UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 number 333-76473
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EQUISTAR CHEMICALS, LP
(Exact name of registrant as specified in its charter)
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Delaware 76-0550481
(State or other jurisdiction of (I.R.S. EMPLOYER
incorporation or organization) IDENTIFICATION NO.)
1221 McKinney Street, 77010
Suite 700, Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 652-7200
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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 [ ]
PART I. FINANCIAL INFORMATION
EQUISTAR CHEMICALS, LP
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
MILLIONS OF DOLLARS 2001 2000 2001 2000
- ------------------- --------------- --------------- --------------- ---------------
SALES AND OTHER OPERATING REVENUES:
Unrelated parties $1,074 $1,493 $3,626 $4,355
Related parties 277 462 1,098 1,357
------ ------ ------ ------
1,351 1,955 4,724 5,712
OPERATING COSTS AND EXPENSES:
Cost of sales:
Unrelated parties 1,064 1,381 3,571 3,969
Related parties 264 398 1,002 1,142
Selling, general and administrative expenses 40 49 131 142
Research and development expense 9 9 29 28
Amortization of goodwill 8 9 25 25
Unusual charges - - - - 22 - -
------ ------ ------ ------
1,385 1,846 4,780 5,306
------ ------ ------ ------
Operating income (loss) (34) 109 (56) 406
Interest expense (48) (46) (139) (137)
Interest income 2 1 2 3
Other income (expense), net 1 (1) 7 (1)
------ ------ ------ ------
Income (loss) before extraordinary item (79) 63 (186) 271
Extraordinary loss on extinguishment of debt (3) - - (3) - -
------ ------ ------ ------
NET INCOME (LOSS) $ (82) $ 63 $ (189) $ 271
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
1
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
- ------------------- ------------------ ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 113 $ 18
Accounts receivable:
Trade, net 540 568
Related parties 122 190
Inventories 504 506
Prepaid expenses and other current assets 33 50
------ ------
Total current assets 1,312 1,332
Property, plant and equipment, net 3,731 3,819
Investment in PD Glycol 50 53
Goodwill, net 1,061 1,086
Other assets 288 292
------ ------
Total assets $6,442 $6,582
====== ======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 414 $ 426
Related parties 37 61
Current maturities of long-term debt 104 90
Other accrued liabilities 146 166
------ ------
Total current liabilities 701 743
Long-term debt, less current maturities 2,234 2,158
Other liabilities 150 141
Commitments and contingencies
Partners' capital:
Partners' accounts 3,351 3,540
Accumulated other comprehensive income 6 - -
------ ------
Total partners' capital 3,357 3,540
------ ------
Total liabilities and partners' capital $6,442 $6,582
====== ======
See Notes to Consolidated Financial Statements.
2
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
MILLIONS OF DOLLARS 2001 2000
- ------------------- ------------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (189) $ 271
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 239 230
Net loss (gain) on disposition of property, plant and equipment (3) 3
Extraordinary loss on extinguishment of debt 3 - -
Decrease (increase) in accounts receivable 104 (86)
Decrease (increase) in inventories 4 (36)
(Decrease) increase in accounts payable (36) 32
Decrease in other accrued liabilities (20) (91)
Net change in other working capital accounts 17 7
Other - - (17)
------ -----
Net cash provided by operating activities 119 313
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (85) (81)
Purchase of business from AT Plastics, Inc. (7) - -
Proceeds from sales of assets 4 4
------ -----
Net cash used in investing activities (88) (77)
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,000 - -
Net (payments) borrowing under lines of credit (820) 20
Repayment of long-term debt (90) (42)
Payment of debt-related costs (26) - -
Distributions to partners - - (280)
------ -----
Net cash provided by (used in) financing activities 64 (302)
------ -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 95 (66)
Cash and cash equivalents at beginning of period 18 108
------ -----
Cash and cash equivalents at end of period $ 113 $ 42
====== =====
See Notes to Consolidated Financial Statements.
3
EQUISTAR CHEMICALS, LP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In
the opinion of management, all adjustments, consisting only of normal, recurring
adjustments considered necessary for a fair presentation, have been included.
For further information, refer to the consolidated financial statements and
notes thereto for the year ended December 31, 2000 included in the Equistar
Chemicals, LP ("Equistar" or "Partnership") 2000 Annual Report on Form 10-K
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Certain
amounts from prior periods have been reclassified to conform to the current
period presentation.
2. COMPANY OPERATIONS
Equistar is a Delaware limited partnership, which commenced operations on
December 1, 1997. Equistar is owned 41% by Lyondell Chemical Company
("Lyondell"), 29.5% by Millennium Chemicals Inc. ("Millennium"), and 29.5% by
Occidental Petroleum Corporation ("Occidental").
Equistar owns and operates the petrochemicals and polymers businesses
contributed by Lyondell, Millennium and Occidental ("Contributed Businesses")
which consist of 18 manufacturing facilities primarily on the U.S. Gulf Coast
and in the U.S. Midwest. The petrochemicals segment manufactures and markets
olefins, oxygenated products, aromatics and specialty products. Olefins include
ethylene, propylene and butadiene, and oxygenated products include ethylene
oxide, ethylene glycol, ethanol and methyl tertiary butyl ether ("MTBE"). The
petrochemicals segment also includes the production and sale of aromatics,
including benzene and toluene. The polymers segment manufactures and markets
polyolefins, including high-density polyethylene ("HDPE"), low-density
polyethylene ("LDPE"), linear low-density polyethylene ("LLDPE"), polypropylene,
and performance polymers, all of which are used in the production of a wide
variety of consumer and industrial products. The performance polymers include
enhanced grades of polyethylene, including wire and cable insulating resins, and
polymeric powders. Effective June 1, 2001, Equistar expanded its wire and cable
business through the acquisition of the low- and medium-voltage power cable
materials business of AT Plastics, Inc. Equistar accounted for the acquisition
as a purchase, allocating the $7 million purchase price to property, plant and
equipment and inventory.
