UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2003

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file no. 333-59054-01

 

Chevron Phillips Chemical Company LLC

(Exact name of the Registrant as specified in its charter)

 

 

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

 

Yes   o       No   ý

 

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

 

Yes   o      No   ý

 

 

Chevron Phillips Chemical Company LLC

Index

 

			Page
Part I.	Financial Information (Unaudited)
	Item 1.	Financial Statements
		Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2003 and 2002	3
		Condensed Consolidated Balance Sheet at June 30, 2003 and December 31, 2002	4
		Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2003 and 2002	5
		Notes to Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	25
	Item 4.	Controls and Procedures	25
Part II.	Other Information
	Item 1.	Legal Proceedings	25
	Item 5.	Other Information	26
	Item 6.	Exhibits and Reports on Form 8-K	26

 

2

 

PART I.     FINANCIAL INFORMATION

 

ITEM 1.               Financial Statements

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Statement of Operations

(Unaudited)

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Revenue
Net sales			$	1,701		$	1,387		$	3,497		$	2,534
Equity in income of affiliates, net			16			9			22			8
Other income			13			13			31			27
Total revenue			1,730			1,409			3,550			2,569
Costs and Expenses
Cost of goods sold			1,539			1,272			3,314			2,335
Selling, general and administrative			127			98			227			189
Research and development			12			13			23			24
Total costs and expenses			1,678			1,383			3,564			2,548
Income (Loss) Before Interest and Taxes			52			26			(14		)	21
Interest income			3			2			4			4
Interest expense			(19		)	(14		)	(35		)	(32		)
Income (Loss) Before Taxes			36			14			(45		)	(7		)
Income taxes			(1		)	(3		)	(2		)	(4		)
Net Income (Loss)			35			11			(47		)	(11		)
Distributions on members’ preferred interests			(5		)	—			(11		)	—
Income (Loss) Attributed to Members’ Interests			$	30		$	11		$	(58	)	$	(11	)

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Balance Sheet

(Unaudited)

 

Millions			June 30, 2003			December 31, 2002
ASSETS
Current assets
Cash and cash equivalents			$	65		$	39
Accounts receivable, net			870			797
Inventories			679			702
Other current assets			16			23
Total current assets			1,630			1,561
Property, plant and equipment, net			3,901			3,950
Investments in and advances to affiliates			612			515
Other assets and deferred charges			71			83
Total Assets			$	6,214		$	6,109
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities
Accounts payable			$	578		$	596
Accrued income and other taxes			38			53
Secured borrowings and other debt			305			294
Other current liabilities			106			108
Total current liabilities			1,027			1,051
Long-term debt			1,330			1,190
Other liabilities and deferred credits			158			117
Total liabilities			2,515			2,358
Members’ preferred interests			250			250
Members’ capital			3,436			3,494
Accumulated other comprehensive income			13			7
Total Liabilities and Members’ Equity			$	6,214		$	6,109

 

See Notes to Condensed Consolidated Financial Statements.

 

4

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Statement of Cash Flows

(Unaudited)

 

			Six months ended June 30,
Millions			2003			2002
Cash Flows From Operating Activities
Net income (loss)			$	(47	)	$	(11	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation, amortization and retirements			140			129
Undistributed equity in income of affiliates, net			(17		)	(1		)
Changes in operating working capital			(107		)	17
Other operating cash flow activity			34			18
Net cash flows provided by operating activities			3			152
Cash Flows From Investing Activities
Capital and investment expenditures			(83		)	(176		)
Advances to Qatar Chemical Company Ltd. (Q-Chem)			(76		)	(125		)
Net cash flows used in investing activities			(159		)	(301		)
Cash Flows From Financing Activities
Increase (decrease) in commercial paper, net			140			(501		)
Increase in secured borrowings, net			10			101
Increase in other debt, net			—			502
Contributions from members, net			32			19
Post-closing adjustments from members, net			—			7
Net cash flows provided by financing activities			182			128
Net Increase (Decrease) in Cash and Cash Equivalents			26			(21		)
Cash and Cash Equivalents at Beginning of Period			39			111
Cash and Cash Equivalents at End of Period			$	65		$	90

 

See Notes to Condensed Consolidated Financial Statements.

 

5

 

Chevron Phillips Chemical Company LLC

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1.          General Information

 

The company, through its subsidiaries, manufactures and markets a wide range of petrochemicals and plastics on a worldwide basis, with manufacturing facilities in existence or under construction in the United States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium.  Chevron Phillips Chemical Company LLC is owned 50% each by ChevronTexaco Corporation (ChevronTexaco) and ConocoPhillips (collectively, the “members”).

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Chevron Phillips Chemical Company LLC and its wholly-owned subsidiaries (collectively, “CPChem”), and should be read in conjunction with the consolidated financial statements included in CPChem’s Annual Report on Form 10-K for the year ended December 31, 2002.  The financial statements and accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Some information and footnote disclosures required by generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  The financial statements include all normal recurring adjustments that CPChem considers necessary for a fair presentation.  Certain amounts for prior periods have been reclassified in order to conform to the current reporting presentation.

