improvements in sales prices and volumes were partially offset by higher feedstock and utility costs, which were driven by significantly higher average natural gas prices, particularly in the first quarter of 2003. Higher technology licensing income also contributed to the overall improvement in earnings. Equity earnings from affiliates were down slightly in 2003.
Aromatics & Styrenics
2004 compared with 2003
Aromatics & Styrenics income before interest and taxes totaled $251 million in 2004 compared with $27 million in the prior year. The improvement in results was driven primarily by higher earnings from the benzene product line.
Included in 2004 results was a $5 million net gain on the sale of assets. Included in 2003 results was $10 million of accelerated depreciation related to the closure of the UDEX benzene extraction unit at the Port Arthur, Texas facility.
Results in 2004 for Aromatics & Styrenics improved $224 million compared with 2003, primarily from higher benzene earnings, including significantly higher equity earnings from SCP. Improved results in the 2004 period were also partially attributable to the actions taken in 2003 to close the UDEX unit and idle the Port Arthur cumene plant. Sales revenues increased across all product lines as a result of higher sales prices, partially offset by lower sales volumes in benzene and paraxylene, and higher feedstock costs in most product lines. Benzene sales volumes were lower in 2004 as a result of the 2003 closure of the UDEX unit. Earnings in 2003 included a $3 million gain related to reductions in certain LIFO-valued inventories.
2003 compared with 2002
Aromatics & Styrenics income before interest and taxes totaled $27 million in 2003 compared to a $13 million loss in 2002. Higher sales revenues and equity earnings in 2003 were partially offset by higher feedstock and utility costs.
Results in 2002 included a $12 million charge related to the retirement of obsolete equipment at CPChem’s Pascagoula, Mississippi facility, a $5 million charge for the retirement of equipment rendered obsolete as a result of the modernization project at the St. James, Louisiana styrene plant and a $6 million pension plan curtailment charge related to enhanced benefits granted to terminated employees at the Puerto Rico facility. Also included in 2002 results were $4 million of accelerated depreciation related to the closure of the UDEX benzene extraction unit and $9 million of benefits related to business interruption and property casualty insurance claim settlements. These and other similar types of net charges totaled $18 million in the aggregate in 2002. Results in 2003 included $10 million of accelerated depreciation described earlier.
Results in 2002 also included a $25 million benefit related to the reversal of a lower-of-cost-or-market inventory reserve initially established in 2001. The reserve was reversed as a result of improved market conditions and prices.
Earnings were higher in 2003 compared with 2002, primarily the result of higher earnings in the benzene, polystyrene, paraxylene and styrene product lines. Significantly higher average realized sales prices for these product lines and increased sales volumes of benzene, paraxylene and styrene were partially offset by higher feedstock costs and energy prices, and costs associated with plant reconfiguration and other activities at the Puerto Rico facility. Equity earnings from SCP more than doubled in 2003 as a result of higher production and favorable benzene and cyclohexane market conditions. Lower earnings from K R Copolymer Co. Ltd., an equity affiliate, and lower feedstock margins and higher utility costs primarily drove results downward for the K-Resin® styrene-butadiene copolymer (SBC) product line.
During 2003, CPChem’s cumene unit at the Port Arthur facility was idled and the UDEX benzene extraction unit at the facility was permanently closed.
Specialty Products
2004 compared with 2003
Specialty Products income before interest and taxes was $58 million in 2004 compared with $34 million in 2003, as earnings from both Specialty Chemicals and Ryton® polyphenylene sulfide (PPS) polymers and compounds increased. Earnings from Ryton® PPS polymers and compounds rose primarily on higher sales volumes, partially offset by higher feedstock costs. Earnings from Specialty Chemicals increased as a result of higher sales volumes and prices, partially offset by increased feedstock costs primarily due to the higher sales volumes. Results for Specialty Products in 2003 included a $2 million net benefit from the sales and use tax audit.
2003 compared with 2002
Income before interest and taxes for Specialty Products was $34 million in 2003 compared with $40 million in 2002. Lower earnings from Ryton® PPS polymers and compounds were partially offset by higher earnings for Specialty Chemicals. Lower earnings in 2003 from Ryton® PPS polymers and compounds were due to higher product costs and SG&A expense. Improved earnings from Specialty Chemicals were attributable to higher sales prices and volumes, partially offset by increased product costs and SG&A expense. Results in 2003 included a $2 million net benefit from the sales and use tax audit. The Ryton® PPS compounding facility in LaPorte, Texas became operational in the first quarter of 2003.
Corporate and Other
Corporate and Other reported a loss before interest and taxes of $30 million in 2004 compared with a loss of $26 million in 2003. The reduction in earnings was primarily due to higher employee benefit and incentive plan expenses in 2004. Results in 2003 included employee termination benefit costs related to workforce reductions totaling $11 million. Results in 2002 included expenses related to a one-time charge for certain other employee benefit costs and also included expenses incurred in connection with the relocation of CPChem’s headquarters.
Interest expense. Interest expense totaled $75 million in 2004, $72 million in 2003 and $66 million in 2002. The increase in 2004 was attributable to higher interest rates on CPChem’s variable-rate based debt. The increase in 2003 resulted primarily from interest expense on $500 million of 5 3/8% notes issued in June 2002. Proceeds from the issuance were used to retire a portion of outstanding commercial paper which carried significantly lower interest rates. In addition, interest costs capitalized in 2003 totaled $3 million as compared with $7 million in 2002.
Interest income. Interest income totaled $9 million in 2004, $8 million in 2003 and $7 million in 2002.
Income Taxes. Income tax expense totaled $15 million in 2004, $5 million in 2003 and $6 million in 2002. The increase in 2004 was due to taxes on foreign income. CPChem is treated as a flow-through entity for federal income tax and for most state income tax purposes, whereby each member is taxable on its respective share of income and losses. However, CPChem is directly liable for federal and state income taxes and franchise taxes on certain separate legal entities and for any foreign taxes incurred.
Outlook
CPChem continues to maintain its focus on safety, operational reliability, improving margins and increasing sales volumes as the global economy improves. While higher sales volumes and prices bolstered CPChem’s earnings in 2004, escalating feedstock and fuel costs, driven by persistently high energy prices, are limiting margin improvements for most products. Results from CPChem’s joint ventures in the Middle East have been strong due in part to good market conditions and favorable local feedstock costs.
Various industry analysts have recently noted that improving global chemical demand, low inventories and capacity limitations are providing support for product price increases. Furthermore, the view of these analysts is that such conditions will likely continue through 2006.
Liquidity and Capital Resources
Cash balances were $63 million at December 31, 2004 and $43 million at December 31, 2003, of which $48 million and $31 million, respectively, was held by foreign subsidiaries. The increase in cash held by foreign subsidiaries was due to higher amounts of cash held for investment in the JCP project. CPChem’s objective is to minimize cash balances in its worldwide operations while utilizing the commercial paper program for its daily operating requirements.
Operating Activities
Cash provided by operating activities in 2004 totaled $459 million, compared with $280 million during 2003. The increase reflected significantly higher earnings in 2004 partially offset by a larger net increase in non-cash working capital over the two years. Cash from operations for 2004 was negatively impacted by a $235 million increase in non-cash working capital, while the increase for 2003 was $14 million.
Cash provided by operating activities in 2003 totaled $280 million, compared with $335 million during 2002. The decrease in 2003 was driven primarily by a net increase of $14 million in non-cash working capital in 2003, compared to an $82 million net decrease in non-cash working capital in 2002. Higher earnings in 2003 partially offset the effect of the change in non-cash working capital.
Investing Activities
Capital and investment expenditures
Capital and investment expenditures for Aromatics & Styrenics in 2004 and 2003, respectively, included a $4 million advance and a $20 million equity investment in Jubail Chevron Phillips Company, a 50%-owned joint venture with facilities to be located in Al Jubail, Saudi Arabia. See below for a discussion of the JCP project. Capital and investment expenditures for Olefins & Polyolefins in 2002 included a $45 million equity investment in Phillips Sumika Polypropylene Company.
In addition to the capital and investment expenditures shown above for Olefins & Polyolefins, CPChem subscribed to additional shares of and advanced Qatar Chemical Company Ltd. (Q-Chem), a CPChem equity investment, a total of $28 million in 2004, $103 million in 2003 and $210 million in 2002. See Part II - Item 8. Financial Statements and Supplementary Data - Note 5 for a further discussion of Q-Chem.
CPChem currently expects to invest a total of approximately $245 million in capital and investment expenditures in 2005. It is expected that $133 million will be invested in Olefins & Polyolefins, $81 million in Aromatics & Styrenics, and $23 million in Specialty Products, with the remainder to be spent at the corporate level. Included in estimated 2005 capital and investment expenditures are $45 million in investments in and advances towards the JCP Project.
JCP Project. Jubail Chevron Phillips Company (JCP), a joint venture company, was formed in 2003 to develop an integrated styrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility to be built on a site adjacent to the existing aromatics complex owned by SCP will include feed fractionation, an olefins cracker, and ethylbenzene and styrene monomer processing units. Construction of the JCP facility will be in conjunction with an expansion of SCP’s benzene plant, together called “the JCP Project.” Construction began in the fourth quarter of 2004 and operational start-up is anticipated in late 2007. It is estimated that project completion, as defined in the JCP Project’s financing agreements, will be achieved in the first half of 2008. The project will be financed through equity contributions and subordinated loans from the co-venturers, in proportion to their equal ownership interests, and limited recourse loans from commercial banks and two Saudi Arabian governmental agencies. Financial closing of the estimated $1.2 billion JCP Project occurred in July 2004.
Q-Chem II Projects. CPChem and Qatar Petroleum announced plans in 2001 for the development of a second petrochemical project in Mesaieed, Qatar (Q-Chem II), designed to produce polyethylene and NAO on a site adjacent to the existing Q-Chem complex.
In connection with the Q-Chem II joint venture, CPChem and Qatar Petroleum entered into a separate agreement in 2002 with Atofina (now Total Petrochemical) and Qatar Petrochemical Company, establishing a joint venture to develop an ethane cracker in northern Qatar at Ras Laffan Industrial City.
Request for final approval of the Q-Chem II projects by CPChem’s board of directors is expected in 2005, with start-up anticipated in 2008. Preliminary financing plans for the projects include equity contributions from the co-venturers and limited recourse loans from commercial banks and an export credit agency.
Financing Activities
Cash provided by (used in) financing activities totaled $(260) million in 2004, $49 million in 2003 and $115 million in 2002. Commercial paper balances outstanding increased $201 million during 2004, while secured borrowings under the accounts receivable securitization program decreased $100 million. Also included in 2004 financing activities were $175 million of voluntary redemptions of members’ preferred interests, $55 million of distributions on members’ preferred interests and $118 million of distributions to members to fund the members’ estimated federal and state income tax liabilities attributable to CPChem. Activities in 2003 included $32 million of contributions from members and a $17 million net increase in debt. During 2002, commercial paper outstanding decreased $808 million, primarily with proceeds from the issuance of $500 million of 5 3/8% notes and from the sale of $250 million of members’ preferred interests.
On July 30, 2004, CPChem entered into an $800 million five-year credit facility with various banks that provides committed credit support for CPChem’s commercial paper program. Effective with the closing of the new credit facility, CPChem terminated its existing $400 million 364-day and $400 million three-year credit facilities. There were no borrowings under any of the current or prior credit facilities during 2004, 2003 or 2002.
Notes issued under CPChem’s commercial paper program are in the tier-2 commercial paper market with maturities of 90 days or less. These borrowings totaled $385 million at December 31, 2004 and were classified as Long-Term Debt since CPChem’s intent is to refinance or replace the obligations on a long-term basis and CPChem has an $800 million credit commitment in effect with a remaining term that exceeds one year.
CPChem had $200 million of short-term borrowings outstanding at December 31, 2004 under its trade receivables securitization program. The agreement allows for borrowings up to $300 million for which CPChem grants a security interest in certain of its trade receivables as collateral for any amounts outstanding. The trade receivables securitization agreement expires on May 17, 2005. CPChem intends to request an extension of the expiration date of the current agreement to May 2006.
In 2002, CPChem sold $250 million of members’ preferred interests, purchased 50% each by ChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire a portion of outstanding commercial paper obligations. In 2004, CPChem voluntarily redeemed $175 million of members’ preferred interests and paid $55 million of distributions on members’ preferred interests. There were no redemptions or preferred distributions paid in 2003 or 2002. It is currently anticipated that the remaining $75 million of outstanding members’ preferred interests will be redeemed during 2005.
CPChem believes cash requirements over the next twelve months will be funded through a combination of cash on hand, cash flows from operations and commercial paper. CPChem is not aware of any conditions that exist as of the date of this report that would cause any of its debt obligations to be in or at risk of default. In addition, CPChem does not have any debt obligations whose maturities would be accelerated as the result of a credit rating downgrade.
Contractual Obligations
Contractual obligations, including debt obligations, at December 31, 2004 were as follows:
See also Part II - Item 8. Financial Statements and Supplementary Data - Note 8 for further discussion related to debt obligations and Note 13 for a discussion related to operating lease obligations.
Secured Borrowings. This represents borrowings related to the accounts receivable securitization program that provides committed credit support for the commercial paper program.
Commercial Paper. The payments due period corresponds with the expiration date of the $800 million bank credit facility that provides committed credit support for the commercial paper program.
Other Long-term Liabilities Included in the Consolidated Balance Sheet. The amounts consist primarily of obligations related to various employee benefit plans, excluding pension plans.
Purchase Obligations. This represents obligations to purchase goods or services which contain: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Estimated future market rates based on CPChem’s long-term forecast were used to calculate obligation amounts that contain variable price provisions. Obligations with no fixed or minimum purchase requirements for product or services were not included.
The above contractual obligations do not include CPChem’s anticipated funding under its pension plans. Based on internal and actuarial assumptions used in conjunction with the determination of future projected benefit obligations, it is estimated that annual funding of approximately $35 million into CPChem’s existing pension plans would be sufficient for the plans to achieve fully funded status over a ten year planning horizon. This level of funding would be in excess of future expected minimum regulatory funding requirements. Actual annual funding levels may differ from this estimate due to, among other things, economic conditions, actual pension asset returns and changes in business plans.
Off-Balance Sheet Arrangements
An off-balance sheet arrangement is generally any transaction, agreement or other contractual arrangement involving an unconsolidated entity of a company under which such company has (1) made certain guarantees, (2) a retained or a contingent interest in assets transferred to an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, (3) an obligation, including a contingent obligation, under derivative instruments classified as equity or (4) any obligation, including a contingent obligation, arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. Other than certain guarantees related to its equity affiliates and a residual guarantee related to a lease, CPChem has no material off-balance sheet arrangements of this nature. See Part II - Item 8. Financial Statements and Supplementary Data - Note 5 for a discussion of certain guarantees related to CPChem’s equity affiliates and Note 10 for a discussion of the residual guarantee.
Other
Other Factors That May Affect Future Performance
Cyclicality and Overcapacity in the Petrochemicals Business. The petrochemicals industry is both cyclical and volatile. Historically, the industry has experienced periods of tight supply, resulting in increased prices and profit margins. This is typically followed by periods of substantial capacity expansion, resulting in oversupply and declining prices and profit margins. As a result of changes in supply and demand for products, changes in energy prices and changes in various other economic conditions around the world, CPChem’s sales volumes and profit margins may fluctuate, not only from year to year, but also from quarter to quarter.