3. UNUSUAL CHARGES
Equistar discontinued production at its Port Arthur, Texas polyethylene facility
on February 28, 2001 and shut down the facility. The asset values of the Port
Arthur production units were previously adjusted as part of a $96 million
restructuring charge recognized in 1999. During the first quarter 2001,
Equistar recorded a $22 million charge, which included environmental remediation
liabilities of $7 million (see Note 10), severance benefits of $5 million,
pension benefits of $2 million, and other exit costs of $3 million. The
severance and pension benefits covered approximately 125 people employed at the
Port Arthur facility. The remaining $5 million of the charge relates primarily
to the write down of certain assets. Payments of $1 million, $4 million and $3
million for environmental, severance and exit costs, respectively, were made
through September 30, 2001.
4
4. EXTRAORDINARY ITEM
As part of the third quarter 2001 refinancing (see Note 8), Equistar wrote off
unamortized debt issuance costs and amendment fees of $3 million related to the
early repayment of the $1.25 billion bank credit facility and reported the
charge as an extraordinary loss on extinguishment of debt.
5. ACCOUNTS RECEIVABLE
As part of the third quarter 2001 refinancing (see Note 8), Equistar terminated
a December 1998 agreement with an independent issuer of receivables-backed
commercial paper. Under the terminated agreement, Equistar sold, on an ongoing
basis and without recourse, designated accounts receivable, maintaining the
balance of the accounts receivable sold by selling new receivables as existing
receivables were collected. As of December 31, 2000, the balance of accounts
receivable previously sold by Equistar was $130 million.
6. INVENTORIES
The components of inventories consisted of the following:
SEPTEMBER 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
- ------------------- ------------- ------------
Finished goods $ 251 $ 273
Work-in-process 18 16
Raw materials 141 123
Materials and supplies 94 94
----- -----
Total inventories $ 504 $ 506
===== ====
7. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, at cost, and the related
accumulated depreciation consisted of the following:
SEPTEMBER 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
- ------------------- ------------- ------------
Land $ 79 $ 78
Manufacturing facilities and equipment 5,886 5,769
Construction in progress 102 134
------ ------
Total property, plant and equipment 6,067 5,981
Less accumulated depreciation 2,336 2,162
------ ------
Property, plant and equipment, net $3,731 $3,819
====== ======
8. LONG-TERM DEBT
In August 2001, Equistar completed a $1.5 billion debt refinancing. The
refinancing included an amended and restated bank credit facility consisting of
a $500 million secured revolving credit facility maturing in August 2006 and a
$300 million secured term loan maturing in August 2007. The revolving credit
facility was undrawn at September 30, 2001. Borrowing under the revolving credit
facility generally bears interest based on a margin over, at Equistar's option,
LIBOR or a base rate. The sum of the applicable margin plus a facility fee
varies between 1.5% and 2.5%, in the case of LIBOR loans, and 0.5% and 1.5%, in
the case of base rate loans, depending on Equistar's ratio of debt to EBITDA, as
provided in the amended and restated bank credit facility. The term loan
generally bears interest at a rate equal to LIBOR plus 3% or the base rate plus
2%, at Equistar's option. Certain financial ratio requirements were modified in
the amended and restated bank credit facility to make them less
5
restrictive. The bank credit facility is secured by a lien on Equistar's
accounts receivable, inventory, other personal property and certain fixed
assets. The refinancing also included the issuance of $700 million of new
10.125% unsecured senior notes ("Senior Notes") maturing in August 2008. The
Senior Notes rank pari passu with existing Equistar notes. The refinancing
replaced a $1.25 billion bank credit facility and all related guarantees have
been terminated. A portion of the net proceeds were used to repay $90 million of
Equistar's medium term notes that matured on August 30, 2001. The remaining net
proceeds of the financing will be used for general business purposes. In
addition, during the third quarter 2001, Equistar terminated a $130 million
receivables securitization program (see Note 5).
Long-term debt consisted of the following:
SEPTEMBER 30, DECEMBER 31,
MILLIONS OF DOLLARS 2001 2000
- ------------------- ------------- ------------
Bank credit facilities:
Revolving credit facility due 2006 $ - - $ 820
Term loan due 2007 300 - -
Other debt obligations:
Medium-term notes (due 2002-2005) 31 121
9.125% Notes due 2002 100 100
8.50% Notes due 2004 300 300
6.50% Notes due 2006 150 150
10.125% Notes due 2008 700 - -
8.75% Notes due 2009 598 598
7.55% Debentures due 2026 150 150
Other 9 9
------ ------
Total long-term debt 2,338 2,248
Less current maturities 104 90
------ ------
Total long-term debt, net $2,234 $2,158
====== ======
In March 2001, Equistar amended the previous $1.25 billion credit facility
making certain financial ratio requirements less restrictive. As a result of
the amendment, the interest rate on the previous credit facility was increased
from LIBOR plus 5/8 of 1% to LIBOR plus 8/10 of 1%.
Lyondell remains a guarantor of certain Equistar debt. The consolidated
financial statements (unaudited) of Lyondell are filed as an exhibit to
Equistar's Quarterly Report on Form 10-Q for the period ended September 30,
2001.
9. DERIVATIVE FINANCIAL INSTRUMENTS
As of January 1, 2001, Equistar adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities. Under SFAS No. 133, all derivative
instruments are recorded on the balance sheet at fair value. Currently,
Equistar uses only cash flow hedges. Gains or losses from changes in the fair
value of the derivative used in a cash flow hedge are deferred in accumulated
other comprehensive income, to the extent the hedge is effective, and
subsequently reclassified to earnings to offset the impact of the related
forecasted transaction.
6
Equistar's Partnership Governance Committee has authorized Equistar to enter
into certain hedge transactions, but does not permit speculative positions.
Equistar formally documents all relationships between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking the hedge. This process includes specific identification of the
hedging instrument and the hedge transaction, the nature of the risk being
hedged and the method for assessing the hedging instrument's effectiveness.
Both at the inception of the hedge and on an ongoing quarterly basis, Equistar
assesses whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of hedged items.
