UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 March 31, 2002
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
EQUISTAR CHEMICALS, LP
(Exact name of registrant as specified in its charter)
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
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
March 31,
---------------------------
Millions of dollars 2002 2001
- ------------------- ------- -------
Sales and other operating revenues:
Unrelated parties $ 895 $ 1,313
Related parties 241 460
------- -------
1,136 1,773
------- -------
Operating costs and expenses:
Cost of sales 1,162 1,723
Selling, general and administrative expenses 40 46
Research and development expense 9 10
Amortization of goodwill -- 8
Unusual charges -- 22
------- -------
1,211 1,809
------- -------
Operating loss (75) (36)
Interest expense (52) (46)
Other income, net 1 5
------- -------
Loss before cumulative effect
of accounting change (126) (77)
Cumulative effect of accounting change (1,053) --
------- -------
Net loss $(1,179) $ (77)
======= =======
See Notes to Consolidated Financial Statements.
1
EQUISTAR CHEMICALS, LP
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
Millions of dollars 2002 2001
- ------------------- --------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 15 $ 202
Accounts receivable:
Trade, net 458 440
Related parties 122 100
Inventories 421 448
Prepaid expenses and other current assets 31 36
------- -------
Total current assets 1,047 1,226
Property, plant and equipment, net 3,660 3,705
Investment in PD Glycol 47 47
Goodwill, net -- 1,053
Other assets, net 294 277
------- -------
Total assets $ 5,048 $ 6,308
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade $ 368 $ 331
Related parties 44 29
Current maturities of long-term debt 4 104
Other accrued liabilities 111 197
------- -------
Total current liabilities 527 661
Long-term debt 2,282 2,233
Other liabilities 181 177
Commitments and contingencies
Partners' capital:
Partners' accounts 2,078 3,257
Accumulated other comprehensive loss (20) (20)
------- -------
Total partners' capital 2,058 3,237
------- -------
Total liabilities and partners' capital $ 5,048 $ 6,308
======= =======
See Notes to Consolidated Financial Statements.
2
EQUISTAR CHEMICALS, LP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended
March 31,
---------------------------
Millions of dollars 2002 2001
- ------------------- ------ ------
Cash flows from operating activities:
Net loss $(1,179) $ (77)
Adjustments to reconcile net loss to
cash used in operating activities:
Cumulative effect of accounting change 1,053 --
Depreciation and amortization 75 78
Net gain on disposition of assets -- (3)
Changes in assets and liabilities that provided (used) cash:
Accounts receivable (40) 47
Inventories 27 (74)
Accounts payable 52 (35)
Other assets and liabilities (107) (90)
------- -------
Cash used in operating activities (119) (154)
------- -------
Cash flows from investing activities:
Expenditures for property, plant and equipment (15) (24)
Proceeds from sales of assets -- 3
------- -------
Cash used in investing activities (15) (21)
------- -------
Cash flows from financing activities:
Net borrowing under lines of credit 50 166
Repayment of long-term debt (101) --
Payment of debt issuance costs (2) --
------- -------
Cash provided by (used in) financing activities (53) 166
------- -------
Decrease in cash and cash equivalents (187) (9)
Cash and cash equivalents at beginning of period 202 18
------- -------
Cash and cash equivalents at end of period $ 15 $ 9
======= =======
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 generally accepted accounting principles 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
notes required by generally accepted accounting principles 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, 2001 included in the Equistar Chemicals, LP ("Equistar" or "Partnership")
2001 Annual Report on Form 10-K.
2. Company Ownership
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").
Early in 2002, Lyondell and Occidental agreed in principle to Lyondell's
acquisition of Occidental's 29.5% share of Equistar and Occidental's purchase of
an equity interest in Lyondell. Upon completion of these transactions,
Lyondell's ownership interest in Equistar would increase to 70.5%. There can be
no assurance that the proposed transactions will be completed.
3. Unusual Charges
Equistar shut down its Port Arthur, Texas polyethylene facility in February
2001. 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 an additional $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 related primarily to the write down of certain assets.
