UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

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 Registrant as specified in its charter)

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

10001 Six Pines Drive

The Woodlands, TX 77380-1498

(Address of principal executive offices, including zip code)

(832) 813-4100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None

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

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant at June 30, 2004:

None

DOCUMENTS INCORPORATED BY REFERENCE:

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

None

TABLE OF CONTENTS

PART I

Items 1. and 2.	Business and Properties	2
Item 3.	Legal Proceedings	15
Item 4.	Submission of Matters to a Vote of Security Holders	16

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8.	Financial Statements and Supplementary Data	31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	104
Item 9A.	Controls and Procedures	104
Item 9B.	Other Information	104

PART III

Item 10.	Directors and Executive Officers of the Registrant	104
Item 11.	Executive Compensation	106
Item 12.	Security Ownership of Certain Beneficial Owners and Management	111
Item 13.	Certain Relationships and Related Transactions	111
Item 14.	Principal Accounting Fees and Services	112

PART IV

Item 15.	Exhibits and Financial Statement Schedules	113

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

This annual report 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” or other words and phrases of similar meaning. Where Chevron Phillips Chemical Company LLC (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. Significant assumptions that, if erroneous, could cause actual results to differ materially from those expressed relate to the following factors, 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, energy 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 and risk factors in this annual report are qualified in their entirety by the cautionary statements contained herein. CPChem does not undertake to update, revise or correct any of the forward-looking information.

PART I

Items 1. and 2. Business and Properties

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

CPChem is governed by a Board of Directors, currently comprised of six representatives, under the terms of a limited liability company agreement. ChevronTexaco and ConocoPhillips each have two voting representatives, and the chief executive officer and the chief financial officer of CPChem are non-voting representatives. Certain major decisions and actions require the approval of the Board of Directors. All decisions and actions of the Board of Directors require the approval of at least one representative of both ChevronTexaco and ConocoPhillips.

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 Securities and Exchange Commission (the “SEC”) was subsequently and automatically suspended under the Act. However, CPChem has voluntarily continued to file quarterly, annual and other periodic reports with the SEC. These reports are available to the public at no charge through CPChem’s website at www.cpchem.com.

CPChem’s business is structured around three primary operating segments: Olefins & Polyolefins, Aromatics & Styrenics, and Specialty Products. For a list of the principal products of these segments, see the tables included in each segment’s discussion. See also “Part II – Item 8. Financial Statements and Supplementary Data – Note 16” for financial data by segment and geographic location. Capacity information is presented in this report as of December 31, 2004 unless otherwise indicated.

Olefins & Polyolefins

This segment gathers, buys, sells and fractionates natural gas liquids, and manufactures and markets olefin products such as ethylene and propylene. This segment also manufactures and markets alpha olefins and polyolefin products such as normal alpha olefins (NAO), polyethylene, polypropylene and polyethylene pipe. CPChem has five olefin and/or polyolefin production facilities located in Texas. CPChem also has nine domestic pipe facilities and one in Mexico, and one domestic pipe fittings facility. In addition, CPChem owns interests in a polypropylene facility located at the Pasadena Plastics Complex in Texas, a high-density polyethylene plant located at CPChem’s Cedar Bayou facility in Texas, polyethylene facilities in Singapore and China, and an ethylene, polyethylene and 1-hexene facility in Qatar. The acetylene black plant at CPChem’s Cedar Bayou facility in Baytown, Texas was permanently idled in 2004.

Olefins & Polyolefins

Product	Approximate Net Capacity		Primary Uses
	(million pounds per year)

Ethylene	8,139	(1,2)	Basic building block for plastics and elastomers, and also a raw material for chemicals used to make paints, detergents and antifreeze.

Polyethylene	6,110	(2)	Thermoplastic polymer used in various applications, including:

			• high-density polyethylene (HDPE), which is a resin used to make detergent bottles, pails, plastic pipe and conduit, shopping bags, geomembrane and film applications;

			• linear low-density polyethylene (LLDPE), which is a resin used to make plastic film and containers; and

			• low-density polyethylene (LDPE), which is a resin used to make plastic film, paper coating, surgical gloves and containers.

Polyethylene pipe, conduit and pipe fittings	564		Used in a wide variety of industries such as electrical, energy, gas distribution, geothermal, mining, municipal projects and telecommunications.

Propylene	2,880		Basic building block for various fibers and plastics, such as polypropylene, and used as a raw material for chemicals used to make paints and detergents.

Polypropylene	486	(2)	Thermoplastic polymer used in fibers, films, automobiles and housewares.

Normal alpha olefins	1,534	(2)	A group of chemicals produced from ethylene and used in plasticizer alcohols, polyethylene, surfactants and synthetic lubricants and additives.

Polyalphaolefins	104		Base stock for synthetic lubricants.

(1) Includes 650 million pounds of idled capacity at the Sweeny facility in Old Ocean, Texas.

(2) Includes CPChem’s share of equity affiliates’ capacities.

Competition. Olefins and polyolefins are delivered into the worldwide commodity markets. Competitive factors include price, product quality and performance, product deliverability and customer service. CPChem generally ranks within the top ten ethylene and polyethylene producers worldwide based on published rated capacities. Other major producers include Dow Chemical Company (Dow), Equistar Chemicals LP (Equistar), ExxonMobil Chemical Company (ExxonMobil), BP p.l.c. (BP) and Shell Chemical Company (Shell). CPChem’s NAO technology allows it to produce a wide range of hydrocarbon products that compete in many different markets. Other significant producers of NAO are BP, Shell and Sasol Ltd. Major producers of polyalphaolefins (PAO) include BP and ExxonMobil.

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

Ethylene

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

Supply/Feedstock Sources. Ethylene can be produced from ethane, propane, butane, natural gasoline or certain refinery liquids such as naphtha and gas oil. The two most common ethylene feedstocks are ethane, because of its high ethylene yield, and naphtha, because of its availability and transportability. Much of CPChem’s ethylene production is based on ethane/propane feedstock, however certain domestic facilities have varying degrees of flexibility to process propane, butane, and naphtha when economics dictate. The price of ethane tends to correlate with the price of natural gas, while the prices of the other ethylene feedstock slates tend to correlate more with the price of crude oil.

CPChem has market-based purchase contracts with Duke Energy Field Services, LLC (an affiliate of ConocoPhillips) and Dynegy Inc. (an affiliate of ChevronTexaco) which cover over 75% of CPChem’s expected domestic ethylene feedstock needs. The agreement with Duke Energy extends through December 31, 2014 and the agreement with Dynegy extends through August 31, 2007. Contracts with other suppliers provide the remainder of feedstock needs. These contracts can be long-term or monthly, or daily contracts made on a spot basis.

Marketing. Polyethylene accounts for more than one-half of all global ethylene consumption. CPChem uses approximately 80% of its domestic ethylene in its production of polyethylene, NAO and styrene. The remainder of domestic ethylene production is sold on the merchant market, largely under long-term contracts. CPChem’s ethylene storage capacity is approximately one billion pounds at its Texas cavern storage facilities in Clemens and Mont Belvieu. All ethylene produced internationally is consumed internally.

Polyethylene

Domestically, polyethylene is produced at the Pasadena Plastics Complex and the Orange and Cedar Bayou facilities, all located in Texas. Internationally, CPChem produces polyethylene through its joint venture facilities in Qatar, Singapore and Jinshanwei, China. CPChem’s share of the combined polyethylene capacity of its domestic and international facilities is approximately 6.1 billion pounds per year.

Supply/Feedstock Sources. The primary raw material for polyethylene production is ethylene, which typically represents the majority of polyethylene manufacturing costs. CPChem produces ethylene in excess of its polyethylene production requirements. Butene and 1-hexene, also used in the production of polyethylene, are produced at the Cedar Bayou facility. The complex in Qatar produces all of the ethylene and 1-hexene required for the production of polyethylene at that location.

Marketing. At December 31, 2004, approximately 80% of CPChem’s net polyethylene capacity was located in the United States, along the Texas Gulf Coast. CPChem markets most of its production from this area in the United States, with the remainder exported to Canada, Mexico, Central and South America, Europe and Asia. Production from CPChem’s plants in Singapore and China is marketed primarily in the Far East. CPChem acts as an agent for the sale of substantially all of Q-Chem’s polyethylene production. The polyethylene is sold to areas in Western Europe, Africa and Asia through CPChem’s established marketing network.

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

In addition, CPChem sells a significant amount of HDPE to customers who are suppliers of bottles to large consumer product manufacturers, dairies and bottled water suppliers. CPChem also supplies HDPE for rigid product applications such as pails, paint cans, margarine tubs and stadium cups. Durable applications include pipe, sheeting for landfill liners and automotive fuel tanks.

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

Propylene

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

Supply/Feedstock Sources. Approximately one-half of CPChem’s propylene is produced as a co-product of ethylene production, the amount of which varies with the type of feedstock used. The remainder of CPChem’s propylene production comes from the processing of refinery-grade propylene, which is converted into polymer-grade product. CPChem purchases approximately 30% of its refinery-grade propylene from CPChem’s owners and the remainder from a variety of suppliers, both under short-term and long-term contracts.

Marketing. Polymer-grade propylene is sold to major chemical manufacturers, the majority of which are polypropylene producers. Approximately 25% of CPChem’s propylene is sold to Phillips Sumika Polypropylene Company, a CPChem joint venture with production facilities located at the Pasadena Plastics Complex. Propylene is also sold to external customers under long-term contracts and on the spot market, and to international contract and spot customers through a third-party export facility located in Deer Park, Texas.

Alpha Olefins

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

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

Marketing. CPChem sells NAO and PAO primarily to other chemical companies who use them to produce a broad range of intermediate products. CPChem also uses a portion of its own production of NAO in the manufacturing of polyethylene and PAO. North America and Europe are the largest geographic markets for NAO and PAO.

Aromatics & Styrenics

This segment manufactures and markets aromatics products such as benzene, styrene, paraxylene and cyclohexane, and has the ability to manufacture cumene at a plant that is currently idled. This segment also manufactures and markets polystyrene as well as styrene-butadiene copolymers (SBC) sold under the trademark K-Resin^®. Production facilities are located in Mississippi, Louisiana, Texas, Ohio, Puerto Rico and China. CPChem also owns equity interests in an aromatics facility in Saudi Arabia and in a
K-Resin^® SBC facility in South Korea.

Product	Approximate Net Capacity		Primary Uses
	(million pounds per year)

Benzene	2,130	(1)	An aromatic primary building block chemical used in the production of ethylbenzene, cumene and cyclohexane.

Styrene	2,100		Aromatic monomer used to produce a wide variety of polymers with very diverse end-uses that include packaging, automotive applications, electronic parts, rubber products, paper, housewares, construction materials, carpeting and toys.

Polystyrene	990		Thermoplastic polymer used to make a variety of products, including packaging materials, cups and media enclosures.

Paraxylene	1,715		Used almost exclusively to make terephthalic acid or dimethyl terephthalate intermediates in the production of polyester and packaging resins such as polyethylene terephthalate (PET).

Cyclohexane	1,230	(1)	Predominantly used in intermediates for the manufacture of nylon.

K-Resin^® styrene-butadiene copolymers	269	(2)	A high quality, clear copolymer material used to make a variety of products including medical components, toys, candy wrap, food packaging, cups and garment hangers.

Cumene	1,100	(3)	An intermediate used to produce phenol and acetone.

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

(2) Excludes 70 million pounds of idled capacity at the Pasadena Plastics Complex.

(3) Capacity of a plant in Port Arthur that is currently idled.

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

Distribution. Depending on the particular product and location of the production facility, Aromatics & Styrenics products are shipped by trucks, railcars, barges, ships and pipelines.

Benzene

Domestically, benzene is produced at CPChem’s Pascagoula, Mississippi facility. Internationally, CPChem produces benzene through its joint venture facility in Al Jubail, Saudi Arabia. CPChem’s share of the combined benzene capacity of its domestic and international facilities is approximately 2.1 billion pounds per year. CPChem uses its proprietary Aromax^® technology for its benzene production.

Supply/Feedstock Sources. The two main feedstocks for benzene production are pyrolysis gasoline and reformate, both of which are intermediate products of petroleum refining and petrochemical plants. These two feedstocks account for over 75% of benzene production worldwide. Domestically, CPChem purchases benzene feedstocks from its owners’ refineries, located in proximity to CPChem’s benzene plants, and from various other sources. In Saudi Arabia, CPChem’s 50%-owned affiliate has a long-term feedstock agreement with a producer that owns a refining complex located nearby.

Marketing. CPChem is a net consumer of benzene in the U.S. Gulf Coast region. This allows CPChem to routinely operate its benzene plant at full capacity, preserving a low-cost position, even during times of reduced demand for derivatives. At CPChem’s joint venture plant in Saudi Arabia, approximately one-half of the benzene produced is consumed by the joint venture’s cyclohexane plant located at the same facility. The balance of benzene is sold under short- and long-term contracts.

Styrene

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

Supply/Feedstock Sources. Styrene is made from benzene and ethylene. Most of the benzene used at CPChem’s styrene plant is produced internally at CPChem’s Pascagoula facility, with the remainder acquired through contract purchases. Ethylene is supplied to the St. James plant by a proprietary pipeline connected to the Louisiana grid system. CPChem maintains flexibility in ethylene supply through long-term contract purchases, exchanges with CPChem’s Texas facilities and spot purchases.

Marketing. CPChem currently consumes approximately 625 million pounds of styrene annually at its polystyrene plant in Marietta, Ohio and a smaller amount in its production of K-Resin^®SBC. The balance of production is sold in the merchant market. CPChem generally markets styrene in all regions of the world and sells almost all of its styrene production through short-term and long-term contracts.

Polystyrene

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

Supply/Feedstock Sources. Polystyrene is manufactured primarily from styrene. The styrene consumed at Marietta is normally supplied by CPChem’s St. James styrene facility. The China plant is supplied by styrene from the St. James plant and from third parties.

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

Paraxylene

CPChem has a production capacity of approximately 1.0 billion pounds of paraxylene per year at its Pascagoula plant. The Guayama, Puerto Rico plant, which has a capacity of approximately 715 million pounds of paraxylene per year, became operational in 2003 after being idled in 2001 for economic reasons.

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

Marketing. In North America, a few very large consumers buy most of the paraxylene available in the market. CPChem currently sells its paraxylene production to major producers of polyester in North America and Europe under long-term contracts, and also sells into the Asian market periodically.