Feedstock Costs and Other External Factors. Due to the overall commodity nature of most of the products CPChem sells, market position cannot necessarily be protected by product differentiation or by passing on cost increases to customers. Accordingly, price increases in raw materials and other costs may not correlate with changes in the prices received for products. Feedstock prices can fluctuate widely for a variety of reasons, including changes in worldwide energy prices, changes in availability or significant facility operating problems. Other external factors that can cause volatility in feedstock prices, as well as demand for products, product
prices and volumes, and margin deterioration, include general economic conditions, the level of business activity in industries that use CPChem’s products, competitors’ actions, domestic and international events and circumstances, product and process technology changes, currency fluctuations and governmental regulation in the United States and abroad.
Although CPChem gathers, transports and fractionates feedstocks to meet a portion of its demand and has long-term feedstock supply contracts with affiliates of its owners and others, CPChem is still subject to volatile feedstock prices. Extreme price volatility, such as that experienced in early 2001 and 2003, can result in the need to temporarily idle or curtail production units.
Environmental, Health and Safety. The petrochemicals business is highly regulated, subject to increasingly stringent laws and regulations addressing environmental, health and safety matters. Such matters include, but are not limited to, air pollutant emissions, discharges of treated wastewater, stormwater runoff, solid waste management, workplace safety, and contamination. Violations of these laws and regulations often result in monetary penalties and corrective action, but depending 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 Conservation and Recovery Act of 1976 and the laws of many states, CPChem may be subject to joint and several liability regarding environmental contamination on or from properties that it previously owned or operated or currently owns or operates. CPChem may also be subject to liability for contaminated properties where it has disposed of or arranged for disposal of hazardous substances, or where feedstocks or products that contained hazardous substances have been spilled or released. Depending on the circumstances, such liabilities may involve, for example, investigation or clean-up costs, claims for damages to natural resources or punitive damage claims. In addition, CPChem may be the subject of third-party tort claims seeking compensatory and punitive damages for alleged impacts on human health or the environment. These liabilities and claims could result in substantial costs to CPChem.
CPChem incurs, and expects to continue to incur, significant costs for capital improvements and general compliance under applicable environmental laws, including costs to acquire, maintain and repair equipment dealing with pollution control. By 2007, industrial facilities in the eight counties in and around Houston, Texas, including certain facilities that CPChem owns, must comply with new nitrogen oxide (NOx) emission standards. These new standards are being phased in between 2003 and 2007. Modifications to existing equipment and the installation of additional control equipment are required to meet these new NOx standards. CPChem expects that total capital expenditures of approximately $100 million will be required during this period to comply with these standards. To date, CPChem has invested approximately $75 million ($30 million in 2004) of such expenditures.
In addition, new regulations were issued in 2004 concerning emissions of highly reactive volatile organic compounds (HRVOCs). CPChem expects that total capital expenditures of approximately $20 million will be required to comply with the monitoring aspects of these regulations. CPChem invested $2 million of such capital expenditures in 2004. While CPChem cannot determine if additional expenditures will be required until monitoring capabilities are in place, CPChem currently believes that additional expenditures required, if any, will not have a material adverse effect on consolidated results of operations, financial position or liquidity.
New laws and regulations, the stricter enforcement of, or changes to, existing laws and regulations, the discovery of previously unknown contamination or the imposition of new disposal or cleanup requirements could in the future require CPChem to incur costs, or affect its production or revenues, in ways that could have a negative effect on its financial condition or results of operations. Therefore, there can be no assurance that material capital expenditures, costs, or operating expenses beyond those currently anticipated will not be required under applicable environmental, health, and safety laws and regulations, or that developments with respect to such laws and regulations, will not adversely affect production or revenues.
There are risks associated with the production of petrochemicals, such as operational hazards and unforeseen interruptions caused by events beyond CPChem’s control. These include accidents, breakdowns or failures of equipment or processes, acts of terrorism and other catastrophic events. These events can result in injury or loss of life and extensive property or environmental damage. In addition, the handling of chemicals has the potential for serious impacts on human health and the environment. Liabilities incurred and interruptions in operations caused by these events have the potential to materially affect consolidated results of operations, financial position and liquidity. While CPChem maintains general and business interruption insurance, insurance proceeds may not be adequate to fully cover substantial liabilities incurred, lost revenues or increased expenses.
International Operations. International operations are exposed to different political, economic and regulatory risks that are not faced by businesses that operate solely in the United States. Some of CPChem’s operations, including certain of its equity affiliates, are outside the continental United States, with manufacturing facilities in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Domestic assets totaled $5.341 billion as of December 31, 2004 and net sales from domestic operations were $7.754 billion in 2004. Assets located outside of the U.S. as of December 31, 2004 totaled $1.531 billion and net sales from non-U.S. operations were $1.484 billion in 2004. Asset and net sales calculations were determined based on location of the operation. CPChem’s international operations are subject to risks similar to those affecting CPChem’s U.S. operations in addition to a number of other risks, including difficulties in enforcing contractual and intellectual property rights, and impositions or increases of withholding and other taxes on remittances and other payments by subsidiaries and affiliates. Other risks include, but are not limited to, exposure to different legal standards, impositions or increases of investment and other demands by foreign governments, the requirements of a wide variety of foreign laws, political and economic instability, and difficulties in staffing and managing operations, particularly in remote locations. In addition, terrorist acts, if directed at CPChem operations, could have a material adverse effect on CPChem’s business.
Foreign Currency Risk. Internationally, CPChem operates facilities in eight countries and sells product in many other countries, resulting in transactions denominated in various currencies. As such, CPChem is exposed to foreign currency risk to the extent there are devaluations and fluctuations in the exchange rates of the local currencies of those countries against the U.S. dollar and other foreign currencies which may adversely affect revenues and margins. The potential foreign currency transaction gain (or loss) from a hypothetical 10% decrease (or increase) in the value of the U.S. dollar relative to those local currencies was approximately $11 million in the aggregate at December 31, 2004.
Interest Rate Risk. Because CPChem’s commercial paper obligations have maturities of 90 days or less and are generally reissued upon maturity, the debt is considered variable-rate based. The secured debt issued in connection with the accounts receivable securitization program is also variable-rate based. A hypothetical 100 basis point change (a one percentage point change) in the weighted average interest rates of the outstanding balances at December 31, 2004 of these debt instruments would impact interest expense by approximately $6 million annually in the aggregate.
Contingencies
In the case of known contingent liabilities, CPChem records an undiscounted liability when a loss is probable and the amount can be reasonably estimated. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probable insurance or other third-party recoveries. Based on currently available information, CPChem believes it is remote that future costs related to known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect on consolidated results of operations, financial position or liquidity.
See Part II - Item 8. Financial Statements and Supplementary Data - Note 11 for further discussion of contingencies.
New Accounting Pronouncements
See Part II - Item 8. Financial Statements and Supplementary Data - Note 2 - “Accounting Pronouncements.”
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - “Other.”
Item 8.
Item 8. Financial Statements and Supplementary Data
Chevron Phillips Chemical Company LLC
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Chevron Phillips Chemical Company LLC:
We have audited the accompanying consolidated balance sheets of Chevron Phillips Chemical Company LLC (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, members’ capital, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Qatar Chemical Company Ltd. (Q-Chem), (a joint venture company in which the Company has a 49% interest), as of December 31, 2004 and for the year then ended have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for Q-Chem, it is based solely on their report. In the consolidated financial statements, the Company’s investment in Q-Chem is stated at $387 million at December 31, 2004 and the Company’s equity in the net income of Q-Chem is stated at $57 million for the year then ended.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chevron Phillips Chemical Company LLC at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Houston, Texas
February 14, 2005
Chevron Phillips Chemical Company LLC
Consolidated Statement of Operations
See Notes to Consolidated Financial Statements.
Chevron Phillips Chemical Company LLC
Consolidated Balance Sheet
See Notes to Consolidated Financial Statements.
Chevron Phillips Chemical Company LLC
Consolidated Statement of Members’ Capital
See Notes to Consolidated Financial Statements.
Chevron Phillips Chemical Company LLC
Consolidated Statement of Cash Flows
See Notes to Consolidated Financial Statements.
Chevron Phillips Chemical Company LLC
Notes to Consolidated Financial Statements
Note 1. Nature of Operations
Chevron Phillips Chemical Company LLC, through its subsidiaries and equity affiliates, manufactures and markets a wide range of petrochemicals on a worldwide basis, with manufacturing facilities in the United States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Chevron Phillips Chemical Company LLC is a limited liability company formed under Delaware law, owned 50% each by ChevronTexaco Corporation (ChevronTexaco) and ConocoPhillips, collectively, the “members.”
The company is governed by a Board of Directors, currently comprised of six representatives, under the terms of a limited liability company agreement. ChevronTexaco and ConocoPhillips each have two voting representatives, and the chief executive officer and the chief financial officer of the company are non-voting representatives. Certain major decisions and actions require the approval of the Board of Directors. All decisions and actions of the Board of Directors require the approval of at least one representative of both ChevronTexaco and ConocoPhillips.
Note 2. Summary of Significant Accounting Policies
Basis of Financial Statements - The accompanying consolidated financial statements include the accounts of Chevron Phillips Chemical Company LLC and its wholly owned subsidiaries (collectively, “CPChem”). All significant intercompany investments, accounts and transactions have been eliminated in consolidation. Investments in affiliates in which CPChem has 20% to 50% of the voting control are accounted for using the equity method. Other securities and investments are carried at the lower of cost or market. Certain amounts for prior periods have been reclassified in order to conform to the current reporting presentation.
Estimates, Risks and Uncertainties - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.
Accounts receivable is shown net of a $7 million allowance for estimated non-recoverable amounts at both December 31, 2004 and 2003.
There are varying degrees of risk and uncertainty in each of the countries in which CPChem operates. CPChem insures its business and assets against material insurable risks in a manner it deems appropriate. Because of the diversity of its operations, CPChem believes any loss incurred from an uninsured event in any one business or country, other than a terrorist act directed at CPChem operations, would not have a material adverse effect on operations as a whole.
Revenue Recognition - CPChem follows the guidance provided by the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, “Revenue Recognition.” Sales of petrochemicals, natural gas liquids and other items, including by-products, are recorded when title passes to the customer. Revenues from royalties for licensed technology are recorded as the associated services are rendered when royalties are paid in advance, and as volumes are produced by the licensee when royalties are paid based on a licensee’s production. Sales are presented net of discounts and allowances. Freight costs billed to customers are recorded as a component of revenue.
In February 2005, the SEC provided guidance regarding the disclosure of the accounting for “buy/sell” arrangements. In limited and infrequent situations, to facilitate the procurement of feedstock or to otherwise manage its feedstock supply chain, CPChem enters into buy/sell agreements with the same counterparty. These transactions are reflected on a gross basis in the consolidated statement of operations. The amounts associated with these transactions are not material to Net Sales or Cost of Goods Sold as reported in the consolidated statement of operations.
Cash and Cash Equivalents - Cash equivalents are highly liquid, short-term investments readily convertible to known amounts of cash that have original maturities of three months or less from date of purchase.
Inventories - For U.S. operations, cost of product inventories is primarily determined using the dollar-value, last-in, first-out (LIFO) method. These inventories are valued at the lower of cost or market, aggregated at a segment level. Lower-of-cost-or-market write-downs for LIFO-valued inventories are generally considered temporary. For operations outside the United States, product inventories are valued using a combination of the first-in, first-out (FIFO) and weighted average methods. Materials and supplies inventories are carried at average cost.
Property, Plant and Equipment - Property, plant and equipment is stated at cost. Property, plant and equipment is comprised of assets, defined as property units, with an initial expected economic life beyond one year. Asset categories are used to compute depreciation and amortization using the straight-line method over the associated estimated future useful lives.
Impairment of Assets - Long-lived assets used in operations are assessed for possible impairment when events or changes in circumstances indicate a potential significant deterioration in future cash flows projected to be generated by an asset group. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets - generally at a product line level.
If, upon review, the sum of the projected undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. The fair values of impaired assets are usually determined based on the present value of projected future cash flows using discount rates commensurate with the risks involved in the asset group, as quoted market prices in active markets are generally not available.
The expected future cash flows used for impairment reviews and related fair value calculations are based on projected production volumes, sales volumes, prices and costs, considering available information at the date of review.
Maintenance and Repairs - Maintenance and repair costs, including turnaround costs of major producing units, are expensed as incurred.
Research and Development Costs - Research and development costs are expensed as incurred.
Property Dispositions - Assets that are no longer in service and for which there is no contemplated future use by CPChem are retired. When assets are retired or sold, the asset cost and related accumulated depreciation are eliminated, 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 past operations and that do not have future economic benefit are expensed. Liabilities for expenditures are recorded on an undiscounted basis when environmental assessments or claims are probable and the costs can be reasonably estimated. Expenditures that create future benefits or that contribute to future revenue generation are capitalized.
Capitalization of Interest - Interest costs incurred to finance projects of at least $75 million and that are longer than one year in duration, and interest costs associated with investments in equity affiliates that have their planned principal operations under construction, are capitalized until commercial production begins. Capitalized interest is amortized over the life of the associated asset. Unamortized capitalized interest totaled $42 million at December 31, 2004 and $44 million at December 31, 2003. Interest costs capitalized in 2004 totaled $1 million. Interest costs capitalized in 2003 totaled $3 million and in 2002 totaled $7 million, both of which were primarily associated with CPChem’s investment in Qatar Chemical Company Ltd. (Q-Chem).
Income Taxes - CPChem is treated as a flow-through entity for federal income tax and for most state income tax purposes whereby each member is taxable on its respective share of income and loss. However, CPChem is directly liable for federal and state income taxes and franchise taxes on certain separate legal entities, and for any foreign taxes incurred. CPChem follows the liability method of accounting for these income taxes.
Accounting Pronouncements - Effective January 1, 2004, CPChem adopted Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments that have characteristics of both a liability and of equity. Generally, it requires that an issuer classify such financial instruments as liabilities because they embody an obligation of the issuer. Because CPChem has no financial instruments outstanding that fall within the scope of this new standard, implementation of this standard did not have an impact on consolidated results of operations, financial position or liquidity. CPChem’s outstanding preferred members’ interests currently do not fall within the scope of this standard because they contain redemption provisions that create a conditional, rather than mandatory, obligation of CPChem. In the event that CPChem’s ratio of debt to total capitalization reaches a stated level, a portion of the outstanding preferred members’ interests will be reclassified as a liability.
The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (FIN No. 46(R)) which provides guidance as to when a company is required to include in its financial statements the assets, liabilities and activities of a variable interest entity (a “VIE”). A VIE is generally a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or that has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46(R) requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the activities of the VIE or is entitled to receive a majority of the residual returns of the VIE. FIN No. 46(R) also requires disclosures about VIEs that are not required to be consolidated by a company, but in which the company has a significant variable interest. The consolidation requirements of FIN No. 46(R) apply immediately to VIEs created after December 31, 2003, and for CPChem, which is considered to be a nonpublic entity as it relates to FIN No. 46(R), the consolidation requirements applied to pre-existing VIEs effective January 1, 2005. CPChem believes that FIN No. 46(R) will not require the consolidation of any existing VIE into CPChem’s consolidated financial statements.
In November 2004, FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” The statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage, requiring that such costs be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. For CPChem, the provisions of SFAS No. 151 are effective January 1, 2006. CPChem believes that implementation of this standard will not have a material impact on consolidated results of operations, financial position or liquidity.
In December 2004, FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets, an Amendment of APB Opinion No. 29.” The guidance in Accounting Principles Board (APB) Opinion No. 29, “Accounting for Non-Monetary Transactions,” is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. This statement amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange does not have commercial substance if the future cash flows of the entity are not expected to change significantly as a result of the exchange. For CPChem, the provisions of SFAS No. 153 are effective July 1, 2005. CPChem believes that implementation of this standard will not have a material impact on consolidated results of operations, financial position or liquidity.