Equistar enters into over-the-counter "derivatives", or price swap contracts,
for crude oil with Occidental Energy Marketing, Inc., a subsidiary of
Occidental, to help manage its exposure to commodity price risk with respect to
crude-oil related raw material purchases. At December 31, 2000, price swap
contracts covering 5.1 million barrels of crude oil were outstanding. The
carrying value and fair market value of these derivative instruments at December
31, 2000 represented a liability of $13 million and was based on quoted market
prices. The related loss was deferred on the consolidated balance sheet. On
January 1, 2001, in accordance with the transition provisions of SFAS No. 133,
Equistar reclassified the deferred loss of $13 million to accumulated other
comprehensive income as a transition adjustment, representing the cumulative
effect of an accounting change (see Note 11). The transition adjustment was
reclassified to the consolidated statements of income during the period January
through July 2001.
In September 2001, the remaining price swap contracts, maturing from October
2001 through March 2002 and covering 4.1 million barrels of crude oil, were
liquidated resulting in a realized gain of nearly $9 million, of which 97% was
deemed effective and recognized in accumulated other comprehensive income. The
ineffective portion, which was less than $1 million, was recorded as a component
of cost of sales in the consolidated statements of income. The $8 million gain
recorded in accumulated other comprehensive income will be reclassified to the
consolidated statements of income from October 2001 through March 2002.
During the second quarter 2001, Equistar entered into put options covering 1.9
million barrels of crude oil. The put options were not treated as hedges for
financial reporting purposes, but are intended to reduce Equistar's crude oil-
based raw material costs. As of September 30, 2001, the outstanding put option
contracts, which mature from October 2001 through December 2001, covered 1.0
million barrels of crude oil. Based on quoted market prices, Equistar recorded
a liability of $2 million at September 30, 2001 for these contracts.
The following table summarizes activity included in accumulated other
comprehensive income ("AOCI") related to the fair value of derivative
instruments for the three and nine months ended September 30, 2001 (see Note
11):
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
MILLIONS OF DOLLARS SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
- ------------------- ------------------ --------------------
Gain (loss):
Balance at beginning of period $(2) $- -
--- ----
January 1, 2001 transition adjustment -
reclassification of December 31, 2000 deferred loss - - (13)
Unrealized gains on derivative instruments 13 31
Reclassification of realized gains on
maturing derivative instruments to earnings (3) (10)
--- ----
Net change included in AOCI for the period 10 8
--- ----
Unrealized gain on derivative instruments
included in AOCI at September 30, 2001 $ 8 $ 8
=== ====
7
10. COMMITMENTS AND CONTINGENCIES
Commitments--Equistar has various purchase commitments for materials, supplies
and services incident to the ordinary conduct of business. In the aggregate,
such commitments are not at prices in excess of current market.
Indemnification Arrangements--Lyondell, Millennium Petrochemicals and certain
subsidiaries of Occidental have each agreed to provide certain indemnifications
to Equistar with respect to the petrochemicals and polymers businesses
contributed by the partners. In addition, Equistar agreed to assume third party
claims that are related to certain pre-closing contingent liabilities that are
asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals,
and May 15, 2005 as to certain Occidental subsidiaries, to the extent the
aggregate thereof does not exceed $7 million to each partner, subject to certain
terms of the respective asset contribution agreements. As of September 30,
2001, Equistar had incurred a total of $17 million for these uninsured claims
and liabilities. Equistar also agreed to assume third party claims that are
related to certain pre-closing contingent liabilities that are asserted for the
first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals,
and for the first time after May 15, 2005 as to certain Occidental subsidiaries.
As of September 30, 2001, Equistar, Lyondell, Millennium Petrochemicals and
certain subsidiaries of Occidental amended the asset contribution agreements
governing these indemnification obligations to clarify the treatment of, and
procedures pertaining to the management of, certain claims arising under the
asset contribution agreements. Equistar management believes that these
amendments do not materially change the asset contribution agreements.
Environmental--Equistar's policy is to be in compliance with all applicable
environmental laws. Equistar is subject to extensive environmental laws and
regulations concerning emissions to the air, discharges to surface and
subsurface waters and the generation, handling, storage, transportation,
treatment and disposal of waste materials. Some of these laws and regulations
are subject to varying and conflicting interpretations. Equistar cannot
accurately predict future developments, such as increasingly strict requirements
of environmental laws, inspection and enforcement policies and compliance costs
therefrom which might affect the handling, manufacture, use, emission or
disposal of products, other materials or hazardous and non-hazardous waste.
Equistar's accrued liability for environmental matters as of September 30, 2001
was $6 million and related to the Port Arthur facility, which was permanently
shut down on February 28, 2001.
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the U.S. Environmental Protection Agency ("EPA").
As a result, the Texas Natural Resource Conservation Commission ("TNRCC") has
submitted a plan to the EPA to reach and demonstrate compliance with the ozone
standard by November 2007. Ozone is a product of the reaction between volatile
organic compounds ("VOCs") and nitrogen oxides ("NOx") in the presence of
sunlight, and is a principal component of smog. The proposed plans for meeting
the ozone standard focus on significant reductions in NOx emissions. NOx
emission reduction controls must be installed at each of Equistar's six plants
located in the Houston/Galveston region during the next several years, well in
advance of the 2007 deadline. Compliance with the plan will result in increased
capital investment, which could be between $150 million and $300 million before
the 2007 deadline, as well as higher annual operating costs for Equistar. The
timing and amount of these expenditures are subject to regulatory and other
uncertainties, as well as obtaining the necessary permits and approvals.
Equistar has been actively involved with a number of organizations to help solve
the ozone problem in the most cost-effective manner and, in January 2001,
Equistar and an organization composed of industry participants filed a lawsuit
against the TNRCC to encourage adoption of their alternative plan to achieve the
same air quality improvement with less negative economic impact on the region.
In June 2001, the parties entered into a consent order with respect to the
lawsuit. Pursuant to the consent order, the TNRCC agreed to review, by June
2002, the scientific data for ozone formation in the Houston/Galveston region.
In October 2001, the EPA approved the TNRCC plan. However, if the TNRCC
scientific review supports the industry group proposal, the TNRCC has agreed to
revise the NOx emission reduction requirements set forth in its original plan.
Any revisions will have to be approved by the EPA. Such revisions of the NOx
emission reduction requirements would reduce Equistar's estimated capital
investments required to comply with the plans for meeting the ozone standard.