Cyclohexane

CPChem is the largest marketer of cyclohexane in the world. This includes volumes produced at the Port Arthur and Saudi Arabian plants, of which CPChem’s share of the combined cyclohexane capacity is approximately 1.2 billion pounds per year, as well as certain volumes produced by ConocoPhillips for which CPChem has marketing rights. In February 2004, a new plant in Port Arthur commenced operations. The existing plant in Port Arthur was shut down. CPChem owns a 50% interest in the Saudi Arabian facility and has an obligation to market all of the cyclohexane exported from that facility. In addition, CPChem has the exclusive right to market the cyclohexane produced by ConocoPhillips at its Sweeny and Borger, Texas refineries.

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

Marketing. Most of CPChem’s cyclohexane is sold in North America and Europe through sales contracts that are typically long-term arrangements. CPChem also has access to the Asian market through its joint venture plant in Saudi Arabia.

K-Resin^® Styrene-Butadiene Copolymer

CPChem produces an SBC sold under the trademark K-Resin^®. Production comes from the Pasadena Plastics Complex and CPChem’s K R Copolymer Co., Ltd. joint venture plant located in Yochon, South Korea. CPChem’s share of the combined K-Resin^® SBC capacity of the facilities is approximately 269 million pounds per year.

Supply/Feedstock Sources. The main feedstocks for K-Resin® SBC are styrene and butadiene. CPChem can produce its own styrene feedstock at its St. James facility for domestic production, and secures butadiene on a long-term contract basis from a single producer. Other sources of butadiene are available if necessary. In South Korea, feedstocks are secured through long-term contracts with a company in which CPChem’s joint venture partner, Daelim Industrial Co., Ltd., has a 50% interest.

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

Specialty Products

This segment manufactures and markets a variety of specialty chemical products, including organosulfur chemicals, solvents, catalysts, drilling chemicals, mining chemicals and high-performance polyphenylene sulfide polymers and compounds sold under the trademark Ryton^®. Production and/or compounding facilities are located in Texas, Belgium and Singapore.

Product	Approximate Net Capacity	Primary Uses
	(million pounds per year)

Ryton^® polyphenylene sulfide polymer and compounds	44	High-performance engineering polymers and compounds used in electronic, automotive and appliance applications.

High-purity hydrocarbons and solvents	140	High-purity chemicals including performance-proven normal paraffins, cycloparaffins and isoparaffins, including Soltrol^® isoparaffin solvents, used in various pharmaceutical, industrial and consumer applications.

Organosulfur chemicals	270	Chemical intermediates, primarily mercaptans, used in agricultural and pharmaceutical intermediates and polymerization modifiers.

Performance and reference fuels	120	Specialty fuels for calibration standards and high-performance service, such as automobile and boat racing.

Drilling specialty chemicals, including Soltex^® additives and Soltex^® potassium additives	21	Additives used in water-based drilling fluids for controlling unstable shale formations and increasing hole lubricity during oil and gas well drilling.

Competition. Specialty chemical products are characterized by smaller, niche markets with fewer producers as compared with other CPChem products.

Distribution. Depending on the particular product and location of the production facility, product is shipped by trucks, railcars and ships.

Specialty Chemicals

Specialty chemicals consist of a variety of organosulfur chemicals, fine chemicals and other specialties. Volumes of any given product are not large when compared to the basic commodity products like ethylene and polyethylene. However, in the aggregate, specialty chemicals can account for a significant portion of the earnings of the Specialty Products segment. Production facilities are located in Borger and Conroe, Texas, and Tessenderlo, Belgium.

Supply/Feedstock Sources. Specialty chemicals production depends on the availability of a number of specialized streams of products and co-products that are the result of the petroleum refining and petrochemical production processes. Feedstocks include hydrogen sulfide, a variety of olefins and other hydrocarbon streams. In many cases, CPChem acquires these feedstocks through long-term arrangements with its owners from facilities that are integrated with production facilities that CPChem owns.

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

Specialty chemicals are sold through CPChem’s global marketing network. This network provides sales, distribution and technical services to customers.

Ryton^® Polyphenylene Sulfide

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

Supply/Feedstock Sources. The feedstocks for Ryton^® polymer are substances such as caustic, sodium hydrosulfide, paradichlorobenzene and other chemicals and solvents that are generally available in substantial quantities on the open market. CPChem has a number of suppliers who provide these materials under either long-term or renewable contracts. The additives used in the compounding process are generally purchased at locations close to CPChem’s compounding facilities.

Marketing. Ryton^® PPS polymers and compounds are sold through CPChem’s global marketing network. CPChem’s compounding facilities are regionally located, enhancing global sales and distribution efforts. The customer base includes component suppliers and appliance manufacturers. Products are generally sold under one-year, renewable agreements.

Properties and Manufacturing Facilities

CPChem currently leases the office space for its headquarters located in The Woodlands, Texas and also owns or leases administrative, technical and sales office space in various other locations. CPChem has 32 manufacturing facilities located in eight countries. The following table provides information regarding principal manufacturing facilities, business segments served, principal products and approximate gross annual capacities at December 31, 2004.

Facility / Location	Segment Served	Product	Approximate Gross Capacity
			(million pounds per year)

Pasadena Plastics Complex	Aromatics & Styrenics	K-Resin^®SBC	200	(1)
Pasadena, Texas	Olefins & Polyolefins	High-density polyethylene	2,240

Sweeny Facility	Olefins & Polyolefins	Ethylene	4,100	(2)
Old Ocean, Texas	Olefins & Polyolefins	Propylene	1,100

Borger Facility	Specialty Products	Organosulfur chemicals	200
Borger, Texas	Specialty Products	Ryton^® PPS polymer	22
	Specialty Products	Performance and reference fuels	120
	Specialty Products	High-purity hydrocarbons and solvents	140

Cedar Bayou Facility	Olefins & Polyolefins	Ethylene	1,750
Baytown, Texas	Olefins & Polyolefins	Propylene	1,000
	Olefins & Polyolefins	Normal alpha olefins	1,485
	Olefins & Polyolefins	Polyalphaolefins	104
	Olefins & Polyolefins	Linear-low, low- and high-density polyethylene	1,900

Orange Chemical Facility Orange, Texas	Olefins & Polyolefins	High-density polyethylene	930

Port Arthur Facility	Olefins & Polyolefins	Ethylene	1,750
Port Arthur, Texas	Olefins & Polyolefins	Propylene	780
	Aromatics & Styrenics	Cyclohexane	920
	Aromatics & Styrenics	Cumene	1,100	(3)

Drilling Specialties Conroe, Texas	Specialty Products	Drilling specialty chemicals	21

Houston Compounding Facility La Porte, Texas	Specialty Products	Ryton^® PPS compounds	15

St. James Facility St. James, Louisiana	Aromatics & Styrenics	Styrene	2,100

Pascagoula Facility	Aromatics & Styrenics	Paraxylene	1,000
Pascagoula, Mississippi	Aromatics & Styrenics	Benzene	1,540

Facility / Location	Segment Served	Product	Approximate Gross Capacity
			(million pounds per year)

Marietta Facility Marietta, Ohio	Aromatics & Styrenics	Polystyrene	770

Puerto Rico Facility Guayama, Puerto Rico	Aromatics & Styrenics	Paraxylene	715

Performance Pipe Division Ten locations in the United States and one in Mexico	Olefins & Polyolefins	Polyethylene pipe, conduit and pipe fittings	564

Plastics Compounds & Development Center	Specialty Products	Ryton^® PPS compounds	9
Singapore

Zhangjiagang, China Facility Zhangjiagang, China	Aromatics & Styrenics	Polystyrene	220

Tessenderlo Chemicals Facility Tessenderlo, Belgium	Specialty Products	Organosulfur chemicals	70

Kallo Compounding Facility Kallo-Beveren, Belgium	Specialty Products	Ryton^® PPS compounds	20

Joint Venture Facilities:

Qatar Chemical Company	Olefins & Polyolefins	Ethylene	1,100
Ltd. (Q-Chem)	Olefins & Polyolefins	High-density polyethylene	1,000
Mesaieed, Qatar	Olefins & Polyolefins	1-hexene	100

Chevron Phillips Singapore Chemicals (Private) Limited Singapore	Olefins & Polyolefins	High-density polyethylene	860

Shanghai Golden Phillips Petrochemical Co., Ltd. Jinshanwei, China	Olefins & Polyolefins	High-density polyethylene	300

Phillips Sumika Polypropylene Company Pasadena, Texas	Olefins & Polyolefins	Polypropylene	810

Saudi Chevron Phillips Company Al Jubail, Saudi Arabia	Aromatics & Styrenics Aromatics & Styrenics	Benzene Cyclohexane	1,180 620

K R Copolymer Co., Ltd. Yochon, South Korea	Aromatics & Styrenics	K-Resin^® SBC	115

(1) Excludes 70 million pounds of idled capacity.

(2) Includes 650 million pounds of idled capacity.

(3) Plant currently idled.

Projects

JCP Project. Jubail Chevron Phillips Company (JCP), a 50%-owned joint venture company with Saudi Industrial Investment Group (SIIG), was formed in 2003 to develop an integrated styrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility, to be built on a site adjacent to the existing aromatics complex owned by Saudi Chevron Phillips Company (SCP), an equity affiliate, will include feed fractionation, an olefins cracker, and ethylbenzene and styrene monomer processing units. Construction of the JCP facility will be in conjunction with an expansion of SCP’s benzene plant, together called “the JCP Project.” Construction began in the fourth quarter of 2004 and operational start-up is anticipated in late 2007. It is estimated that project completion, as defined in the JCP Project’s financing agreements, will be achieved in the first half of 2008. The project will be financed through equity contributions and subordinated loans from the co-venturers, in proportion to their equal ownership interests, and limited recourse loans from commercial banks and two Saudi Arabian governmental agencies. Financial closing of the estimated $1.2 billion JCP Project occurred in July 2004.

Q-Chem II Projects. CPChem and Qatar Petroleum announced plans in 2001 for the development of a second petrochemical project in Mesaieed, Qatar (Q-Chem II), designed to produce polyethylene and NAO on a site adjacent to the existing Q-Chem complex.

In connection with the Q-Chem II joint venture, CPChem and Qatar Petroleum entered into a separate agreement in 2002 with Atofina (now Total Petrochemical) and Qatar Petrochemical Company, establishing a joint venture to develop an ethane cracker in northern Qatar at Ras Laffan Industrial City.

Request for final approval of the Q-Chem II projects by CPChem’s board of directors is expected in 2005, with start-up anticipated in 2008. Preliminary financing plans for the projects include equity contributions from the co-venturers and limited recourse loans from commercial banks and an export credit agency.

Employees

Chevron Phillips Chemical Company LLC and its wholly owned subsidiaries employed approximately 5,300 people at December 31, 2004. About 89% of the workforce was employed in North America, 6% in Asia, 4% in Europe and 1% in the Middle East. Almost one-fourth of all employees are covered under collective bargaining agreements, and of those covered, approximately 160 employees are subject to collective bargaining agreements that will expire by December 31, 2005. Overall, CPChem believes that its relations with its employees are good.

Intellectual Property

CPChem’s business is, to a considerable extent, technology driven. CPChem aggressively develops and protects the intellectual property necessary to conduct its operations via a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual provisions. Where CPChem does not possess a necessary technology, it obtains or licenses it from third parties. CPChem owned or licensed from its owners the rights to approximately 2,800 patents and/or patent applications in the United States and abroad at December 31, 2004.

CPChem periodically grants licenses to its technology to third parties. Two of the more significant processes that it licenses are CPChem’s loop slurry polyethylene and Aromax^® aromatics production processes. Licenses granted for these processes typically provide for royalty payments from third parties based on the actual or anticipated volume of product that they may produce, payable either in advance of production or as a “running royalty.” The licenses for these processes generally provide that any technologies developed by the licensee related to such process shall be licensed to CPChem with the right to sublicense such developments to third parties. This technique, common in technology licensing, enhances CPChem’s ability to provide customers and licensees with the most current technology available.

CPChem relies on confidentiality agreements and contractual provisions to protect its technology that is provided to third parties. CPChem’s licenses to third parties contain restrictions on disclosure, and contractors involved in the detailed design or construction of CPChem’s or its licensees’ facilities are required to execute nondisclosure agreements. Third parties are not allowed to inspect or photograph facilities without permission, and even then only under close supervision. Appropriate actions are taken to prevent third parties from disclosing proprietary data, or otherwise using intellectual property, without proper authorization.

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

Research and Development

CPChem has scientists, process engineers and technical service experts at six technical centers. The Bartlesville, Oklahoma site provides basic research, pilot plants and product development for polyethylene, specialty chemicals, Ryton^® PPS polymers and compounds and K-Resin^® SBC, and a plastics technical center for all polymer products. The Kingwood, Texas technology center focuses on process engineering in support of all manufacturing as well as all phases of research and process development for aromatics, NAO, PAO, oxygen scavenging polymers and specialty catalysts. The technology center at Orange, Texas provides a plastics technical center and technical services for polyethylene. Polystyrene research and technical services are located at Marietta, Ohio. International technical support and product development are provided by the Belgium and Singapore technical centers.

Research and development expense totaled $42 million in 2004, $55 million in 2003 and $47 million in 2002. Included in 2003 expense was a $9 million charge related to the permanent closure of a research and technology pilot plant in Orange, Texas.

Environmental Regulation

CPChem must comply with, and is subject to liability under, environmental laws and regulations in the jurisdictions in which it conducts business. Under some laws, CPChem may be subject to joint and several liability regarding environmental contamination on or from properties that it previously owned or operated or currently owns or operates. CPChem may also be subject to liability for contaminated properties where it has disposed of or arranged for disposal of hazardous substances, or where feedstocks or products that contained hazardous substances have been accidentally spilled or released. See “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk and Other Factors That May Affect Future Performance – Environmental, Health and Safety” for further discussion.

CPChem incurs, and expects to continue to incur, significant costs for capital improvements and general compliance under applicable environmental laws, including costs to acquire, maintain and repair equipment dealing with pollution control. By 2007, industrial facilities in the eight counties in and around Houston, Texas, including certain facilities that CPChem owns, must comply with new nitrogen oxide (NOx) emission standards. These new standards are being phased in between 2003 and 2007. Modifications to existing equipment and the installation of additional control equipment are required to meet these new NOx standards. CPChem expects that total capital expenditures of approximately $100 million will be required during this period to comply with these standards. To date, CPChem has invested approximately $75 million ($30 million in 2004) of such expenditures.

In addition, new regulations were issued in 2004 concerning emissions of highly reactive volatile organic compounds (HRVOCs). CPChem expects that total capital expenditures of approximately $20 million will be required to comply with the monitoring aspects of these regulations. CPChem invested approximately $2 million of such capital expenditures in 2004. While CPChem cannot determine if additional expenditures will be required until monitoring capabilities are in place, CPChem currently believes that additional expenditures required, if any, will not have a material adverse effect on consolidated results of operations, financial position or liquidity.