Payments of $4 million for severance, $3 million for exit costs and $2 million
for environmental remediation were made through March 31, 2002. The pension
benefits of $2 million will be paid from the assets of the pension plans. As of
March 31, 2002, the remaining liability included $5 million for environmental
remediation costs and $1 million for severance benefits.
4. Accounting Changes
Effective January 1, 2002, Equistar implemented Statement of Financial
Accounting Standards ("SFAS") No. 141, Business Combinations, SFAS No. 142,
Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and
SFAS No. 144 did not have a material effect on the consolidated financial
statements of Equistar.
Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment
and concluded that the entire balance of goodwill was impaired, resulting in a
$1.1 billion charge that was reported as the cumulative effect of an accounting
change as of January 1, 2002. The conclusion was based on a comparison to
Equistar's indicated fair value, using multiples of EBITDA (earnings before
interest, taxes, depreciation and amortization) for comparable companies as the
indicator of fair value.
4
In addition, as a result of implementing SFAS No. 142, earnings in 2002 and
subsequent years will be favorably affected by $33 million annually because of
the elimination of goodwill amortization. The following table presents
Equistar's loss before cumulative effect of accounting change and net loss for
all periods presented as adjusted for goodwill amortization expense.
For the three months ended
March 31,
--------------------------------
Millions of dollars 2002 2001
- ------------------- -------------- ---------------
Reported loss before cumulative effect of accounting change $ (126) $ (77)
Add back: Goodwill amortization -- 8
------- -------
Adjusted loss before cumulative effect of accounting change $ (126) $ (69)
======= =======
Reported net loss $(1,179) $ (77)
Add back: Goodwill amortization -- 8
------- -------
Adjusted net loss $(1,179) $ (69)
======= =======
5. Inventories
Inventories consisted of the following at:
March 31, December 31,
Millions of dollars 2002 2001
- ------------------- --------- ------------
Finished goods $220 $243
Work-in-process 11 12
Raw materials 104 104
Materials and supplies 86 89
---- ----
Total inventories $421 $448
==== ====
6. Property, Plant and Equipment, Net
The components of property, plant and equipment, at cost, and the related
accumulated depreciation were as follows at:
March 31, December 31,
Millions of dollars 2002 2001
- ------------------- ------ ------
Land $ 79 $ 79
Manufacturing facilities and equipment 5,956 5,929
Construction in progress 80 92
------ ------
Total property, plant and equipment 6,115 6,100
Less accumulated depreciation 2,455 2,395
------ ------
Property, plant and equipment, net $3,660 $3,705
====== ======
Depreciation and amortization is summarized as follows for the periods
presented:
March 31, March 31,
Millions of dollars 2002 2001
- ------------------- --------- ---------
Property, plant and equipment $60 $59
Goodwill -- 8
Turnaround expense 7 6
Software costs 4 3
Debt issuance costs 2 --
Other 2 2
--- ---
$75 $78
=== ===
5
7. Long-Term Debt
In late March 2002, Equistar amended its $800 million credit facility making
certain financial ratio requirements less restrictive (see also Note 8). As a
result of the amendment, the interest rate on the credit facility was increased
by 0.5% per annum. If certain financial ratios are met, the interest rate will
only increase by 0.25% per annum.
Long-term debt consisted of the following at:
March 31, December 31,
Millions of dollars 2002 2001
- ------------------- ------ ------
Bank credit facility:
Revolving credit facility due 2006 $ 50 $ --
Term loan due 2007 298 299
Other debt obligations:
Medium-term notes due 2002-2005 31 31
9.125% Notes due 2002 -- 100
8.50% Notes due 2004 300 300
6.50% Notes due 2006 150 150
10.125% Senior Notes due 2008 700 700
8.75% Notes due 2009 599 598
7.55% Debentures due 2026 150 150
Other 8 9
------ ------
Total long-term debt 2,286 2,337
Less current maturities 4 104
------ ------
Total long-term debt, net $2,282 $2,233
====== ======
Lyondell remains a guarantor of $300 million of Equistar debt and a co-obligor
with Equistar for $31 million of debt. The consolidated financial statements
(unaudited) of Lyondell are filed as an exhibit to Equistar's Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2002.
8. Lease Commitments
Equistar leases railcars, under operating leases, from unaffiliated entities
established for the purpose of serving as lessors with respect to these leases.