In the United States, the Clean Air Act Amendments of 1990 set minimum levels
for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified
air quality standards. However, while studies by federal and state agencies and
other organizations have shown that MTBE is safe for use in gasoline, is not
carcinogenic and is effective in reducing automotive emissions, the presence of
MTBE in some water supplies in California and other
8
states due to gasoline leaking from underground storage tanks and in surface
water from recreational water craft has led to public concern that MTBE may, in
certain limited circumstances, affect the taste and odor of drinking water
supplies, and thereby lead to possible public concerns.
Certain federal and state governmental initiatives have sought either to rescind
the oxygenate requirement for reformulated gasoline or to restrict or ban the
use of MTBE. Such actions, to be effective, would require (i) a waiver of the
state's oxygenate mandate, (ii) Congressional action in the form of an amendment
to the Clean Air Act or (iii) replacement of MTBE with another oxygenate such as
ethanol, a more costly, untested, and less widely available additive. The
initiatives mentioned above or other governmental actions could result in a
significant reduction in Equistar's MTBE sales. Equistar has developed
technologies to convert its process to produce alternate gasoline blending
components should it be necessary to reduce MTBE production in the future.
General-The Partnership is also subject to various lawsuits and proceedings.
Subject to the uncertainty inherent in all litigation, management believes the
resolution of these proceedings will not have a material adverse effect upon the
financial position or liquidity of Equistar.
In the opinion of management, any liability arising from the matters discussed
in this Note is not expected to have a material adverse effect on the financial
position or liquidity of Equistar. However, the adverse resolution in any
reporting period of one or more of these matters discussed in this Note could
have a material impact on Equistar's results of operations for that period
without giving effect to contribution or indemnification obligations of co-
defendants or others, or to the effect of any insurance coverage that may be
available to offset the effects of any such award.
11. COMPREHENSIVE INCOME
Comprehensive income (loss) consisted of the following:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net income (loss) $ (82) $ 63 $(189) $ 271
----- ----- ----- -----
Other comprehensive income:
Unrealized net gains on derivative instruments 10 - - 8 - -
Unrealized loss on securities (2) - - (2) - -
----- ----- ----- -----
Total other comprehensive income 8 - - 6 - -
----- ----- ----- -----
Comprehensive income (loss) $ (74) $ 63 $(183) $ 271
===== ===== ===== =====
Equistar accounts for certain investments as "available-for-sale" securities in
accordance with the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Accordingly, changes in the fair
value of the investments are recognized in the balance sheet and the unrealized
holding gains and losses are recognized in other comprehensive income.
9
12. SEGMENT AND RELATED INFORMATION
Equistar has two reportable segments in which it operates: (i) petrochemicals;
and (ii) polymers. Summarized financial information concerning Equistar's
reportable segments is shown in the following table:
MILLIONS OF DOLLARS PETROCHEMICALS POLYMERS UNALLOCATED ELIMINATIONS TOTAL
- ------------------- -------------- -------- ----------- ------------ -----
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001:
Sales and other operating revenues:
Customers $ 857 $ 494 $ - - $ - - $1,351
Intersegment 324 - - - - (324) - -
------ ------ ------ ------- ------
Total sales and operating revenues 1,181 494 - - (324) 1,351
Operating income (loss) 29 (26) (37) - - (34)
Interest expense - - - - (48) - - (48)
Interest income - - - - 2 - - 2
Other income, net - - - - 1 - - 1
Income (loss) before extraordinary item 29 (26) (82) - - (79)
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2000:
Sales and other operating revenues:
Customers $1,353 $ 602 $ - - $ - - $1,955
Intersegment 495 - - - - (495) - -
------ ------ ------ ------- ------
Total sales and operating revenues 1,848 602 - - (495) 1,955
Operating income (loss) 204 (46) (49) - - 109
Interest expense - - - - (46) - - (46)
Interest income - - - - 1 - - 1
Other expense, net - - - - (1) - - (1)
Net income (loss) 204 (46) (95) - - 63
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001:
Sales and other operating revenues:
Customers $3,172 $1,552 $ - - $ - - $4,724
Intersegment 1,173 - - - - (1,173) - -
------ ------ ------ ------- ------
Total sales and operating revenues 4,345 1,552 - - (1,173) 4,724
Operating income (loss) 225 (138) (143) - - (56)
Interest expense - - - - (139) - - (139)
Interest income - - - - 2 - - 2
Other income, net - - - - 7 - - 7
Income (loss) before extraordinary item 225 (138) (273) - - (186)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2000:
Sales and other operating revenues:
Customers $3,899 $1,813 $ - - $ - - $5,712
Intersegment 1,435 - - - - (1,435) - -
------ ------ ------ ------- ------
Total sales and operating revenues 5,334 1,813 - - $(1,435) 5,712
Operating income (loss) 643 (100) (137) - - 406
Interest expense - - - - (137) - - (137)
Interest income - - - - 3 - - 3
Other expense, net - - - - (1) - - (1)
Net income (loss) 643 (100) (272) - - 271
10
The "Operating income (loss)" amounts presented above in the "Unallocated"
column consist of expenses not allocated to the petrochemicals and polymers
segments, principally general and administrative expenses. Additionally, for
the nine months ended September 30, 2001, the $143 million includes $22 million
of unusual charges related to the Port Arthur shutdown costs.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
OVERVIEW
GENERAL--Equistar's operating results for the first nine months of 2001 were
negatively affected by a severe decrease in demand as a result of the slowing
U.S. economy and lower exports. The decreased demand combined with increased
industry capacity put downward pressure on product sales prices. Crude oil and
natural gas prices, which affect raw material and energy costs in the production
of chemicals, also decreased during 2001. However, product sales prices
declined at a faster rate. These combined factors resulted in lower product
margins for the industry and for Equistar during 2001 compared to 2000.
The decrease in demand primarily reflected a weaker U.S. economy, which began to
weaken in the third quarter 2000 as a result of a manufacturing recession that
included the chemical sector. U.S. gross domestic product, or GDP, growth
slowed from an annual rate of 3.1% for the first nine months of 2000 to an
estimated 0.4% annual rate for the first nine months of 2001 as the
manufacturing recession spread to other segments of the economy. The third
quarter 2001 saw a contraction in GDP estimated at 0.4% on an annual basis.