Note 3. Transactions with Affiliates
Significant transactions with affiliated parties, including equity affiliates, were as follows:
(a) CPChem sells ethylene residue gas to ConocoPhillips’ crude oil refining operations; specialty chemicals, alpha olefin products and aromatics and styrenics by-products to ChevronTexaco; and feedstocks and various services to non-consolidated equity companies, all at prices that approximate market.
(b) CPChem purchases various feedstocks from ChevronTexaco and ConocoPhillips, and also purchases finished product from non-consolidated equity companies. In addition, ChevronTexaco and ConocoPhillips provide CPChem certain common facility and manufacturing services at some of CPChem’s facilities.
(c) ConocoPhillips and ChevronTexaco provide various services to CPChem under services agreements, including engineering consultation, research and development, laboratory services, security services, procurement services and pipeline operating services.
(d) Amounts include billings in 2004, 2003 and 2002 to Qatar Chemical Company Ltd. (Q-Chem), an equity affiliate, credited to expense.
The K-Resin® styrene-butadiene copolymer (SBC) plant at the Pasadena Plastics Complex in Pasadena, Texas, while still owned by ConocoPhillips, was idled in March 2000 due to a fire. The contribution agreement that was entered into upon the formation of CPChem contained certain provisions related to pre-established K-Resin® SBC plant earnings and production targets. In accordance with those provisions, ConocoPhillips made member contributions of $22 million in 2003 and $38 million in 2002.
See also Note 9 for a discussion of members’ preferred interests and Note 15 for a discussion of tax distributions to members.
Note 4. Inventories
Inventories were as follows:
The excess of replacement cost over book value of product inventories valued under the LIFO method was $396 million at December 31, 2004 and $194 million at December 31, 2003.
CPChem recorded $4 million of gains in 2004 (Olefins & Polyolefins) and $13 million of gains in 2003 ($10 million in Olefins & Polyolefins and $3 million in Aromatics & Styrenics) related to reductions in certain LIFO-valued inventories.
Note 5. Investments in and Advances to Affiliates
CPChem’s investments in its affiliates are accounted for using the equity method. These affiliates are also engaged in the manufacturing and marketing of petrochemicals. The carrying amounts of these investments were as follows:
* Profit/loss sharing percentage.
Dividends received from equity affiliates totaled $21 million in 2004, $13 million in 2003 and $16 million in 2002. CPChem’s members’ capital at December 31, 2004 included $69 million of undistributed net earnings (losses) from equity affiliates and $(128) million at December 31, 2003.
Phillips Sumika Polypropylene Company and K R Copolymer Co., Ltd. are not consolidated because CPChem does not have voting control of these entities.
Qatar Chemical Company Ltd. (Q-Chem)
Qatar Chemical Company Ltd. (Q-Chem), a joint venture company, was formed in 1998 to develop a petrochemical complex in Qatar. The complex achieved project completion, as defined in Q-Chem’s $750 million senior bank financing agreement, on September 16, 2004. Upon project completion, CPChem’s obligations to advance funds under its subordinated loan agreement with Q-Chem were terminated. In addition, the completion guarantees under Q-Chem’s senior bank financing were terminated and the bank financing became non-recourse with respect to the co-venturers. Prior to achieving project completion, as required under the subordinated loan agreement, CPChem advanced Q-Chem $85 million in 2003 and $210 million in 2002. No advances were made in 2004. In addition, as required by the completion guarantees, CPChem subscribed to $28 million of additional shares of Q-Chem in 2004 and $18 million of shares in 2003 to fund its ownership share of the periodic debt service payments of Q-Chem. No shares were subscribed to in 2002.
CPChem has agreed to provide up to $75 million of loans to Q-Chem if there is insufficient cash to pay the minimum debt service payments on the bank financing. CPChem believes it is unlikely that funding under this support agreement will be required.
CPChem also agreed to provide loans to Q-Chem through December 2006 if there is insufficient cash to make Q-Chem’s target debt service payments. These loans are limited to the amount of lost operating margins resulting from sales volumes being less than design capacity, or the actual cash deficiency, whichever is less. CPChem believes that any funding required under this support agreement is unlikely to have a material adverse effect on CPChem’s consolidated results of operations, financial position or liquidity.
CPChem’s rights under the subordinated loan agreement and the other contingent loan agreements related to Q-Chem previously described are subordinate to Q-Chem’s senior bank debt. Security interests in the notes related to such loans have been granted to the banks to support the terms of subordination. Advances to Q-Chem, including accrued interest, under the subordinated loan agreement totaled $310 million at December 31, 2004 and $303 million at December 31, 2003.
CPChem entered into an agency agreement with Q-Chem to act as an agent for the sale of substantially all of Q-Chem’s production. CPChem has also entered into an offtake and credit risk agreement with Q-Chem, under which CPChem is required to purchase, at market prices, specified amounts of production if CPChem fails to sell that product under the terms of the agency agreement. CPChem has no exposure to price risk for volumes it may be obligated to purchase under the terms of the offtake agreement. The offtake and credit risk agreement expires upon the earlier of the repayment in full by Q-Chem of its outstanding bank financing, currently scheduled to mature in 2012, or any refinancing thereof. CPChem expects that it will be able to sell all the production under the terms of the agency agreement.
CPChem records its 49% share of Q-Chem’s operating results using the equity method. Q-Chem is considered to be a VIE under the provisions of FIN No. 46(R). CPChem’s maximum exposure to loss per FIN No. 46(R) was $387 million at December 31, 2004. This amount represents CPChem’s carrying value of its investment in and advances to Q-Chem, including accrued interest.
Saudi Chevron Phillips Company
Saudi Chevron Phillips Company (SCP), a joint venture company that owns an aromatics complex in Al Jubail, Saudi Arabia, was originally financed with loans from commercial banks and a Saudi Arabian governmental agency. In July 2004, SCP refinanced its commercial bank loans, and as a result, CPChem’s contingent obligation to fund up to $25 million of SCP’s debt service payments was terminated. The subsidiary of Chevron Phillips Chemical Company LLC which directly owns the 50% interest in SCP, along with the other co-venturer, have each guaranteed their respective 50% share of certain loans to SCP from a Saudi Arabian governmental agency for the duration of the loans. Chevron Phillips Chemical Company LLC is not a direct party to this guarantee. These loans totaled $69 million (gross) at December 31, 2004. CPChem believes it is unlikely that funding under this guarantee will be required. SCP is not considered to be a VIE under the provisions of FIN No. 46(R).
Under the terms of a sales and marketing agreement that runs through 2026, CPChem is obligated to purchase, at market prices, 100% of production from the plant less any quantities sold by SCP in the Middle East. CPChem has no exposure to price risk for volumes it may be obligated to purchase and believes that it will continue to be able to sell all the purchased production required under the terms of the sales and marketing agreement.
Jubail Chevron Phillips Company
Jubail Chevron Phillips Company (JCP), a joint venture company, was formed in 2003 to develop an integrated styrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility, to be built on a site adjacent to the existing aromatics complex owned by SCP, will include feed fractionation, an olefins cracker, and ethylbenzene and styrene monomer processing units. Construction of the JCP facility will be in conjunction with an expansion of SCP’s benzene plant, together called “the JCP Project.” Construction began in the fourth quarter of 2004 and operational start-up is anticipated in late 2007. It is estimated that project completion, as defined in the JCP Project’s financing agreements, will be achieved in the first half of 2008. JCP is not considered to be a VIE under the provisions of FIN No. 46(R).
The project will be financed through equity contributions and subordinated loans from the co-venturers, in proportion to their equal ownership interests, and limited recourse loans from commercial banks and two Saudi Arabian governmental agencies (collectively, called “senior debt”). Principal and accrued interest outstanding under the commercial bank loans totaled $50 million at December 31, 2004. Principal and accrued interest outstanding under loans from one of the governmental agencies totaled $42 million at December 31, 2004, while no amounts were outstanding under the loan agreements with the second governmental agency.
Financial closing of the estimated $1.2 billion JCP Project occurred in July 2004. Effective with the financial closing and initial borrowings related to the JCP Project, the following commitments and guarantees were granted.
Under the terms of the commercial bank facilities, funding available from the senior debt is limited to 75% of the estimated project costs, as defined. The JCP co-venturers are obligated to each fund their respective 50% share of the remaining estimated project cost for the JCP Project through equity contributions and/or subordinated loans. In addition, the co-venturers are obligated to each fund their respective 50% share, through equity contributions and/or subordinated loans, of any project cost incurred in excess of the estimated project cost and of any project cost not funded by senior debt. These funding obligations terminate upon achieving project completion.
Certain bridge loan guarantees obligate the JCP co-venturers to each repay their respective 50% share of certain commercial bank loans to JCP and SCP if the loans from the second Saudi Arabian governmental agency are not available for borrowings one year after financial closing of the commercial loan facilities.
Under the terms of completion guarantees, the commercial bank lenders and the first Saudi Arabian governmental agency have the right to demand from each JCP Project co-venturer, on a pro rata basis, funds to cover the debt service requirements associated with the JCP Project that are due after March 31, 2009 until project completion. Furthermore, if the project is not completed by March 31, 2010, the commercial bank lenders and the first Saudi Arabian governmental agency have the right to demand from each co-venturer, on a pro rata basis, repayment of all outstanding principal and interest.
The subsidiary of CPChem which directly owns the 50% interest in JCP, along with the other co-venturer, have each guaranteed their respective 50% share of certain loans payable by JCP to the second Saudi Arabian governmental agency for the duration of the loans. Chevron Phillips Chemical Company LLC is not a direct party to this guarantee.
In addition to the above guarantees, CPChem guaranteed payment to a contractor for certain construction costs of the project, limited to a maximum of $103 million. The guarantee remains in effect until payment for those construction costs is made. CPChem also granted a guarantee related to the delivery of stated amounts of JCP’s styrene monomer production to a JCP customer, limited to a maximum of $8 million. This guarantee terminates upon the achievement of commercial production of styrene by JCP.
The total carrying amount of liabilities recorded, discounted and weighted for probability, for the aforementioned guarantees related to the JCP Project totaled $4 million at December 31, 2004. The liabilities were recorded as Other Liabilities and Deferred Credits, with an offsetting increase to Investments. CPChem believes it is unlikely that performance under any of the guarantees will be required. However, should such performance be required, CPChem believes it would not have a material adverse effect on consolidated results of operations, financial position or liquidity.
Equity Investments’ Financial Information
In accordance with the Securities and Exchange Commission’s rules pertaining to equity investments that are deemed to be “significant,” summarized financial information for CPChem’s equity investments, shown at 100%, follows:
Note 6. Property, Plant and Equipment
Property, plant and equipment was as follows:
Approximately $6.4 billion of gross property, plant and equipment at December 31, 2004 consisted of chemical plant assets depreciated on estimated useful lives of approximately 25 years. Other non-plant items, such as furniture, fixtures, buildings and automobiles, have
estimated useful lives ranging from 5 to 45 years, with a weighted average of 27 years. Assets under construction totaled $136 million at December 31, 2004 and $167 million at December 31, 2003.
Asset impairment charges totaling $6 million were recorded in 2002, consisting primarily of a $5 million charge related to CPChem’s Colton, California polyethylene pipe facility, which was part of the Olefins & Polyolefins segment. The remaining assets of the facility, which were written down to a $1 million estimated net realizable value, were classified as assets held for sale and were included in Other Current Assets at December 31, 2003. The assets were sold during 2004.
Note 7. Environmental Liabilities
CPChem is subject to federal, state and local environmental laws and regulations that may result in obligations to mitigate or remove the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at its sites. Undiscounted accrued environmental liabilities totaled $6 million at both December 31, 2004 and 2003. There were no accrued environmental costs associated with discontinued or sold operations.
Note 8. Debt
Long-term debt, net of applicable debt discounts, was as follows:
In addition to the information presented, CPChem had secured borrowings outstanding totaling $200 million at December 31, 2004 and $300 million at December 31, 2003 under a trade receivables securitization agreement. These borrowings are classified as short-term and were secured by $665 million and $459 million of trade receivables, respectively. The agreement allows CPChem to borrow up to $300 million for which CPChem grants a security interest in certain of its trade receivables as collateral for any amounts outstanding. Borrowings under the agreement are reduced or security interests in new trade receivables are granted as the receivables are collected by CPChem. The trade receivables securitization agreement expires on May 17, 2005. CPChem intends to request an extension of the expiration date of the current agreement to May 2006. The interest rate of borrowings outstanding under the agreement was 2.20% at December 31, 2004 and 1.07% at December 31, 2003, and averaged 1.37% in 2004, 1.21% in 2003 and 1.63% in 2002.
In 2002, Chevron Phillips Chemical Company LLC and its wholly owned subsidiary, Chevron Phillips Chemical Company LP, jointly and severally issued $500 million of senior unsecured 5 3/8% notes. The notes mature in 2007 and interest is payable semiannually. In 2001, Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP jointly and severally issued $500 million of senior unsecured 7% notes. These notes mature in 2011 and interest is also payable semiannually. Both series of notes contain certain covenants, such as limitations on liens, sale/leaseback transactions, sales of assets and business combinations, which CPChem does not consider to be restrictive to normal operations.
Notes issued under CPChem’s commercial paper program are in the tier-2 commercial paper market with maturities of 90 days or less. These commercial paper borrowings are classified as Long-Term Debt since CPChem’s intent is to refinance or replace the obligations on a long-term basis and CPChem has a committed backup credit facility in effect. The weighted average interest rate of commercial paper borrowings outstanding was 2.35% at December 31, 2004 and 1.07% at December 31, 2003, and averaged 1.54% in 2004, 1.23% in 2003 and 2.02% in 2002.
On July 30, 2004, CPChem entered into an $800 million five-year credit facility with various banks that provides committed credit support for the commercial paper program. Effective with the closing of the new credit facility, CPChem terminated the existing $400 million 364-day and $400 million three-year credit facilities. The current agreement contains covenants and events of default typical of bank revolving credit facilities, such as restrictions on liens. The agreement also contains a provision requiring the maintenance of ownership of CPChem by ChevronTexaco and ConocoPhillips of at least 50% in the aggregate. Provisions under this agreement are not considered to be restrictive to normal operations. There were no borrowings under any of the current or prior credit facilities during 2004, 2003 or 2002.
CPChem is not aware of any conditions that exist as of the date of this report that would cause any of its debt obligations to be in or at risk of default. In addition, CPChem does not have any debt obligations whose maturities would be accelerated as the result of a credit rating downgrade.
Note 9. Members’ Preferred Interests
On July 1, 2002, CPChem sold $250 million of members’ preferred interests, purchased 50% each by ChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire a portion of outstanding commercial paper obligations. Preferred distributions are cumulative at 9% per annum and are payable quarterly from cash earnings, as defined in CPChem’s Second Amended and Restated Limited Liability Company Agreement. The securities have no stated maturity date and are mandatorily redeemable quarterly, in increments of $25 million, if CPChem’s ratio of debt to total capitalization reaches a stated level. Members’ preferred interests are also redeemable at CPChem’s option.
In 2004, CPChem voluntarily redeemed $175 million of members’ preferred interests and paid $55 million of distributions on members’ preferred interests. There were no redemptions or preferred distributions paid in 2003 or 2002. Accrued preferred distributions payable, included in Other Current Liabilities and Deferred Credits, totaled $34 million at December 31, 2003. There were no accrued preferred distributions payable at December 31, 2004.