The leases include options for Equistar to purchase the railcars covered by the
leases during a lease term. If Equistar does not exercise a purchase option, the
affected railcars will be sold upon termination of the lease. In the event the
sales proceeds are less than the lessor's unrecovered investment, Equistar will
pay the difference to the lessor, but no more than the guaranteed residual
value. The total guaranteed residual value under these leases was approximately
$208 million at March 31, 2002. One of the railcar leases with a guaranteed
residual value of $35 million terminates in December 2002. Equistar has not
decided whether to exercise the purchase option under this lease, but does not
currently anticipate payment of a material amount under the residual value
guarantee provisions.
Early in 2002, Equistar's credit rating was lowered by two major rating
agencies. The credit rating downgrade permitted the early termination of one
of Equistar's railcar leases by the lessor, which could have accelerated the
payment of $126 million of minimum lease payments. Equistar renegotiated the
lease during the first quarter 2002, resulting in a payment of additional fees
and a prepayment of basic rent of $17 million, which reduced the guaranteed
residual value to $87 million and which will be fully offset by a corresponding
reduction in future cash lease payments.
Certain of Equistar's railcar operating leases contain financial and other
covenants that are substantially the same as those contained in the $800 million
credit facility. A breach of these covenants could permit the early termination
of these railcar leases by the lessors. Under one of the leases, the covenants
were automatically updated with the March 2002 amendment to the credit facility
(see Note 7).
Equistar also amended the covenants under the remaining railcar lease to
incorporate the March 2002 amendment to the $800 million credit facility. The
amendment, which was completed in the second quarter 2002, required the payment
of additional fees and a
6
payment of $16 million, which reduced the guaranteed residual value to $70
million. The $16 million payment will be partially offset by a corresponding
reduction in future lease payments. In addition, the lessor has the option to
terminate the lease under certain circumstances by December 31, 2002.
9. Derivative Financial Instruments
The following table summarizes activity included in accumulated other
comprehensive loss related to derivative financial instruments used as cash flow
hedges for the three-month periods ended March 31:
Millions of dollars 2002 2001
- ------------------- ------ ------
Gain (loss):
Beginning balance $ -- $ --
January 1, 2001 transition adjustment -
Reclassification of December 31, 2000 deferred loss -- (13)
Net gains on derivative instruments -- 10
Reclassification of net losses on
derivative instruments to earnings -- 1
----- ----
Loss on derivative instruments at March 31 $ -- $ (2)
===== ====
The transition adjustment represents the cumulative effect of an accounting
change, resulting from the adoption of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as of January 1, 2001.
10. Commitments and Contingencies
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 March 31, 2002,
Equistar had incurred a total of $19 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.
Environmental Remediation--Equistar's accrued liability for environmental
matters as of March 31, 2002 was $5 million and primarily related to the Port
Arthur facility, which was permanently shut down on February 28, 2001. In the
opinion of management, there is currently no material estimable range of loss in
excess of the amounts recorded for environmental remediation.
Clean Air Act--The eight-county Houston/Galveston region has been designated a
severe non-attainment area for ozone by the U.S. Environmental Protection Agency
("EPA"). Emission reduction controls for nitrogen oxides ("NOx") must be
installed at each of Equistar's six plants located in the Houston/Galveston
region during the next several years. Compliance with the plan will result in
increased capital investment, which could be between $200 million and $260
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. In January 2001, Equistar and an organization composed of industry
participants filed a lawsuit against the Texas Natural Resource Conservation
Commission ("TNRCC") to encourage adoption of their alternative plan to achieve
the same air quality improvement with less negative economic impact on the
region. Adoption of the alternative plan, as sought by the lawsuit, is expected
to reduce Equistar's estimated capital investments for NOx reductions required
to comply with the standards. However, there can be no guarantee as to the
ultimate capital cost of implementing any final plan developed to ensure ozone
attainment by the 2007 deadline.