 

CPChem previously sold certain debt securities pursuant to registration statements filed under the Securities Act of 1933, which subjected CPChem to the reporting requirements of Section 15(d) of the Securities Exchange Act of 1934 (the “Act”).  These debt securities were not registered under Section 12 of the Act.  CPChem’s statutory duty to file reports with the SEC was subsequently and automatically suspended pursuant to certain provisions of the Act.

 

Note 2.          New Accounting Pronouncements

 

In May 2003, the Financial Accounting Standards Board (FASB) issued 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 a financial instrument as a liability because the financial instrument embodies an obligation of the issuer.  For CPChem, the provisions of SFAS No. 150 are effective January 1, 2004.  Because CPChem currently has no financial instruments outstanding that fall within the scope of this new standard, CPChem believes that implementation of this standard will not have a material impact on consolidated results of operations, financial position or liquidity.

 

In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN No. 46) 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 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss

 

6

 

from the activities of the VIE, is entitled to receive a majority of the residual returns of the VIE, or both.  FIN No. 46 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 apply immediately to VIEs created after January 31, 2003, and for CPChem, will apply to pre-existing VIEs effective December 31, 2004.  CPChem is reviewing FIN No. 46 as it applies to CPChem's investments in affiliates to determine what impact, if any, that its implementation will have on CPChem’s financial statements.

 

Effective January 1, 2003, CPChem adopted SFAS No. 143, “Accounting for Asset Retirement Obligations,” which addresses the accounting and reporting requirements for legal obligations associated with the retirement of long-lived assets.  This standard requires that a liability for an asset retirement obligation, measured at fair value, be recognized in the period in which it is incurred if a reasonable estimate of fair value is determinable.  That initial fair value is capitalized as part of the carrying amount of the long-lived asset and subsequently depreciated.  The liability is adjusted each reporting period for accretion, with a charge to the statement of operations.  Implementation of this standard did not have a material impact on consolidated results of operations, financial position or liquidity.

 

Also effective January 1, 2003, CPChem adopted SFAS No. 146, “Accounting for Costs Associated With Exit or Disposal Activities,” which requires that a liability for costs associated with an exit or disposal activity be recognized when the liability occurs, and that the liability be measured initially at fair value.  The liability is adjusted each reporting period for accretion, with a charge to the statement of operations.  Implementation of this standard did not have a material impact on consolidated results of operations, financial position or liquidity.

 

In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN No. 45).  For guarantees issued or modified on or after January 1, 2003, FIN No. 45 requires a guarantor to recognize, at the inception of a new guarantee or at the modification of an existing guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  FIN No. 45 also expands the disclosures required to be made by a guarantor about its obligations under guarantees issued prior to January 1, 2003.  Implementation of FIN No. 45 was effective immediately upon its release.  There have been no issuances of new guarantees or modifications of existing guarantees by CPChem in 2003.  See Note 5 of Notes to Condensed Consolidated Financial Statements for a discussion of guarantees and commitments.  Implementation of FIN No. 45 had no impact on consolidated results of operations, financial position or liquidity.

 

Note 3.          Comprehensive Income (Loss)

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Net income (loss)			$	35		$	11		$	(47	)	$	(11	)
Foreign currency translation adjustments			5			19			9			17
Minimum pension liability adjustment			—			—			(3		)	—
Comprehensive income (loss)			$	40		$	30		$	(41	)	$	6

 

7

 

Note 4.          Taxes

 

CPChem is treated as a flow-through entity for federal 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.  CPChem follows the liability method of accounting for these income taxes.

 

Note 5.          Guarantees and Commitments

 

Qatar Chemical Company Ltd. (Q-Chem)

 

Qatar Chemical Company Ltd. (Q-Chem), a 49%-owned joint venture, was formed in 1998 to develop a world-scale petrochemical complex in Qatar in the Middle East.  The complex is currently undergoing performance testing.  Q-Chem has drawn the full $750 million available under its 1999 bank financing agreement for the construction of the complex.  CPChem is required to fund any remaining construction costs, initial working capital requirements, and certain debt service and operating reserve fund requirements through advances under a subordinated loan agreement with Q-Chem.

 

CPChem advanced Q-Chem $210 million in 2002 under the subordinated loan agreement, of which $125 million was advanced in the first six months.  CPChem advanced Q-Chem another $76 million in the first six months of 2003 under the agreement, bringing total advances to Q-Chem to $286 million at June 30, 2003, excluding interest.  CPChem expects to advance Q-Chem an estimated $125 million during the remainder of 2003 under the agreement.  CPChem will have no further obligation to make advances under the subordinated loan agreement upon completion of the facilities, as defined in the bank financing agreements.

 

If the project is not completed by August 31, 2003 under the terms of the bank financing completion guarantee, the banks have the right to demand payment from each co-venturer on a pro rata basis to the extent necessary to cover the debt service requirements until August 31, 2004.  If the project is not completed by August 31, 2004, the banks have the right to demand repayment of all outstanding principal and interest from each co-venturer on a pro rata basis.  These dates may be extended for up to one year due to events of force majeure.  After the project is completed, the bank financing is non-recourse with respect to the co-venturers, with the exception of the contingent obligations described below.  CPChem believes that any funding required under this agreement is unlikely to have a material adverse effect on CPChem’s consolidated results of operations, financial position or liquidity.