CPChem is aware that there is or may be soil or groundwater contamination at some facilities and that remediation of soil and groundwater contaminated with hazardous substances will be required. Undiscounted accrued environmental liabilities totaled $6 million at both December 31, 2004 and 2003. There were no accrued environmental costs associated with discontinued or sold operations, sites where CPChem had been named a potentially responsible party, or environmental litigation at December 31, 2004 or 2003. Based on available information, CPChem believes that the costs that may be incurred to investigate and remediate known contamination will not have a material adverse effect on consolidated results of operations, financial position or liquidity.

International Operations

International operations are exposed to different political, economic and regulatory risks that are not faced by businesses that operate solely in the United States. Some of CPChem’s operations, including certain of its equity affiliates, are outside the continental United States, with manufacturing facilities in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Domestic assets totaled $5.341 billion as of December 31, 2004 and net sales from domestic operations were $7.754 billion in 2004. Assets located outside of the U.S. as of December 31, 2004 totaled $1.531 billion and net sales from non-U.S. operations were $1.484 billion in 2004. Asset and net sales calculations were determined based on location of the operation. CPChem’s international operations are subject to risks similar to those affecting its U.S. operations in addition to a number of other risks, including difficulties in enforcing contractual and intellectual property rights, and impositions or increases of withholding and other taxes on remittances and other payments by subsidiaries and affiliates. Other risks include, but are not limited to, exposure to different legal standards, fluctuations in currency exchange rates, impositions or increases of investment and other restrictions by foreign governments, the requirements of a wide variety of foreign laws, political and economic instability, terrorist acts, war and difficulties in staffing and managing operations, particularly in remote locations.

Item 3. Legal Proceedings

Governmental Agency Proceedings

The following are descriptions of reportable legal proceedings involving governmental authorities under federal, state and local laws regulating the discharge of materials into the environment. While it is not possible to predict with certainty the outcome of an unresolved proceeding, if the proceedings described below were decided adversely to CPChem, CPChem expects that there would be no material adverse effect on consolidated results of operations, financial position or liquidity. Nevertheless, such proceedings are reported pursuant to the SEC’s regulations.

CPChem is a party to certain agreements with ChevronTexaco and ConocoPhillips relating to the operation of facilities at which CPChem and either ChevronTexaco or ConocoPhillips have common operations. In December 2002, the U.S. Department of Justice (the “DOJ”) notified ConocoPhillips of various alleged violations of the National Pollutant Discharge Elimination System permit at its Sweeny,

Texas facility. The DOJ asserts that these alleged violations occurred at various times during the period beginning January 1997 through July 2002. On September 30, 2004 and October 4, 2004, the DOJ filed papers evidencing the parties’ agreement to resolve the matter through the payment of a civil penalty and performance of a Supplemental Environmental Project (SEP) for a combined value of $700,000. ConocoPhillips has advised CPChem that it is seeking a portion of the assessment from CPChem pursuant to an agreement relating to the operation of common facilities at the Sweeny complex.

The U.S. Environmental Protection Agency (the “EPA”) and the DOJ previously informed CPChem that they were considering a civil enforcement action against CPChem related to inspections performed in mid-2000 of CPChem’s facility in Pasadena, Texas. This civil enforcement action stemmed from alleged violations of Section 112(r) of the Clean Air Act and related regulations, largely in connection with fires that occurred at the Pasadena facility’s K-Resin^® styrene-butadiene copolymer (SBC) unit in 1999 and 2000. On September 27, 2004, CPChem reached an agreement with the EPA and the DOJ to resolve the matter for a $1.8 million civil penalty and performance of SEPs with a value of $1.2 million. The Contribution Agreement under which CPChem was formed provides that ConocoPhillips shall indemnify CPChem for liabilities associated with the 2000 K-Resin^® SBC unit fire. Accordingly, ConocoPhillips reimbursed CPChem for its agreed portion of the settlement.

In July and August 2004, the Texas Commission for Environmental Quality (the “TCEQ”) conducted an annual air compliance inspection at CPChem’s facility in Port Arthur, Texas. By letter dated December 30, 2004, the TCEQ issued a Notice of Enforcement letter to CPChem with a proposed Agreed Order and recommended penalty amount of $420,036, which CPChem is disputing. The enforcement matter and corresponding penalty are for alleged violations of state and federal reporting and record keeping requirements, fugitive emissions monitoring requirements, permit-by-rule requirements and three emission events.

In late 2001, CPChem received a Notice of Violation (NOV) from the Texas Natural Resource Conservation Commission, now the TCEQ, following an inspection of the solid waste management program at CPChem’s Cedar Bayou facility in Baytown, Texas. The NOV pertained to the historical management of an on-site impoundment. CPChem agreed to conduct an investigation of the unit and, in late June 2004, completed the investigation. The investigation characterized the contents of the impoundment and identified a small groundwater plume, adjacent to and unrelated to the operation of the impoundment. In November 2004, CPChem and TCEQ representatives agreed to move forward on addressing the groundwater plume. TCEQ and CPChem are presently in discussions regarding the final disposition of the impoundment and the management of the materials contained within the impoundment.

Other Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

Item 6. Selected Financial Data

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

Chevron Phillips Chemical Company LLC

	Years ended December 31,										July 1, 2000 (inception) through December 31, 2000
	Years ended December 31,
Millions	2004		2003		2002			2001
Net sales	$	9,238	$	6,907	$	5,389		$	5,871		$	3,402
Net income (loss)	626		7		(30		)	(480		)	(241		)

	December 31,
Millions	2004		2003		2002		2001		2000
Total assets	$	6,872	$	6,242	$	6,109	$	5,860	$	6,673
Long-term debt, less current maturities	1,390		1,189		1,190		1,507		1,784
Members’ preferred interests	75		250		250		—		—

The following financial information of Phillips Petroleum Company’s Chemicals Business and Chevron Chemical Company C Chem Business (the businesses contributed to form Chevron Phillips Chemical Company LLC) is presented for informational purposes only. The results of these contributed businesses presented, when combined, are not intended to and do not represent pro forma results of Chevron Phillips Chemical Company LLC, nor do the results necessarily reflect results that would have been achieved had the contributed businesses been combined for the periods presented.

Phillips Petroleum Company’s Chemicals Business

Millions	Six months ended June 30, 2000
Net sales	$	2,238
Net income	84

Chevron Chemical Company C Chem Business

Millions	Six months ended June 30, 2000
Net sales	$	1,834
Net income	96

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

An accounting policy is deemed to be “critical” if it is important to a company’s results of operations and financial condition, and requires significant judgment and estimates on the part of management in its application. The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and related disclosures. Actual results could differ from these estimates and assumptions.

CPChem believes that the estimates and assumptions used in connection with the amounts reported in its financial statements and related disclosures are reasonable and made in good faith. CPChem further believes the following represent its most critical accounting policies. For a summary of all of CPChem’s significant accounting policies, see Part II - Item 8. Financial Statements and Supplementary Data – Note 2.

Impairment of Assets – Long-lived assets used in operations are assessed for possible impairment when events or changes in circumstances indicate a potential significant deterioration in future cash flows projected to be generated by an asset group. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets – generally at a product line level. If, upon review, the sum of the projected undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. Since there are usually no quoted market prices available to determine the fair values of CPChem’s long-lived assets, fair values of impaired assets are usually determined based on the present value of projected future cash flows using discount rates commensurate with the risks involved in the asset group. This area often requires management to make complex and subjective judgments, involving significant variables such as asset lives, future product demand, and future product, feedstock and energy prices in order to estimate projected future cash flows. Should the outlook for projected cash flows change unfavorably, material charges for impairments could occur.

Inventories – For U.S. operations, cost of product inventories is primarily determined using the dollar-value, last-in, first-out (LIFO) method. These inventories are valued at the lower of cost or market, aggregated at a segment level. Lower-of-cost-or-market write-downs for LIFO-valued inventories are generally considered temporary. However, deterioration of market prices for prolonged periods of time could result in write-downs determined to be permanent in nature.

Contingencies – As facts concerning contingent liabilities become known, CPChem reassesses its position with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem’s liability in proportion to those of other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available.

Results of Operations

Overview

CPChem’s business, and the chemicals industry in general, is cyclical in nature and is impacted by, among other things, product demand and the prices of raw materials, feedstocks and energy in general. CPChem is particularly impacted by the prices of natural gas and natural gas liquids (NGLs). During periods of extreme natural gas and NGL price volatility and corresponding spikes in natural gas and NGL prices such as those seen in recent years, CPChem is less able to recover such increased costs through product sales price increases than it could if there had been steady, sustained prices, even at elevated levels. Business is also affected by overall domestic and global economic conditions, which drive consumer spending for durable goods. In addition, capacity expansions or contractions contribute to the cyclical and volatile nature of the commodity chemicals industry.

CPChem’s 2004 results improved on higher volumes and margins, due in part to healthier U.S. economic conditions and an upward trend in industry operating rates. Equity earnings from CPChem’s foreign affiliates also improved. Overall, sales price increases outpaced the rise in feedstock costs and high energy costs. In addition, CPChem’s continued focus on safety and operational reliability, along with aggressive management of costs and assets, contributed to increased profitability in 2004.

Condensed Consolidated Statement of Operations

	Years ended December 31,
Millions	2004			2003			2002
Net sales	$	9,238		$	6,907		$	5,389
Equity in income of affiliates, net	218			41			22
Other revenues	102			70			62
Total revenues	9,558			7,018			5,473
Cost of goods sold	8,373			6,439			4,986
Other costs and expenses	478			503			452
Income before interest and taxes	707			76			35
Net interest expense	(66		)	(64		)	(59		)
Income taxes	(15		)	(5		)	(6		)
Net income (loss)	$	626		$	7		$	(30	)

2004 compared with 2003

Net income in 2004 was $626 million, representing a $619 million improvement over the $7 million of net income recorded in 2003. Consolidated net sales revenue rose significantly in 2004 on higher overall sales prices and volumes. Equity earnings from affiliates improved, primarily on improved results from Saudi Chevron Phillips Company (SCP) and Qatar Chemical Company Ltd. (Q-Chem). Cost of Goods Sold rose in the 2004 period, attributable to increased feedstock costs and higher sales volumes.

2003 compared with 2002

Net income in 2003 was $7 million, compared to a $30 million loss in 2002. Consolidated net sales revenues increased in 2003 compared with 2002 as a result of higher overall sales prices. Other revenues increased in 2003, primarily from higher equity earnings from affiliates, in particular, earnings from SCP. Unseasonably low U.S. natural gas inventory levels, the war in Iraq, geopolitical events in Venezuela and Nigeria, and SARS (severe acute respiratory syndrome)

in Asia, as well as other events experienced early in 2003, negatively influenced feedstock and energy costs, which offset most of the benefit of higher sales prices. Other costs and expenses rose in 2003, which included charges for certain legal settlements and accruals, workforce reductions and the closure of a research and technology pilot plant.

Income (Loss) Before Interest and Taxes by Segment

Millions	Olefins & Polyolefins		Aromatics & Styrenics			Specialty Products		Corporate & Other			Consolidated
Year ended December 31, 2004	$	428	$	251		$	58	$	(30	)	$	707
Year ended December 31, 2003	41		27			34		(26		)	76
Year ended December 31, 2002	33		(13		)	40		(25		)	35

Included in 2004 results were $9 million of gains on the sale of certain assets. Included in 2003 results were charges related to CPChem’s share of certain ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities, asset retirements, a pilot plant closure, employee termination benefit costs related to workforce reductions and a benefit recorded as a result of a sales and use tax audit. These and other similar types of net charges totaled $36 million in the aggregate in 2003. See subsequent segment-level discussions for additional information.

Included in 2002 results were charges related to asset retirements and impairments, the write-off of certain technology projects and a pension plan curtailment charge (included in Cost of Goods Sold). Also included in 2002 results were benefits related to business interruption and property casualty insurance claim settlements and a benefit recorded for the reduction of a customer claim accrual. These and other similar types of net charges totaled $30 million in the aggregate. See subsequent segment-level discussions for additional information.

Olefins & Polyolefins

	Years ended December 31,
Millions	2004		2003		2002
Income before interest and taxes	$	428	$	41	$	33

2004 compared with 2003

Olefins & Polyolefins income before interest and taxes totaled $428 million in 2004, compared with $41 million in 2003, primarily driven by improved margins and sales volumes.

Results in 2004 included a $4 million gain on the sale of assets. Results in 2003 included $13 million of charges to Selling, General and Administrative (SG&A) expense for the ChevronTexaco and ConocoPhillips legal settlements and accruals relating to CPChem’s facilities, a $9 million charge to Research and Development depreciation related to the permanent closure of the research and technology pilot plant facility in Orange, Texas and a $5 million net benefit resulting from the sales and use tax audit that covered the period from October 1993 through June 2000.

Olefins & Polyolefins income before interest and taxes improved $387 million in 2004 compared with 2003, driven primarily by higher earnings from the olefins and polyethylene product lines. Higher revenues from increased sales prices and volumes were partially offset by higher feedstock costs. Equity earnings from affiliates also increased significantly in 2004, largely from improved results of Q-Chem. Earnings in 2004 and 2003 included gains of $4 million and $10 million, respectively, related to reductions in certain LIFO-valued inventories.

2003 compared with 2002

Olefins & Polyolefins income before interest and taxes totaled $41 million in 2003 compared with $33 million in 2002. Higher overall sales prices and volumes more than offset higher feedstock and energy costs.

Results in 2002 included a $7 million charge for the write-off of two technology projects, a $4 million charge for the remainder of the accelerated depreciation associated with the retirement in February 2002 of two polyethylene particle loop reactors at the Orange facility and a benefit related to a reduction of a customer claim accrual. Results in 2002 also included a $5 million impairment charge related to the Colton, California polyethylene pipe facility. The remaining assets of the facility were written down to their estimated net realizable value and subsequently sold during 2004. These and other similar types of net charges totaled $12 million in the aggregate in 2002. Results in 2003 included $17 million of similar types of net charges described earlier.

Results improved in 2003 compared with 2002, as higher earnings from the polyethylene, polypropylene, and polyethylene pipe product lines were partially offset by lower earnings from olefins and normal alpha olefins. Average realized sales prices and volumes were up across all the product lines. The positive effects of these improvements in sales prices and volumes were partially offset by higher feedstock and utility costs, which were driven by significantly higher average natural gas prices, particularly in the first quarter of 2003. Higher technology licensing income also contributed to the overall improvement in earnings. Equity earnings from affiliates were down slightly in 2003.

Aromatics & Styrenics

	Years ended December 31,
Millions	2004		2003		2002
Income (loss) before interest and taxes	$	251	$	27	$	(13	)

2004 compared with 2003

Aromatics & Styrenics income before interest and taxes totaled $251 million in 2004 compared with $27 million in the prior year. The improvement in results was driven primarily by higher earnings from the benzene product line.

