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 September 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

 

 

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.

 

 

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

 

 

 

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 nine months ended September 30, 2003 and 2002	3
		Condensed Consolidated Balance Sheet at September 30, 2003 and December 31, 2002	4
		Condensed Consolidated Statement of Cash Flows for the nine months ended September 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		21
	Item 3.  Quantitative and Qualitative Disclosures about Market Risk		26
	Item 4.  Controls and Procedures		26
Part II.  Other Information
	Item 1.  Legal Proceedings		27
	Item 6.  Exhibits and Reports on Form 8-K		27

 

2

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.    Financial Statements

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Statement of Operations

(Unaudited)

 

			Three months ended September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Revenue
Net sales			$	1,702		$	1,429		$	5,199		$	3,963
Equity in income of affiliates, net			3			11			25			19
Other income			23			13			54			40
Total revenue			1,728			1,453			5,278			4,022
Costs and Expenses
Cost of goods sold			1,550			1,319			4,864			3,654
Selling, general and administrative			114			98			341			287
Asset impairments			—			6			—			6
Research and development			21			11			44			35
Total costs and expenses			1,685			1,434			5,249			3,982
Income Before Interest and Taxes			43			19			29			40
Interest income			2			1			6			5
Interest expense			(19		)	(18		)	(54		)	(50		)
Income (Loss) Before Taxes			26			2			(19		)	(5		)
Income taxes			(1		)	(1		)	(3		)	(5		)
Net Income (Loss)			25			1			(22		)	(10		)
Distributions on members’ preferred interests			(6		)	(6		)	(17		)	(6		)
Income (Loss) Attributed to Members’ Interests			$	19		$	(5	)	$	(39	)	$	(16	)

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Balance Sheet

(Unaudited)

 

Millions			September 30, 2003			December 31, 2002
ASSETS
Current assets
Cash and cash equivalents			$	42		$	39
Accounts receivable, net			871			797
Inventories			668			702
Other current assets			31			23
Total current assets			1,612			1,561
Property, plant and equipment, net			3,862			3,950
Investments in and advances to affiliates			648			515
Other assets and deferred charges			71			83
Total Assets			$	6,193		$	6,109
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities
Accounts payable			$	565		$	596
Accrued income and other taxes			51			53
Secured borrowings and other debt			308			294
Other current liabilities			126			108
Total current liabilities			1,050			1,051
Long-term debt			1,264			1,190
Other liabilities and deferred credits			157			117
Total liabilities			2,471			2,358
Members’ preferred interests			250			250
Members’ capital			3,454			3,494
Accumulated other comprehensive income			18			7
Total Liabilities and Members’ Equity			$	6,193		$	6,109

 

See Notes to Condensed Consolidated Financial Statements.

 

4

 

Chevron Phillips Chemical Company LLC

Condensed Consolidated Statement of Cash Flows

(Unaudited)

 

			Nine months ended September 30,
Millions			2003			2002
Cash Flows From Operating Activities
Net income (loss)			$	(22	)	$	(10	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation, amortization and retirements			225			219
Asset impairments			—			6
Undistributed equity in income of affiliates, net			(14		)	(6		)
Changes in operating working capital			(90		)	13
Other operating cash flow activity			30			34
Net cash flows provided by operating activities			129			256
Cash Flows From Investing Activities
Capital and investment expenditures			(152		)	(253		)
Investments in and advances to Qatar Chemical Company Ltd. (Q-Chem)			(94		)	(169		)
Decrease in other investments			1			2
Net cash flows used in investing activities			(245		)	(420		)
Cash Flows From Financing Activities
Increase (decrease) in commercial paper, net			74			(785		)
Increase in secured borrowings, net			10			101
Increase in other debt, net			3			503
Proceeds from the issuance of members’ preferred interests			—			250
Contributions from members, net			32			29
Post-closing adjustments from members, net			—			7
Net cash flows provided by financing activities			119			105
Net Increase (Decrease) in Cash and Cash Equivalents			3			(59		)
Cash and Cash Equivalents at Beginning of Period			39			111
Cash and Cash Equivalents at End of Period			$	42		$	52

 

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 and equity affiliates, manufactures and markets a wide range of petrochemicals and plastics 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 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 in conformity with 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 duty to file reports with the SEC was subsequently and automatically suspended.