 

In addition, after the project is completed, 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 amount 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 for a period of up to 33 months following commencement of commercial operation as defined in the bank financing agreements, if there is insufficient cash to pay the target debt service amount.  These loans are limited to an amount not greater than lost operating margins resulting from sales volumes being less than 100% of design capacity.  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.

 

8

 

CPChem has 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.  The offtake and credit risk agreement expires upon the earlier of the repayment in full by Q-Chem of its $750 million bank financing, 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.

 

Should the Q-Chem 1-hexene unit fail to operate as designed, CPChem has guaranteed to compensate Q-Chem for any economic loss of diverting surplus ethylene not used to produce 1-hexene to the high-density polyethylene units.  CPChem believes the risk of the 1-hexene unit failing to operate as designed is remote.

 

Saudi Chevron Phillips Company

 

Saudi Chevron Phillips Company (Saudi Chevron Phillips) is a 50%-owned joint venture that owns facilities in Al Jubail, Saudi Arabia.  Saudi Chevron Phillips was financed with loans from commercial banks and a Saudi Arabian government agency.  The loans are payable in semiannual installments and mature in 2009.  The co-venturers have a several obligation of up to $25 million each to fund debt service requirements in the event Saudi Chevron Phillips has insufficient cash to pay debt service requirements.  In addition, under the terms of a sales and marketing agreement that runs through 2026, CPChem is obligated to purchase, at market price, 100% of production from the plant less any quantities sold by Saudi Chevron Phillips in the Middle East.  CPChem believes it is unlikely that any funding under the debt service obligation will be required and further believes that it will continue to be able to sell all the production required under the terms of the sales and marketing agreement.

 

Residual Lease Guarantee

 

CPChem’s headquarters building is leased under a synthetic lease agreement entered into in 2002 that contains a fixed price purchase option and a residual guarantee.  The option price was considered to be the fair market value of the building at the inception of the lease.  If CPChem does not 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.

 

9

 

Note 6.          Investments

 

Summarized financial information for Q-Chem and Saudi Chevron Phillips, and for all other equity investments of CPChem in the aggregate, follows:

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Q-Chem
Revenues			$	12		$	—		$	12		$	—
Income (loss) before income taxes			(15		)	(5		)	(21		)	(10		)
Net income (loss)			(15		)	(5		)	(21		)	(10		)
Saudi Chevron Phillips
Revenues			117			84			210			138
Income before income taxes			44			15			68			13
Net income			44			15			68			13
Other equity investments
Revenues			171			160			327			296
Income (loss) before income taxes			(1		)	9			—			13
Net income (loss)			(1		)	8			(1		)	10

 

Note 7.          Trade Receivables Securitization

 

CPChem had $300 million of secured borrowings outstanding at June 30, 2003 and $290 million of secured borrowings outstanding at December 31, 2002 under a trade receivables securitization agreement.  These borrowings are classified as short-term and were secured by $488 million and $393 million of trade receivables, respectively.  CPChem renewed its trade receivables securitization agreement on May 22, 2003 for an additional 364 days on terms substantially identical to those of the agreement that expired during the month.

 

Note 8.          Contingencies

 

In the case of all known contingencies, CPChem records an undiscounted liability when the loss is probable and the amount is reasonably estimable.  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 contingencies become known, CPChem reassesses its position both 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 that of other responsible parties.  Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available during the administrative and litigation process.

 

10

 

CPChem is a party to a number of legal proceedings pending in various courts or agencies for which, in many instances, no provision has been made.  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.

 

Note 9.          Employee Termination Benefits

 

Approximately $9 million was recorded as Selling, General and Administrative expense in the second quarter of 2003 for employee termination benefit costs in connection with announced workforce reductions of approximately 139 positions at various locations.  Termination benefits payable, classified as Other Current Liabilities, totaled $8 million at June 30, 2003.

 

Note 10.    Subsequent Event

 

In August 2003, CPChem’s Board of Directors approved the decision to permanently close the research and technology pilot plant facility in Orange, Texas, pending completion of certain research and development projects currently in progress.  As a result, it is expected that third quarter 2003 results will include approximately $10 million of charges for related asset write-downs.

 

Note 11.    Segment Information

 

Financial information by segment follows:

 

Millions			Olefins & Polyolefins			Aromatics & Styrenics			Specialty Products			Corporate, Other & Eliminations			Consolidated
Three months ended June 30, 2003
Net sales – external			$	1,010		$	590		$	101		$	—		$	1,701
Net sales – inter-segment			77			34			1			(112		)	—
Income (loss) before interest & taxes			35			20			10			(13		)	52
Three months ended June 30, 2002
Net sales – external			809			487			91			—			1,387
Net sales – inter-segment			74			36			1			(111		)	—
Income (loss) before interest & taxes			(9		)	32			14			(11		)	26
Six months ended June 30, 2003
Net sales – external			2,036			1,260			201			—			3,497
Net sales – inter-segment			145			76			1			(222		)	—
Income (loss) before interest & taxes			(40		)	23			20			(17		)	(14		)
Six months ended June 30, 2002
Net sales – external			1,490			868			176			—			2,534
Net sales – inter-segment			129			58			1			(188		)	—
Income (loss) before interest & taxes			(9		)	20			24			(14		)	21
Total assets – June 30, 2003			3,704			1,836			491			183			6,214
Total assets – December 31, 2002			3,620			1,815			468			206			6,109

 

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Note 12.    Condensed Consolidating Financial Statements

 

Condensed 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 condensed consolidating financial statements were prepared using the equity method of accounting for investments.

