<Page> ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR / / 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 (I.R.S. Employer incorporation or organization) Identification Number) CHEVRON TOWER 1301 MCKINNEY STREET HOUSTON, TX 77010-3030 (Address of principal executive offices, including zip code) (713) 289-4100 (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 /X/ NO 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. X 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 ================================================================================ <Page> TABLE OF CONTENTS <Table> <Caption> PART I <S> <C> <C> 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 and Related Stockholder Matters.......... 16 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..................... 29 Item 8. Financial Statements and Supplementary Data.................................... 30 Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure......................................................... 84 PART III Item 10. Directors and Executive Officers of the Registrant............................. 84 Item 11. Executive Compensation......................................................... 86 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 90 Item 13. Certain Relationships and Related Transactions................................. 91 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 92 </Table> 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," "foresees" or other words and phrases of similar import. Where Chevron Phillips Chemical Company LLC (CPChem) expresses an expectation or belief as to future results, there can be no assurance that the expectation or belief will result, be achieved or be accomplished. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, CPChem believes such assumptions or bases to be reasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. The more significant factors that, if erroneous, could cause actual results to differ materially from those expressed include, among others: the timing and duration of periods of expansion and contraction within the chemicals industry, plans for the construction, modernization or de-bottlenecking of domestic and foreign chemical plants, prices of feedstocks and products, force majeure events, accidents, labor relations, political risks, 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 U.S. and global economies, results of financing efforts and overall financial market conditions. All forward-looking statements in this annual report are qualified in their entirety by the cautionary statements herein. Unless legally required, CPChem does not undertake to update, revise or correct any of the forward-looking information. <Page> PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES Chevron Phillips Chemical Company LLC (CPChem), a limited liability company formed under Delaware law, manufactures and markets a wide range of petrochemicals and plastics on a worldwide basis through its subsidiaries, with manufacturing facilities in existence or under construction in the United States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. On July 1, 2000, Chevron Corporation, now ChevronTexaco Corporation (ChevronTexaco), and Phillips Petroleum Company (Phillips) combined their worldwide chemicals and plastics businesses, excluding ChevronTexaco's Oronite additives business, to form CPChem. ChevronTexaco and Phillips (collectively, the parents) each own 50% of CPChem. 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 Phillips 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 unanimous approval of the voting representatives. CPChem's business in 2001 was structured upon three primary operating segments: Olefins and Polyolefins, Aromatics, and Specialty Chemicals and Plastics. For a list of the principal products of these segments, see the table on pages 11 and 12 of this section. See also "Part II - Item 8. Financial Statements and Supplementary Data - Note 15" for financial data by segment and geographic location. OLEFINS AND POLYOLEFINS CPChem's Olefins and Polyolefins segment gathers, buys, sells and fractionates natural gas liquids, and manufactures and markets olefins products such as ethylene and propylene. This segment also manufactures and markets polyolefin products such as polyethylene, polypropylene and polyethylene pipe and pipe fittings. CPChem's five olefin and polyethylene production facilities are located in Texas. CPChem has 10 domestic pipe facilities and two pipe fittings facilities in the U.S., and one pipe facility in Mexico. CPChem also owns equity interests in a polypropylene facility at the Houston Chemical Complex in Pasadena, Texas, polyethylene facilities in Singapore and China, and a polyethylene pipe facility in Mexico. A major ethylene, polyethylene and hexene-1 facility, in which CPChem has a 49% equity interest, is under construction in Qatar, and a high-density polyethylene plant of which CPChem will have a 50% interest, is under construction at CPChem's Cedar Bayou facility in Baytown, Texas. 2 <Page> <Table> <Caption> Approximate Product Capacity Primary Uses ------- ----------- ------------ (MILLION LBS. PER YEAR) <S> <C> <C> Ethylene 7,600 Basic building block for plastics and elastomers, and also a raw material for chemicals used to make paints, detergents and antifreeze. Polyethylene 5,182(1,2) Thermoplastic polymer used in various applications: high-density polyethylene (HDPE), which is a resin used for detergent bottles, pails, plastic pipe and conduit, shopping bags, geomembrane and film applications; linear low-density polyethylene (LLDPE), which is a resin used for plastic film and containers; low-density polyethylene (LDPE), which is a resin used for plastic films, paper coating, surgical gloves and containers; and polyethylene pipe, which is 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 plastics and fibers, and used as a raw material for chemicals used to make paints, detergents and resins. Polypropylene 486(1) Thermoplastic polymer used in fibers, films, automobiles and housewares. </Table> ---------- (1) Represents or includes CPChem's share of affiliates' capacity. (2) Reflects shutdown of two polyethylene units at the Orange, Texas facility in February 2002. 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 five 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 and Shell Chemical Company (Shell). ETHYLENE By volume, ethylene is the most widely-consumed petrochemical product in the world, according to Chemical Markets Associates, Inc. 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. These facilities have been modernized recently by improving processes that may have been limiting production, by upgrading control systems and by making other process improvements. Polyethylene accounts for more than half of global ethylene consumption, making growth in the applications for and the consumption of polymer derivatives a key driver for the ethylene market as a whole. Polyethylene end-uses include various nondurable applications such as soap packaging, food packaging and other consumer packaging that are not as affected as other products during general economic slowdowns. 3 <Page> SUPPLY/FEEDSTOCK SOURCES. Ethylene can be produced from ethane, propane, butane, natural gasoline or certain refinery liquids such as naphtha. The two most common feedstocks are ethane, because of its high ethylene yield, and naphtha, because of its availability and transportability. CPChem's ethylene production is primarily ethane-based, but also includes a feedstock slate of propane, butane and naphtha. CPChem's ethylene plants have varying degrees of flexibility in the feedstocks they use due to their configuration, which enables the plants to utilize different feedstock slates depending on feedstock costs. 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 with the price of crude oil. CPChem has long-term, market-based purchase contracts with Duke Energy Field Services, LLC (an affiliate of Phillips) and Dynegy Inc. (an affiliate of ChevronTexaco) which cover over 80% of anticipated ethylene feedstock needs. The agreement with Duke Energy extends through December 31, 2014 and the agreement with Dynegy extends through August 31, 2006. Contracts with numerous other suppliers provide the remainder of feedstock needs. These contracts can be long-term, monthly, or daily contracts made on a spot basis. MARKETING. CPChem uses approximately 75% of its ethylene in the production of CPChem's derivative products (polyethylene, normal alpha olefins and styrene). The remainder of ethylene production is sold on the merchant market, largely in the form of long-term contracts. CPChem owns an extensive ethylene pipeline system that provides access to a large number of the ethylene consumers in the Texas Gulf Coast region. CPChem owns the only ethylene import and export facility on the Gulf Coast and has the right to transport half of the product imported or exported through the facility. CPChem's ethylene storage capacity, in caverns, is approximately one billion pounds and is split between its Texas storage facilities in Clemens and Mont Belvieu. POLYETHYLENE Domestically, polyethylene is produced at the Cedar Bayou facility, the Houston Chemical Complex and CPChem's Orange, Texas facility. Internationally, CPChem produces polyethylene through its joint venture facilities in Singapore and Shanghai, China. CPChem's share of the combined capacity of its domestic and international facilities is 5.2 billion pounds per year. SUPPLY/FEEDSTOCK SOURCES. The primary raw material for polyethylene production is ethylene, which typically represents 60% to 70% of polyethylene manufacturing costs. CPChem produces ethylene in excess of its polyethylene production requirements. Hexene and butene, also necessary for the production of polyethylene, are produced at the Cedar Bayou facility. MARKETING. Currently, approximately 90% of CPChem's polyethylene net capacity is located in the United States, along the Texas Gulf Coast. CPChem markets almost all its production from this area in the United States, with the remainder exported to Mexico and Central and South America. Production from CPChem's plants in Singapore and China is marketed almost exclusively in the Far East. Polyethylene is sold to over 400 customers, the single largest consumer being CPChem's Performance Pipe Division. This division consumes over 500 million pounds of HDPE per year and manufactures plastic pipe and fittings in 14 plants throughout the United States and Mexico. Performance Pipe is the largest polyethylene pipe manufacturer in North America. In addition, a significant part of HDPE is sold into the blow-molded container market. CPChem's customers 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, sheet for landfill liners and automotive fuel tanks. 4 <Page> 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 Propylene is a basic building block for various chemicals, plastics and fibers. CPChem produces propylene in its Cedar Bayou, Port Arthur and Sweeny facilities. 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 ethylene 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 25% of refinery-grade propylene from its parents and the remainder from a variety of suppliers under long-term and short-term contracts. MARKETING. Polymer-grade propylene is sold to major chemical manufacturers, with the majority to polypropylene producers. Approximately 25% of CPChem's propylene is sold to Phillips Sumika Polypropylene Company (Phillips Sumika), a CPChem joint venture. Propylene is also sold to external customers under long-term contracts and to international contract and spot customers through a third-party export facility at Deer Park, Texas. CPChem has an extensive propylene pipeline delivery system, which allows it to deliver to a majority of the Texas polymer-grade propylene consumers. AROMATICS This segment manufactures and markets aromatics products such as benzene, styrene, paraxylene, cyclohexane and cumene. Major production facilities are located in Mississippi, Louisiana, Texas and Puerto Rico. CPChem also owns an equity interest in an aromatics facility in Al Jubail, Saudi Arabia. <Table> <Caption> Approximate Product Capacity Primary Uses ------- ----------- ------------ (MILLION LBS. PER YEAR) <S> <C> <C> Benzene 2,600(1) An aromatic primary building block chemical used in the production of ethylbenzene, cumene, cyclohexane and other chemicals. Styrene 1,700 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. Paraxylene 1,640 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 580(1) Predominantly used in intermediates for the manufacture of nylon. Cumene 1,100 An intermediate used to produce phenol and acetone. </Table> ---------- (1) Includes CPChem's share of affiliate's capacity. COMPETITION. Aromatics' products are sold into the worldwide 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. 5 <Page> BENZENE Benzene has historically been produced as a by-product of the motor fuel and ethylene production processes. About 10% - 15% of the world's requirements are produced "on purpose" in plants using a process known as the hydro-dealkylation (HDA) process. The HDA process is one of the highest cost processes currently used in this area of the industry. To an extent, producers using the HDA process control the price of benzene since they are able to produce until prices drop to levels that will not allow them to recover costs. At that point, they tend to shut down their capacity until prices recover to levels that make their operations economical. However, CPChem has developed and uses its proprietary Aromax -Registered Trademark- technology for benzene production, which results in lower production costs. 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 three-fourths of benzene production worldwide. CPChem purchases its benzene feedstocks from refineries owned by its parents, located in proximity to CPChem's benzene plants, and from various other sources. In Saudi Arabia, CPChem's affiliate has a 30-year feedstock agreement with a producer that owns a refining complex located within six miles of the plant. MARKETING. CPChem is a net consumer of benzene in the Gulf Coast region, which is the heavy production area of North America. This allows CPChem to operate its benzene plants at full capacity, preserving a low-cost position, even during times of slack demand 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 within the same facility. The balance of benzene is sold on a term contract basis to a local Saudi Arabian styrene producer. CPChem has a marketing agreement with Pertamina, the Indonesian state oil company, under which CPChem markets benzene produced by Pertamina in Cilacap, Indonesia. This product is sold predominantly through one-year contracts with consumers in Asia. STYRENE Styrene is produced at CPChem's St. James, Louisiana facility, which has a capacity of approximately 1.7 billion pounds per year. The plant was temporarily idled in February 2001 due to a fire in a distillation unit that occurred during a maintenance turnaround. Production capacity was fully restored in October 2001. CPChem has begun a modernization of the St. James plant that should increase annual plant capacity by approximately 22% when completed in the second half of 2002. SUPPLY/FEEDSTOCK SOURCES. Styrene is made from benzene and ethylene. Almost all of the benzene used at CPChem's styrene plant is produced internally at CPChem's Pascagoula, Mississippi plant, 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 contract purchases, shipments from CPChem's Texas facilities and spot purchases. MARKETING. CPChem currently consumes about 600 million pounds of styrene annually at its polystyrene plant in Marietta, Ohio and a small amount in its production of K-Resin -Registered Trademark- styrene-butadiene copolymers (SBC). The balance of production is sold in the merchant market. Although CPChem generally markets styrene in all regions of the world, it currently sells most of the St. James plant styrene production in the United States. Recently, U.S. producers have not been as competitive with world markets due to high natural gas prices in the U.S. In addition, the global economic slowdown has dampened styrene demand both domestically and abroad. CPChem sells almost all of its styrene production through term contracts. Distribution of product is primarily handled by railcars, barges and ocean vessels. 6 <Page> PARAXYLENE CPChem has a combined capacity of approximately 1.6 billion pounds of paraxylene production per year at its Guayama, Puerto Rico and Pascagoula plants. Production at the Puerto Rico plant was suspended in 2001 for economic reasons and plant modifications. 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 also available on the merchant market as both gasoline blending stocks and paraxylene plant feedstocks that CPChem uses during periods of high market demand. CPChem purchases mixed xylenes from ChevronTexaco and other suppliers. During periods of high paraxylene demand, mixed xylenes are also purchased on the spot market. MARKETING. A few very large global consumers buy most of the paraxylene available in the market. They purchase mainly on a term contract basis with pricing tied to a quarterly-negotiated, industry-wide contract price. With the purchasing concentrated in a few large consumers, these large consumers are able to exert pressure on the quarterly-negotiated contract price, which means that low margins result during times of oversupply. There is also an active spot market for paraxylene, which allows large consumers a degree of flexibility with respect to pricing options and the periodic need to cut back production for inventory control. CPChem sells approximately three-fourths of its production under long-term contracts, with the balance sold on the spot market. CPChem sells its paraxylene production to major producers of polyester in North America and Europe. It also sells to polyester producers in Asia via a marketing agreement with Pertamina. Paraxylene is shipped via railcars, barges and ocean vessels. CYCLOHEXANE CPChem markets approximately 14% of worldwide cyclohexane production. This includes volumes produced at CPChem's Port Arthur and Saudi Arabia plants, as well as volumes for which CPChem has marketing rights. CPChem owns 50% of the Saudi facility, with independent investors owning the remaining interest, and also has the exclusive right to market the cyclohexane exported from that facility. In addition, CPChem has the exclusive right to market the cyclohexane produced by Phillips at its Sweeny and Borger, Texas refinery complexes. SUPPLY/FEEDSTOCK SOURCES. The raw materials for cyclohexane are benzene and hydrogen. CPChem consumes more benzene than it produces. The balance of benzene needs is obtained through term contracts and spot purchases. MARKETING. Most of CPChem's cyclohexane is sold in the United States and Europe through sales contracts that are typically long-term arrangements. CPChem also has access to the Asian market via its joint venture plant in Saudi Arabia. Like other commodity aromatics chemicals, cyclohexane is distributed via trucks, railcars, barges and ocean vessels. SPECIALTY CHEMICALS AND PLASTICS CPChem produces a variety of specialty chemicals including normal alpha olefins (NAO), polyalpha olefins, polystyrene, an SBC sold under the trademark K-Resin -Registered Trademark- and polyphenylene sulfide (PPS) engineering plastics and compounds sold under the trademark Ryton -TM-. Additionally, CPChem produces a variety of lower-volume, higher-margin organosulfur chemicals, fine chemicals and specialty chemicals. 7 <Page> Several of Specialty Chemicals and Plastics' products have leading market positions. Major production facilities are located in Texas, Ohio, Belgium, China and Singapore. CPChem also owns an equity interest in a K-Resin facility in South Korea. <Table> <Caption> Approximate Product Capacity Primary Uses ------- ----------- ------------ (MILLION LBS. PER YEAR) <S> <C> <C> Normal alpha 1,250 A group of chemicals produced from ethylene and used olefins (NAO) in plasticizer alcohols, polyethylene, surfactants and synthetic lubricants and additives. Polyalpha olefins 104 Base stock for synthetic lubricants. K-Resin -Registered Trademark- 404(1,2) A high quality, clear polymer material used in a styrene-butadiene variety of products including medical components, copolymers (SBC) toys, candy wrap, food packaging, cups and garment hangers. Polystyrene 990 Polymer used in packing, cups, toys, furniture and housewares. Ryton -TM- 51 A high-performance engineering polymer used in electronic, automotive and polyphenylene appliance applications. sulfide (PPS) polymer & compounds Neohexene * Fine chemical used in the production of synthetic industrial perfumes. Acetylene black * Carbon black resulting from the exothermic decomposition of acetylene gas, used in batteries, magnetic tape, caulk, sealant, conductive paint and ink, specialty silicone rubber and plastics, and explosives. Dimethyl sulfide * Used as a sulfiding agent and agricultural chemical intermediate. High-purity * High-purity chemicals including performance-proven normal hydrocarbons & paraffins, cycloparaffins and isoparaffins, including solvents Soltrol -Registered Trademark- isoparaffin solvents, used in various pharmaceutical, industrial and consumer applications. Mining chemicals * Petroleum distillates, organosulfur and other mineral processing chemicals used in the recovery of copper, molybdenum and other metals from ore. Organosulfur * Chemical intermediates, primarily mercaptans, used in chemicals agricultural and pharmaceutical intermediates and polymerization modifiers. Performance & * Specialty fuels for calibration standards and reference fuels high-performance service, such as automobile and boat racing. Drilling Specialty * Additives used in water-based drilling fluids for controlling unstable Chemicals shale formations and increasing hole lubricity during oil and gas well including Soltex -Registered Trademark- drilling. & Potassium Soltex -Registered Trademark- </Table> ---------- (1) Includes CPChem's share of affiliate's capacity. (2) Capacity once operations are fully restored. * Small volume specialty chemicals. 8 <Page> COMPETITION. Specialty chemicals are characterized by smaller, niche markets with fewer producers. CPChem's NAO technology allows it to produce a wide range of hydrocarbon products that compete in many different markets, including comonomers for polyethylene, surfactants, drilling fluids and polyalpha olefins. Other significant producers of NAO are BP, Shell and Sasol Ltd. Major producers of polyalpha olefins also include BP and ExxonMobil. NORMAL ALPHA OLEFINS, POLYALPHA OLEFINS CPChem is capable of producing approximately 1.3 billion pounds per year of NAO in the U.S., which currently represents approximately 15% of global capacity. All of CPChem's NAO is produced at the Cedar Bayou facility. A plant under construction in Qatar, in which CPChem has a 49% interest, will have an annual capacity of an additional 100 million pounds of hexene-1, an NAO used as a comonomer in the production of polyethylene. SUPPLY/FEEDSTOCK SOURCES. NAO is generally produced by processing ethylene. CPChem produces all of the ethylene required in its production of NAO. The ethylene is produced at the Sweeny, Cedar Bayou and Port Arthur facilities. Polyalpha olefins are produced from fractions of the NAO produced at CPChem's Cedar Bayou facility. MARKETING. CPChem primarily sells NAO and polyalpha olefins to other chemical companies who use them to produce a broad range of intermediate products. CPChem also uses its own production of NAO in the manufacturing of polyethylene and polyalpha olefins. North America and Europe are the largest markets for NAO and polyalpha olefins, but the Asia Pacific, Middle East and South America markets are growing. Most domestic sales of NAO and polyalpha olefins are transported via bulk railcars and tank trucks. International sales are transported primarily via parcel tankers. SPECIALTY CHEMICALS Specialty chemicals consist of a variety of organosulfur chemicals, fine chemicals and other specialties. The volumes of any given product are not large when compared to the basic commodity products like ethylene and polyethylene produced by CPChem's other business segments. However, in the aggregate, specialty chemicals account for a significant portion of the earnings of the Specialty Chemicals and Plastics segment. 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 parents from facilities that are integrated with CPChem production facilities. MARKETING. Specialty chemicals are generally sold into smaller, niche markets. 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 the customer and applications base is diverse, the business is generally less cyclical than the commodity chemicals business. CPChem has a global marketing network, consisting of CPChem representatives and third-party distributors and agents. More than half of CPChem's representatives are located outside the United States in all major regions of the world. This network provides sales, distribution and technical services to customers. Distribution channels used to deliver product to customers include ocean vessels, railcars and airfreight. 9 <Page> K-RESIN(Registered Trademark) STYRENE-BUTADIENE COPOLYMER CPChem produces an SBC sold under the trademark K-Resin(Registered Trademark). Production comes from the Houston Chemical Complex and CPChem's K R Copolymer Co., Ltd. joint venture plant in South Korea. Production of K-Resin SBC at the Houston Chemical Complex was idled in March 2000 as the result of an accident and fire at the plant. The plant began a phased-in start-up in the fourth quarter of 2001. It is currently expected that production levels necessary to remove the product line from a state of force majeure should be reached by the end of the second quarter of 2002. CPChem is one of approximately seven major producers in the world of high-styrene content SBC. SUPPLY/FEEDSTOCK SOURCES. The main feedstocks for K-Resin SBC are styrene and butadiene. CPChem produces its own styrene in the United States and secures butadiene on a long-term contract basis with 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. Because high-styrene content SBC such as K-Resin SBC are specialty polymers, pricing does not tend to follow the same cyclical patterns experienced by commodity resins such as polyethylene and polypropylene. CPChem conducts its 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, agents and distributors, that is active in North America and internationally. Some product is sold under multiyear agreements. The majority of K-Resin SBC, however, is sold through individual purchase orders with customers and is delivered via truck, railcar and ocean vessels. RYTON -TM- POLYPHENYLENE SULFIDE CPChem produces high-performance PPS polymers and compounds sold under the trademark Ryton -TM-. Compounds are combinations of Ryton polymer and various additives, designed to have specific properties. CPChem has the annual production capacity of approximately 22 million pounds of Ryton polymer at its Borger, Texas plant. Substantially all Ryton polymer produced at Borger is used by CPChem's Belgium and Singapore facilities to produce Ryton compounds. These facilities have an annual capacity of 29 million pounds of Ryton compounds per year in the aggregate. The compounds are then sold to third parties. SUPPLY/FEEDSTOCK SOURCES. The feedstocks for Ryton polymer are substances such as caustic, sodium hydrosulfide 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 materials used in the compounding process are generally purchased at locations close to CPChem compounding facilities. MARKETING. CPChem has a global sales network that includes direct representatives, distributors and agents to market PPS products. CPChem's compounding facilities are located near its customers, enhancing global sales efforts. The customer base includes component suppliers and appliance manufacturers. Products are generally sold under one-year, renewable agreements. Distribution channels used to deliver product to customers include truck, railcar and ocean vessels. 10 <Page> PROPERTIES AND MANUFACTURING FACILITIES CPChem currently leases the office space for its headquarters in Houston, Texas and also owns or leases administrative, technical and sales office space in various other locations. CPChem announced its intention to move its headquarters in 2002 to a new building in The Woodlands, Texas, located north of Houston. CPChem manufactures product at 33 facilities in seven countries, with an additional facility under construction in Qatar. The following chart provides information regarding CPChem's principal manufacturing facilities, business segments served, principal products and approximate annual capacity. <Table> <Caption> Approximate Facility / Location Segments Served Product Gross Capacity ------------------- --------------- ------- -------------- (MILLION LBS. PER YEAR) <S> <C> <C> <C> Houston Chemical Complex Olefins and Polyolefins Polyethylene 2,200 Pasadena, Texas Olefins and Polyolefins Polypropylene 810(1) Specialty Chemicals and Plastics K-Resin -Registered Trademark- SBC 335(2) Sweeny Facility Olefins and Polyolefins Ethylene 4,100 Old Ocean, Texas Olefins and Polyolefins Propylene 1,100 Borger Facility Specialty Chemicals and Plastics Methyl Mercaptan 100 Borger, Texas Specialty Chemicals and Plastics Dimethyl Sulfide 10 Specialty Chemicals and Plastics Ryton -TM- PPS Polymer 22 Specialty Chemicals and Plastics Other various 200 Cedar Bayou Facility Olefins and Polyolefins Ethylene 1,750 Baytown, Texas Olefins and Polyolefins Propylene 1,000 Specialty Chemicals and Plastics Acetylene Black 18 Specialty Chemicals and Plastics Normal Alpha Olefins (NAO) 1,250 Specialty Chemicals and Plastics Polyalpha Olefins 104 Olefins and Polyolefins Linear low, low and high density polyethylene 1,530 Orange Chemical Facility Olefins and Polyolefins Polyethylene 902(3) Orange, Texas Port Arthur Facility Olefins and Polyolefins Ethylene 1,750 Port Arthur, Texas Olefins and Polyolefins Propylene 780 Aromatics Benzene 530 Aromatics Cyclohexane 330 Aromatics Cumene 1,100 Drilling Specialties Specialty Chemicals and Plastics Soltex(Registered Trademark) 20 Conroe, Texas St. James Facility Aromatics Styrene 1,700 St. James, Louisiana </Table> 11 <Page> <Table> <Caption> Approximate Facility / Location Segments Served Product Gross Capacity ------------------- --------------- ------- -------------- (MILLION LBS. PER YEAR) <S> <C> <C> <C> Pascagoula Facility Aromatics Paraxylene 1,000 Pascagoula, Mississippi Aromatics Benzene 1,540 Marietta Facility Specialty Chemicals and Plastics Polystyrene pellets, crystal Marietta, Ohio and high impact polystyrene 770 Puerto Rico Facility Aromatics Paraxylene 640 Guayama, Puerto Rico Chevron Phillips Singapore Olefins and Polyolefins Polyethylene 860(1) Chemicals (Private) Limited Palau Ayer Merbau Island, Singapore Plastics Compounds & Specialty Chemicals and Plastics Ryton -TM- Compounds 9 Development Center (PCDC) 100%, Singapore Shanghai Golden Phillips Olefins and Polyolefins Polyethylene 300(1) Petrochemicals Co. Facility Shanghai, China Chevron Chemical Specialty Chemicals and Plastics Polystyrene 220 Zhangjiagang Company Ltd. Zhangjiagang, China Tessenderlo Chemicals Facility Specialty Chemicals and Plastics Organosulfur Chemicals 40 Tessenderlo, Belgium Kallo Compounding Facility Specialty Chemicals and Plastics Ryton -TM- Compounds 20 Kallo-Beveren, Belgium Saudi Chevron Phillips Aromatics Benzene 1,060(1) Company Aromatics Cyclohexane 500(1) Al Jubail, Saudi Arabia K R Copolymer Co., Ltd. Specialty Chemicals and Plastics K-Resin(Registered Trademark) SBC 115(1) Facility Yochon, South Korea Performance Pipe Division Olefins and Polyolefins Polyethylene Pipe 624(1) 12 locations in the United States and two in Mexico </Table> ---------- (1) Represents or includes gross capacity of CPChem's affiliate. (2) Capacity once operations are fully restored. (3) Reflects shutdown of two polyethylene units at the Orange, Texas facility in February 2002. 12 <Page> PROJECTS QATAR CHEMICAL COMPANY LTD. (Q-CHEM). CPChem entered into an agreement with Qatar Petroleum for the construction of a petrochemical facility in Qatar. CPChem has a 49% interest in the project, which is designed to produce approximately 1.1 billion pounds of ethylene, 1.0 billion pounds of polyethylene and 100 million pounds of hexene-1 annually. The estimated cost of producing polyethylene in Qatar is significantly less than the cost of producing polyethylene in the U.S. Gulf Coast region according to Chem Systems, a provider of chemicals industry data. Through its established marketing network, CPChem will market approximately 90% of the polyethylene produced by Q-Chem, targeting developed markets in Western Europe and high-growth markets in Asia. The Q-Chem project supports CPChem's strategy to build modern, world-scale plants in areas with secure access to competitive feedstocks and access to key markets. In addition, in July 2001, a CPChem subsidiary and Qatar Petroleum signed a joint venture agreement for the development of a second world-scale petrochemical project in Qatar, scheduled for completion in 2007. CPCHEM / BP SOLVAY POLYETHYLENE JOINT VENTURE. CPChem entered into an agreement with Solvay Polymers, Inc., now BP Solvay Polyethylene, for the construction of a 700 million pound-per-year loop slurry plant designed to produce basic, high-density polyethylene resins. The plant will be located at CPChem's Cedar Bayou facility in Texas and will have the largest capacity of any single loop polyethylene reactor in the world. The plant will be owned equally with BP Solvay Polyethylene, with each co-owner independently marketing their share of production. Production is expected to begin in late 2002. EMPLOYEES From July 1, 2000 through December 31, 2000, CPChem's workforce consisted of the combined workforces of ChevronTexaco and Phillips devoted to their respective chemicals activities. Effective January 1, 2001, these individuals became direct employees of CPChem. CPChem employed 6,056 persons at December 31, 2001. Approximately 83% of this workforce was employed in North America, 10% in Asia, 4% in Europe and the remainder in other locations. Some employees are subject to collective bargaining arrangements. Overall, CPChem believes that employee relations are good. INTELLECTUAL PROPERTY CPChem's business is, to a considerable extent, technology driven. CPChem aggressively develops and protects the intellectual property necessary to conduct operations via a combination of patent, trademark, copyright and trade secret laws as well as confidentiality procedures and contractual provisions to protect intellectual property rights. Where CPChem does not have a necessary technology, it obtains or licenses it from third parties. As of February 11, 2002, CPChem owned or licensed from its parents the rights to 905 issued patents and 334 applications in the United States, and 2,443 issued patents and 1,529 applications in foreign jurisdictions relating to CPChem operations and products. CPChem's parents granted CPChem an irrevocable, exclusive license, with the right to grant sublicenses, to use the patents that they own in connection with CPChem's operations and products. CPChem has the option to have these patents assigned to it. ChevronTexaco and Phillips retain certain irrevocable, nonexclusive rights to use the patents, which they have assigned or licensed to CPChem, for their own business operations or to license such patents to third parties for use in fields of operations not primarily related to the business of CPChem. Furthermore, ChevronTexaco and Phillips have granted nonexclusive rights to use certain other intellectual property that they own, which is, to some degree, useful in CPChem's business. 13 <Page> CPChem often grants licenses to its technology to third parties. Two significant processes that it licenses include CPChem's loop slurry polyethylene and Aromax(Registered Trademark) aromatics production processes. Licenses granted to 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 as a lump sum 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 procedures and contractual provisions to protect its technology in cases where the technology is not patented or patentable. CPChem's licenses to third parties contain restrictions on disclosure. Employees execute nondisclosure agreements when their employment begins and agree to assign to CPChem the rights to intellectual property developed during their employment. Third parties are not allowed to inspect or photograph facilities except under close supervision. Contractors involved in the detailed design or construction of CPChem's or its licensees' facilities are also required to execute nondisclosure agreements. 