 

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, which is considered to be a nonpublic entity as it relates to FIN No. 46, the consolidation requirements will apply to pre-existing VIEs effective December 31, 2004.  CPChem believes that it is unlikely that FIN No. 46 will require the consolidation of any existing VIE into CPChem’s consolidated 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 results 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 results 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.  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 September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Net income (loss)			$	25		$	1		$	(22	)	$	(10	)
Foreign currency translation adjustments			5			(2		)	14			15
Minimum pension liability adjustment			—			—			(3		)	—
Comprehensive income (loss)			$	30		$	(1	)	$	(11	)	$	5

 

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, Commitments and Indemnifications

 

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 operating and debt service reserve fund requirements through advances under a subordinated loan agreement with Q-Chem.  Under the terms of the agreement, CPChem expects to advance Q-Chem $5 million during the remainder of 2003 and $40 million in 2004.  The obligation to make advances under the subordinated loan agreement will cease upon completion of the facilities, as defined in the bank financing agreements.

 

Under the terms of the bank financing completion guarantee, the banks have the right, effective September 1, 2003, to demand funds from each Q-Chem co-venturer, on a pro rata basis, to cover the debt service requirements of Q-Chem until project completion.  Furthermore, 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.  This date may be extended for up to one year due to events of force majeure.  CPChem and the other Q-Chem co-venturer each subscribed to $9 million of additional shares of Q-Chem to fund their respective ownership interests of the debt service requirements due in the third quarter of 2003 and expect to subscribe to additional shares pro rata until project completion is achieved, which is expected to be in the first half of 2004.  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.

 

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 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 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.  Given the current performance of the 1-hexene unit, CPChem believes the risk of the 1-hexene unit failing to operate as designed is remote.

 

Q-Chem is considered to be a VIE under the provisions of FIN No. 46.  CPChem does not have majority voting control over Q-Chem, and therefore records its 49% share of Q-Chem’s operating results using the equity method.  CPChem’s maximum exposure to loss per FIN No. 46 was $640 million at September 30, 2003.  This amount represents the total of CPChem’s carrying value of its investment in Q-Chem, advances and related interest receivable from Q-Chem under the subordinated loan agreement and CPChem’s pro rata share of Q-Chem’s outstanding bank financing and associated accrued interest.  CPChem believes the risk of incurring any substantial portion of the stated maximum exposure to loss is remote.  Nonetheless, CPChem’s maximum exposure to loss is presented as required by FIN No. 46.

 

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 governmental 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 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 also 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

 

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 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.  Consistent with customary business practice, any particular indemnity obligation incurred is the result of a negotiated transaction or contractual relationship for which CPChem has accepted a certain level of risk in return for a financial or other type of benefit.  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.

 

With regard to indemnifications, CPChem’s risk management philosophy is to limit risk in any transaction or relationship to the maximum extent reasonable in relation to commercial and other considerations.  Before accepting any indemnity obligation, consideration is given to, among other things, the remoteness of the possibility that the triggering event will occur, the potential costs to perform under any resulting indemnity obligation, possible actions to reduce the likelihood of a triggering event or to reduce the costs of performing under the indemnity obligation, whether CPChem is indemnified by an unrelated third party, insurance coverage that may be available to offset the cost of the indemnity obligation, and the benefits from the transaction or relationship.

 

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 all known contingencies, however, CPChem records an undiscounted liability when the loss is probable and the amount is reasonably estimable.

 

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 as a result of such triggering event or condition.