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2003
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	1,494		$	296		$	(89	)	$	1,701
Equity in income of affiliates			55			2			53			(94		)	16
Other income			—			15			10			(12		)	13
Total revenue			55			1,511			359			(195		)	1,730
Costs and Expenses
Cost of goods sold			—			1,339			282			(82		)	1,539
Selling, general and administrative			—			124			22			(19		)	127
Research and development			—			12			—			—			12
Total costs and expenses			—			1,475			304			(101		)	1,678
Income Before Interest & Taxes			55			36			55			(94		)	52
Interest income			—			3			3			(3		)	3
Interest expense			(20		)	(1		)	(1		)	3			(19		)
Income Before Taxes			35			38			57			(94		)	36
Income taxes			—			—			(1		)	—			(1		)
Net Income			35			38			56			(94		)	35
Distributions on members’ preferred interests			(5		)	—			—			—			(5		)
Income Attributed to Members’ Interests			$	30		$	38		$	56		$	(94	)	$	30

 

12

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2002
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	1,249		$	207		$	(69	)	$	1,387
Equity in income (loss) of affiliates			25			(2		)	1			(15		)	9
Other income			—			19			30			(36		)	13
Total revenue			25			1,266			238			(120		)	1,409
Costs and Expenses
Cost of goods sold			—			1,149			190			(67		)	1,272
Selling, general and administrative			—			117			19			(38		)	98
Research and development			—			13			—			—			13
Total costs and expenses			—			1,279			209			(105		)	1,383
Income (Loss) Before Interest & Taxes			25			(13		)	29			(15		)	26
Interest income			—			1			1			—			2
Interest expense			(14		)	—			—			—			(14		)
Income (Loss) Before Taxes			11			(12		)	30			(15		)	14
Income taxes			—			—			(3		)	—			(3		)
Net Income (Loss)			$	11		$	(12	)	$	27		$	(15	)	$	11

 

13

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2003
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	3,095		$	614		$	(212	)	$	3,497
Equity in income (loss) of affiliates			(9		)	(1		)	(43		)	75			22
Other income			—			43			42			(54		)	31
Total revenue			(9		)	3,137			613			(191		)	3,550
Costs and Expenses
Cost of goods sold			—			2,937			572			(195		)	3,314
Selling, general and administrative			—			248			50			(71		)	227
Research and development			—			23			—			—			23
Total costs and expenses			—			3,208			622			(266		)	3,564
Income (Loss) Before Interest & Taxes			(9		)	(71		)	(9		)	75			(14		)
Interest income			—			6			4			(6		)	4
Interest expense			(38		)	(1		)	(2		)	6			(35		)
Income (Loss) Before Taxes			(47		)	(66		)	(7		)	75			(45		)
Income taxes			—			—			(2		)	—			(2		)
Net Income (Loss)			(47		)	(66		)	(9		)	75			(47		)
Distributions on members’ preferred interests			(11		)	—			—			—			(11		)
Income (Loss) Attributed to Members’ Interests			$	(58	)	$	(66	)	$	(9	)	$	75		$	(58	)

 

14

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2002
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	2,271		$	390		$	(127	)	$	2,534
Equity in income (loss) of affiliates			20			(17		)	(13		)	18			8
Other income			—			49			53			(75		)	27
Total revenue			20			2,303			430			(184		)	2,569
Costs and Expenses
Cost of goods sold			—			2,095			364			(124		)	2,335
Selling, general and administrative			—			215			52			(78		)	189
Research and development			—			24			—			—			24
Total costs and expenses			—			2,334			416			(202		)	2,548
Income (Loss) Before Interest & Taxes			20			(31		)	14			18			21
Interest income			—			2			2			—			4
Interest expense			(31		)	—			(1		)	—			(32		)
Income (Loss) Before Taxes			(11		)	(29		)	15			18			(7		)
Income taxes			—			—			(4		)	—			(4		)
Net Income (Loss)			$	(11	)	$	(29	)	$	11		$	18		$	(11	)

 