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 the Marlex(Registered Trademark), Ryton -TM-, and K-Resin(Registered Trademark) trademarks, which are each used in the plastics and specialty chemicals businesses, and the Aromax(Registered Trademark) trademark, which is used in the aromatics technology licensing business. Also, CPChem licenses its trade name on a nonexclusive basis from its parents. Appropriate actions are taken to maintain, renew, protect and enforce CPChem's trademarks in order to prevent infringement, dilution or misappropriation by third parties in the United States and abroad. RESEARCH AND DEVELOPMENT CPChem has scientists, process engineers and technical service experts at seven technical centers. The Bartlesville, Oklahoma site provides basic research, pilot plants and product development for polyethylene, specialty chemicals, Ryton, and K-Resin, 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 development and process development for aromatics, NAO, polyalpha olefins and specialty catalysts. Richmond, California is the site of oxygen scavaging polymer development, and the technology center at Orange, Texas provides a gas phase pilot plant, 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 expenditures totaled $60 million for the year ended December 31, 2001 and $23 million for the period July 1, 2000 (inception) through December 31, 2000. ENVIRONMENTAL REGULATION CPChem must comply with, and is subject to liability under, environmental laws and regulations in all the jurisdictions in which it does business. 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, substantial costs for capital improvements and general compliance under applicable environmental laws, including costs to acquire, maintain and repair pollution control equipment. Over the next several years, industrial facilities in the Texas Gulf Coast region, including facilities CPChem owns, will require modification and the installation of additional control equipment to comply with regulations relating to nitrogen oxide (NOx) emissions, which apply 14 <Page> generally to industries in this area. Under some environmental laws, CPChem may be jointly and severally liable for environmental contamination on or from its properties and at off-site locations where CPChem disposes of, or arranges for disposal or treatment of, hazardous wastes. 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. Accrued environmental remediation costs totaled $7 million at December 31, 2001 and $8 million at December 31, 2000. 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, 2001 or 2000. Based on available information, CPChem believes that the costs that may be needed to 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 political, economic and regulatory risks not faced by businesses that operate only in the United States. A portion of CPChem's operations are outside the United States, with manufacturing facilities in existence or under construction in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. These international operations are subject to risks similar to those affecting CPChem's U.S. operations in addition to a number of other risks, including differences and unexpected changes in regulatory and tax environments, difficulties in enforcing contractual rights, devaluations and fluctuations in currency exchange rates which may adversely affect revenues and margins, 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 restrictions 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. ITEM 3. LEGAL PROCEEDINGS K-RESIN(Registered Trademark) FACILITY INCIDENTS As previously reported in CPChem's Registration Statement on Form S-4 dated April 16, 2001 (CPChem's Registration Statement), a flash fire occurred in a reactor vessel at the K-Resin facility located at CPChem's Houston Chemical Complex on June 23, 1999. Two individuals employed by a subcontractor, Zachry Construction Corporation, were killed and other workers were injured. Ten lawsuits were filed in Texas in connection with the incident, including two actions for wrongful death. Both wrongful death lawsuits and most of the personal injury claims have been resolved, with two lawsuits pending. Of the pending lawsuits, one was filed on August 28, 2000, in the 281st District Court of Harris County, Texas, and the other was filed on June 22, 2001, in the United States District Court for the Southern District of Texas. Both lawsuits are personal injury cases filed against Phillips. While the incident occurred prior to the formation of CPChem, provisions in the contribution agreement under which CPChem was formed (the Contribution Agreement) provide for CPChem's indemnification of Phillips for all liabilities associated with this particular incident. CPChem believes that the resolution of the two remaining lawsuits will not have a material adverse effect on CPChem's consolidated results of operations, financial position or liquidity. As previously reported in CPChem's Registration Statement, an explosion and fire occurred at the K-Resin facility on March 27, 2000, due to the over-pressurization of an out-of-service butadiene storage tank. One employee was killed and several others were injured. Additionally, several individuals who were allegedly in the area of the Houston Chemical Complex at the time of the incident have claimed 15 <Page> they suffered various personal injuries due to exposure to the event. While CPChem generally assumed the liabilities associated with Phillips' chemicals businesses upon the formation of CPChem, CPChem did not assume any responsibility for Phillips' liability in connection with this incident. In fact, the Contribution Agreement specifically provides for Phillips' indemnification of CPChem for all liabilities associated with this particular incident. Thus, CPChem's involvement in these proceedings is minimal. Accordingly, CPChem believes that the resolution of matters relating to this incident will not have a material adverse effect on CPChem's consolidated results of operations, financial position or liquidity. As previously reported in CPChem's Registration Statement, the Occupational Safety and Health Administration (OSHA) issued a Citation and Notification of Penalty to Phillips and CPChem (as successor to Phillips in this instance) alleging 50 different violations of the Occupational Safety and Health Act related to the March 27, 2000 incident at the K-Resin facility. In December 2001, Phillips and CPChem reached a settlement agreement with OSHA, pursuant to which CPChem will retain outside consultants to review its compliance with certain performance standards and will implement all feasible and useful recommendations of the consultants by July 31, 2002. GOVERNMENTAL AGENCY PROCEEDINGS The following are descriptions of 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 the outcome of an unresolved proceeding, if the proceeding described in the next paragraph was decided adversely to CPChem, there would be no material adverse effect on consolidated results of operations, financial position or liquidity. Nevertheless, such proceedings are reported pursuant to the U.S. Securities and Exchange Commission's regulations. The Environmental Protection Agency and the Texas Natural Resources Conservation Commission jointly proposed a civil penalty in connection with inspections conducted in 1999 and 2000 at CPChem's Borger facility. CPChem is negotiating with these agencies in an effort to resolve all related issues. As previously reported in CPChem's Registration Statement, CPChem was in discussions with the Louisiana Department of Environmental Quality (LDEQ) regarding a Notice of Potential Penalty issued on May 26, 2000, in connection with an alleged violation of certain regulations relating to fugitive emissions monitoring at CPChem's St. James facility. On August 15, 2001, CPChem entered into a settlement agreement with the LDEQ whereby CPChem agreed to pay a penalty of $150,000 and develop a model leak detection and repair program. OTHER CPChem is also a party to a number of other legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. While the final outcome of these proceedings cannot be predicted with certainty, CPChem believes that none of the other 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 AND RELATED STOCKHOLDER MATTERS 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 of CPChem. 16 <Page> ITEM 6. SELECTED FINANCIAL DATA The following selected financial data was derived from the audited financial statements included in this Annual Report on Form 10-K and 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 ------------------------------------- <Table> <Caption> July 1, 2000 Year ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ----------------- <S> <C> <C> Net sales $ 5,871 $ 3,402 Net loss (480) (241) <Caption> December 31, 2001 December 31, 2000 ----------------- ----------------- <S> <C> <C> Total assets $ 5,860 $ 6,673 Long-term debt, less current maturities 1,507 1,784 </Table> 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), unless otherwise indicated, was derived from audited financial statements not necessarily included in this Annual Report on Form 10-K and 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 ----------------------------------------------- <Table> <Caption> Year ended December 31, Six months ended ----------------------- MILLIONS June 30, 2000 1999 1998 1997 -------- --------------- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 2,238 $ 3,117 $ 2,800 $ 3,429 Net income 84 147 147 276 <Caption> December 31, ----------------------- 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Total assets $ 3,214 $ 3,021 $ 2,977(a) Long-term debt, less current maturities - - -(a) </Table> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS ---------------------------------------- <Table> <Caption> Year ended December 31, Six Months Ended ----------------------- MILLIONS June 30, 2000 1999 1998 1997 -------- ------------- ---- ---- ---- <S> <C> <C> <C> <C> Net sales $ 1,834 $ 2,695 $ 2,289 $ 2,695 Net income 96 177 22 155 <Caption> December 31, ----------------------- 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Total assets $ 3,072 $ 2,684 $ 2,610(a) Long-term debt, less current maturities - - -(a) </Table> ---------- (a) Unaudited 17 <Page> ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" within the meaning of the federal securities laws. Such statements can generally be identified with words and phrases such as "believes," "expects," "anticipates," "should," "estimates," "foresees" or other words and phrases of similar import. Where CPChem expresses an expectation or belief as to future results, there can be no assurance that the expectation or belief will result, be achieved or be accomplished. Where any such forward-looking statement includes a statement of the assumptions or bases underlying such forward-looking statement, CPChem believes such assumptions or bases to be reasonable and to be made in good faith. Assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending on the circumstances. The more significant factors that, if erroneous, could cause actual results to differ materially from those expressed include, among others: the timing and duration of periods of expansion and contraction within the chemicals industry, plans for the construction, modernization or de-bottlenecking of domestic and foreign chemical plants, prices of feedstocks and products, force majeure events, accidents, labor relations, political risks, 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 U.S. and global economies, results of financing efforts and overall financial market conditions. All forward-looking statements in this annual report are qualified in their entirety by the cautionary statements herein. Unless legally required, CPChem does not undertake to update, revise or correct any of the forward-looking information. OVERVIEW CPChem was formed July 1, 2000. As such, the following discussion focuses on CPChem's results of operations for the year ended December 31, 2001 and for the period July 1, 2000 (inception) through December 31, 2000. To comply with the Securities and Exchange Commission rules and regulations, similar discussions are presented for Phillips Petroleum Company's Chemicals Business and Chevron Chemical Company C Chem Business (the businesses contributed to form CPChem). The results of those contributed businesses presented, when combined, are not intended to and do not represent pro forma results of CPChem, nor do the results necessarily reflect results that would have been achieved had the contributed businesses been combined for the periods presented. CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates and assumptions. Management believes that the estimates and assumptions used in connection with the amounts reported in CPChem's financial statements and related disclosures are reasonable and made in good faith. The following are CPChem's critical accounting policies, some of which require the application of significant estimates and assumptions. Sales of petrochemicals, plastics, natural gas liquids and other items, including by-products, are recorded when title passes to the customer and are presented net of discounts and allowances. Accounts receivable are presented at estimated net realizable value. Product inventories are valued at the lower of cost or market, aggregated at the segment level for dollar-value, last-in, first-out (LIFO) pools. Lower-of-cost-or-market write-downs for LIFO-valued inventory are generally considered temporary and would be reversed should market conditions and prices improve in the future. However, further deterioration of market prices could result in additional write-downs. 18 <Page> Long-lived assets used in operations are assessed for possible impairment when changes in facts and circumstances indicate a potential significant deterioration in future cash flows projected to be generated by an asset group. Should the outlook for future projected cash flows change, additional material charges for impairments could occur. In the case of all known contingencies CPChem records an undiscounted liability when the loss is probable and the amount is reasonably estimable. As facts concerning contingencies become known, CPChem reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem's liability in proportion to other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available during the administrative and litigation process. See "Part II - Item 8. Financial Statements and Supplementary Data -- Note 2. Summary of Significant Accounting Policies" for further discussion of CPChem's significant accounting policies. CPCHEM RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 The continued slowing of the U.S. economy that began in the second half of 2000 resulted in reduced demand and excess capacity in the chemicals industry, negatively impacting margins and volumes. CPChem's operating results have reflected these downward pressures. Net loss for the year ended December 31, 2001 totaled $480 million, which included $197 million of special items. Excluding special items, net loss was $283 million. Special items are nonrecurring or infrequently occurring transactions that CPChem does not consider representative of ongoing operations. Approximately $167 million of special items were recorded in the fourth quarter of 2001. CPChem achieved in excess of $200 million of net recurring merger synergies and cost savings in 2001, surpassing the previous target of $150 million announced when CPChem was formed. <Table> <Caption> MILLIONS Consolidated -------- ------------ <S> <C> Net loss $ (480) Less special items (197) ------ Net loss, as adjusted $ (283) ====== <Caption> Specialty Corporate, Olefins & Chemicals Other & Polyolefins Aromatics & Plastics Eliminations Consolidated ----------- --------- ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> Income (loss) before interest and taxes $(222) $(209) $ 124 $ (29) $(336) Less special items (162) (66)* 84 (9) (153)* ----- ----- ----- ----- ----- Income (loss) before interest and taxes, as adjusted $ (60) $(143) $ 40 $ (20) $(183) ===== ===== ===== ===== ===== </Table> ---------- * Excludes charges of $44 million for an increase in the valuation allowance for deferred tax assets. OLEFINS AND POLYOLEFINS Excluding special items, loss before interest and taxes for Olefins and Polyolefins totaled $60 million for the year ended December 31, 2001. Special items totaled $162 million, including fourth quarter charges to depreciation expense (included as a component of Cost of Goods Sold) of $68 million related to the permanent idling of the front end of the Sweeny ethylene Unit 12, 19 <Page> $14 million related to accelerated depreciation associated with the planned permanent shutdown in February 2002 of two particle loop reactors at the Orange polyethylene plant, and $6 million for the retirement of the developmental reactor unit at the Houston Chemical Complex. Special items also included a $46 million charge to equity in net loss of affiliates in the consolidated statement of operations, representing CPChem's share of an impairment charge recorded in December 2001 by Phillips Sumika Polypropylene Company (Phillips Sumika), an equity investment, adjusted for the difference between CPChem's carrying value of its investment in Phillips Sumika and CPChem's equity in its net assets. Olefins earnings decreased during the year, as sales prices were affected by the weak economy, reduced demand and excess capacity. Lower feedstock and energy prices partially offset the lower sales prices. Due to market conditions, certain units were idled and production rates at others were reduced for inventory control. Polyethylene profit margins increased in the latter half of the year, particularly in the third quarter of 2001, due to lower feedstock and lower fuel costs. These benefits were partially offset by lower sales volumes. AROMATICS Aromatics' loss before interest and taxes for the year, excluding special items, was $143 million. Special items included costs associated with a column fire at the St. James facility in February 2001 and, due to the outlook for future margin conditions, a third quarter $42 million asset impairment charge related to the Puerto Rico facility. The present value of projected future cash flows was used to determine fair value. In addition, a $17 million charge to depreciation expense, included as a component of Cost of Goods Sold, was recorded in December 2001 to retire the benzene and cyclohexane plant assets in Puerto Rico based on the decision to discontinue such production in Puerto Rico. As a result, the workforce at the Puerto Rico facility will be reduced to a level necessary to support the remaining paraxylene operations. It is currently anticipated that the paraxylene operations will resume in late 2002 or early 2003. The motor fuels reformer in Puerto Rico was shut down in March 2001 in an effort to improve financial performance. Styrene margins improved in the second half of the year on significantly lower feedstock and fuel costs. Lower sales prices partially offset this benefit. Styrene production increased, as well as sales volumes, as capacity at St. James was restored in October 2001 following the column fire earlier in the year. Paraxylene margins also improved in the latter half of the year on lower feedstock costs. In the fourth quarter of 2001, Aromatics recorded a $25 million write-down of domestic dollar-value last-in, first-out (LIFO) pool inventories to current net realizable value. The associated reserve established is considered temporary and will be reversed should market conditions and prices improve in the future. SPECIALTY CHEMICALS AND PLASTICS Excluding special items, income before interest and taxes for Specialty Chemicals and Plastics was $40 million for the year. Special items for the year consisted primarily of a $113 million benefit, recorded as other income, in connection with the settlement of a business interruption insurance claim associated with the March 2000 incident at CPChem's Houston Chemical Complex K-Resin -Registered Trademark- facility. Production of K-Resin SBC was idled in March 2000 as the result of an accident and fire at the plant. The plant began a phased-in start-up in the fourth quarter of 2001. It is currently expected that production levels necessary to remove the product line from a state of force majeure should be reached by the end of the second quarter of 2002. 20 <Page> Earnings from NAO were higher in the second half of 2001 as a result of higher production and sales volumes, and lower feedstock and fuel costs. Lower sales prices partially offset these benefits. Lower earnings from K-Resin SBC and polystyrene offset the higher earnings from NAO. OTHER INTEREST EXPENSE. Interest expense totaled $104 million in 2001, with average interest rates falling throughout the year. Debt outstanding decreased to $1.7 billion at December 31, 2001 from $1.8 billion at year-end 2000. INCOME TAXES. CPChem is treated as a flow-through entity for U.S. income tax purposes whereby each member is taxable on its respective share of income and losses. However, CPChem and its subsidiaries are directly liable for U.S. and state income taxes and franchise taxes on certain separate legal entities and for any foreign taxes incurred. CPChem recorded income tax expense of $49 million for the year ended December 31, 2001, consisting primarily of a $44 million increase in the valuation allowance related to the deferred tax assets balance at December 31, 2000 of Chevron Phillips Chemical Puerto Rico Core Inc. (Puerto Rico Core). This increase was necessitated, in part, by the Phillips merger with Tosco Corporation in September 2001, which triggered regulatory limitations on the future utilization of pre-merger Puerto Rico Core net operating losses. The valuation allowance was also increased as a result of a change in the outlook for future margin conditions. At December 31, 2001, the deferred tax assets of Puerto Rico Core were fully offset by valuation allowances. JULY 1, 2000 (INCEPTION) THROUGH DECEMBER 31, 2000 <Table> <Caption> MILLIONS Consolidated -------- ------------ <S> <C> Net loss $ (241) Less special items (216) ------- Net loss, as adjusted $ (25) ======= <Caption> Specialty Corporate, Olefins & Chemicals Other & Polyolefins Aromatics & Plastics Eliminations Consolidated ----------- --------- ---------- ------------ ------------ <S> <C> <C> <C> <C> <C> Income (loss) before interest and taxes $ 48 $ (177) $ 10 $ (39) $ (158) Less special items (7) (137)* (15) (12) (171)* ------- ------ ----- ----- ------ Income (loss) before interest and taxes, as adjusted $ 55 $ (40) $ 25 $ (27) $ 13 ======= ====== ===== ===== ====== </Table> ---------- * Excludes charges of $45 million for an increase in the valuation allowance for deferred tax assets. CPChem incurred a consolidated net loss of $241 million for the period July 1, 2000 (inception) through December 31, 2000. Excluding the effect of special items, CPChem incurred a net loss of $25 million. Special items for the six-month period include property impairments primarily related to CPChem's Puerto Rico facility. The Puerto Rico impairment charge, totaling $135 million, was required due to the outlook for margin conditions and a shift in strategic direction for the facility, which is part of the Aromatics segment. In addition, a valuation allowance of $45 million was recorded against a related deferred tax asset because it was viewed as unlikely that the Puerto Rico facility would generate sufficient future taxable income to allow full use of such tax benefit. The balance of $36 million of special items includes contingency and environmental accruals, charges related to workforce reductions and the retirement of an NAO unit. Statements in the following discussion regarding increases or decreases in production, margins or similar matters generally are in relation to levels of such items at July 1, 2000. 21 <Page> OLEFINS AND POLYOLEFINS Ethylene and polyethylene margins deteriorated, as sales prices fell on decreased demand and increased operating capacity in the industry. Product costs increased due to higher feedstock, fuel and utility costs. Ethylene production was adversely impacted during August and September 2000 by an unexpected production interruption at CPChem's Port Arthur facility that resulted from a loss of steam provided by a third-party supplier. Ethylene production was also impacted in December 2000 as a result of an operating decision to shut down two units for inventory control purposes. Polyethylene production was reduced in December 2000 to control inventory levels and minimize the purchase of high-cost feedstocks. AROMATICS Prices for Aromatics products were depressed due to overcapacity in the industry. Additionally, feedstock and utility costs rose due to energy prices reaching historically high levels, resulting in lower margins. Even though CPChem believed that long-term growth rates for many of the primary aromatics derivatives remained strong, demand for these derivatives decreased during the six-month period. The decrease was a result of a buildup of inventory by customers. SPECIALTY CHEMICALS AND PLASTICS Production volumes in Specialty Chemicals and Plastics increased during the six-month period, due primarily to the August 2000 start-up of a new 750 million pound-per-year NAO plant at the Cedar Bayou facility. As a result of the new plant start-up, an older 250 million pound-per-year plant was retired in November 2000. A new 220 million pound-per-year polystyrene plant, located in China, came onstream in August 2000, adding additional production volumes for the six-month period. The K-Resin facility remained shut down as facility repairs continued following a March 2000 incident. Earnings decreased during the fourth quarter for Specialty Chemicals and Plastics, primarily due to the retirement of the NAO plant and increasing feedstock and energy prices. Earnings included accruals for business interruption insurance proceeds. CHEVRON CHEMICAL COMPANY C CHEM BUSINESS RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 Net income was $96 million for the first six months of 2000. Product margins were strong as prices for olefins, polyethylene, styrene, polystyrene and benzene continued their upward trend, reflecting higher worldwide demand and tighter industry inventories for olefins. Margins for styrene widened as prices rose on improved economic conditions in Asia and restricted industry capacity due to planned and unplanned turnarounds. NAO margins were depressed by both higher feedstock costs and plant operational problems. Operating expense was unfavorably impacted by higher fuel costs. Sales volumes of polystyrene and benzene were higher than in 1999. Polyethylene sales rose on stronger demand, resulting in lower external olefin sales as olefins are used as a feedstock for polyethylene production. Net income included an after-tax LIFO inventory valuation gain of $6 million resulting from the reduction of certain inventory quantities which were valued at lower LIFO costs. There were no special items in the first six months of 2000. Production in the first half of 2000 was slightly below 1999 levels. Styrene and NAO production were lower due to a planned turnaround at the St. James, Louisiana styrene facility and Cedar Bayou NAO plant operational problems. Benzene production remained high on a record run for an Aromax -Registered Trademark- I catalyst charge at Pascagoula. 22 <Page> YEAR ENDED DECEMBER 31, 1999 Net income was $177 million in 1999, which included the recovery of an unfavorable lower-of-cost-or-market LIFO inventory valuation adjustment charged in 1998. Excluding the effects of the inventory valuation adjustment, adjusted net income was $96 million in 1999. Results included asset write-offs associated with an Orange, Texas gas phase expansion project. Operationally, ethylene, benzene and paraxylene margins rebounded from the prior year, while styrene and polystyrene margins continued their upward trend. Margin improvements reflected worldwide demand-driven sales price increases and continued reduction of operating expense despite higher fuel costs. Sales volumes rose in all major product lines except for styrene, which remained flat. Operating cost per unit fell to its lowest level since 1985. Olefins and plastics production volumes rose 6% from the previous year. Ethylene and propylene production were up 13%, setting sales and production records, despite a compressor failure at the Cedar Bayou plant. Polyethylene and pipe production increases were offset by production lost during downtime associated with an Orange, Texas gas phase expansion, resulting in flat overall production for 1999. Aromatics and derivatives production rose, reflecting a 12% increase in polystyrene production and benzene and paraxylene production increases following the loss of production from 1998's Hurricane Georges-related downtime at Pascagoula and from downtime associated with the Pascagoula paraxylene plant expansion. Production of styrene remained at historically high levels at St.James for the second straight year. Special item after-tax LIFO losses totaled $3 million, resulting from the reduction of certain inventory quantities which were valued at lower LIFO costs prevailing in prior periods. In addition, after-tax severance costs of $5 million were incurred related to the move of Chevron Chemical Company's headquarters to Houston, Texas. PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 2000 Net income for the six-month period ended June 30, 2000 was $84 million. Special items benefited net income by $2 million in the period. After excluding special items, net operating income was $82 million. Sales and other operating revenues were $2.2 billion. Average ethylene, propylene, polyethylene and paraxylene prices for the six-month period were all higher than year-end 1999 prices. Equity in earnings of affiliated companies was $33 million. Equity earnings from Sweeny Olefins Limited Partnership, which is 100% owned by CPChem since July 1, 2000, benefited from improved ethylene and propylene margins. Other revenues were $17 million for the six-month period, primarily representing net gains on asset sales and insurance-related activity. Purchased products were $1.6 billion in the first six months of 2000. The business experienced higher average feedstock costs for natural gas liquids and ethylene during the period compared with year-end 1999 levels. Controllable costs, which are comprised of operating expenses and selling, general and administrative expenses, were $457 million during the period. The business experienced increased fuel and utility costs, as well as costs commensurate with higher production levels of certain products. Depreciation and amortization costs were $57 million, while taxes other than income taxes were $20 million. If annualized, both of these items would be slightly higher than corresponding amounts in the prior year. 23 <Page> During the six-month period ended June 30, 2000, the business experienced higher ethylene margins and production volumes, as well as increased propylene, other chemicals, and plastic pipe margins and volumes. The second quarter of 2000 was negatively impacted by the expiration of the business' composition of matter patents on crystalline polypropylene in March, which led to lower licensing income. Earnings from the K-Resin business were also lower during the period. In late March 2000, the K-Resin facility was damaged by an explosion and fire, and the facility was idled. YEAR ENDED DECEMBER 31, 1999 Net income was $147 million in 1999. Excluding special items, net operating income was $129 million. Sales and other operating revenues increased, primarily the result of higher sales prices for ethylene and other key products, as well as increased sales volumes for polyethylene. Equity in earnings of affiliated companies benefited from improved earnings from the international polyethylene joint ventures in China and Singapore and also from improved earnings from Sweeny Olefins Limited Partnership. Other revenues in 1999 primarily represented favorable contingency settlements. Purchased products reflected higher feedstock costs for natural gas liquids and ethylene. Controllable costs decreased, the result of general cost control efforts across all business lines, along with lower operating costs following various production facility shutdowns in 1999. Net operating income reflected lower polyethylene margins that resulted from increased ethylene feedstock costs that could not be fully recovered in the polyethylene market, although demand remained firm. Ethylene margins, after moving downward in the previous year, trended upward through 1999, even though natural gas liquids feedstock prices increased substantially. This reflected continued strong demand for ethylene. Margins on certain other olefins and polyethylene pipe improved as well. Olefins and polyolefins facilities operated well in 1999, with higher ethylene and polyethylene production than the previous year. Ethylene production was negatively impacted in the prior year by a maintenance turnaround and a weather-related shutdown of the Sweeny, Texas facility. Polyethylene production was higher at the three chemical production facilities: the 100%-owned Houston Chemical Complex, a 50%-owned plant in Singapore and a 40%-owned facility in China. Results from specialty chemicals were down, mainly resulting from lower margins and higher operating expenses. The company's K-Resin facility, located at the Houston Chemical Complex, was damaged by a flash fire in June 1999. Portions of the damaged plant were repaired and restarted in 1999. Paraxylene and cyclohexane were produced at the Puerto Rico facility. Paraxylene margins remained depressed in 1999, although they did improve somewhat in the fourth quarter. Paraxylene margins were in a cyclical downturn due to weak demand and industry overcapacity. Paraxylene production volumes decreased in 1999, mainly due to operating problems and weather-related shutdowns in the first half of the year. CPCHEM OUTLOOK The overall decline in the chemicals industry that began in the second half of 2000 and the weakened U.S. economy continued to negatively impact CPChem in 2001, resulting in excess capacity, reduced product demand and lower margins in most business lines. In addition, a strong dollar, which negatively affects exports, along with the higher-than-anticipated fuel and feedstock costs that were experienced throughout the first half of the year, also made conditions difficult. CPChem expects existing conditions to continue to be a challenge for the near term. 24 <Page> CPCHEM LIQUIDITY AND CAPITAL RESOURCES <Table> <Caption> Contractual Cash Obligation Payments Due by Period -------------------------------------------------- less than greater than As of December 31, 2001, IN MILLIONS 1 Year 2-3 Years 4-5 Years 5 Years Total ------------------------------------ --------- --------- --------- ------------ ----- <S> <C> <C> <C> <C> <C> Secured borrowings (accounts receivable securitization) $ 199 $ - $ - $ - $ 199 Commercial paper - - - 1,002* 1,002* 7% notes due 2011 - - - 500 500 Other debt, including current portion 1 2 2 7 12 Operating leases 40 61 45 118 264 Advances to Q-Chem (estimated) 275 125 - - 400 ----- ----- ----- ------ ------ Total $ 515 $ 188 $ 47 $1,627 $2,377 ===== ===== ===== ====== ====== </Table> ---------- * Assumes maintaining the current ability and intent to re-issue upon maturity. CPChem has no unconsolidated limited-purpose or special-purpose entities, and therefore, has no other legal obligations that might be associated with entities of that nature, such as the purchase of such entities' capital stock or assets, the issuance of securities pursuant to a call option held by such entities or the financial support for such entities' non-performance in a commercial arrangement. Cash balances declined $45 million during 2001. Capital and investment expenditures, net debt repayments and net member distributions exceeded cash provided by operating activities. Cash increased $81 million in the period July 1, 2000 through December 31, 2000. Proceeds from the implementation of a commercial paper program and from the members in the forms of an advance and a note payable, along with cash provided by operating activities, were partially offset by distributions and post-closing adjustment payments to ChevronTexaco and Phillips. OPERATING ACTIVITIES Cash provided by operating activities totaled $371 million during 2001, including $169 million of net proceeds received from the settlement of a business interruption insurance claim associated with a March 2000 incident at the Houston Chemical Complex K-Resin plant. Reductions in accounts payable partially offset lower accounts receivable and inventory balances. Operating activities generated $98 million during the six month period ended December 31, 2000. An increase in accounts payable was partially offset by higher inventory and accounts receivable balances. INVESTING ACTIVITIES Capital and investment expenditures totaled $291 million in 2001 and $112 million in the six months ended December 31, 2000. Approximately $130 million of capital and investment expenditures in 2001 was invested in Olefins and Polyolefins, $68 million in Aromatics, $74 million in Specialty Chemicals and Plastics, and the remaining $19 million at the corporate level. CPChem currently expects to invest a total of approximately $340 million in capital and investment expenditures in 2002. Approximately 60% is budgeted to be spent in Olefins and Polyolefins, 19% in Aromatics and 16% in Specialty Chemicals and Plastics, with the remainder to be spent at the corporate level. In addition to the capital and investment expenditures budget described above, CPChem expects to advance Qatar Chemical Company Ltd. (Q-Chem), a CPChem equity investment, approximately $275 million in 2002 and $125 million in 2003 under a subordinated loan agreement to be used towards the cost of construction and start-up of the Qatar complex. Qatar Chemical Company Ltd. (Q-Chem), a joint venture company, was formed in 1997 to develop a major petrochemical 25 <Page> complex in Qatar in the Middle East at an estimated cost of $1.2 billion. Construction of the complex began in October 1999, with start-up scheduled for late 2002. At December 31, 2001, $750 million had been drawn by Q-Chem under a bank financing agreement for the construction of the complex. CPChem is now required to fund any remaining construction costs, initial working capital requirements, and certain debt service and operating reserve fund requirements through advances under the subordinated loan agreement. No funding occurred in 2001. In connection with the bank financing, the co-venturers agreed that if the complex is not completed by August 2003, each will make capital contributions on a pro rata, several basis to the extent necessary to cover bank financing service requirements including, if demanded, repayment of principal. This obligation may be extended for up to one year due to force majeure. After construction is completed, the bank financing is non-recourse with respect to the co-venturers. CPChem has also agreed to provide up to $75 million of credit support to Q-Chem for cash flow needs under a contingent support agreement after construction of the complex is completed. A CPChem subsidiary and Qatar Petroleum of Qatar signed a joint venture agreement on July 24, 2001 for the development of a second world-scale petrochemical project in the State of Qatar, scheduled for completion in 2007. CPChem and Solvay Polymers, Inc., now BP Solvay Polyethylene, announced in June 2001 plans for the construction of a 700-million-pound-per-year, high-density polyethylene plant to be constructed at CPChem's Cedar Bayou facility. CPChem and BP Solvay Polyethylene will each own 50% of the plant, scheduled for start-up in late 2002. FINANCING ACTIVITIES Cash used in financing activities totaled $152 million during 2001. Commercial paper outstanding decreased $783 million and a note payable to ChevronTexaco was repaid, largely with proceeds from the issuance of private placement notes and monies received in connection with the implementation of a trade receivables securitization program discussed below. CPChem borrowed $50 million from ChevronTexaco in February 2001 in addition to the $50 million note that was outstanding at December 31, 2000. These notes, totaling $100 million, were repaid on March 19, 2001 with proceeds from the issuance of the private placement notes described below, and the credit agreement with ChevronTexaco was terminated. On March 19, 2001, Chevron Phillips Chemical Company LLC and its wholly-owned subsidiary, Chevron Phillips Chemical Company LP, jointly and severally issued $500 million of senior unsecured 7% notes in a private placement. The LLC and the LP subsequently filed a joint registration statement on Form S-4 with the SEC, as amended and declared effective May 10, 2001, to register exchange notes with terms substantially identical to the private placement notes, except that the exchange notes are freely tradeable. The notes are due in March 2011 and interest is payable semiannually, with the first interest payment paid on September 15, 2001. Proceeds from this debt issuance were used to repay the notes payable to ChevronTexaco, to retire a portion of outstanding commercial paper obligations and for general corporate purposes. In May 2001, CPChem entered into a trade receivables securitization agreement that expires in May 2002. 