Included in 2004 results was a $5 million net gain on the sale of assets. Included in 2003 results was $10 million of accelerated depreciation related to the closure of the UDEX benzene extraction unit at the Port Arthur, Texas facility.

Results in 2004 for Aromatics & Styrenics improved $224 million compared with 2003, primarily from higher benzene earnings, including significantly higher equity earnings from SCP. Improved results in the 2004 period were also partially attributable to the actions taken in 2003 to close the UDEX unit and idle the Port Arthur cumene plant. Sales revenues increased across all product lines as a result of higher sales prices, partially offset by lower sales volumes in benzene and paraxylene, and higher feedstock costs in most product lines. Benzene sales volumes were lower in 2004 as a result of the 2003 closure of the UDEX unit. Earnings in 2003 included a $3 million gain related to reductions in certain LIFO-valued inventories.

2003 compared with 2002

Aromatics & Styrenics income before interest and taxes totaled $27 million in 2003 compared to a $13 million loss in 2002. Higher sales revenues and equity earnings in 2003 were partially offset by higher feedstock and utility costs.

Results in 2002 included a $12 million charge related to the retirement of obsolete equipment at CPChem’s Pascagoula, Mississippi facility, a $5 million charge for the retirement of equipment rendered obsolete as a result of the modernization project at the St. James, Louisiana styrene plant and a $6 million pension plan curtailment charge related to enhanced benefits granted to terminated employees at the Puerto Rico facility. Also included in 2002 results were $4 million of accelerated depreciation related to the closure of the UDEX benzene extraction unit and $9 million of benefits related to business interruption and property casualty insurance claim settlements. These and other similar types of net charges totaled $18 million in the aggregate in 2002. Results in 2003 included $10 million of accelerated depreciation described earlier.

Results in 2002 also included a $25 million benefit related to the reversal of a lower-of-cost-or-market inventory reserve initially established in 2001. The reserve was reversed as a result of improved market conditions and prices.

Earnings were higher in 2003 compared with 2002, primarily the result of higher earnings in the benzene, polystyrene, paraxylene and styrene product lines. Significantly higher average realized sales prices for these product lines and increased sales volumes of benzene, paraxylene and styrene were partially offset by higher feedstock costs and energy prices, and costs associated with plant reconfiguration and other activities at the Puerto Rico facility. Equity earnings from SCP more than doubled in 2003 as a result of higher production and favorable benzene and cyclohexane market conditions. Lower earnings from K R Copolymer Co. Ltd., an equity affiliate, and lower feedstock margins and higher utility costs primarily drove results downward for the K-Resin^® styrene-butadiene copolymer (SBC) product line.

During 2003, CPChem’s cumene unit at the Port Arthur facility was idled and the UDEX benzene extraction unit at the facility was permanently closed.

Specialty Products

	Years ended December 31,
Millions	2004		2003		2002
Income before interest and taxes	$	58	$	34	$	40

2004 compared with 2003

Specialty Products income before interest and taxes was $58 million in 2004 compared with $34 million in 2003, as earnings from both Specialty Chemicals and Ryton^® polyphenylene sulfide (PPS) polymers and compounds increased. Earnings from Ryton^® PPS polymers and compounds rose primarily on higher sales volumes, partially offset by higher feedstock costs. Earnings from Specialty Chemicals increased as a result of higher sales volumes and prices, partially offset by increased feedstock costs primarily due to the higher sales volumes. Results for Specialty Products in 2003 included a $2 million net benefit from the sales and use tax audit.

2003 compared with 2002

Income before interest and taxes for Specialty Products was $34 million in 2003 compared with $40 million in 2002. Lower earnings from Ryton^® PPS polymers and compounds were partially offset by higher earnings for Specialty Chemicals. Lower earnings in 2003 from Ryton^® PPS polymers and compounds were due to higher product costs and SG&A expense. Improved earnings from Specialty Chemicals were attributable to higher sales prices and volumes, partially offset by increased product costs and SG&A expense. Results in 2003 included a $2 million net benefit from the sales and use tax audit. The Ryton^® PPS compounding facility in LaPorte, Texas became operational in the first quarter of 2003.

Corporate and Other

	Years ended December 31,
Millions	2004			2003			2002
Income (loss) before interest and taxes	$	(30	)	$	(26	)	$	(25	)

Corporate and Other reported a loss before interest and taxes of $30 million in 2004 compared with a loss of $26 million in 2003. The reduction in earnings was primarily due to higher employee benefit and incentive plan expenses in 2004. Results in 2003 included employee termination benefit costs related to workforce reductions totaling $11 million. Results in 2002 included expenses related to a one-time charge for certain other employee benefit costs and also included expenses incurred in connection with the relocation of CPChem’s headquarters.

Interest expense. Interest expense totaled $75 million in 2004, $72 million in 2003 and $66 million in 2002. The increase in 2004 was attributable to higher interest rates on CPChem’s variable-rate based debt. The increase in 2003 resulted primarily from interest expense on $500 million of 5 3/8% notes issued in June 2002. Proceeds from the issuance were used to retire a portion of outstanding commercial paper which carried significantly lower interest rates. In addition, interest costs capitalized in 2003 totaled $3 million as compared with $7 million in 2002.

Interest income. Interest income totaled $9 million in 2004, $8 million in 2003 and $7 million in 2002.

Income Taxes. Income tax expense totaled $15 million in 2004, $5 million in 2003 and $6 million in 2002. The increase in 2004 was due to taxes on foreign income. CPChem is treated as a flow-through entity for federal income tax and for most state income tax purposes, whereby each member is taxable on its respective share of income and losses. However, CPChem is directly liable for federal and state income taxes and franchise taxes on certain separate legal entities and for any foreign taxes incurred.

Outlook

CPChem continues to maintain its focus on safety, operational reliability, improving margins and increasing sales volumes as the global economy improves. While higher sales volumes and prices bolstered CPChem’s earnings in 2004, escalating feedstock and fuel costs, driven by persistently high energy prices, are limiting margin improvements for most products. Results from CPChem’s joint ventures in the Middle East have been strong due in part to good market conditions and favorable local feedstock costs.

Various industry analysts have recently noted that improving global chemical demand, low inventories and capacity limitations are providing support for product price increases. Furthermore, the view of these analysts is that such conditions will likely continue through 2006.

Liquidity and Capital Resources

Cash balances were $63 million at December 31, 2004 and $43 million at December 31, 2003, of which $48 million and $31 million, respectively, was held by foreign subsidiaries. The increase in cash held by foreign subsidiaries was due to higher amounts of cash held for investment in the JCP project. CPChem’s objective is to minimize cash balances in its worldwide operations while utilizing the commercial paper program for its daily operating requirements.

Operating Activities

Cash provided by operating activities in 2004 totaled $459 million, compared with $280 million during 2003. The increase reflected significantly higher earnings in 2004 partially offset by a larger net increase in non-cash working capital over the two years. Cash from operations for 2004 was negatively impacted by a $235 million increase in non-cash working capital, while the increase for 2003 was $14 million.

Cash provided by operating activities in 2003 totaled $280 million, compared with $335 million during 2002. The decrease in 2003 was driven primarily by a net increase of $14 million in non-cash working capital in 2003, compared to an $82 million net decrease in non-cash working capital in 2002. Higher earnings in 2003 partially offset the effect of the change in non-cash working capital.

Investing Activities

Capital and investment expenditures

Millions	Olefins & Polyolefins		Aromatics & Styrenics		Specialty Products		Corporate & Other		Consolidated
Year ended December 31, 2004	$	138	$	44	$	12	$	7	$	201
Year ended December 31, 2003	127		73		17		6		223
Year ended December 31, 2002	179		103		20		12		314

Capital and investment expenditures for Aromatics & Styrenics in 2004 and 2003, respectively, included a $4 million advance and a $20 million equity investment in Jubail Chevron Phillips Company, a 50%-owned joint venture with facilities to be located in Al Jubail, Saudi Arabia. See below for a discussion of the JCP project. Capital and investment expenditures for Olefins & Polyolefins in 2002 included a $45 million equity investment in Phillips Sumika Polypropylene Company.

In addition to the capital and investment expenditures shown above for Olefins & Polyolefins, CPChem subscribed to additional shares of and advanced Qatar Chemical Company Ltd. (Q-Chem), a CPChem equity investment, a total of $28 million in 2004, $103 million in 2003 and $210 million in 2002. See Part II - Item 8. Financial Statements and Supplementary Data – Note 5 for a further discussion of Q-Chem.

CPChem currently expects to invest a total of approximately $245 million in capital and investment expenditures in 2005. It is expected that $133 million will be invested in Olefins & Polyolefins, $81 million in Aromatics & Styrenics, and $23 million in Specialty Products, with the remainder to be spent at the corporate level. Included in estimated 2005 capital and investment expenditures are $45 million in investments in and advances towards the JCP Project.

JCP Project. Jubail Chevron Phillips Company (JCP), a joint venture company, was formed in 2003 to develop an integrated styrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility to be built on a site adjacent to the existing aromatics complex owned by SCP will include feed fractionation, an olefins cracker, and ethylbenzene and styrene monomer processing units. Construction of the JCP facility will be in conjunction with an expansion of SCP’s benzene plant, together called “the JCP Project.” Construction began in the fourth quarter of 2004 and operational start-up is anticipated in late 2007. It is estimated that project completion, as defined in the JCP Project’s financing agreements, will be achieved in the first half of 2008. The project will be financed through equity contributions and subordinated loans from the co-venturers, in proportion to their equal ownership interests, and limited recourse loans from commercial banks and two Saudi Arabian governmental agencies. Financial closing of the estimated $1.2 billion JCP Project occurred in July 2004.

Financing Activities

Cash provided by (used in) financing activities totaled $(260) million in 2004, $49 million in 2003 and $115 million in 2002. Commercial paper balances outstanding increased $201 million during 2004, while secured borrowings under the accounts receivable securitization program decreased $100 million. Also included in 2004 financing activities were $175 million of voluntary redemptions of members’ preferred interests, $55 million of distributions on members’ preferred interests and $118 million of distributions to members to fund the members’ estimated federal and state income tax liabilities attributable to CPChem. Activities in 2003 included $32 million of contributions from members and a $17 million net increase in debt. During 2002, commercial paper outstanding decreased $808 million, primarily with proceeds from the issuance of $500 million of 5 3/8% notes and from the sale of $250 million of members’ preferred interests.

On July 30, 2004, CPChem entered into an $800 million five-year credit facility with various banks that provides committed credit support for CPChem’s commercial paper program. Effective with the closing of the new credit facility, CPChem terminated its existing $400 million 364-day and $400 million three-year credit facilities. There were no borrowings under any of the current or prior credit facilities during 2004, 2003 or 2002.

Notes issued under CPChem’s commercial paper program are in the tier-2 commercial paper market with maturities of 90 days or less. These borrowings totaled $385 million at December 31, 2004 and were classified as Long-Term Debt since CPChem’s intent is to refinance or replace the obligations on a long-term basis and CPChem has an $800 million credit commitment in effect with a remaining term that exceeds one year.

CPChem had $200 million of short-term borrowings outstanding at December 31, 2004 under its trade receivables securitization program. The agreement allows for borrowings up to $300 million for which CPChem grants a security interest in certain of its trade receivables as collateral for any amounts outstanding. The trade receivables securitization agreement expires on May 17, 2005. CPChem intends to request an extension of the expiration date of the current agreement to May 2006.

In 2002, CPChem sold $250 million of members’ preferred interests, purchased 50% each by ChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire a portion of outstanding commercial paper obligations. In 2004, CPChem voluntarily redeemed $175 million of members’ preferred interests and paid $55 million of distributions on members’ preferred interests. There were no redemptions or preferred distributions paid in 2003 or 2002. It is currently anticipated that the remaining $75 million of outstanding members’ preferred interests will be redeemed during 2005.

CPChem believes cash requirements over the next twelve months will be funded through a combination of cash on hand, cash flows from operations and commercial paper. CPChem is not aware of any conditions that exist as of the date of this report that would cause any of its debt obligations to be in or at risk of default. In addition, CPChem does not have any debt obligations whose maturities would be accelerated as the result of a credit rating downgrade.

Contractual Obligations

Contractual obligations, including debt obligations, at December 31, 2004 were as follows:

			Payments Due
Millions	Total		2005		2006-2007		2008-2009		Thereafter
Secured borrowings	$	200	$	200	$	—	$	—	$	—
Commercial paper	385		—		—		385		—
Long-term debt	1,000		—		500		—		500
Other debt, including current portions	9		1		2		3		3
Other long-term liabilities included in the consolidated balance sheet	65		—		38		16		11
Operating lease obligations	209		25		72		31		81
Purchase obligations	3,513		1,352		1,820		171		170
Total	$	5,381	$	1,578	$	2,432	$	606	$	765

See also Part II - Item 8. Financial Statements and Supplementary Data – Note 8 for further discussion related to debt obligations and Note 13 for a discussion related to operating lease obligations.

Secured Borrowings. This represents borrowings related to the accounts receivable securitization program that provides committed credit support for the commercial paper program.

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

Other Long-term Liabilities Included in the Consolidated Balance Sheet. The amounts consist primarily of obligations related to various employee benefit plans, excluding pension plans.

Purchase Obligations. This represents obligations to purchase goods or services which contain: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Estimated future market rates based on CPChem’s long-term forecast were used to calculate obligation amounts that contain variable price provisions. Obligations with no fixed or minimum purchase requirements for product or services were not included.

The above contractual obligations do not include CPChem’s anticipated funding under its pension plans. Based on internal and actuarial assumptions used in conjunction with the determination of future projected benefit obligations, it is estimated that annual funding of approximately $35 million into CPChem’s existing pension plans would be sufficient for the plans to achieve fully funded status over a ten year planning horizon. This level of funding would be in excess of future expected minimum regulatory funding requirements. Actual annual funding levels may differ from this estimate due to, among other things, economic conditions, actual pension asset returns and changes in business plans.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is generally any transaction, agreement or other contractual arrangement involving an unconsolidated entity of a company under which such company has (1) made certain guarantees, (2) a retained or a contingent interest in assets transferred to an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, (3) an obligation, including a contingent obligation, under derivative instruments classified as equity or (4) any obligation, including a contingent obligation, arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. Other than certain guarantees related to its equity affiliates and a residual guarantee related to a lease, CPChem has no material off-balance sheet arrangements of this nature. See Part II - Item 8. Financial Statements and Supplementary Data – Note 5 for a discussion of certain guarantees related to CPChem’s equity affiliates and Note 10 for a discussion of the residual guarantee.