Note 10. Guarantees, Commitments and Indemnifications
Guarantees
CPChem’s headquarters building is leased under a synthetic lease agreement entered into in 2002. A synthetic lease is a lease that qualifies as an operating lease for financial accounting purposes and as a capital lease for federal tax purposes. The lease contains a fixed price purchase option and a residual guarantee. The purchase option price was considered to be the fair market value of the building at the inception of the lease. If CPChem does not extend the lease or exercise the purchase option upon the expiration of the lease in 2007, CPChem has an obligation to pay the lessor the shortfall, if any, in the proceeds realized from the sale of the building to a third party relative to the purchase option price, not to exceed $27 million. CPChem is entitled to receive any proceeds from the sale of the building that are in excess of the purchase option price. While it is not possible to predict with certainty the amount, if any, that CPChem would be required to pay or be entitled to receive should the building be sold to a third party upon the expiration of the lease, CPChem believes that the amount paid or received would not be material to consolidated results of operations, financial position or liquidity.
See Note 5 for a discussion of certain guarantees related to Q-Chem, SCP and JCP.
Commitments
See Note 13 for a discussion of commitments under non-cancelable operating leases.
Indemnifications
As part of CPChem’s ongoing business operations and consistent with generally accepted and recognized industry practice, CPChem enters into numerous agreements with other parties which apportion future risks between the parties to the transaction or relationship governed by the agreements. One method of apportioning risk is the inclusion of provisions requiring one party to indemnify the other party against losses that might be incurred in the future. Many of CPChem’s agreements, including technology license agreements, contain indemnities that require CPChem to perform certain acts, such as defending certain licensees against patent infringement claims of others, as a result of the occurrence of a triggering event or condition.
The nature of these indemnity obligations are diverse and numerous and each has different terms, business purposes, and triggering events or conditions. In addition, the indemnities in each agreement vary widely in their definitions of both the triggering event and the resulting obligation, which is contingent upon that triggering event. Because many of CPChem’s indemnity obligations are not limited in duration or potential monetary exposure, CPChem cannot reasonably calculate the maximum potential amount of future payments that could possibly be paid under the indemnity obligations stemming from all of CPChem’s existing agreements. In the case of known contingent liabilities, however, CPChem records an undiscounted liability when a loss is probable and the amount can be reasonably estimated.
CPChem is not aware of the occurrence of any triggering event or condition that would have a material adverse impact on consolidated results of operations, financial position or liquidity as a result of an indemnity obligation arising from such triggering event or condition.
Note 11. Contingent Liabilities
In the case of known contingent liabilities, CPChem records an undiscounted liability when a loss is probable and the amount can be reasonably estimated. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probable insurance or other third-party recoveries. Based on currently available information, CPChem believes it is remote that future costs related to known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect on consolidated results of operations, financial position or liquidity.
As facts concerning contingent liabilities become known, CPChem reassesses its position with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem’s liability in proportion to those of other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available.
CPChem is a party to certain asbestos lawsuits for which the financial responsibility between CPChem and ConocoPhillips is disputed. CPChem and ConocoPhillips are attempting to resolve where the financial responsibility for these lawsuits rests. In the meantime, ConocoPhillips is managing and defending these lawsuits. In the event the financial responsibility for these lawsuits is ultimately determined to rest with CPChem, CPChem may be required to record a charge to operations that could be material to the period reported.
CPChem is a party to a number of other legal proceedings that arose in the ordinary course of business for which, in many instances, no provision has been made in the financial statements. While the final outcome of these proceedings cannot be predicted with certainty, CPChem believes that none of these proceedings, when resolved, will have a material adverse effect on consolidated results of operations, financial position or liquidity.
Electricity Deregulation
Legislation for electricity deregulation for the Electricity Reliability Council of Texas (ERCOT) area was enacted in 1999, allowing retail electricity consumers to choose electricity providers effective January 1, 2002. This legislation also allows utilities to file an application with the Public Utility Commission of Texas (PUCT) for determination and reimbursement of costs, if any, associated with the implementation of this legislation. Included in these costs are certain environmental expenses and costs associated with stranded assets. Stranded asset costs are those associated with the utility asset devaluation that may have occurred due to the legislation. Once determined, these costs are paid by electricity consumers under PUCT-mandated procedures.
CenterPoint Energy Houston Electric LLC (CenterPoint), which previously provided electricity to CPChem’s Cedar Bayou manufacturing facility and its Kingwood research center, both located in Texas, filed its application for such determination with the PUCT on March 31, 2004. A number of consumers and organizations representing consumers intervened in the PUCT proceedings to object to certain claims in CenterPoint’s application. In November of 2004, the PUCT denied the amount of CenterPoint’s request and entered an order for a recovery of approximately one-half of that amount. Both sides are appealing the decision.
If it is determined that CenterPoint is entitled to recover some or all of the costs claimed in its application, CPChem would receive a monthly charge added to its electricity cost over an extended period of time to pay for such reimbursement. Based on the stated amounts of CenterPoint’s application and the PUCT’s subsequent order, it is currently anticipated that the additional monthly cost to CPChem that is approved by the PUCT, when finalized, would not have a material adverse effect on consolidated results of operations, financial position or liquidity.
Note 12. Credit Risk
Financial instruments that potentially subject CPChem to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are currently comprised of bank accounts and short-term investments with several financial institutions that have high credit ratings. CPChem’s policy for short-term investments both diversifies and limits its exposure to credit risk. Trade receivables are dispersed among a broad customer base, both domestic and foreign, which results in limited concentrations of credit risk. CPChem also maintains and follows credit policies and procedures that minimize credit risk and exposures. Letters of credit are sometimes utilized when a customer’s financial strength is considered to be insufficient.
Note 13. Operating Leases
CPChem leases tank and hopper railcars, office buildings and certain other facilities and equipment. Total operating lease rental expense was $44 million in both 2004 and 2003, and $48 million in 2002. Aggregate future minimum lease payments under non-cancelable leases at December 31, 2004 totaled $25 million, $22 million, $50 million, $17 million and $14 million in the years 2005 through 2009, respectively, and $81 million thereafter. Included in aggregate future minimum lease payments in 2007 is CPChem’s maximum exposure of $27 million under the contingent obligation associated with the lease agreement for CPChem’s headquarters building.
Note 14. Benefit Plans
The majority of CPChem employees are former employees of ChevronTexaco or ConocoPhillips. Certain CPChem benefit plans provide that employees who were former employees of ChevronTexaco or ConocoPhillips receive enhanced benefits, including credit for service while employees of ChevronTexaco or ConocoPhillips.
Pension and Other Postretirement Health Care
CPChem’s retirement plan is a defined benefit plan that covers most U.S.-based employees. Eligible employees automatically participate in the plan and begin accruing benefits from January 1, 2001 or their first day of employment if employed after that date. Eligible employees become fully vested in their retirement benefits after five years of service with CPChem, including prior service with ChevronTexaco or ConocoPhillips or their affiliates. Retirement benefits are based on two types of credits: a career average pay benefit and a variable annuity account benefit. Both benefits are based on an employee’s compensation over the years and the number of years that an employee is qualified to receive benefit credits.
CPChem also offers health care benefits to eligible employees, mostly U.S.-based, upon their retirement. A retiree flexible spending account is established by CPChem for eligible retirees at the time of retirement based on years of service times a fixed dollar amount and marital status. Retirees may use funds in their account to purchase medical and/or dental coverage from CPChem or from private health care plans, or to pay eligible out-of-pocket health care expenses. Retirees’ flexible spending accounts earn interest upon inception at market-based rates. Any changes in future health care cost rates for retirees would not impact future CPChem earnings as health care benefits for retirees are solely based on years of service and marital status.
A January 1 measurement date is used in the determination of pension and other postretirement net periodic benefit costs. A December 31 measurement date is used in the determination of pension and other postretirement benefit obligations and plan assets.
Included in the pension plan tables presented is an unfunded supplemental retirement plan covering key executives. The purpose of the plan is to provide compensating benefits to those employees affected by federally mandated limits on eligible compensation levels contained in CPChem’s normal retirement plan. The benefit obligation associated with this plan was $20 million at December 31, 2004 and $17 million at December 31, 2003. Also included are separate pension plans for employees of the Puerto Rico and Belgium facilities, and employees of certain bargaining units within the Performance Pipe division of CPChem.
Net periodic benefit costs for pension and other postretirement benefits included the following:
The pension and other postretirement benefit plans’ funded status and related amounts follow:
CPChem expects to fund approximately $50 million to its pension plans and $6 million to its other postretirement benefits plans in 2005.
The accumulated benefit obligation for all pension plans was $222 million at December 31, 2004 and $180 million at December 31, 2003. Certain information for pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2004 follows:
CPChem’s investment strategy with respect to pension plan assets is to maintain a diversified portfolio of domestic and international equities, fixed income securities, real estate-backed securities and cash equivalents. Target asset allocations are chosen based on an analysis of the historical returns and volatilities of various asset classes. The plan investments are periodically rebalanced to maintain the target asset allocation. Rates of return for the investment funds comprising each asset class are monitored quarterly against benchmarks and peer fund results.
Asset allocations for CPChem’s pension plans, along with target allocations for 2005, follow:
Weighted average rate assumptions used in determining estimated benefit obligations were as follows:
Weighted average rate assumptions used in determining periodic benefit costs for pension and other postretirement benefits follow:
The expected return on plan assets were developed through, among other things, analysis of historical market returns for the plans’ investment classes and current market conditions.
The determination of CPChem’s projected benefit obligations for its pension plans affects the amounts of related expense recorded in the current period and also impacts the level and timing of contributions into the plans. Due to the specialized nature of these calculations, CPChem utilizes outside actuarial firms to assist in the calculation of these obligations. An actuarial determination of projected benefit obligations and company contribution requirements involves significant estimates regarding future unknown events, which include estimated future rates of return on pension plan assets, discount rates applied to pension plan obligations, estimated employee retirement dates and salary levels at retirement, and mortality rates. Estimates of these future unknown events are judgmentally determined based on factors such as, among other things, historical returns on pension plan assets and outside actuarial advice. However, a 1% decrease in the estimated future returns on pension plan assets or a 1% decrease in the discount rates applied to pension plan obligations would not have a material adverse effect on consolidated results of operations, financial position or liquidity.
It is anticipated that benefit payments, which reflect expected future service, will be paid as follows:
Contribution Plans
Defined contribution plans are available for most employees, whereby CPChem matches a percentage of the employee’s contribution. CPChem’s contributions to the plans are expensed and funded on a current basis, and totaled $17 million in 2004 and $13 million in each of 2003 and 2002.
Share-Based Compensation
CPChem currently does not utilize any share-based employee compensation plans.
Termination Benefits
Termination benefit costs totaling $12 million were recorded to Selling, General and Administrative expense in 2003. The announced workforce reductions affected 196 employees at various locations.
Termination benefit costs payable follows:
Note 15. Taxes
CPChem is treated as a flow-through entity for federal income tax and for most state income tax purposes whereby each member is taxable on its respective share of income and loss. However, CPChem is directly liable for federal and state income taxes and franchise taxes on certain separate legal entities, and for any foreign taxes incurred.
CPChem has a U.S. subsidiary operating in Puerto Rico that is subject to U.S. federal income tax, but has been granted an exemption from certain Puerto Rico taxes, including income taxes. All Puerto Rico tax exemptions related to this subsidiary expire in 2017. Limited tax incentives, in the form of reduced income tax rates, also exist in South Korea, China, Singapore, Saudi Arabia and Qatar. CPChem is subject to state income tax in certain jurisdictions.
CPChem is required to make quarterly distributions to its members in amounts representing the liability for combined federal and state income taxes calculated at specified rates based on CPChem’s estimate of federal taxable income. In 2004, CPChem made $118 million of tax distributions to its members. In addition, a $39 million tax distribution was accrued in Other Current Liabilities and Deferred Credits at December 31, 2004 and will be paid in the first quarter of 2005.
The components of income (loss) before taxes follow:
The components of income tax expense follow:
Deferred income tax assets and liabilities follow:
At December 31, 2004 and 2003, the deferred tax assets of CPChem’s Puerto Rico subsidiary were fully offset by valuation allowances. A valuation allowance was established to reduce the deferred tax assets of the subsidiary’s net operating loss carryforwards and tax depreciation differences to amounts that would more likely than not be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future profitability of operations.
Net deferred income tax assets and liabilities related to the following:
Note 16. Segment and Geographic Information
CPChem’s reporting structure is based on the grouping of similar products, resulting in three operating segments - Olefins & Polyolefins (O&P), Aromatics & Styrenics (A&S), and Specialty Products.
Olefins & Polyolefins - This segment gathers, buys, sells and fractionates natural gas liquids, and manufactures and markets olefin products such as ethylene and propylene. This segment also manufactures and markets alpha olefins and polyolefin products such as normal alpha olefins, polyethylene, polypropylene and polyethylene pipe. CPChem has five olefin and/or polyolefin production facilities located in Texas, nine domestic pipe facilities and one domestic pipe fittings facility. CPChem also has one pipe facility in Mexico. In addition, CPChem owns interests in a polypropylene facility located at the Pasadena Plastics Complex in Texas, a high-density polyethylene plant located at CPChem’s Cedar Bayou facility in Texas, an ethylene, polyethylene and 1-hexene facility in Qatar, and polyethylene facilities in Singapore and China.
Aromatics & Styrenics - This segment manufactures and markets aromatics products such as benzene, styrene, paraxylene and cyclohexane. This segment also manufactures and markets polystyrene as well as styrene-butadiene copolymers sold under the trademark K-Resin®. Production facilities are located in Mississippi, Louisiana, Texas, Ohio, Puerto Rico and China. CPChem also owns an equity interest in an aromatics facility in Saudi Arabia and in a K-Resin® SBC facility in South Korea.
Specialty Products - This segment manufactures and markets a variety of specialty chemical products, including organosulfur chemicals and high-performance polyphenylene sulfide polymers and compounds sold under the trademark Ryton®. Production facilities are located in Texas, Belgium and Singapore.
“Corporate and Other” (Other) includes items not directly attributable to CPChem’s operating segments. Interest expense, certain charges for employee incentive plans and charges related to domestic workforce reductions are generally retained within Other.
Financial information follows. Inter-segment transactions are billed at prevailing market rates.
The following charges or benefits were related to items such as asset retirements and plant closures, asset impairments, business interruption and property casualty insurance claim settlements, employee severance costs, pension plan curtailments and other items of that nature.
(a) Includes a $9 million benefit related to the sale of assets - $5 million in A&S and $4 million in O&P.
(b) Includes a $10 million benefit related to a sales and use tax audit - $7 million in O&P and $3 million in Specialty Products.
(c) Includes $27 million of charges, mostly related to legal settlements and accruals, and employee severance costs - $16 million in O&P, $10 million in Other and $1 million in Specialty Products.
(d) Includes $19 million in asset retirements and plant closures - $10 million in A&S and $9 million in O&P.
(e) Includes $9 million of benefits in A&S related to business interruption and property casualty insurance claim settlements.
(f) Includes $6 million of net charges, primarily related to a pension curtailment charge in A&S. Also includes a benefit for the reversal of certain customer claim accruals, offset by the write-off of two technology projects in O&P.
(g) Includes $28 million of net charges related to asset retirements - $21 million in A&S and $7 million in O&P.
(h) Includes a $5 million charge related to a polyethylene pipe facility (O&P).
* Excludes investments in and advances to Q-Chem (O&P) of $28 million in 2004, $103 million in 2003 and $210 million in 2002.
Geographic information was as follows. Net sales were determined based on location of the operation generating the sale.
Foreign currency transaction gains were $5 million in both 2004 and 2003, and $7 million in 2002.