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. As the receivables are collected by CPChem, borrowings under the agreement are reduced or security interests in new trade receivables are granted. At December 31, 2001, $199 million of borrowings, classified as secured borrowings, were outstanding under the trade receivables securitization agreement, secured by $313 million of trade receivables. CPChem intends to request an extension of the expiration date of the agreement to May 2003. 26 <Page> CPChem has separate $700 million and $900 million revolving credit agreements with a syndicate of banks. The agreements expire in July 2002 and July 2003, respectively. The July 2002 agreement, which replaced the previous $900 million 364-day revolving credit agreement that expired in July 2001, provides that CPChem may, at its option, extend the date for repayment by one year of any borrowings outstanding on July 1, 2002. Both facilities are used to support the commercial paper program. There were no borrowings outstanding under any of the credit agreements at December 31, 2001 and 2000. CPChem intends to request extensions of the expiration dates of the agreements or replace the existing agreements with new agreements with similar terms. Phillips advanced CPChem $70 million in 2000 in connection with an incident at the K-Resin plant in March 2000. Pursuant to the contribution agreement, a certain portion of the advance would be re-characterized as a member contribution each month until the plant met a pre-established production threshold. Accordingly, $35 million of the advance was recorded as Member Contributions during the six months ended December 31, 2000 and the remainder was recorded as Member Contributions during 2001. Beginning in January 2002, Phillips will contribute an additional $3.2 million per month, to a maximum of $38.4 million, until a pre-established production threshold is met. In addition, Phillips will remit additional contributions, to a maximum of $30 million, should earnings from the K-Resin business fail to meet pre-established targets as agreed to, and as later amended, in the contribution agreement. CPChem believes cash requirements over the next twelve months will be funded through a combination of cash on hand, cash flows from operations, available lines of credit and/or future debt issuances. CPCHEM OTHER RISK AND OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE CYCLICALITY AND OVERCAPACITY IN THE PETROCHEMICALS AND PLASTICS BUSINESS. The petrochemicals and plastics industry is both cyclical and volatile. Historically, the industry has experienced alternating 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 demand for products, changes in energy prices and changes in economic conditions around the world, CPChem's profit margins may fluctuate, not only from year to year, but also from quarter to quarter. Currently, industry-wide capacity expansions have also contributed to a decline in the profit margin of some of CPChem's products. There can be no guarantee that future growth in product demand will be sufficient to utilize this additional capacity. Fluctuations in capacity and supply can cause volatility in profit margins. FEEDSTOCK COSTS AND OTHER EXTERNAL FACTORS. Due to the commodity nature 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 availability because of major capacity additions or significant facility operating problems. Other external factors that can cause volatility in feedstock prices, demand for products, product prices and volumes, and margin deterioration include general economic conditions, the level of business activity in user industries, competitors' actions, international events and circumstances, product and process technology changes, and governmental regulation in the United States and abroad. Although CPChem produces feedstocks to meet a portion of its demand and has long-term feedstock supply contracts with affiliates of its parents and others, CPChem is still subject to volatile feedstock prices. Extreme volatility, such as that experienced at the beginning of the fourth quarter of 2000, can result in the need to temporarily idle or curtail production units. 27 <Page> ENVIRONMENTAL, HEALTH AND SAFETY. The chemicals and plastics business is highly regulated, subject to increasingly stringent laws and regulations addressing environmental, health and safety matters. A violation of these laws and regulations or permit conditions can result in substantial fines, criminal sanctions, permit revocation and/or facility shutdowns. Under some laws, including in the United States 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 its current and former properties, as well as other locations where it has disposed or arranged for disposal of wastes, or where feedstock or products have spilled. 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 toxic tort claims seeking compensatory and punitive damages for alleged impacts on human health or the environment. There are risks associated with the production of chemicals and plastics, such as operational hazards and unforeseen interruptions caused by events beyond CPChem's control. These include accidents, the breakdown or failure of equipment or processes, and 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 adequate 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 political, economic and regulatory risks not faced by businesses that operate only in the United States. A portion of CPChem's operations are outside the United States, with manufacturing facilities in existence or under construction in Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Assets located outside of the U.S. as of December 31, 2001 totaled $564 million and net sales from non-U.S. operations were $627 million in 2001. These international operations are subject to risks similar to those affecting CPChem's U.S. operations in addition to a number of other risks, including differences and unexpected changes in regulatory and tax environments, difficulties in enforcing contractual rights, devaluations and fluctuations in currency exchange rates which may adversely affect revenues and margins, 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 restrictions 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. FOREIGN CURRENCY RISK. Internationally, CPChem operates facilities in six foreign 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 fluctuations in the exchange rates of local currencies in those countries against the U.S. dollar and other foreign currencies. The potential foreign currency transaction gain or loss from a hypothetical 10% change in the exchange rates of those local currencies against the U.S. dollar at December 31, 2001 was approximately $6 million in the aggregate. 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, 2001 of these debt instruments would impact interest expense by approximately $12 million annually in the aggregate. 28 <Page> CONTINGENCIES In the case of all known contingencies, CPChem records an undiscounted liability when the loss is probable and the amount is reasonably estimable. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probable insurance or other third-party recoveries. Based on currently available information, CPChem believes it is remote that future costs related to known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect on consolidated results of operations, financial position or liquidity. As facts concerning contingencies become known, CPChem reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem's liability in proportion to other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available during the administrative and litigation process. CPChem is a party to a number of legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. While the final outcome of these proceedings cannot be predicted with certainty, CPChem believes that none of these proceedings, when resolved, will have a material adverse effect on consolidated results of operations, financial position or liquidity. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations," which addresses the accounting and reporting requirements for legal obligations associated with the retirement of long-lived assets. This standard requires that a liability for an asset retirement obligation, measured at fair value, be recognized in the period in which it is incurred if a reasonable estimate of fair value is determinable. That initial fair value is capitalized as part of the carrying amount of the long-lived asset and subsequently depreciated. The liability is adjusted each year for accretion, with a charge to the statement of operations. SFAS No. 143 will become effective for CPChem beginning January 1, 2003. CPChem is currently reviewing the new standard to determine what impact, if any, that implementation of this standard will have on consolidated results of operations and financial position. CPChem adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. This new standard supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business from Accounting Principles Board Opinion No.30, "Reporting the Results of Operations -- Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss as the difference between the carrying value and the fair value for assets to be held and used only if the carrying amount is greater than the undiscounted cash flows it produces; however, for all assets classified as held for sale, SFAS No. 144 requires that depreciation on the assets ceases and that assets be measured at the lower of carrying value or fair value, less cost to sell. Implementation of this standard is not expected to have a material adverse effect on consolidated results of operations, financial position or liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - CPChem Other." 29 <Page> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA <Table> <S> <C> INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CHEVRON PHILLIPS CHEMICAL COMPANY LLC Report of Management 31 Report of Independent Auditors 32 Consolidated Statement of Operations for the year ended December 31, 2001 and the period July 1, 2000 (inception) through December 31, 2000 33 Consolidated Balance Sheet at December 31, 2001 and December 31, 2000 34 Consolidated Statement of Members' Capital for the year ended December 31, 2001 and the period July 1, 2000 (inception) through December 31, 2000 35 Consolidated Statement of Cash Flows for the year ended December 31, 2001 and the period July 1, 2000 (inception) through December 31, 2000 36 Notes to Consolidated Financial Statements 37 Selected Quarterly Financial Data (Unaudited) 59 </Table> 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. <Table> <S> <C> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Report of Independent Auditors 60 Combined Statement of Income for the six months ended June 30, 2000 and the year ended December 31, 1999 61 Combined Statement of Cash Flows for the six months ended June 30, 2000 and the year ended December 31, 1999 62 Combined Statement of Parent Company Investment and Accumulated Comprehensive Income for the six months ended June 30, 2000 and the year ended December 31, 1999 63 Notes to Combined Financial Statements 64 CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Report of Independent Accountants 74 Combined Statement of Income for the six months ended June 30, 2000 and the year ended December 31, 1999 75 Combined Statement of Changes in Owner's Net Investment for the six months ended June 30, 2000 and the year ended December 31, 1999 76 Combined Statement of Cash Flows for the six months ended June 30, 2000 and the year ended December 31, 1999 77 Notes to Combined Financial Statements 78 </Table> 30 <Page> Report of Management Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Chevron Phillips Chemical Company LLC (CPChem). The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include, where necessary, amounts that are based on management's best estimate and judgment. Management is also responsible for maintaining an internal control structure designed to provide reasonable assurance that CPChem's assets are safeguarded from unauthorized use and that transactions are recorded properly to permit the preparation of accurate financial information. Such internal control structure is based upon established policies and procedures and is monitored by an internal audit department that conducts a program of internal audits and independently assesses the effectiveness of internal controls. Management believes that the system of internal controls in place at December 31, 2001 provides reasonable assurance that the books and records accurately reflect the transactions of CPChem and there has been compliance with established policies and procedures. The Audit Committee of the Board of Directors meets regularly with members of management, the internal auditors and the independent auditors to discuss the adequacy of CPChem's internal controls, results of internal audits, the independent auditors' findings and opinion, financial information and related matters. Both the independent auditors and the internal auditors have free and direct access to the Audit Committee, with and without management present. <Table> <S> <C> <C> /s/ James L. Gallogly /s/ C. Kent Potter /s/ Greg G. Maxwell --------------------- ------------------- -------------------- James L. Gallogly C. Kent Potter Greg G. Maxwell President and Chief Senior Vice President Vice President Executive Officer and Chief Financial and Controller Officer </Table> February 1, 2002 31 <Page> Report of Independent Auditors 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 and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, members' capital and cash flows for the year ended December 31, 2001 and the period July 1, 2000 (inception) through December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(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. We conducted our audits in accordance with auditing standards generally accepted in the 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for the year ended December 31, 2001 and for the period July 1, 2000 (inception) through December 31, 2000 in conformity with accounting principles generally accepted in the United States. 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. /s/ Ernst & Young LLP Houston, Texas February 1, 2002 32 <Page> CHEVRON PHILLIPS CHEMICAL COMPANY LLC Consolidated Statement of Operations <Table> <Caption> July 1, 2000 Year ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ------------------- <S> <C> <C> Revenue Net sales $5,871 $3,402 Equity in net loss of affiliates (65) (3) Other income 204 64 ------ ------ Total revenue 6,010 3,463 ------ ------ Costs and Expenses Cost of goods sold 5,733 3,171 Selling, general and administrative 509 290 Asset impairments 44 137 Research and development 60 23 ------ ------ Total costs and expenses 6,346 3,621 ------ ------ Loss Before Interest and Taxes (336) (158) Interest income 9 10 Interest expense (104) (65) ------ ------ Loss Before Taxes (431) (213) Income taxes (49) (28) ------ ------ Net Loss $ (480) $ (241) ====== ====== </Table> See Notes to Consolidated Financial Statements. 33 <Page> CHEVRON PHILLIPS CHEMICAL COMPANY LLC Consolidated Balance Sheet ASSETS <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ---- ---- <S> <C> <C> Current assets Cash and cash equivalents $ 111 $ 156 Accounts receivable, net - trade 674 874 Accounts receivable, net - affiliates 108 137 Inventories 638 878 Other current assets 20 20 ----------- ------------- Total current assets 1,551 2,065 ----------- ------------- Property, plant and equipment 7,550 7,636 Less: accumulated depreciation 3,582 3,507 ----------- ------------- Net property, plant and equipment 3,968 4,129 ----------- ------------- Investment in affiliates 259 336 Other assets and deferred charges 82 143 ----------- ------------- Total Assets $ 5,860 $ 6,673 =========== ============= LIABILITIES AND MEMBERS' CAPITAL Current liabilities Accounts payable - trade $ 335 $ 649 Accounts and note payable - affiliates 114 196 Accrued income and other taxes 57 43 Accrued salaries, wages and benefits 89 17 Secured borrowings 199 - Other current liabilities 26 5 ----------- ------------- Total current liabilities 820 910 Long-term debt 1,507 1,784 Advance payable to member - 35 Other liabilities and deferred credits 99 101 ----------- ------------- Total liabilities 2,426 2,830 Members' capital 3,450 3,849 Accumulated other comprehensive loss (16) (6) ----------- ------------- Total Liabilities and Members' Capital $ 5,860 $ 6,673 =========== ============= </Table> See Notes to Consolidated Financial Statements. 34 <Page> CHEVRON PHILLIPS CHEMICAL COMPANY LLC Consolidated Statement of Members' Capital <Table> <Caption> Accumulated Other Members' Comprehensive MILLIONS Capital Loss Total -------- -------------- ---------------- -------------- <S> <C> <C> <C> Contributions from Members on July 1, 2000, net of Adjustments $ 5,747 $ - $ 5,747 ------- Net loss (241) - (241) Foreign currency translation adjustments - (6) (6) ------- Total comprehensive loss - - (247) ------- Distributions to members (1,692) - (1,692) Member contributions 35 - 35 ------- ---- ------- Balance on December 31, 2000 3,849 (6) 3,843 ------- ---- ------- Net loss (480) - (480) Foreign currency translation adjustments - (10) (10) ------- Total comprehensive loss - - (490) ------- Distributions to members (20) - (20) Member contributions 101 - 101 ------- ---- ------- Balance on December 31, 2001 $ 3,450 $(16) $ 3,434 ======= ==== ======= </Table> See Notes to Consolidated Financial Statements. 35 <Page> CHEVRON PHILLIPS CHEMICAL COMPANY LLC Consolidated Statement of Cash Flows <Table> <Caption> July 1, 2000 Year Ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ------------------ <S> <C> <C> Cash Flows From Operating Activities Net loss $(480) $ (241) Adjustments to reconcile net loss to net cash flows provided by operating activities Depreciation, amortization and retirements 381 151 Asset impairments 44 137 Deferred income taxes 44 27 Undistributed equity in losses of affiliates, net 67 3 ----- ------- Changes in operating working capital Decrease (increase) in accounts receivable 238 (65) Decrease (increase) in inventories 234 (153) Decrease (increase) in other current assets (3) 3 Increase (decrease) in accounts payable (333) 256 Increase (decrease) in accrued income and other taxes 13 (8) Increase (decrease) in other current liabilities 87 (13) ----- ------- Total changes in operating working capital 236 20 Other operating cash flow activity 79 1 ----- ------- Net cash flows provided by operating activities 371 98 ----- ------- Cash Flows From Investing Activities Capital and investment expenditures (291) (112) Decrease in investments 27 - ----- ------- Net cash flows used in investing activities (264) (112) ----- ------- Cash Flows From Financing Activities Increase (decrease) in commercial paper, net (783) 1,784 Proceeds from the issuance of other long-term debt 509 - Increase in secured borrowings, net 199 - Increase (decrease) in note payable to member, net (50) 50 Advance from member - 70 Contributions from members 6 - Distributions to members (20) (1,692) Post-closing adjustments to members (13) (117) ----- ------- Net cash flows provided by (used in) financing activities (152) 95 ----- ------- Net Increase (Decrease) in Cash and Cash Equivalents (45) 81 Cash and Cash Equivalents at Beginning of Period 156 75 ----- ------- Cash and Cash Equivalents at End of Period $ 111 $ 156 ===== ======= Supplemental Disclosures of Cash Flow Information Cash paid for interest $ 88 $ 16 ===== ======= Cash paid for income taxes $ 4 $ 4 ===== ======= </Table> See Notes to Consolidated Financial Statements. 36 <Page> CHEVRON PHILLIPS CHEMICAL COMPANY LLC Notes to Consolidated Financial Statements <Table> <Caption> Index Page ----- ---- <S> <C> 1. Formation and Nature of Operations 37 2. Summary of Significant Accounting Policies 38 3. Transactions with Affiliates 40 4. Business Interruption Insurance Settlement 41 5. Inventories 41 6. Investments 42 7. Property, Plant and Equipment 43 8. Environmental Liabilities 44 9. Debt 44 10. Contingencies 46 11. Credit Risk 46 12. Operating Leases 46 13. Benefit Plans 47 14. Taxes 49 15. Segment and Geographic Information 50 16. Fair Values of Financial Instruments 53 17. Consolidating Financial Statements 53 </Table> Note 1. Formation and Nature of Operations On July 1, 2000, Chevron Corporation, now ChevronTexaco Corporation (ChevronTexaco), and Phillips Petroleum Company (Phillips) combined their worldwide chemicals and plastics businesses, excluding ChevronTexaco's Oronite additives business, into a new company, Chevron Phillips Chemical Company LLC. The company, through its subsidiaries, manufactures and markets a wide range of petrochemicals and plastics on a worldwide basis, with manufacturing facilities in existence or under construction in the United States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. Chevron Phillips Chemical Company LLC is a limited liability company formed under Delaware law, owned 50% each by ChevronTexaco and Phillips (collectively, the members). For accounting purposes, the combination was accounted for on the historical basis of the assets and liabilities contributed. 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 Phillips 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 unanimous approval of the voting representatives. 37 <Page> 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 owns 20% to 50% of voting control are accounted for using the equity method. Other securities and investments, if any, 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 accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates and assumptions. Accounts receivable at December 31, 2001 is shown net of a $6 million allowance for estimated non-recoverable amounts and net of a $3 million allowance at December 31, 2000. CPChem has manufacturing facilities in existence or under construction in the United States, Puerto Rico, Singapore, China, South Korea, Saudi Arabia, Qatar, Mexico and Belgium. There are varying degrees of risk and uncertainty in each of these countries. CPChem insures its business and assets against insurable risk in a manner it deems appropriate. Because of the diversity of CPChem, management believes that the risk of loss from noninsurable events in any one business or country 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. 101, "Revenue Recognition in Financial Statements." Sales of petrochemicals, plastics, natural gas liquids and other items, including by-products, are recorded when title passes to the customer. Revenues from royalties for licensed technology are generally recorded based on volumes produced by the licensee. Sales are presented net of discounts and allowances. Freight costs billed to customers are recorded as a component of revenue. CASH AND CASH EQUIVALENTS - Cash equivalents are highly liquid short-term investments that are readily convertible to known amounts of cash and have original maturities of three months or less from date of purchase. INVENTORIES - Product inventories are valued at the lower of cost or market, aggregated at the segment level for dollar-value, last-in, first-out (LIFO) pools. For U.S. operations, cost is primarily determined using the LIFO method. Lower-of-cost-or-market write-downs for LIFO-valued inventory are 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 the lower of average cost or market. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment (PP&E) is stated at cost. PP&E are assets, defined as property units, with an economic life beyond one year. Initial contributions of PP&E from ChevronTexaco and Phillips were recorded at their book values. Depreciation and amortization is computed using the straight-line method over the estimated future useful lives of the related assets. 38 <Page> IMPAIRMENT OF ASSETS - Long-lived assets used in operations are assessed for possible impairment when changes in facts and 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 determined based on quoted market prices in active markets, if available, or on the present value of projected future cash flows using discount rates commensurate with the risks involved in the asset group. The expected future cash flows used for impairment reviews and related fair value calculations are based on projected production and sales volumes, prices and costs, considering all available evidence at the date of review. MAINTENANCE AND REPAIRS - Maintenance and repair costs, including turnaround costs of major producing units, that are not considered to be significant improvements are expensed as incurred. RESEARCH AND DEVELOPMENT COSTS - Research and development costs are expensed as incurred. PROPERTY DISPOSITIONS - When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated, with any gain or loss reflected in income. When a portion of a unit of depreciable property is disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation, with no recognition of gain or loss. 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 those expenditures are recorded on an undiscounted basis when environmental assessments or clean-ups 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 are capitalized until commercial production begins. Capitalized interest is amortized over the life of the associated asset. Unamortized capitalized interest totaled $23 million at December 31, 2001 and $24 million at December 31, 2000. No interest costs were capitalized during 2001 or the period July 1, 2000 through December 31, 2000. INCOME TAXES - CPChem is treated as a flow-through entity for U.S. income tax purposes whereby each member is taxable on its respective share of income. However, CPChem is directly liable for U.S. and state income and franchise taxes on certain legal entities and for any foreign taxes incurred. CPChem follows the liability method of accounting for these income taxes. COMPREHENSIVE LOSS - CPChem's only item of other comprehensive loss resulted from the translation into U.S. dollars of the financial statements of foreign subsidiaries and corporate joint ventures whose functional currencies are not the U.S. dollar. ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, was implemented effective January 1, 2001. Implementation of this standard had no material effect on consolidated results of operations, financial position or liquidity, as CPChem generally does not use derivative instruments. 39 <Page> In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which addresses the accounting and reporting requirements for legal obligations associated with the retirement of long-lived assets. This standard requires that a liability for an asset retirement obligation, measured at fair value, be recognized in the period in which it is incurred if a reasonable estimate of fair value is determinable. That initial fair value is capitalized as part of the carrying amount of the long-lived asset and subsequently depreciated. The liability is adjusted each year for accretion, with a charge to the statement of operations. SFAS No. 143 will become effective for CPChem beginning January 1, 2003. CPChem is currently reviewing the new standard to determine what impact, if any, that implementation of this standard will have on consolidated results of operations and financial position. CPChem adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective January 1, 2002. This new standard supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions for the disposal of a segment of a business from Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effect of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to recognize an impairment loss as the difference between the carrying value and the fair value for assets to be held and used only if the carrying amount is greater than the undiscounted cash flows it produces; however, for all assets classified as held for sale, SFAS No. 144 requires that depreciation on the assets ceases and that the assets be measured at the lower of carrying value or fair value, less cost to sell. Implementation of this standard is not expected to have a material adverse effect on consolidated results of operations, financial position or liquidity. Note 3. Transactions with Affiliates Significant transactions with affiliated parties were as follows: <Table> <Caption> July 1, 2000 Year ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ----------------- <S> <C> <C> Net sales (a) $ 799 $ 412 Other income 22 14 Cost of goods sold (b,c) 1,310 923 Selling, general and administrative (c) 64 143 </Table> (a) CPChem sells ethylene residue gas to Phillips' crude oil refining operations, Specialty Chemicals and Plastics products and Aromatics by-products to ChevronTexaco, and feedstocks and various services to non-consolidated equity companies, all at prices that approximate market. (b) Phillips sells CPChem natural gas liquids feedstocks for olefins products, and provides common facility services such as steam generation, waste and water treatment, and warehouse facilities. CPChem purchases feedstocks from ChevronTexaco for the Aromax -Registered Trademark- and paraxylene units at Pascagoula, Mississippi. In addition, ChevronTexaco provides common facility and manufacturing services at the Pascagoula facility. (c) Phillips and ChevronTexaco provide various services to CPChem under transition services agreements. 