Other

Other Factors That May Affect Future Performance

Cyclicality and Overcapacity in the Petrochemicals Business. The petrochemicals industry is both cyclical and volatile. Historically, the industry has experienced periods of tight supply, resulting in increased prices and profit margins. This is typically followed by periods of substantial capacity expansion, resulting in oversupply and declining prices and profit margins. As a result of changes in supply and demand for products, changes in energy prices and changes in various other economic conditions around the world, CPChem’s sales volumes and profit margins may fluctuate, not only from year to year, but also from quarter to quarter.

Feedstock Costs and Other External Factors. Due to the overall commodity nature of most of the products CPChem sells, market position cannot necessarily be protected by product differentiation or by passing on cost increases to customers. Accordingly, price increases in raw materials and other costs may not correlate with changes in the prices received for products. Feedstock prices can fluctuate widely for a variety of reasons, including changes in worldwide energy prices, changes in availability or significant facility operating problems. Other external factors that can cause volatility in feedstock prices, as well as demand for products, product

prices and volumes, and margin deterioration, include general economic conditions, the level of business activity in industries that use CPChem’s products, competitors’ actions, domestic and international events and circumstances, product and process technology changes, currency fluctuations and governmental regulation in the United States and abroad.

Although CPChem gathers, transports and fractionates feedstocks to meet a portion of its demand and has long-term feedstock supply contracts with affiliates of its owners and others, CPChem is still subject to volatile feedstock prices. Extreme price volatility, such as that experienced in early 2001 and 2003, can result in the need to temporarily idle or curtail production units.

Environmental, Health and Safety. The petrochemicals business is highly regulated, subject to increasingly stringent laws and regulations addressing environmental, health and safety matters. Such matters include, but are not limited to, air pollutant emissions, discharges of treated wastewater, stormwater runoff, solid waste management, workplace safety, and contamination. Violations of these laws and regulations often result in monetary penalties and corrective action, but depending on the severity of the violation, could result in substantial fines, criminal sanctions, permit revocation and/or facility shutdowns.

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

In addition, new regulations were issued in 2004 concerning emissions of highly reactive volatile organic compounds (HRVOCs). CPChem expects that total capital expenditures of approximately $20 million will be required to comply with the monitoring aspects of these regulations. CPChem invested $2 million of such capital expenditures in 2004. While CPChem cannot determine if additional expenditures will be required until monitoring capabilities are in place, CPChem currently believes that additional expenditures required, if any, will not have a material adverse effect on consolidated results of operations, financial position or liquidity.

New laws and regulations, the stricter enforcement of, or changes to, existing laws and regulations, the discovery of previously unknown contamination or the imposition of new disposal or cleanup requirements could in the future require CPChem to incur costs, or affect its production or revenues, in ways that could have a negative effect on its financial condition or results of operations. Therefore, there can be no assurance that material capital expenditures, costs, or operating expenses beyond those currently anticipated will not be required under applicable environmental, health, and safety laws and regulations, or that developments with respect to such laws and regulations, will not adversely affect production or revenues.

There are risks associated with the production of petrochemicals, such as operational hazards and unforeseen interruptions caused by events beyond CPChem’s control. These include accidents, breakdowns or failures of equipment or processes, acts of terrorism and other catastrophic events. These events can result in injury or loss of life and extensive property or environmental damage. In addition, the handling of chemicals has the potential for serious impacts on human health and the environment. Liabilities incurred and interruptions in operations caused by these events have the potential to materially affect consolidated results of operations, financial position and liquidity. While CPChem maintains general and business interruption insurance, insurance proceeds may not be adequate to fully cover substantial liabilities incurred, lost revenues or increased expenses.

International Operations. International operations are exposed to different political, economic and regulatory risks that are not faced by businesses that operate solely in the United States. Some of CPChem’s operations, including certain of its equity affiliates, are outside the continental United States, with manufacturing facilities in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Domestic assets totaled $5.341 billion as of December 31, 2004 and net sales from domestic operations were $7.754 billion in 2004. Assets located outside of the U.S. as of December 31, 2004 totaled $1.531 billion and net sales from non-U.S. operations were $1.484 billion in 2004. Asset and net sales calculations were determined based on location of the operation. CPChem’s international operations are subject to risks similar to those affecting CPChem’s U.S. operations in addition to a number of other risks, including difficulties in enforcing contractual and intellectual property rights, and impositions or increases of withholding and other taxes on remittances and other payments by subsidiaries and affiliates. Other risks include, but are not limited to, exposure to different legal standards, impositions or increases of investment and other demands by foreign governments, the requirements of a wide variety of foreign laws, political and economic instability, and difficulties in staffing and managing operations, particularly in remote locations. In addition, terrorist acts, if directed at CPChem operations, could have a material adverse effect on CPChem’s business.

Foreign Currency Risk. Internationally, CPChem operates facilities in eight countries and sells product in many other countries, resulting in transactions denominated in various currencies. As such, CPChem is exposed to foreign currency risk to the extent there are devaluations and fluctuations in the exchange rates of the local currencies of those countries against the U.S. dollar and other foreign currencies which may adversely affect revenues and margins. The potential foreign currency transaction gain (or loss) from a hypothetical 10% decrease (or increase) in the value of the U.S. dollar relative to those local currencies was approximately $11 million in the aggregate at December 31, 2004.

Interest Rate Risk. Because CPChem’s commercial paper obligations have maturities of 90 days or less and are generally reissued upon maturity, the debt is considered variable-rate based. The secured debt issued in connection with the accounts receivable securitization program is also variable-rate based. A hypothetical 100 basis point change (a one percentage point change) in the weighted average interest rates of the outstanding balances at December 31, 2004 of these debt instruments would impact interest expense by approximately $6 million annually in the aggregate.

Contingencies

In the case of known contingent liabilities, CPChem records an undiscounted liability when a loss is probable and the amount can be reasonably estimated. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probable insurance or other third-party recoveries. Based on currently available information, CPChem believes it is remote that future costs related to known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect on consolidated results of operations, financial position or liquidity.

See Part II - Item 8. Financial Statements and Supplementary Data – Note 11 for further discussion of contingencies.

New Accounting Pronouncements

See Part II - Item 8. Financial Statements and Supplementary Data – Note 2 – “Accounting Pronouncements.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

Chevron Phillips Chemical Company LLC

		Page
Report of Independent Registered Public Accounting Firm		32

Consolidated Statement of Operations for the years ended December 31, 2004, 2003 and 2002		33

Consolidated Balance Sheet at December 31, 2004 and 2003		34

Consolidated Statement of Members’ Capital for the years ended December 31, 2004, 2003 and 2002		35

Consolidated Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002		36

Notes to Consolidated Financial Statements		37

Selected Quarterly Financial Data (Unaudited)		67

The following financial statements are presented in accordance with the Securities and Exchange Commission’s rules pertaining to equity affiliates deemed to be “significant.”

Saudi Chevron Phillips Company

Auditors’ Report		68

Balance Sheet at December 31, 2004, 2003 and 2002		69

Statement of Income for the years ended December 31, 2004, 2003 and 2002		70

Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002		71

Statement of Changes in Partners’ Equity for the years ended December 31, 2004, 2003 and 2002		72

Notes to the Financial Statements		73

Qatar Chemical Company Ltd. (Q-Chem)

Report of the Auditors		82

Auditors' Report		83

Balance Sheet at December 31, 2004, 2003 and 2002		84

Statement of Income for the years ended December 31, 2004, 2003 and 2002		85

Statement of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2003 and 2002		86

Statement of Cash Flows for the years ended December 31, 2004, 2003 and 2002		87

Notes to the Financial Statements		88

Report of Independent Registered Public Accounting Firm

To the Board of Directors of Chevron Phillips Chemical Company LLC:

We have audited the accompanying consolidated balance sheets of Chevron Phillips Chemical Company LLC (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, members’ capital, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Qatar Chemical Company Ltd. (Q-Chem), (a joint venture company in which the Company has a 49% interest), as of December 31, 2004 and for the year then ended have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for Q-Chem, it is based solely on their report. In the consolidated financial statements, the Company’s investment in Q-Chem is stated at $387 million at December 31, 2004 and the Company’s equity in the net income of Q-Chem is stated at $57 million for the year then ended.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chevron Phillips Chemical Company LLC at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Ernst & Young LLP

Houston, Texas

February 14, 2005

Chevron Phillips Chemical Company LLC

Consolidated Statement of Operations

	Years ended December 31,
Millions	2004			2003			2002
Revenue
Net sales	$	9,238		$	6,907		$	5,389
Equity in income of affiliates, net	218			41			22
Other income	102			70			62
Total revenue	9,558			7,018			5,473

Costs and Expenses
Cost of goods sold	8,373			6,439			4,986
Selling, general and administrative	436			448			399
Asset impairments	—			—			6
Research and development	42			55			47
Total costs and expenses	8,851			6,942			5,438

Income Before Interest and Taxes	707			76			35

Interest income	9			8			7
Interest expense	(75		)	(72		)	(66		)

Income (Loss) Before Taxes	641			12			(24		)

Income taxes	(15		)	(5		)	(6		)

Net Income (Loss)	626			7			(30		)

Distributions on members’ preferred interests	(21		)	(23		)	(11		)

Income (Loss) Attributed to Members’ Interests	$	605		$	(16	)	$	(41	)

See Notes to Consolidated Financial Statements.

Chevron Phillips Chemical Company LLC

Consolidated Balance Sheet

	December 31,
Millions	2004		2003
ASSETS
Current assets
Cash and cash equivalents	$	63	$	43
Accounts receivable, net – trade	1,140		775
Accounts receivable, net – affiliates	126		87
Inventories	784		700
Other current assets	43		31
Total current assets	2,156		1,636

Property, plant and equipment	7,903		7,744
Less: accumulated depreciation	4,135		3,880
Net property, plant and equipment	3,768		3,864

Investments in and advances to affiliates	893		673
Other assets and deferred charges	55		69

Total Assets	$	6,872	$	6,242

LIABILITIES AND MEMBERS’ EQUITY

Current liabilities
Accounts payable – trade	$	665	$	521
Accounts payable – affiliates	219		146
Accrued income and other taxes	60		54
Accrued salaries, wages and benefits	102		92
Secured borrowings and other debt	201		314
Other current liabilities and deferred credits	94		57
Total current liabilities	1,341		1,184

Long-term debt	1,390		1,189
Other liabilities and deferred credits	91		109

Total liabilities	2,822		2,482

Members’ preferred interests	75		250

Members’ capital	3,925		3,478
Accumulated other comprehensive income	50		32

Total Liabilities and Members’ Equity	$	6,872	$	6,242

See Notes to Consolidated Financial Statements.

Chevron Phillips Chemical Company LLC

Consolidated Statement of Members’ Capital

Millions	Members’ Capital			Accumulated Other Comprehensive Income (Loss)			Total
Balance on December 31, 2001	$	3,450		$	(16	)	$		3,434

Net income (loss)	(30		)	—			(30			)
Foreign currency translation adjustments	—			23			23
Total comprehensive income (loss)							(7			)
Contributions from members	86			—			86
Distributions on members’ preferred interests	(11		)	—			(11			)
Other distributions to members	(1		)	—			(1			)

Balance on December 31, 2002	3,494			7			3,501

Net income	7			—			7
Foreign currency translation adjustments	—			25			25
Total comprehensive income							32
Distributions on members’ preferred interests	(23		)	—			(23			)

Balance on December 31, 2003	3,478			32			3,510

Net income	626			—			626
Foreign currency translation adjustments	—			21			21
Minimum pension liability adjustments	—			(3		)	(3			)
Total comprehensive income							644
Distributions on members’ preferred interests	(21		)	—			(21			)
Other distributions to members	(158		)	—			(158			)

Balance on December 31, 2004	$	3,925		$	50		$	3,975

See Notes to Consolidated Financial Statements.

Chevron Phillips Chemical Company LLC

Consolidated Statement of Cash Flows

	Years ended December 31,
Millions	2004			2003			2002
Cash Flows From Operating Activities
Net income (loss)	$	626		$	7		$	(30	)
Adjustments to reconcile net income (loss) to net cash flows provided by operating activities
Depreciation, amortization and retirements	281			298			291
Asset impairments	—			—			6
Undistributed equity in income of affiliates, net	(197		)	(28		)	(6		)
Changes in operating working capital	(235		)	(14		)	82
Other operating cash flow activity	(16		)	17			(8		)
Net cash flows provided by operating activities	459			280			335

Cash Flows From Investing Activities
Capital and investment expenditures	(201		)	(223		)	(314		)
Investments in and advances to Qatar Chemical Company Ltd. (Q-Chem)	(28		)	(103		)	(210		)
Advance repayment from Saudi Chevron Phillips Company	32			—			—
Proceeds from the sale of assets	18			1			2
Net cash flows used in investing activities	(179		)	(325		)	(522		)

Cash Flows From Financing Activities
Increase (decrease) in commercial paper, net	201			(1		)	(808		)
Increase (decrease) in secured borrowings, net	(100		)	10			91
Increase (decrease) in other debt, net	(13		)	8			500
Proceeds from the issuance of members’ preferred interests	—			—			250
Redemptions of members’ preferred interests	(175		)	—			—
Distributions on members’ preferred interests	(55		)	—			—
Contributions from members	—			32			76
Other distributions to members	(118		)	—			(1		)
Post-closing adjustments from members	—			—			7
Net cash flows provided by (used in) financing activities	(260		)	49			115

Net Increase (Decrease) in Cash and Cash Equivalents	20			4			(72		)
Cash and Cash Equivalents at Beginning of Period	43			39			111
Cash and Cash Equivalents at End of Period	$	63		$	43		$	39

Supplemental Disclosures of Cash Flow Information
Changes in operating working capital
Decrease (increase) in accounts receivable	$	(408	)	$	(100	)	$	3
Decrease (increase) in inventories	(77		)	13			(54		)
Decrease (increase) in other current assets	(13		)	(5		)	1
Increase in accounts payable	216			70			142
Increase (decrease) in accrued income and other taxes	6			1			(4		)
Increase (decrease) in other current liabilities	41			7			(6		)
Total	$	(235	)	$	(14	)	$	82
Cash paid for interest	$	70		$	70		$	73
Cash paid for income taxes	$	18		$	5		$	7

See Notes to Consolidated Financial Statements.