 

Note 6.  Employee Termination Benefits

 

Approximately $12 million was recorded in the first nine months of 2003 as Selling, General and Administrative expense, $3 million of which was recorded in the third quarter, for employee termination benefit costs in connection with announced workforce reductions of 196 positions at various locations.  Termination benefits payable, classified as Other Current Liabilities, totaled $10 million at September 30, 2003.

 

Note 7.  Trade Receivables Securitization

 

CPChem had $300 million of secured borrowings outstanding at September 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 $468 million and $393 million of trade receivables, respectively.

 

10

 

Note 8.  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 September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Q-Chem
Revenues			$	22		$	—		$	34		$	—
Income (loss) before income taxes			(20		)	(6		)	(41		)	(16		)
Net income (loss)			(20		)	(6		)	(41		)	(16		)
Saudi Chevron Phillips
Revenues			86			98			296			236
Income before income taxes			17			26			85			39
Net income			17			26			85			39
Other equity investments
Revenues			172			159			499			455
Income before income taxes			7			4			7			17
Net income			6			3			5			13

 

Note 9.  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.

 

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.

 

11

 

Note 10. Segment Information

 

Financial information by segment follows:

 

Millions			Olefins & Polyolefins			Aromatics & Styrenics			Specialty Products			Corporate, Other & Eliminations			Consolidated
Three months ended Sept. 30, 2003
Net sales – external			$	995		$	613		$	94		$	—		$	1,702
Net sales – inter-segment			71			30			—			(101		)	—
Income (loss) before interest & taxes			45			(1		)	8			(9		)	43
Three months ended Sept. 30, 2002
Net sales – external			867			476			86			—			1,429
Net sales – inter-segment			68			37			—			(105		)	—
Income (loss) before interest & taxes			52			(30		)	3			(6		)	19
Nine months ended Sept. 30, 2003
Net sales – external			3,031			1,873			295			—			5,199
Net sales – inter-segment			216			106			1			(323		)	—
Income (loss) before interest & taxes			5			22			28			(26		)	29
Nine months ended Sept. 30, 2002
Net sales – external			2,357			1,344			262			—			3,963
Net sales – inter-segment			197			95			1			(293		)	—
Income (loss) before interest & taxes			43			(10		)	27			(20		)	40
Total assets –  September 30, 2003			3,659			1,869			482			183			6,193
Total assets – December 31, 2002			3,620			1,815			468			206			6,109

 

12

 

Note 11. 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 September 30, 2003

(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	1,501		$	317		$	(116	)	$	1,702
Equity in income of affiliates			44			4			21			(66		)	3
Other income			—			22			18			(17		)	23
Total revenue			44			1,527			356			(199		)	1,728
Costs and Expenses
Cost of goods sold			—			1,369			288			(107		)	1,550
Selling, general and administrative			—			120			20			(26		)	114
Research and development			—			21			—			—			21
Total costs and expenses			—			1,510			308			(133		)	1,685
Income Before Interest & Taxes			44			17			48			(66		)	43
Interest income			—			4			2			(4		)	2
Interest expense			(19		)	—			(4		)	4			(19		)
Income Before Taxes			25			21			46			(66		)	26
Income taxes			—			—			(1		)	—			(1		)
Net Income			25			21			45			(66		)	25
Distributions on members’ preferred interests			(6		)	—			—			—			(6		)
Income Attributed to Members’ Interests			$	19		$	21		$	45		$	(66	)	$	19

 

13

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2002

(Unaudited)

 

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	1,291		$	221		$	(83	)	$	1,429
Equity in income (loss) of affiliates			17			—			(7		)	1			11
Other income			—			21			28			(36		)	13
Total revenue			17			1,312			242			(118		)	1,453
Costs and Expenses
Cost of goods sold			—			1,198			193			(72		)	1,319
Selling, general and administrative			—			118			27			(47		)	98
Asset impairments			—			5			1			—			6
Research and development			—			11			—			—			11
Total costs and expenses			—			1,332			221			(119		)	1,434
Income (Loss) Before Interest & Taxes			17			(20		)	21			1			19
Interest income			—			—			1			—			1
Interest expense			(16		)	1			(3		)	—			(18		)
Income (Loss) Before Taxes			1			(19		)	19			1			2
Income taxes			—			(1		)	—			—			(1		)
Net Income (Loss)			1			(20		)	19			1			1
Distributions on members’ preferred interests			(6		)	—			—			—			(6		)
Income (Loss) Attributed to Members’ Interests			$	(5	)	$	(20	)	$	19		$	1		$	(5	)