40 <Page> Services provided under the transition services agreements with ChevronTexaco and Phillips included various activities such as certain treasury, legal, accounting, human resource and building administration, and environmental services. Certain information technology support, research and development, engineering and construction services were also provided. The primary term of the transition services agreements is two years, but specific services can be canceled with 30 days notification. Substantially all staff services provided under the transition services agreements were discontinued in the first quarter of 2001. Due to an incident at Phillips' K-Resin -Registered Trademark- styrene-butadiene copolymer plant in March 2000 (before CPChem was formed), the K-Resin facility that was contributed to CPChem was idled. Under the contribution agreement, upon formation of CPChem, Phillips agreed to indemnify CPChem for all physical loss or damage, and repair to the facility. In addition, Phillips advanced CPChem $70 million in 2000. Pursuant to the agreement, a certain portion of the advance would be re-characterized as a member contribution each month until the plant met a pre-established production threshold. Accordingly, $35 million of the advance was recorded as Member Contributions during the six months ended December 31, 2000, with the remainder of the advance included in Other Liabilities and Deferred Credits. During 2001, the remaining $35 million was recorded as Member Contributions. Beginning in January 2002, Phillips will contribute an additional $3.2 million per month, to a maximum of $38.4 million, until a pre-established production threshold is met. In addition, Phillips will remit additional contributions, to a maximum of $30 million, should earnings from the K-Resin business fail to meet pre-established targets as agreed to, and as later amended, in the contribution agreement. CPChem borrowed $50 million from ChevronTexaco in December 2000 and an additional $50 million in February 2001 under a $100 million credit agreement. Both borrowings were repaid in March 2001 with proceeds from the issuance of private placement notes, and the credit agreement with ChevronTexaco was terminated. Note 4. Business Interruption Insurance Settlement In June 2001, agreement was reached among Phillips and various insurers to settle the business interruption insurance claim associated with the March 2000 incident at CPChem's (formerly Phillips') Houston Chemical Complex K-Resin styrene-butadiene copolymer plant. After adjusting for previously accrued claims, CPChem recognized $113 million in Other Income as a special item in connection with the settlement. Note 5. Inventories Inventories were as follows: <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ---- ---- <S> <C> <C> LIFO inventories Olefins and polyolefins products $ 248 $ 340 Specialty chemicals and plastics products 146 138 Aromatics products 76 148 -------- --------- Total LIFO inventories 470 626 -------- --------- Non-LIFO inventories Olefins and polyolefins products 60 110 Specialty chemicals and plastics products 47 41 Aromatics products 17 65 -------- --------- Total non-LIFO inventories 124 216 -------- --------- Materials, supplies and other 44 36 -------- --------- Total inventories $ 638 $ 878 ======== ========= </Table> 41 <Page> A reserve was established in the fourth quarter of 2001 to adjust Aromatics' domestic dollar-value LIFO pool inventories to current net realizable value, resulting in a charge of approximately $25 million. This reserve is considered temporary and will be reversed should market conditions and prices improve in the future. The excess of replacement cost over book value of product inventories valued under the LIFO method was $29 million at December 31, 2001 (including the dollar-value LIFO reserve) and $158 million at December 31, 2000. Note 6. Investments CPChem's investments in its affiliates, who are also engaged in the manufacturing and marketing of petrochemicals and plastics, are accounted for using the equity method. These investments consisted of the following: <Table> <Caption> December 31, MILLIONS Ownership 2001 2000 -------- --------- ---- ---- <S> <C> <C> <C> Saudi Chevron Phillips Company 50 % $ 122 $ 126 K R Copolymer Co., Ltd. 60 % 47 59 Chevron Phillips Singapore Chemicals (Private) Limited 50 % 43 55 CPChem / BP Solvay Polyethylene joint venture 50 % 21 - Shanghai Golden Phillips Petrochemical Co. 40 % 16 13 Phillips Sumika Polypropylene Company 60 % 10 76 Qatar Chemical Company Ltd. (Q-Chem) 49 % - 5 Other Various - 2 -------- --------- Total investments $ 259 $ 336 ======== ========= </Table> ---------- * Profit/loss sharing percentage. Phillips Sumika Polypropylene Company (Phillips Sumika) and K R Copolymer Co., Ltd. are not consolidated because CPChem does not have majority voting control of these entities. Dividends received from equity investments totaled $2 million in 2001. No dividends were received in the period July 1, 2000 through December 31, 2000. CPChem and Solvay Polymers, Inc., now BP Solvay Polyethylene, announced in June 2001 plans for the construction of a 700-million-pound-per-year, high-density polyethylene plant to be constructed at CPChem's Cedar Bayou facility. CPChem and BP Solvay Polyethylene will each own 50% of the plant, scheduled for start-up in late 2002. Qatar Chemical Company Ltd. (Q-Chem), a joint venture company, was formed in 1997 to develop a major petrochemical complex in Qatar in the Middle East at an estimated cost of $1.2 billion. Construction of the complex began in October 1999, with start-up scheduled for late 2002. At December 31, 2001, $750 million had been drawn by Q-Chem under a bank financing agreement for the construction of the complex. CPChem is now required to fund any remaining construction costs, initial working capital requirements, and certain debt service and operating reserve fund requirements through advances under a subordinated loan agreement with Q-Chem. No funding occurred in 2001. In connection with the bank financing, the co-venturers agreed that if the complex is not completed by August 2003, each will make capital contributions on a pro rata, several basis to the extent necessary to cover bank financing service requirements including, if demanded, repayment of principal. This obligation may be extended for up to one year due to force majeure. After construction is completed, the bank financing is non-recourse with respect to the co-venturers. CPChem has also agreed to provide up to $75 million of credit support to Q-Chem for cash flow needs under a contingent support agreement after construction of the complex is completed. 42 <Page> Aggregate summarized financial information for Phillips Sumika, a significant investment from time to time as defined by the SEC that is accounted for using the equity method, was as follows: <Table> <Caption> July 1, 2000 Year ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ------------------- <S> <C> <C> Revenues $ 187 $ 117 Loss before income taxes (176) (20) Net loss (176) (20) <Caption> December 31, 2001 December 31, 2000 ----------------- ----------------- <S> <C> <C> Current assets $ 52 $ 54 Noncurrent assets 66 209 Current liabilities 85 60 Noncurrent liabilities - - </Table> Phillips Sumika recorded a $137 million impairment charge in the fourth quarter of 2001. CPChem recorded $46 million of charges as equity in net loss of affiliates in the consolidated statement of operations representing its share of the impairment charge, adjusted for the difference between CPChem's carrying value of its investment in Phillips Sumika and CPChem's equity in its net assets. Aggregate summarized financial information for all other investments accounted for using the equity method was as follows: <Table> <Caption> July 1, 2000 Year ended (inception) through MILLIONS December 31, 2001 December 31, 2000 -------- ----------------- ------------------ <S> <C> <C> Revenues $ 631 $ 414 Income (loss) before income taxes (9) 26 Net income (loss) (14) 25 <Caption> December 31, 2001 December 31, 2000 ----------------- ----------------- <S> <C> <C> Current assets $ 236 $ 316 Noncurrent assets 1,633 1,333 Current liabilities 263 271 Noncurrent liabilities 1,253 984 </Table> Note 7. Property, Plant and Equipment Property, plant and equipment was as follows: <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ---------- --------- <S> <C> <C> Olefins and polyolefins $ 4,497 $ 4,507 Specialty chemicals and plastics 1,531 1,477 Aromatics 1,326 1,516 Other 196 136 ---------- --------- Gross property, plant and equipment, at cost 7,550 7,636 Accumulated depreciation 3,582 3,507 ---------- --------- Net property, plant and equipment $ 3,968 $ 4,129 ========== ========= </Table> Approximately $6.015 billion of gross property, plant and equipment at December 31, 2001 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 28 years. 43 <Page> CPChem recorded before-tax asset impairment charges totaling $44 million in 2001. Of these charges, $42 million was recorded in the third quarter of 2001 related to the Puerto Rico facility, part of the Aromatics segment, which resulted from the outlook for future margin conditions. The present value of projected future cash flows was used to determine fair value. The remaining $2 million of impairment charges was recorded in the fourth quarter of 2001, related to a polyethylene pipe manufacturing facility that is part of the Olefins and Polyolefins segment. In addition to the impairment charges described above, CPChem recorded $104 million of charges during 2001 as depreciation expense, included as a component of Cost of Goods Sold, for permanent shutdowns in 2001 of an ethylene unit at Sweeny, cyclohexane and benzene units in Puerto Rico, and a developmental reactor at the Houston Chemical Complex, as well as accelerated depreciation associated with the planned permanent shutdown in February 2002 of two particle loop reactors at the Orange polyethylene plant. The gross value of assets retired was $338 million, with $247 million of associated accumulated depreciation. Before-tax asset impairment charges totaling $137 million were recorded in the period July 1, 2000 through December 31, 2000. Approximately $135 million of the charges related to the write-down of the Puerto Rico facility, resulting from the outlook for future margin conditions and a shift in strategic direction for the facility. The present value of projected future cash flows was used to determine fair value. Note 8. 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. Accrued undiscounted environmental liabilities totaled $7 million at December 31, 2001 and $8 million at December 31, 2000. Approximately $1 million of environmental expenses were paid in 2001. No environmental costs were accrued that were associated with discontinued or sold operations. Note 9. Debt Long-term debt, net of applicable debt discounts, as shown on the consolidated balance sheet was as follows: <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ---- ---- <S> <C> <C> Commercial paper $ 1,002 $ 1,800 7% notes due 2011 500 - Other 11 - -------- --------- Subtotal 1,513 1,800 Unamortized debt discount (6) (16) --------- --------- Total $ 1,507 $ 1,784 ========= ========= </Table> CPChem has separate $700 million and $900 million revolving credit agreements with a syndicate of banks. The agreements expire in July 2002 and July 2003, respectively. The July 2002 agreement, which replaced the previous $900 million 364-day revolving credit agreement that expired in July 2001, provides that CPChem may, at its option, extend the date of repayment by one year of any borrowings outstanding on July 1, 2002. Both facilities are used to support the commercial paper program. The agreements contain covenants and events of default typical of bank revolving credit facilities, such as restrictions on liens, with certain exceptions, and 44 <Page> maintenance of ownership of CPChem by ChevronTexaco and Phillips of at least 50% in the aggregate. Provisions under these agreements are not considered restrictive to normal operations. The rates of interest of both existing agreements vary, depending on market rates and CPChem's long-term debt rating. There were no borrowings outstanding under any of the credit agreements at December 31, 2001 and 2000. CPChem had borrowed funds outstanding for one day during 2001 under the July 2003 credit agreement. No borrowings were made under any of these credit agreements during the six months ended December 31, 2000. CPChem intends to request extensions of the expiration dates of the credit agreements or replace the existing agreements with new agreements with similar terms. 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 on the consolidated balance sheet since CPChem's intent is to refinance or replace the obligations on a long-term basis and CPChem has the option to extend the date of repayment by one year of any borrowings outstanding on July 1, 2002 under the July 2002 credit agreement. The weighted average interest rate of commercial paper was 5.01% in 2001 and 6.91% in 2000. The weighted average interest rate of commercial paper outstanding at December 31, 2001 and 2000 was 3.05% and 7.54%, respectively. On March 19, 2001, Chevron Phillips Chemical Company LLC (the "LLC") and its wholly-owned subsidiary, Chevron Phillips Chemical Company LP (the "LP"), jointly and severally issued $500 million of senior unsecured 7% notes in a private placement. The notes are due in March 2011 and interest is payable semiannually, with the first interest payment paid on September 15, 2001. The notes contain certain covenants such as limitations on liens, sale/leaseback transactions, sales of assets and business combinations that CPChem does not consider to be restrictive to normal operations. Proceeds from this debt issuance were used to repay the notes payable to ChevronTexaco described below, to retire a portion of outstanding commercial paper obligations and for general corporate purposes. The LLC and the LP subsequently filed a joint registration statement on Form S-4 with the SEC, as amended and declared effective May 10, 2001, to register $500 million of exchange notes with terms substantially identical to the private placement notes, except that the exchange notes are freely tradeable. Substantially all of the holders of the private placement notes tendered their notes for the registered exchange notes. In May 2001, CPChem entered into a trade receivables securitization agreement that expires in May 2002. 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. As the receivables are collected by CPChem, borrowings under the agreement are reduced or security interests in new trade receivables are granted. Proceeds from the initial borrowing were used to reduce outstanding commercial paper obligations. At December 31, 2001, $199 million of borrowings, classified as short-term, were outstanding under the trade receivables securitization agreement, secured by $313 million of trade receivables. The interest rate of these borrowings was 2.06% at December 31, 2001 and averaged 3.28% during 2001. CPChem intends to request an extension of the expiration date of the agreement to May 2003. CPChem borrowed $50 million from ChevronTexaco in December 2000 and an additional $50 million in February 2001 under a $100 million credit agreement. Both borrowings were repaid in March 2001 with proceeds from the issuance of the private placement notes described above, and the credit agreement with ChevronTexaco was terminated. 45 <Page> Note 10. Contingencies In the case of all known contingencies, CPChem records an undiscounted liability when the loss is probable and the amount is reasonably estimable. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are recorded for probable insurance or other third-party recoveries. Based on currently available information, CPChem believes it is remote that future costs related to known contingent liabilities will exceed current accruals by an amount that would have a material adverse effect on consolidated results of operations, financial position or liquidity. As facts concerning contingencies become known, CPChem reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include legal matters and contingent liabilities for environmental remediation. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of cleanup costs, prospective changes in laws and regulations, the unknown timing and extent of remedial actions that may be required and the determination of CPChem's liability in proportion to other responsible parties. Estimated future costs related to legal matters are subject to change as events occur and as additional information becomes available during the administrative and litigation process. CPChem is a party to a number of legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. While the final outcome of these proceedings cannot be predicted with certainty, CPChem believes that none of these proceedings, when resolved, will have a material adverse effect on consolidated results of operations, financial position or liquidity. Note 11. Credit Risk Financial instruments that potentially subject CPChem to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Cash equivalents are comprised of bank accounts and short-term investments with several financial institutions that have high credit ratings. CPChem's policy for short-term investments diversifies and limits 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 maintains credit policies and procedures that minimize credit risk and exposures. Letters of credit or negotiated sales contracts are utilized when customer financial strength is considered insufficient. Note 12. Operating Leases CPChem leases tank and hopper rail cars, computers, office buildings and other facilities and equipment. Total operating lease rental charges were $62 million for 2001 and $28 million for the period July 1, 2000 through December 31, 2000. Aggregate future minimum lease payments under non-cancelable leases at December 31, 2001 were as follows: <Table> <Caption> Year MILLIONS ---- -------- <S> <C> 2002 $ 40 2003 33 2004 28 2005 26 2006 19 Thereafter 118 </Table> 46 <Page> Note 13. Benefit Plans Substantially all employees of CPChem are former employees of ChevronTexaco or Phillips. These individuals provided services to CPChem from July 1, 2000 (the formation date of CPChem) through December 31, 2000 pursuant to transition services agreements. See Note 3 for further discussion. These individuals were covered by their respective former employers' employee benefit plans through December 31, 2000 and became employees of CPChem on January 1, 2001. CPChem established its own benefit plans effective January 1, 2001, which included a health care and income protection benefit plan, a savings plan and retirement and retiree health care benefits plans. CPChem employees who were former employees of ChevronTexaco or Phillips received enhanced benefits in certain CPChem benefit plans, including credit for service while employees of ChevronTexaco or Phillips. PENSION AND OTHER POSTRETIREMENT HEALTH CARE CPChem's retirement plan is a defined benefit plan and applies to 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 Phillips or ChevronTexaco or their affiliates. Retirement benefits are based on two types of credits: a career average pay benefit and cash balance 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. Pension costs are accrued and charged to expense on a current basis. 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 and is funded by CPChem at the time of retirement based on years of service 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. Net periodic benefit costs for the plans included the following components. <Table> <Caption> 2001 ---- Pension Other MILLIONS Benefits Benefits -------- -------- -------- <S> <C> <C> Service cost benefits earned during the year $ 16 $ 2 Interest cost on projected benefit obligations 14 3 Expected return on plan assets (4) - Amortization of prior service costs 12 3 Net actuarial gain (1) - -------- -------- Net periodic pension cost $ 37 $ 8 ======== ======== </Table> 47 <Page> The plans' funded status and related amounts were as follows: <Table> <Caption> December 31, 2001 --------------------- Pension Other MILLIONS Benefits Benefits -------- -------- -------- <S> <C> <C> Change in Benefit Obligation Benefit obligation at beginning of year $ 186 $ 48 Service cost 16 2 Interest cost 14 3 Actuarial loss 5 1 Benefits paid (2) (3) -------- -------- Benefit obligation at end of year 219 51 -------- -------- Change in Plan Assets Fair value of plan assets at beginning of year 38 - Actual return on plan assets 2 - Employer contributions 26 3 Benefits paid (2) (3) -------- -------- Fair value of plan assets at end of year 64 - -------- -------- Funded Status of Plan Excess obligation (155) (51) Unrecognized net actuarial loss 4 2 Unrecognized transition obligation 1 - Unrecognized prior service cost 141 41 -------- -------- Total recognized $ (9) $ (8) ======== ======== Components of total recognized Prepaid pension benefits $ 5 $ - Intangible asset 25 - Accrued benefit liability (39) (8) -------- -------- Total recognized $ (9) $ (8) ======== ======== </Table> Included in the pension plans tables is an unfunded supplemental retirement plan covering key executives. The benefit obligation associated with this plan was $10 million at December 31, 2001. Also included are separate pension plans for employees of the Puerto Rico Core facility and employees of certain bargaining units within the Performance Pipe division of CPChem. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $220 million, $96 million and $28 million, respectively. Weighted average rate assumptions used in determining estimated benefit obligations were as follows: <Table> <Caption> December 31, 2001 ----------------- Pension Other Benefits Benefits -------- -------- <S> <C> <C> Discount rate 7.3% 7.3% Expected return on plan assets 10.0 - Rate of increase in compensation levels 4.0 - </Table> 48 <Page> CONTRIBUTION PLANS Defined contribution plans are available for most employees, whereby CPChem matches a percentage of the employee's contribution. CPChem contributions to the plans were expensed and funded on a current basis, and totaled $13 million in 2001. TERMINATION BENEFITS Approximately $8 million was recorded in 2001 for employee termination benefits in connection with announced workforce reductions of 242 positions at various locations. Approximately $7 million was recorded as Selling, General and Administrative expense and $1 million was recorded as Cost of Goods Sold. Termination benefits payable totaled $6 million at December 31, 2001. Note 14. Taxes CPChem is treated as a flow-through entity for U.S. income tax purposes whereby each member is taxable on its respective share of income and losses. However, CPChem and its subsidiaries are directly liable for U.S. 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, Chevron Phillips Chemical Puerto Rico Core Inc. (Puerto Rico Core), which 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 Core tax exemptions expire in 2002. Limited tax reduction agreements also exist in South Korea, China, Saudi Arabia and Qatar. CPChem is subject to state income tax in certain jurisdictions. Income tax expense in 2001 consisted of $5 million of current foreign taxes and $44 million of deferred U.S. federal income taxes. Income tax expense for the period July 1, 2000 through December 31, 2000 consisted of $1 million of current foreign taxes and $27 million of deferred U.S. federal income taxes. Deferred income tax assets and liabilities follow: <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ------- ------- <S> <C> <C> Deferred income tax assets U.S. $ 175 $ 136 Foreign 1 2 ------- ------- Gross deferred income tax assets 176 138 Valuation allowance (175) (92) ------- ------- Deferred income tax assets 1 46 Deferred tax liabilities - foreign (2) (2) ------- ------- Net deferred income tax assets (liabilities) $ (1) $ 44 ======= ======= </Table> 49 <Page> At December 31, 2001, the deferred tax assets of Puerto Rico Core were fully offset by valuation allowances. A valuation allowance of $92 million was initially established in December 2000. The valuation allowance reduced deferred tax assets of Puerto Rico Core net operating loss carryforwards and tax depreciation differences to amounts that would more likely than not be realized. During 2001, the valuation allowance was increased by $83 million so that the total valuation allowance relating to Puerto Rico Core deferred tax assets totaled $175 million at December 31, 2001. Approximately $44 million of the increase related to the deferred tax assets balance at December 31, 2000 of Puerto Rico Core. The increase in the valuation allowance in 2001 was necessitated, in part, by the Phillips merger with Tosco Corporation in September 2001, which triggered regulatory limitations on the future utilization of pre-merger Puerto Rico Core net operating losses. The valuation allowance was also increased in 2001 as a result of a change in the outlook for future margin conditions. Other 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: <Table> <Caption> December 31, MILLIONS 2001 2000 -------- ---- ---- <S> <C> <C> Deferred income tax assets Loss carryforward (expires 2011- 2021) $ 126 $ 89 Depreciation and amortization 45 42 Foreign and other 5 7 ---------- ---------- Gross deferred income tax assets 176 138 Valuation allowance (175) (92) ---------- ---------- Deferred income tax assets 1 46 Deferred tax liabilities - foreign (2) (2) ---------- ---------- Net deferred income tax assets (liabilities) $ (1) $ 44 ========== ========== </Table> Note 15. Segment and Geographic Information CPChem's reporting structure is based on the grouping of similar products, resulting in the following three operating segments at December 31, 2001 and 2000: OLEFINS AND POLYOLEFINS - This segment gathers, buys, sells and fractionates natural gas liquids, and manufactures and markets olefins products such as ethylene and propylene. This segment also manufactures and markets polyolefin products such as polyethylene, polypropylene and polyethylene pipe. CPChem's five olefin and polyethylene production facilities are located in Texas. CPChem has 10 domestic pipe facilities and two pipe fittings facilities in the U.S., and one pipe facility in Mexico. CPChem also owns equity interests in a polypropylene facility at the Houston Chemical Complex in Pasadena, Texas, polyethylene facilities in Singapore and China, and a polyethylene pipe facility in Mexico. A major ethylene, polyethylene and hexene-1 facility, in which CPChem has a 49% equity interest, is under construction in Qatar, and a high-density polyethylene plant of which CPChem has a 50% interest, is under construction at CPChem's Cedar Bayou facility in Baytown, Texas. AROMATICS - This segment manufactures and markets aromatics products such as styrene, paraxylene and cyclohexane. Major production facilities are located in Mississippi, Louisiana, Texas and Puerto Rico. CPChem also owns an equity interest in an aromatics facility in Saudi Arabia. 50 <Page> SPECIALTY CHEMICALS AND PLASTICS - This segment manufactures and markets a variety of specialty products such as K-Resin styrene-butadiene copolymer, normal alpha olefins and polystyrene. Major U.S. production facilities are located in Texas and Ohio, with other operations located in Belgium and China. CPChem also owns an equity interest in a K-Resin facility in South Korea. "Other" or "Corporate" includes items not directly attributable to CPChem's operating segments. Interest expense and income are generally retained within the Corporate segment, as are special charges related to domestic workforce reductions. Geographic information was as follows. Net sales was determined based on location of the operation generating the sale. <Table> <Caption> United Foreign MILLIONS States Countries Total -------- ------ --------- ----- <S> <C> <C> <C> NET SALES - EXTERNAL Year ended December 31, 2001 $ 5,244 $ 627 $ 5,871 July 1, 2000 (inception) through December 31, 2000 3,146 256 3,402 INVESTMENTS December 31, 2001 31 228 259 December 31, 2000 77 259 336 PROPERTY, PLANT & EQUIPMENT, NET December 31, 2001 3,837 131 3,968 December 31, 2000 3,992 137 4,129 </Table> Financial information by segment follows. Inter-segment transactions are billed at prevailing market rates. <Table> <Caption> Specialty Olefins & Chemicals Corporate MILLIONS Polyolefins Aromatics & Plastics & Other Consolidated -------- ----------- --------- ---------- --------- ------------ <S> <C> <C> <C> <C> <C> INVESTMENTS IN EQUITY AFFILIATES December 31, 2001 $ 90 $ 122 $ 47 $ - $ 259 December 31, 2000 150 127 59 - 336 TOTAL ASSETS December 31, 2001 3,106 1,043 1,463 248 5,860 December 31, 2000 3,568 1,355 1,529 221 6,673 CAPITAL & INVESTMENT EXPENDITURES Year ended December 31, 2001 130 68 74 19 291 July 1, 2000 (inception) through December 31, 2000 Not available Not available Not available Not available 112 </Table> 51 <Page> <Table> <Caption> Specialty Corporate, MILLIONS Olefins & Chemicals Other & -------- Polyolefins & Plastics Eliminations YEAR ENDED DECEMBER 31, 2001 (O&P) Aromatics (SC&P) (Other) Consolidated ---------------------------- ----------- --------- ----------- ------------- ------------ <S> <C> <C> <C> <C> <C> Net sales -- external $ 3,431 $ 1,349 $ 1,091 $ - $ 5,871 Net sales -- inter-segment 428 277 30 (735) - Equity in income (loss) of affiliates (76) (4) 15 - (65)(a) Other income 39 12 153 - 204 (b) -------- -------- --------- ------- -------- Total revenue 3,822 1,634 1,289 (735) 6,010 Operating and selling costs 3,795 1,726 1,108 (708) 5,921 (c) Depreciation and amortization 247 75 57 2 381 (d) Asset impairments 2 42 - - 44 (e) -------- -------- --------- ------- -------- Income (loss) before interest & taxes (222) (209) 124 (29) (336) Interest income (expense), net - - 3 (98) (95) Income tax benefit (expense) 1 (44) (6) - (49)(f) -------- -------- --------- ------- -------- Net income (loss) $ (221) $ (253) $ 121 $ (127) $ (480) ======== ======== ========= ======= ======== JULY 1, 2000 (INCEPTION) THROUGH DECEMBER 31, 2000 ------------------------- Net sales -- external $ 1,915 $ 949 $ 538 $ - $ 3,402 Net sales -- inter-segment 242 90 12 (344) - Equity in income (loss) of affiliates (12) 7 2 - (3) Other income 28 - 36 - 64 (g) -------- -------- --------- ------- -------- Total revenue 2,173 1,046 588 (344) 3,463 Operating and selling costs 2,035 1,066 539 (307) 3,333 (h) Depreciation and amortization 90 22 39 - 151 (i) Asset impairments - 135 - 2 137 (j) -------- -------- --------- ------- -------- Income (loss) before interest & taxes 48 (177) 10 (39) (158) Interest income (expense), net 1 - - (56) (55) Income taxes (1) (25) (2) - (28)(k) -------- -------- --------- ------- -------- Net income (loss) $ 48 $ (202) $ 8 $ (95) $ (241) ======== ======== ========= ======= ======== </Table> (a) Includes $43 million of net special charges, mostly CPChem's share (O&P) of an impairment charge recorded by an equity investment. (b) Includes $117 million of net special credits, primarily a $113 million net benefit (SC&P) recorded in connection with the settlement of a business interruption insurance claim. (c) Includes $72 million of various net special charges - $30 million in O&P, $4 million in Aromatics, $30 million in SC&P and $8 million in Other. (d) Includes $111 million of net special charges, primarily accelerated depreciation and asset retirements totaling $86 million in O&P and $18 million in Aromatics. (e) The $44 million of special charges for impairments relates mostly to impairment of Puerto Rico assets. (f) Includes a special charge of $44 million for an increase in the valuation allowance for deferred tax assets in Aromatics. (g) Includes $9 million in various special credits in O&P. (h) Includes $29 million in various special charges, primarily in O&P ($16 million) and Other ($9 million). (i) Includes $14 million in special charges in SC&P for the retirement of a normal alpha olefins unit. (j) The $137 million of special charges for impairments relates mostly to impairment of Puerto Rico assets. (k) Includes a special charge of $45 million for an increase in the valuation allowance for deferred tax assets in Aromatics. 52 <Page> Note 16. Fair Values of Financial Instruments The carrying amounts of cash and cash equivalents, trade and affiliated receivables, and trade and affiliated payables approximate their estimated fair values. The carrying amount of secured borrowings outstanding also approximates fair value due to the short-term nature of the borrowings. Due to the variable interest rate features of the note payable to affiliate and the commercial paper outstanding, the carrying amounts of these instruments also approximate their fair values. The fair value at December 31, 2001 of the 7% notes due 2011 was approximately $474 million based on quoted market prices. Note 17. Consolidating Financial Statements Consolidating financial statements follow. This information is presented in accordance with SEC rules and regulations as they relate to the debt jointly and severally issued in 2001 by Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP. See Note 9 for further discussion. The LLC is the non-operating parent holding company. The LP is the primary U.S. operating company. "Other Entities" is principally comprised of foreign operations and the holding companies that have direct ownership of the LP. These consolidating financial statements were prepared using the equity method of accounting for investments. Chevron Phillips Chemical Company LLC Consolidating Statement of Operations For the Year ended December 31, 2001 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- ------- ------- --------- ------------ ------- <S> <C> <C> <C> <C> <C> Revenue Net sales $ - $ 5,583 $ 1,086 $ (798) $ 5,871 Equity in net loss of affiliates (385) (44) (339) 703 (65) Other income - 256 62 (114) 204 ------- ------- ------- ------ ------- Total revenue (385) 5,795 809 (209) 6,010 ------- ------- ------- ------ ------- Costs and Expenses Cost of goods sold - 5,495 1,029 (791) 5,733 Selling, general and administrative - 581 49 (121) 509 Asset impairments - - 44 - 44 Research and development - 60 - - 60 ------- ------- ------ ------ ------- Total costs and expenses - 6,136 1,122 (912) 6,346 ------- ------- ------ ------ ------- Loss Before Interest and Taxes (385) (341) (313) 703 (336) Interest income 2 4 5 (2) 9 Interest expense (97) (3) (6) 2 (104) ------- ------- ------- ------ ------- Loss Before Taxes (480) (340) (314) 703 (431) Income taxes - (1) (48) - (49) ------- ------- ------- ------ ------- Net Loss $ (480) $ (341) $ (362) $ 703 $ (480) ======= ======= ======= ====== ======= </Table> 53 <Page> Note 17. Consolidating Financial Statements (continued) Chevron Phillips Chemical Company LLC Consolidating Statement of Operations July 1, 2000 (Inception) through December 31, 2000 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- ------- ------- -------- ------------ ------- <S> <C> <C> <C> <C> <C> Revenue Net sales $ - $ 3,424 $ 908 $ (930) $ 3,402 Equity in net loss of affiliates (175) (10) (34) 216 (3) Other income - 55 35 (26) 64 ------- ------- -------- ------- ------- Total revenue (175) 3,469 909 (740) 3,463 ------- ------- -------- ------- ------- Costs and Expenses Cost of goods sold - 3,227 874 (930) 3,171 Selling, general and administrative 1 264 51 (26) 290 Asset impairments - 2 135 - 137 Research and development - 23 - - 23 ------- ------- -------- ------- ------- Total costs and expenses 1 3,516 1,060 (956) 3,621 ------- ------- -------- ------- ------- Loss Before Interest and Taxes (176) (47) (151) 216 (158) Interest income - 6 4 - 10 Interest expense (65) - - - (65) ------- ------- -------- ------- ------- Loss Before Taxes (241) (41) (147) 216 (213) Income taxes - - (28) - (28) ------- ------- -------- ------- ------- Net Loss $ (241) $ (41) $ (175) $ 216 $ (241) ======= ======= ======== ======= ======= </Table> 54 <Page> Note 17. Consolidating Financial Statements (continued) Chevron Phillips Chemical Company LLC Consolidating Balance Sheet December 31, 2001 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- -------- ------- -------- ------------ --------- <S> <C> <C> <C> <C> <C> Current assets Cash and cash equivalents $ - $ 71 $ 40 $ - $ 111 Accounts receivable, net 37 944 543 (742) 782 Inventories - 541 97 - 638 Other current assets - 17 3 - 20 -------- ------- ------- ----------- ------ Total current assets 37 1,573 683 (742) 1,551 Property, plant and equipment, net - 3,681 287 - 3,968 Investment in affiliates 5,430 86 4,916 (10,173) 259 Other assets and deferred charges 5 60 17 - 82 -------- ------- ------- ----------- ------ Total Assets $ 5,472 $ 5,400 $ 5,903 $ (10,915) $5,860 ======== ======= ======= =========== ====== Current liabilities Accounts payable $ 516 $ 472 $ 203 $ (742) $ 449 Secured borrowings - - 199 - 199 Other current liabilities 10 142 20 - 172 -------- ------- ------- ----------- ------ Total current liabilities 526 614 422 (742) 820 Long-term debt 1,496 11 - - 1,507 Other liabilities and deferred credits - 87 12 - 99 -------- ------- ------- ----------- ------ Total liabilities 2,022 712 434 (742) 2,426 Members' capital 3,450 4,688 5,485 (10,173) 3,450 Accumulated other comprehensive loss - - (16) - (16) -------- ------- ------- ----------- ------ Total Liabilities and Members' Capital $ 5,472 $ 5,400 $ 5,903 $ (10,915) $5,860 ======== ======= ======= =========== ====== </Table> 55 <Page> Note 17. Consolidating Financial Statements (continued) Chevron Phillips Chemical Company LLC Consolidating Balance Sheet December 31, 2000 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- ------- ------- -------- ------------ ------- <S> <C> <C> <C> <C> <C> Current assets Cash and cash equivalents $ - $ 75 $ 81 $ - $ 156 Accounts receivable, net 12 1,017 252 (270) 1,011 Inventories - 736 142 - 878 Other current assets 1 15 4 - 20 ------- ------- ------- --------- ------- Total current assets 13 1,843 479 (270) 2,065 Property, plant and equipment, net - 3,464 665 - 4,129 Investment in affiliates 5,776 76 4,802 (10,318) 336 Other assets and deferred charges 1 81 61 - 143 ------- ------- ------- --------- ------- Total Assets $ 5,790 $ 5,464 $ 6,007 $ (10,588) $ 6,673 ======= ======= ======= ========= ======= Current liabilities Accounts payable $ 72 $ 774 $ 219 $ (270) $ 795 Note payable to member 50 - - - 50 Other current liabilities - 62 3 - 65 ------- ------- ------- --------- ------- Total current liabilities 122 836 222 (270) 910 Long-term debt 1,784 - - - 1,784 Other liabilities and deferred credits 35 86 15 - 136 ------- ------- ------- --------- ------- Total liabilities 1,941 922 237 (270) 2,830 Members' capital 3,849 4,542 5,776 (10,318) 3,849 Accumulated other comprehensive loss - - (6) - (6) ------- ------- ------- --------- ------- Total Liabilities and Members' Capital $ 5,790 $ 5,464 $ 6,007 $ (10,588) $ 6,673 ======= ======= ======= ========= ======= </Table> 56 <Page> Note 17. Consolidating Financial Statements (continued) Chevron Phillips Chemical Company LLC Consolidating Statement of Cash Flows For the Year ended December 31, 2001 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- ----- ----- -------- ------------ ------- <S> <C> <C> <C> <C> <C> Cash Flows From Operating Activities Net loss $(480) $(341) $(362) $ 703 $(480) Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities Depreciation, amortization and retirements - 328 53 - 381 Asset impairments - 2 42 - 44 Deferred income taxes - - 44 - 44 Undistributed equity in losses of affiliates, net 385 44 341 (703) 67 Changes in operating working capital 446 37 (247) - 236 Other operating cash flow activity 146 41 (108) - 79 ----- ----- ----- ----- ----- Net cash provided by (used in) operating activities 497 111 (237) - 371 ----- ----- ----- ----- ----- Cash Flows From Investing Activities Capital and investment expenditures - (281) (10) - (291) Decrease (increase) in investments (134) 2 (128) 287 27 ----- ----- ----- ----- ----- Net cash used in investing activities (134) (279) (138) 287 (264) ----- ----- ----- ----- ----- Cash Flows From Financing Activities Decrease in commercial paper, net (783) - - - (783) Proceeds from the issuance of other long-term debt 497 12 - - 509 Increase in secured borrowings, net - - 199 - 199 Decrease in notes payable to member, net (50) - - - (50) Contributions from parents / members 6 152 243 (395) 6 Distributions to parents / members (20) - (108) 108 (20) Post-closing adjustments to members (13) - - - (13) ----- ----- ----- ----- ----- Net cash provided by (used in) financing activities (363) 164 334 (287) (152) ----- ----- ----- ----- ----- Net Decrease in Cash and Cash Equivalents - (4) (41) - (45) Cash and Cash Equivalents at Beginning of Year - 75 81 - 156 ----- ----- ----- ----- ----- Cash and Cash Equivalents at End of Year $ - $ 71 $ 40 $ - $ 111 ===== ===== ===== ===== ===== </Table> 57 <Page> Note 17. Consolidating Financial Statements (continued) Chevron Phillips Chemical Company LLC Consolidating Statement of Cash Flows July 1, 2000 (Inception) through December 31, 2000 <Table> <Caption> Other MILLIONS LLC LP Entities Eliminations Total -------- ------ ------ -------- ------------- ------- <S> <C> <C> <C> <C> <C> Cash Flows From Operating Activities Net loss $(241) $ (41) $(175) $ 216 $(241) Adjustments to reconcile net loss to net cash flows provided by (used in) operating activities Depreciation, amortization and retirements - 125 26 - 151 Asset impairments - 2 135 - 137 Undistributed equity in losses of affiliates, net 175 10 34 (216) 3 Changes in operating working capital 51 7 (38) - 20 Other operating cash flow activity (1) 1 28 - 28 ----- ----- ----- ----- ----- Net cash provided by (used in) operating activities (16) 104 10 - 98 ----- ----- ----- ----- ----- Cash Flows From Investing Activities Capital expenditures - (98) (14) - (112) Increase in investments in affiliates (82) - (66) 148 - ----- ----- ----- ----- ----- Net cash used in investing activities (82) (98) (80) 148 (112) ----- ----- ----- ----- ----- Cash Flows From Financing Activities Increase in commercial paper, net 1,784 - - - 1,784 Contributions from parent - 66 82 (148) - Distributions to members (1,692) - - - (1,692) Other financing cash flow activity 6 - (3) - 3 ----- ----- ----- ----- ----- Net cash provided by financing activities 98 66 79 (148) 95 ----- ----- ----- ----- ----- Net Increase in Cash and Cash Equivalents - 72 9 - 81 Cash and Cash Equivalents at Beginning of Period - 3 72 - 75 ----- ----- ----- ----- ----- Cash and Cash Equivalents at End of Period $ - $ 75 $ 81 $ - $ 156 ===== ===== ===== ===== ===== </Table> 58 <Page> Chevron Phillips Chemical Company LLC Selected Quarterly Financial Data (Unaudited) <Table> <Caption> MILLIONS Income (Loss) -------- Net Before Interest Net Income 2001 Sales and Taxes (Loss) ---- ----- ---------------- ------------ <S> <C> <C> <C> First quarter $ 1,825 $ (87) $ (118) Second quarter 1,521 58 30 Third quarter 1,367 (101) (167) Fourth quarter 1,158 (206) (225) ------- ------ ------ Total $ 5,871 $ (336) $ (480) ======= ====== ====== <Caption> 2000 ---- <S> <C> <C> <C> Third quarter $ 1,785 $ 66 $ 47 Fourth quarter 1,617 (224) (288) ------- ------ ------ Total $ 3,402 $ (158) $ (241) ======= ====== ====== </Table> Income (loss) before interest and taxes in 2001 included special charges (credits) of $17 million, $(81) million, $50 million and $167 million in the first through fourth quarters, respectively. In addition, net income (loss) included a $44 million special charge in the third quarter of 2001 related to income taxes. Income (loss) before interest and taxes in 2000 included $15 million of special charges in the third quarter and $156 million in the fourth quarter. In addition, net loss for the fourth quarter of 2000 included a $45 million special charge related to income taxes. See Part I -- Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" for further discussions. 