Crude oil prices, which affect the cost of Equistar's crude-oil based raw
materials, trended downward during the first nine months of 2001. Natural gas
costs, which affect energy costs and the cost of natural gas liquids ("NGL"),
another major source of raw materials for Equistar, spiked to nearly $10 per
million BTUs in January 2001. This compared to a price range of $1.50 to $2.50
per million BTUs in the period from 1991 to 1999. Since the January 2001 spike,
natural gas prices have decreased steadily, averaging $2.96 in the third quarter
2001, a 31% decrease from third quarter 2000. The high NGL costs caused
producers to switch to crude-oil based raw materials. This resulted in an
increased supply of co-products such as propylene, butadiene and benzene, which
put downward pressure on the prices of these co-products for most of 2001. The
high NGL costs also had a significant impact in reducing the competitive
position of North American polyethylene exports to other regions of the world.
With the recent decreases in natural gas prices, North American exports have
returned to their historical position.
The significant increase in NGL costs and lower domestic demand led some
producers, including Equistar, to idle plants that primarily use NGLs as raw
materials. In the second quarter 2001, Equistar further reduced the state of
readiness of its previously idled Lake Charles, Louisiana plant, which
represents 7% of its ethylene capacity. Industry analysts estimate that U.S.
producers curtailed more than 20% of U.S. ethylene production during 2001 due to
weak demand.
In addition, the ethylene industry is affected by significant capacity
additions. The industry added annual ethylene capacity of 13.4 billion pounds
globally in 2000 and is scheduled to add a record 14.1 billion pounds in 2001,
or nearly 6% in each year. New domestic capacity in 2001 is adding 5% to
existing domestic ethylene capacity during this period of weak demand growth.
NET INCOME (LOSS)--In the third quarter 2001, Equistar had a net loss of $79
million, excluding a $3 million extraordinary loss due to early debt retirement,
compared to net income of $63 million in the third quarter 2000. The $142
million decrease was primarily due to lower petrochemicals segment margins as
well as lower volumes in both the petrochemicals and polymers segments. The
lower margins and volumes reflected weaker demand in 2001. These were partly
offset by higher polymers segment margins and lower general and administrative
expenses. Polymers segment margins improved as raw material costs decreased
more than sales prices.
For the first nine months of 2001, Equistar had a net loss of $186 million,
excluding the $3 million extraordinary loss, compared to net income of $271
million for the first nine months of 2000. The $457 million decrease primarily
reflects lower margins and volumes in both the petrochemicals and polymers
segments. The lower margins were due to lower sales prices and higher raw
material costs in the first nine months of 2001 compared to the first nine
months of 2000. The lower sales prices and volumes reflect weaker demand in
2001. Petrochemical margins were negatively affected by decreases in co-product
prices during 2001. The first quarter 2001 also included $22 million of costs
associated with the shutdown of the Port Arthur, Texas polyethylene facility.
12
THIRD QUARTER 2001 VERSUS SECOND QUARTER 2001
In the third quarter 2001, Equistar had a net loss of $79 million, excluding the
$3 million extraordinary loss, compared to a net loss of $30 million in the
second quarter 2001. The $49 million decrease was primarily due to declines in
the profitability of the petrochemicals segment, which had operating income of
$29 million in the third quarter 2001 compared to $81 million in the second
quarter 2001. The $52 million decrease was due to lower ethylene and co-product
prices, which were only partially offset by lower raw material, natural gas and
energy costs. Third quarter 2001 benchmark prices for ethylene were 23.8 cents
per pound, a 16% decrease compared to 28.4 cents per pound in the second quarter
2001. Benchmark prices for co-products such as propylene, butadiene and benzene
decreased significantly during the third quarter 2001 due to excess supply early
in the quarter. Equistar's ethylene volumes were relatively unchanged compared
to the second quarter 2001, reflecting the end of industry inventory reductions
in the second quarter 2001 offset by continued weak demand in the third quarter
2001.
The polymers segment had an operating loss of $26 million in the third quarter
2001 compared to a loss of $23 million in the second quarter 2001. Polymers
sales prices decreased more than raw material costs. Benchmark polymers sales
prices decreased approximately 5.5 cents per pound compared to a 4.5 cents per
pound decrease in benchmark ethylene prices. The resulting decrease in margins
during the third quarter 2001 was substantially offset by a 12 percent increase
in polymers sales volumes due to higher exports. Export sales activity
increased due to a return to the historical U.S. competitive cost position
compared to the rest of the world in the third quarter 2001, when natural gas
prices declined compared to the high levels experienced earlier in 2001.
13
SEGMENT DATA
The following tables reflect selected actual sales volume data, including
intersegment sales volumes, and summarized financial information for Equistar's
business segments.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
IN MILLIONS 2001 2000 2001 2000
- ----------- --------------- --------------- --------------- ---------------
SELECTED PETROCHEMICALS PRODUCTS:
Olefins (pounds) 4,039 4,512 12,352 14,020
Aromatics (gallons) 86 101 274 312
POLYMERS PRODUCTS (pounds) 1,565 1,622 4,402 4,763
MILLIONS OF DOLLARS
- -------------------
SALES AND OTHER OPERATING REVENUES:
Petrochemicals segment $1,181 $1,848 $ 4,345 $ 5,334
Polymers segment 494 602 1,552 1,813
Intersegment eliminations (324) (495) (1,173) (1,435)
------ ------ ------- -------
Total $1,351 $1,955 $ 4,724 $ 5,712
====== ====== ======= =======
COST OF SALES:
Petrochemicals segment $1,152 $1,642 $ 4,113 $ 4,685
Polymers segment 500 632 1,633 1,861
Intersegment eliminations (324) (495) (1,173) (1,435)
------ ------ ------- -------
Total $1,328 $1,779 $ 4,573 $ 5,111
====== ====== ======= =======
OTHER OPERATING EXPENSES:
Petrochemicals segment $ - - $ 2 $ 7 $ 6
Polymers segment 20 16 57 52
Unallocated 37 49 121 137
Unusual charges - - - - 22 - -
------ ------ ------- -------
Total $ 57 $ 67 $ 207 $ 195
====== ====== ======= =======
OPERATING INCOME (LOSS):
Petrochemicals segment $ 29 $ 204 $ 225 $ 643
Polymers segment (26) (46) (138) (100)
Unallocated (37) (49) (121) (137)
Unusual charges - - - - (22) - -
------ ------ ------- -------
Total $ (34) $ 109 $ (56) $ 406
====== ====== ======= =======
PETROCHEMICALS SEGMENT
REVENUES--Revenues of $1.2 billion in the third quarter 2001 decreased 36%
compared to third quarter 2000 revenues of $1.8 billion due to lower sales
prices as well as 11% lower volumes. Benchmark ethylene prices averaged 23.8
cents per pound in the third quarter 2001, a 23% decrease compared to the third
quarter 2000. The decrease in sales prices and volumes reflected lower demand
due to weakness of the U.S. economy and excess industry capacity.