 

14

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

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

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	4,596		$	931		$	(328	)	$	5,199
Equity in income (loss) of affiliates			35			3			(22		)	9			25
Other income			—			65			60			(71		)	54
Total revenue			35			4,664			969			(390		)	5,278
Costs and Expenses
Cost of goods sold			—			4,306			860			(302		)	4,864
Selling, general and administrative			—			368			70			(97		)	341
Research and development			—			44			—			—			44
Total costs and expenses			—			4,718			930			(399		)	5,249
Income (Loss) Before Interest & Taxes			35			(54		)	39			9			29
Interest income			—			10			6			(10		)	6
Interest expense			(57		)	(1		)	(6		)	10			(54		)
Income (Loss) Before Taxes			(22		)	(45		)	39			9			(19		)
Income taxes			—			—			(3		)	—			(3		)
Net Income (Loss)			(22		)	(45		)	36			9			(22		)
Distributions on members’ preferred interests			(17		)	—			—			—			(17		)
Income (Loss) Attributed to Members’ Interests			$	(39	)	$	(45	)	$	36		$	9		$	(39	)

 

15

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

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

Millions			LLC			LP			Other Entities			Eliminations			Total
Revenue
Net sales			$	—		$	3,562		$	611		$	(210	)	$	3,963
Equity in income (loss) of affiliates			37			(17		)	(20		)	19			19
Other income			—			70			81			(111		)	40
Total revenue			37			3,615			672			(302		)	4,022
Costs and Expenses
Cost of goods sold			—			3,293			557			(196		)	3,654
Selling, general and administrative			—			333			79			(125		)	287
Asset impairments			—			5			1			—			6
Research and development			—			35			—			—			35
Total costs and expenses			—			3,666			637			(321		)	3,982
Income (Loss) Before Interest & Taxes			37			(51		)	35			19			40
Interest income			—			2			3			—			5
Interest expense			(47		)	1			(4		)	—			(50		)
Income (Loss) Before Taxes			(10		)	(48		)	34			19			(5		)
Income taxes			—			(1		)	(4		)	—			(5		)
Net Income (Loss)			(10		)	(49		)	30			19			(10		)
Distributions on members’ preferred interests			(6		)	—			—			—			(6		)
Income (Loss) Attributed to Members’ Interests			$	(16	)	$	(49	)	$	30		$	19		$	(16	)

 

16

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Balance Sheet
September 30, 2003
(Unaudited)

Millions			LLC			LP			Other Entities			Eliminations			Total
Current assets
Cash and cash equivalents			$	—		$	14		$	28		$	—		$	42
Accounts receivable, net			213			451			789			(582		)	871
Inventories			—			551			117			—			668
Other current assets			1			25			5			—			31
Total current assets			214			1,041			939			(582		)	1,612
Property, plant and equipment, net			—			3,546			316			—			3,862
Investments in and advances to affiliates			5,847			64			5,341			(10,604		)	648
Other assets and deferred charges			22			1,043			25			(1,019		)	71
Total Assets			$	6,083		$	5,694		$	6,621		$	(12,205	)	$	6,193
Current liabilities
Accounts payable			$	99		$	664		$	384		$	(582	)	$	565
Secured borrowings and other debt			—			1			307			—			308
Other current liabilities			9			153			15			—			177
Total current liabilities			108			818			706			(582		)	1,050
Long-term debt			1,254			10			—			—			1,264
Other liabilities and deferred credits			1,017			123			36			(1,019		)	157
Total liabilities			2,379			951			742			(1,601		)	2,471
Members’ preferred interests			250			—			—			—			250
Members’ capital			3,454			4,743			5,861			(10,604		)	3,454
Accumulated other comprehensive income			—			—			18			—			18
Total Liabilities and Members’ Equity			$	6,083		$	5,694		$	6,621		$	(12,205	)	$	6,193