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. Other Selected Quarterly Financial Data (Unaudited) <Table> <Caption> Phillips Petroleum Company's Chevron Chemical Company Chemicals Business C Chem Business ------------------------------------- --------------------------------------- MILLIONS Income Income -------- Before Interest Net Before Interest Net 2000 Sales and Taxes Income Sales and Taxes Income ---- ------- -------------- ------ -------- --------------- ------ <S> <C> <C> <C> <C> <C> <C> First quarter $ 1,131 $ 42 $ 27 $ 898 $ 70 $ 44 Second quarter 1,107 91 57 936 80 52 ------- ------ ---- -------- ------ ----- Total $ 2,238 $ 133 $ 84 $ 1,834 $ 150 $ 96 ======= ====== ==== ======== ====== ===== </Table> 59 <Page> Report of Independent Auditors The Board of Directors Phillips Petroleum Company We have audited the accompanying combined statements of income, parent company investment and accumulated comprehensive income, and cash flows of Phillips Petroleum Company's Chemicals Business for the six months ended June 30, 2000 and the year ended December 31, 1999. These financial statements are the responsibility of the company's Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the 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 examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of Phillips Petroleum Company's Chemicals Business for the six months ended June 30, 2000 and the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Tulsa, Oklahoma February 22, 2001 60 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Combined Statement of Income <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ---------------- ----------------- <S> <C> <C> REVENUES Sales and other operating revenues $2,238 $3,117 Equity in earnings of affiliated companies 33 31 Other revenues 17 23 ------ ------ Total Revenues 2,288 3,171 ------ ------ COSTS AND EXPENSES Purchased products 1,620 1,916 Operating expenses 313 601 Selling, general and administrative expenses 144 276 Depreciation and amortization 57 103 Taxes other than income taxes 20 37 Foreign currency transaction losses 1 1 ------ ------ Total Costs and Expenses 2,155 2,934 ------ ------ Income before income taxes 133 237 Provision for income taxes 49 90 ------ ------ NET INCOME $ 84 $ 147 ====== ====== </Table> See Notes to Combined Financial Statements. 61 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Combined Statement of Cash Flows <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ------------------ ----------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 84 $ 147 Adjustments to reconcile net income to net cash provided by operating activities Non-working capital adjustments Depreciation and amortization 57 103 Deferred taxes 7 31 Other (33) 5 Working capital adjustments Increase in accounts receivable (36) (142) Increase in inventories (28) (21) Decrease in prepaid expenses and other current assets 7 12 Increase in accounts payable 81 50 Decrease in taxes and other accruals (7) (3) ----- ----- Net Cash Provided by Operating Activities 132 182 ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (41) (105) Advances to affiliated companies (64) - Investment purchases (24) - Proceeds from asset dispositions 1 2 Proceeds from property insurance 14 - ----- ----- Net Cash Used for Investing Activities (114) (103) ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Net cash change in parent company advances (18) (79) ----- ----- Net Cash Used for Financing Activities (18) (79) ----- ----- NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at beginning of period - - ----- ----- Cash and Cash Equivalents at End of Period $ - $ - ===== ===== </Table> See Notes to Combined Financial Statements. 62 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Combined Statement of Parent Company Investment and Accumulated Comprehensive Income <Table> <Caption> MILLIONS OF DOLLARS ------------------- <S> <C> <C> Parent company investment and accumulated comprehensive income at December 31, 1998 $ 2,329 Net income $ 147 Foreign currency translation adjustments (15) ----- Comprehensive income 132 Net change in parent company advances (34) ------- Parent company investment and accumulated comprehensive income at December 31, 1999 2,427 Net income 84 Foreign currency translation adjustments (5) ----- Comprehensive income 79 Net change in parent company advances (40) ------- Parent company investment and accumulated comprehensive income at June 30, 2000 $ 2,466 ======= </Table> See Notes to Combined Financial Statements. 63 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements NOTE 1 - ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENTS - These financial statements represent Phillips Petroleum Company's (Phillips or the parent company) worldwide chemicals business and include certain natural gas liquids and pipeline operations (hereinafter collectively referred to as Chemicals). The financial statements are presented as if Chemicals had existed as an entity separate from Phillips during the periods presented. Chemicals is not and was not a separate legal entity during the periods presented. References to Chemicals are to "Phillips Petroleum Company, with respect to its chemicals business." Phillips charges Chemicals a portion of its corporate support costs, including engineering, legal, treasury, planning, environmental, tax, auditing, information technology, research and development and other corporate services, based on usage, actual costs or other allocation methods considered reasonable by Phillips' Management. Chemicals manufactures and markets petrochemicals and plastics on a worldwide basis, with manufacturing facilities in the United States, Puerto Rico, Singapore, China, Mexico, South Korea and Belgium. Key products manufactured include ethylene, propylene, polyethylene, polypropylene, K-Resin -Registered Trademark- styrene-butadiene copolymer, paraxylene, Ryton -TM- polyphenylene sulfide, and polyethylene pipe. Chemicals also fractionates and markets natural gas liquids. On February 7, 2000, Phillips announced that it had signed a letter of intent to form a 50/50 joint venture with Chevron Corporation combining the two companies' worldwide chemicals businesses, excluding Chevron's Oronite additives business. The proposed joint venture was approved by the companies' Boards of Directors and the U.S. Federal Trade Commission, and definitive agreements were signed on May 23, 2000. The transaction closed July 1, 2000, forming Chevron Phillips Chemical Company LLC (CPChem). CONSOLIDATION PRINCIPLES AND INVESTMENTS - Majority-owned, controlled subsidiaries are consolidated. Investments in affiliates in which Chemicals owns 20 percent to 50 percent of voting control are accounted for using the equity method. Other securities and investments are generally carried at cost. REVENUE RECOGNITION - Revenues associated with sales of petrochemicals, plastics, natural gas liquids, and all other items are recorded when title passes to the customer. Revenues associated with royalty fees from licensed technology are recorded periodically based upon volumes produced by the licensee. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosures of contingent assets and liabilities. The estimates were made as if Phillips continued to own and operate Chemicals subsequent to June 30, 2000. Actual results could differ from the estimates and assumptions used. PARENT COMPANY INVESTMENT - The parent company investment represents the net balances resulting from various transactions between Chemicals and Phillips. There are no terms of settlement or interest charges associated with most of the account balance. The balance includes Chemicals' participation in Phillips' central cash management program. Chemicals' cash receipts are remitted to Phillips and its cash disbursements are funded by Phillips. Other transactions 64 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements include product purchases from and sales to Phillips, Chemicals' share of the current portion of Phillips' consolidated income tax liability, and other administrative and support expenses incurred by Phillips and allocated or charged to Chemicals. INVENTORIES - Inventories were valued at cost, which is lower than market in the aggregate, on the first-in, first-out (FIFO) basis, the weighted-average basis, and last-in, first-out (LIFO) basis. Materials and supplies are valued at, or below, average cost. DERIVATIVE INSTRUMENTS - In accordance with Phillips' risk-management policies, any derivative instruments held by Chemicals must relate to an underlying, offsetting position, probable anticipated transaction or firm commitment. Additionally, the hedging instrument used must be expected to be highly effective in achieving market value changes that offset the opposing market value changes of the underlying transaction. If an existing derivative position is terminated prior to expected maturity or re-pricing, any deferred or resultant gain or loss will continue to be deferred unless the underlying position has ceased to exist. During the six months ended June 30, 2000 and the year ended December 31, 1999, Chemicals did not use any material derivative instruments. DEPRECIATION AND AMORTIZATION - Depreciation and amortization of major operating units are determined using the group composite straight-line method over an estimated life of 25 years for most of these assets. Major operating units are grouped for this purpose based on their relative similarity and the degree of physical and economic interdependence between individual pieces of equipment. Other properties, plants and equipment are depreciated using the straight-line method over the estimated useful lives of the individual assets. IMPAIRMENT OF ASSETS - Long-lived assets used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group. If, upon review, the sum of the undiscounted pretax cash flows are less than the carrying value of the asset group, the carrying value is written down to estimated fair value. 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 an entire complex level for Chemicals' assets. The fair value of impaired assets is determined based on quoted market prices in active markets, if available, or upon the present values of expected future cash flows using discount rates commensurate with the risks involved in the asset group. Long-lived assets committed by Management for disposal are accounted for at the lower of amortized cost or fair value, less cost to sell. The expected future cash flows used for impairment reviews and related fair value calculations are based on production volumes, prices and costs, considering all available evidence at the date of the review. MAINTENANCE AND REPAIRS - Maintenance and repair costs incurred, which are not significant improvements, are expensed. The estimated turnaround costs of major producing units are accrued in other liabilities over the estimated interval between turnarounds. 65 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements PROPERTY DISPOSITIONS - When complete units of depreciable property are retired or sold, the asset cost and related accumulated depreciation are eliminated with any gain or loss reflected in income. When less-than-complete units of depreciable property are disposed of or retired, the difference between asset cost and salvage value is charged or credited to accumulated depreciation with no recognition of gain or loss. Retirements or sales of equipment, whether complete units of depreciable property or less-than-complete units of depreciable property, have not been significant to the financial statements. ENVIRONMENTAL COSTS - Environmental costs are expensed or capitalized as appropriate, depending upon their future economic benefit. Costs that relate to an existing condition caused by past operations, and that do not have future economic benefit, are expensed. Liabilities are recorded on an undiscounted basis when environmental assessments or cleanups are probable and the costs can be reasonably estimated. INCOME TAXES - Chemicals' results of operations are included in the consolidated U.S. federal and state income tax returns of Phillips. Deferred taxes are provided on all temporary differences between the financial reporting basis and the tax basis of Chemicals' assets and liabilities, except for temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. Income tax expense represents Chemicals on a separate-return basis using the same principles and elections used in Phillips' consolidated return. Any resulting current tax liability or refund is settled with Phillips on a current basis. COMPREHENSIVE INCOME - Chemicals' only item of other comprehensive income results from the process of translating the financial statements of certain foreign subsidiaries and corporate joint ventures into U.S. dollars. Chemicals' investment in these subsidiaries and joint ventures is essentially permanent in duration so deferred taxes have not been provided on the related temporary differences. NOTE 2 - RELATED PARTY TRANSACTIONS Significant transactions with affiliated parties were: <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ------------------ ----------------- <S> <C> <C> Sales and other operating revenues (a) $ 549 $ 694 Purchased products (b) 810 1,036 Operating expenses (c,d,e) 10 21 Selling, general and administrative expenses (e) 44 108 </Table> (a) Chemicals sells ethylene residue natural gas to Phillips' crude oil refining operations, as well as feedstocks to non-consolidated equity companies, at prices that approximates market. (b) Chemicals purchases natural gas liquids feedstocks for its ethylene and propylene products from Phillips and its affiliates, and purchases finished products from nonconsolidated equity companies, at prices that approximate market. 66 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements (c) Phillips' refining operations charge Chemicals for its use of facilities common to both operations, such as steam generation, waste and water treaters, pumps, gauges, etc. (d) Chemicals purchases natural gas from Phillips and its affiliates for use as fuel at its manufacturing facilities at prices that approximate market. In addition, Phillips provides for and arranges liability, property and business interruption insurance coverage for Chemicals through its captive insurance subsidiary. (e) Phillips charges Chemicals a portion of its corporate support costs, including engineering, legal, treasury, planning, environmental, tax, auditing, information technology, research and development, and other corporate services, based on usage, actual costs, or other allocation methods considered reasonable by Phillips' Management. NOTE 3 - EQUITY INVESTMENTS Chemicals owns investments in entities in the petrochemical and plastics industries. In the ordinary course of business, Chemicals has transactions with most of these equity investee companies. Summarized financial information for all entities accounted for using the equity method, except Sweeny Olefins Limited Partnership (see below), follows: <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ---------------- ----------------- <S> <C> <C> Revenues $ 321 $ 475 Loss before income taxes (28) (26) Net loss (28) (26) </Table> SWEENY OLEFINS LIMITED PARTNERSHIP (SOLP) - Chemicals is a general partner and has a 50 percent interest in SOLP, which owns and operates a 2-billion-pound-per-year ethylene facility located adjacent to Phillips' Sweeny, Texas, refinery. During construction of the facility, Chemicals made advances to the partnership under a subordinated loan agreement to fund certain costs related to completing the project. During 1995, SOLP entered into a second subordinated loan agreement with Chemicals, with essentially the same terms as the first, for $120 million to fund three new furnaces for the ethylene plant. In November 1999, the second subordinated loan was increased by $20 million to fund expenditures to improve plant operating efficiency. On June 30, 2000, SOLP made a distribution to its partners that brought the total distribution to the other unrelated general partner to a target-specified after-tax internal rate of return on its investment. The partnership agreement states that once this general partner achieved the specified internal rate of return, its 49.49 percent general partnership interest is withdrawn in the subsequent month with no additional cash distribution required. Also, the remaining .51 percent limited partner investment interest converts to 1 percent following the withdrawal of the unrelated general partner. Accordingly, the other general partner withdrew from SOLP effective July 1, 2000, and its general partnership interest reverted to CPChem, giving CPChem a majority interest in SOLP. Also in July, CPChem purchased, subject to the receipt of necessary approvals or clearances and the execution of required documentation, the combined remaining 1 percent limited partnership interests. 67 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements Summarized financial information for SOLP follows: <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ---------------- ----------------- <S> <C> <C> Revenues $ 380 $ 482 Income before income taxes 67 78 Net income 67 78 </Table> QATAR CHEMICAL COMPANY LTD. (Q-CHEM) - In 1997, Chemicals entered into an agreement with Qatar General Petroleum Corporation to form a joint venture to develop a major petrochemical complex in Qatar, at an estimated cost of $1.16 billion. During 1999, Q-Chem, the joint-venture company established by the co-venturers, signed a $750 million bank financing agreement for the construction of the complex. At June 30, 2000 and December 31, 1999, $153 million and $51 million, respectively, (excluding accrued interest) had been drawn under this financing agreement. After the bank financing has been fully drawn, Chemicals will be required to fund any remaining construction costs under a subordinated loan agreement with Q-Chem. In connection with the bank financing, the co-venturers agreed that, if the complex is not successfully completed by August 31, 2003 (which may be extended for up to one year due to force majeure), each will make, or cause to be made, capital contributions on a pro rata, several basis to the extent necessary to cover bank financing service requirements including, if demanded, repayment of principal. After construction is successfully completed, the bank financing is non-recourse with respect to the two co-venturers and the lenders can look only to Q-Chem's cash flows for payment, except Chemicals has agreed to provide up to $75 million of credit support to the venture under a contingent equity loan agreement. Construction has begun, with start-up scheduled for the last half of 2002. Chemicals owns 49 percent of Q-Chem. NOTE 4 - CONTINGENCIES In the case of all known contingencies, Chemicals accrues an undiscounted liability when the loss is probable and the amount is reasonably estimable. These liabilities are not reduced for potential insurance recoveries. If applicable, undiscounted receivables are accrued for probable insurance or other third-party recoveries. Based on currently available information, Chemicals believes that it is remote that future costs related to known contingent liability exposures will exceed current accruals by an amount that would have a material adverse impact on Chemicals' financial statements. As facts concerning contingencies become known, Chemicals reassesses its position both with respect to accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change include contingent liabilities recorded for environmental remediation and legal matters. Estimated future environmental remediation costs are subject to change due to such factors as the unknown magnitude of clean-up costs, the unknown time and extent of such remedial actions that may be required, and the determination of Chemicals' liability in proportion to other responsible parties. Estimated future costs related to legal matters are subject to change as events evolve, and as additional information becomes available during the administrative and litigation process. 68 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements ENVIRONMENTAL - Chemicals is subject to federal, state and local environmental laws and regulations. These may result in obligations to remove or mitigate the effects on the environment of the placement, storage, disposal or release of certain chemical, mineral and petroleum substances at various sites. OTHER LEGAL PROCEEDINGS - Chemicals is a party to a number of other legal proceedings pending in various courts or agencies for which, in some instances, no provision has been made. NOTE 5 - FINANCIAL INSTRUMENTS AND CREDIT RISK Chemicals' financial instruments that are exposed to concentrations of credit risk consist primarily of cash equivalents and trade receivables. Phillips' cash equivalents are placed in high quality time deposits with major international banks and financial institutions, limiting Chemicals' exposure to concentrations of credit risk. Chemicals' trade receivables reflect a broad customer base. Chemicals routinely assesses the financial strength of its customers. NOTE 6 - OPERATING LEASES Chemicals leases tank and hopper railcars, computers, office buildings and other facilities and equipment. At June 30, 2000, future minimum payments due under non-cancelable operating leases were: <Table> <Caption> MILLIONS OF DOLLARS ------------------- <S> <C> July 1, 2000 through December 31, 2000 $ 12 2001 24 2002 22 2003 21 2004 24 2005 19 Remaining years 163 --------- $ 285 ========= </Table> Operating lease rental expense was $18 million for the six months ended June 30, 2000 and $21 million for the year ended December 31, 1999. NOTE 7 - EMPLOYEE BENEFIT PLANS Chemicals employees are included in the various employee benefit plans of Phillips. These plans include the Retirement Income Plan, employee and retiree medical, dental and life insurance plans, the Thrift and Long-Term Stock Savings Plans of Phillips, and other such benefits. For the purpose of these separate financial statements, Chemicals is considered to be participating in multi-employer benefit plans. Chemicals' share of allocated parent company employee benefit plan expenses was $14 million for the six months ended June 30, 2000 and $24 million for the year ended December 31, 1999. 69 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements NOTE 8 - TAXES Taxes charged to income were: <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ---------------- ----------------- <S> <C> <C> Taxes other than income taxes Property $ 10 $ 21 Payroll 9 15 Other 1 1 -------- -------- 20 37 -------- -------- Income taxes Federal Current 28 42 Deferred 10 28 Foreign Current 7 11 Deferred - 1 State and local Current 2 16 Deferred 2 (8) -------- -------- 49 90 -------- -------- Total taxes charged to income $ 69 $ 127 ======== ======== </Table> Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Deferred taxes have not been provided on temporary differences related to investments in certain foreign subsidiaries and corporate joint ventures that are essentially permanent in duration. These temporary differences were $28 million at June 30, 2000 and $144 million at December 31, 1999. Determination of the amount of unrecognized deferred taxes on these temporary differences is not practicable due to foreign tax credits and exclusions. Any loss carryforwards that have not been utilized will begin expiring in 2011. 70 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements The amounts of U.S. income before income taxes, with a reconciliation of tax at the federal statutory rate with the provision for income taxes were: <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ----------------------- ------------------------- Percent of Percent of MILLIONS OF DOLLARS, EXCEPT PERCENTAGES Amount Pretax Income Amount Pretax Income --------------------------------------- ------ ------------- ------ ------------- <S> <C> <C> <C> <C> Income before income taxes United States $ 98 74% $ 182 77% Foreign 35 26 55 23 ------ --- ------ --- $ 133 100% $ 237 100% ====== === ====== === Federal statutory income tax $ 46 35% $ 83 35% State income tax 3 2 6 3 Foreign taxes in excess of federal statutory rate 1 1 2 1 Other (1) (1) (1) (1) ------ --- ------ --- $ 49 37% $ 90 38% ====== === ====== === </Table> Excise taxes accrued on the sale of chemical products were less than $1 million in both the first six months of 2000 and the year ended December 31, 1999. These taxes are excluded from reported revenues and expenses. NOTE 9 - CASH FLOW INFORMATION <Table> <Caption> Six Months Ended Year Ended MILLIONS OF DOLLARS June 30, 2000 December 31, 1999 ------------------- ---------------- ----------------- <S> <C> <C> Non-cash investing and financing activities Investment in joint venture in exchange for non-cash assets $ - $ 8 Parent company contribution of non-cash assets - 37 Cash payments Income taxes 37 69 </Table> NOTE 10 - OTHER FINANCIAL INFORMATION Expensed research and development expenditures totaled $16 million for the six months ended June 30, 2000 and $32 million for the year ended December 31, 1999. NOTE 11 - SEGMENT DISCLOSURES AND RELATED INFORMATION Chemicals has organized its reporting structure based on the grouping of similar products, resulting in three operating segments: (1) OLEFINS AND POLYOLEFINS. This segment manufactures and markets olefins and polyolefins products, including ethylene, propylene, polyethylene, polypropylene, and polyethylene pipe. 71 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements This segment also fractionates and markets natural gas liquids and has pipeline operations. Major production facilities are located at the Sweeny Complex and the Houston Chemical Complex, both in Texas. Chemicals also owns equity interests in an ethylene/propylene facility at the Sweeny Complex, a polypropylene facility at the Houston Chemical Complex, and polyethylene facilities in Singapore and China. Polyethylene pipe is manufactured at six regionally located U.S. plants and at a plant in Mexico. Natural gas liquids are fractionated at the Sweeny Complex. (2) AROMATICS. This segment manufactures and markets aromatics, including paraxylene and cyclohexane. The major production facility is located in Puerto Rico. (3) SPECIALTY CHEMICALS AND PLASTICS. This segment manufactures and markets specialty chemicals and plastics, including K-Resin styrene-butadiene copolymer, Ryton polyphenylene sulfide, and methyl mercaptans. Major production facilities are located at the Borger Complex and the Houston Chemical Complex, both located in Texas. Other manufacturing facilities are located in Belgium and Singapore. Chemicals also owns an equity interest in a K-Resin production facility in South Korea. Other includes all items not directly attributable to the operating segments. All interest revenue and expense is retained by the parent company. Chemicals evaluates performance and allocates resources based on net income. The segment accounting policies are the same as those in Note 1 - Accounting Policies. Intersegment sales were not material. ANALYSIS OF RESULTS BY OPERATING SEGMENT <Table> <Caption> MILLIONS OF DOLLARS Specialty ------------------- Olefins & Chemicals SIX MONTHS ENDED JUNE 30, 2000 Polyolefins Aromatics & Plastics Other Consolidated ------------------------------ ------------ ---------- ----------- ------ ------------- <S> <C> <C> <C> <C> <C> Sales & Other Operating Revenues External customers* $ 1,600 $ 346 $ 292 $ - $ 2,238 ======== ======== ======== ===== ======== Operating Results $ 132 $ (19) $ 48 $ - $ 161 Depreciation & amortization (37) (5) (15) - (57) Equity in earnings of affiliates 31 - 2 - 33 Other items - - - (4) (4) Income taxes (47) 9 (13) 2 (49) -------- -------- -------- ----- -------- Net income (loss) $ 79 $ (15) $ 22 $ (2) $ 84 ======== ======== ======== ===== ======== Assets Identifiable assets $ 1,685 $ 440 $ 713 $ - $ 2,838 Investments in and advances to affiliates 485 - 59 - 544 -------- -------- -------- ----- -------- Total assets $ 2,170 $ 440 $ 772 $ - $ 3,382 ======== ======== ======== ===== ======== Capital Expenditures $ 15 $ 5 $ 21 $ - $ 41 ======== ======== ======== ===== ======== </Table> ---------- * Includes sales to parent company's non-chemicals businesses. 72 <Page> PHILLIPS PETROLEUM COMPANY'S CHEMICALS BUSINESS Notes to Combined Financial Statements <Table> <Caption> MILLIONS OF DOLLARS Specialty ------------------- Olefins & Chemicals YEAR ENDED DECEMBER 31, 1999 Polyolefins Aromatics & Plastics Other Consolidated ---------------------------- ----------- --------- ---------- ----- ------------ <S> <C> <C> <C> <C> <C> Sales & Other Operating Revenues External customers* $ 2,170 $ 389 $ 558 $ - $ 3,117 ======== ======== ======== ===== ======== Operating Results $ 231 $ (15) $ 99 $ - $ 315 Depreciation & amortization (66) (11) (26) - (103) Equity in earnings (losses) of affiliates 32 - (1) - 31 Other items - - - (6) (6) Income taxes (75) 10 (27) 2 (90) -------- -------- -------- ----- -------- Net income (loss) $ 122 $ (16) $ 45 $ (4) $ 147 ======== ======== ======== ===== ======== Assets Identifiable assets $ 1,682 $ 406 $ 677 $ - $ 2,765 Investments in and advances to affiliates 449 - - - 449 -------- -------- -------- ----- -------- Total assets $ 2,131 $ 406 $ 677 $ - $ 3,214 ======== ======== ======== ===== ======== Capital Expenditures $ 40 $ 16 $ 49 $ - $ 105 ======== ======== ======== ===== ======== </Table> ---------- * Includes sales to parent company's non-chemicals businesses. <Table> <Caption> GEOGRAPHIC INFORMATION United Foreign Worldwide States Countries Consolidated ------ --------- ------------ <S> <C> <C> <C> Outside Operating Revenues* Six months ended June 30, 2000 $ 2,009 $ 229 $ 2,238 Year ended December 31, 1999 2,738 379 3,117 Long-Lived Assets** June 30, 2000 2,242 185 2,427 December 31, 1999 2,221 133 2,354 </Table> ---------- * Revenues are attributable to countries based on the location of the operations generating the revenue. ** Includes property, plant and equipment and investments in equity affiliates. NOTE 12 - SUBSEQUENT EVENT Subsequent to the contribution of Chemicals to CPChem on July 1, 2000 (see Note 1 - Basis of Financial Statements), the outlook for future paraxylene market conditions deteriorated. Paraxylene, along with gasoline and certain other petroleum and chemical products, was produced at Chemicals' Puerto Rico Core facility in Guayama, Puerto Rico. In response to market conditions and as part of a strategic review of CPChem's businesses, CPChem's management decided to change the strategic direction of the facility, including a decision to shut down gasoline production, and revised the facility's estimated remaining economic life. As a result of these subsequent changes and developments, a property impairment related to the Puerto Rico Core facility was recorded in the fourth quarter of 2000 by CPChem. In addition, a valuation allowance was recorded against a related deferred tax asset. Combined, these two items resulted in a non-cash $180 million after-tax charge for CPChem. 