7
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. The presence of MTBE in some water supplies in California
and other states due to gasoline leaking from underground storage tanks and in
surface water from recreational water craft has led to public concern about the
use of MTBE. Certain federal and state governmental initiatives in the U.S. have
sought either to rescind the oxygenate requirement for reformulated gasoline or
to restrict or ban the use of MTBE. On April 25, 2002, the U.S. Senate passed
its version of an omnibus energy bill, which, among other things, would ban the
use of MTBE as a fuel oxygenate. The Senate bill is not law and needs to be
reconciled with the U.S. House of Representatives' omnibus energy bill, which
was passed in July 2001. Equistar's MTBE sales represented approximately 4% of
its total 2001 revenues. Equistar does not expect these initiatives to have a
significant impact on MTBE margins and volumes in 2002. Should it become
necessary to reduce MTBE production, Equistar would need to make capital
expenditures to convert its MTBE plants to production of alternate gasoline
blending components. The profit margins on such alternate gasoline blending
components could differ from those historically realized on MTBE.
General--Equistar is involved in 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 on the financial
position, liquidity or results of operations 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 the 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 Loss
The components of the comprehensive loss were as follows:
For the three months ended
March 31,
--------------------------
2002 2001
------ ------
Net loss $(1,179) $ (77)
------- -------
Other comprehensive loss:
Net loss on derivative instruments -- (2)
Unrealized loss on securities -- (1)
------- -------
Total other comprehensive loss -- (3)
------- -------
Comprehensive loss $(1,179) $ (80)
======= =======
8
12. Segment and Related Information
Equistar operates in two reportable segments, petrochemicals and polymers.
Summarized financial information concerning Equistar's reportable segments is
shown in the following table. Intersegment sales between the petrochemicals and
polymers segments were based on current market prices.
Millions of dollars Petrochemicals Polymers Unallocated Eliminations Total
- ------------------- -------------- -------- ----------- ------------ -----
For the three months ended March 31, 2002:
Sales and other operating revenues:
Customers $ 726 $ 410 $ -- $ -- $ 1,136
Intersegment 267 -- -- (267) --
------------------------------------------------------------
Total sales and other operating revenues 993 410 -- (267) 1,136
Operating loss (24) (21) (30) -- (75)
Interest expense -- -- (52) -- (52)
Other income, net -- -- 1 -- 1
Loss before cumulative
effect of accounting change (24) (21) (81) -- (126)
For the three months ended March 31, 2001:
Sales and other operating revenues:
Customers $ 1,231 $ 542 $ -- $ -- $ 1,773
Intersegment 458 -- -- (458) --
------------------------------------------------------------
Total sales and other operating revenues 1,689 542 -- (458) 1,773
Operating income (loss) 115 (89) (62) -- (36)
Interest expense -- -- (46) -- (46)
Other income, net -- -- 5 -- 5
Net income (loss) 115 (89) (103) -- (77)
The following table presents the details of "Operating income (loss)" as
presented above in the "Unallocated" column for the three-month periods ended:
March 31, March 31,
Millions of dollars 2002 2001
- ------------------- ------ ------
Expenses not allocated to petrochemicals and polymers:
Principally general and administrative expenses $ (30) $ (40)
Unusual charges -- (22)
----- ------
Total--Unallocated $ (30) $ (62)
===== ======
During the first quarter of 2002, Equistar wrote off the entire balance of its
goodwill, resulting in a $1.1 billion charge that was reported as the cumulative
effect of an accounting change (see Note 4).
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
General--U.S. demand for ethylene in the first quarter 2002 grew an estimated 2%
compared to the first quarter 2001 and 3% compared to the fourth quarter 2001.
Nonetheless, the first quarter 2002 demand growth failed to absorb the effects
of an estimated 7.6% increase in worldwide ethylene industry capacity during
calendar 2001 or to offset the effects of a 10% contraction in U.S. ethylene
demand in 2001.
Raw material costs in the first quarter 2002 were significantly lower than in
the first quarter 2001. The benchmark price of crude oil averaged 24% lower in
the first quarter 2002 than in the first quarter 2001. Natural gas prices, which
spiked to historically high levels in the first quarter 2001, averaged 67% lower
in the first quarter 2002, resulting in lower energy costs.