 

17

 

Note 11. 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

 

18

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

Chevron Phillips Chemical Company LLC
Condensed Consolidating Statement of Cash Flows
For the nine months ended September 30, 2003

(Unaudited)

Millions			LLC			LP			Other Entities			Eliminations			Total
Cash Flows From Operating Activities
Net income (loss)			$	(22	)	$	(45	)	$	36		$	9		$	(22	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation, amortization and retirements			—			213			12			—			225
Undistributed equity in losses (income) of affiliates, net			(35		)	(3		)	33			(9		)	(14		)
Changes in operating working capital			22			(34		)	(78		)	—			(90		)
Other operating cash flow activity			47			(17		)	—			—			30
Net cash flows provided by operating activities			12			114			3			—			129
Cash Flows From Investing Activities
Capital and investment expenditures			—			(109		)	(43		)	—			(152		)
Investments in and advances to Q-Chem			—			—			(94		)	—			(94		)
Decrease (increase) in other investments			(118		)	1			—			118			1
Net cash flows used in investing activities			(118		)	(108		)	(137		)	118			(245		)
Cash Flows From Financing Activities
Increase in commercial paper, net			74			—			—			—			74
Increase in secured borrowings, net			—			—			10			—			10
Increase (decrease) in other debt, net			—			(1		)	4			—			3
Contributions from members, net			32			—			118			(118		)	32
Net cash flows provided by (used in) financing activities			106			(1		)	132			(118		)	119
Net Increase (Decrease) in Cash and Cash Equivalents			—			5			(2		)	—			3
Cash and Cash Equivalents at Beginning of Period			—			9			30			—			39
Cash and Cash Equivalents at End of Period			$	—		$	14		$	28		$	—		$	42

 

19

 

Note 11. Condensed Consolidating Financial Statements (continued)

 

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

Millions			LLC			LP			Other Entities			Eliminations			Total
Cash Flows From Operating Activities
Net income (loss)			$	(10	)	$	(49	)	$	30		$	19		$	(10	)
Adjustments to reconcile net income (loss) to net cash flows provided by (used in) operating activities
Depreciation, amortization and retirements			—			208			11			—			219
Asset impairments			—			5			1			—			6
Undistributed equity in losses (income) of affiliates, net			2			23			33			(64		)	(6		)
Changes in operating working capital			4			147			(138		)	—			13
Other operating cash flow activity			183			(148		)	(1		)	—			34
Net cash flows provided by (used in) operating activities			179			186			(64		)	(45		)	256
Cash Flows From Investing Activities
Capital and investment expenditures			—			(240		)	(13		)	—			(253		)
Advances to Q-Chem			—			—			(169		)	—			(169		)
Decrease (increase) in other investments			(178		)	2			—			178			2
Net cash flows used in investing activities			(178		)	(238		)	(182		)	178			(420		)
Cash Flows From Financing Activities
Decrease in commercial paper, net			(785		)	—			—			—			(785		)
Increase in secured borrowings, net			—			—			101			—			101
Increase (decrease) in other debt			498			(1		)	6			—			503
Proceeds from the issuance of members’ preferred interests			250			—			—			—			250
Contributions from members, net			29			—			133			(133		)	29
Post-closing adjustments from members			7			—			—			—			7
Net cash flows provided by (used in) financing activities			(1		)	(1		)	240			(133		)	105
Net Decrease in Cash and Cash Equivalents			—			(53		)	(6		)	—			(59		)
Cash and Cash Equivalents at Beginning of Period			—			71			40			—			111
Cash and Cash Equivalents at End of Period			$	—		$	18		$	34		$	—		$	52

 

20

 