Note 17. Fair Values of Financial Instruments
The carrying amounts of cash and cash equivalents, trade and affiliated receivables, and trade and affiliated payables approximate fair values. The carrying amount of secured borrowings outstanding also approximates fair value due to the short-term nature of the borrowings. The carrying amount of commercial paper outstanding also approximates fair value due to the variable interest rate feature. The carrying amount of other long-term debt outstanding at both December 31, 2004 and 2003 was $1.005 billion, with fair values of $1.094 billion and $1.096 billion, respectively, based on quoted market prices.
Note 18. Consolidating Financial Statements
Consolidating financial statements follow. This information is presented in accordance with SEC rules and regulations as they relate to the debt jointly and severally issued by Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP.
The LLC is the non-operating parent holding company. The LP is the primary U.S. operating company. “Other Entities” is principally comprised of foreign operations and the holding companies that have direct ownership of the LP. These consolidating financial statements were prepared using the equity method of accounting for investments.
Chevron Phillips Chemical Company LLC
Consolidating Statement of Operations
For the Year ended December 31, 2004
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Statement of Operations
For the Year ended December 31, 2003
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Statement of Operations
For the Year ended December 31, 2002
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Balance Sheet
December 31, 2004
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Balance Sheet
December 31, 2003
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Statement of Cash Flows
For the Year ended December 31, 2004
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Statement of Cash Flows
For the Year ended December 31, 2003
Note 18. Consolidating Financial Statements (continued)
Chevron Phillips Chemical Company LLC
Consolidating Statement of Cash Flows
For the Year ended December 31, 2002
Chevron Phillips Chemical Company LLC
Selected Quarterly Financial Data
(Unaudited)
Income (loss) before interest and taxes in 2004 included gains on the sale of assets of $4 million in the third quarter and $5 million in the fourth quarter.
Income (loss) before interest and taxes in 2003 included net charges (credits) of $7 million, $21 million, $9 million and $(1) million in the first through the fourth quarters, respectively, related to asset retirements and plant closures, employee severance costs, legal settlements and accruals, a benefit related to a sales and use tax audit, and other items of that nature.
See Part I - Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” for further discussions.
DR. ABDULLAH A. BAESHEN-COUNTRY CO-ORDINATING PARTNER
P.O. Box 3795
Phone: 8825414
4th Floor
Fax:
Fluor Building
www.ey.com/me
Alkhobar 31952
Saudi Arabia
Registration No. 45
AUDITORS’ REPORT TO THE PARTNERS OF
SAUDI CHEVRON PHILLIPS COMPANY LIMITED
We have audited the accompanying balance sheet of Saudi Chevron Phillips Company Limited, expressed in United States Dollars, as of 31 December 2004, 31 December 2003 and 31 December 2002 and the related statements of income, cash flows and changes in partners’ equity for the year then ended. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the Kingdom of Saudi Arabia, which are substantially the same as those followed in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Saudi Chevron Phillips Company Limited as of 31 December 2004, 31 December 2003, 31 December 2002 and the results of its operations and its cash flows for the year then ended in conformity with accounting standards generally accepted in the Kingdom of Saudi Arabia.
Accounting principles generally accepted in the Kingdom of Saudi Arabia vary in certain significant respects from accounting principles generally accepted in United States of America. The significant differences between the accounting principles generally accepted in the Kingdom of Saudi Arabia and those generally accepted in the United States of America so far as concerns the financial statements referred to are summarised in note 18 to the accompanying financial statements.
for Ernst & Young
Abdulaziz Saud Alshubaibi
Certified Public Accountant
Registration No. 339
February 2005
Alkhobar
Dr. Abdullah A. Baeshen (66), Husam H. Sadagah (73)
Abdulaziz A. Alsowailim (277), Abdulaziz Alshubaibi (339)
Offices in the Kingdom : Alkhobar, Jeddah, Riyadh
Saudi Chevron Phillips Company Limited
BALANCE SHEET
As At 31 December 2004
The attached notes 1 to 18 form part of these financial statements.
Saudi Chevron Phillips Company Limited
STATEMENT OF INCOME
Year Ended 31 December 2004
The attached notes 1 to 18 form part of these financial statements.
Saudi Chevron Phillips Company Limited
STATEMENT OF CASH FLOWS
Year Ended 31 December 2004
The attached notes 1 to 18 form part of these financial statements.
Saudi Chevron Phillips Company Limited
STATEMENT OF CHANGES IN PARTNERS’ EQUITY
Year Ended 31 December 2004
The attached notes 1 to 18 form part of these financial statements.
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS
December 2004
1 ACTIVITIES
The company is a limited liability company registered in Jubail - Saudi Arabia under Commercial Registration number 2055003839 dated 22 Safar 1417H, corresponding to 8 July 1996 with a branch in Jubail under Commercial Registration number 2055003839/001. The company was established to develop, construct and operate a petrochemical plant in Jubail, Saudi Arabia, to produce aromatics, solvents and Cyclohexane. It is owned 50% by Saudi and 50% by non-Saudi partners.
2 SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting standards generally accepted in the Kingdom of Saudi Arabia. The significant accounting policies adopted are as follows:
Accounting convention
The financial statements are prepared under the historical cost convention.
Fixed assets/depreciation
All property, plant and equipment are recorded at cost. The cost of property, plant and equipment is depreciated on a straight line basis over the estimated useful lives of the assets.
Expenditure for repair and maintenance are charged to income. Improvements that increase the value or materially extend the life of the related assets are capitalised.
Deferred charges/amortisation
Deferred charges comprise total pre-production costs net of pre-production income, and Saudi Industrial Development Fund (SIDF) loan appraisal fees and are amortised in equal annual instalments from the date of commencement of commercial production over the estimated period of benefit.
Inventories
Inventories are stated at the lower of cost and market value. Cost is determined as follows:
Raw materials, spares and catalysts
•
purchase cost on a weighted average basis.
Finished goods
•
cost of direct materials and labour plus attributable overheads based on a normal level of activity.
Zakat and income tax
Zakat and income tax are provided for in accordance with Saudi Arabian fiscal regulations. The provision is charged to retained earnings. Reimbursements by the partners of such zakat and income tax are credited to retained earnings.
Employees’ terminal benefits
Provision is made for amounts payable to comply with the Saudi Arabian labour law applicable to employees’ accumulated periods of service at the balance sheet date.
Sales
Sales represent the invoiced value of goods supplied by the company during the year net of marketing costs.
Foreign currencies
Transactions in foreign currencies are recorded in US Dollars at the rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All differences are taken to the statement of income.
Expenses
Selling and distribution expenses comprise expenses that specifically relate to the delivery of products. All other period expenses, other than amortisation of deferred charges and financial charges, are classified as cost of sales.
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
3 PROPERTY, PLANT AND EQUIPMENT
The estimated useful lives of the assets for the calculation of depreciation are as follows:
The buildings and plant and equipment are situated on land leased from the Royal Commission for Jubail and Yanbu. The lease is initially for a period of 30 years commencing from 20 Rajab 1417H (corresponding to 1 December 1996) and is renewable for further periods thereafter.
All plant and equipment are mortgaged to the Saudi Industrial Development Fund as security for certain term loans (note 13 (b)). Finance charges of US $ 18.9 million (2003 and 2002: US $ 18.9 million) incurred during construction phase in respect of the loan facilities disclosed in note 13 (b) have been capitalised as part of plant and equipment.
Construction work in progress represents costs incurred on certain civil and mechanical projects currently under construction (also see note 17).
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
4 DEFERRED CHARGES
Deferred charges consist of pre-production costs of US $ 22.2 million (2003 and 2002: US $ 22.2 million) and appraisal fees on the SIDF and commercial loans of US $ 9.3 million (2003 and 2002: US $ 9.3 million).
In 2003, in order to comply with the SOCPA’s standard on “Intangible Assets”, with effect from 1 January 2003, the company reduced the pre-production costs amortisation period of ten years. The balance is now being amortised over 7 years.
Appraisal fees on the SIDF and commercial loans are amortised over the period of the related loans (9 years).
5 INVENTORIES
6 ACCOUNTS RECEIVABLE AND PREPAYMENTS
Four customers account for the entire trade accounts receivable balance as at 31 December 2004 (2003: four customers and 2002: three customers).
7 BANK BALANCES AND CASH
Bank balances amounting to US $ 220.5 million are assigned as security against loan facilities from a consortium of banks (note 13 (a)).
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December
8 RELATED PARTY TRANSACTIONS AND BALANCES
Purchases amounting to approximately US $ 11.4 million were made from the foreign partner’s parent company and its affiliates during 2004 (2003: approximately US $ 3.2 million and 2002: approximately US $ 11.4 million).
Approximately 48% (2003: approximately 38% and 2002: approximately 31%) of the company’s sales are made through a marketing affiliate of the foreign partner under a marketing agreement. Upon delivery of the product to the marketing affiliate, sales are recorded at provisional prices approved by the Board. The provisional prices are subsequently adjusted to actual selling prices, as received by the marketer from its customers, after deducting shipping, distribution and selling costs, and a marketing fee (in accordance with the above marketing contract) to cover all other marketing expenses. Adjustments are recorded on a quarterly basis as they are reported by the marketer and become known to the company.
The prices and terms of the transactions are approved by the management. Amounts due from partners and an affiliate and amounts payable to affiliates are shown under notes 6 and 9, respectively.
In addition, subordinated loans from the partners are disclosed in note 14 to these financial statements.
9 ACCOUNTS PAYABLE AND ACCRUALS
10 ZAKAT AND INCOME TAX
a) Zakat
Charge for the year
The zakat charge relating to the Saudi partner consists of:
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
10 ZAKAT AND INCOME TAX (continued)
The Saudi partner’s provision is based on his share as follows:
The differences between the financial and the zakatable profit are mainly due to adjustments for certain costs/claims based on the relevant fiscal regulations.
The adjustment for previous year relates to the difference between provision made in the books on a provisional basis and the amount calculated and included in the final zakat declaration for the preceding year.
Movement in provision
The movement in the zakat provision was as follows:
b) Income tax
Under the provisions of the Foreign Capital Investment Code, the non-Saudi partner is exempt from income tax on its share of income for ten years from the date of commencement of commercial production (1 March 2000). The non-Saudi partner’s cumulative share of net income since the commencement of the tax holiday is US $ 233 million (2003: US $ 82 million and 2002: US $ 25.6 million).
Status of assessments
For the period ended 31 December 1997 and the year ended 31 December 1998, the Department of Zakat and Income Tax (DZIT) raised assessments with additional zakat, tax and delay fine liabilities of US $ 0.4 million, US $ 2.2 million and US $ 0.6 million, respectively. The company has filed an appeal against the DZIT’s assessments with the Preliminary Appeals Committee. Management is confident that the committee’s decision will be in favour of the company. Accordingly no provision for the additional liabilities, as assessed by DZIT, has been made in the books as at 31 December 2004. The zakat and income tax assessments for the years ended 31 December 1999 to 2003 have not yet been received by the company.
11 CAPITAL
Capital is divided into 6,550,000 shares (2003 and 2002: 6,100,000 shares) of US $ 26.67 (100 Saudi Riyals) each. During the year, the partners resolved to increase the capital of the company by US $ 12 million. All the legal formalities were completed in this respect.
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
12 STATUTORY RESERVE
As required by Saudi Arabian Regulations for Companies, 10% of the net income for the year has been transferred to a statutory reserve. The company may resolve to discontinue such transfers when the reserve totals 50% of the capital. The reserve is not available for distribution.
13 TERM LOANS
a) During the year, the company has restructured the previous term loan facilities from a consortium of banks (the consortium). The new term loans facilities consist of US $ 101 million for refinancing the old term loan, US $ 40 million as a new term loan facility and US $ 38 million as a revolving credit facility. The US $ 101 million is repayable in 7 half yearly instalments increasing from US $ 10 million to US $ 20 million. The repayment of this loan commenced on 25 October 2004 with the final instalment due on 25 October 2007. The $ 40 million is repayable in 18 half yearly instalments commencing six months after the expansion project completion which is expected in 2006. The loans are secured by assignment of residual proceeds of the plant and equipment of the company, assignment of receipts from all material and significant contracts, charge and assignment over offshore project accounts and pledge and assignment over onshore project accounts. The facilities are subject to commission at LIBOR plus 1% (2003 and 2002: same terms and conditions).
Amounts due within 12 months from the balance sheet date are shown as current liabilities.
b) During the year, the company also restructured its term loans facilities of US $ 151 million (2003 and 2002: US $ 151 million) with SIDF. The total amount of term loans facilities with the SIDF is now US $ 215 million of which US $ 150 million (2003 and 2002: US $ 150 million) has been drawn as at the balance sheet date. According to the revised terms of the agreement, the loans are secured by a mortgage on the company’s plant and equipment and assignment of insurance proceeds and technology rights. The loans carry appraisal fees which are being amortised over the term of the loans (note 4) and are repayable in twenty half yearly instalments (2003: fifteen half yearly instalments) of varying amounts from US $ 4.3 million to US $ 9.3 million (2003: US $7.5 million to US $ 14.4 million). Repayment of the remaining balance, after restructuring, commenced on 15 Sha’aban 1425H (corresponding to 30 September 2004), with the final instalment due on 15 Sha’aban 1429H (corresponding to 23 February 2008).
Amounts due within 12 months from the balance sheet date are shown as current liabilities.
14 SUBORDINATED PARTNERS’ LOANS
Subordinated partners’ loans are commission free and are repayable subject to the minimum level required to be maintained by the terms of the SIDF loan agreement disclosed in note 13.
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
15 SELLING AND DISTRIBUTION EXPENSES
16 FINANCIAL CHARGES
17 CAPITAL COMMITMENTS
The directors have authorised future capital expenditure amounting to US $ 122 million in connection with the construction of certain civil and mechanical projects.
18 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements of the company have been prepared in accordance with accounting standards generally accepted in the Kingdom of Saudi Arabia. For the purpose of these financial statements, following are the differences between the accounting standards generally accepted in the Kingdom of Saudi Arabia and United States Generally Accepted Accounting Principles (US GAAP).
a) Reconciliation of net income with US GAAP
For each year presented in the table above, it has been assumed that the pre production costs balance is not adjusted in the preceding year. Had the balance of pre production costs been written off prior to 2002, US GAAP net income for 2004, 2003 and 2002 would have been US $ 304 million, US $ 115 million, US $ 47 million, respectively.
b) Reconciliation of partners’ equity with US GAAP
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December 2004
18 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - continued
c) Estimated future aggregate amortisation expense
The estimated aggregate amortisation expense during the next five years would be US $ 3.306 million per annum (same as in 2004) as no more deferred charges are expected to be incurred during the next five years.
d) Related party transactions
The amounts of the company’s sales made through a marketing affiliate of the foreign partner as described in note 8 were 2004: US $ 320.1 million, 2003: US $ 150.5 million and 2002: US $ 96.1 million.
e) Source of raw materials
The company purchases all of its raw materials primarily from one supplier in the Kingdom of Saudi Arabia.
f) Term loans maturities
Following are the combined aggregate amounts of next five years’ maturities of the term loans stated under note 13 to the financial statements:
g) Dividends paid
Cash dividends during the year were US $ 30 million (2002: US $ 19.9 million and 2001: Nil) and constitute 17.19% of the capital (2003: 12.23%) and US $ 4.92 per share (2003: US $ 3.26 per share).
h) Deferred taxation
There is no deferred tax liability or asset as at the balance sheet date because the amount of tax, if any, is reimbursable by the non-Saudi partner who is enjoying a tax holiday as mentioned under note 10 to the financial statements.
i) Fair value
The fair values of the company’s financial assets and liabilities approximate their book values.
j) Comprehensive income
Comprehensive income under US GAAP is substantially the same as the net income under US GAAP.
k) Employees’ terminal benefits
Provision for employees’ terminal benefits is made for amounts payable to comply with the Saudi Arabian labour law applicable to employees’ accumulated periods of service at the balance sheet date and therefore, does not require actuarial calculation.