Despite increased demand in the first quarter 2002, the ongoing industry
overcapacity and the decreases in raw material costs during 2001 and most of the
first quarter 2002 put downward pressure on product sales prices. This resulted
in sales prices decreasing more than the costs of raw materials. Average
benchmark sales prices for ethylene were 41% lower in the first quarter 2002
compared to the first quarter 2001, while average benchmark prices for
co-product propylene were 29% lower in the first quarter 2002 compared to the
first quarter 2001. These factors combined to reduce Equistar's margins in the
first quarter 2002 compared to the first quarter 2001.
In addition, in response to political uncertainties in the Middle East and
Venezuela, raw material costs rose rapidly toward the end of the first quarter
2002. March 2002 crude oil prices averaged 18% higher than in February 2002,
while March 2002 natural gas prices averaged 20% higher than in February 2002.
This also had a negative effect on Equistar's first quarter 2002 margins due to
lags in implementing sales price increases in response to cost increases.
Net Loss--Equistar had a loss before cumulative effect of accounting change of
$126 million in the first quarter 2002 compared to a net loss of $77 million in
the first quarter 2001. The first quarter 2001 included $22 million of shutdown
costs for Equistar's Port Arthur facility and $8 million of goodwill
amortization. Excluding the effect of the first quarter 2001 shutdown costs and
the goodwill amortization, the net loss increased by $79 million, reflecting a
significant decrease in petrochemicals segment operating results partly offset
by improvement in polymers segment results. The decrease in petrochemicals
segment profitability was due to lower prices and margins, lower sales volumes
and the negative effects of certain above-market fixed price contracts. Polymers
segment results, however, improved due to higher margins as raw materials costs
decreased more than sales prices.
RESULTS OF OPERATIONS
First Quarter 2002 versus Fourth Quarter 2001
Equistar had a loss before cumulative effect of accounting change of $126
million in the first quarter 2002 compared to a loss of $94 million in the
fourth quarter 2001, which included $8 million of goodwill amortization.
Excluding the effect of the fourth quarter 2001 goodwill amortization, the $40
million increase in the net loss reflected a decrease in petrochemicals segment
operating results partly offset by improvement in polymers segment operating
results. The decrease in petrochemicals segment profitability was due to lower
prices and margins. Polymers segment results improved on higher margins as raw
materials costs decreased more than sales prices. Both petrochemicals and
polymers segment sales volumes increased in the first quarter 2002 compared to
the fourth quarter 2001.
The petrochemicals segment had an operating loss of $24 million in the first
quarter 2002 compared to operating income of $50 million in the fourth quarter
2001. Margins in the first quarter 2002 decreased from the fourth quarter 2001
as ethylene prices declined in the first quarter 2002, while raw material and
energy costs increased. First quarter 2002 average benchmark prices for ethylene
were 19.3 cents per pound compared to 20.9 cents per pound in the fourth quarter
2001, an 8% decrease. Costs of raw materials increased due to rising ethane and
naphtha prices during the first quarter 2002. Benchmark prices of co-product
propylene decreased an estimated 2.0 cents per pound, or 12%, in the first
quarter 2002, further contributing to lower margins. Equistar's costs were also
higher
10
due to certain fixed price natural gas and NGL supply contracts entered into in
early 2001. In the first quarter 2002, Equistar's costs under these fixed-price
contracts were approximately $33 million higher than market-based contracts
would have been. These fixed-price contracts largely expired at the end of the
first quarter 2002. Sales volumes for petrochemical products increased 6.5% in
the first quarter 2002 compared to the fourth quarter 2001 as aggressive
inventory reductions by customers in the fourth quarter 2001 ended and there
were some indications of improved demand in the first quarter 2002.
The polymers segment operating loss of $21 million in the first quarter 2002
improved from an operating loss of $48 million in the fourth quarter 2001 due to
improved margins and higher volumes. Margins in the polymers segment improved
somewhat as decreasing prices for ethylene, a major raw material, more than
offset lower sales prices. Estimated benchmark polymer sales prices fell
approximately 0.5 cents per pound in the first quarter 2002 compared to the
above-noted decrease of 1.6 cents per pound for ethylene over the same period.