Revenues of $4.3 billion in the first nine months of 2001 decreased 19% compared
to revenues of $5.3 billion for the first nine months of 2000 on 12% lower sales
volumes and lower average sales prices in 2001. Sales volumes decreased due to
weaker business conditions in 2001. Benchmark ethylene prices averaged 8% lower
in the first nine months of 2001 compared to the first nine months of 2000.
COST OF SALES--Cost of sales of $1.2 billion in the third quarter 2001 decreased
30% compared to $1.6 billion in the third quarter 2000. The decrease was due to
lower raw material costs and 11% lower volumes, partly offset by a significant
decrease in co-product propylene prices, which resulted in a lower co-product
credit to cost of sales.
14
Average benchmark prices of crude oil and natural gas, which affect the cost of
Equistar's raw materials, decreased 16% and 31%, respectively, in the third
quarter 2001 compared to the third quarter 2000. Benchmark propylene prices
averaged 14.7 cents per pound in the third quarter 2001, a 39% decrease compared
to the third quarter 2000.
Cost of sales of $4.1 billion in the first nine months of 2001 decreased 12%
compared to $4.7 billion in the first nine months of 2000. The effect of the
12% decrease in sales volumes and lower crude oil prices was partly offset by
higher NGL-based raw material and energy costs as well as the decrease in co-
product prices. Benchmark natural gas prices averaged 44% higher in the first
nine months of 2001 compared to the first nine months of 2000 due to the
significant first quarter 2001 increase in natural gas costs.
OPERATING INCOME--Operating income of $29 million in the third quarter 2001
decreased $175 million from $204 million in the third quarter 2000. Operating
income of $225 million in the first nine months of 2001 decreased $418 million
from $643 million in the first nine months of 2000. The decreases were
primarily due to lower margins and, to a lesser extent, lower sales volumes.
The lower margins primarily reflected lower prices for ethylene and for co-
products such as propylene and benzene in the 2001 periods compared to 2000.
The lower prices and volumes were due to weaker demand in the 2001 periods
compared to 2000.
POLYMERS SEGMENT
REVENUES--Revenues of $494 million in the third quarter 2001 decreased 18%
compared to $602 million in the third quarter 2000 due to a decrease in average
sales prices and a 4% decrease in volumes. The decrease in sales prices
reflected weaker 2001 business conditions and pressure from decreasing raw
material costs.
Revenues of $1.6 billion in the first nine months of 2001 decreased 14% compared
to $1.8 billion in the first nine months of 2000 due to an 8% decrease in sales
volumes and a decrease in average sales prices. The decreases in sales volumes
and sales prices were both due to the weaker demand in the first nine months of
2001.
COST OF SALES--Cost of sales of $500 million in the third quarter 2001 decreased
21% compared to $632 million in the third quarter 2000. The decrease in 2001
reflected lower raw material costs, primarily ethylene and propylene, as well as
the 4% decrease in volumes.
Cost of sales of $1.6 billion in the first nine months of 2001 decreased 12%
compared to $1.9 billion in the first nine months of 2000 primarily due to an 8%
decrease in sales volumes in 2001. The decreases in raw material costs in the
nine months comparison were not as significant as in the third quarter
comparison. For example, the first quarter 2001 reflected the effects of high
natural gas costs on both raw material and energy costs. In addition, during
2001, the price of ethylene peaked in February before trending steadily
downwards.
OPERATING INCOME--The polymers segment had an operating loss of $26 million in
the third quarter 2001 compared to a loss of $46 million in the third quarter
2000. Although sales prices decreased in the third quarter 2001, raw material
cost decreases more than offset the lower prices and the 4% lower sales volumes.
For the first nine months of 2001, the operating loss was $138 million compared
to an operating loss of $100 million in the first nine months of 2000. The
increased operating loss was primarily due to the effect of lower polymers
prices on margins as well as the effect of lower sales volumes, which were only
partly offset by lower raw material costs.
15
UNALLOCATED ITEMS
The following discusses expenses that were not allocated to the petrochemicals
or polymers segments.
OTHER OPERATING EXPENSES--These include unallocated general and administrative
expense and goodwill amortization. Unallocated other operating expenses of $37
million in the third quarter 2001 decreased $12 million compared to $49 million
in the third quarter 2000. Unallocated other operating expenses of $121 million
in the first nine months of 2001 decreased $16 million compared to $137 million
in the first nine months of 2000. The decreases were due to cost reduction
efforts and a lower level of business activity in 2001.
UNUSUAL CHARGES--Equistar discontinued production at its higher-cost Port
Arthur, Texas polyethylene facility in February 2001 and shut down the facility.
Closed production units included a 240 million pounds per year HDPE reactor and
an LDPE reactor with annual capacity of 160 million pounds. These units and a
300 million pounds per year HDPE reactor mothballed in the fourth quarter of
1999 have been permanently shut down. The asset values of these production
units were previously adjusted as part of a $96 million restructuring charge
recognized in 1999. During the first quarter 2001, Equistar recorded a $22
million charge, which included environmental remediation liabilities of $7
million, other exit costs of $3 million and severance and pension benefits of $7
million for approximately 125 people employed at the Port Arthur facility. The
remaining balance primarily related to the write down of certain assets.