Saudi Chevron Phillips Company Limited
NOTES TO THE FINANCIAL STATEMENTS - continued
31 December
18 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES FOLLOWED BY THE COMPANY AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES - continued
l) Statement of cash flows
Statement of cash flows as presented in the financial statements complies with the International Financial Reporting Standard on “Cash Flow Statements”.
m) Provision for tax
Provision for zakat is charged to the statement of partners’ equity in accordance with Saudi Accounting Standards as it is considered to be a charge of the Saudi partner. Had the provision for zakat been charged to the statement of income, the net income for 2004, 2003 and 2002 would have been reduced by US $ 3.8 million, US $ 1.1 million and US $ 0.9 million, respectively.
Report of the Auditors
To
The Shareholders
Qatar Chemical Company Limited, Q.S.C
Doha,
Qatar
We have audited the accompanying financial statements of Qatar Chemical Company Limited, Q.S.C (the “Company”) on pages 2 to 21 as of and for the year ended 31 December 2004. The financial statements of the Company as of 31 December 2003 were audited by another auditor whose report thereon dated 24 March 2004, expressed an unqualified opinion on those statements with an emphasis of matter relating to going concern assumption of the financial statements resulting from accumulated losses as at 31 December 2003.
Respective responsibilities of the Company’s management and auditors
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
Basis of opinion
We conducted our audit in accordance with the International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of 31 December 2004, the results of its operations, changes in its shareholders’ equity and its cash flows for the year then ended in accordance with International Financial Reporting Standards.
Other matters
In addition, in our opinion, the Company has maintained proper accounting records and the financial statements are in agreement therewith and a physical count of the inventories was carried out in accordance with the established principles. We have obtained all the information and explanations we required for the purpose of our audit and are not aware of any significant violations of the provisions of the Company’s Articles of Association and Qatar Commercial Companies’ Law No. 5 of 2002 to the extent applicable having occurred during the year which might have had a material adverse effect on the business of the Company or its financial position.
13 February 2005
Abdul Hakim Al-Adhamy
Doha
KPMG
State of Qatar
Qatar Auditors’ Registry No.
AUDITORS’ REPORT TO THE SHAREHOLDERS OF
QATAR CHEMICAL COMPANY LTD. (Q-CHEM), Q.S.C.
We have audited the accompanying balance sheet of Qatar Chemical Company Ltd. (Q-Chem), a Qatari Shareholding Company (Q.S.C.), as of 31 December 2003 and 31 December 2002, and the related statements of income, cash flows and changes in equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. These financial statements are presented together with the financial statements for the year ended 31 December 2004 which are audited by another auditor whose report dated 13 February 2005, expressed an unqualified opinion on these financial statements.
We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of 31 December 2003 and 31 December 2002 and the results of its operations and its cash flows for the years then ended in accordance with International Financial Reporting Standards.
Furthermore, in our opinion, proper books of account have been kept by the Company and the financial statements comply with the Qatar Commercial Companies’ Law No. 5 of 2002 and the Company’s Articles of Association. We have obtained all the information and explanations we required for the purpose of our audit, and are not aware of any violations of the above mentioned law or the Articles of Association having occurred during the year which might have had a material effect on the business of the Company or its financial position.
In our reports dated 24 March 2004 and 31 March 2003 we expressed an unqualified opinion on the individual financial statements for the years ended 31 December 2003 and 31 December 2002 respectively with an emphasis of matter relating to going concern assumption of the financial statements resulting from accumulated losses as at 31 December 2003 and 31 December 2002.
A Member of Ernst & Young Global
Qatar Chemical Company Limited, Q.S.C
Balance Sheet
as at 31 December
The attached notes on pages 6 to 21 form an integral part of these financial statements.
Qatar Chemical Company Limited, Q.S.C
Statement of Income
for the year ended 31 December 2004
The attached notes on pages 6 to 21 form an integral part of these financial statements.
Qatar Chemical Company Limited, Q.S.C
Statement of Changes in Shareholders’ Equity
for the year ended 31 December 2004
Legal reserve In accordance with the regulations of Qatar Commercial Companies Law No. 5 of 2002, 10% of the net profit for the year is required to be transferred to the Legal Reserve until the balance in the Reserve equals 50% of the paid up capital. This Reserve is not normally available for distribution except in circumstances specified in the Qatar Commercial Companies Law No. 5 of 2002.
The attached notes on pages 6 to 21 form an integral part of these financial statements.
Qatar Chemical Company Limited, Q.S.C
Statement of cash flows
for the year ended 31 December 2004
The attached notes on pages 6 to 21 form an integral part of these financial statements.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
1 LEGAL STATUS AND PRINCIPAL ACTIVITIES
Qatar Chemical Company Limited (“the Company”) was formed by the enactment of Emiri decree no. 20 issued on 6 October 1998 and is registered in Qatar as a Qatari Shareholding Company (Q.S.C). The activities of the Company are governed by a joint venture agreement dated 16 November 1997 between Qatar General Petroleum Corporation (now doing business under the name of Qatar Petroleum), Chevron Phillips Chemical International Qatar Holdings LLC (“CPCIQH”, as successor to Phillips Investment Company) and Chevron Phillips Chemical Company LLC (“CPChem”, as successor to Phillips Petroleum Company), as amended and is valid for a period of 25 years. The Company is owned by Qatar Petroleum (51%) and Chevron Phillips Chemical International Qatar Holdings LLC (49%).
The principal objectives of the Company are to own, operate and maintain a complex for the production, storage and sale of polyethylene, hexene-1 and other petrochemical products. The Company commenced production on 8 April 2003.
2 BASIS OF PREPARATION
These financial statements have been prepared in accordance with the International Financial Reporting Standards. The financial statements have been prepared under the historical cost convention.
3 SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are consistent with those used in the previous year.
3.1 Functional currency
The currency of the State of Qatar, in which the Company is domiciled, is Qatari Riyals. However these financial statements have been presented in United States Dollars in accordance with the amended Joint Venture Agreement between the shareholders.
3.2 Revenue recognition
Sales of petrochemicals including by-products, are recorded when title passes to the customer. Revenue is reported net of freight and insurance. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due or associated costs or possible return of goods.
Interest income and expenses are recognised on accrual basis using the effective interest rate.
3.3 Income tax
Income tax is the expected tax payable on taxable income for the year in accordance with Qatar Income Tax Regulations applying the tax rates specified in Law No.8 of 1999 related to the incorporation of the Company.
Deferred income tax is provided for using the liability method on all temporary differences at the balance sheet date. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on the laws that have been enacted at the balance sheet date.
3.4 Operating leases
Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
3.5 Property, plant and equipment
Property, plant and equipment have been recorded at cost less accumulated depreciation and impairment losses, if any (refer accounting policy 3.11).
Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and net book value of replaced component is written-off. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditure is recognised in the statement of income as an expense as incurred. Capital work in progress is transferred to property, plant and equipment on completion of work.
Shutdown costs incurred by the Company are normally expensed except when a design change to an item of plant and equipment is carried out as part of the shutdown which is capitalised.
3.6 Depreciation
Depreciation is provided on all property, plant and equipment on a straight-line basis over the assets’ estimated useful lives at the following annual rates:
3.7 Inventories
Inventories are stated at the lower of cost and net realisable value (NRV). Costs are those expenses incurred in bringing each product to its present location and condition, as follows:
Raw materials, consumables, spare parts and packaging supplies
-
moving weighted average cost
Work in progress and finished goods
-
moving weighted average cost which comprised of direct materials, direct labour, other direct costs, plus attributable overheads based on normal level of capacity.
NRV is the estimated selling price in the ordinary course of business less the estimated costs of disposition.
3.8 Accounts’ receivable and other receivables
Receivables are stated at the original invoice amount less a provision for any estimated uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred.
3.9 Cash and cash equivalents
Cash and cash equivalents comprise of cash on hand, balances with banks under current and call accounts and short term deposits with maturity of 90 days or less.
3.10 Accounts payable and accruals
Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.
3.11 Impairment
The carrying amounts of the Company assets, other than inventories (refer accounting policy 3.7) are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the statement of income.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
3.12 Provisions
Provisions are recognised when the Company has a legal or constructive obligation arising from a past event, and the costs to settle the obligation are both probable and can be reliably measured.
3.13 Loans
Loans are carried on the balance sheet at its principal amount plus accrued interest. Instalments due within one year are shown as a current liability. Interest due under the syndicated loan is included in “accounts payable and accruals”.
3.14 Borrowing costs
Borrowing costs that are attributable to the construction of the Company’s plant have been capitalised as part of property, plant and equipment. The capitalisation of borrowing costs ceased once the asset was put to use in April 2003. Thereafter the interest on borrowed funds are being charged to the income statement.
3.15 End of service benefits
The Company provides for end of service benefits to its employees based upon the employees’ length of service and the completion of a minimum service period.
Under Law No. 24 of 2002 on Retirement and Pension, the Company makes contribution to a government pension scheme for Qatari employees calculated as a percentage of the Qatari employees’ salaries. The Company’s obligations are limited to these contributions, which are expensed on accrual basis.
3.16 Foreign currencies
The books of account are maintained in United States Dollars. Transactions in foreign currencies are translated to US Dollars at the rates of exchange prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies other than US Dollars are translated at rates ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
4 PROPERTY, PLANT AND EQUIPMENT
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
4 PROPERTY, PLANT AND EQUIPMENT (Continued)
5 ACCUMULATED PLANT COSTS
Included in accumulated plant costs of 2003 was capitalised interest of US$68.9 million (2002: US$63.7 million). Interest capitalised during the year was nil (2003: US$5.2 million; 2002: US$24 million). Accumulated plant costs were transferred to property, plant and equipment upon the assets being put to use on 8 April 2003.
The unamortized capital interest cumulative balance as of 31 December 2004 was US$64.3 million (2003: US$67.1 million).
6 LONG TERM RECEIVABLES
Long term receivables represent furniture allowance recoverable from employees and prepayments.
7 INVENTORIES
Material consumption of US$ 54.2 million (2003: US$ 23.6 million) is included under cost of goods sold.
8 OTHER RECEIVABLES AND PREPAYMENTS
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
9 TRANSACTIONS WITH RELATED PARTIES
A significant portion of the Company’s costs have been charged by the shareholders. The prices and terms of payment for these transactions are in accordance with specific agreements entered into, by the shareholders, pursuant to the Joint Venture Agreement. In accordance with these agreements, the shareholders provide support services, feedstock fuel gas, catalysts and other goods and services to the Company. Also, the Company sells its products to the related affiliates.
QChem entered into an Agency Agreement with CPChem to act as an agent for the sale of substantially all of QChem’s production. QChem has also entered into an Offtake and Credit Risk Agreement with CPChem, under which CPChem is required to purchase at market prices, specified amounts of production if CPChem fails to sell that product under the terms of the Agency Agreement. As of balance sheet date no transaction has been executed under the Offtake and Credit Risk Agreement. The Offtake and Credit Risk Agreement expires upon the earlier of the repayment in full by QChem of its outstanding bank financing, currently scheduled to mature in 2012, or any refinancing thereof.
QChem entered into an Agency Agreement with QAPCO to act as an agent for the sale of QChem’s products, primarily in the Middle East region to a maximum of 10% of QChem’s production.
QChem and Qatar Petroleum entered into a Feedstock Supply Agreement for the duration of the amended Joint Venture Agreement, where QP agreed to provide ethane gas to meet QChem production requirement.
Transactions with significant related parties during the year are summarised as follows:
(a) Due from related parties
(b) Due to related parties
Refer to note 14 for disclosure of subordinate loan payable to an affiliate.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
10 TRADE ACCOUNTS RECEIVABLE
The Company is engaged in the sale of polyethylene, hexene-1 and other petrochemical products to a large number of customers. Its five largest customers account for 52% of outstanding accounts receivable at 31 December 2004 (2003: 32%).
11 CASH AND CASH EQUIVALENTS
The call deposits of US$104.8 million (2003: US$37.7 million) is maintained in the United States in accordance with the terms of the senior debt agreements.
12 SHARE CAPITAL
During 2004, the Board of Directors had approved the issue of 56,500 shares with a par value of US$ 1,000 per share. The issue was subscribed by the shareholders according to their proportion of shareholding.
13 SYNDICATED LOAN
The Company signed a facility credit agreement with a syndicate of banks on 27 August 1999 for a project finance loan of US$ 750,000,000. The Company had drawn down the entire loan by the end of year 2001 to fund the project. The loan carries interest at LIBOR plus pre-determined mark-ups.
According to the terms of the agreement, the loan is repayable in quarterly instalments that commenced on 15 June 2003. During the year, the total amount repaid was US$ 66 million (2003: US$ 43.6 million). Fixed repayment amounts are due in the amount of US$ 65.9 million in 2005, US$ 70.5 million in 2006, US$ 75.2 million in 2007, US$ 80.6 million in 2008 and US$ 86.2 million in 2009.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
13 SYNDICATED LOAN (Continued)
Each of the shareholders had provided LaSalle Bank National Association (security trustee), for the benefit of the consortium of lenders, a completion guarantee which provided the banks the right to demand repayment of all outstanding principal and interest from each QChem co-venturer if the project was not completed by 31 August 2004, which was subsequently extended to 31 October 2004. The project completion was successfully achieved on 16 September 2004. Hence the subject agreement was terminated.
14 SUBORDINATED LOANS
The Company signed a subordinated loan agreement with Chevron Phillips Chemical International Qatar Holdings LLC (CPCIQH) on 16 September 1999 as amended in accordance with the QChem Joint Venture Agreement. Accordingly, CPCIQH has agreed to make the subordinated loan available until project completion.
Excluding the accrued interest, the Company has drawn down US$ 308 million (2003: US$ 302 million) of the subordinated loan as of 31 December 2004 to fund the project as the syndicated loan was fully drawn down as of 31 December 2001. The subordinated loan carries interest as follows:
• The outstanding principal amount of each subordinated loan shall bear interest until repayment in full at a rate equal to the rate payable under the syndicated loan.
• Any amounts outstanding, after the syndicated loan terminates, shall bear interest at a rate equal to LIBOR plus the margin over LIBOR payable under the syndicated loan on the termination date.
According to the terms of this agreement, there is no schedule of repayment and the principal balance of all outstanding subordinated loans and interest thereon shall be repayable each quarter from available cash flows after the payment of all priority dividends.
With respect to any interest due and payable at the end of each quarter not paid from available cash flows, an amount equal to such interest shall be deemed to have been advanced to the Company as a Tranche B Subordinated loan in accordance with the agreement.
CPChem has agreed to provide up to US$ 75 million of loans to QChem if there is insufficient cash to pay the minimum debt service payments on the bank financing. CPChem has also agreed to provide loans to QChem through December 2006 if there is insufficient cash to make QChem’s target debt service payments. These loans are limited to an amount not greater than operating margin loss resulting from sales volumes being less than design capacity. CPChem’s rights under the Subordinated Loan Agreement and the other contingent loan agreements related to QChem previously described are subordinated to QChem’s senior bank debt.