Chevron Phillips Chemical Company LLC

Notes to Consolidated Financial Statements

Index		Page
1.	Nature of Operations	37
2.	Summary of Significant Accounting Policies	37
3.	Transactions with Affiliates	40
4.	Inventories	41
5.	Investments in and Advances to Affiliates	42
6.	Property, Plant and Equipment	45
7.	Environmental Liabilities	46
8.	Debt	46
9.	Members’ Preferred Interests	47
10.	Guarantees, Commitments and Indemnifications	47
11.	Contingent Liabilities	48
12.	Credit Risk	49
13.	Operating Leases	50
14.	Benefit Plans	50
15.	Taxes	54
16.	Segment and Geographic Information	55
17.	Fair Values of Financial Instruments	58
18.	Consolidating Financial Statements	59

Note 1. Nature of Operations

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

The company is governed by a Board of Directors, currently comprised of six representatives, under the terms of a limited liability company agreement. ChevronTexaco and ConocoPhillips each have two voting representatives, and the chief executive officer and the chief financial officer of the company are non-voting representatives. Certain major decisions and actions require the approval of the Board of Directors. All decisions and actions of the Board of Directors require the approval of at least one representative of both ChevronTexaco and ConocoPhillips.

Note 2. Summary of Significant Accounting Policies

Basis of Financial Statements – The accompanying consolidated financial statements include the accounts of Chevron Phillips Chemical Company LLC and its wholly owned subsidiaries (collectively, “CPChem”). All significant intercompany investments, accounts and transactions have been eliminated in consolidation. Investments in affiliates in which CPChem has 20% to 50% of the voting control are accounted for using the equity method. Other securities and investments are carried at the lower of cost or market. Certain amounts for prior periods have been reclassified in order to conform to the current reporting presentation.

Estimates, Risks and Uncertainties – The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions.

Accounts receivable is shown net of a $7 million allowance for estimated non-recoverable amounts at both December 31, 2004 and 2003.

There are varying degrees of risk and uncertainty in each of the countries in which CPChem operates. CPChem insures its business and assets against material insurable risks in a manner it deems appropriate. Because of the diversity of its operations, CPChem believes any loss incurred from an uninsured event in any one business or country, other than a terrorist act directed at CPChem operations, would not have a material adverse effect on operations as a whole.

Revenue Recognition – CPChem follows the guidance provided by the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104, “Revenue Recognition.” Sales of petrochemicals, natural gas liquids and other items, including by-products, are recorded when title passes to the customer. Revenues from royalties for licensed technology are recorded as the associated services are rendered when royalties are paid in advance, and as volumes are produced by the licensee when royalties are paid based on a licensee’s production. Sales are presented net of discounts and allowances. Freight costs billed to customers are recorded as a component of revenue.

In February 2005, the SEC provided guidance regarding the disclosure of the accounting for “buy/sell” arrangements. In limited and infrequent situations, to facilitate the procurement of feedstock or to otherwise manage its feedstock supply chain, CPChem enters into buy/sell agreements with the same counterparty. These transactions are reflected on a gross basis in the consolidated statement of operations. The amounts associated with these transactions are not material to Net Sales or Cost of Goods Sold as reported in the consolidated statement of operations.

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

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

Property, Plant and Equipment – Property, plant and equipment is stated at cost. Property, plant and equipment is comprised of assets, defined as property units, with an initial expected economic life beyond one year. Asset categories are used to compute depreciation and amortization using the straight-line method over the associated estimated future useful lives.

Impairment of Assets – Long-lived assets used in operations are assessed for possible impairment when events or changes in circumstances indicate a potential significant deterioration in future cash flows projected to be generated by an asset group. Individual assets are grouped for impairment purposes at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets – generally at a product line level.

If, upon review, the sum of the projected undiscounted pre-tax cash flows is less than the carrying value of the asset group, the carrying value is written down to estimated fair value. The fair values of impaired assets are usually determined based on the present value of projected future cash flows using discount rates commensurate with the risks involved in the asset group, as quoted market prices in active markets are generally not available.

The expected future cash flows used for impairment reviews and related fair value calculations are based on projected production volumes, sales volumes, prices and costs, considering available information at the date of review.

Maintenance and Repairs – Maintenance and repair costs, including turnaround costs of major producing units, are expensed as incurred.

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

Property Dispositions – Assets that are no longer in service and for which there is no contemplated future use by CPChem are retired. When assets are retired or sold, the asset cost and related accumulated depreciation are eliminated, with any gain or loss reflected in income.

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

Capitalization of Interest – Interest costs incurred to finance projects of at least $75 million and that are longer than one year in duration, and interest costs associated with investments in equity affiliates that have their planned principal operations under construction, are capitalized until commercial production begins. Capitalized interest is amortized over the life of the associated asset. Unamortized capitalized interest totaled $42 million at December 31, 2004 and $44 million at December 31, 2003. Interest costs capitalized in 2004 totaled $1 million. Interest costs capitalized in 2003 totaled $3 million and in 2002 totaled $7 million, both of which were primarily associated with CPChem’s investment in Qatar Chemical Company Ltd. (Q-Chem).

Income Taxes – CPChem is treated as a flow-through entity for federal income tax and for most state income tax purposes whereby each member is taxable on its respective share of income and loss. However, CPChem is directly liable for federal and state income taxes and franchise taxes on certain separate legal entities, and for any foreign taxes incurred. CPChem follows the liability method of accounting for these income taxes.

Accounting Pronouncements – Effective January 1, 2004, CPChem adopted Statement of Financial Accounting Standards (SFAS) No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” which establishes standards for how an issuer classifies and measures certain financial instruments that have characteristics of both a liability and of equity. Generally, it requires that an issuer classify such financial instruments as liabilities because they embody an obligation of the issuer. Because CPChem has no financial instruments outstanding that fall within the scope of this new standard, implementation of this standard did not have an impact on consolidated results of operations, financial position or liquidity. CPChem’s outstanding preferred members’ interests currently do not fall within the scope of this standard because they contain redemption provisions that create a conditional, rather than mandatory, obligation of CPChem. In the event that CPChem’s ratio of debt to total capitalization reaches a stated level, a portion of the outstanding preferred members’ interests will be reclassified as a liability.

The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” (FIN No. 46(R)) which provides guidance as to when a company is required to include in its financial statements the assets, liabilities and activities of a variable interest entity (a “VIE”). A VIE is generally a corporation, partnership, trust, or any other legal structure used for business purposes that either does not have equity investors with voting rights or that has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46(R) requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the activities of the VIE or is entitled to receive a majority of the residual returns of the VIE. FIN No. 46(R) also requires disclosures about VIEs that are not required to be consolidated by a company, but in which the company has a significant variable interest. The consolidation requirements of FIN No. 46(R) apply immediately to VIEs created after December 31, 2003, and for CPChem, which is considered to be a nonpublic entity as it relates to FIN No. 46(R), the consolidation requirements applied to pre-existing VIEs effective January 1, 2005. CPChem believes that FIN No. 46(R) will not require the consolidation of any existing VIE into CPChem’s consolidated financial statements.

In November 2004, FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4.” The statement amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage, requiring that such costs be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. For CPChem, the provisions of SFAS No. 151 are effective January 1, 2006. CPChem believes that implementation of this standard will not have a material impact on consolidated results of operations, financial position or liquidity.

In December 2004, FASB issued SFAS No. 153, “Exchanges of Non-Monetary Assets, an Amendment of APB Opinion No. 29.” The guidance in Accounting Principles Board (APB) Opinion No. 29, “Accounting for Non-Monetary Transactions,” is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged, with certain exceptions. This statement amends APB Opinion No. 29 to eliminate the exception for non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange does not have commercial substance if the future cash flows of the entity are not expected to change significantly as a result of the exchange. For CPChem, the provisions of SFAS No. 153 are effective July 1, 2005. CPChem believes that implementation of this standard will not have a material impact on consolidated results of operations, financial position or liquidity.

Note 3. Transactions with Affiliates

Significant transactions with affiliated parties, including equity affiliates, were as follows:

	Years ended December 31,
Millions	2004		2003		2002
Net sales (a)	$	1,158	$	858	$	662
Other income	45		28		32
Cost of goods sold (b,c)	2,489		1,622		1,189
Selling, general and administrative (c,d)	23		26		27

(a) CPChem sells ethylene residue gas to ConocoPhillips’ crude oil refining operations; specialty chemicals, alpha olefin products and aromatics and styrenics by-products to ChevronTexaco; and feedstocks and various services to non-consolidated equity companies, all at prices that approximate market.

(b) CPChem purchases various feedstocks from ChevronTexaco and ConocoPhillips, and also purchases finished product from non-consolidated equity companies. In addition, ChevronTexaco and ConocoPhillips provide CPChem certain common facility and manufacturing services at some of CPChem’s facilities.

(c) ConocoPhillips and ChevronTexaco provide various services to CPChem under services agreements, including engineering consultation, research and development, laboratory services, security services, procurement services and pipeline operating services.

(d) Amounts include billings in 2004, 2003 and 2002 to Qatar Chemical Company Ltd. (Q-Chem), an equity affiliate, credited to expense.

The K-Resin^® styrene-butadiene copolymer (SBC) plant at the Pasadena Plastics Complex in Pasadena, Texas, while still owned by ConocoPhillips, was idled in March 2000 due to a fire. The contribution agreement that was entered into upon the formation of CPChem contained certain provisions related to pre-established K-Resin^® SBC plant earnings and production targets. In accordance with those provisions, ConocoPhillips made member contributions of $22 million in 2003 and $38 million in 2002.

See also Note 9 for a discussion of members’ preferred interests and Note 15 for a discussion of tax distributions to members.

Note 4. Inventories

Inventories were as follows:

	December 31,
Millions	2004		2003
LIFO inventories
Olefins & Polyolefins	$	267	$	288
Aromatics & Styrenics	169		136
Specialty Products	48		49
Total LIFO inventories	484		473
Non-LIFO inventories
Olefins & Polyolefins	111		78
Aromatics & Styrenics	91		53
Specialty Products	47		44
Total non-LIFO inventories	249		175
Materials, supplies and other	51		52
Total inventories	$	784	$	700

The excess of replacement cost over book value of product inventories valued under the LIFO method was $396 million at December 31, 2004 and $194 million at December 31, 2003.

CPChem recorded $4 million of gains in 2004 (Olefins & Polyolefins) and $13 million of gains in 2003 ($10 million in Olefins & Polyolefins and $3 million in Aromatics & Styrenics) related to reductions in certain LIFO-valued inventories.

Note 5. Investments in and Advances to Affiliates

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

		December 31,
Millions	Ownership	2004		2003
Qatar Chemical Company Ltd. (Q-Chem)	49%	$	387	$	296
Saudi Chevron Phillips Company	50%	303		194
Jubail Chevron Phillips Company	50%	27		20
Chevron Phillips Singapore Chemicals (Private) Limited	50%	58		48
Phillips Sumika Polypropylene Company	60%*	52		53
K R Copolymer Co., Ltd.	60%	42		42
Shanghai Golden Phillips Petrochemical Company Limited	40%	24		20
Total investments		$	893	$	673

^*Profit/loss sharing percentage.

Dividends received from equity affiliates totaled $21 million in 2004, $13 million in 2003 and $16 million in 2002. CPChem’s members’ capital at December 31, 2004 included $69 million of undistributed net earnings (losses) from equity affiliates and $(128) million at December 31, 2003.

Phillips Sumika Polypropylene Company and K R Copolymer Co., Ltd. are not consolidated because CPChem does not have voting control of these entities.

Qatar Chemical Company Ltd. (Q-Chem)

Qatar Chemical Company Ltd. (Q-Chem), a joint venture company, was formed in 1998 to develop a petrochemical complex in Qatar. The complex achieved project completion, as defined in Q-Chem’s $750 million senior bank financing agreement, on September 16, 2004. Upon project completion, CPChem’s obligations to advance funds under its subordinated loan agreement with Q-Chem were terminated. In addition, the completion guarantees under Q-Chem’s senior bank financing were terminated and the bank financing became non-recourse with respect to the co-venturers. Prior to achieving project completion, as required under the subordinated loan agreement, CPChem advanced Q-Chem $85 million in 2003 and $210 million in 2002. No advances were made in 2004. In addition, as required by the completion guarantees, CPChem subscribed to $28 million of additional shares of Q-Chem in 2004 and $18 million of shares in 2003 to fund its ownership share of the periodic debt service payments of Q-Chem. No shares were subscribed to in 2002.

CPChem has agreed to provide up to $75 million of loans to Q-Chem if there is insufficient cash to pay the minimum debt service payments on the bank financing. CPChem believes it is unlikely that funding under this support agreement will be required.

CPChem also agreed to provide loans to Q-Chem through December 2006 if there is insufficient cash to make Q-Chem’s target debt service payments. These loans are limited to the amount of lost operating margins resulting from sales volumes being less than design capacity, or the actual cash deficiency, whichever is less. CPChem believes that any funding required under this support agreement is unlikely to have a material adverse effect on CPChem’s consolidated results of operations, financial position or liquidity.

CPChem’s rights under the subordinated loan agreement and the other contingent loan agreements related to Q-Chem previously described are subordinate to Q-Chem’s senior bank debt. Security interests in the notes related to such loans have been granted to the banks to support the terms of subordination. Advances to Q-Chem, including accrued interest, under the subordinated loan agreement totaled $310 million at December 31, 2004 and $303 million at December 31, 2003.

CPChem entered into an agency agreement with Q-Chem to act as an agent for the sale of substantially all of Q-Chem’s production. CPChem has also entered into an offtake and credit risk agreement with Q-Chem, under which CPChem is required to purchase, at market prices, specified amounts of production if CPChem fails to sell that product under the terms of the agency agreement. CPChem has no exposure to price risk for volumes it may be obligated to purchase under the terms of the offtake agreement. The offtake and credit risk agreement expires upon the earlier of the repayment in full by Q-Chem of its outstanding bank financing, currently scheduled to mature in 2012, or any refinancing thereof. CPChem expects that it will be able to sell all the production under the terms of the agency agreement.

CPChem records its 49% share of Q-Chem’s operating results using the equity method. Q-Chem is considered to be a VIE under the provisions of FIN No. 46(R). CPChem’s maximum exposure to loss per FIN No. 46(R) was $387 million at December 31, 2004. This amount represents CPChem’s carrying value of its investment in and advances to Q-Chem, including accrued interest.

Saudi Chevron Phillips Company

Saudi Chevron Phillips Company (SCP), a joint venture company that owns an aromatics complex in Al Jubail, Saudi Arabia, was originally financed with loans from commercial banks and a Saudi Arabian governmental agency. In July 2004, SCP refinanced its commercial bank loans, and as a result, CPChem’s contingent obligation to fund up to $25 million of SCP’s debt service payments was terminated. The subsidiary of Chevron Phillips Chemical Company LLC which directly owns the 50% interest in SCP, along with the other co-venturer, have each guaranteed their respective 50% share of certain loans to SCP from a Saudi Arabian governmental agency for the duration of the loans. Chevron Phillips Chemical Company LLC is not a direct party to this guarantee. These loans totaled $69 million (gross) at December 31, 2004. CPChem believes it is unlikely that funding under this guarantee will be required. SCP is not considered to be a VIE under the provisions of FIN No. 46(R).