15

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Balance Sheet
June 30, 2003

(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Current assets
Cash and cash equivalents			$	—		$	24		$	41		$	—		$	65
Accounts receivable, net			228			440			700			(498		)	870
Inventories			—			569			110			—			679
Other current assets			2			11			3			—			16
Total current assets			230			1,044			854			(498		)	1,630
Property, plant and equipment, net			—			3,579			322			—			3,901
Investments in and advances to affiliates			5,767			69			5,270			(10,494		)	612
Other assets and deferred charges			21			958			13			(921		)	71
Total Assets			$	6,018		$	5,650		$	6,459		$	(11,913	)	$	6,214
Current liabilities
Accounts payable			$	73		$	696		$	307		$	(498	)	$	578
Secured borrowings and other debt			—			1			304			—			305
Other current liabilities			11			121			12			—			144
Total current liabilities			84			818			623			(498		)	1,027
Long-term debt			1,320			10			—			—			1,330
Other liabilities and deferred credits			928			117			34			(921		)	158
Total liabilities			2,332			945			657			(1,419		)	2,515
Members’ preferred interests			250			—			—			—			250
Members’ capital			3,436			4,705			5,789			(10,494		)	3,436
Accumulated other comprehensive income			—			—			13			—			13
Total Liabilities and Members’ Equity			$	6,018		$	5,650		$	6,459		$	(11,913	)	$	6,214

 

16

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Balance Sheet
December 31, 2002

 

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

 

17

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2003
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Cash Flows From Operating Activities
Net income (loss)			$	(47	)	$	(66	)	$	(9	)	$	75		$	(47	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities
Depreciation, amortization and retirements			—			132			8			—			140
Undistributed equity in losses (income) of affiliates, net			9			1			48			(75		)	(17		)
Changes in operating working capital			(10		)	(54		)	(43		)	—			(107		)
Other operating cash flow activity			(35		)	63			6			—			34
Net cash flows provided by (used in) operating activities			(83		)	76			10			—			3
Cash Flows From Investing Activities
Capital and investment expenditures			—			(61		)	(22		)	—			(83		)
Advances to Q-Chem			—			—			(76		)	—			(76		)
Increase in other investments			(89		)	—			—			89			—
Net cash flows used in investing activities			(89		)	(61		)	(98		)	89			(159		)
Cash Flows From Financing Activities
Increase in commercial paper, net			140			—			—			—			140
Increase in secured borrowings, net			—			—			10			—			10
Contributions from members, net			32			—			89			(89		)	32
Net cash flows provided by financing activities			172			—			99			(89		)	182
Net Increase in Cash and Cash Equivalents			—			15			11			—			26
Cash and Cash Equivalents at Beginning of Period			—			9			30			—			39
Cash and Cash Equivalents at End of Period			$	—		$	24		$	41		$	—		$	65

 

18

 

Note 12.    Condensed Consolidating Financial Statements (Continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2002
(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Cash Flows From Operating Activities
Net income (loss)			$	(11	)	$	(29	)	$	11		$	18		$	(11	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities
Depreciation, amortization and retirements			—			121			8			—			129
Undistributed equity in losses (income) of affiliates, net			13			23			20			(57		)	(1		)
Changes in operating working capital			(16		)	141			(108		)	—			17
Other operating cash flow activity			124			(105		)	(1		)	—			18
Net cash flows provided by (used in) operating activities			110			151			(70		)	(39		)	152
Cash Flows From Investing Activities
Capital and investment expenditures			—			(171		)	(5		)	—			(176		)
Advances to Q-Chem			—			—			(125		)	—			(125		)
Increase in other investments			(129		)	—			—			129			—
Net cash flows used in investing activities			(129		)	(171		)	(130		)	129			(301		)
Cash Flows From Financing Activities
Decrease in commercial paper, net			(501		)	—			—			—			(501		)
Increase in secured borrowings, net			—			—			101			—			101
Increase (decrease) in other debt			498			(1		)	5			—			502
Contributions from members, net			19			—			90			(90		)	19
Post-closing adjustments from members			7			—			—			—			7
Net cash flows provided by (used in) financing activities			23			(1		)	196			(90		)	128
Net Increase (Decrease) in Cash and Cash Equivalents			4			(21		)	(4		)	—			(21		)
Cash and Cash Equivalents at Beginning of Period			—			71			40			—			111
Cash and Cash Equivalents at End of Period			$	4		$	50		$	36		$	—		$	90

 

19

 

ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion should be read in conjunction with the condensed consolidated financial statements and notes preceding this discussion, and with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes included in CPChem’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

Results of Operations

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes
Olefins & Polyolefins			$	35		$	(9	)	$	(40	)	$	(9	)
Aromatics & Styrenics			20			32			23			20
Specialty Products			10			14			20			24
Corporate & Other			(13		)	(11		)	(17		)	(14		)
Consolidated			52			26			(14		)	21
Interest expense, net and income taxes			(17		)	(15		)	(33		)	(32		)
Net income (loss)			$	35		$	11		$	(47	)	$	(11	)

 

Consolidated revenues increased significantly on higher overall sales prices, comparing the 2003 periods with the same 2002 periods.  Significantly higher feedstock costs and natural gas prices in the 2003 periods partially negated the benefit of the higher sales prices.  Feedstock costs and natural gas prices trended downward in the second quarter of 2003 compared with earlier in the year.