73 <Page> Report of Independent Accountants To the Board of Directors of Chevron Corporation: In our opinion, the accompanying combined statements of income, of changes in owner's net investment and of cash flows present fairly, in all material respects, the results of the operations and the cash flows of Chevron Chemical Company C Chem Business for the six month period ended June 30, 2000 and the year ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Business' management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. /s/ PRICEWATERHOUSECOOPERS LLP San Francisco, California February 1, 2001 74 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Combined Statement of Income (in millions of dollars) <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> REVENUE Sales and other operating revenues (see Note 6) $ 1,834 $ 2,695 Other income 2 5 -------- -------- Total revenue and other income 1,836 2,700 -------- -------- COSTS AND OTHER DEDUCTIONS Purchased products (see Note 6) 1,130 1,497 Inventory recovery (see Note 3) - (81) Operating expenses 387 681 Selling, general and administrative expenses 97 174 Depreciation and amortization 54 110 Taxes other than income 18 36 -------- -------- Total costs and other deductions 1,686 2,417 -------- -------- Income before income tax expense 150 283 Income tax expense 54 106 -------- -------- Net income $ 96 $ 177 ======== ======== </Table> The accompanying notes are an integral part of these financial statements. 75 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Combined Statement of Changes in Owner's Net Investment (in millions of dollars) <Table> <S> <C> Balance at December 31, 1998 $ 2,082 Net income 177 Net transfers from owner 75 -------- Balance at December 31, 1999 2,334 Net income 96 Net transfers to owner (66) -------- Balance at June 30, 2000 $ 2,364 ======== </Table> The accompanying notes are an integral part of these financial statements. 76 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Combined Statement of Cash Flows (in millions of dollars) <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 96 $ 177 Add (deduct) adjustments to net income Depreciation and amortization 54 110 Inventory recovery - (81) Deferred income taxes 35 75 Other, net - (5) Changes in working capital: Accounts receivable (75) (161) Inventories (7) 33 Prepaid expenses and other current assets 1 1 Accounts payable 85 62 Accrued liabilities (11) 12 Deferred income and other taxes payable (12) (3) -------- ------- Net cash provided by operating activities 166 220 -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (81) (285) Investments and advances - (7) -------- ------- Net cash used in investing activities (81) (292) -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net transfers from (to) owner (66) 75 -------- ------- Net cash provided by (used in) financing activities (66) 75 -------- ------- Net change in cash 19 3 Cash, beginning of period 13 10 -------- ------- Cash, end of period $ 32 $ 13 ======== ======= </Table> The accompanying notes are an integral part of these financial statements. 77 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) 1. OVERVIEW AND BASIS OF PRESENTATION On May 23, 2000, Chevron Corporation (Chevron) and Phillips Petroleum Company (Phillips) signed a Contribution Agreement to form a joint venture, Chevron Phillips Chemical Company LLC (the Venture), to combine certain chemical operations of Chevron and Phillips effective July 1, 2000. These financial statements include the operating results and cash flows of the businesses of Chevron (the Business) that were contributed to the joint venture. The results of operations include revenues and costs directly attributable to the Business, including costs for certain functions and services performed by centralized Chevron organizations and charged to the Business. Also included are allocations of certain Chevron corporate expenses in such areas as legal, accounting, employee benefits, real estate, insurance, information technology, treasury and other corporate and infrastructure costs. The expense allocations have been determined on bases that the Business consider to be a reasonable reflection of the utilization of services provided or the benefit received by the Business. Principle allocation methods include proportionate allocation on the basis of assets, usage, revenues and employees. However, the financial information included herein may not reflect the operating results and cash flows of the Business in the future or what would have resulted if the Business had operated as a separate, stand-alone entity during the periods presented. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF COMBINATION The financial statements include the accounts of the Business. Investments in and advances to affiliates in which the Business has a substantial ownership interest of approximately 20 to 50 percent are accounted for by the equity method. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. REVENUE RECOGNITION Revenues associated with sales of chemicals products are recorded when title passes to the customer. INVENTORIES Product inventories are stated at the lower of cost, using a Last-In, First-Out (LIFO) method, or net realizable value. Materials and supplies generally are stated at average cost. Other merchandise is stated at cost, using a First-In, First-Out (FIFO) method. PROPERTY, PLANT AND EQUIPMENT Depreciation of property, plant and equipment is determined over the assets' useful lives, generally using the declining balance method. Generally, the estimated useful life of plant and equipment is 20 years, and of buildings is 45 years. 78 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) Gains or losses for normal retirements or sales of property, plant and equipment are included in income and are immaterial. Expenditures for maintenance, repairs, turnaround costs and minor renewals to maintain facilities in operating condition are expensed as incurred. Major replacements and renewals are capitalized. The carrying values of long-lived assets and intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of the carrying value of an asset is assessed by reference to an estimate of the asset's undiscounted future net cash flows. Measurement of any impairment would include a comparison of discounted estimated future net cash flows to the net carrying value of the related assets. PATENTS AND LICENSES Patents and licenses are amortized on a straight line basis over periods ranging from 2 to 20 years. ENVIRONMENTAL LIABILITIES Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed. Expenditures that create future benefits or contribute to future revenue generation are capitalized. Liabilities related to future remediation costs are recorded when environmental assessments and/or cleanups are probable and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals are generally based on the Business' commitment to a formal plan of action, such as an approved remediation plan or the sale or disposal of an asset. The Business records the gross amount of its liability based on its best estimate of future costs using currently available technology and applying current regulations as well as the Business' own internal environmental policies. Future amounts are not discounted. Recoveries or reimbursements are recorded as an asset when receipt is reasonably ensured. INCOME TAXES Historically, the Business' results have been included in the consolidated federal and state income tax returns of Chevron. The income tax provisions in these financial statements have been determined as if the Business were a stand-alone taxable entity filing its own tax returns. Accordingly, the calculation of the tax provisions and related balances necessarily require certain assumptions, allocations and estimates which management believes are reasonable to reflect the tax amounts of the Business as a stand-alone entity. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Business does not believe it is vulnerable to the risk of a near-term severe impact as a result of any concentration of its activities. 79 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) 3. INVENTORIES Substantially all chemical product inventories are accounted for on the LIFO method. Inventories at December 31, 1998 were written down to estimated net realizable value, resulting in a before tax charge of $81. As a result of improved prices and the sale of the related products, this reserve was reversed in 1999. The Business reduced certain inventory quantities which were valued at different LIFO costs prevailing in prior periods. The effect of this reduction was to increase net income by approximately $6 for the six month period ended June 30, 2000 and to decrease net income by approximately $3 for the year ended December 31, 1999. 4. INCOME TAXES Income tax expense consists of the following: <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> U.S. Federal Current $ 15 $ 20 Deferred 35 75 State and local 4 11 ---------- --------- Total taxes on income $ 54 $ 106 ========== ========= </Table> The Business' effective income tax rate varied from the U.S. statutory federal income tax rate because of the following: <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> Statutory U.S. federal income tax rate 35.0 % 35.0 % Effect of Foreign Sales Corporation (2.0) (2.2) Losses of equity investee 0.6 1.1 State and local taxes on income, net of U.S. federal income tax benefit 2.4 2.4 Other 0.2 1.1 ---- ---- Effective tax rate 36.2 % 37.4 % ==== ==== </Table> Before-tax income for U.S. operations was $147 for the six months ended June 30, 2000 and $265 for the year ended December 31, 1999. For international operations, before tax-income was $3 for the six months ended June 30, 2000 and $18 for the year ended December 31, 1999. 80 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) 5. EMPLOYEE BENEFIT PLANS Chevron has defined benefit pension plans that covered substantially all employees of the Business. Benefits under these plans are based primarily upon years of service and final earnings. Chevron also provides for certain health care and life insurance plans for active and qualifying retired employees. For purposes of these financial statements, the Business is considered to be participating in the multi-employer benefit plans of Chevron. Charges from Chevron associated with these benefits were $9 for the six months ended June 30, 2000 and $20 for the year ended December 31, 1999. Eligible employees of the Business also participated in various defined benefit plans of Chevron, including the Profit Sharing/Savings Plan, the Employee Stock Ownership Plan, the Management Incentive Plan, Chevron Success Sharing and the Stock Option Plan. Charges from Chevron associated with these plans were $19 for the six months ended June 30, 2000 and $21 for the year ended December 31, 1999. After formation, the Venture established its own employee benefit plans. 6. RELATED PARTY TRANSACTIONS A summary of transactions with Chevron and affiliated companies is shown below: <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> Purchases from equity investees of Chevron $ 181 $ 508 Purchases from affiliated companies 77 83 Sales to affiliated companies 80 151 Corporate, general and administrative charges 37 63 Benefit plan costs 28 41 Current income taxes 15 31 </Table> Intercompany receivable, payable and other balances are non-interest bearing. Purchases and sales from/to Chevron were recorded at prices that management believes approximate prices an unrelated third party would pay. 7. SEGMENT AND GEOGRAPHIC DATA AND OTHER DATA The Business' primary country of operation is the United States. The Business operates in one segment, the manufacture and marketing of commodity petrochemicals and plastics. 81 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) Information about geographic areas follows: <Table> <Caption> Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> Revenues United States $ 1,815 $ 2,663 International 19 32 ---------- --------- $ 1,834 $ 2,695 ========== ========= <Caption> June 30, 2000 December 31, 1999 ------------- ----------------- <S> <C> <C> Long-lived assets United States $ 2,049 $ 2,033 Other* 197 187 ---------- --------- $ 2,246 $ 2,220 ========== ========= </Table> ---------- * Includes equity investment in a 50 percent joint venture, Saudi Chevron Petrochemical Company (SCPC), which began operations in late 1999. Revenue for the six month period through June 30, 2000 of Saudi Chevron Petrochemical Company was $93. Revenue for the year ended December 31, 1999 was not material. The Business' 50% of the net losses is included in operating expenses. Research and development costs expensed by the Business were $16 for the six months ended June 30, 2000 and $29 for the year ended December 31, 1999. 8. EMPLOYEE TERMINATION BENEFITS The Business recorded before-tax charges to income of $8 in 1999 for employee termination benefits as part of a Chevron corporatewide staff reduction program. The charge included severance and other termination benefits of $14 for 200 U.S.-based employees. These charges were offset partly by $6 of restructuring-related net pension settlement/curtailment gains for payments made to terminated employees. 9. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Business is subject to various laws and regulations. In the opinion of management, compliance with existing laws and regulations will not materially affect the financial position or results of operations of the Business. There are certain pending legal actions which have arisen in the ordinary course of business with respect to the assets and operations of the Business. Management believes that the ultimate disposition of these actions, either individually or in the aggregate, will not have a material, adverse effect on the financial position, cash flows or results of operations of the Business. 82 <Page> CHEVRON CHEMICAL COMPANY C CHEM BUSINESS Notes to Combined Financial Statements (in millions of dollars) The Business is also subject to various environmental laws and regulations and incurred costs for preventive and corrective actions at facilities and waste disposal sites, and those environmental costs of operations and remediation activities are accrued on a basis consistent with the accounting policy set forth in Note 2. The Business may be obligated to take remedial action as a result of the enactment of laws or the issuance of new regulations or to correct the effects on the environment of disposal practices or release of chemical substances. Expensed environmental costs and related accruals at June 30, 2000 and December 31, 1999 were not significant. At June 30, 2000, Chevron USA, a subsidiary of Chevron, had a guarantee related to a bank term loan facility of SCPC in the amount of approximately $137. In September 2000 SCPC was advised by Gulf International Bank (GIB) that SCPC was in default on the facility due to certain covenant violations. The Business believes that it is remote that GIB would invoke the guarantee of the indebtedness by Chevron USA. Future minimum lease payments under noncancelable operating leases at June 30, 2000 are as follows: <Table> <Caption> Year ending June 30, ----------- <S> <C> 2001 $ 11 2002 10 2003 6 2004 3 2005 2 Thereafter 13 ------- $ 45 ======= </Table> Rental expense under operating leases was $10 through June 30, 2000 and $18 in the year ended December 31, 1999. 83 <Page> ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers and directors of Chevron Phillips Chemical Company LLC are set forth in the following table: <Table> <Caption> NAME AGE POSITION ---- --- -------- <S> <C> <C> James L. Gallogly.......... 49 President and Chief Executive Officer; Nonvoting Director C. Kent Potter............. 55 Senior Vice President and Chief Financial Officer; Nonvoting Director Greg C. Garland............ 44 Senior Vice President, Planning & Specialty Products J. Mike Parker............. 55 Senior Vice President, Aromatics & Styrenics Rick L. Roberts............ 47 Senior Vice President, Manufacturing Tim G. Taylor.............. 48 Senior Vice President, Olefins & Polyolefins Craig B. Glidden........... 44 Vice President, General Counsel and Secretary Greg G. Maxwell............ 45 Vice President and Controller Joe M. McKee............... 51 Vice President and Treasurer Darald W. Callahan......... 59 Class C Director Patricia E. Yarrington..... 45 Class C Director John E. Lowe............... 43 Class P Director Michael J. Panatier........ 53 Class P Director </Table> JAMES L. GALLOGLY: Mr. Gallogly is President and Chief Executive Officer. He previously served as Senior Vice President of Chemicals for Phillips, a position he accepted in 1999. From 1998 to 1999, he was Vice President for Olefins and Polyolefins for Phillips and from 1997 to 1998 he was Vice President, Plastics, for Phillips. Mr. Gallogly is a Director of the American Chemistry Council and the American Plastics Council. C. KENT POTTER: Mr. Potter is Senior Vice President and Chief Financial Officer. Mr. Potter previously served as Vice President, Finance, of Chevron Overseas Petroleum Inc., a position he accepted in 1996. GREG C. GARLAND: Mr. Garland is Senior Vice President for Planning & Specialty Products. He previously served as General Manager, Qatar/Middle East for Phillips, a position to which he was named in 1997. Mr. Garland is a member of the Chemical Engineering Industrial Advisory board for Texas A&M University. J. MIKE PARKER: Mr. Parker is Senior Vice President for Aromatics & Styrenics. He previously served Chevron as General Manager, Olefins & Plastics, a position to which he was appointed in 1999. From 1998 to 1999, he was General Manager for BTX/Styrene at Chevron. From 1996 to 1998, he was Chevron's General Manager, Supply Chain, for U.S. Chemicals. RICK L. ROBERTS: Mr. Roberts was named Senior Vice President for Manufacturing in October 2001. Since CPChem's formation in 2000, he has served as Vice President of Manufacturing for Olefins & Polyolefins. From 1999 to 2000, he was Plant Manager at Cedar Bayou, and from 1994 to 1999 was Manager of the Chevron refinery in Hawaii. 84 <Page> TIM G. TAYLOR: Mr. Taylor is Senior Vice President for Olefins & Polyolefins. He previously served Phillips as Polyolefins Manager. Before being named to that position in 1999, Mr. Taylor was worldwide Manager for Polyethylene. From 1995 to 1999, he was in charge of chemicals and plastics as Manager of Global Ventures at Phillips. CRAIG B. GLIDDEN: Mr. Glidden is Vice President, General Counsel and Secretary. In 1996, Mr. Glidden founded Glidden Partners LLP, a business litigation firm, and was managing partner of the firm until joining CPChem in 2000. GREG G. MAXWELL: Mr. Maxwell is Vice President and Controller. From 1998 to 2000, he served as General Auditor for Phillips, and from 1994 to 1998 he served as Finance Manager of Phillips' plastics division. JOE M. MCKEE: Mr. McKee is Vice President and Treasurer. Prior to assuming his current position, he served as Finance Manager for the Americas Division of Phillips Exploration and Production, a position to which he was appointed in 1993. DARALD W. CALLAHAN: Mr. Callahan currently serves as Executive Vice President, Power, Chemicals and Technology at ChevronTexaco, a position to which he was appointed upon the formation of ChevronTexaco in October 2001. Prior to the merger of Chevron Corporation and Texaco Inc., he served as an Executive Vice President responsible for human resources; technology, chemical additives and coal companies; CPChem; the Dynegy power and natural gas business; and Chevron Corporation's joint venture with Sasol. From 1999 to 2000, he served as President of Chevron Chemical Company LLC, which subsequently became a part of CPChem, and prior to 1999, he served as Senior Vice President of Chevron Chemical Company LLC. He also serves as a Director of Dynegy Inc. PATRICIA E. YARRINGTON: Ms. Yarrington currently serves as Vice President of Strategic Planning for ChevronTexaco, a position to which she was appointed upon the formation of ChevronTexaco. She served in a similar position, Vice President of Strategic Planning, with Chevron Corporation prior to the merger of Chevron Corporation and Texaco Inc., which she assumed in August 2000. In March 1998, she was appointed President of Chevron Canada Ltd. Prior to that assignment, Ms. Yarrington served as Comptroller for Chevron Products Company. JOHN E. LOWE: Mr. Lowe currently serves as Senior Vice President of Corporate Strategy and Development for Phillips, a position to which he was appointed in 2001. He served as Senior Vice President of Planning and Strategic Transactions, beginning in 2000, Vice President Planning and Strategic Transactions, beginning in August 1999, and as Manager of Strategic Growth Projects, beginning in May 1999. He was Supply Chain Manager in Refining, Marketing and Transportation with Phillips from 1997 to 1999. He serves as a Director of Duke Energy Field Services, LLC. MICHAEL J. PANATIER: Mr. Panatier currently serves as Executive Vice President of Refining, Marketing and Transportation for Phillips, a position to which he was appointed in April 2001. He served as Vice Chairman of the Board of Duke Energy Field Services, LLC from 2000 to 2001. From 1998 to 2000, Mr. Panatier served as Senior Vice President of Gas Processing and Marketing for Phillips. From 1994 to 2000, he also served as President and Chief Executive Officer of GPM Gas Corporation, a subsidiary of Phillips. He serves as a Director of Duke Energy Field Services, LLC. 85 <Page> ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The table below provides information regarding the compensation earned by CPChem's Chief Executive Officer and the next four most highly compensated executive officers (collectively, the "named executive officers") during the year ended December 31, 2001 and the six months ended December 31, 2000. For the six months ended December 31, 2000, either Phillips or ChevronTexaco paid the compensation shown below of the named executive officers and CPChem reimbursed the parents for such amounts. Some of the named executive officers received additional compensation from the parents during the six months ended December 31, 2000 for their service to the parents prior to the formation of CPChem. These amounts, which CPChem did not reimburse, were included in the Summary Compensation Table contained in CPChem's Registration Statement. <Table> <Caption> Annual Compensation Long-term Compensation ------------------- ---------------------- Awards Payouts All Other ------ ------- Compen- Name and Principal Position Year (a) Salary Bonus Options LTIP sation (b) --------------------------- -------- --------- --------- ------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> James L. Gallogly.............. 2001 $ 438,471 $ 212,182 59,108 $ 850,000 $ 14,425 President and 2000 207,498 135,814 - - 268 Chief Executive Officer Tim G. Taylor.................. 2001 268,125 94,421 25,339 361,280 8,579 Senior Vice President, 2000 127,500 60,097 - - 142 Olefins & Polyolefins C. Kent Potter................. 2001 253,500 106,683 19,874 320,000 7,344 Senior Vice President and Chief 2000 120,000 56,571 - - 777 Financial Officer Greg C. Garland................ 2001 239,411 114,296 14,574 311,686 7,496 Senior Vice President, 2000 110,000 44,542 - - 104 Planning & Specialty Products Craig B. Glidden............... 2001 273,650 162,747 21,530 200,000 8,658 Vice President, 2000 130,000 55,714 - - 850 General Counsel & Secretary </Table> ---------- (a) The amounts shown for 2000 are for the six months ended December 31, 2000. (b) During 2001, Messrs. Gallogly, Taylor, Potter, Garland and Glidden received company contributions to their savings plan accounts of $13,774, $8,137, $6,926, $7,113 and $8,210, respectively, and life insurance premiums of $651, $442, $418, $383 and $448, respectively, were paid on their behalf. During the last six months of 2000, life insurance premiums of $268, $142, $777, $104 and $850, respectively, were paid on their behalf. 86 <Page> OPTION GRANTS AND OPTIONS EXERCISED DURING 2001 There were no options to purchase securities of CPChem granted during 2001 nor were any outstanding as of December 31, 2001. However, under CPChem's Long-Term Incentive Plan (LTIP), phantom share options were granted to the named executive officers. The following table sets forth information concerning such grants. <Table> <Caption> Potential Realizable Value at Assumed Percent of Annual Rates of Total Options Price Appreciation Number of Granted to Exercise for Option Term (b) Options Employees Price per Expiration ----------------------- Name Granted (a) in 2001 Share Date @ 5% @ 10% ---- ------------ ------------- --------- ---------- ------ ------- <S> <C> <C> <C> <C> <C> <C> James L. Gallogly.... 59,108 17.5% $ 23.08 01/01/2011 $ 857,657 $ 2,173,992 Tim G. Taylor........ 25,339 7.5 23.08 01/01/2011 367,669 931,968 C. Kent Potter....... 19,874 5.9 23.08 01/01/2011 288,372 730,966 Greg C. Garland...... 14,574 4.3 23.08 01/01/2011 211,469 536,032 Craig B. Glidden..... 21,530 6.4 23.08 01/01/2011 312,400 791,873 </Table> (a) The phantom share options vest in one-third (1/3) increments on each anniversary of the grant date, which was January 1, 2001 for all of the options listed above. Upon exercise, the option holder is entitled to receive in cash the difference between the exercise price and the market value per share on the valuation date immediately prior to the exercise date. (b) Potential realizable value is based on the assumption that the market value per share appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the option term. The market value per share at the end of the option term for the options are $37.59 and $59.86, assuming 5% and 10% appreciation rates, respectively. The amounts of hypothetical appreciation reflect required calculations at rates set by the Securities and Exchange Commission and, therefore, are not intended to represent either historical appreciation or anticipated future appreciation in the market value per share. AGGREGATED OPTION EXERCISES AND OPTION VALUES AT DECEMBER 31, 2001 The following table reflects the number of unexercised phantom share options at year-end. At the time of filing, the value of such options could not be determined as the information required to determine the market value per share was not yet available. The market value per share is equal to an amount calculated by multiplying CPChem's average annual EBITDA, as defined in the LTIP, by the EBITDA multiple of a group of comparable, publicly-traded chemical companies, and dividing this amount by 100,000,000. No options were exercised by the named executive officers during 2001. <Table> <Caption> Number of Options at Value of Options at December 31, 2001 December 31, 2001 Shares -------------------- ------------------- Acquired on Value Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> James L. Gallogly.... - - - 59,108 - n/a Tim G. Taylor........ - - - 25,339 - n/a C. Kent Potter....... - - - 19,874 - n/a Greg C. Garland...... - - - 14,574 - n/a Craig B. Glidden..... - - - 21,530 - n/a </Table> 87 <Page> LONG-TERM INCENTIVE PLANS In 2001, CPChem's Board of Directors adopted the Chevron Phillips Chemical Company LLC Long-Term Incentive Plan for selected key employees. The plan provides for two types of awards: phantom share options and target awards. The Compensation Committee has the sole discretion to determine which employees receive phantom options or target awards. The phantom options will have an exercise price equal to the market value per share as of the grant date. The market value per share is established each January 1 and July 1, and is equal to an amount calculated by multiplying CPChem's average annual EBITDA, as defined in the LTIP, by the EBITDA multiple of a group of comparable, publicly-traded chemical companies, and dividing this amount by 100,000,000. The options vest in one-third increments on each anniversary of the grant date and remain exercisable until the tenth anniversary of the grant date. Upon exercise, the option holder is entitled to receive in cash the appreciation in value between the exercise price and the market value per share as of the exercise date. The Compensation Committee sets target awards at the time such awards are granted. The amount payable as a target award is determined at the end of each performance cycle, typically three years, by comparing CPChem's average return on assets for the performance cycle with a group of comparable companies selected by the Compensation Committee. This comparison yields a percentile ranking, which is used to determine the amount of the award as a percentage of the target award. LTIP AWARDS IN 2001 <Table> <Caption> Estimated Future Payouts Performance UNDER NON-STOCK-PRICE-BASED-PLANS Target Period Until --------------------------------------------- Name Award Payout Threshold(b) Target Maximum ---- ----- ------------ ------------ ------ ------- <S> <C> <C> <C> <C> <C> James L. Gallogly...... $ 758,448 (a) 12/31/2003 $ 379,224 $ 758,448 $ 1,516,895 Tim G. Taylor.......... 291,275 (a) 12/31/2003 145,638 291,275 582,550 C. Kent Potter......... 153,000 12/31/2003 76,500 153,000 306,000 Greg C. Garland........ 201,500 (a) 12/31/2003 100,750 201,500 403,000 Craig B. Glidden....... 165,750 12/31/2003 82,875 165,750 331,500 </Table> (a) The Compensation Committee granted Messrs. Gallogly, Taylor and Garland additional target awards of $303,400, $96,200 and $89,300, respectively, to replace potential payouts from the Phillips LTIP that were lost due to their termination as Phillips employees. (b) CPChem's return on assets must be at least equal to the 40th percentile when compared with the peer group (threshold performance) before any award can be paid. If the threshold performance is achieved, the awards are paid at the threshold level, which is 50% of the target award established for the performance period. The actual awards earned can range from 0% -- 200% of the target awards. 88 <Page> CPChem's Board of Directors also adopted a Special Synergy Incentive Plan (SSIP) for selected key employees. The SSIP is intended to provide incentive for selected senior management and other key employees to achieve in excess of $150 million in annually-recurring synergies and cost savings on or before June 30, 2002. The amounts payable under the SSIP are based upon a percentage, determined by the Compensation Committee, of all annually-recurring synergies. The participants in the SSIP were nominated by CPChem's President and Chief Executive Officer and confirmed by the Compensation Committee. As provided in the SSIP, awards will be paid out prior to June 30, 2002 because CPChem achieved more than $200 million in recurring synergies before that date. A second measurement will occur after June 30, 2002 and participants may receive a supplemental payment thereafter based on the difference, if any, between amounts paid prior to June 30, 2002 and the amounts that would have been paid as of June 30, 2002. The SSIP will expire on June 30, 2002. PENSION PLANS RETIREMENT PLAN CPChem's retirement plan is a defined benefit plan and applies to 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 Phillips or ChevronTexaco or their affiliates. Retirement benefits are based on two types of credits: a career average pay benefit and cash balance account benefit. The career average pay benefit is made up of an annual credit and discretionary upgrades. The annual credit is equal to 1% of each eligible employee's pay. Discretionary upgrades to the 1% annual credit may be made as often as every three years, provided CPChem's earnings support the additional cost. At age 65, the sum of all the annual credits and discretionary upgrades are divided by 12 and the result is the eligible employee's monthly retirement benefit. The cash balance account benefit is made up of an annual credit and additional credits based on CPChem's profitability. The annual credit is equal to 1% of each eligible employee's pay. Additional credits may be made at rates ranging from 0% - 10% of the total amount in each eligible employee's cash balance account. Upon retirement, the amount in the employee's cash balance account may be paid as a lump sum payment or converted to a monthly benefit. If an eligible employee leaves CPChem for any reason prior to retirement, the balance in the cash balance account may be rolled over into an individual retirement account or another employer's 401(k) or other defined contribution plan that accepts rollovers. Eligible employees that came to CPChem from either parent on January 1, 2001 will receive an adjustment to their retirement benefit. This adjustment will ensure that an employee's retirement benefit will not be adversely affected as a result of that employee's ceasing to accumulate service credit under either parent's pension plan. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN The supplemental executive retirement plan applies to designated officers and key executives who receive a retirement benefit under the retirement plan and who have had the amount of that benefit reduced due to required limitations under the Internal Revenue Code of 1986, as amended, or by reason of deferral of compensation under our executive deferred compensation plan. The eligible employee's benefit under this plan is equal to the difference between (a) the amount the employee would have received under the retirement plan without regard to the limitations imposed by the Internal Revenue Code and the amounts deferred by the employee under CPChem's executive deferred compensation plan, and (b) the amount of the employee's retirement benefit payable under the retirement plan. The benefits payable under the supplemental executive retirement plan are payable in the same manner, for the same period, and on the same basis as the benefits under the retirement plan. 89 <Page> ESTIMATED RETIREMENT BENEFITS The estimated annual benefits payable upon retirement at normal retirement age (defined in the retirement plan as age 65) for each of the named executive officers are as follows: <Table> <Caption> Estimated Name Retirement Benefits ---- ------------------- <S> <C> James L. Gallogly.................................. $ 231,624 Tim G. Taylor...................................... 116,332 C. Kent Potter..................................... 89,293 Greg C. Garland.................................... 113,381 Craig B. Glidden................................... 101,000 </Table> DIRECTOR COMPENSATION Neither the Class C nor Class P directors of CPChem receive any additional compensation for their service as directors. EMPLOYMENT AGREEMENTS None of the named executive officers have employment agreements with CPChem. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Since December 2000, Messrs. Callahan and Lowe have served as members of the Compensation Committee of the Board of Directors of CPChem. Neither director has served as an officer or employee of CPChem or any of its subsidiaries. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ------- -------------------------------------------------------------- CPChem is a limited liability company wholly-owned by ChevronTexaco and Phillips, either directly or indirectly through their wholly-owned subsidiaries. ChevronTexaco's ownership interest is held entirely by Chevron U.S.A. Inc., its wholly-owned subsidiary. A portion of Phillips' ownership interest is held directly by Phillips, with the remaining ownership interest held by WesTTex 66 Pipeline Company, Drilling Specialties Company and Phillips Petroleum International Corporation, all wholly-owned subsidiaries of Phillips. Pursuant to CPChem's limited liability company agreement, neither parent may transfer its ownership interest before July 1, 2003, except to wholly-owned affiliates. After July 1, 2003, either parent may transfer all, but not less than all, of its ownership interest, subject to a right of first refusal in favor of the nontransferring parent. The following information is given with respect to the parents' interests in CPChem as of the date of this annual report. 90 <Page> <Table> <Caption> Percentage Name and Address of Owner Title of Class of Ownership ------------------------- -------------- ------------ <S> <C> <C> Chevron U.S.A. Inc.......................................... Class C 50.0% 575 Market Street San Francisco, California 94105 Phillips Petroleum Company.................................. Class P 37.9% Phillips Building Bartlesville, Oklahoma 74004 Phillips Petroleum International Corporation................ Class P 9.6% 1250 Adams Building Bartlesville, Oklahoma 74004 WesTTex 66 Pipeline Company................................. Class P 2.1% 1250 Adams Building Bartlesville, Oklahoma 74004 Drilling Specialties Company................................ Class P 0.4% 1250 Adams Building Bartlesville, Oklahoma 74004 </Table> ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------- ---------------------------------------------- All of the related transactions described below are on terms substantially no more favorable than those that would have been agreed upon by third parties on an arm's-length basis. THE GENERAL TRANSITION SERVICES AGREEMENTS. In connection with the formation of the company, CPChem entered into a General Transition Services Agreement with Chevron U.S.A. Inc. (Chevron U.S.A.) and a Transition Services Agreement with Phillips to provide CPChem with personnel, equipment, tools and technology for reasonable periods of transition after July 1, 2000. Under the agreements, Chevron U.S.A. and Phillips agree to make all reasonable efforts to have their employees available to CPChem upon request. Phillips and Chevron U.S.A charge CPChem for these services according to the rates agreed upon in the various transition services agreements. The General Transition Services Agreement and the Transition Services Agreement cover the most significant aspects of the transfer of employees from and the provision of services by Chevron U.S.A. and Phillips to CPChem. CPChem has also entered into other ancillary agreements that cover the provision of particular personnel and services for a period of time after the formation of the company. CHEVRON CREDIT FACILITY. On December 22, 2000, CPChem entered into a credit facility with Chevron Capital Corporation to provide for loans of up to $100 million with interest payable at LIBOR plus 0.25%. As of December 31, 2000, $50 million was drawn under this facility. The balance of this facility, an additional $50 million, was drawn on February 14, 2001. On March 19, 2001, all amounts owed under this facility were paid in full and the facility was canceled. INTELLECTUAL PROPERTY AGREEMENTS. In connection with the formation of the company, CPChem entered into a Tradename License Agreement with ChevronTexaco and Phillips, a General Trademark Assignment Agreement with Phillips, and separate Intellectual Property Agreements with each assigning or exclusively licensing rights to certain intellectual property owned by ChevronTexaco and Phillips. 91 <Page> COMMON FACILITY OPERATING AGREEMENTS AND SUPPLY AGREEMENTS. In connection with the formation of the company, CPChem entered into Common Facilities Operating Agreements with Phillips and Chevron U.S.A. related to the operation of the chemical facilities located within their refineries in Sweeny, Borger, and Pascagoula. CPChem has also entered into supply agreements with Phillips and Chevron U.S.A. under which CPChem purchases various products produced in these refineries, and Phillips and Chevron U.S.A. purchase various products CPChem produces in the chemical facilities. CPChem has also entered into an agreement with Phillips under which it purchases low-sulfur kerosene and solvent extraction diluents produced at Phillips' refinery located in Woods Cross, Utah. FEEDSTOCK AGREEMENTS. CPChem is a party to contracts with Phillips, Duke Energy Field Services, LLC (an affiliate of Phillips) and Dynegy Inc. (an affiliate of ChevronTexaco) under which they supply CPChem with natural gas liquid feedstocks. SALES AGENCY AGREEMENTS. In connection with the formation of the company, CPChem entered into two sales agency agreements with Phillips under which it markets and sells certain chemical products produced by Phillips at its Sweeny Refinery located in Old Ocean, Texas. POLYETHYLENE PINE SALES. CPChem's Performance Pipe division sells polyethylene pipe to Phillips. CPChem does not have a long-term sales agreement with Phillips for the supply of polyethylene pipe; consequently, all of the sales in 2001 were made via individual purchase orders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------- --------------------------------------------------------------- (a)(1) The financial statements listed in the Index to Consolidated Financial Statements on page 30 are filed as part of this annual report. (a)(2) The following schedule is presented as required. All other schedules are omitted because the information is not applicable, not required or has been furnished in the Consolidated Financial Statements or Notes thereto. Chevron Phillips Chemical Company LLC Schedule II - Valuation and Qualifying Accounts Allowance for Doubtful Accounts <Table> <Caption> MILLIONS -------- <S> <C> Balance at July 1, 2000 $ 3 Additions charged to expense 1 Bad debt write-offs (1) ---- Balance at December 31, 2000 3 Additions charged to expense 6 Bad debt write-offs (3) ---- Balance at December 31, 2001 $ 6 ==== </Table> (a)(3) The exhibits listed in the Index of Exhibits on page 95 are filed as part of this annual report. (b) There were no Reports on Form 8-K filed during the quarter ended December 31, 2001. 92 <Page> SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHEVRON PHILLIPS CHEMICAL COMPANY LLC /s/ C. Kent Potter ------------------------------------- C. Kent Potter Senior Vice President and Chief Financial Officer Date: March 15, 2002 Each person whose signature appears below hereby constitutes and appoints James L. Gallogly, C. Kent Potter and Greg G. Maxwell and each of them, the true and lawful attorneys-in-fact and agents of the undersigned, with full power of substitution and resubstitution, for and in the name, place and stead of the undersigned, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and anything necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute, or substitutes, may lawfully do or cause to be done by virtue hereof. 93 <Page> Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <Table> <Caption> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> /s/ James L. Gallogly President and Chief Executive Officer March 15, 2002 -------------------------------- James L. Gallogly /s/ C. Kent Potter Senior Vice President and March 15, 2002 -------------------------------- Chief Financial Officer C. Kent Potter /s/ Greg G. Maxwell Vice President and Controller March 15, 2002 -------------------------------- Greg G. Maxwell /s/ Darald W. Callahan Director March 15, 2002 -------------------------------- Darald W. Callahan /s/ John E. Lowe Director March 15, 2002 -------------------------------- John E. Lowe /s/ Michael J. Panatier Director March 15, 2002 -------------------------------- Michael J. Panatier /s/ Patricia E. Yarrington Director March 15, 2002 -------------------------------- Patricia E. Yarrington </Table> SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934: No annual report to security holders covering the Registrant's last fiscal year has been sent to the Registrant's security holders and no proxy statement, form of proxy or other proxy soliciting material has been sent to more than ten of the Registrant's security holders with respect to any annual or other meeting of security holders. No such report or proxy material is expected to be furnished to security holders subsequent to the filing of this Annual Report on Form 10-K. 94 <Page> INDEX OF EXHIBITS <Table> <Caption> EXHIBIT NO. DOCUMENT ----------- -------- <S> <C> *3.1 Certificate of Formation of Chevron Phillips Chemical Company LLC, dated May 23, 2000 (Exhibit No. 3.1 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *3.2 Certificate of Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26, 2000 (Exhibit No. 3.2 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *3.3 Certificate of Amendment to Certificate of Limited Partnership of Chevron Phillips Chemical Company LP, dated May 23, 2000 (Exhibit No. 3.3 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *3.4 Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC, dated July 1, 2000, by and between Chevron Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Overseas Petroleum Inc., Drilling Specialties Co., WesTTex 66 Pipeline Co. and Phillips Petroleum International Corporation (Exhibit No. 3.4 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *3.5 Agreement of Limited Partnership of Chevron Phillips Chemical Company LP, dated April 26, 2000 (Exhibit No. 3.5 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *3.6 Amendment No. 1 to the Amended and Restated Limited Liability Company Agreement of Chevron Phillips Chemical Company LLC, dated as of July 1, 2000, by and between Chevron Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc., Chevron Pipe Line Company, Chevron Overseas Petroleum Inc., Drilling Specialties Co., WesTTex 66 Pipeline Co. and Phillips Petroleum International Corporation (Exhibit No. 3.2 to CPChem's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001). *4.1 Indenture, dated as of March 19, 2001 between Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Issuers, and The Bank of New York as Trustee (Exhibit No. 4.1 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *4.2 Amended and Restated Three-Year Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Bank of America, N.A., The Chase Manhattan Bank, ABN AMRO Bank, N.V., National Westminster Bank Plc., and certain financial institutions party thereto, dated as of July 3, 2000 (Exhibit No. 4.3 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *4.3 First Amendment to Amended and Restated Three-Year Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Bank of America, N.A., The Chase Manhattan Bank, ABN AMRO Bank, N.V., National Westminster Bank Plc., and certain lenders from time to time parties thereto, dated as of July 2, 2001 (Exhibit No. 4.1 to CPChem's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). *4.4 364-Day Credit Agreement among Chevron Phillips Chemical Company LLC and Chevron Phillips Chemical Company LP, as Borrowers, and Bank of America, N.A., The Chase Manhattan Bank, ABN AMRO Bank N.V., The Royal Bank of Scotland, Barclays Bank Plc, and the several lenders from time to time parties thereto, dated as of July 2, 2001 (Exhibit No. 4.2 to CPChem's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). *10.1 Contribution Agreement by and among Phillips Petroleum Company, Chevron Corporation and Chevron Phillips Chemical Company LLC, dated May 23, 2000 (Exhibit No. 10.1 to CPChem's Registration Statement on Form S-4/A dated May 10, 2001). 95 <Page> *10.2 Letter Agreement dated July 5, 2001, amending the Contribution Agreement, dated May 23, 2000, between Chevron Corporation, Phillips Petroleum Company and Chevron Phillips Chemical Company LLC (Exhibit No. 10.1 to CPChem's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001). *10.3 Chevron Phillips Chemical Company LP Executive Deferred Compensation Plan, effective January 1, 2001 (Exhibit No. 10.2 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). *10.4 Chevron Phillips Chemical Company LP Supplemental Executive Retirement Plan (Exhibit No. 10.3 to CPChem's Registration Statement on Form S-4 dated April 16, 2001). 10.5 Chevron Phillips Chemical Company LLC Long-Term Incentive Plan. 10.6 Chevron Phillips Chemical Company LLC Annual Incentive Plan. 10.7 Chevron Phillips Chemical Company LP Special Synergy Incentive Plan. 21.1 Subsidiaries of the Registrant. ---------- * Incorporated by reference as indicated. </Table> 96
<Page> -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- LONG-TERM INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- <Page> LONG-TERM INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC -------------------- TABLE OF CONTENTS <Table> <S> <C> 1. Interpretation and Definitions..........................................1 1.1 General..........................................................1 1.2 Definitions......................................................2 2. Administration..........................................................5 3. Eligibility and Participation...........................................6 4. Grants..................................................................6 4.1 Grant and Exercise of Phantom Share Options......................6 4.2 Grant and Exercise of Target Awards..............................9 4.3 Provisions Common to Option and Performance Awards..............11 5. Amendment or Discontinuance............................................11 6. Recapitalization, Merger, and Consolidation; Change in Control.........13 7. Miscellaneous..........................................................13 </Table> <Page> LONG-TERM INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC PURPOSE The purpose of the Long-Term Incentive Plan (the "Plan") is to attract, motivate, and retain qualified management personnel by providing to them a long-term incentive compensation plan that will provide competitive compensation opportunities similar to those of comparable companies in the chemical industry, align the interests of key management with the interests of the Company's shareholders, and encourage the creation of additional shareholder value for the benefit of the Company's shareholders. The Plan is intended to be a compensation plan for a select group of management or other highly-compensated employees, within the meaning of ERISA. The Plan shall be effective as of January 1, 2001. 1. INTERPRETATION AND DEFINITIONS 1.1 GENERAL. (a) INTERPRETATION. Unless a clear contrary intention appears, for purposes of construction of this Plan and all related Plan Documents: (i) the singular number includes the plural number and vice versa; (ii) reference to any person includes such person's successors and assigns but, if applicable, only if such successors and assigns are permitted by the Plan Documents, and reference to a person in a particular capacity excludes such person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (v) reference to any law means such law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any law means that provision of such law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision; <Page> (vi) reference in any Plan Document to any article, section, appendix, schedule or exhibit means such article or section thereof or appendix, schedule or exhibit thereto; (vii) "hereunder", "hereof", and words of similar import shall be deemed references to a Plan Document as a whole and not to any particular Article, Section or other provision thereof; (viii) "including" (and with the correlative meaning "include") means including without limiting the generality of any description preceding such term; (ix) "or" is not exclusive; (x) relative to the determination of any period of time, "from" means "from and including" and "to" means "to but excluding;" and (xi) references to days, weeks, months, quarters and years are references to such periods as determined by the Gregorian calendar. (b) ACCOUNTING TERMS. In each Plan Document, unless expressly otherwise provided, accounting terms shall be construed and interpreted, and accounting determinations and computations shall be made, in accordance with generally accepted accounting principles. (c) CONFLICT IN PLAN DOCUMENTS. If there is any conflict between any two or more Plan Documents, such Plan Documents shall be interpreted and construed, if possible, so as to avoid or minimize such conflict but, to the extent (and only to the extent) of such conflict, the Plan Document dealing most specifically with the matter as to which there is a conflict shall prevail and control. 1.2 DEFINITIONS (a) "Average Return on Assets" means the statistical mean of the Returns on Assets earned by a company in each year of a given Performance Cycle. (b) "Board" means the Board of Directors of the Company. (c) "Chevron" means Chevron Corporation, or such entity as may be controlled by Chevron, that directly or indirectly holds a membership interest in the Company. (d) "Change in Control" of the Company means the occurrence of an event in which (i) any persons or persons acting together as a single entity, other than Chevron Corporation or Phillips Petroleum Company, acquires more than fifty percent (50%) of the Company's assets or voting shares; (ii) during any period of two consecutive years, individuals who at the beginning of the two-year period constitute the Board cease for 2 <Page> any reason to constitute a majority of the Board; (iii) there is consummated a merger or consolidation of the Company with any other corporation or entity which the Board deems to be a Change in Control; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (e) "Committee" means the Compensation Committee of the Board. (f) "Company" means the Chevron Phillips Chemical Company LLC and any successor entity. (g) "Date of Grant" means the effective date on which a Phantom Share or a Target Award, as the case may be, is granted to a Participant. (h) "Date of Termination" means the date on which a Participant ceases to be a regular, full-time Employee. (i) "Disability" means disability as determined under the Long-Term Disability Plan of Chevron Phillips Chemical Company LP. (j) "EBITDA" means earnings before interest, taxes, depreciation, and amortization as reported in the financial records of the Company, or the financial records of any other company, or segment thereof, against whom the performance of the Company is being compared. (k) "EBITDA Multiple" means the average of the quotients obtained by dividing the market value of each company listed from time to time on Exhibit A as of any relevant date by the EBITDA of that company as of the same date. For purposes of the foregoing calculation, the market value of a company shall be deemed to be the product of the publicly quoted price per share of common stock of that company as of the close of business on the relevant date (or, in the event that such day is not a day on which shares of such company are traded on the principal exchange on which such shares are listed, on the next day preceding the relevant date on which such shares are traded) multiplied by the number of issued and outstanding shares of such company. In the event that the EBITDA Multiple of a segment of a company, as opposed to the company as a whole, is being obtained, the Committee shall make such determinations, as to market value and other considerations, as it deems necessary for purposes of arriving at an EBITDA Multiple which it deems fair and appropriate in all the circumstances. (l) "Employee" means full-time employee of a Participating Employer. (m) "ERISA" means the Employee Retirement Income Security Act of 1974. (n) "Grant" means the award of a Phantom Share Option or the award of a Target Award, as the case may be, subject to such terms and conditions as may be set forth in a Grant Agreement accompanying such award. 3 <Page> (o) "Grant Agreement" or "Agreement" means, (i) in the case of a Grant of Phantom Share Options, the agreement accompanying such Grant which sets forth the number of Phantom Shares, the initial Market Value Per Share, vesting, exercise rights, and other terms and conditions pertaining to that Grant as established by the Committee, or (ii) in the case of a Grant of a Target Award, agreement accompanying such Grant which sets forth the Performance Schedule, vesting, and other terms and conditions pertaining to that Grant, as established by the Committee. (p) "Market Value" means the estimated market value of the Company as determined as of each Valuation Date by the Committee by multiplying the Company's average annual EBITDA by the EBITDA Multiple of the group of comparable chemical companies. For the calculation to be made January 1, 2001, the Committee shall use the Company's EBITDA for the preceding twelve (12) months, and for the calculation, if any, to be made July 1, 2001, the Committee shall use the Company's EBITDA for the preceding eighteen (18) months. Thereafter, the Committee shall utilize the Company's EBITDA for the preceding twenty-four (24) months. (q) "Market Value Per Share" means the Company's Market Value divided by one hundred million (100,000,000). (r) "Participant" means an Employee to whom a Phantom Share Option or a Target Award, as the case may be, may be granted pursuant to the Plan. (s) "Participating Employer" means any direct or indirect subsidiary entity of the Company which, with the Company's consent, has adopted the Plan. (t) "Performance Award" means the amount payable to a Participant based on the Company's Relative Return during a Performance Cycle, calculated as described in the Performance Schedule of the Grant Agreement accompanying the Participant's Target Award. (u) "Performance Cycle" means the continuous period during which a Target Award is earned by Participants. (v) "Performance Schedule" means the schedule relating a Participant's Performance Award amount to the Company's Relative Return during the Performance Cycle. (w) "Phantom Share" means a fictitious share of Company stock, having a value, as of each Valuation Date, equal to the Company's Market Value Per Share. (x) "Phantom Share Option" or "Option" means the right to receive the gain in the Company's Market Value Per Share for each Phantom Share granted. 4 <Page> (y) "Phillips" means Phillips Petroleum Company, or such entity as may be controlled by Phillips Petroleum Company, that directly or indirectly holds a membership interest in the Company. (z) "Plan" means the Chevron Phillips Chemical Company LLC Long-Term Incentive Plan. (aa) "Plan Document" means this Plan, any Grant Agreement executed in respect of any award, and any other document defining the rights and liabilities of any Participant. (bb) "Relative Return" means the percentile ranking of the Company's Average Return on Assets, as measured at the end of a Performance Cycle, based on the Average Returns on Assets earned by a group of comparable chemical companies. (cc) "Retirement" means retirement pursuant to the Retirement Income Plan of Chevron Phillips Chemical Company LP, or any retirement plan of any Participating Employer. (dd) "Return on Assets" means operating income of a company divided by the average of that company's assets over the fiscal period during which such operating income was earned. The operating income and assets data to be used shall be derived from publicly available information reported by the Company and each component company of a group of comparable chemical companies, with allowance for such adjustments, as are deemed necessary by the Committee (i) to achieve a degree of accuracy acceptable to the Committee and (ii) to ensure that the results obtained are consistent with the return on assets calculations made for purposes of the Employee Incentive Plan available generally to Employees. (ee) "Target Award" means the Performance Award which will be paid to a Participant, assuming that the Company's actual Relative Return equals the Relative Return level required for the payment of awards at a one hundred percent (100%) level, as established by the Committee at the beginning of each Performance Cycle, and as set forth in Participants' Grant Agreements. (ff) "Termination of Service" occurs when a Participant ceases to serve as an Employee for any reason. (gg) "Valuation Date" means each January 1, July 1 or such other date as the Committee shall select. (hh) "Vest," and the correlative term "Vested," shall mean that the holding period for Options described in Section 4.1(b) has been satisfied. 2. ADMINISTRATION (a) The Plan shall be administered by the Committee. 5 <Page> (b) The Committee may establish, from time to time and at any time, subject to the limitations of the Plan as set forth herein, such rules and regulations and amendments and supplements thereto, as it deems necessary to comply with applicable law and for the proper administration of the Plan. A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee provided that at least one member of the Committee appointed by Chevron and one member appointed by Phillips concurs therein. (c) The Committee shall from time to time determine the names of those executives or other key Employees who, in it opinion, should receive Phantom Share Options, Target Awards, or both, and shall determine the number of Phantom Shares Options and/or the value of Target Awards which should be granted to such person, and the terms and conditions of any grant to be made; provided, in those cases in which the Board has delegated to the Chief Executive Officer of the Company (the "CEO") or other officers of the Company the authority to make such determination with respect to certain classes of Employees, such determinations shall be made by the CEO or such officers. (d) Phantom Share Options and/or Target Awards shall be granted by the Company only upon the prior approval of the Committee and upon the execution of a Grant Agreement between the Company and the Participant. All such Grant Agreements shall be entered into by the Company as agent for Participating Employers, and all Phantom Share Option Grants, Target Awards and resultant Performance Awards shall be and remain the liability of the Participating Employer employing a Participant at the time of such Grants. (e) The Committee's interpretation and construction of the provisions of the Plan and rules and regulations adopted by the Committee shall be final. No member of the Committee or the Board shall be liable for any action taken, or determination made, in respect of the Plan in good faith. Each member of the Committee and each member of the Board shall be fully justified in relying upon or acting in good faith upon any opinion, report, or information furnished in connection with the Plan by any accountant, counsel, or other specialist (including financial officers of the Company, whether or not such persons are Participants in the Plan). (f) This Plan may be adopted by such subsidiary entities of the Company as the Board or Committee may approve, whereupon such entities shall become Participating Employers. 3. ELIGIBILITY AND PARTICIPATION (a) Any Employee (including an Employee who is also a director or an officer) is eligible to participate in the Plan. Participants shall be selected, however, in consideration of the purpose of the Plan. 6 <Page> (b) The Committee, upon its own action, may grant, but shall not be required to grant, Phantom Share Options and/or Target Awards to any Employee. Grants may be made by the Committee at any time and from time to time to new Participants, or to then Participants, or to a greater or lesser number of Participants, and may include or exclude previous Participants, as the Committee shall determine. (c) Each Grant shall be evidenced by a Grant Agreement in such form and with such terms and conditions, as the Committee may from time to time determine. The rights of a Participant with respect to any Grant shall at all times be subject to the terms and conditions set forth in the Grant Agreement relating thereto and in the Plan Documents. Except as required by this Plan, different Grants need not contain terms or conditions similar to any Grant made prior thereto or contemporaneously therewith. The Committee's determinations under the Plan (including determinations of which Employees, if any, are to receive Grants, the form, amount and timing of such Grants, the terms and provisions of such Grants and the agreements evidencing same) need not be uniform and may be made by it selectively among Employees who receive, or are eligible to receive, Grants under the Plan. 4. GRANTS 4.1 GRANT AND EXERCISE OF PHANTOM SHARE OPTIONS (a) Upon the Grant of any Phantom Share Options, the Committee shall establish a Market Value Per Share for the fictitious shares underlying such Options. (b) Except as otherwise in this Section 4.1 or in any other Plan Document, (i) one third (1/3) of the Phantom Share Options granted pursuant to any Grant Agreement shall become exercisable by the Participant twelve (12) months, twenty-four (24) months, and thirty-six (36) months, respectively, following the effective Date of Grant, and (ii) Phantom Share Options which have become exercisable shall remain exercisable until the tenth (10th) anniversary of the effective Date of Grant. Notwithstanding any provision to the contrary in this Section 4.1, Phantom Share Options may not be increased after the tenth (10th) anniversary of the Effective Date of Grant. (c) Upon a Participant's Retirement, all Phantom Share Options previously granted shall Vest according to the schedule described in Section 4.1(b), and all Options granted must be exercised within three (3) years of the Participant's date of Retirement. In the event a Participant does not elect to exercise any such Option prior to the expiration of such period, the same shall be deemed to have been exercised on the final day thereof. (d) Upon a Participant's other voluntary Termination of Service, the Participant shall be deemed to have elected to exercise all Vested Options, and the value thereof shall be paid to the Participant as promptly as reasonably practicable following the calculation of such value. All Options not Vested as of the Participant's Date of Termination shall be forfeited. 7 <Page> (e) Upon a Participant's involuntary Termination of Service, the Participant shall have a period of ninety (90) days from the Participant's Date of Termination within which to exercise all Vested Options, and the value thereof shall be paid to the Participant as promptly as reasonably practicable following such exercise and the calculation of such value. In the event a Participant does not elect to exercise any such Option prior to the expiration of such period, the same shall be deemed to have been exercised on the final day thereof. All Options not Vested as of the Participant's Date of Termination shall be forfeited. (f) Upon a Participant's Disability, the Participant shall have a period of twelve (12) months from the Participant's date of Disability within which to exercise all Vested Options, and the value thereof shall be paid to the Participant as promptly as reasonably practicable following such exercise and the calculation of such value. In the event a Participant does not elect to exercise any such Option prior to the expiration of such period, the same shall be deemed to have been exercised on the final day thereof. All Options not Vested as of the Participant's date of Disability shall be forfeited. (g) Upon a Participant's death, the Participant's beneficiary, executor, administrator or other personal representative, as the case may be, shall have a period of three (3) years from the Participant's date of death within which to exercise all Vested Options, and the value thereof shall be paid to the Participant's beneficiary or estate as promptly as reasonably practicable following such exercise and the calculation of such value. In the event a Participant's beneficiary, executor, administrator or other personal representative does not exercise any such Option prior to the expiration of such period, the same shall be deemed to have been exercised on the final day thereof. All Options not Vested as of the Participant's date of death shall be forfeited. (h) Notwithstanding the foregoing provisions of this Section 4.1, in the event a Phantom Share Option holder (i) takes a leave of absence for personal reasons or as a result of entry into the Armed Forces of the United States, or (ii) terminates employment for reasons which, in the judgment of the Committee are deemed to be special circumstances, the Committee may consider such circumstances and may take such action in respect of the related Grant and Grant Agreement as it may deem appropriate, including reducing or canceling such Grant, and accelerating and/or extending the time rights with respect to previously granted Phantom Share Options may be exercised; provided in no event may any Option be exercised after the expiration of the term of the Option. (i) The Committee shall determine the Market Value of the Company as of each Valuation Date. For purposes of such determination, the comparator group shall be initially composed of the publicly-traded chemical companies set forth in Exhibit A. The Committee, in its sole discretion and judgment, may make such changes to the comparator group from time to time as it deems advisable to reflect industry merger and acquisition activity, shifts in market or business strategy, or other considerations which could influence the Company's Market Value determination. 8 <Page> (j) The Market Value Per Share shall always be based upon the most recent calculation as set forth in Section 4.1(i). The calculated Market Value Per Share will always be in effect for a period of six (6) months and until such time as a new calculation is made based upon publicly-available market and financial data. The calculated Market Value Per Share shall be the prevailing value for all grant and exercise activity pursuant to the Plan. (k) A Phantom Share Option holder desiring to exercise rights with respect to an Option shall notify the Company in writing in such manner as shall be specified in the Grant Agreement. (l) The Phantom Share Option holder must be Vested with respect to the number of Phantom Share Options he elects to exercise as set forth in the Grant Agreement and must make each election to exercise on or before the end of the Option's term. (m) Upon the exercise of rights with respect to a Phantom Share Option, the Participant will receive the appreciation in value, if any, between the Company's Market Value Per Share on the Date of Grant and the date of exercise. The Market Value Per Share on the date of exercise will be based upon the same calculation methodology as is set forth in Section 4.1(i). Except as otherwise provided, the appreciation in value, if any, will be paid to the Participant in the form of cash as a lump sum as soon as is practicable following the Participant's written notification to the Company of his exercise election. Such cash payment will be made consistent with the Company's regular payroll policy and procedures and will be subject to applicable tax and withholding regulations and procedures in effect at that time. (n) On a date at least six (6) months in advance of the Participant's election to exercise a Grant, the Participant may voluntarily elect to defer receipt of his Phantom Share appreciation and to cause such amount to be credited to his account with the Company's nonqualified deferred compensation plan for executives. The rules and procedures governing the nonqualified deferred compensation plan shall govern and be binding upon any Participants who elect to make such deferrals. (o) A Participant shall not make payment for or in any way contribute to the exercise of a Phantom Share Option. Any applicable withholding and payroll taxes may be taken from the applicable appreciation in Market Value Per Share due to the Participant following exercise. 4.2 GRANT AND EXERCISE OF TARGET AWARDS (a) The Performance Schedule for each Target award shall be established by the Committee at the time of Grant. At the conclusion of each Performance Cycle, Grants shall, subject to the provisions of the Plan Documents, become payable. (b) Each Performance Cycle, subject to the other limitations set forth in the Plan, may extend for a period of up to three (3) years from the Date of the Grant. The length of each 9 <Page> Performance Cycle shall be determined by the Committee at the time of Grant; provided, if no term is established by the Committee the term of the Performance Cycle shall be three (3) years from the Date of Grant. (c) Except as provided in Sections 4.2(d) and 4.3(c), upon voluntary or involuntary Termination of Service, the Participant's Target Award and all rights thereunder shall terminate effective at the close of business on the date the Participant's Date of Termination; provided, in the case of termination due to Retirement, Disability or death, the Participant shall be entitled to a pro-rated Performance Award based on the Relative Return of the Company through the end of the year in which the Date of Termination occurs. (d) Notwithstanding Section 4.2(c), in the event a Participant (i) takes a leave of absence from the Company for personal reasons or as a result of entry into the Armed Forces of the United States, or (ii) terminates employment for reasons which, in the judgment of the Committee, are deemed to be special circumstances, the Committee may consider such circumstances and may take such action in respect of the related Grant and Grant Agreement as it may deem appropriate under the circumstances, including extending the rights of a Participant to continue participation in the Plan beyond his Date of Termination; provided in no event may participation be extended beyond the term of the Performance Cycle. (e) At the end of each year, the Committee shall determine the Return on Assets earned by the Company and each of the companies composing the group of comparable chemical companies selected by the Committee for each complete fiscal year covered by the relevant Performance Cycle. The comparator group shall be initially composed of the chemical companies, or chemical segments thereof, set forth in Exhibit B. (f) The statistical mean average of the Company's Return on Assets for the duration of the Performance Cycle (the Average Return on Assets) will be compared to those of each of the component companies of the group of comparable companies selected by the Committee. The comparison of the Company's results against those of the component companies will yield a percentile ranking, which will be used to determine the amount of the Performance Award as a percentage of Participants' Target Award. The Committee may make such further adjustments in such calculations as it deems appropriate with respect to individual Participants or to Participants in the aggregate. (g) For purposes of assessing the Company's Relative Return, only companies against which relative performance can be reasonably determined for each component year of the Performance Cycle shall be considered. (h) Upon final determination of the Participants' Performance awards by the Committee, Participants will become eligible to receive payment. Performance Award amounts shall be paid in cash as a lump sum as soon as practicable after the final determination by the Committee. 