Polymer sales volume increases in the first quarter 2002 reflected the end of
aggressive inventory reductions by customers in late December 2001 as well as
some evidence of improved demand late in the first quarter 2002. Total Equistar
polymer sales volumes increased approximately 3% versus the fourth quarter 2001.
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
March 31,
--------------------------
In millions 2002 2001
----------- ------ ------
Selected petrochemicals products:
Olefins (pounds) 4,137 4,241
Aromatics (gallons) 86 90
Polymers products (pounds) 1,508 1,441
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment $ 993 $ 1,689
Polymers segment 410 542
Intersegment eliminations (267) (458)
------- -------
Total $ 1,136 $ 1,773
======= =======
Cost of sales:
Petrochemicals segment $ 1,015 $ 1,568
Polymers segment 414 613
Intersegment eliminations (267) (458)
------- -------
Total $ 1,162 $ 1,723
======= =======
Other operating expenses:
Petrochemicals segment $ 2 $ 6
Polymers segment 17 18
Unallocated 30 40
Unusual charges -- 22
------- -------
Total $ 49 $ 86
======= =======
Operating income (loss):
Petrochemicals segment $ (24) $ 115
Polymers segment (21) (89)
Unallocated and unusual charges (30) (62)
------- -------
Total $ (75) $ (36)
======= =======
11
Petrochemicals Segment
Revenues--Revenues of $1.0 billion in the first quarter 2002 decreased 41%
compared to revenues of $1.7 billion in the first quarter 2001 primarily due to
lower sales prices and, to a lesser extent, lower sales volumes. Benchmark
ethylene prices averaged 41% lower in the first quarter 2002 compared to the
first quarter 2001. Sales volumes decreased 3% in the first quarter 2002
compared to the first quarter 2001.
Cost of Sales--Cost of sales of $1.0 billion in the first quarter 2002 decreased
35% compared to $1.6 billion in the first quarter 2001, less than the percentage
decrease in sales noted above. While the costs of NGL-based raw materials and
energy decreased from the historically high levels experienced in the first
quarter 2001, other raw material costs, such as heavy liquids, did not decrease
proportionately to the decrease in sales prices. Costs were also higher due to
certain fixed price natural gas and NGL supply contracts entered into in early
2001. In the first quarter 2002, Equistar's costs under these fixed-price
contracts were approximately $33 million higher than market-based contracts
would have been. These fixed-price contracts largely expired by the end of the
first quarter 2002.
Operating Income--The operating loss of $24 million in the first quarter 2002
compares to operating income of $115 million in the first quarter 2001. The $139
million decrease is primarily due to lower product margins as sales prices
decreased much more than raw material costs. As noted above, raw material and
energy costs actually rose rapidly in March 2002 after declining steadily since
the first quarter 2001. This negatively affected first quarter 2002 margins, as
sales prices could not be increased timely in response to the cost increases.
Polymers Segment
Revenues--Revenues of $410 million in the first quarter 2002 decreased 24%
compared to revenues of $542 million in the first quarter 2001. The decrease was
due to lower sales prices partly offset by a 5% increase in sales volumes. First
quarter 2002 average sales prices decreased in response to lower raw material
costs, primarily ethylene and propylene. The higher sales volumes reflected
improvement in demand.
Cost of Sales--Cost of sales of $414 million in the first quarter 2002 decreased
32% compared to $613 million in the first quarter 2001. This decrease reflected
decreases in raw material costs, primarily ethylene and propylene. Benchmark
ethylene and propylene costs were 41% and 29% lower, respectively, in the first
quarter 2002 compared to the first quarter 2001. The benefits of these cost
decreases were reduced by the effect of the increase in sales volumes.
Operating Income--For the first quarter 2002, the polymers segment had an
operating loss of $21 million compared to an operating loss of $89 million in
the first quarter 2001. The reduced operating loss was due to improvement in
polymer margins and, to a lesser extent, higher sales volumes. Margins improved
in the first quarter 2002 compared to the first quarter 2001 as sales prices
decreased less than the decreases in polymer raw material costs.
Unallocated Items
The following discusses significant changes in expenses that were not allocated
to the petrochemicals or polymers segments.
Unusual Charges--Equistar discontinued production at its higher-cost Port
Arthur, Texas polyethylene facility in February 2001 and shut down the facility.