 

Included in 2003 results were charges to Selling, General and Administrative expense for CPChem’s share of certain ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities ($9 million for the three months and $13 million for the six months) and $9 million of employee termination benefit charges recorded in the second quarter in connection with announced workforce reductions.  See Note 9 of Notes to Condensed Consolidated Financial Statements for further discussion of the employee termination benefit charges.  Also included in 2003 results was accelerated depreciation related to the previously-announced planned closure of the UDEX benzene extraction unit at CPChem’s Port Arthur, Texas facility in October 2003 ($3 million for the three months and $6 million for the six months).

 

Included in 2002 results was a first-quarter $6 million pension plan curtailment charge (included in Cost of Goods Sold) related to enhanced benefits granted to terminated employees at CPChem’s Puerto Rico facility and $4 million of accelerated depreciation, also recorded in the first quarter, associated with the retirement in February 2002 of two polyethylene particle loop reactors at the Orange, Texas facility.

 

20

 

Olefins & Polyolefins

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes			$	35		$	(9	)	$	(40	)	$	(9	)

 

Income before interest and taxes for Olefins & Polyolefins totaled $35 million in the second quarter of 2003 compared to a $9 million loss in the prior-year period.  Higher revenues, primarily due to improved overall average sales prices, were partially offset by higher feedstock and utility costs.  Included in second-quarter 2003 earnings was a $9 million charge for CPChem’s share of certain ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities.

 

Results from the ethylene and polyethylene product lines improved significantly in the three months ended June 30, 2003 compared with the same period in 2002, partially offset by lower earnings from normal alpha olefins (NAO).  Ethylene sales volumes were down, but margins improved as higher sales prices more than offset increased feedstock and utility costs.  Polyethylene margins increased due to sales prices outpacing higher feedstock costs.  Lower polyethylene sales volumes partially offset the impact of the higher margins.  Results for NAO declined due to lower sales volumes and margins.

 

Olefins & Polyolefins losses before interest and taxes totaled $40 million for the six months ended June 30, 2003 compared with $9 million for the first six months of 2002.  Higher feedstock and energy costs more than offset increased revenues.  Results in 2003 included $13 million of charges for the ChevronTexaco and ConocoPhillips legal settlements and accruals.  Results in 2002 included $4 million of accelerated depreciation associated with the retirement of the two polyethylene particle loop reactors.

 

Margins were lower in the 2003 six-month period for the polyethylene and NAO product lines.  The lower margins were primarily due to higher feedstock costs and significantly higher energy costs, partially offset by higher overall average sales prices.  In addition, earnings were impacted by lower sales volumes for ethylene, polyethylene and NAO.  Feedstock and energy costs were negatively influenced by unseasonably low U.S. natural gas inventory levels, the war in Iraq and geopolitical events in Venezuela and Nigeria.

 

Aromatics & Styrenics

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Income before interest and taxes			$	20		$	32		$	23		$	20

 

Income before interest and taxes for Aromatics & Styrenics totaled $20 million in the three months ended June 30, 2003 compared with $32 million in the 2002 period.  Increases in sales revenues and equity earnings in the 2003 period were partially offset by higher feedstock and utility costs.  Included in 2003 results was $3 million of accelerated depreciation related to the planned closure of the UDEX benzene extraction unit in October 2003.  Results in the 2002 period included a $14 million benefit related to the reversal of a lower-of-cost-or-market inventory reserve initially established in 2001.  The reserve was partially reversed in the first quarter of 2002, with the remainder reversed in the following quarter as a result of improved market conditions and prices.

 

21

 

Improvements in the benzene and polystyrene product lines in the second quarter of 2003 compared with the prior-year period were partially offset by lower results from the styrene and K-Resin^® styrene-butadiene copolymer product lines.  Higher feedstock and utility costs reduced styrene earnings.  Lower feedstock margins, higher utility costs and lower equity earnings from K R Copolymer Co. Ltd. drove results downward for the K-Resin product line.  Benzene earnings improved due to significantly higher equity earnings from Saudi Chevron Phillips.  Higher benzene sales prices and volumes offset increased feedstock and utility costs.  Results from polystyrene showed improvement, primarily attributable to significantly higher sales prices.

 

Aromatics & Styrenics income before interest and taxes totaled $23 million for the first six months in 2003 compared with $20 million for the same period in 2002.  Higher sales revenues and equity earnings in 2003 were partially offset by higher feedstock and utility costs.  Included in 2003 results was $6 million of accelerated depreciation related to the planned closure of the UDEX unit.  Results in the 2002 period included a $25 million benefit for the full reversal of the lower-of-cost-or-market inventory reserve and a $6 million pension plan curtailment charge related to enhanced benefits granted to terminated employees at CPChem’s Puerto Rico facility.

 

Earnings were higher in the 2003 six-month period primarily as a result of higher earnings in the benzene, polystyrene and paraxylene product lines.  Higher average realized sales prices in these product lines, particularly in benzene, and increased sales volumes of benzene and paraxylene were partially offset by higher feedstock costs and energy prices.  Significantly higher equity earnings from Saudi Chevron Phillips also contributed to the overall improvement in earnings.  Earnings from styrene were lower in 2003 as increased product and utility costs more than offset higher sales prices.  Lower equity earnings from K R Copolymer Co. Ltd., lower feedstock margins and higher utility costs primarily drove results downward for the K-Resin product line.