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 September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes
Olefins & Polyolefins			$	45		$	52		$	5		$	43
Aromatics & Styrenics			(1		)	(30		)	22			(10		)
Specialty Products			8			3			28			27
Corporate & Other			(9		)	(6		)	(26		)	(20		)
Consolidated			43			19			29			40
Interest expense, net and income taxes			(18		)	(18		)	(51		)	(50		)
Net income (loss)			$	25		$	1		$	(22	)	$	(10	)

 

Consolidated revenues increased significantly on higher overall sales prices, comparing the 2003 periods with the same 2002 periods.  Higher sales volumes in the 2003 third quarter compared with the 2002 third quarter also contributed to the increase in revenues.  Higher feedstock costs and natural gas prices in the 2003 periods negated most of the benefit of higher sales prices.  Unseasonably low U.S. natural gas inventory levels, the war in Iraq and geopolitical events in Venezuela and Nigeria, as well as other events experienced earlier in the year, negatively influenced feedstock and energy costs.

 

Included in 2003 results were charges to Selling, General and Administrative (SG&A) expense for CPChem’s share of certain ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities ($13 million for the first six months), 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 ($4 million for the three months and $10 million for the nine months) and employee termination benefit charges to SG&A expense in connection with announced workforce reductions ($3 million for the three months and $12 million for the nine months).  See Note 6 of Notes to Condensed Consolidated Financial Statements for further discussion of the employee termination benefit charges.  Also included in 2003 was a third- quarter $9 million charge to Research and Development depreciation related to the permanent closure of a research and technology pilot plant facility in Orange, Texas and a third-quarter $7 million net benefit recorded (an $11 million benefit to Other Income and a $4 million charge to SG&A expense) as a result of a refund from a sales and use tax audit that covered the period October 1993 through June 2000. In addition, CPChem recognized an inventory valuation gain of $6 million in the third quarter of 2003 resulting from the reduction of certain LIFO (last-in, first-out) inventories that are not expected to be replaced by year-end 2003.

 

Included in 2002 results were $26 million of net charges in the third quarter primarily related to asset retirements, the write-off of certain technology projects, asset impairments and a benefit recorded for the reduction of a customer claim accrual.  Also 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.

 

21

 

Olefins & Polyolefins

 

			Three months ended September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Income before interest and taxes			$	45		$	52		$	5		$	43

 

Income before interest and taxes for Olefins & Polyolefins totaled $45 million in the third quarter of 2003 compared with $52 million in the prior-year period.  Higher revenues resulting from increased sales volumes and prices were more than offset by higher feedstock and utility costs.  Included in third-quarter 2003 earnings was a $6 million inventory valuation gain related to LIFO inventories and a $5 million net benefit for Olefins & Polyolefins' share of the refund from the sales and use tax audit, partially offset by a $9 million charge related to the permanent closure of the research and technology pilot plant facility. Third-quarter 2002 results included $6 million of net charges related to an asset impairment, the write-off of two technology projects and a benefit related to the reduction of a customer claim accrual.

 

Results declined in the three months ended September 30, 2003 compared with the same period in 2002, as lower earnings from ethylene, normal alpha olefins (NAO) and Q-Chem were partially offset by improvements from the polyethylene pipe product line.  Sales volumes and prices were up across all product lines, but were offset by higher feedstock and utility costs.

 

Olefins & Polyolefins income before interest and taxes totaled $5 million for the nine months ended September 30, 2003 compared with $43 million for the first nine 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, the $9 million charge related to the closure of the research and technology pilot plant facility and the $5 million net benefit resulting from the sales and use tax audit.  Results in 2002 included $10 million of net charges related to an asset impairment, the write-off of two technology projects, the retirement of two polyethylene particle loop reactors and a benefit related to the reduction of a customer claim accrual.

 

Margins were lower in the 2003 nine-month period for the NAO product line, primarily due to higher feedstock costs and significantly higher energy costs, partially offset by higher overall average sales prices.  Earnings for the segment were also negatively impacted by higher equity losses from Q-Chem.  Results from the polyethylene pipe product line improved due to higher sales prices and volumes and lower SG&A expense.