15 PROVISION FOR EMPLOYEES’ END OF SERVICE BENEFITS
The Company has created a provision for its estimated obligation for pension contribution for Qatari staff in accordance with the requirements of Qatari Retirement and Pension Law No. 24 of 2002. The provision of US$ 0.5 million as of 31 December 2004 (2003: US$ 0.3 million) is included in accounts payable and accrued expenses.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
16 DEFERRED LIABILITY
Deferred liability as at 31 December 2004 represents a premium amount payable to an insurance company. Since QChem doesn’t expect this amount to be paid within next one year, the same has been classified as non-current.
The engineering, procurement and construction (EPC) contract for the construction of an integrated petrochemical complex at the Mesaieed Industrial area, contains provisions allowing the Company to collect liquidated delay damages if the complex is not completed by stipulated dates. During 2003, the Company asserted its claim that it was entitled to collect the full delay damages. In order to enforce this claim, the Company drew from the letters of credit that were provided by the contractor as security and immediately suspended payment of the remaining invoices. The contractor disputed the Company’s claim. In November 2003, the contractor and the Company agreed to the general terms of settlement that were incorporated into a binding agreement executed in February 2004. In accordance with this agreement the compensation receivable by the Company amounting to US$ 25 million was classified as a deferred credit as at 31 December 2003. During 2004, the contractor had settled this amount and the Company had set off the deferred credit of US$ 25 million against the cost of the plant facilities.
17 TAXATION
(a) DEFERRED TAXATION
Deferred income tax is provided for temporary differences existing between the financial statement and the tax basis of the Company’s assets and liabilities and relate primarily to depreciation on property, plant and equipment.
The deferred liability comprises of the following type of temporary differences:
(b) CASH TAX PROVISION
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
(c) EFFECTIVE INCOME TAX RATE RECONCILIATION
18 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The amount recognised for 2004 as an expense for the pension liability for Qatari employees is US$ 0.05 million (2003: US$ 0.1 million).
19 NET PROFIT / (LOSS) FOR THE YEAR
20 EXPENDITURE COMMITMENTS
The Company has the following outstanding contractual commitments:
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
20 EXPENDITURE COMMITMENTS (Continued)
Land on which the plant is constructed, located at Mesaieed Industrial area, has been leased from Qatar Petroleum under a land lease agreement signed on 25 August 1999.
21 FINANCIAL INSTRUMENTS
A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise.
Accounting policies for financial assets and liabilities are set out in note 3.
Financial instruments comprise of cash and bank balances, accounts receivables, other receivables, due from / to related parties, term loans, accounts payable and accrued expenses.
a) Fair values
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable willing parties on an arm’s length basis. Differences can therefore arise between the book values under the historical cost method and fair value estimates.
Underlying the definition of fair value is a presumption that an enterprise is a going concern without any intention or need to liquidate, curtail materially the scale of its operations or undertake a transaction on adverse terms.
The fair values of financial asset and liabilities are not materially different from their carrying values at the balance sheet date.
b) Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Company exposure to credit risk is as indicated by the carrying amount of its financial assets which consist primarily of current balances with banks and accounts receivable, net of provision for doubtful accounts, if any.
The Company manages its exposure to balances with banks through selection of reputed local and international banks for placing its funds. The Company seeks to limit its credit risk with respect to customers by setting credit limits for individual customers and monitoring outstanding receivables. Further more, Chevron Phillips Chemical Company LLC guarantees certain credit sales of it’s agents.
c) Liquidity risk
The Company is not exposed to significant liquidity risk. The Company’s terms of sales require amount to be paid within 30-150 days of the date of sale. Trade payables are normally settled within 30-45 days of the date of purchase.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
21 FINANCIAL INSTRUMENTS (Continued)
d) Currency risk
The Company is exposed to significant currency risk on a portion of its trade accounts receivable. Trade accounts receivable include US$ 46.2 million (2003: US$ 13.19 million) receivable in foreign currencies, mainly Euro.
The balances in Qatari Riyal are not considered to represent significant currency risk since the US Dollar is pegged to Qatari Riyal.
Trade accounts payable include US$ 4.2 million (2003: US$ 3.2 million) due in foreign currencies, mainly Qatari Riyal.
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
21 FINANCIAL INSTRUMENTS (Continued)
e) Interest rate risk
A significant portion of the Company’s financial assets and liabilities as of 31 December 2004 are exposed to interest rate fluctuations.
The Company’s exposure to interest rate risk and the effective interest rates on its financial assets and liabilities are summarised below:
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
21 FINANCIAL INSTRUMENTS (Continued)
e) Interest rate risk
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
21 FINANCIAL INSTRUMENTS (Continued)
e) Interest rate risk
Qatar Chemical Company Limited, Q.S.C
Notes to the financial statements
for the year ended 31 December 2004
22 COMPARATIVE FIGURES
The corresponding figures presented for 2003 and 2002 have been reclassified and restated where necessary to preserve consistency with 2004 figures. However, such reclassification did not have an effect on the total assets or total liabilities or the net profit of the previous year.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, and with the participation of management, CPChem’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of CPChem’s disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that CPChem’s disclosure controls and procedures are effective in providing them with timely material information that is required to be disclosed in reports CPChem files under Section 13 or 15(d) of the Securities Exchange Act. There were no changes in CPChem’s internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during CPChem’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, CPChem’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Directors and Officers. Directors, executive officers and certain other officers of Chevron Phillips Chemical Company LLC are set forth in the following table:
James L. Gallogly: Mr. Gallogly has been President and Chief Executive Officer, and has served as a non-voting director, since the inception of CPChem in July 2000. He previously served as Senior Vice President of Chemicals for Phillips Petroleum Company (Phillips), now ConocoPhillips, a position he accepted in 1999.
Greg G. Maxwell: Mr. Maxwell has been Senior Vice President, Chief Financial Officer and Controller, and has served as a non-voting director, since August 2003. From July 2000 to August 2003, Mr. Maxwell was Vice President and Controller. From 1998 to July 2000, he served as General Auditor for Phillips.
Greg C. Garland: Mr. Garland has been Senior Vice President, Planning & Specialty Products of CPChem since October 2001. From July 2000 to October 2001, Mr. Garland was Senior Vice President, Planning and Strategic Transactions. From 1997 to July 2000, he served as General Manager, Qatar/Middle East for Phillips.
Craig B. Glidden: Mr. Glidden has been Senior Vice President, Legal and Public Affairs, General Counsel and Secretary of CPChem since April 2004. From July 2000 to April 2004, Mr. Glidden was Vice President, General Counsel and Secretary. In 1996, Mr. Glidden founded the law firm of Glidden Partners LLP and was managing partner of the firm until joining CPChem in 2000.
J. Mike Parker: Mr. Parker has been Senior Vice President, Aromatics & Styrenics of CPChem since October 2001. From July 2000 to October 2001, Mr. Parker was Senior Vice President of Aromatics. He served Chevron Chemical Company LLC (Chevron Chemical) as General Manager, Olefins and Plastics, from 1999 to July 2000.
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 of Manufacturing for Olefins & Polyolefins. He served Chevron Chemical as Plant Manager at Cedar Bayou from 1999 to July 2000.
Tim G. Taylor: Mr. Taylor has been Senior Vice President, Olefins & Polyolefins of CPChem since July 2000. He served Phillips as Polyolefins Manager from 1999 to July 2000.
Joe M. McKee: Mr. McKee has been Vice President and Treasurer of CPChem since July 2000. Prior to assuming his current position, he served as Finance Manager for the Americas Division of Phillips Exploration and Production, a position to which he was appointed in 1993.
Patricia E. Yarrington: Ms. Yarrington was elected a director of CPChem on July 31, 2001. She currently serves as Vice President, Policy, Government and Public Affairs at ChevronTexaco Corporation (ChevronTexaco), a position to which she was named in 2002. Ms. Yarrington previously served ChevronTexaco as Vice President, Strategic Planning, a position to which she was appointed upon the formation of ChevronTexaco in 2001. She served in a similar position, Vice President of Strategic Planning, with Chevron Corporation prior to the merger of Chevron Corporation and Texaco Inc., which she assumed in August 2000. In 1998, she was appointed President of Chevron Canada Ltd.
Gary G. Yesavage: Mr. Yesavage was elected a director of CPChem on June 1, 2003. He currently serves as General Manager of the Chevron Products Company El Segundo refinery, a position to which he was appointed in 1999.
John E. Lowe: Mr. Lowe has served as a director of CPChem since its inception in July 2000. He currently serves as Executive Vice President, Planning, Strategy and Corporate Affairs for ConocoPhillips, a position to which he was appointed in 2002. Mr. Lowe previously served as Senior Vice President, Corporate Strategy and Development for Phillips, a position to which he was appointed in 2001, and as Senior Vice President of Planning and Strategic Transactions in 2000. In 1999, he served as Vice President, Planning and Strategic Transactions and Manager of Strategic Growth Projects for Phillips. Mr. Lowe also serves as a Director of Duke Energy Field Services, LLC.
Jim W. Nokes: Mr. Nokes was elected a director of CPChem on October 24, 2002. He currently serves as Executive Vice President, Refining, Marketing, Supply and Transportation for ConocoPhillips, a position to which he was appointed in 2002. Mr. Nokes previously served Conoco Inc. (Conoco) as Executive Vice President, Worldwide Refining, Marketing, Supply and Transportation, a position to which he was named in 1999.
Audit Committee Financial Expert. CPChem’s Board of Directors has designated Mr. Lowe as the “audit committee financial expert” of the Audit Committee of the Board of Directors (the “Audit Committee”). Mr. Lowe is not considered to be “independent” as defined in the applicable SEC rules and regulations.
Code of Ethics. CPChem has adopted a code of ethics that applies to its principal executive officer and principal financial officer. A copy of this code is available to any person upon request and at no charge. Requests should be directed to the Office of the General Counsel at CPChem’s principal executive office at the address and phone number as shown on the cover of this report.
Item 11.
Item 11. Executive Compensation
Summary Compensation Table
The table below provides information regarding compensation earned by CPChem’s Chief Executive Officer and the next four most highly compensated executive officers for the year ended December 31, 2004 (collectively, the “named executive officers”). Information for the named executive officers is also presented for the years ended December 31, 2003 and 2002.
(a) Under provisions contained in CPChem’s amended and restated Long-Term Incentive Plan, in 2003, all Phantom Share Option holders exchanged options that they were awarded for performance cycles beginning in 2002 and 2001 for retroactive Relative Performance (RP) awards effective for the same 2002 and 2001
performance cycles. The target amounts of the retroactive RP awards were equal to the target amounts of the respective Phantom Share Options awarded for the 2002 and 2001 performance cycles, and for the above named executive officers were as follows: Mr. Gallogly - $479,800 (2002) and $557,700 (2001); Mr. Garland - $158,700 (2002) and $166,100 (2001); Mr. Glidden - $173,900 (2002) and $203,100 (2001); Mr. Roberts - $142,500 (2002) and $151,100 (2001); and Mr. Taylor - $204,400 (2002) and $239,100 (2001). See “Long-Term Incentive Plans” for a discussion of the RP awards and Strategic Performance (SP) awards.
(b) Information for 2004 represents SP awards earned in 2004 for the completed 2002-2004 performance cycle that will be paid in 2005. As of the date of this report, amounts earned and payable for the 2002-2004 performance cycle under the RP awards had not been determined and are not included in the table. Information for 2003 represents RP and SP awards earned in 2003 for the completed 2001-2003 performance cycle that were paid in 2004 (information for 2003 as presented in the 2003 Annual Report on Form 10-K included only SP awards, as the RP award amounts had not been determined as of the date of the report). Information presented for 2002 represents awards that were paid in 2002 under CPChem’s Special Synergy Incentive Plan (SSIP). The SSIP expired on June 30, 2002.
(c) During 2004, Messrs. Gallogly, Garland, Glidden, Roberts and Taylor received company contributions to their savings plan accounts of $30,413, $17,675, $18,698, $14,469 and $18,317, respectively, and life insurance premiums of $827, $473, $511, $421 and $497, respectively, were paid on their behalf. During 2003, those officers received company contributions to their savings plan accounts of $23,725, $13,628, $14,676, $12,096 and $14,322, respectively, and life insurance premiums of $778, $443, $486, $399 and $475, respectively, were paid on their behalf. During 2002, those officers received company contributions to their savings plan accounts of $22,589, $12,707, $14,049, $11,321 and $13,769, respectively, and life insurance premiums of $778, $418, $486, $376 and $475, respectively, were paid on their behalf.
Option Grants and Options Exercised During 2004
There were no options to purchase securities of CPChem granted or exercised during 2004 nor were any such options outstanding as of December 31, 2004.
Long-Term Incentive Plans
In 2003, CPChem’s Long-Term Incentive Plan (LTIP) for selected key employees was retroactively amended and restated effective January 1, 2001. Prior to the amendment and restatement of the LTIP, participants were eligible for two types of awards: Phantom Share Options and Target Awards. The LTIP, as amended and restated, currently provides for two different types of awards: Relative Performance (RP) awards and Strategic Performance (SP) awards. Effective for performance cycles beginning on or after January 1, 2003, grants of Phantom Share Options and Target Awards are no longer available under the LTIP.
Under provisions contained in the amended and restated LTIP, in 2003, all Phantom Share Option holders exchanged options that they were awarded for performance cycles beginning in 2002 and 2001 for retroactive RP awards effective for the same 2002 and 2001 performance cycles. The target amounts of the retroactive RP awards were equal to the target amounts of the respective Phantom Share Options awarded. In addition, all persons eligible for Target Awards exchanged their eligible 2002 and 2001 Target Awards for retroactive SP awards effective for the same 2002 and 2001 performance cycles. The target amounts of the retroactive SP awards were equal to the target amounts of the respective Target Awards granted for the 2002 and 2001 performance cycles. The Compensation Committee of the Board of Directors of CPChem (the “Compensation Committee”) has the sole discretion to determine which employees receive RP and SP awards.
The Compensation Committee sets target RP and SP award amounts for a performance cycle at the time the annual RP and SP awards are granted to eligible employees. RP awards are generally based on changes in CPChem’s financial performance as compared to a group of peer companies as selected by the Compensation Committee. SP awards are based on CPChem’s strategic performance as compared to defined strategic objectives as selected by the Compensation Committee. Amounts granted under each type of award, payable only in cash, are determined at the end of each performance cycle, which is typically three years. The Compensation Committee has the sole discretion to determine the amounts payable, if any, under each type of award.
LTIP Awards in 2004
Relative Performance Awards for the 2002-2004 Performance Cycle Under the LTIP
On August 24, 2003, the Compensation Committee approved the grant of RP awards to certain executives, including Messrs. Gallogly, Garland, Glidden, Roberts and Taylor. According to the terms of the grant, each of those executives is entitled to earn between 0% and 200% of such executive’s respective target RP award depending on performance measures achieved during the three year performance cycle beginning January 1, 2002 and ending December 31, 2004, as determined by the Compensation Committee at the end of the performance cycle. Target RP awards are set as a percentage of such executive’s base salary at the time of the grant, with the percentage differing based upon the executive’s grade level. The payment of any RP award amount, once determined, will be made in 2005.
The performance measures for the RP awards consist of: (1) earnings before interest, taxes and depreciation (EBITDA) divided by total assets; (2) a comparison of CPChem’s financial performance relative to a peer group of companies; and/or (3) economic value added.
Executive Compensation Arrangements
On February 22, 2005, the Compensation Committee approved the following compensation arrangements relating to executive officers of CPChem.