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 $5 million
balance primarily related to the write down of certain assets.
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Cumulative Effect of Accounting Change--Effective January 1, 2002, Equistar
adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill
and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar
reviewed goodwill for impairment and concluded that the entire balance of
goodwill was impaired, resulting in a $1.1 billion charge that was reported as
the cumulative effect of an accounting change as of January 1, 2002. See Note 4
of Notes to Consolidated Financial Statements. In addition, as a result of
implementing SFAS No. 142, earnings in 2002 and subsequent years will be
favorably affected by $33 million annually because of the elimination of
goodwill and its related amortization.
FINANCIAL CONDITION
Operating Activities--Operating activities used cash of $119 million in the
first quarter 2002 compared to $154 million in the first quarter 2001. For
Equistar, the first quarter of the year includes significant payments of annual
and semiannual property taxes, interest and compensation-related items,
generally resulting in negative operating cash flow for the period. Despite a
$49 million higher loss before the cumulative effect of accounting change in the
first quarter 2002, cash used by operating activities in the first quarter 2002
decreased compared to the first quarter 2001. This was primarily due to a net
reduction of $39 million in the main components of working capital -
receivables, inventory and payables - during the first quarter 2002. This
compares to a $62 million increase in these components of working capital during
the first quarter 2001. The improvement in the first quarter 2002 was due to a
significant increase in payables. During the first quarter 2001, the inventory
component of working capital increased $74 million, primarily due to increased
levels of raw materials compared to December 31, 2000.
Investing Activities--Equistar's capital expenditures were $15 million in the
first quarter 2002 and $24 million in the first quarter 2001. The reduced level
of expenditures in 2002 reflects the continuing poor business environment.
Equistar's capital budget for 2002 is $94 million, primarily for regulatory and
environmental compliance and cost reduction projects.
Financing Activities--Cash used by financing activities was $53 million in the
first quarter 2002, and included the scheduled retirement of $100 million
principal amount of the 9.125% notes. This $100 million payment was partly
funded by net borrowing of $50 million under the revolving credit facility.
There were no distributions to partners in the first quarter 2002.
Liquidity and Capital Resources--At March 31, 2002, Equistar had cash on hand of
$15 million. In addition $450 million of the $500 million revolving credit
facility, which matures in August 2006, was available at March 31, 2002. Amounts
available under the revolving credit facility are also reduced to the extent of
outstanding letters of credit, which were $5 million as of March 31, 2002. Early
in 2002, Equistar's credit rating was lowered by two major rating agencies,
which could affect Equistar's borrowing costs in the future.
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, other
contractual obligations, necessary capital expenditures and ongoing operations.
Long-Term Debt--The bank credit facility and the indenture governing Equistar's
senior notes contain covenants that, subject to certain exceptions, restrict
sale and leaseback transactions, lien incurrence, debt incurrence, sales of
assets, investments, certain payments, and mergers and consolidations. In
addition, the bank credit facility requires Equistar to maintain specified
financial ratios. 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.
As a result of the continued poor current business environment, in late March
2002, Equistar amended its $800 million credit facility making certain financial
ratio requirements less restrictive. See Note 7 of Notes to Consolidated
Financial Statements. As a result of the amendment, the interest rate on the
credit facility was increased by 0.5% per annum. If certain financial ratios are
met, the interest rate will only increase by 0.25% per annum. Equistar was in
compliance with all covenants under its debt instruments as of March 31, 2002.
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Railcar Leases--Equistar leases railcars, under operating leases, from
unaffiliated entities established for the purpose of serving as lessors with
respect to these leases. The leases include options for Equistar to purchase the
railcars covered by the leases during a lease term. If Equistar does not
exercise a purchase option, the affected railcars will be sold upon termination
of the lease. In the event the sales proceeds are less than the lessor's
unrecovered investment, Equistar will pay the difference to the lessor, but no
more than the guaranteed residual value. The total guaranteed residual value
under these leases was approximately $208 million at March 31, 2002. One of the
railcar leases with a guaranteed residual value of $35 million terminates in
December 2002. Equistar has not decided whether to exercise the purchase option
under this lease, but does not currently anticipate payment of a material amount
under the residual value guarantee provisions.