 

Aromatics & Styrenics

 

			Three months ended September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes			$	(1	)	$	(30	)	$	22		$	(10	)

 

Loss before interest and taxes for Aromatics & Styrenics totaled $1 million in the three months ended September 30, 2003 compared with $30 million in the 2002 period.  Increases in sales revenues in the 2003 period, primarily resulting from higher sales volumes and prices, were partially offset by higher feedstock and utility costs, and lower equity earnings.  Included in third-quarter 2003 results was $4 million of accelerated depreciation related to the planned closure of the UDEX benzene extraction unit in October 2003.  Included in third-quarter 2002 results were $17 million of charges related to asset retirements and $3 million of accelerated depreciation related to the UDEX unit.

 

22

 

Improvements in earnings of the styrene, polystyrene and benzene product lines in the third quarter of 2003 compared with the prior-year period were partially offset by lower results from the cumene product line.  Styrene earnings increased on significantly higher sales volumes, partially offset by higher feedstock and utility costs.  Polystyrene earnings improved due to higher sales volumes and prices.  Benzene results improved on higher sales prices and lower feedstock costs, partially offset by lower equity earnings from Saudi Chevron Phillips.

 

Aromatics & Styrenics income before interest and taxes totaled $22 million for the first nine months in 2003 compared to a $10 million loss 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 $10 million of accelerated depreciation related to the planned closure of the UDEX benzene extraction unit.  Included in 2002 results were $17 million of charges related to asset retirements, a $6 million pension plan curtailment charge related to enhanced benefits granted to terminated employees at CPChem’s Puerto Rico facility and $3 million of accelerated depreciation related to the UDEX unit.  Results in 2002 also included a $25 million benefit related to the full 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 the 2003 nine-month period primarily as a result of higher earnings in the benzene, polystyrene and paraxylene product lines.  Significantly higher average realized sales prices for these product lines 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 September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Income before interest and taxes			$	8		$	3		$	28		$	27

 

Income before interest and taxes for Specialty Products was $8 million in the three-month period ended September 30, 2003 compared with $3 million in the same period in 2002, and $28 million and $27 million for the nine-month periods in 2003 and 2002, respectively.  Third-quarter 2003 results include a $2 million net benefit for Specialty Products’ share of the refund from the sales and use tax audit.

 

In the third quarter of 2003, higher earnings for Specialty Chemicals were partially offset by lower earnings for Ryton^® polyphenylene sulfide polymers, as Specialty Chemicals benefited from higher sales volumes and Ryton incurred higher product costs.  Higher overall sales prices for Specialty Products and increased sales volumes of Specialty Chemicals partially offset overall increased product costs in the 2003 nine-month period.

 

Corporate and Other

 

			Three months ended September 30,						Nine months ended September 30,
Millions			2003			2002			2003			2002
Income (loss) before interest and taxes			$	(9	)	$	(6	)	$	(26	)	$	(20	)

 

23

 

Corporate and Other results in 2003 included employee termination benefit charges in connection with announced workforce reductions ($3 million for the three months and $12 million for the nine months).  Results in 2002 included second-quarter expenses related to a one-time charge for employee benefit costs and also included expenses incurred in connection with the relocation of CPChem’s headquarters.

 

Outlook

 

The chemicals industry continues to be challenged to improve margins and increase sales volumes as the economy shows signs of recovery.  Various industry analysts and consultants believe that while U.S. economic growth will accelerate during the remainder of 2003 and throughout 2004, they also believe that U.S. commodity chemicals and plastics consumption will be driven by recovery in the U.S. manufacturing sector, which is expected to lag the general economy.

 

Elevated and volatile energy and feedstock costs, along with an increase in the geographic relocation of North American manufacturing to developing regions, is expected to moderate near-term North American chemical demand growth.  However, results from CPChem’s Q-Chem I complex, as well as its Singapore and China facilities, should benefit from the resiliency of China’s economic growth.