 

Specialty Products

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Income before interest and taxes			$	10		$	14		$	20		$	24

 

Income before interest and taxes for Specialty Products was $10 million in the three-month period ended June 30, 2003 compared with $14 million in the same period in 2002, and $20 million and $24 million for the six-month periods in 2003 and 2002, respectively.  Higher sales volumes of Specialty Chemicals and higher sales prices of Ryton^® polyphenylene sulfide polymers partially offset the impact of increased product costs in the second quarter of 2003.  Lower foreign currency exchange gains also contributed to the decline in earnings in the second quarter of 2003.  Higher overall sales prices and increased sales volumes of Specialty Chemicals partially offset increased product costs in the 2003 six-month period.

 

Corporate and Other

 

			Three months ended June 30,						Six months ended June 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes			$	(13	)	$	(11	)	$	(17	)	$	(14	)

 

Corporate and Other results in 2003 included $9 million of employee termination benefit charges recorded in the second quarter in connection with announced workforce reductions.  Results in 2002 included $6 million of second-quarter expenses related to a one-time charge for employee benefit costs and expenses incurred in connection with the relocation of CPChem’s headquarters.

 

22

 

Interest expense.  Interest expense was $19 million and $14 million for the three-month periods in 2003 and 2002, respectively, and $35 million and $32 million for the six-month periods in 2003 and 2002.  The increases in the 2003 periods resulted primarily from the effects of the issuance of $500 million of 5³/₈% notes in June 2002, whose proceeds were used to retire a portion of outstanding commercial paper obligations that carried lower interest rates.  Lower overall debt balances and lower interest rates on commercial paper and secured debt outstanding in 2003 partially offset the effects of the June 2002 debt issuance.

 

Outlook

 

The chemicals industry continues to be challenged to effectively utilize capacity and manage costs, while at the same time addressing the need for margin improvement.  Extreme natural gas and natural gas liquids price volatility was experienced during the first quarter of 2003.  Energy and feedstock prices have recently become more stable, but remain at elevated levels.  It is anticipated that chemical demand will continue to recover in 2003 along with global economic growth.  At the same time, announced and anticipated industry capacity reductions, coupled with limited near-term new investment, should help alleviate some of the excess capacity in the industry and promote future margin improvements as operating rates gradually trend up.

 

CPChem is addressing prevailing market conditions by continuing to ensure safe and reliable operations, while at the same time focusing on cost stewardship, improving efficiencies and prudently operating and managing its assets.  New world-scale investments in feedstock-advantaged regions with access to growing markets, such as the Q-Chem I complex, are expected to enhance future earnings.

 

The Q-Chem I complex, a project in which CPChem owns a 49% interest, is currently undergoing performance testing.  A 50%-owned high-density polyethylene plant, located at CPChem’s Cedar Bayou facility in Baytown, Texas, became operational in the second quarter of 2003.  CPChem’s Ryton compounding facility in La Porte, Texas, which has a gross production capacity of 15 million pounds per year of Ryton compounds, became operational at the end of March 2003.

 

CPChem’s cumene unit at the Port Arthur facility was idled in the second quarter of 2003 until market conditions improve.  This action is in addition to the previously-announced planned closure in October 2003 of the UDEX benzene extraction unit at the facility.  Operations at the olefins complex and the existing cyclohexane unit at the facility are continuing.

 

Liquidity and Capital Resources

 

CPChem’s cash balance at June 30, 2003 was $65 million, of which $41 million was held by foreign subsidiaries.  This compares with a $39 million cash balance at December 31, 2002, of which $30 million was held by foreign subsidiaries.  CPChem’s objective is to minimize cash balances through effective management of its commercial paper program for daily operating requirements.

 

Operating Activities

 

Cash provided by operating activities totaled $3 million during the first half of 2003 compared with $152 million during the same period in 2002.  The decrease was driven by a net increase of $124 million in non-cash working capital and lower income primarily due to higher energy and feedstock prices experienced in the 2003 period.

 

23

 

Investing Activities

 

Capital and investment expenditures totaled $83 million during the first six months of 2003, compared with $176 million in the prior-year period.  Approximately $45 million of 2003 expenditures were invested in Olefins & Polyolefins, $29 million in Aromatics & Styrenics, $8 million in Specialty Products and the remaining $1 million in corporate-level expenditures.  In addition, CPChem advanced $76 million to Q-Chem in the first half of 2003, excluding interest, under a subordinated loan agreement.  CPChem expects to invest approximately $260 million in capital and investment expenditures in 2003.  In addition, CPChem expects to advance Q-Chem a total of approximately $200 million in 2003 under the subordinated loan agreement.

 

See Note 5 of Notes to Condensed Consolidated Financial Statements for further discussion of the advances and commitments to Q-Chem and for a discussion of a contingent funding commitment to Saudi Chevron Phillips.

 

Financing Activities

 

Cash provided by financing activities totaled $182 million in the first six months of 2003 compared with $128 million in the prior-year period.  The increase was primarily attributable to a net increase in commercial paper outstanding.