Early in 2002, Equistar's credit rating was lowered by two major rating
agencies. The credit rating downgrade permitted the early termination of one
of Equistar's railcar leases by the lessor, which could have accelerated the
payment of $126 million of minimum lease payments. Equistar renegotiated the
lease during the first quarter 2002, resulting in a payment of additional fees
and a prepayment of basic rent of $17 million, which reduced the guaranteed
residual value to $87 million, and will be fully offset by a corresponding
reduction in future cash lease payments.
Certain of Equistar's railcar operating leases contain financial and other
covenants that are substantially the same as those contained in the $800 million
credit facility. A breach of these covenants could permit the early termination
of these railcar leases by the lessors. Under one of the leases, the covenants
were automatically updated with the March 2002 amendment to the credit facility.
Equistar also amended the covenants under the remaining railcar lease to
incorporate the March 2002 amendment to the $800 million credit facility. The
amendment, which was completed in the second quarter 2002, required the payment
of additional fees and a payment of $16 million, which reduced the guaranteed
residual value to $70 million. The $16 million payment will be partially offset
by a corresponding reduction in future lease payments. In addition, the lessor
has the option to terminate the lease under certain circumstances by December
31, 2002.
RECENT DEVELOPMENTS
Early in 2002, Lyondell and Occidental agreed in principle to Lyondell's
acquisition of Occidental's 29.5% share of Equistar and Occidental's purchase of
an equity interest in Lyondell. Upon completion of these transactions,
Lyondell's ownership interest in Equistar would increase to 70.5%. Millennium
holds the remaining 29.5% interest in Equistar. There can be no assurance that
the proposed transactions will be completed.
CURRENT BUSINESS OUTLOOK
Equistar expects modestly improved demand coupled with the expiration of many of
its fixed price natural gas and NGL contracts to result in improved results in
the second quarter 2002. Such improvement could be offset by any significant
increases in raw material costs.
RECENT ACCOUNTING STANDARDS
Effective January 1, 2002, Equistar implemented SFAS No. 141, Business
Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. See
"Results of Operations" and Note 4 of Notes to Consolidated Financial
Statements.
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Item 3. Disclosure of Market and Regulatory Risk.
Equistar's exposure to market and regulatory risks is described in Item 7a of
its Annual Report on Form 10-K for the year ended December 31, 2001. Equistar's
exposure to market and regulatory risks has not changed materially in the
quarter ended March 31, 2002, except as noted below.
Certain federal and state governmental initiatives in the U.S. have sought
either to rescind the oxygenate requirement for reformulated gasoline or to
restrict or ban the use of MTBE. On April 25, 2002, the U.S. Senate passed its
version of an omnibus energy bill, which, among other things, would ban the use
of MTBE as a fuel oxygenate. The Senate bill is not law and needs to be
reconciled with the U.S. House of Representatives' omnibus energy bill, which
was passed in July 2001. Equistar's MTBE sales represented approximately 4% of
its total 2001 revenues. Equistar does not expect these initiatives to have a
significant impact on MTBE margins and volumes in 2002. Should it become
necessary to reduce MTBE production, Equistar would need to make capital
expenditures to convert its MTBE plants to production of alternate gasoline
blending components. The profit margins on such alternate gasoline blending
components could differ from those historically realized on MTBE.
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 and utilities,
... access to 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, 2001.
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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, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.2(a) Amendment No. 1 dated as of March 26, 2002 to the Amended
and Restated Credit Agreement dated as of August 24, 2001
among Equistar Chemicals, LP, the lenders from time to time
party thereto and Citicorp USA, Inc. and Credit Suisse First
Boston, as co-syndication agents, Bank of America, N.A., as
servicing agent and as administrative agent and The Chase
Manhattan Bank, as collateral agent and as administrative
agent
99 Consolidated Financial Statements (Unaudited) of Lyondell
Chemical Company
(b) Reports on Form 8-K
None.
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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: May 13, 2002 /s/ CHARLES L. HALL
------------------------------------
Charles L. Hall
Vice President and Controller
(Duly Authorized Officer and
Principal Accounting Officer)
17