10 <Page> (i) On a date at least six (6) months in advance of the end of a given Performance Cycle, the Participant may voluntarily elect to defer receipt of his Performance Award and to cause such amount to be credited to his account with the Company's nonqualified deferred compensation plan for executives. The rules and procedures governing the nonqualified deferred compensation plan shall govern and be binding upon any Participants who elect to make such deferrals. 4.3 PROVISIONS COMMON TO OPTIONS AND PERFORMANCE AWARDS (a) Awards shall be nontransferable and nonassignable, except that such Awards may be transferred (i) to such beneficiary as the Participant may designate in the event of death, Disability or other incapacity, or (ii) by testamentary instrument or by the laws of descent and distribution. The Committee shall prescribe the form and manner in which beneficiary designations shall be made, revoked or amended. Any valid beneficiary designation on file with the Company shall take priority over any conflicting provision of any testamentary or similar instrument. (b) The establishment of the Plan shall not confer any legal rights upon any Employee or other person to continued of employment, nor shall it interfere with the right of any Participating Employer (which right is hereby reserved) to discharge any Employee and to treat him without regard to the effect which that treatment might have upon him as a Participant or potential Participant. (c) In the event that any Participant engages in any activity which the Committee judges to be detrimental to the Company or any Participating Employer, or otherwise fails to substantially perform his or her obligations as an Employee, the Committee may, at any time prior to payment of an award to a Participant, cancel or reduce the award in whole or in part. 5. AMENDMENT OR DISCONTINUANCE Subject to the limitations set forth in this Section 5, the Board may at any time and from time to time, without the consent of the Participants, alter, amend, revise, suspend, or discontinue the Plan in whole or in part. Any such amendment shall, to the extent deemed necessary or advisable by the Committee, be applicable to any outstanding Grants theretofore awarded under the Plan, notwithstanding any contrary provisions contained in any Grant Agreement. In the event of any such amendment to the Plan, the holder of any Grant outstanding under the Plan shall, upon request of the Committee and as a condition to the exercisability thereof, execute a conforming amendment in the form prescribed by the Committee to any Grant Agreement relating thereto. Notwithstanding anything contained in this Plan to the contrary, unless required by law, no action contemplated or permitted by this Section 5 shall adversely affect any rights of Participants or obligations of the Company to Participants with respect to any award theretofore granted under the Plan without the consent of the affected Participant. 11 <Page> 6. RECAPITALIZATION, MERGER, AND CONSOLIDATION; CHANGE IN CONTROL (a) The existence of this Plan and the awards granted hereunder shall not affect in any way the right or power of the Company or those entities holding membership interests in the Company to make or authorize any or all adjustments, reorganizations, or other changes in the Company's capital structure and its business, or any merger or consolidation of the Company, or the dissolution or liquidation of the Company, or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) In the event of a Change in Control, all Grants outstanding shall thereupon automatically be accelerated and payable in full. In the case of Performance Awards, payment shall be made at a Relative Return level determined by the Committee, which shall be deemed payment in full. The determination of the Committee that any of the foregoing conditions has been met shall be binding and conclusive on all parties. Notwithstanding the foregoing, in the event that, incident to a Change in Control, provision is made for the transfer of rights under this Plan to another or successor Plan, Participants shall be allowed to make such transfer. 7. MISCELLANEOUS (a) Neither the adoption of this Plan nor any action of the Board or the Committee shall be deemed to give any person any right to be granted an award or any other rights except as may be evidenced by Grant Agreement, or any amendment thereto, duly authorized by the Committee and executed on behalf of the Company, and then only to the extent and upon the terms and conditions expressly set forth therein. (b) The Company shall have the right to deduct from all amounts hereunder paid in cash, any federal, state, local, or other taxes required by law to be withheld with respect to such payments. (c) THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN, ANY PLAN DOCUMENTS, AND ANY ACTIONS TAKEN OR RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WITHIN SUCH STATE. (d) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, expressly to assume and agree to perform the Company's obligations under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. (e) The Plan shall be unfunded. Neither the Company, any Participating Employer, the Committee, nor the Board shall be required to segregate any assets or secure any liability that may at any time be represented by Grants made pursuant to the Plan. 12 <Page> (f) The Plan shall have a term of ten (10) years from its effective date. After termination of the Plan, no future Grants may be made. 13 <Page> EXHIBIT A COMPARATOR COMPANIES OPTION AWARDS The following companies shall be the initial comparator companies for the purposes of Option awards: 1. Air Products and Chemicals, Inc. 2. The Dow Chemical Company 3. E.I. du Pont de Nemours and Company 4. Eastman Chemical Company 5. Georgia Gulf Corporation 6. Lyondell Chemical Company 7. Millennium Chemicals Inc. 8. NOVA Chemicals Corporation 9. Rhome and Haas Company 10. Solutia Inc. 14 <Page> EXHIBIT A COMPARATOR COMPANIES PERFORMANCE AWARDS The following companies, or the chemicals segments thereof, shall be the initial comparator companies for the purposes of Performance Awards: 1. BP, p.l.c. (chemicals segment) 2. Borealis (polyolefins & chemicals segment) 3. The Dow Chemical Company 4. Eastman Chemical Company 5. Equistar Chemicals, LP 6. ExxonMobil Corporation (chemicals segment) 7. Georgia Gulf Corporation 8. NOVA Chemicals Corporation 9. Royal Dutch/Shell Group (Chemicals segment) 10. Solutia Inc. 11. Sunoco, Inc. (chemicals segment) 15
<Page> -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- ANNUAL INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- <Page> ANNUAL INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC -------------------- TABLE OF CONTENTS <Table> <S> <C> 1. Interpretation and Definitions..........................................1 1.1 General..........................................................1 1.2 Definitions......................................................2 2. Administration..........................................................4 3. Eligibility and Participation...........................................5 4. Awards and Payment of Awards............................................5 5. Recapitalization, Merger, and Consolidation; Change in Control..........6 6. Miscellaneous...........................................................7 </Table> Schedule A - Administrative Procedures ii <Page> ANNUAL INCENTIVE PLAN OF CHEVRON PHILLIPS CHEMICAL COMPANY LLC PURPOSE The purpose of the Annual Incentive Plan (the "Plan") is to attract, motivate, and retain qualified management personnel by providing to them an annual incentive compensation plan that will provide competitive compensation opportunities similar to those of comparable companies in the chemical industry, align the interests of key management personnel with the interests of the Company's shareholders, and assist the Company in achieving its goal of being the top performer in each of its businesses. The Plan is intended to be a compensation plan for a select group of management or other highly-compensated employees, within the meaning of ERISA. The Plan shall be effective as of January 1, 2001. 1. INTERPRETATION AND DEFINITIONS 1.1 GENERAL. (a) INTERPRETATION. Unless a clear contrary intention appears, for purposes of construction of this Plan and all related Plan Documents: (i) the singular number includes the plural number and vice versa; (ii) reference to any person includes such person's successors and assigns but, if applicable, only if such successors and assigns are permitted by the Plan Documents, and reference to a person in a particular capacity excludes such person in any other capacity or individually; (iii) reference to any gender includes each other gender; (iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof; (v) reference to any law means such law as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any law means that provision of such law from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision; <Page> (vi) reference in any Plan Document to any article, section, appendix, schedule or exhibit means such article or section thereof or appendix, schedule or exhibit thereto; (vii) "hereunder", "hereof", and words of similar import shall be deemed references to a Plan Document as a whole and not to any particular article, section or other provision thereof; (viii) "including" (and with the correlative meaning "include") means including without limiting the generality of any description preceding such term; (ix) "or' is not exclusive; (x) relative to the determination of any period of time, "from" means "from and including" and "to" means "to but excluding;" and (xi) references to days, weeks, months, quarters and years are references to such periods as determined by the Gregorian calendar. (b) ACCOUNTING TERMS. In each Plan Document, unless expressly otherwise provided, accounting terms shall be construed and interpreted, and accounting determinations and computations shall be made, in accordance with generally accepted accounting principles. (c) CONFLICT IN PLAN DOCUMENTS. If there is any conflict between any two or more Plan Documents, such Plan Documents shall be interpreted and construed, if possible, so as to avoid or minimize such conflict but, to the extent (and only to the extent) of such conflict, the Plan Document dealing most specifically with the matter as to which there is a conflict shall prevail and control. 1.2 DEFINITIONS (a) "Affiliate" means an entity which controls, is controlled by, or is under common control with, the Company. For purposes hereof, an entity shall be deemed to control another entity if the first entity directly or indirectly owns at least fifty percent (50%) of the stock, partnership interests or membership interests of the second entity, or if, by the ownership of stock, by contract or otherwise, the first entity has the right to select the management or direct the policies of the second entity. (b) "Award" means an award of cash made pursuant to the Plan. (c) "Board" means the Board of Directors of the Company. (d) "Bonus Level Employee" means, (i) with respect to Employees on the U.S. Dollar payroll of a Participating Employer, those Employees who are employed within 2 <Page> pay grades 90 through 99, and (ii) with respect to Employees who are not on a U.S. Dollar payroll, those Employees who are employed within pay grades which are deemed by the Compensation Committee to be equivalent to grades 90 through 99. (e) "Chevron" means Chevron Corporation or such entity as may be controlled by Chevron that directly or indirectly holds a membership interest in the Company. (f) "Change in Control" of the Company means the occurrence of an event in which (i) any persons or persons acting together as a single entity, other than Chevron Corporation or Phillips Petroleum Company, acquires more than fifty percent (50%) of the Company's assets or membership interests; (ii) during any period of two consecutive years, individuals who at the beginning of the two-year period constitute the Board cease for any reason to constitute a majority of the Board; (iii) there is consummated a merger or consolidation of the Company with any other corporation or entity which the Board deems to be a Change in Control; or (iv) the shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (g) "Committee" or "Compensation Committee" means the Compensation Committee of the Board. (h) "Company" means the Chevron Phillips Chemical Company LLC and any successor entity. (i) "Date of Termination" means the date on which a Participant ceases to be a regular, full-time Employee. (j) "Disability" means disability as determined under the Long-Term Disability Plan of Chevron Phillips Chemical Company LP. (k) "Employee" means any full-time employee of a Participating Employer. (l) "ERISA" means the Employee Retirement Income Security Act of 1974. (m) "Layoff" means termination of employment by reason of layoff pursuant to the Chevron Phillips Chemical Company LP Layoff Pay Plan or a similar layoff pay plan adopted by a Participating Employer. (n) "Participant" means an Employee to who has been designated as a participant pursuant to Section 3. (o) "Participating Employer" means any direct or indirect subsidiary entity of the Company which, with the Company's consent, has adopted the Plan. 3 <Page> (p) "Phillips" means Phillips Petroleum Company or such entity as may be controlled by Phillips Petroleum Company that directly or indirectly holds a membership interest in the Company. (q) "Plan" means the Chevron Phillips Chemical Company LLC Annual Incentive Plan. (r) "Plan Year" means a period of twelve (12) months beginning on January 1 of any year. (s) "Plan Document" means this Plan, any Administrative Procedures that may from time to time be adopted by the Committee, and any other document defining the rights and liabilities of any Participant. (t) "Retirement" means retirement pursuant to the Retirement Income Plan of Chevron Phillips Chemical Company LP, or any retirement plan of any Participating Employer. (u) "Salary" means the annualized base rate of a Participant as of December 31 of the Plan Year with respect to which an Award is made or, in the case of the termination of a Participant's employment by reason of Disability, Retirement, Layoff or death, the base rate of the Participant on the date of such Participant's Termination of Service. (v) "Termination of Service" means the cessation of a Participant's status as an Employee for any reason. 2. ADMINISTRATION (a) The Plan shall be administered by the Committee. (b) The Committee may establish, from time to time and at any time, subject to the limitations of the Plan as set forth herein, such rules and regulations, and amendments and supplements thereto, as it deems necessary to comply with applicable law and for the proper administration of the Plan. (c) A majority of the members of the Committee shall constitute a quorum. The vote of a majority of a quorum shall constitute action by the Committee provided that at least one member of the Committee appointed by Chevron and one member appointed by Phillips concurs therein. (d) No member of the Board or the Committee shall be personally liable for any action taken, or determination made, in respect of the Plan in good faith. Each member of the Board and the Committee shall be fully justified in relying upon or acting in good faith upon any opinion, report or information furnished in connection with the Plan by any accountant, counsel, or other specialist (including 4 <Page> financial officers of the Company, whether or not such persons are Participants in the Plan). (e) This Plan may be adopted by such subsidiary entities of the Company as the Board or Committee may approve, whereupon such entities shall become Participating Employers. The Committee shall administer the Plan for the benefit of all Participating Employers. (f) The Committee may delegate to the officers or other employees of the Company or any Participating Employer such authorities and responsibilities with respect to the administration of the Plan as it may deem appropriate. (g) Determinations by the Committee and its designees with respect to the construction operation or interpretation of any Plan Document shall be final, binding and conclusive on the Company, Participating Employers, Employees and Participants. 3. ELIGIBILITY AND PARTICIPATION (a) Except as hereinafter provided, all Bonus Level Employees shall be Participants in the Plan. (b) Notwithstanding Section 3(a), the Committee may from time to time select additional Employees or classes of Employees for participation in the Plan, and may direct that specific Bonus Level Employees, or classes of Bonus Level Employees be removed from participation. Any such determination may be made at any time prior to the payment of awards with respect to any Plan Year, and may be made with respect to participation during all or any part of any Plan Year. 4. AWARDS AND PAYMENT OF AWARDS (a) As soon as practicable following the beginning of each Plan Year, the Committee shall (i) make such determinations as it may deem appropriate with respect to the selection of Participants for such Plan Year; (ii) establish target awards for such Participants, and (iii) establish performance measures under which determinations may be made as to whether awards will be paid for such Plan Year and, if so, the amounts to be paid. (b) The matters described in Section 4(a) applicable to any Plan Year shall be set forth in an Administrative Procedures document. The Administrative Procedures for the 2001 Plan Year are attached hereto. Administrative Procedures applicable to subsequent Plan Years, when adopted by the Committee, shall be substituted for the Administrative Procedures attached hereto. (c) Awards, if determined to be payable pursuant to the Administrative Procedures, shall be payable to Participants as soon as practicable following the date on which 5 <Page> such determination is made for any Plan Year. All such Awards shall be payable in cash, unless another form of payment is specified by the Committee. Notwithstanding the foregoing, Participants may elect to defer receipt of all or part of any Award, and to have the same credited to an account under the Company's nonqualified deferred compensation plan, provided that such Participant is otherwise eligible to participate in such plan. Any such election must be made at such time, and in such manner, as may be specified by the Committee. (d) In the event of a Participant's termination of employment by reason of Retirement, Disability, Layoff or death, or by reason of such Participant's transfer to the payroll of an Affiliate which is not a Participating Employer, the award, if any, payable to such Participant for the Plan Year in which such termination occurs shall be equal to the product of (i) the Award that would have been payable to such Participant if such termination had not occurred, and (ii) a fraction, the numerator of which is the number of days in such Plan Year for which the Participant participated in the Plan, and the denominator of which is 365. Notwithstanding the foregoing, the Committee may, in its sole discretion, determine that a greater or lesser amount shall be paid. Any amount payable by reason of a Participant's death, shall be paid to such Participant's estate or to such other individuals or entities as the Committee shall direct. (e) In the event of a Participant's termination of employment, prior to the payment of Awards for any Plan Year, for reasons other than Retirement, Disability, Layoff or death, the Award, if any, which would have been payable for such Plan Year shall be forfeited; provided, the Committee may in its sole discretion determine to pay all or any portion of any such Award. (f) The payment of any Award may be made subject to such conditions as the Committee may specify. Any such conditions may be specified in respect of Participants as a whole, individual Participants, or classes of Participants. 5. RECAPITALIZATION, MERGER, AND CONSOLIDATION; CHANGE IN CONTROL (a) The existence of this Plan and the Awards granted hereunder shall not affect in any way the right or power of the Company or those entities holding membership interests in the Company to make or authorize adjustments, reorganizations, or other changes in the Company's capital structure and its business, or any merger or consolidation of the Company, or the dissolution or liquidation of the Company, or any sale or transfer of all or part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (b) In the event of a Change in Control, all target awards outstanding shall thereupon automatically be accelerated and payable in full. The amount of such awards shall be determined in the Committee's discretion on the assumption that the Plan Year then in effect ended on the date on which the Change in Control occurred. The 6 <Page> determination of the Committee that any of the foregoing conditions has been met shall be binding and conclusive on all parties. Notwithstanding the foregoing, in the event that, incident to a Change in Control, provision is made for the transfer of rights under this Plan to another or successor Plan, Participants shall be allowed to make such transfer. 6. MISCELLANEOUS (a) Awards shall be nontransferable and nonassignable, except that such Awards may be transferred (i) by testamentary instrument or by the laws of descent and distribution, or (ii) to such individual or entity as the Committee may designate in the event of a Participant's death. (b) The Board may at time and from time to time amend the Plan. Any such amendments may be made effective with respect to any Plan Year and with respect to any awards which, as of the date of amendment, have not become payable. (c) The establishment of the Plan shall not confer any legal rights upon any Employee or other person to continued employment, nor shall it interfere with the right of the Company or any Participating Employer (which right is hereby reserved) to discharge any Employee and to treat him or her without regard to the effect which that treatment might have upon him or her as a Participant or potential Participant. (d) In the event that any Participant engages in any activity which the Committee judges to be detrimental to the Company or any Participating Employer, or otherwise fails to substantially perform his or her obligations as an Employee, the Committee may, at any time prior to payment of an award to a Participant, cancel or reduce the award in whole or in part. (e) Neither the adoption of this Plan nor any action of the Board or the Committee shall be deemed to give any person any right to be granted an Award, except as otherwise specifically provided herein. (f) The Company shall have the right to deduct from all amounts paid hereunder, any federal, state, local, or other taxes required by law to be withheld with respect to such payments. (g) THE VALIDITY, CONSTRUCTION AND EFFECT OF THE PLAN, ANY PLAN DOCUMENTS, AND ANY ACTIONS TAKEN OR RELATING TO THE PLAN SHALL BE DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WITHIN SUCH STATE. (h) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business 7 <Page> and/or assets of the Company, expressly to assume and agree to perform the Company's obligations under this Plan in the same manner and to the same extent that the Company would be required to perform them if no such succession had taken place. (i) The Plan shall be unfunded. Neither the Company, any Participating Employer, the Committee, nor the Board shall be required to segregate any assets or secure any liability that may at any time exist under the Plan. 8 <Page> SCHEDULE A ADMINISTRATIVE PROCEDURES PLAN YEAR 2001 ------------------------- 1. TARGET AWARDS The following target award schedule shall apply to Participants in the Plan for the Plan Year 2001 and for subsequent Plan Years unless changed by the Board of Directors or Compensation Committee: GRADE TARGET LEVEL (% OF SALARY AT 12/31 OF PLAN YEAR) ----- ----------------------------------- 99 65% 98 60% 97 55% 96 50% 95 45% 94 40% 93 35% 92 30% 91 27.5% 90 22.5% 2. ASSIGNMENT TO AWARD UNITS The Company has established Award Units for purposes of the Employee Incentive Plan ("EIP") applicable to Employees generally. Each Participant shall be deemed to be a member of the Award Unit through which such individual would participate in the EIP if such individual were not a Participant in this Plan. 3. CALCULATION OF AWARDS The award payable to each Participant shall be determined under the following formula: Award = S * T * X/7% Where: S is the Participant's Salary; T is the Participant's target award, determined under Paragraph 1 above; and 9 <Page> X is the percentage of EIP Target paid to Employees in the Award Unit to which the Participant is assigned. The above calculation may result in an award ranging from 0% up to 200% of the Target. 4. PERFORMANCE AND OTHER ADJUSTMENTS In the case of the Chief Executive Officer ("CEO") or other employees who, in the Committee's judgment, do not provide services to a single SBU, Facility, Technology Group or Staff, the Committee shall make a special determination as to the manner in which any such individual's award shall be calculated. In the event the Committee determines that an individual Participant or group of Participants has made contributions to the success of the Company which deserve special recognition, the Committee may provide for such enhancement of the awards payable to them as the Committee may deem appropriate. Conversely, if the Committee determines that an individual Participant or group of Participants has failed to make such contribution as would have been justified by application of the formula described in paragraph 3 above, the Committee may reduce or cancel the award payable to any such Participant. 10
<Page> CHEVRON PHILLIPS CHEMICAL COMPANY LP SPECIAL SYNERGY INCENTIVE PLAN Chevron Phillips Chemical Company LP has adopted a one-time incentive plan that focuses on the ability of the Company and its affiliated companies (collectively the "Company") to achieve in excess of $150 million in annually recurring synergies/cost savings from the Company's start-up through June 30, 2002. ARTICLE I - PURPOSE The Plan is intended to provide a significant incentive and prospective award opportunity for selected senior management and other employees to achieve in excess of $150 million in planned, annually recurring synergies/cost savings on or before June 30, 2002. ARTICLE II - PARTICIPATION (a) The President and Chief Executive Officer will nominate personnel to participate in each of two Incentive Pools, Executive Pool and Selected Managers Pool. Each participant must be a full-time employee of the Company at the time of his or her entrance into the Plan. (b) The Executive Pool shall consist of such number of executive management members as the Compensation Committee shall designate. (c) The Selected Managers Pool shall consist of such additional full-time management members as the Compensation Committee shall designate. (d) The nominations made by the President and Chief Executive Officer shall be confirmed by the Compensation Committee of the Board of Directors of Chevron Phillips Chemical Company LLC. A participant must be a full-time employee of the Company at the time of his or her entrance to the Plan. ARTICLE III - ADMINISTRATION The Plan shall be administered by the Compensation Committee, unless otherwise determined by the Board. The Committee shall have the full authority to: (a) Determine, designate and verify from time to time the amount of recurring synergies achieved, as reported by management; (b) Determine and designate from time to time the participants to whom awards are made; (c) Interpret the Plan, in its discretion; <Page> (d) Prescribe, award, and rescind any rules and regulations necessary or appropriate for the administration of the Plan; and (e) Make such other determinations and take such other action as it deems necessary or advisable in the administration of the Plan. ARTICLE IV - INCENTIVE POOLS Each of the Executive Pool and the Selected Managers Pool shall be equal to such percentage of all annually recurring synergies achieved above a $150 million threshold as the Compensation Committee may determine. The $150 million in annually recurring synergies/cost savings must be obtained on or before December 31, 2001. The percentage applicable to the Executive Pool and the Selected Managers Pool need not be the same. The total value of each Incentive Pool will be determined by June 30, 2002. Any synergies/cost savings achieved after that date will not count towards the Executive Pool. ARTICLE V - ACCELERATED DETERMINATION In the event that the Company achieves $200 million in recurring synergies/cost savings before June 30, 2002, the value of the Incentive Pools will be initially determined as of that date and participants shall receive awards within 45 days thereafter, as set forth in Article VI below, on the basis of the initial Incentive Pools. A second measurement will occur on June 30, 2002 and participants will receive a supplement incentive payment within 45 days following June 30, 2002 on the basis of the difference between the initial Incentive Pools (determined prior to June 30, 2002) and the final Incentive Pools (determined as of June 30, 2002). ARTICLE VI - ALLOCATION OF THE INCENTIVE POOLS The Incentive Pools will be allocated to participants in such manner as the Compensation Committee may direct. Allocations may be in stated dollar amounts or may be based on other criteria, including the relative compensation of participants within a Pool, the extent to which a participant had contributed to the realization of recurring synergies important to the Company's financial success, or other factors. The methods of allocation may vary as between the Executive Pool and the Selected Managers Pool. The Committee may categorize awards as basic awards, discretionary awards or such other type of awards as it may deem appropriate, and may make all such awards subject to such rules, regulations or requirements as to performance as it may elect. The Committee's evaluation as to the amount allocable to any participant shall be final and binding on all participants and the Company. <Page> ARTICLE VII - TERMINATION OF EMPLOYMENT --------------------------------------- (a) A participant who, prior to the date on which awards are paid, either (i) voluntarily terminates employment or (ii) is discharged for cause, shall have no right to any awards under the Plan. (b) An Executive Pool participant whose employment is terminated due to layoff, retirement, death, disability or transfer to a parent company may be eligible, in the sole discretion of the Committee, for up to two thirds (2/3) of any basic award that may otherwise have been made to him or her and for such portion of any other discretionary award as the Committee may elect to make. The remainder of any basic award shall be reallocated to the remaining participants in the Executive Pool, exclusive of those other participant's whose awards have been reduced for any of the foregoing reasons. (c) A Selected Managers Pool participant whose employment is terminated due to layoff, retirement, death, disability or transfer to a parent company shall receive no basic award, but may be eligible, in the sole discretion of the Committee for such portion of any Selected Managers Pool discretionary award as the Committee may elect to make. ARTICLE VIII - NEW ENTRANTS --------------------------- The Compensation Committee may, upon the recommendation of the President and Chief Executive Officer, select additional participants for either the Executive Pool or the Selected Managers Pool. The Committee may, but shall not be required to, provide for awards to additional participants on the same basis as the same shall have been made to original participants. ARTICLE IX - PAYOUT OF AWARDS ----------------------------- Except as provided in Article V, awards will be paid by the Company within 45 days following the determination of the value of the Incentive Pool. Awards will be paid as cash bonuses and will be subject to normal rules regarding withholding and payroll taxes. Participants may elect to defer all or a portion of their awards (in 10 percent increments) into the Chevron Phillips Chemical Company LP Executive Deferred Compensation Plan, and awards shall be deemed to be "Bonuses" as provided in such plan. Any such election must be made on or before December 31, 2001, subject to approval by the Deferred Compensation Plan Committee. ARTICLE X - EXPIRATION ---------------------- The Plan will expire on June 30, 2002, and the Plan will become non-operational from that date forward, subject to final payout of awards. <Page> ARTICLE XI - MISCELLANEOUS -------------------------- The validity, construction, and effect of the Plan and any actions taken or relating to the Plan shall be determined in accordance with the laws of the State of Texas, (other than choice of law provisions) except to the extent pre-empted by applicable Federal law. Nothing in the Plan shall be construed to confer upon any participant any right to continued employment with the Company or interfere in any way with the right of the Company to terminate the employment, or discipline, such participant at any time without assigning any reason therefor. The Plan shall be unfunded until such time as awards are paid.
<Page> SCHEDULE OF SUBSIDIARIES ------------------------ <Table> <Caption> STATE OR ENTITY NAME JURISDICTION OF ORGANIZATION ----------- ---------------------------- <S> <C> Arabian Chevron Phillips Petrochemical Co. Bermuda Chemical Services Inc. Delaware Chevron Phillips Chemical (China) Co., Ltd. China Chevron Phillips Chemical (Shanghai) Co. Ltd. China Chevron Phillips Chemical Company LP Delaware Chevron Phillips Chemical Company Qatar LLC Delaware Chevron Phillips Chemical Holdings I LLC Delaware Chevron Phillips Chemical Holdings II LLC Delaware Chevron Phillips Chemical International Canada Ltd. Canada Chevron Phillips Chemical International Holdings LLC Delaware Chevron Phillips Chemical International Inc. Panama Chevron Phillips Chemical International Ltd. Japan Chevron Phillips Chemical International Qatar Holdings LLC Delaware Chevron Phillips Chemical International Sales Inc. Bahamas Chevron Phillips Chemical International Sales LLC Delaware Chevron Phillips Chemical Pipeline Company LLC Delaware Chevron Phillips Chemical Puerto Rico Core Inc. Delaware Chevron Phillips Chemicals Asia Pte. Limited Singapore Chevron Phillips Chemicals France S.A.R.L. France Chevron Phillips Chemicals Germany GmbH Germany Chevron Phillips Chemicals International N.V. Belgium Chevron Phillips Chemicals Italy S.r.L. Italy Chevron Phillips Chemicals Malaysia Sdn Bhd Malaysia Chevron Phillips Chemicals S.A. de C.V. Mexico Chevron Phillips Chemicals Spain S.L. Spain Chevron Phillips Chemicals UK Limited England Chevron Phillips International Corporation Bahamas Chevron Phillips Spain Holding Company S.L. Spain CPC Receivables Company LLC Delaware Drilling Specialties Company LLC Delaware Driscopipe Mexicana S. de R.L. de C.V. Mexico Phillips Petroleum FSC Corporation U.S. Virgin Islands Phillips Petroleum International Ventures Corporation Panama Plexco de Mexico S.A. de C.V. Mexico Plexco International S.A. de C.V. Mexico Productos Plasticos Plexco S.A. de C.V. Mexico SouthTex 66 Pipeline Company, Ltd. Texas </Table>