Relative Performance Awards for the 2005-2007 Performance Cycle Under the LTIP
The Compensation Committee approved the grant of RP awards to certain executives, including Messrs. Gallogly, Garland, Glidden, Roberts and Taylor. According to the terms of the grant, each of those executives is entitled to earn between 0% and 200% of such executive’s respective target RP award depending on performance measures achieved during the three year performance cycle beginning January 1, 2005 and ending December 31, 2007, as determined by the Compensation Committee at the end of the
performance cycle. Target RP awards are set as a percentage of such executive’s base salary at the time of the grant, with the percentage differing based upon the executive’s grade level. The payment of any RP award amount, once determined, will be made in 2008.
The performance measures for the RP awards consist of: (1) EBITDA divided by total assets; (2) a comparison of CPChem’s financial performance relative to a peer group of companies; and/or (3) economic value added.
Strategic Performance Awards for the 2005-2007 Performance Cycle Under the LTIP
The Compensation Committee approved the grant of SP awards to certain executives, including Messrs. Gallogly, Garland, Glidden, Roberts and Taylor. According to the terms of the grant, each of those executives is entitled to earn between 0% and 200% of such executive’s respective SP award depending on performance measures achieved during the three year performance cycle beginning January 1, 2005 and ending December 31, 2007, as determined by the Compensation Committee at the end of the performance cycle. Target SP awards are set as a percentage of such executive’s base salary at the time of the grant, with the percentage differing based upon the executive’s grade level. The payment of any SP award amount, once determined, will be made in 2008.
The performance measures for the SP awards consist of: (1) gap closure/synergies; (2) major project management; (3) portfolio management; (4) effective management of capital projects; (5) unit cost reductions versus baseline measurements; (6) reliability versus baseline measurements, and/or (7) achievement of effective growth goals.
2005 Target Awards Pursuant to the Annual Incentive Plan
The Compensation Committee approved the grant of target awards to certain executives, including Messrs. Gallogly, Garland, Glidden, Roberts and Taylor. Target awards are measured as a percentage of such executive’s base salary at December 31, 2005, with the percentage differing based upon the executive’s grade level. Each of those executives is entitled to earn between 0% and 200% of such executive’s target award depending on performance measures achieved under CPChem’s Employee Incentive Program (EIP) during the year ending December 31, 2005, as determined by the Compensation Committee at the end of such year. The payment of any target award amount, once determined, will be made in 2006.
The performance measures for EIP consist of corporate wide measures and award unit measures. Corporate wide measures consist of: (1) safety; (2) EBITDA; and (3) operating expenses. Award unit measures, which may vary depending on the executive, consist of (1) safety; (2) earnings; (3) expenses; (4) key projects; and (5) customer satisfaction.
Executive Financial Planning Program
CPChem adopted the Executive Financial Planning Program on February 22, 2005, to be effective for 2005. This program provides for the reimbursement, to qualified executives, of certain personal financial and tax planning services up to an annual maximum of $10,000, depending on an individual’s salary grade level.
Pension Plans
Retirement Plan
CPChem’s retirement plan is a defined benefit plan and covers most U.S.-based employees. Eligible employees automatically participate in the plan and begin accruing benefits from January 1, 2001 or their first day of employment if employed after that date. Eligible employees become fully vested in their retirement benefits after five years of service with CPChem, including prior service with ChevronTexaco or
ConocoPhillips or their affiliates. Retirement benefits are based on two types of credits: a career average pay benefit and a variable annuity benefit. For the career average pay benefit, each year employees receive an annual credit equal to 1% of eligible compensation for that year. The variable annuity benefit is the second component of the retirement plan and is made up of a monthly credit equal to 1% of each eligible employee’s compensation for that month. Discretionary increases to the career average pay benefit and/or the variable annuity benefit may be made from time to time provided CPChem’s performance metrics support the additional cost. Upon retirement, the accrued benefit may be paid as a lump sum payment or converted to a monthly benefit. If a lump sum payment is elected, that payment may be rolled over to an individual retirement account or individual retirement annuity of another employer’s plan.
If an employee leaves CPChem for any reason prior to retirement and is vested, the accrued benefit may either be paid out at that time in accordance with the options described above or remain in the plan until the individual’s early or normal retirement date, at which time the accrued benefit may be paid out as a lump sum or converted to a monthly benefit. Eligible employees that came to CPChem from either ChevronTexaco or ConocoPhillips on January 1, 2001 may receive certain adjustments, or “uplifts,” to their retirement benefit which are intended to (1) make up for pay increases that would have been added to their retirement benefit had they stayed at ChevronTexaco or ConocoPhillips, and (2) approximate the extent to which their continued employment at ChevronTexaco or ConocoPhillips would have resulted in a more favorable early retirement factor.
Supplemental Executive Retirement Plan
The supplemental executive retirement plan applies to designated officers and key executives who receive a retirement benefit under the retirement plan and who have had the amount of that benefit reduced due to required limitations under the Internal Revenue Code, or by reason of deferral of compensation under CPChem’s executive deferred compensation plan, or as a result of management incentive bonus amounts not being recognized as compensation under the retirement plan. The eligible employee’s benefit under this plan is equal to the difference between (1) the amount the employee would have received under the retirement plan had the amount been calculated (a) without regard to the limitations imposed by the Internal Revenue Code; (b) as if amounts deferred by the employee under CPChem’s executive deferred compensation plan had been paid, (c) by treating management incentive bonus amounts as compensation; and (d) with respect to an employee that came from ConocoPhillips on January 1, 2001, by “decoupling” that employee’s compensation payable as bonus and the amount payable as base pay for purposes of determining highest average earnings under the retirement plan; and (2) the amount of the employee’s retirement benefit payable under the retirement plan.
The payment options under the supplemental executive retirement plan are generally the same as those offered under the CPChem retirement plan.
Estimated Retirement Benefits
The estimated annual benefits payable upon retirement at normal retirement age (defined in the retirement plans as age 65) for each of the named executive officers are as follows:
Director Compensation
Neither the Class C nor Class P directors of CPChem receive any additional compensation for their service as directors.
Employment Agreements
None of the named executive officers have employment, termination of employment, or change in control agreements with CPChem.
Compensation Committee Interlocks and Insider Participation
Mr. Lowe, who currently serves as Executive Vice President, Planning, Strategy and Corporate Affairs for ConocoPhillips, served as a voting member of the Compensation Committee during 2004. Ms. Yarrington, who currently serves as Vice President, Policy, Government and Public Affairs at ChevronTexaco, also served as a voting member of the Compensation Committee during 2004. Mr. Gallogly and Mr. Don F. Kremer, Vice President, Human Resources, served as non-voting members during 2004. Neither Mr. Lowe nor Ms. Yarrington has served as an officer or employee of CPChem or any of its subsidiaries.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
CPChem is a limited liability company, owned 50% each by ChevronTexaco and ConocoPhillips either directly or indirectly through their wholly owned subsidiaries. The ownership interests in CPChem as of the date of this report are as follows:
Name and Address of Owner
Title of Class
Percentage
of Ownership
ChevronTexaco
Chevron U.S.A. Inc.
6001 Bollinger Canyon Road
San Ramon, California 94583
Class C
50.0
%
ConocoPhillips
ConocoPhillips Company
600 North Dairy Ashford
Houston, Texas 77079
Class P
38.0
%
Phillips Petroleum International Corporation
600 North Dairy Ashford
Houston, Texas 77079
Class P
9.5
%
WesTTex 66 Pipeline Company
600 North Dairy Ashford
Houston, Texas 77079
Class P
2.1
%
Phillips Chemical Holdings Company
600 North Dairy Ashford
Houston, Texas 77079
Class P
0.4
%
Item 13.
Item 13. Certain Relationships and Related Transactions
All of the related transactions described below are on terms substantially no more favorable than those that would have been agreed upon with third parties on an arm’s-length basis. See Part II - Item 8. Financial Statements and Supplementary Data - Notes 3, 9 and 15 for information regarding aggregate amounts paid in transactions with affiliated parties.
Services Agreements. CPChem is a party to agreements with ChevronTexaco and ConocoPhillips, under which they provide CPChem with personnel, equipment and technology primarily for research, technology development, laboratory services, and engineering and project management support. ChevronTexaco and ConocoPhillips charge CPChem for these services according to the rates agreed upon in these services agreements. CPChem has also entered into other agreements with affiliates of ChevronTexaco and ConocoPhillips that cover the provision of additional services including, but not limited to, security, procurement and pipeline operating services.
Intellectual Property Agreements. In connection with the formation of the company, CPChem entered into a Tradename License Agreement with ChevronTexaco and ConocoPhillips, a General Trademark Assignment Agreement with ConocoPhillips, and separate Intellectual Property Agreements with each, assigning or exclusively licensing rights to certain intellectual property owned by ChevronTexaco and ConocoPhillips.
Common Facility Operating Agreements and Supply Agreements. CPChem is a party to Common Facilities Operating Agreements with ConocoPhillips and ChevronTexaco related to the operation of the chemical facilities located within or near their refineries at Sweeny, Borger and Pascagoula. CPChem is also a party to supply agreements with ChevronTexaco and ConocoPhillips under which CPChem purchases various products produced in these refineries, and ChevronTexaco and ConocoPhillips purchase various products that CPChem produces in its chemical facilities.
Feedstock Agreements. CPChem is a party to agreements with each of ConocoPhillips, Duke Energy Field Services, LLC (an affiliate of ConocoPhillips) and Dynegy Inc. (an affiliate of ChevronTexaco) under which they supply CPChem with certain natural gas liquid feedstocks. CPChem is also a party to agreements with ChevronTexaco and ConocoPhillips under which CPChem supplies olefin products to them.
Sales Agency Agreements. CPChem is a party to sales agency agreements with ConocoPhillips under which it markets and sells certain chemical products produced by ConocoPhillips at its Borger and Sweeny refineries.
Polyethylene Pipe. CPChem’s Performance Pipe division sells polyethylene pipe to ChevronTexaco and ConocoPhillips.
Specialty Products. CPChem’s Specialty Chemicals division sells specialty and reference fuels, gas odorants, sulfiding agents and extractive solvents to ConocoPhillips, ChevronTexaco and Duke Energy Field Services, LLC.
Item 14.
Item 14. Principal Accounting Fees and Services
Fees. Aggregate fees for professional services rendered by CPChem’s independent auditor, Ernst & Young LLP, were as follows:
(a) Audit fees represent fees billed for professional services rendered for the audits of CPChem’s annual consolidated financial statements, statutory audits of CPChem’s subsidiaries, reviews of documents filed with the SEC and comfort letters.
(b) Audit-related fees represent fees billed for professional services rendered for audits of employee benefit plans, attest services and accounting consultations.
(c) Tax fees represent fees billed for professional services rendered for tax planning, tax advice and tax compliance.
(d) Other fees in 2004 represent charges for a training seminar sponsored by Ernst & Young LLP.
CPChem and its Audit Committee are committed to ensuring the independence of its independent auditor as related to CPChem. As such, it is CPChem’s policy that all engagements of Ernst & Young LLP by CPChem be pre-approved by the Audit Committee, with the exception that the Audit Committee has granted CPChem’s Senior Vice President, Chief Financial Officer and Controller the pre-approval authority to engage Ernst & Young LLP for certain non-audit services in an amount of up to $5,000 per engagement, limited to a maximum of $50,000 per year in the aggregate.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) The financial statements listed in the Index to Financial Statements on page 31 are filed as part of this annual report.
(a)(2) The following schedule is presented as required. All other schedules are omitted because the information is not applicable, not required or has been furnished in the Consolidated Financial Statements or Notes thereto.
Chevron Phillips Chemical Company LLC
Schedule II - Valuation and Qualifying Accounts
(a) Additions were charged to expense.
(b) Deductions represent receivables written off less recoveries, if any.
(c) Additions were generally offset by tax benefits of related losses.
(a)(3) The exhibits listed in the Index of Exhibits on pages 115 and 116 are filed as part of this annual report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Signature
Title
Date
/s/ James L. Gallogly
President and Chief Executive Officer
February 25,
James L. Gallogly
/s/ Greg G. Maxwell
Senior Vice President,
February 25,
Greg G. Maxwell
Chief Financial Officer and Controller
/s/ John E. Lowe
Director
February 25,
John E. Lowe
/s/ Jim W. Nokes
Director
February 25,
Jim W. Nokes
/s/ Patricia E. Yarrington
Director
February 25,
Patricia E. Yarrington
/s/ Gary G. Yesavage
Director
February 25,
Gary G. Yesavage
Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Securities Exchange Act of 1934 by Registrants which have not Registered Securities Pursuant to Section 12 of the Securities Exchange Act of 1934:
No annual report to security holders covering the Registrant’s last fiscal year has been sent to the Registrant’s security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of the Registrant’s security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K.
INDEX OF EXHIBITS
Exhibit No.
Document
*3.1
Certificate of Formation of Chevron Phillips Chemical Company LLC, dated May 23, 2000 (Exhibit No. 3.1 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*3.2
Certificate of Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26, 2000 (Exhibit No. 3.2 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*3.3
Certificate of Amendment to Certificate of Limited Partnership of Chevron Phillips Chemical Company LP, dated May 23, 2000 (Exhibit No. 3.3 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*3.4
Second Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC, dated July 1, 2002, by and between ChevronTexaco Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc., Phillips Chemical Holding Company, WesTTex 66 Pipeline Company and Phillips Petroleum International Corporation (Exhibit No. 3.4 to CPChem’s Registration Statement on Form S-4 dated August 6, 2002).
*3.5
Agreement of Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26, 2000 (Exhibit No. 3.5 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*4.1
Indenture, dated as of March 19, 2001 between Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Issuers, and The Bank of New York as Trustee (Exhibit No. 4.1 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*10.1
Contribution Agreement by and among Phillips Petroleum Company, Chevron Corporation and Chevron Phillips Chemical Company LLC, dated May 23, 2000 (Exhibit No. 10.1 to CPChem’s Registration Statement on Form S-4/A dated May 10, 2001).
*10.2
Letter Agreement dated July 5, 2001, amending the Contribution Agreement, dated May 23, 2000, between Chevron Corporation, Phillips Petroleum Company and Chevron Phillips Chemical Company LLC (Exhibit No. 10.1 to CPChem’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
*10.3
Letter Agreement dated February 24, 2003, amending the Contribution Agreement, dated May 23, 2000, between Chevron Corporation, Phillips Petroleum Company and Chevron Phillips Chemical Company LLC (Exhibit No. 10.3 to CPChem’s Annual Report on Form 10-K for the year ended December 31, 2002).
*10.4
Chevron Phillips Chemical Company LP Executive Deferred Compensation Plan, effective January 1, 2001 (Exhibit No. 10.2 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
INDEX OF EXHIBITS (continued)
Exhibit No.
Document
*10.5
Chevron Phillips Chemical Company LP Supplemental Executive Retirement Plan (Exhibit No. 10.3 to CPChem’s Registration Statement on Form S-4 dated April 16, 2001).
*10.6
Chevron Phillips Chemical Company LLC Long-Term Incentive Plan (as Amended and Restated Effective January 1, 2001) (Exhibit No. 10.2 to CPChem’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003).
*10.7
Chevron Phillips Chemical Company LLC Annual Incentive Plan (Exhibit No. 10.6 to CPChem’s Annual Report on Form 10-K for the year ended December 31, 2001).
*10.8
Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Barclays Bank Plc, The Royal Bank of Scotland Plc, Sumitomo Mitsui Banking Corporation, The Bank of Nova Scotia, The Bank of Tokyo-Mitsubishi Ltd., and certain lenders from time to time thereto, dated as of July 30, 2004 (Exhibit No. 10.1 to CPChem’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
10.9
Chevron Phillips Chemical Company LP Executive Financial Planning Program.
21.1
Subsidiaries of the Registrant.
31.1
Certification of Chief Executive Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934.
* Incorporated by reference as indicated.