 

CPChem had $300 million of secured borrowings outstanding at June 30, 2003 under a trade receivables securitization agreement, secured by $488 million of trade receivables.  CPChem renewed its trade receivables securitization agreement on May 22, 2003 for an additional 364 days on terms substantially identical to those of the agreement that expired during the month.

 

CPChem has a $400 million 364-day credit facility and a $400 million three-year credit facility with a syndicate of banks that are used to provide backup committed credit for the commercial paper program.  The 364-day credit facility provides that CPChem may, at its option, extend the date of repayment by one year of any borrowings outstanding on August 28, 2003 under the agreement.  There were no borrowings outstanding under either credit agreement at June 30, 2003.  As of the date of this report, CPChem had received in excess of $400 million of commitments from banks towards a new $400 million 364-day credit facility that will replace the existing 364-day credit facility that expires on August 28, 2003.

 

Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, jointly and severally issued $500 million of senior unsecured 5³/₈% notes in June 2002.  Proceeds were used to retire a portion of outstanding commercial paper obligations and for general corporate purposes.

 

CPChem believes cash requirements in 2003 will be funded through a combination of cash on hand, cash flows from operations, commercial paper and/or future debt issuances.  CPChem is not aware of any conditions that exist as of the date of 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.

 

Other

 

Contingencies.  See Note 8 of Notes to Condensed Consolidated Financial Statements for a discussion of contingencies.

 

New Accounting Pronouncements.  See Note 2 of Notes to Condensed Consolidated Financial Statements for a discussion of new accounting pronouncements.

 

Subsequent Event.  In August 2003, CPChem’s Board of Directors approved the decision to permanently close the research and technology pilot plant facility in Orange, Texas, pending completion of certain research and development projects currently in progress.  As a result, it is expected that third quarter 2003 results will include approximately $10 million of charges for related asset write-downs.

 

24

 

CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING INFORMATION

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking statements” within the meaning of the federal securities laws.  Such statements can generally be identified with words and phrases such as “believes,” “expects,” “anticipates,” “should,” “estimates,” “foresees” or other words and phrases of similar meaning.  Where CPChem expresses an expectation or belief as to future results, there can be no assurance that the expectation or belief will result, be achieved or be accomplished.  Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, CPChem believes such assumptions or bases to be reasonable and to be made in good faith.  Assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances.  The more significant factors that, if erroneous, could cause actual results to differ materially from those expressed include, among others: the timing and duration of periods of expansion and contraction within the chemicals business, plans for the construction, modernization, start-up or de-bottlenecking of domestic and foreign chemical plants, prices of feedstocks and products, force majeure events, accidents, labor relations, political risks, terrorist acts, war, changes in foreign and domestic laws, rules and regulations and the interpretation and enforcement thereof, regulatory decisions relating to taxes, the environment and human resources, the global economy, results of financing efforts and overall financial market conditions.  All forward-looking statements in this Form 10-Q are qualified in their entirety by the cautionary statements contained in this section.  CPChem does not undertake to update, revise or correct any of the forward-looking information.

 

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

 

CPChem’s exposure to market risk is described in Item 7a of its Annual Report on Form 10-K for the year ended December 31, 2002.  CPChem believes its exposure to market risk has not changed materially at June 30, 2003.

 

ITEM 4.  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 Acting 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 Acting 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 the period covered by this report that have materially affected, or are reasonably likely to materially affect, CPChem’s internal control over financial reporting.

 

PART II.   OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

Governmental Agency Proceedings

 

CPChem’s Puerto Rico facility received a complaint and penalty assessment from the Environmental Protection Agency in September 2002 alleging violations of the facility’s National Pollutant Discharge Elimination System permit as a result of a June 2002 inspection.  In June 2003, the parties settled this matter, resulting in a civil penalty of $20,075 and CPChem’s agreement to complete a supplemental environmental project with a cost cap commitment of $65,000.

 

25

 

Other Proceedings

 

CPChem is a party to a number of other legal proceedings for which, in many instances, no provision has been made.  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 5.  Other Information

 

Mr. C. Kent Potter, CPChem’s Senior Vice President, Chief Financial Officer and non-voting member of the Board of Directors, retired effective July 28, 2003.  Mr. Greg G. Maxwell, CPChem’s Vice President and Controller, was appointed Senior Vice President, Chief Financial Officer and Controller effective August 7, 2003.

 

Mr. Darald W. Callahan resigned as a Class C Director of CPChem’s Board of Directors, effective June 1, 2003, in advance of his retirement from ChevronTexaco on June 30, 2003. Mr. Gary G. Yesavage, currently General Manager of ChevronTexaco’s El Segundo refinery, was elected to succeed Mr. Callahan as a Class C Director effective June 1, 2003.

 

ITEM 6.  Exhibits and Reports on Form 8-K

 

(a)  Exhibits

 

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)  Reports on Form 8-K - none

 

SIGNATURE

 

Pursuant to the requirements 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.

 

 

CHEVRON PHILLIPS CHEMICAL COMPANY LLC
Date:  August 7, 2003	/s/ Greg G. Maxwell
	Greg G. Maxwell
	Senior Vice President, Chief Financial Officer and Controller

 

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