EXTRAORDINARY LOSS--As part of the third quarter 2001 refinancing, Equistar
wrote off unamortized debt issuance costs and amendment fees of $3 million
related to the early repayment of the $1.25 billion bank credit facility and
reported the charge as an extraordinary loss on extinguishment of debt.
FINANCIAL CONDITION
OPERATING ACTIVITIES--Operating activities provided cash of $119 million in the
first nine months of 2001 compared to $313 million in the first nine months of
2000. The $194 million decrease primarily reflected a $460 million decrease in
income in the first nine months of 2001 compared to the 2000 period. This was
partly offset by an improvement in the working capital position in 2001. In the
first nine months of 2001, working capital was reduced $69 million. In the
first nine months of 2000, working capital increased $174 million. The
reduction in working capital in the first nine months of 2001 was primarily due
to a $104 million net reduction in receivables, despite the termination of a
$130 million receivables sales agreement in August 2001. The net reduction in
receivables primarily reflected the effects of lower sales prices in 2001.
INVESTING ACTIVITIES--Equistar's capital expenditures were $85 million in the
first nine months of 2001 and $81 million in the first nine months of 2000.
Equistar's capital spending for 2001 is currently projected at approximately
$103 million and includes spending for cost reduction and yield improvement
projects. The planned 2001 capital expenditures have been reduced by
approximately 40% from amounts originally budgeted due to the poor current
business environment. During the second quarter 2001, Equistar purchased the
low- and medium-voltage power cable materials business of AT Plastics, Inc. for
$7 million.
FINANCING ACTIVITIES--In August 2001, Equistar completed a $1.5 billion debt
refinancing. The refinancing included an amended and restated bank credit
facility consisting of a $500 million secured revolving credit facility maturing
in August 2006 and a $300 million secured term loan maturing in August 2007.
The financing also included the issuance of $700 million of new unsecured
10.125% Senior Notes maturing in August 2008. The financing replaced a $1.25
billion bank credit facility, $820 million of which was outstanding. A portion
of the net proceeds was also used to repay the $90 million of Equistar's medium-
term notes that matured on August 30, 2001.
16
The remaining net proceeds will be used for general business purposes. The
amended and restated bank credit facility also made certain financial ratio
requirements less restrictive. Equistar had previously amended its credit
facility in March 2001, easing certain financial ratio requirements. In
addition, during the third quarter 2001, Equistar terminated a $130 million
receivables securitization program.
There were no distributions to partners in the first nine months of 2001 and
Equistar does not currently anticipate making any distributions to partners for
the remainder of 2001.
LIQUIDITY AND CAPITAL RESOURCES--The August 2001 $1.5 billion debt refinancing
significantly extended Equistar's debt maturity schedule and eased the financial
ratio requirements in the bank credit facility. This provided Equistar with
additional liquidity and financial flexibility. At September 30, 2001, Equistar
had cash on hand of $113 million. The $500 million revolving credit facility,
which extends until August 2006, was undrawn and available for borrowing at
September 30, 2001. Current maturities of long-term debt at September 30, 2001
were $104 million.
The amended and restated bank credit facility and the indenture governing
Equistar's Senior Notes contain covenants that, subject to exceptions, restrict
sale and leaseback transactions, lien incurrence, debt incurrence, sales of
assets and mergers and consolidations. In addition, the amended and restated
bank credit facility requires Equistar to maintain specified financial ratios,
in all cases as provided in the credit facility. The breach of these covenants
could permit the lenders under Equistar's credit facility and the indenture
governing the Senior Notes to declare the loans immediately payable and could
permit the lenders under Equistar's credit facility to terminate future lending
commitments. Equistar was in compliance with all covenants under its debt
instruments as of September 30, 2001.
Management believes that conditions will be such that cash balances, cash flow
from operations and funding under the credit facility will be adequate to meet
anticipated future cash requirements, including scheduled debt repayments,
necessary capital expenditures and ongoing operations.
CURRENT BUSINESS OUTLOOK
Although co-product prices have increased recently, Equistar expects continued
trough conditions in the fourth quarter 2001 for the global chemical markets
that it serves. Pricing pressures are expected to continue for the remainder of
the year in Equistar's petrochemicals and polymers businesses. As trough
conditions continue, management will continue to take appropriate and necessary
steps not only to manage through the current difficult business environment, but
also to position Equistar to take full advantage of improvements in the market
when they occur. Equistar has aggressively controlled costs in the third
quarter of 2001. Cash management strategies and fixed-cost reduction
initiatives that were implemented have already generated results. Progress is
expected to continue through 2002.
ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. The statement will be effective for Equistar's calendar year
2002. Under SFAS No. 142, amortization of goodwill to earnings will be
discontinued. However, goodwill will be reviewed for impairment at least
annually and whenever events indicate impairment may have occurred. A benchmark
assessment of potential impairment also must be completed within six months
after adopting SFAS No. 142. Equistar currently carries $1.1 billion of goodwill
on its balance sheet, which is amortized at an annual rate of $33 million.
Equistar is currently evaluating the effect that implementation of SFAS No. 142
will have on its financial statements.
17
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Adoption of SFAS No. 143 and SFAS
No. 144 is not expected to have a material effect on the consolidated financial
statements of Equistar.
ITEM 3. DISCLOSURE OF MARKET AND REGULATORY RISK.
Equistar's exposure to market risks is described in Item 7a of its Annual Report
on Form 10-K for the year ended December 31, 2000. Equistar's exposure to
market and regulatory risks has not changed materially in the quarter ended
September 30, 2001, except as noted below.
Equistar enters into over-the-counter "derivatives," or price swap contracts,
for crude oil to help manage its exposure to commodity price risk with respect
to crude oil-related raw material purchases. These hedging arrangements have
the effect of locking in, at predetermined prices or ranges of prices and for a
specified period of time, the prices that Equistar will pay for the volumes to
which the hedge relates. As a result, while these hedging arrangements are
structured to reduce its exposure to increases in price associated with the
hedged commodity, they also limit the benefit Equistar might otherwise receive
from any price decreases associated with the hedged commodity. In September
2001, the remaining price swap contracts, maturing from October 2001 through
March 2002 and covering 4.1 million barrels of crude oil, were liquidated and
none were outstanding as of September 30, 2001.