Under the terms of a sales and marketing agreement that runs through 2026, CPChem is obligated to purchase, at market prices, 100% of production from the plant less any quantities sold by SCP in the Middle East. CPChem has no exposure to price risk for volumes it may be obligated to purchase and believes that it will continue to be able to sell all the purchased production required under the terms of the sales and marketing agreement.

Jubail Chevron Phillips Company

Jubail Chevron Phillips Company (JCP), a joint venture company, was formed in 2003 to develop an integrated styrene facility in Al Jubail, Saudi Arabia. The 1.6 billion-pound-per-year facility, to be built on a site adjacent to the existing aromatics complex owned by SCP, will include feed fractionation, an olefins cracker, and ethylbenzene and styrene monomer processing units. Construction of the JCP facility will be in conjunction with an expansion of SCP’s benzene plant, together called “the JCP Project.” Construction began in the fourth quarter of 2004 and operational start-up is anticipated in late 2007. It is estimated that project completion, as defined in the JCP Project’s financing agreements, will be achieved in the first half of 2008. JCP is not considered to be a VIE under the provisions of FIN No. 46(R).

The project will be financed through equity contributions and subordinated loans from the co-venturers, in proportion to their equal ownership interests, and limited recourse loans from commercial banks and two Saudi Arabian governmental agencies (collectively, called “senior debt”). Principal and accrued interest outstanding under the commercial bank loans totaled $50 million at December 31, 2004. Principal and accrued interest outstanding under loans from one of the governmental agencies totaled $42 million at December 31, 2004, while no amounts were outstanding under the loan agreements with the second governmental agency.

Financial closing of the estimated $1.2 billion JCP Project occurred in July 2004. Effective with the financial closing and initial borrowings related to the JCP Project, the following commitments and guarantees were granted.

Under the terms of the commercial bank facilities, funding available from the senior debt is limited to 75% of the estimated project costs, as defined. The JCP co-venturers are obligated to each fund their respective 50% share of the remaining estimated project cost for the JCP Project through equity contributions and/or subordinated loans. In addition, the co-venturers are obligated to each fund their respective 50% share, through equity contributions and/or subordinated loans, of any project cost incurred in excess of the estimated project cost and of any project cost not funded by senior debt. These funding obligations terminate upon achieving project completion.

Certain bridge loan guarantees obligate the JCP co-venturers to each repay their respective 50% share of certain commercial bank loans to JCP and SCP if the loans from the second Saudi Arabian governmental agency are not available for borrowings one year after financial closing of the commercial loan facilities.

Under the terms of completion guarantees, the commercial bank lenders and the first Saudi Arabian governmental agency have the right to demand from each JCP Project co-venturer, on a pro rata basis, funds to cover the debt service requirements associated with the JCP Project that are due after March 31, 2009 until project completion. Furthermore, if the project is not completed by March 31, 2010, the commercial bank lenders and the first Saudi Arabian governmental agency have the right to demand from each co-venturer, on a pro rata basis, repayment of all outstanding principal and interest.

The subsidiary of CPChem which directly owns the 50% interest in JCP, along with the other co-venturer, have each guaranteed their respective 50% share of certain loans payable by JCP to the second Saudi Arabian governmental agency for the duration of the loans. Chevron Phillips Chemical Company LLC is not a direct party to this guarantee.

In addition to the above guarantees, CPChem guaranteed payment to a contractor for certain construction costs of the project, limited to a maximum of $103 million. The guarantee remains in effect until payment for those construction costs is made. CPChem also granted a guarantee related to the delivery of stated amounts of JCP’s styrene monomer production to a JCP customer, limited to a maximum of $8 million. This guarantee terminates upon the achievement of commercial production of styrene by JCP.

The total carrying amount of liabilities recorded, discounted and weighted for probability, for the aforementioned guarantees related to the JCP Project totaled $4 million at December 31, 2004. The liabilities were recorded as Other Liabilities and Deferred Credits, with an offsetting increase to Investments. CPChem believes it is unlikely that performance under any of the guarantees will be required. However, should such performance be required, CPChem believes it would not have a material adverse effect on consolidated results of operations, financial position or liquidity.

Equity Investments’ Financial Information

In accordance with the Securities and Exchange Commission’s rules pertaining to equity investments that are deemed to be “significant,” summarized financial information for CPChem’s equity investments, shown at 100%, follows:

	Qatar Chemical								Saudi Chevron
	Company Ltd. (Q-Chem)								Phillips Company
	Years ended December 31,								Years ended December 31,
Millions	2004		2003			2002			2004		2003		2002
Revenues	$	324	$	73		$	—		$	665	$	392	$	310
Income (loss) before income taxes	129		(40		)	(22		)	304		115		47
Net income (loss)	117		(40		)	(22		)	304		115		47

	December 31,						December 31,
	2004		2003		2002		2004		2003		2002
Current assets	$	265	$	111	$	22	$	388	$	197	$	116
Noncurrent assets	880		940		937		460		475		504
Current liabilities	110		104		62		137		87		83
Noncurrent liabilities	889		974		920		135		294		340

	All Others
	in the Aggregate
	Years ended December 31,
Millions	2004		2003		2002
Revenues	$	951	$	682	$	628
Income before income taxes	33		13		27
Net income	28		10		23

	December 31,
	2004		2003		2002
Current assets	$	295	$	196	$	188
Noncurrent assets	412		357		340
Current liabilities	134		105		98
Noncurrent liabilities	191		90		109

Note 6. Property, Plant and Equipment

Property, plant and equipment was as follows:

	December 31,
Millions	2004		2003
Olefins & Polyolefins	$	5,086	$	4,966
Aromatics & Styrenics	2,060		2,048
Specialty Products	589		568
Other	168		162
Gross property, plant and equipment, at cost	7,903		7,744
Accumulated depreciation	4,135		3,880
Net property, plant and equipment	$	3,768	$	3,864

Approximately $6.4 billion of gross property, plant and equipment at December 31, 2004 consisted of chemical plant assets depreciated on estimated useful lives of approximately 25 years. Other non-plant items, such as furniture, fixtures, buildings and automobiles, have

estimated useful lives ranging from 5 to 45 years, with a weighted average of 27 years. Assets under construction totaled $136 million at December 31, 2004 and $167 million at December 31, 2003.

Asset impairment charges totaling $6 million were recorded in 2002, consisting primarily of a $5 million charge related to CPChem’s Colton, California polyethylene pipe facility, which was part of the Olefins & Polyolefins segment. The remaining assets of the facility, which were written down to a $1 million estimated net realizable value, were classified as assets held for sale and were included in Other Current Assets at December 31, 2003. The assets were sold during 2004.

Note 7. Environmental Liabilities

CPChem is subject to federal, state and local environmental laws and regulations that may result in obligations to mitigate or remove the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at its sites. Undiscounted accrued environmental liabilities totaled $6 million at both December 31, 2004 and 2003. There were no accrued environmental costs associated with discontinued or sold operations.

Note 8. Debt

Long-term debt, net of applicable debt discounts, was as follows:

	December 31,
Millions	2004			2003
7% notes due 2011	$	500		$	500
5 3/8% notes due 2007	500			500
Commercial paper	385			184
Other	9			10
Subtotal	1,394			1,194
Unamortized debt discount	(4		)	(5		)
Total long-term debt	$	1,390		$	1,189

In addition to the information presented, CPChem had secured borrowings outstanding totaling $200 million at December 31, 2004 and $300 million at December 31, 2003 under a trade receivables securitization agreement. These borrowings are classified as short-term and were secured by $665 million and $459 million of trade receivables, respectively. The agreement allows CPChem to borrow up to $300 million for which CPChem grants a security interest in certain of its trade receivables as collateral for any amounts outstanding. Borrowings under the agreement are reduced or security interests in new trade receivables are granted as the receivables are collected by CPChem. The trade receivables securitization agreement expires on May 17, 2005. CPChem intends to request an extension of the expiration date of the current agreement to May 2006. The interest rate of borrowings outstanding under the agreement was 2.20% at December 31, 2004 and 1.07% at December 31, 2003, and averaged 1.37% in 2004, 1.21% in 2003 and 1.63% in 2002.

In 2002, Chevron Phillips Chemical Company LLC and its wholly owned subsidiary, Chevron Phillips Chemical Company LP, jointly and severally issued $500 million of senior unsecured 5 3/8% notes. The notes mature in 2007 and interest is payable semiannually. In 2001, Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP jointly and severally issued $500 million of senior unsecured 7% notes. These notes mature in 2011 and interest is also payable semiannually. Both series of notes contain certain covenants, such as limitations on liens, sale/leaseback transactions, sales of assets and business combinations, which CPChem does not consider to be restrictive to normal operations.

Notes issued under CPChem’s commercial paper program are in the tier-2 commercial paper market with maturities of 90 days or less. These commercial paper borrowings are classified as Long-Term Debt since CPChem’s intent is to refinance or replace the obligations on a long-term basis and CPChem has a committed backup credit facility in effect. The weighted average interest rate of commercial paper borrowings outstanding was 2.35% at December 31, 2004 and 1.07% at December 31, 2003, and averaged 1.54% in 2004, 1.23% in 2003 and 2.02% in 2002.

On July 30, 2004, CPChem entered into an $800 million five-year credit facility with various banks that provides committed credit support for the commercial paper program. Effective with the closing of the new credit facility, CPChem terminated the existing $400 million 364-day and $400 million three-year credit facilities. The current agreement contains covenants and events of default typical of bank revolving credit facilities, such as restrictions on liens. The agreement also contains a provision requiring the maintenance of ownership of CPChem by ChevronTexaco and ConocoPhillips of at least 50% in the aggregate. Provisions under this agreement are not considered to be restrictive to normal operations. There were no borrowings under any of the current or prior credit facilities during 2004, 2003 or 2002.

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

Note 9. Members’ Preferred Interests

On July 1, 2002, CPChem sold $250 million of members’ preferred interests, purchased 50% each by ChevronTexaco and ConocoPhillips. Proceeds from the sale were used to retire a portion of outstanding commercial paper obligations. Preferred distributions are cumulative at 9% per annum and are payable quarterly from cash earnings, as defined in CPChem’s Second Amended and Restated Limited Liability Company Agreement. The securities have no stated maturity date and are mandatorily redeemable quarterly, in increments of $25 million, if CPChem’s ratio of debt to total capitalization reaches a stated level. Members’ preferred interests are also redeemable at CPChem’s option.

In 2004, CPChem voluntarily redeemed $175 million of members’ preferred interests and paid $55 million of distributions on members’ preferred interests. There were no redemptions or preferred distributions paid in 2003 or 2002. Accrued preferred distributions payable, included in Other Current Liabilities and Deferred Credits, totaled $34 million at December 31, 2003. There were no accrued preferred distributions payable at December 31, 2004.

Note 10. Guarantees, Commitments and Indemnifications

Guarantees

CPChem’s headquarters building is leased under a synthetic lease agreement entered into in 2002. A synthetic lease is a lease that qualifies as an operating lease for financial accounting purposes and as a capital lease for federal tax purposes. The lease contains a fixed price purchase option and a residual guarantee. The purchase option price was considered to be the fair market value of the building at the inception of the lease. If CPChem does not extend the lease or exercise the purchase option upon the expiration of the lease in 2007, CPChem has an obligation to pay the lessor the shortfall, if any, in the proceeds realized from the sale of the building to a third party relative to the purchase option price, not to exceed $27 million. CPChem is entitled to receive any proceeds from the sale of the building that are in excess of the purchase option price. While it is not possible to predict with certainty the amount, if any, that CPChem would be required to pay or be entitled to receive should the building be sold to a third party upon the expiration of the lease, CPChem believes that the amount paid or received would not be material to consolidated results of operations, financial position or liquidity.

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

Commitments

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

Indemnifications

As part of CPChem’s ongoing business operations and consistent with generally accepted and recognized industry practice, CPChem enters into numerous agreements with other parties which apportion future risks between the parties to the transaction or relationship governed by the agreements. One method of apportioning risk is the inclusion of provisions requiring one party to indemnify the other party against losses that might be incurred in the future. Many of CPChem’s agreements, including technology license agreements, contain indemnities that require CPChem to perform certain acts, such as defending certain licensees against patent infringement claims of others, as a result of the occurrence of a triggering event or condition.

The nature of these indemnity obligations are diverse and numerous and each has different terms, business purposes, and triggering events or conditions. In addition, the indemnities in each agreement vary widely in their definitions of both the triggering event and the resulting obligation, which is contingent upon that triggering event. Because many of CPChem’s indemnity obligations are not limited in duration or potential monetary exposure, CPChem cannot reasonably calculate the maximum potential amount of future payments that could possibly be paid under the indemnity obligations stemming from all of CPChem’s existing agreements. In the case of known contingent liabilities, however, CPChem records an undiscounted liability when a loss is probable and the amount can be reasonably estimated.

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

Note 11. Contingent Liabilities

As facts concerning contingent liabilities become known, CPChem reassesses its position with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem’s liability in proportion to those of other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available.

CPChem is a party to certain asbestos lawsuits for which the financial responsibility between CPChem and ConocoPhillips is disputed. CPChem and ConocoPhillips are attempting to resolve where the financial responsibility for these lawsuits rests. In the meantime, ConocoPhillips is managing and defending these lawsuits. In the event the financial responsibility for these lawsuits is ultimately determined to rest with CPChem, CPChem may be required to record a charge to operations that could be material to the period reported.

Electricity Deregulation

Legislation for electricity deregulation for the Electricity Reliability Council of Texas (ERCOT) area was enacted in 1999, allowing retail electricity consumers to choose electricity providers effective January 1, 2002. This legislation also allows utilities to file an application with the Public Utility Commission of Texas (PUCT) for determination and reimbursement of costs, if any, associated with the implementation of this legislation. Included in these costs are certain environmental expenses and costs associated with stranded assets. Stranded asset costs are those associated with the utility asset devaluation that may have occurred due to the legislation. Once determined, these costs are paid by electricity consumers under PUCT-mandated procedures.

CenterPoint Energy Houston Electric LLC (CenterPoint), which previously provided electricity to CPChem’s Cedar Bayou manufacturing facility and its Kingwood research center, both located in Texas, filed its application for such determination with the PUCT on March 31, 2004. A number of consumers and organizations representing consumers intervened in the PUCT proceedings to object to certain claims in CenterPoint’s application. In November of 2004, the PUCT denied the amount of CenterPoint’s request and entered an order for a recovery of approximately one-half of that amount. Both sides are appealing the decision.