 

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.

 

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 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 closure in October 2003 of the UDEX benzene extraction unit at the facility.  Operations at the olefins complex and the existing cyclohexane unit at Port Arthur are continuing.

 

Liquidity and Capital Resources

 

CPChem’s cash balance at September 30, 2003 was $42 million, of which $28 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 $129 million during the first nine months of 2003 compared with $256 million during the same period in 2002.  The decrease was driven primarily by a net increase of $90 million in non-cash working capital during the 2003 period and lower income primarily due to higher energy and feedstock prices experienced in the 2003 period.

 

Investing Activities

 

Capital and investment expenditures totaled $152 million during the first nine months of 2003, compared with $253 million in the prior-year period.  Approximately $79 million of 2003 expenditures were invested in Olefins & Polyolefins, $58 million in Aromatics & Styrenics, $12 million in Specialty Products and the remaining $3 million in corporate-level expenditures.

 

24

 

In addition, CPChem advanced $85 million to Q-Chem in the first nine months of 2003, excluding interest, under a subordinated loan agreement and subscribed to $9 million of additional shares of Q-Chem in the third quarter of 2003 in connection with a bank financing completion guarantee.

 

For the year 2003, CPChem expects to invest a total of approximately $245 million in capital and investment expenditures, to advance Q-Chem a total of approximately $90 million under the subordinated loan agreement and to subscribe to a total of $20 million of additional shares of Q-Chem in connection with the bank financing completion guarantee.

 

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 $119 million in the first nine months of 2003 compared with $105 million in the prior-year period.

 

CPChem had $300 million of secured borrowings outstanding at September 30, 2003 under a trade receivables securitization agreement, secured by $468 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 prior agreement.

 

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.  CPChem replaced its 364-day credit facility with a new 364-day credit facility on substantially identical terms to those of the prior facility.  The new 364-day credit facility, which expires on August 26, 2004, provides that CPChem may, at its option, extend the date of repayment by one year of any borrowings outstanding on August 26, 2004 under the agreement.  There were no borrowings outstanding under either credit agreement at September 30, 2003.

 

In July 2002, CPChem sold $250 million of Members’ Preferred Interests, purchased 50% each by ChevronTexaco and ConocoPhillips.  Proceeds were used to retire a portion of outstanding commercial paper obligations.

 

In June 2002, Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP jointly and severally issued $500 million of five-year, senior unsecured 5 3/8% notes.  Proceeds were used to retire a portion of outstanding commercial paper obligations and for general corporate purposes.

 

CPChem believes that cash requirements over the next 12 months 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 9 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.

 

25

 

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

 

26

 

PART II.  OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

Governmental Agency Proceedings

 

As was previously disclosed, the Environmental Protection Agency (the “EPA”) and the Department of Justice (the “DOJ”) are considering a possible civil enforcement action against CPChem related to an inspection of CPChem’s Pasadena Plastics Complex in mid-2000.  This potential action stems from alleged violations of Section 112(r) of the Clean Air Act and related regulations, largely in connection with the June 1999 and March 2000 K-Resin incidents.  The EPA and DOJ are seeking a proposed penalty of $3 million.  CPChem disputes this proposed action and penalty.

 

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 6.  Exhibits and Reports on Form 8-K

 

(a)          Exhibits

 

10.1		364-Day Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Barclays Bank Plc, The Royal Bank of Scotland Plc, The Bank of Nova Scotia, The Bank of Tokyo-Mitsubishi Ltd., Sumitomo Mitsui Banking Corporation and certain lenders from time to time thereto, dated as of August 28, 2003
10.2		Long-Term Incentive Plan of Chevron Phillips Chemical Company LLC  (as Amended and Restated Effective January 1, 2001)
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

 

(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:  November 12, 2003			/s/ Greg G. Maxwell
		Greg G. Maxwell
		Senior Vice President, Chief Financial Officer and Controller

 

27