During the second quarter 2001, Equistar entered into put options covering 1.9
million barrels of crude oil. The put options were not treated as hedges for
financial reporting purposes, but are intended to reduce Equistar's crude oil-
based raw material costs. As of September 30, 2001, the outstanding put option
contracts, which mature from October 2001 through December 2001, covered 1.0
million barrels of crude oil. Based on quoted market prices, Equistar recorded
a liability of $2 million at September 30, 2001 for those contracts. Assuming a
hypothetical 25% decrease in crude oil prices from those in effect at September
30, 2001, Equistar's loss in earnings for the put option contracts would be
approximately $9 million. Sensitivity analysis was used for purposes of the
above analysis. The quantitative information about market risk is necessarily
limited because it does not take into account the effects of the underlying
operating transactions. Equistar does not engage in any derivatives trading
activities.
18
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are "forward-looking
statements" within the meaning of the federal securities laws. Although
Equistar believes the expectations reflected in such forward-looking statements
are reasonable, they do involve certain assumptions, risks and uncertainties,
and Equistar can give no assurance that such expectations will prove to have
been correct. Equistar's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including:
. the cyclical nature of the chemical industry,
. uncertainties associated with the economy,
. substantial chemical industry capacity additions resulting in oversupply and
declining prices and margins,
. the availability and cost of raw materials,
. the availability of capital markets,
. technological developments,
. current and potential governmental regulatory actions,
. potential terrorist acts,
. operating interruptions (including leaks, explosions, fires, mechanical
failure, unscheduled downtime, labor difficulties, transportation
interruptions, spills and releases and other environmental risks), and
. Equistar's ability to implement its business strategies, including cost
reductions.
Many of such factors are beyond Equistar's ability to control or predict. Any
of the factors, or a combination of these factors, could materially affect
Equistar's future results of operations and the ultimate accuracy of the
forward-looking statements. These forward-looking statements are not guarantees
of Equistar's future performance, and Equistar's actual results and future
developments may differ materially from those projected in the forward-looking
statements. Management cautions against putting undue reliance on forward-
looking statements or projecting any future results based on such statements or
present or prior earnings levels.
All forward-looking statements in this Form 10-Q are qualified in their entirety
by the cautionary statements contained in this section and in Equistar's Annual
Report on Form 10-K for the year ended December 31, 2000.
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments with respect to Equistar's legal
proceedings previously reported in the Annual Report on Form 10-K for the year
ended December 31, 2000 and the Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2001 and June 30, 2001, except as described below.
The eight-county Houston/Galveston region has been designated a severe non-
attainment area for ozone by the EPA. As a result, the TNRCC has submitted a
plan to the EPA to reach and demonstrate compliance with the ozone standard by
November 2007. On January 19, 2001, Equistar and LCR, individually, and
Lyondell, individually and as part of the BCCA Appeal Group (a group of industry
participants), filed a lawsuit against the TNRCC in State District Court in
Travis County, Texas to encourage the adoption of the plaintiffs' alternative
plan to achieve the same air quality improvement as the TNRCC plan, with less
negative economic impact on the region. In June 2001, the parties entered into a
consent order with respect to the lawsuit. Pursuant to the consent order, the
TNRCC agreed to review, by June 2002, the scientific data for ozone formation in
the Houston/Galveston region. In October 2001, the EPA approved the TNRCC plan.
However, if the TNRCC scientific review supports the industry group proposal,
the TNRCC has agreed to revise the NOx emission reduction requirements set forth
in its original plan. Any revisions will have to be approved by the EPA.
Lyondell, Millennium Petrochemicals and certain subsidiaries of Occidental have
each agreed to provide certain indemnifications to Equistar with respect to the
petrochemicals and polymers businesses contributed by the partners. In addition,
Equistar agreed to assume third party claims that are related to certain pre-
closing contingent liabilities that are asserted prior to December 1, 2004 as to
Lyondell and Millennium Petrochemicals, and May 15, 2005 as to certain
Occidental subsidiaries, to the extent the aggregate thereof does not exceed $7
million to each partner, subject to certain terms of the respective asset
contribution agreements. Equistar also agreed to assume third party claims that
are related to certain pre-closing contingent liabilities that are asserted for
the first time after December 1, 2004 as to Lyondell and Millennium
Petrochemicals, and for the first time after May 15, 2005 as to certain
Occidental subsidiaries. As of September 30, 2001, Equistar, Lyondell,
Millennium Petrochemicals and certain subsidiaries of Occidental amended the
asset contribution agreements governing these indemnification obligations to
clarify the treatment of, and procedures pertaining to the management of,
certain claims arising under the asset contribution agreements. Equistar
believes that these amendments do not materially change the asset contribution
agreements.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(b) Second Amendment to Lyondell Asset Contribution Agreement, dated
as of September 30, 2001, among Lyondell Chemical Company,
Lyondell Petrochemical LP Inc. and Equistar Chemicals, LP.
10.11(b) Second Amendment to Millennium Asset Contribution Agreement,
dated as of September 30, 2001, among Millennium Petrochemicals
Inc., Millennium Petrochemicals LP LLC and Equistar Chemicals,
LP.
10.13(a) First Amendment to Occidental Asset Contribution Agreement, dated
as of September 30, 2001, among Occidental Petrochem Partner 1,
Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc.,
Occidental Petrochem Partner GP, Inc. and Equistar Chemicals, LP.
99 Consolidated Financial Statements (Unaudited) of Lyondell
Chemical Company
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed during the quarter
ended September 30, 2001 and through the date hereof:
Date of Report Item Nos. Financial Statements
- -------------- --------- --------------------
July 26, 2001 5, 7 No
August 01, 2001 5, 7 No
August 15, 2001 9 No
August 28, 2001 5, 7 No
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equistar Chemicals, LP
Dated: November 13, 2001 /s/ CHARLES L. HALL
--------------------------------
Charles L. Hall
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
22