If it is determined that CenterPoint is entitled to recover some or all of the costs claimed in its application, CPChem would receive a monthly charge added to its electricity cost over an extended period of time to pay for such reimbursement. Based on the stated amounts of CenterPoint’s application and the PUCT’s subsequent order, it is currently anticipated that the additional monthly cost to CPChem that is approved by the PUCT, when finalized, would not have a material adverse effect on consolidated results of operations, financial position or liquidity.

Note 12. Credit Risk

Financial instruments that potentially subject CPChem to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are currently comprised of bank accounts and short-term investments with several financial institutions that have high credit ratings. CPChem’s policy for short-term investments both diversifies and limits its exposure to credit risk. Trade receivables are dispersed among a broad customer base, both domestic and foreign, which results in limited concentrations of credit risk. CPChem also maintains and follows credit policies and procedures that minimize credit risk and exposures. Letters of credit are sometimes utilized when a customer’s financial strength is considered to be insufficient.

Note 13. Operating Leases

CPChem leases tank and hopper railcars, office buildings and certain other facilities and equipment. Total operating lease rental expense was $44 million in both 2004 and 2003, and $48 million in 2002. Aggregate future minimum lease payments under non-cancelable leases at December 31, 2004 totaled $25 million, $22 million, $50 million, $17 million and $14 million in the years 2005 through 2009, respectively, and $81 million thereafter. Included in aggregate future minimum lease payments in 2007 is CPChem’s maximum exposure of $27 million under the contingent obligation associated with the lease agreement for CPChem’s headquarters building.

Note 14. Benefit Plans

The majority of CPChem employees are former employees of ChevronTexaco or ConocoPhillips. Certain CPChem benefit plans provide that employees who were former employees of ChevronTexaco or ConocoPhillips receive enhanced benefits, including credit for service while employees of ChevronTexaco or ConocoPhillips.

Pension and Other Postretirement Health Care

CPChem’s retirement plan is a defined benefit plan that covers most U.S.-based employees. Eligible employees automatically participate in the plan and begin accruing benefits from January 1, 2001 or their first day of employment if employed after that date. Eligible employees become fully vested in their retirement benefits after five years of service with CPChem, including prior service with ChevronTexaco or ConocoPhillips or their affiliates. Retirement benefits are based on two types of credits: a career average pay benefit and a variable annuity account benefit. Both benefits are based on an employee’s compensation over the years and the number of years that an employee is qualified to receive benefit credits.

CPChem also offers health care benefits to eligible employees, mostly U.S.-based, upon their retirement. A retiree flexible spending account is established by CPChem for eligible retirees at the time of retirement based on years of service times a fixed dollar amount and marital status. Retirees may use funds in their account to purchase medical and/or dental coverage from CPChem or from private health care plans, or to pay eligible out-of-pocket health care expenses. Retirees’ flexible spending accounts earn interest upon inception at market-based rates. Any changes in future health care cost rates for retirees would not impact future CPChem earnings as health care benefits for retirees are solely based on years of service and marital status.

A January 1 measurement date is used in the determination of pension and other postretirement net periodic benefit costs. A December 31 measurement date is used in the determination of pension and other postretirement benefit obligations and plan assets.

Included in the pension plan tables presented is an unfunded supplemental retirement plan covering key executives. The purpose of the plan is to provide compensating benefits to those employees affected by federally mandated limits on eligible compensation levels contained in CPChem’s normal retirement plan. The benefit obligation associated with this plan was $20 million at December 31, 2004 and $17 million at December 31, 2003. Also included are separate pension plans for employees of the Puerto Rico and Belgium facilities, and employees of certain bargaining units within the Performance Pipe division of CPChem.

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

	Pension Benefits									Other Benefits
Millions	2004			2003			2002			2004			2003		2002
Service cost benefits earned during the year	$	22		$	21		$	18		$	2		$	3	$	2
Interest cost on projected benefit obligations	18			17			16			3			5		4
Expected return on plan assets	(12		)	(9		)	(4		)	(1		)	—		—
Amortization of prior service costs	12			12			12			3			3		3
Net actuarial gain	1			1			(3		)	—			1		—
Plan amendment	—			—			6			—			—		—
Net periodic benefit cost	$	41		$	42		$	45		$	7		$	12	$	9

The pension and other postretirement benefit plans’ funded status and related amounts follow:

	December 31, 2004						December 31, 2003
Millions	Pension Benefits			Other Benefits			Pension Benefits			Other Benefits
Change in Benefit Obligation
Benefit obligation at beginning of year	$	321		$	75		$	271		$	62
Service cost	22			2			21			3
Interest cost	18			3			17			5
Actuarial loss	1			15			17			6
Foreign currency exchange loss	2			—			2			—
Plan amendment	—			(1		)	—			—
Benefits paid	(6		)	(2		)	(7		)	(1		)
Benefit obligation at end of year	358			92			321			75

Change in Plan Assets
Fair value of plan assets at beginning of year	151			12			101			—
Actual return on plan assets	17			2			20			—
Employer contributions	56			14			34			13
Foreign currency exchange gain	1			—			3			—
Benefits paid	(6		)	(2		)	(7		)	(1		)
Fair value of plan assets at end of year	219			26			151			12

Funded Status of Plan
Excess obligation	(139		)	(66		)	(170		)	(63		)
Unrecognized net actuarial loss	37			22			42			13
Unrecognized transition obligation	1			—			1			—
Unrecognized prior service cost	105			31			117			34
Total recognized	$	4		$	(13	)	$	(10	)	$	(16	)

Components of Total Recognized
Prepaid asset	$	12		$	—		$	—		$	—
Intangible asset	5			—			24			—
Accrued liability	(16		)	(13		)	(34		)	(16		)
Accumulated comprehensive loss	3			—			—			—
Total recognized	$	4		$	(13	)	$	(10	)	$	(16	)

CPChem expects to fund approximately $50 million to its pension plans and $6 million to its other postretirement benefits plans in 2005.

The accumulated benefit obligation for all pension plans was $222 million at December 31, 2004 and $180 million at December 31, 2003. Certain information for pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2004 follows:

	December 31,
Millions	2004		2003
Projected benefit obligation	$	42	$	37
Accumulated benefit obligation	33		29
Fair value of plan assets	18		19

CPChem’s investment strategy with respect to pension plan assets is to maintain a diversified portfolio of domestic and international equities, fixed income securities, real estate-backed securities and cash equivalents. Target asset allocations are chosen based on an analysis of the historical returns and volatilities of various asset classes. The plan investments are periodically rebalanced to maintain the target asset allocation. Rates of return for the investment funds comprising each asset class are monitored quarterly against benchmarks and peer fund results.

Asset allocations for CPChem’s pension plans, along with target allocations for 2005, follow:

	Target Allocation		Plan Assets at December 31,
Category	2005		2004		2003
Equity	50	%	43	%	45	%
Debt	35		34		36
Real estate	10		8		8
Other	5		15		11
Total	100	%	100	%	100	%

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

	December 31,				December 31,
	2004				2003
	Pension Benefits		Other Benefits		Pension Benefits		Other Benefits
Discount rate	5.8	%	5.8	%	6.0	%	6.0	%
Expected return on plan assets	8.0		—		8.0		—
Rate of increase in compensation levels	4.0		—		4.0		—

Weighted average rate assumptions used in determining periodic benefit costs for pension and other postretirement benefits follow:

	2004				2003				2002
	Pension Benefits		Other Benefits		Pension Benefits		Other Benefits		Pension Benefits		Other Benefits
Discount rate	6.0	%	6.0	%	6.5	%	6.5	%	7.3	%	7.3	%
Expected return on plan assets	8.0		—		8.0		—		8.0		—
Rate of increase in compensation levels	4.0		—		4.0		—		4.0		—

The expected return on plan assets were developed through, among other things, analysis of historical market returns for the plans’ investment classes and current market conditions.

The determination of CPChem’s projected benefit obligations for its pension plans affects the amounts of related expense recorded in the current period and also impacts the level and timing of contributions into the plans. Due to the specialized nature of these calculations, CPChem utilizes outside actuarial firms to assist in the calculation of these obligations. An actuarial determination of projected benefit obligations and company contribution requirements involves significant estimates regarding future unknown events, which include estimated future rates of return on pension plan assets, discount rates applied to pension plan obligations, estimated employee retirement dates and salary levels at retirement, and mortality rates. Estimates of these future unknown events are judgmentally determined based on factors such as, among other things, historical returns on pension plan assets and outside actuarial advice. However, a 1% decrease in the estimated future returns on pension plan assets or a 1% decrease in the discount rates applied to pension plan obligations would not have a material adverse effect on consolidated results of operations, financial position or liquidity.

It is anticipated that benefit payments, which reflect expected future service, will be paid as follows:

Millions	Pension Benefits		Other Benefits
2005	$	13	$	2
2006	15		3
2007	18		3
2008	22		4
2009	27		5
2010-2014	222		55

Contribution Plans

Defined contribution plans are available for most employees, whereby CPChem matches a percentage of the employee’s contribution. CPChem’s contributions to the plans are expensed and funded on a current basis, and totaled $17 million in 2004 and $13 million in each of 2003 and 2002.

Share-Based Compensation

CPChem currently does not utilize any share-based employee compensation plans.

Termination Benefits

Termination benefit costs totaling $12 million were recorded to Selling, General and Administrative expense in 2003. The announced workforce reductions affected 196 employees at various locations.

Termination benefit costs payable follows:

	Millions
December 31, 2001	$	6
Additions	—
Payments	(6		)
December 31, 2002	—
Additions	12
Payments	(4		)
December 31, 2003	8
Additions	2
Payments	(6		)
December 31, 2004	$	4

Note 15. Taxes

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

CPChem has a U.S. subsidiary operating in Puerto Rico that is subject to U.S. federal income tax, but has been granted an exemption from certain Puerto Rico taxes, including income taxes. All Puerto Rico tax exemptions related to this subsidiary expire in 2017. Limited tax incentives, in the form of reduced income tax rates, also exist in South Korea, China, Singapore, Saudi Arabia and Qatar. CPChem is subject to state income tax in certain jurisdictions.

CPChem is required to make quarterly distributions to its members in amounts representing the liability for combined federal and state income taxes calculated at specified rates based on CPChem’s estimate of federal taxable income. In 2004, CPChem made $118 million of tax distributions to its members. In addition, a $39 million tax distribution was accrued in Other Current Liabilities and Deferred Credits at December 31, 2004 and will be paid in the first quarter of 2005.

The components of income (loss) before taxes follow:

	Years ended December 31,
Millions	2004		2003			2002
Domestic	$	301	$	(98	)	$	(138	)
Foreign	340		110			114
Total income (loss) before taxes	$	641	$	12		$	(24	)

The components of income tax expense follow:

	Years ended December 31,
Millions	2004		2003		2002
Federal – current	$	—	$	—	$	(1	)
State – current	—		—		1
Foreign – current	15		5		6
Total income tax expense	$	15	$	5	$	6

Deferred income tax assets and liabilities follow:

	December 31,
Millions	2004			2003
Deferred income tax assets – federal	$	191		$	190
Valuation allowance	(191		)	(190		)
Total	—			—
Deferred income tax liabilities – foreign	(1		)	(1		)
Net deferred income tax liability	$	(1	)	$	(1	)

At December 31, 2004 and 2003, the deferred tax assets of CPChem’s Puerto Rico subsidiary were fully offset by valuation allowances. A valuation allowance was established to reduce the deferred tax assets of the subsidiary’s net operating loss carryforwards and tax depreciation differences to amounts that would more likely than not be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future profitability of operations.

Net deferred income tax assets and liabilities related to the following:

	December 31,
Millions	2004			2003
Deferred income tax assets
Loss carryforward (expires 2011- 2024)	$	171		$	162
Depreciation and amortization	15			23
Other	5			5
Gross deferred income tax assets	191			190
Valuation allowance	(191		)	(190		)
Deferred income tax assets	—			—
Deferred tax liabilities – foreign	(1		)	(1		)
Net deferred income tax liability	$	(1	)	$	(1	)

Note 16. Segment and Geographic Information

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

Olefins & Polyolefins – This segment gathers, buys, sells and fractionates natural gas liquids, and manufactures and markets olefin products such as ethylene and propylene. This segment also manufactures and markets alpha olefins and polyolefin products such as normal alpha olefins, polyethylene, polypropylene and polyethylene pipe. CPChem has five olefin and/or polyolefin production facilities located in Texas, nine domestic pipe facilities and one domestic pipe fittings facility. CPChem also has one pipe facility in Mexico. In addition, CPChem owns interests in a polypropylene facility located at the Pasadena Plastics Complex in Texas, a high-density polyethylene plant located at CPChem’s Cedar Bayou facility in Texas, an ethylene, polyethylene and 1-hexene facility in Qatar, and polyethylene facilities in Singapore and China.

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

Specialty Products – This segment manufactures and markets a variety of specialty chemical products, including organosulfur chemicals and high-performance polyphenylene sulfide polymers and compounds sold under the trademark Ryton^®. Production facilities are located in Texas, Belgium and Singapore.

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

Financial information follows. Inter-segment transactions are billed at prevailing market rates.

Millions	O&P			A&S			Specialty Products			Other and Eliminations			Consolidated
Year ended December 31, 2004
Net sales – external	$	5,574		$	3,187		$	477		$	—		$	9,238
Net sales – inter-segment	295			1			2			(298		)	—
Equity in income of affiliates	73			145			—			—			218
Other income	76			24			2			—			102		(a)
Total revenue	6,018			3,357			481			(298		)	9,558
Operating and selling costs	5,416			3,023			400			(269		)	8,570
Depreciation and amortization	174			83			23			1			281
Income (loss) before interest & taxes	428			251			58			(30		)	707
Interest income (expense), net	7			1			—			(74		)	(66		)
Income tax benefit (expense)	(5		)	(3		)	(7		)	—			(15		)
Net income (loss)	430			249			51			(104		)	626
Distributions on members’ preferred interests	—			—			—			(21		)	(21		)
Income (loss) attributed to members’ interests	$	430		$	249		$	51		$	(125	)	$	605

Year ended December 31, 2003
Net sales – external	$	4,079		$	2,437		$	391		$	—		$	6,907

Washington, D.C. 20549

Form 10-K

For the Fiscal Year Ended December 31, 2004

For the Transition Period from to

Commission File No. 333-59054-01

Chevron Phillips Chemical Company LLC

10001 Six Pines Drive

None

None

None

Aromatics & Styrenics

Page

The following financial statements are presented in accordance with the Securities and Exchange Commission’s rules pertaining to equity affiliates deemed to be “significant.”

Qatar Chemical Company Ltd. (Q-Chem)

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet

Consolidated Statement of Members’ Capital

The following financial statements are presented in accordance with the Securities and
Exchange Commission’s rules pertaining to equity affiliates deemed to be “significant.”

CHEVRON PHILLIPS CHEMICAL CO LLC 10-K